Sunday, November 18, 2012

Replace CEO’s from Innovation….Let Lower Management Jump


Well in the past couple of weeks I have written and you have read a dozen of articles about Innovation. A question might come up in the mind about the about the reasons behind such a huge aggression behind innovation. The reason is simple and not a mathematical complex formula. I find innovation is drying up and even if it comes its being more rejected due to the aftershocks of 2008 post recessions. We must accept that in order to strive growth in the coming decade’s innovation is the only way to survive and develop new living means for the unemployed global mass.

We need innovation in every profession and in every business. Today I will present your certain facts where innovation and innovators are being killed without proper reasoning followed with the process of designing the innovation way. Well I am not an expert but its from my research finds I find the inputs to be valuable for my readers.

One of my recent finding was that innovators are being killed and were killed in the past decade. Results being expected from the innovators are mostly compared with magic. This is the beginning of the problem. Innovation investments are huge in the initial days and the successes from such innovation are usually low. The same has applied for iphone and also for Microsoft.

This risk can be eliminated if we design PainStorm session for our consumers. Well PainStorm is nothing but a session through which corporate collect information with direct interaction with the consumers about their pains in an particular product/segment/process or anything related to the objective of the company. One of the biggest features of this process will be that even after designing the innovation as per the PainStorm session the corporate will again get back to the consumer to let them know about the final innovation. This reduces the risk of failure and increases success in every probable steps.

Mobile Bazaar was an similar product which was designed after following the steps of PainStorm. The story is like this that the company went to the farmers and certain numbers of innovators were plugged with framers for a week. During this phase the company understood the entire process of farming and its various problems. Among the several hurdles the biggest was storage facility which was very less resulting loss. The innovators came back to the company and designed the process of Mobile Bazar through which buyers and sellers can text message each other demand and supply information. This improved the farmers prices by 20% where was losses got zero. Innovation works best through PainStorm.

More than Innovation we need innovators. Every company needs to leave space for it employees to come up with innovative minds where innovation can breed. Compliance and Risk management department needs to be educated and needs to honor the innovation and innovators. Since I find Risk management is more concerned about showing its own work rather than working in real terms for the companies’ benefits. Compliance needs to formulate flexible and not rigid regulations where innovation and innovators die within the womb of the mother. Innovators are not the outside people but the people within the organization who are in the process of business.

Another prime mistake which is being done from the companies’ heads is that they expect innovation to be new product or process. Well innovation cannot be every time be like an iphone product. Innovation may come from the ones which were rejected previously as it did not match with the goal of the company or ego of the senior management. The biggest truth behind failure of innovation is the hypocrite nature of the top management and the tussle behind the leader of innovation team and no leader’s team. I find that in innovation meetings where new process or products are being presented they are simply at first sight being sent to the elimination wardrobe. Yesterday’s rejection might be based upon the secondary demand of the same for the consumer but today the same might be primary for the consumer. Well when we say that everything changes consumer demand changes very fast that the consumer itself.

A brilliant product can lose its sheen since marketing and distribution process is not being informed in full extent neither they are into product design process. Neither the CEO nor the COO of the company will go for selling the product to the end user. The top management of the company should only come when the lower level management is confirmed about the strategies of innovation and its benefit to the end user. Well the greater throw may come from the weaker hand. Backward integration is the key to success of an innovation. If marketing and sales team are not included in the innovation process then despite of a best product the company will find death in its success. It being best taken that CEO and COO are the people who are appointed by the shareholders for the benefit of the company and they carry couple of decades of experience Well they have earned the experience prior to 2008 and not during the recession. The quick gainers of experience are the ones who are selling on the street. 2008 has changed very experience and its high time that we can’t afford to spend another decade to gain experience under the recession phase. CEO and other top level management need to know that quick learners are also beneficial for the long term perspective of the company.

Innovation in marketing process or anything in an existing product can produce spellbound results in an short time frame. But innovation fails since the initial baseline of expectation and marketing expectation fails to understand the strength of the innovation. I find innovation presentation and designing process team includes only the top management. This is one of the biggest mistakes of the companies. Innovation ideas and inputs should come first from the lower level of the management since they are the ones who will sell the product to the end user. If an existing product life cycle is dropping we find through our research that often out of 10 usp of a product 7 are being missed while selling the product.

