How people behave under different situations?

The post is about how people behave under different contextual settings. The reactions are most extreme when the onus of any mishap doesn't lie within. The Milgram experiment conforms to this behavior. It showed how far the people are ready to go, beyond their personal threshold level, to justify the expected behavior. In general, people are more committed towards the outcome of the assignment than its objectives and its impact.. A similar experiment, the Prison Experiment, delves into the extremities of role-playing by the volunteers even when it was just a mock environment. The experiment poses a very serious question, "How to behave rationally and responsibly when you are in an authoritative position but are expected to act against your judgmental bases". 

The idea to explore is how an organization culture is shaped to guide the behavior of people. Example of Disneyland is probably the one of the best examples that show how the organization's culture is deeply ingrained within the psyche of its employees that they remain in their character even when nobody is watching. This understanding also provides an insight into our child life bringing up. The way we structured our understanding of different situations and shaped our mannerisms to act and judge in atypical situations. 

In a corporate setting, we often come across situations where taking decisions is tough especially when the decisions have an impact on others' life. The cultural setting where good behavior can emerge in the same way as the undesirable behavior can amplify and overcome the internal voices. In my personal experience the culture of the organization dictated that the client deliverable's have to submitted on time no matter what. Although it was the organization's duty to fulfill the contractual obligations, it's not true that the system will fail if one deliverable is not submitted on time. 

Although the negative aspects of human behavior are more discusses, it is also important to analyze if there are any positives. One such positive behavior is the extent to which the people are willing to go for ensuring that the objectives are met. As a leader we'd often come across situations where the support from the team would be far more important than anything else. Most often the team cease to perform well because of the repercussions of failure would be very high. In such situations it is important that we try to take away the onus of responsibility from the sub-ordinates. Another positive I can think of is the way trust is built in the system. So as we saw the regular people had faith in the professor that the experiment is being conducted for the greater good of the organization or the society. This trust is important from the organization's point of view. This is probably the reason why we as child experimented because there was always a home leader backing our efforts and absorbing the accidental fatalities.

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The big Idea: How to measure the potential of your business?

This is just an example to illustrate how a business can be evaluated. You can evaluate your business idea similarly.

The Idea
"The idea is to bring people closer and enhance their network"

In today's age of information and pace, networking is of paramount importance. Although the technological spurt has ensured wider connections, most of the ties are weak in nature as they hardly meet in person. "Meet-Ups" is an attempt to fill this gap by bringing people on a single platform and network based on the common interest expressed. 

Set of considerations  :

• Tier 1 cities would be the most active in this kind of structure
• Age-group of 16-40 would be more interested in expanding their network
• The realistic conversion rate would be 1% of the potential targets as understood from the above two assumptions
• The target market is India

Yearly demand: About 10% of 50 million population in the target age group residing in Tier1 cities can be addressed i.e. a population of 5 Million.

Addressable market (A)= 0.5 Million

Willingness to pay: The business model is to charge the creator of the meet-up group an annual fee of Rs.500 and the members an amount of Rs. 100. About 5% of the people would be creating groups and rest of them would join a group member. Total revenue collection per year hence would be 500*0.05*0.5M+100*0.95*0.5M = 12.5M+47.5M= Rs. 60Million. The charges are normal and comfortably below the "willingness-to-pay" bar.

Surplus (B)= Rs. 6 Crores

Cost to manufacture or provide service: There is almost zero fixed cost involved. The costs would mainly be variable in terms of human capital responsible for managing the meet-ups and related operational issues. One person every 20 groups is what is fairly manageable. About 2000 groups is targeted and expected and hence the annual operational cost would be equal to approx. 4L*100= Rs. 4 Crores.

