Tuesday, April 18, 2006

Did business school make me a better leader?
The short answer is yes. The combination of the learning team experience, consulting to a technology firm in Israel, working in multiple consulting teams over summer and the recent experience working on a private equity study have brought home many lessons on leadership and teamwork. I had similar leadership and team experiences at Cisco, with one major difference - I did not have the formal frameworks to reflect on my experiences as well as I have had at Wharton, and that has made all the difference.
So, where did the frameworks come from? This term, I made it an explicit goal to read my bulkpack (set of readings) for my leadership and teamwork core class, and reflect on my experiences at business school and before. This was one of my goals from my last quarter at Wharton. Next, I will discuss some of my recent reflections.
(1) Using the right sources of power/influence: I have found that in a team of mostly peers, 3 things bestow influence and power on a leader - (a) a wider view of the problem at hand, (b) expertise and (c) referent power. (a) is having a wider view, understanding the broad picture more than anyone else on the team. In turn, this results from an ability to break down large problems in a socratic top-down fashion, drilling down to the level of tasks. (more on this later). (b) is the power that results from domain expertise, which leads people to naturally defer to the leader. In formal literature, this is referred to as expert power. (c) is the power to influence based on personal characteristics, which causes people to aspire to work with the leader. People tend to want to work with, and be held in esteem, by people with they admire. Some characteristics that lend referent power are self-awareness, motivation, self-regulation, empathy and social skills. Similar to my BITSConnect leadership posting, this really relies on the leader becoming something of a role model.
An interesting corollary is how little MBAs know of (or are experienced in using) coercive power, which is almost considered "dirty" at business schools. The bias is rooted in service industry (consulting, banking) demographics, where most employees are extremely motivated and need little coercion to perform. The same is not true outside the service industry, and some of us will find we will need to learn to exercise coercive power the hard way.
(2) Choosing task-oriented vs. Problem oriented management: A leader can assign a problem or a set of tasks to solve the problem to a member of the team. I have found the latter is preferred as it affords much clearer communication. The only time I find assigning a problem is better is when you are grooming a team-member to be a leader (which is not always the case).
A related tool is agenda control and deadline assignment. Trivial as it may sound (I worked in an engineering heavy company where the techies hated running meetings), the person who owns an agenda or project plan naturally acquires a leadership position. So, if you are in a team of equals and need to assert leadership, taking control of the agenda or plan is a good idea.
(3) Choosing top-down vs. bottom-up problem solving: This is key to team situations with an analytical problem at hand - should you start breaking the problem down from the top and then assign small pieces or should you work on pieces independently and then integrate them to solve the high level problem. I am a strong believer in the former (notice how consulting firms use some form of a storyboard), but the key takeway here is that even if you choose the latter, make sure you (the leader) provide an integrative framework so people understand how their pieces fit into the overall picture.

Tuesday, February 21, 2006

How can the private sector fund more long-term R&D?

The question above uses the word "more" for a reason. Since the 60s, US R&D spending as a % of GDP has stayed between 2-3%, but with one twist - In the 60s, the government spent all of that, now the government spends slight more than 0.5% with the rest of the tab picked by the private sector. A recent Time magazine article laments this trend, and the apparently consequent slowing rate of US patent filings and publications in engineering and science journals. So, the private sector has picked much of the slack, but can it do more?

The problem, of course, is that no one knows if and when R&D will payoff (in most cases). Today, Google is a massive R&D engine and out-innovates most in computer science, but how much of that has been monetized? Turns out targeted advertising and Adsense comprise 90% of Google's revenues, so some great recent innovations in machine learning, operating systems and algorithms may have little or no marginal revenue impact.

A simple insight might suggest one way to get more funding into R&D. The payoff from R&D looks exactly like a call option - essentially, the same insight that has driven recent work in real options. There is much criticism of real options, something I will not delve into as it's less relevant to the question at hand. Consider a project funded entirely by writing options on R&D.

This could be a project in academia, or an entire firm. Let such R&D options be tradeable and liquid in a market-place, and let a new breed of analysts emerge that can value such options. Along with new standards around the disclosure of the progress of R&D projects, such analysts are critical to ensure liquidity in the market, and hence the viability of R&D options.

Assuming R&D options mimic European calls, an interesting corollary is that the price of the option increases with the risk of the underlying asset. This provides a perverse incentive to fund projects that are more risky, exactly the kind of projects that find funding hard in the current system.

As a global leader in science and engineering, the US might well consider investigating this route to draw more funds into risky R&D. Thoughts?

Saturday, January 28, 2006

What is the role of a 'philosophy' in private equity?

In looking at business, I have not seen the role of 'philosophy' more pronounced than in private equity. PE firms have have a view on investment opportunities - some rely on leverage, others on macro-economic drivers, still others on specific operational value-add - a view (mostly) sustained through the life of a fund. This contrasts with the usual corporation, which can (and must!) change focus, markets, sometimes even sectors to deliver returns to investors.

There may be a curious contrast here. PE investments (by LPs) are illiquid, and therefore non-diversifiable in a continuous, non-discrete sense. On the other hand, public markets are liquid, so investments in the public markets are truly diversifiable on a continuous basis. Yet, investors lock themselves into a philosophy.