A small innovative process can change the product positioning and marketing which increases the life cycle of the product. Hence when the same management was buys in drilling innovation of an new product a simple process innovation can change the current product life cycle. We simply ignore these innovation concepts. Since, as I said earlier that by innovation we mean magical returns. Limited vision is a big threat to the innovation process.

I find further in my research that product offering also plays a pivotal role in the process of innovation. Certain products can be offered in bundled format where as certain can be given separately. Reshuffling the two can be of great success of the innovation team.

Much of the thrust on innovation is being given to beat the competitors which often works in a haphazard way creating short term sparks only. This devil needs to be avoided. One needs to spend 80% of the time to understand the consumer and the reaming at the back of innovation and innovators.

Saturday, November 17, 2012

RURAL FIXED COST ...PATH TO MASS SELLING


Low cost of production, higher volumes, efficient raw material management and one costing model based on specific economic condition followed with an average percentage of growth clubbed very year; all these days are now over or on the path of extension.

These cost management techniques were feasible before 2008 global recession and before the Indian slow down economic phase of 2010.Mass volume based sales proposition hardly exist and even that happens like a magic to specific products. Variable cost is the prime are of focus for the cost accountants but I find that after 2008 recession and 2010 of Indian economic slowdown fixed cost has a huge area to be factored while designing cost structures for products. In this article I will be trying to derive the thought behind fixed cost component which is more important than managing the variable cost. After all the sucess of an enterprise depends upon the cost structures.

Doing business in India it is an cost escalation prospective followed with higher operational cost and volatile inflation affects on product pricing leaves negligible space for small and medium enterprise to design product costing. We cost accountants often ignore the part of distribution cost management while design the cost structure or pricing of a product. After the debacle of 2008 and slow down in India after 2012 customer retention and customer acquisition cost are never being taken into account while arriving at the cost structure. More emphasis is being deployed on raw material and direct cost married with variable cost. But when the product is being sold there is a cost associated with consumer which is hardly being taken into account. All we do is that simply club it with sales and marketing cost. Do we ever break the cost components of marketing cost and drive any new strategies for the efficient cost management linked with consumers. We find companies dropping up product very fast since they dont calculate the numbers matched with
Behavioral Finance.

For customer retention and acquisition are two different perspectives which can only be served in an economy like India through mass selling. Developed economies don’t believe in the theory of mass selling they believe in mass value creation. I India we sell to convert the product into cash but in developed economies selling mean value creation.

Selling products in rural India is a challenge. It’s easy to say that development and expansion and there is stupendous demand in rural India for consumption of products. But rural India is scattered. Hence to built the network over these scattered rural India we need high levels of cost for customer acquisition and retention. We hardly think about these when designing cost structures for products.

Fixed cost is a bigger component over here. Variable cost is left at the door of cost of production. Fixed cost has a greater role to play for rural consumer acquisition and retention.

If ones product does not needs much education to consume will leave negligible cost for use of the product for the end user. But if my product needs consumer education and also training to use the product then simply calculate the cost associated with such product distribution cost. It’s an high fixed cost associated with that product. Then what should be the pricing techniques and cost structure designing process for these products. Well this where we cost accountants needs to drill hard and raise ourselves above the traditional factors of cost designing. When we will design cost structures for product we need to factor in the rural distribution factors which will help to design the profit module for the product. In poor markets we have high level of fixed cost and we have to judge that beyond numbers. Well according to me price cannot be uniform for every market.

Infrastructure cost for distribution of the product in rural India needs to calculate. If the same urban infrastructure can be used for distribution for rural products then this will reduce the burden of higher cost levels for the product. If ones product needs less education in urban areas for consumption and higher for rural then that part needs to be well accounted while arriving at the price of a product.