Total Cost (C) = Rs. 4 Crores

Value of the opportunity every year (O)= Rs. 2 Crores

Expected monopoly life of the idea (D)= 5 years

Total (monopoly) value of the opportunity (X=O X D = 10 Crores)

Rivalry and competition: Currently none. And given the unique nature of the idea not many competitors would pitch in. Expected competitive life of the idea (E) is about 3-4 years. Average market share (F) would be around 50% of the data presented above. Total (competitive) value of the opportunity (Y = F X O X E = Rs. 3.5 Crores

Total value of the opportunity = X + Y = 13.5 Crores

Enter or not:

The porters five forces would help in determining the market forces as presented below:

As clearly visible from the porters framework, the entry barrier is not strong. However the early entry advantage is immense. Networkers would prefer not to leave their groups once formed as the networking worth is expected to be quite high.

Given the assumptions how the business model would be implemented, the following reasons support the decision to enter the market    

• Gap in networking opportunities for people sharing common interest not yet addressed
• A trend in developed countries for the last few decades do tell stories about the validity of the idea
• Competitors are minimum and hence the risk of failure is also low on that front
• The upfront/fixed costs are very low and hence a chance can always be taken. Operational leverage
• The yearly revenue generation is around 10 Crores even when the estimates have been conservatively taken. As compared to the opportunity cost, this is quite a lucrative business
• The strength would be to build a common brand

Reasons that discourage market entry

• Difficult to break in early. It is important to make the ball roll at the very early stage
• Unexpected consumer behavior may deter the plan
• Legal hurdles of forming groups under the Indian law
• The social platforms may deter people to step out
• Frequency of meetings and participation can be a major issue in many of the groups

The analysis presented above indicates that the probability of not being able to scale up is not very low. However given the value of the opportunity and other reasons as stated above it is an exciting opportunity and the market should be entered.

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Importance of Cash and Hiring in a new business

Cash is like oxygen to a start-up, probably much more important than earning profits. The question of optimum burn rate is something which is critical for all kind of start-ups. The trade-off is between growth opportunity and the risk of failure. For a established firm it is easy to procure capital but this is not the case with the start-up. The optimum burn rate is decided on the basis of factors such as

• Cash to sustain operations e.g. salaries of the employees, office rent etc.
• Enough cash to acquire a new customer and generate positive NPV
• Growth is more important because you would like to fail fast than not to expand
• Amortize the idea over a larger volume of business

Hence on one hand the opportunity to expand is very lucrative but the risk of failure is also high. The ideal strategy would be to reduce the burn rate to an extent the survival is not risked and the growth opportunity is also not sacrificed which is more likely if they stick to their current model of operation and give some more time to reap profits.

Hiring is also one of the most difficult and important decisions for a start-up. It is difficult to find the right fit with the right skills and motivation to succeed in a start-up environment. It is difficult to assimilate a new employee within the already established inter-relationships in the organization. It is important that the new joinee complement the existing skill sets, share the vision of the company and stay committed for a longer period of time. The problems of the moral hazard and long-term commitment should be solved by giving stake and options to the first employees before the firm gets bigger.

Do read my note on the differences between an established company and a start-up when it comes to an innovative business idea..
http://buildyourbusinesshere.blogspot.in/2015/03/entrepreneurship-vs-established.html

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Entrepreneurship vs established companies

Success in entrepreneurship is about creating value in the otherwise saturated ecosystem. Disruptions in technological arena is what has pushed the rise of the likes of SUN Micro-systems. And it is not impossible to take on established and successful players. However it takes a lot of courage and conviction to target and reach the heights. And the liability of newness often decides the route that can be taken. Newness means that the customers would be apprehensive, the investors would be skeptical, the value creators would choose to stay away. But despite all the odds, it's important not to bargain because for some organizational objectives it is critical to play on the size. The task is to minimize the liability by doing something different or something similar but better than the rest. In my understanding, building large organization through an evolutionary process is more likely to succeed. It is critical to dominate through the power of superiority as the 'survival of the fittest' hypothesis operates even in the business environment. Developing a new organization is a process that is to be learned than to acquire. To create that disruption you need the best in the field with similar objectives and beliefs in the opportunity. It is not about spending everything to make a product successful but the resource organization to meet the objectives with the minimum. More often than not the "liability of newness" boils down to the maneuver between "all or nothing". Mediocrity is not an option if the target is the sky. Proactive initiatives and acquired sense of responsibilities and ownership make a good team who can prove to be equivalent to a team twice the size in an older organization. "Early bird catches the worms". Conviction on the success of the product is important to gain the time advantage.