The answer may lie in portfolio theory. A philosophy defines an "asset class" - a security with an expected IRR and risk profile. So, a firm with a unique philosophy gets the attention of LPs, and potentially offers financing for situations that other funds would not touch. Therefore, there are few "me too" funds left (many were formed in the late 90s). This is more true in mature markets (like the US), where efficient markets direct capital to the best deployment opportunities.
Finally, it's worth considering another indicator of how important a 'view' or philosophy is, seen in recent club deals. The Sunguard deal began with a group of investors, but some dropped out while others joined in as the bidding process continued. Clearly, for some firms, "in their view", Sunguard did not provide value at the price in question. As an LP, this is exactly what I hope for when I invest in funds A and B, so I know I am really getting two securities and not the same one. Thoughts?

Tuesday, December 27, 2005

What are leadership lessons from BITSConnect?
BITSConnect (http://www.bitsaa.org/giving/bitsconnect.html) was an incredible journey for me personally. I drove the project from inception to completion, and everything in between. At the end, BITS Pilani students across the world (not an exaggeration) had bounded together to fund and build $1.5M worth of state-of-the-art communication infrastructure at the alma mater. As a leader, here is what I learnt - a template I hope to refine and use in my career.
(1) Communicate vision and incentives: This is perhaps obvious and self-explanatory. To the inexperienced leader, it may not be immediately evident how hard this truly is. To the end, I don't believe 100% of the participants really understood the vision for BITSConnect. Incentives need to be tuned for individuals - some people joined BITSConnect to contribute to the alma mater, others did to get introduced to highly successful alums who could help them elsewhere, yet others participated because they were coerced and couldn't say "no". You need to recognize these differences in individual motivation, and speak to each one of them.
(2) Assemble teams with complementary skills: "Doers" - people who can be relied on to get things done without specific instructions and follow-up within the assigned time - get things done, they're execution artists. "Thinkers" are people who can see the bigger picture and come up with ideas, solutions ... like most other team efforts, BITSConnect needed a healthy mix of both. Many of the senior folk were thinkers who addressed questions us doers brought to weekly meetings, besides which they focused on fund-raising. Primarily a doer, I would turn thinker in our weekend meetings - an example of a need to play both roles depending on the occasion.
(3) Set and track short-term goals: Execution is essentially an excercise in discipline, and BITSConnect was no different. We met each weekend, assigned goals to each sub-team, and tested progress the following weekend. Breaking a large task like BITSConnect into 18 months of evenly spread weekly goals was probably the smartest execution move we made.
(4) Lead by example: You can both inspire and shame people into doing things by setting an example. The good part is that you dont need to do anything more than doing your own job exceedingly well ! In BITSConnect, I believe I set a really high bar by doing my very best at my specific assignments - and I was often inspired by the examples of others who pushed hard when I started to slacken.
(5) Use the carrot and stick selectively: I have seen people who excessively use one method than the other, and it's more often the stick that gets used. I recall two occasions when I needed to pull the vendor team up by threatening (once actually following up on the threat) by bringing in senior management from the vendor firm. But I used positive motivation a lot more often.
(6) Reward better than expected: We ended BITSConnect on a high note, and most everyone felt rewarded (I am painfully aware of exceptions). Well aware of differing individual motivations, the team overdelivered on rewarding people on criteria that the individual valued. An example is how I was rewarded on the one thing I valued - recognition - and how far the senior members of the team went to give me a place in their midst as a reward.
As I discovered from my classmates' varied responses to readings in our core leadership class at Wharton, unless you have been through a significant leadership event yourself, this sounds like a bunch of BS. I wish for you, reader, experiences that force you to think as hard about such experiences as some of us have.

Tuesday, December 13, 2005

Why startups are needed for big firms to survive?

This is just a corollary to my previous post, last paragraph. If the equilibrium described there must exist, then we have a compelling argument for why we will always need startups - because big firms, by the very nature of their incentive structures [stock price = wall street's pleasure] cannot risk innovating beyond a certain limit. Startups fill that gap.

Apple is a firm more in the startup mode - product focussed and a risk-taker, therefore with a very volatile wall street record. Microsoft is the opposite - a big company mindset from the start, which is why they wait for someone else to show them a big potential market, then they go after it like their life depends on it [Google?].