Mass selling concept can work only best when proper pricing and cost estimation have been built for the products and markets. Otherwise after a certain period the product will collapse before it could enter into growth phase. This will damage the product life cycle and also the project cost.

In between I would like to accentuate the probable areas where cost structures fails while designing the product pricing.

• Higher investments in operational cost followed with wrong market cultural behavior analysis.

• Conventional product sales revenue calculation.

• Customer acquisition and retention cost not being accounted.

• Failed analysis of marketing and distribution cost.

Well the above list should have been big but I kept it short since I want my readers to fill up the gap. Transportation cost is also being calculated in an wrong way. Travel time cost should be accounted since that increases the selling time cost. The more time one spent on transportation the more the product loses its value and hence it pushes up the cost of selling in the long term. (When demand comes supply becomes lag and hence the product loses its market).

I have found that capital expenditure related to distribution of products and the business model itself are substantially higher the cost of the production. In rural India we need the following cost factors like warehouse space, office space, technical staff, office amenities and above all servicing centers. This is why I said in the above lines price cannot be uniform at every place. Now while designing cash flow for an product we need to take into factor all the above mentioned aspects so that we can take up an higher level of discounting rate so that to derive the correct NVP of an product or project. If we don’t take into account then cash flow will take a lengthy time than the projected which will damage the entire business operation.

Low cost of production and mass selling needs to be linked with pushing up the variable cost and leaving enough space for the fixed cost to accommodate followed with improving the gross margins above the average margins which finally makes it possible for selling the product in rural India. In countries like India we need cost structures to be designed in accordance to the culture of the buyers. If one does not push up the variable cost then fixed cost will create a long term sustainability problem.

CHINA DOMESTIC OPPORTUNITIES...ABOUT TO GROW


An Economy which has made a turnaround from the tyrant rules of Mao to an economic engine of the global economy after 2008 debacle. It needs no praise that due to its economic policies China pulled and save the collapse of the 2008 holocaust.2012 has been one of the biggest eventful month for the Chinese economy. The 12th Plan got introduced followed with new FDI policy and now the new President of China.

China has been always being trying to develop and design new vision for the global economy. On my recent study about the economy I find that Chinese private firms are doing huge investments across industries and countries. The proof of the pudding is that the 5 Chinese private firms went to be listed on the Fortune Global 500 ranking that was released in July 2012. Last year, about 45% of China's outbound direct investment in the non-financial sector came from non-State-owned enterprises in china which is a remarkable vision outlook by the private firms in china. One of the prime reasons for increasing the investment appetite is greater percentage of Return on Investments being envisaged and achieved by the Chinese private firms.

In the recent policy declaration china has widen up the gates of FDI inflow. This is well found from the attraction of the inflow in the first six months of the year. China attracted 59.1 billion U.S. dollars in FDI while the U.S. attracted 57.4 billion U.S. dollars, according to the latest Global Investment Trends Monitor. But what made china to be so bold into framing polices to attract the entire inflow of FDI capital into their own economy.

According to the statistics of news release of foreign investment, from January to September 2012, Newly Approved Foreign-invested Enterprises amounted to 18,025, down by 11.67% year on year; and the actual use of foreign investment reached US$83.423 billion, down by 3.76% year on year. Well the numbers can be improved in the next coming years but the prime reason is that china needs huge capital to reduce the gap and build the inbound economic infrastructures of china. At the same time despite of an slowdown in the global economy china’s inflow of FDI was not very dramatic fall, in other words it kept the momentum alive despite of the global turbulence.

China is more focused to improve its domestic trade business rather focusing more on export. It is now more inclined to draw a line of control between inbound growths of its economy along with the turbulent global economic conditions. If we make a quick glance at the achievement being made by the domestic trade policies under the 11th plan we find

• The total retail sales of social consumer goods rose from RMB6.8 trillion in 2005 to RMB15.7 trillion in 2010

• The total sales of means of production rose from RMB14.3 trillion in 2005 to RMB36.1 trillion in 2010

• Added value from wholesale, retail, hotel and catering industries rose from RMB1.8 trillion in 2005 to RMB4.4 trillion in 2010, with an annual average actual growth rate of 14.9%

• Tax revenue from domestic trade increased at an annual average growth rate of 24%, with 102.7 million employees hired in domestic trade in 2010.