It is worthwhile noting that it is the new players that bring the maximum technological disruption than the incumbents. This is the reason why big players fear a new player with a disruptive business idea as they know that they can become big in no time. This is probably the reason why they are ready to pay any price for newly formed but small enterprises. This is probably the reason why Facebook bought Whatsapp, Instagram etc. as their strategy is to exist in the social platform as the only dominant player. However it is quite possible that incumbents are unable to recognize the disruptions by an entrant or have chosen to ignore it. This is perhaps one of the main reason why SUN Microsystems was able to garner the market share in a very short period of time. 

It is also worth noting that even great companies can fail. Listening to customer is a good idea but in cases it can be the cause of its own destruction as well, particularly in the industry where consumers are not technically qualified and informed. One of the possible reasons of failure is that it is difficult to change the entire ecosystem when you are a big player and not the one who is leading the change. For example the evolution of the disk drive industry started with the fancy of IBM only later to be taken up more aggressively by non-integrated computer makers. Having said that then how to explain the modern model of running a business where customer is considered to be the "King". There are industries where the customers drive the innovative disruptions i.e. the customers can't be ignored on the criteria if the technological innovation is a norm.

In my view, it is important for the big players to identify the disruptions and the nature of the industry to prevent the possible downfall of its market prominence. It is important to embrace the might of the new players and incorporate continuous innovation as a part of its culture.

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Non Performing Assets problem in India

In the last few years, NPA problems in India have grown significantly. According to the RBI, the total value of NPAs stood at 9.8 percent of loans at the end of FY2014. The economic fluctuations of 2008-09 created avenues for possible default by individuals as well as institutions. However I feel the entire blame cannot be attributed to the economic cycles. The rating agencies and ARCs play the most critical role in assessing loans and credits and hence potentially alleviating NPA problems. But the government has not effectively encouraged the use of rating agencies. Consequently, the effectiveness of credit risk assessment and credit administration has come into question. In general, credit rating agencies provide independent assessment of default risk of an issuer on a debt instrument. But the current regulatory framework requires banks to have their own credit risk assessment framework. The reliance on external credit rating is limited to capital adequacy computation.

CRAs can help the lenders alleviate the NPA problems in the following manner:

• There is evidence of lack of rigour in the loan appraisal systems followed by the banks which is critical for identifying possible NPAs in advance. Rating agencies provide a better appraisal system.
• CRAs help the general investors to gain knowledge about the company they are interested to invest in. This enhances liquidity in the market as reduced information asymmetry leads to confidence in investors.
• For companies which don't trade in the market, the rating agencies can provide significant information to enable quality decision making by the banks.
• A standard rating system would ensure that only the most deserving entities get the debt from the market.
• It can help the corporates to explore alternate source of funds.
• Corporates can optimally price their bonds and equity issues.
• CRAs can provide a forward looking market based credit rating which would help the system to reduce the burden of stressed assets and potentially reduce NPAs.
• CRAs can provide a dynamic rating mechanism which can help the lenders to assess the credit risk in advance and the opportunity to take steps to mitigate those risks.

ARCs commands specialization in the field of sale of distressed assets. It help the banks in seizing collateral in secured loans. Although the idea behind the creation of ARCs was novel, the implementation has not been very effective. While the stressed assets increased 8 times in the period 2003-2013, the annual sale of assets by banks to ARCs increased only twice. The government has failed to empower the ARCs. I believe following actions can be taken to empower the ARCs to help reduce the current NPA problems:

• Reducing excessive regulatory interference
• Provisioning of regulations for sale of assets
• Empowering ARCs through building restructuring capabilities
• Addressing the issue of shortage of capital
• Reducing barriers to foreign investors
• Improving the effectiveness of the asset resolution mechanism

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Developing world in the next 10 years