These two previous posts dont just apply to technology companies. Consider P&G and GE. Both underwent a radical change under their current CEOs - AG Lafley and Jeff Immelt [both non-engineers with Harvard MBAs] - who broke with years of tradition by acknowledging the need to buy innovative new firms as well as hire outsiders into senior management positions. P&G's acquisition of SpinBrush [small startup] and Gillette are results of that choice. GE's acquisition of Amersham Healthcare Plc., and the appointment of Amersham's CEO as the head of GE healthcare again reflect the same reality. Thoughts?
When is product innovation too quick for the market?
A few years ago, I realized there is an maximum ability in a market per unit time to absorb products - this is not the market size, but is the ability to buy replacement products. Consider a curve representing sales of all products that are dependent (in a probabilistic sense) on the product in question, then the maximum absorption ability is the slope of this curve.
This is a very real limitation. In the last couple of years, you hear VCs investing in telecommunications equipment tell you buyers were suffering from 'box fatigue' - buyers were tired of the number of telecom devices they had bought, and were less willing to consider a new network element. Indeed, this gave modular switches and routers in the network market a distinct advantage, and is one of the reasons such products enjoy enormous success. I see (anecdotally) a similar limit getting hit in the consumer communication device space, though interestingly, this limit seems to be different in different geographies - an interesting function of consumer psychology and disposable income.
The closest notion I have seen are replacement or adoption curves. Im sure these have been quantified well someplace, I just haven't seen them - I would like to do more than apply generic 'crossing the chasm' or 'S' curves to the problem - but actually draw a curve based on market data that is collectible in advance. Further, I would like to overlay this on a curve representing innovation - x-axis represents time and y-axis represents some measure of expected profitable return on R&D investment - so I can see where I will likely outrun the market's ability to absorb new products.
The upshot of all this? To the academic, this might be an interesting problem to quantify, and see what models might help both gauge and predict this maximum ability to absorb products. To the practicing manager, as technological innovation continues to outrun the market's ability to absorb new products, this could be a very useful tool in making R&D decisions.
In my experience as a product manager and engineer and studying technology companies at business school, large companies [often beholden to wall street] tend to wait for some proof of market adoption before investing [via acquisition?] in new technology whereas startups tend to introduce new products [often] in the hope that markets will prove themselves. Would a more predictive tool as described above destabilize this happy equilibrium?
How responsible are accounting boards for current pension problems?
Pension accounting rules in the US appear contrary to the FASB's usual conservatism in accounting. Consequently, accounting rules lead firms to understate pension obligations, and it requires fairly sophisticated financial statement analysis to get to the bottom of the actual pension obligations.
In addition to the current work at FASB on improving pension accounting, there appears to be a need for firms to state pension assets and liabilities on their balance sheets minus smoothing effects (this is often already in the notes) - which is really two changes - one, that pensions should not be treated off-balance sheet financing and two, pensions must be marked-to-market on balance sheets. The latter will be more aligned with the conservatism usually applied to accounting, and might allow investment management experts to continuously adapt to actual returns on pension funds.

Sunday, December 11, 2005

Is the MBA worth it?
As mentioned before, Im trying to get a general management education devoid of a major. In continuation of that theme, here are my courses for spring 2006 - 1 finance (finance of buyouts and acquisitions), 1 legal studies (negotiations), 1 strategy (strategic implementation) , 1 marketing (marketing strategy) and 1 leadership (leadership seminar). These will mark the completion of my formal business education, and Im happy with the material I have chosen.
In addition, I continue to be involved in the Knowledge@Wharton strategy group, am helping some friends from the valley with marketing and finance for their venture, and getting back on a health and fitness program that I had successfully executed through Fall 2004, but which has fallen by the wayside since. The last is important not just for immediate health, but is an exercise in work-life balance, and will perhaps help develop tools for the times ahead.
I have often been asked if the MBA is worth it, and what I have learned. Three things - (a) general business sense and judgment, (b) greatly increased self-awareness, and the realization that teams built with complementary skills are much more than the sum of parts, (c) softer, human skills; especially the ability to effectively interact with a very wide variety of people, which is more important (and a specific developmental need) than many realize. If these didn't make sense to you, you probably need an MBA.

Friday, November 04, 2005

When is branding necessary?

Note the use of the word necessary, as opposed to useful (good, important ... etc.) - I examine the question of when is branding needed. This may help answer when does branding add value, but that is an entirely different question, perhaps for another post.
My hypothesis is that branding is necessary when perceived product differentiation is low, either because of (a) low product differentiation or (b) poor cognition of product differentiation. (a) is easy to explain - if products are similar, might as well brand to differentiate yourself.
(b) is a little harder, so I will use two examples. Consider the iPod - essentially a commodity consumer electronics product, with many "me-too" devices available - yet, Apple commands a premium on the product because it's an Apple product. This is an example where the mass consumer has poor cognition of product differentiation - beyond the technical enthusiast, a bulk of iPod customers do not (and can not) understand the feature differences between Apple and the next guy's product - so they go with a name they trust, Apple. On the other hand, consider aspartame, a chemical ingredient that goes into low calorie sweeteners. The buyers in this case, chemists and chemical engineers at the firms that make table-top low calorie sweeteners, understand aspartame very well, and can easily make "feature" comparisons with other artificial sweetening products like saccharine and cyclamate, and therefore rely less on branding to differentiate products - they have high cognition of product differentiation. In general, the sophestication of the buyer in terms of their ability to compare products is inversely related to the need for branding.
If this model works, then a firm should ask the question whether either (a) or (b) are true for their upcoming product before committing to branding. If neither are true, perhaps your ad dollars are better spent elsewhere. Thoughts?
As a corollary, do sites like CNET.com therefore transfer value from the seller to the buyer, by giving the buyer an ability to compare products that they otherwise could not?