The numbers and achievement are well reflected in the Chinese GDP number in the 11th plan. Under the 12th plan it has further extended and broadened the trade opportunities which includes.

• Total retail sales of social consumer goods to achiev a growth of 15% amounting to approximately RMB32 trillion.

• Added value from the wholesale, retail, hotel and catering industries shall exceed RMB7 trillion, with an average annual actual growth rate of 11%

• Employees engaged in domestic trade shall amount to 130 million, including about 100 million employed in urban areas, with an annual growth of more than 5 million employees

• Improving the cycle of commodity flow into the inbound system of china.

• Improving and modernizing the circulation process which invites infrastructure and IT investments.

• Boosting up domestic trade and improving the penetration level of such trade activities.

The above expectation is reasonable and may not sound to be very aggressive but the result being expected to achieve is strong enough for the various states of Chinese economy. The recent drop in FDI inflow in china is not an drop but its well above the level compared with the steep slow down in global economy married with several GDP cut down economy wise by World Bank, IMF, rating agencies etc.

If we make a reverse loom towards Chinese FDI investments in other economies then we will get further clear understanding about the long term visionary outlook by Chinese think tanks.

China's fast-growing direct investment in the United States has created jobs. The study, commissioned by U.S.-China Economic and Security Review Commission, found that Chinese-owned firms in the United States added between 10,000 and 20,000 workers in the past five years. In the first nine months, China's outbound investments jumped nearly 30 percent year-on-year, reaching $52.5 billion. They acquire businesses in the US, Europe, Africa, it's a good timing because prices are low, and they are selective in the ways they make acquisition. Hence china is now holding substantial assets in different economies which give immense power to china to increase its GDP growth in coming years. Since flow of income from these countries will get added up to the GDP of China which will give a balanced and a stable growth to Chinese economy even in times when Chinese economy will be in doldrums. Its nothing but risk mitigation by diversification of assets by china.

Wednesday, November 14, 2012

Race for Innovation Labs.

Innovation the mother of growth plays a pivotal role in the global economy since inception of the fire on this planet. Invention of wheel and fire were also innovation. The recent debacle of 2008 had changed the landscape of innovation across the globe. Policy makers across the globe have went through cut down on cost on various segments across every organization. Much of the effect has been on research and development segment which the house of the mother of innovation.

At the same innovators took a bold step and moved with their own enterprises. This resulted creation of copycats of large organizations since innovators can innovate techniques with modern minimum tools. This creates significant threats to the large organizations which spends billion dollars at the back of innovation. So where the threat lies and does the small innovators are threat to the giants.

Well the fact is completely different and large companies are unable to tap the resources of innovators who are striving for success. As corporate are unable to bear the cost of Research and Development I find Innovation labs needs to be created which will be an outsourced service for the big giants.

Companies are always on the toss about the end utility of various researches being carried internally. Say if an company whose R&D division does 5 innovation out of which only 2 can be utilized by the same company under the policies and business planning. Now the same company also bears the cost of the other 3 projects but it’s of no use. This rising cost of non income generating research has been ruling force behind shut down of R&D division by the companies.

Now if an Innovation Lab is being constructed by the innovators where they carry out various innovations for different companies then that should work wonders for many industries. Big corporate spends billions to attract the innovators. But innovators under the changing circumstances have shifted into their own world where they are looking for recognition. Hence companies should come up with maps to link up these Innovation labs where companies will pay only for the product which they find to be matching with their business model.

Well innovation labs might sound like an new concept and its highly required. As growing concerns about prolonged slow down in developed economies and volatile movements of the emerging economies the birth of Innovation Labs is highly required. In India we find one prominent and well investments driven Innovation Lab which can also be marked as the King of Innovation Bosch. Well the rest can be easily found from the website of the company. We needs Bosch type Innovation labs.