The world is immersed in the pond of destitution- limited access to the supply of food, drinking water, healthcare and other basic necessities. The organizations have striven hard to find solutions to all such problems. They have indeed found success in many of their ventures. One such venture is the objective of achieving universal education and I believe that in the next decade the world will achieve the goal of universal primary education. As per 2011 data there are still about 57 Million children of primary school age who were not in school. It is a known fact that children with no quality education are exposed to exploitation and diseases. The situation is severe for female children as they are exposed to a greater risk at different time points in their life. However, data suggests that this problem, that has been a part of world's millennium development goal, has shown good progress and the world is likely to achieve the goal of net enrollment ratio of 100%. The improvement is particularly encouraging in the Sub-Saharan African countries where in a period of 5-6 years, the net enrollment ratio has increased from 65% to 77%. Overall this figure hovers around 88-90%. 

The root-cause of the problem is quite evident. It is nothing but the existence of sheer poverty and marginalization that is responsible for poor state of primary education. Digging deeper into the source of disparity would reveal three major factors: Income, Gender and Location e.g. the children from the poorest households are at least three times as likely to be out of school as their richest counterparts, rural children are nearly twice as likely to be out of school as urban children. Statistically, the largest income & gender disparity is seen in the South Asian and Sub-Saharan countries while the rural-urban disparity exists in all the countries. 

Different forums at the world level have come together and have embraced the mission of global education as one of the top most development priority. Countries like India have launched development schemes such as Sarva Shiksha Abhiyan to attain the goal. Some of the actions that are being taken by all the institutions, in particular UNICEF, to reach to the goal are:

• Awareness Campaigns: UNICEF has committed $233 million to stage global awareness campaigns on the importance of children going to school. Different campaigns also highlights the issues of gender discrimination and forced child labour. 

• Investment on improving facilities at school: In many places, schools are safe haven for children where they can find latrines, clean water, meals and possibly health care. "UNICEF has a strong presence in school-based water, sanitation and hygiene projects, supporting initiatives in 73 countries such as supplying hand pumps to primary schools and training teachers in hygiene education".

• Ensuring 'Right to Education': The support is being provided in the area of community-based early child care, parent education, nutrition, hygiene and other intervention initiatives.

I believe that the world is in the right path and pace of achieving the goal of universal primary education and would be achieved if various institutions keep implementing different initiatives on a mission mode basis.

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Improve vendor experience at a market place

Value proposition/incentive for sellers by an e-commerce marketplace

Brand Value of Seller: Use of better packaging is must. The market-place owner should check at periodic intervals whether the seller is maintaining the quality or not. If the quality is maintained they should be rewarded from your bucket of profits.

Reduced Concession rate: The use of better packaging will reduce damage of the products delivered to the customers. The concession rate of the delivered products will also fall, reducing the overall cost for the seller.

Incentives based on customer feedback: Needless to say, customer feedback should also be taken into the incentive structure. It is in the best interest of the seller only to ensure that the customer is delighted after making the order.

The following options can be taken to achieve the above mentioned:

• Ensure that good packaging is met, the marketplace should develop a process that ensures the availability of good quality packaging materials at the seller’s end. 
• Negotiate with the suppliers of the packaging material for a reduced rate for packaging material. 
• Create a customer feedback form for all the orders that include the quality of packaging. 
• Develop a metric that evaluates all sellers based on their packaging quality. Give financial and moral incentive system that appreciates the sellers who post good ratings. The guiding principle is to keep visibility and control of the packaging supply chain 
• Ensure that more suppliers are developed during a 5 year span that will reduce the cost of transportation and the lead time of delivery of the packaging material. The guiding principle is to keep the solution cost neutral in the long term (3-5 years) 

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Launching a product in India

A sound knowledge and understanding of the local market including understanding of the consumers' need and behavior pattern is required before launching a product in a region. A detailed account of the consumer behavior is a must before formulation of the right strategy.

Launch of any product in India should take into consideration the following behavioral patterns at the least:

• High degree of value orientation
• Quality oriented outlet: an orientation towards expensive known brands
• Trendy lifestyle, Higher disposable income
• Open minded and experimental
• High involvement when the product is purchased infrequently
• Influenced by freebies

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