Today’s we find the biggest Innovation Labs are the NGO who are working on non profit targets. They have converted themselves into a perfect Innovation Lab. Innovation labs need not be an non-profit making organization they all needs to be an mission driven like the NGO’s.

Innovation labs needs the biggest attention of Investments banking segment since huge amount of capital will be required to invest in order to run the segment. Venture capital needs to flow into the Innovation Labs and at the same time the investors should be enough educated to understand the Innovation Labs business process and its risk.

Over the next decade we will need thousand of innovators and double the number of Innovation labs so that new industrial revolution can happen. Extensive capital needs to be deployed for keeping the industrial revolution alive matching with the speed of technological changes. Innovators play a pivotal role in the society in the coming decade. They are the ones who will bring the developed economies out from the dark nights of recession. For successful Innovation labs we should not direct them according to our thought line. Rather I would ask the innovators to dream the future and design accordingly since that’s the base line of the Innovation Lab. Corporate will not be able to dream like Innovators hence they should stay away from indulging into the minds of Innovators.

One more aspect I would like to accentuate is that providing additional financial support decreases the quality of innovation by corporate. The prime reason being the race of competition which forces innovation to catch up the wrong path which further finally leads loss for the organization in the long term.

Slowdown creates opportunities and Innovation lab is the future of the next generation. More Innovation labs gets into an economy the more revolution in various economies will happen in the coming decades. Well its up to India who will take the steps of numbers of Innovation labs.


Tuesday, November 13, 2012

EMERGING ECONOMIES CORRUPTION IS ABOUT TO INCREASE.

Often the debate about corruption is being heard in our day to day activities of life. Corruption is being blamed for the slow growth of the economy. But I would place it as the path of growth. Since corruption increases the speed of a process, saves time and final achieves the desired end results. With global slowdown I find that the emerging economies particularly India is going to face new heights and altitudes of corruption. Global slowdown has compelled to invest in emerging economies and within emerging economies India and China are the biggest absorbers of foreign capital.

To make my thoughts to be well read to all of you I will give an example from our day to day to life where one will get an idea about the level of corruption growth to be achieved in coming years in emerging economies.

I am Deputy General Manager of an overseas company dealing in cosmetics looking for penetration of my products in to India. Now if want to do the business directly in India I will not be able to do since according to the Indian guidelines I have to have an company registered in India under the companies act 1956.Now I hope everyone knows the cumbersome process of opening up an company in India. Now as I is employee of my company heading the Indian business I would not wait for the normal procedure of opening an company in India. I will place bribe on the table and get my work done easily without much fuss. For getting trade license I will bribe and get it without much fuss and in the same process I will clear the rest of the requirements for opening up my shop in India.

Now my readers will find that I am the culprit who is spreading the seeds of bribes into India. Well just try to look into the glass of water from the other way round. If my company is stuck with long and delayed and harassment full legal procedures then what should be the role of the company in that case. It very easy to be said than done, Indian governments declaration about various FDI policies and other policies which invites foreign capital itself is an open opportunity of the corruption to gain momentum. But are we prepared to handle such things is a question of endless debate.

We might write thousands of quality books and papers on integrity and corporate ethics and principles but if the government policies are against the economic growth of a country then what should be the step for that economy is a question of great thought. In US and Europe we find government agencies being formed to track the malpractices being adopted by corporate as well as by government agencies to promote capital profits. Well thankfully in India we don’t have such things and even if it comes its around beyond lacs of corer being stolen from the exchequers pockets. Well the point is not restricted to opening up new business but also related to export, import and even to small social factors too. To generate stupendous growth corporate coming into emerging economies bribery and corruption is going to the strongest tool to be utilized. Hence the first conclusion that can be drawn is that emerging economies are trapped under their own shield of corruption.

Indian needs a GDP growth of 8% above hence that can only be achieved if legal network is user friendly. Only pumping inflow of capital into the economy cannot be path to success of an economy.

The next part I will focus towards Capital Integrity. Well the word might sound new but it has old meaning and highly required at the corporate level. Capital Integrity needs to be planted at the higher levels of the management. Well this too might sound like an strange theory. Its very common that most of the targets and instruction of achieving deadlines comes from the higher level of management. They are the parents of the corruption which is being acted and implemented by the junior or lower level management.

It took lot of guts to write the above statements but the truth can be understood by the ones how the game under pressure plays. No one dreams to take the responsibility of slowdown but it’s high time that corporate who are coming into emerging economies needs to identify that legal bottlenecks are a part of the culture of the emerging economies and it will take a decade to replicate the process with the current developed economies.

Sunday, November 11, 2012

CAPITAL BUDGETING ….CMA needs a new look.


The financial market took a huge turnaround after the debacle of 2008 where demand and supply inequality were the main players. Industrial revolution took a halt across the world and financial market reflected more fearful days. Global GDP took one of the hardest turnaround followed with diverse policies towards growth and survival of recession.

In this article I would like to depict more about why the companies are not actively behind new projects and why there is an active change in capital budgeting and financial management aspect. I hope this article will provide a new thought for the Cost Accountants and Investment bankers. My main target is to develop the insight of Cost Accountants beyond calculations and to be an active player in the Indian economy as well as in the global economic platform.

The old books of financial management and capital budgeting techniques has changed after 2008 recession phase across the globe. Investment opportunity has all taken a dramatic change due to the changing factors of capital budgeting and financial management. Business schools have also failed in majority of the case to find out the difference in project slowdown after 2008 debacle.

We have found that in India and in U.S economy corporate are having pile of profits in their books in the form of cash. Currently US corporate are having around $2.5 triilion as cash in their books of accounts. But they are still reluctant to drive into the ocean of investments since capital budgeting techniques will fail to capture the recessionary factors. In order to validate my data according to the recent report from Moody's Investors Service non-financial corporate cash position rose to $1.24 trillion at the end of 2011. The report further states, that nearly $700 billion, 57% of the corporate cash total, is held overseas which includes emerging economies. The below image depicts the same story.

One will be shocked to find that according to the Federal Reserve that, at the end of March, U.S. corporations held $1.7 trillion in cash reserves, which they keep in treasuries, other bonds, and bank accounts. When I drilled further I find that the cash position of the US corporate increased from 12% from 2006 to 24% from the Great Recession in 2008.

Time frame of generating cash flow is the biggest factor which the capital budgeting process will fail after the recession slow down. With negative growth in consumer demand in US and Europe and significant slowdown in Asian economy has changed the demand of any product. Hence more time will be consumed in generating a positive cash flow or even break even for any product as compared to the post recessionary phase.

Another aspect that fails to capture is the low cost of debt and equity component mixture within financial management of a project. US have got an zero interest rate which might seem like an gives an thumbs up to an investment project. But with significant slowdown in the global economy the real benefit of zero interest rate has negligible effect. At the same time with poor performance of the equity market and negative show down of the IPO market which is a key exit route for any venture capital and corporate finance has also changed the rules of financial management. Debt to equity ratio across the globe has taken a huge toll and a significant part of it can be witnessed in Indian market in the last 2 financial years.

Disparity about assumptions while drawing conclusion for project viability through capital budgeting and financial management techniques needs a high level of economic factors which needs to be accounted. I find project risk management has got a huge significant role to play since through this we can resolve the economic factors by certain percentage.

• Communication about risk in cash flow projection

• Identification of early risk in projects,

•Diverse markets and economic conditions linked with product consumption need to be linked with cash flow projections,

• In depth focus of equity option more than debt consideration should be the key aspect since equity is the key exit option for financial investments,

• Life cycle costing of the product should be mapped with different geographies since after recession of 2008 there has been an significant change in demand culture.
Well the above list might be incomplete and needs some more inclusion but it’s up to you to add up taking the practical aspects in mind.

In order to have new projects Cost Accountants needs to keep in mind those only mathematical calculations are no longer enough. One needs to grill into the cash flow projection factors while deriving the end result of the investment project. Geographical factors and product life cycle costing, needs to have a high level of priority to decide the project viability. Unless we cost accountants move ahead with these factors new projects will find times to come and hence the economic slowdown will only keep on growing.

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