Can 'Lean' Fire Back on Your Business? Potential Pitfalls in Implementation.

Recently I came across some news/discussions which stumped me and motivated me to examine the topic in detail. 'A leading tractor company couldn't fulfil its customer orders because it did not have enough inventory owing to lean manufacturing.'

But before we reach any conclusions, lets go in detail. The company reaped the benefits of Lean during the recession period as its decline in bottom-line was lower than other companies. It was when tide was turning, the company miscalculated. The demand rose faster than they had anticipated. Other firms with unsold inventory were clearing up while this company was turning its customers away. And the blame was put on Lean, which is not a person, not an organisation but just a concept.

So what is amiss in the whole episode? First we need to clarify the premises on which Lean gained prominence. As the consumers became more demanding, competition increased and so the customer choices (as the car became available in colours other than 'Black Ford Model T'), the old model of large batch size production became ineffective. Long-term forecasts became unreliable, large inventories rotted in stores and companies lost money.

Then entered 'Lean'. A customer oriented approach where you give what customer wants and produce only what he wants. Reduced cycle times and flexibility were key goals. To achieve them it became pertinent to reorganise and streamline value chain, eliminate wastes, empower employees and collaborate with suppliers. All these are good for business and in no way undermine it.

A common mistake is to equate Lean with inventory reduction. Inventory has to be looked in a strategic way. At one end its locked up capital, has high associated costs and risks of obsolescence with changing customer preferences. At other end it has strategic importance in terms of absorbing production ups & downs and buffer for variation in customer demands.

Now coming to tractors. Are they same as mobile phones where you need a new model every month to survive in market? Does the product configuration change drastically? Is the product life cycle as short as a laptop model? If the answer is 'No' then it would not hurt to keep some inventory. One might argue against it citing inventory as waste. But here its a strategic trade-off. Protecting customer base is more important and lost sales are more costly than inventory costs.

But does this strategic decision violates the basic tenets of Lean? Answer is 'No' as Lean is all about 'giving customer what he wants'. Just because 'Inventory' is mentioned as one of the 7 wastes, does not mean that it is to be eliminated at all times. Inventory has been and always be a strategic tool. Reduce it to save money. Increase it if required to protect your customer base. Especially when economy is coming out of recession and demand is bound to jump.

Carbon Footprint: A Cost Management Driver and Product Differentiator - Twin benefits

In my recent studies on Carbon Footprinting of Supply Chain, it was interesting to note that the efforts towards reducing carbon footprint also resulted in cost savings. This is contrary to the popular notion that becoming Green comes at a cost. One might be tempted to believe that it is just a co-incidence, but is not so if one analyses in depth.

Once carbon footprint of whole supply chain is measured, its clearly visible that which areas are contributing more carbon emissions. Attacking these areas result in steps which also lower associated costs:
- lower fuel costs by switching to better fuel efficient transportation
- reduced electricity costs by using more energy efficient design
- decreased transportation costs by rationalisation of logistics routes
- reduced raw material costs by use of recycled material
- saving on packaging costs by reducing packaging material
There are many more with real life cases for each.

With so much evidence around, I am tempted to consider carbon footprint as a cost management parameter. Organisations are under continuous pressure to reduce costs and delegate this responsibility to functional heads. This approach does not take systemic view, department inter-relations and is unable to locate the high cost centres which should be prioritised first. ABC (Activity Based Costing) is a systemic approach but is costly and difficult to implement. Carbon footprint can be an alternate approach. Any area with high relative carbon footprint is indicative of high energy consumption, high wastage in that area. Once zeroed on priority area, one can then use various measures, implement 'Lean' (Refer my blog post 'Lean Is Green') etc.

However, during my recent conversation with an expert in the field of Carbon Footprint consulting, I was told that cost savings go hand in hand with reduction on carbon footprint only up to a point. After a certain stage, any further reduction in carbon footprint involves major overhaul in operations and product which results in increased costs. Now we come to the second use of Carbon Footprint as the product differentiator in marketing.

As awareness of climate change grows, consumers would prefer environment friendly products and will be ready to pay a premium for it. Companies can get return on their investments by marketing their products as 'Green'. That day is not far off when a count of Carbon Footprint will be printed on a product similar to the Price or Calorie count. And consumers along-with looking at price, will also look at carbon footprint count before deciding to buy a product. Promoting consumer awareness and Green differentiation can incentivise companies to go that extra mile beyond cost savings.

Sustainable Design: What Qualifies & What Does Not?

Sustainability has made successful inroads in day to day functioning of organisations. Use of energy-efficient devices, minimizing usage of paper, green buildings are some examples. Also individuals today are more conscious. They now segregate household wastes, voluntarily use public transportation, reduce water and electricity usage. However much scope for sustainability gets locked-in in design stage. An energy efficient building by design saves lot more than any retrofits or conservative usage can. It is similar to engineering design of the product that decides the reliability, ease of manufacturing and maintainability later on.

While making our business plan on E-Waste recycling, we stumbled upon a similar issue. Electronic waste has plastic, glass and various metals, all mixed in them. Disassembly of electronic products is not an easy task. But then we came to know about a directive from EU which suggests electronic manufacturers to design the products for ease of dismantling to facilitate their recycling. In this age of high consumerism, where products have short life, ease of disassembly for recycling certainly qualifies as a sustainable design. However, from my aeronautics experience, in design there is always a compromise among the wishlist parameters. The question is that whether a mobile company will agree to compromise on other design features (like style, feel, function, cost etc..) to make their phone easily recyclable?

Not long ago we used pencils made out of wood. Then due to concerns over cutting of trees and deforestation, pencils made of plastic came to market and became an instant hit. But then plastic pencils were not entirely bio-degradable. What can be a sustainable design in this case? A pencil made out of bio-degradable plastic or a wooden pencil manufacturing company with a system in place to plant new trees to offset its usage of wood. A case in point is the sustainable palm-oil effort from Unilever, where they try to ensure that the raw material does not come from deforestation but from a source where Palm trees are replenished after they have been cut.

As evident from above examples, a sustainable design not only considers proper disposal of product but also considers proper source of raw materials for the product. A typical 'Cradle to Cradle' (a term coined by Walter R. Stahel in 1970s) approach.

Hence a sustainable design may have following qualifiers:

- The raw materials used are either coming from a closed loop recycling process or from environment where the source is being replenished.

- At the end of its life, the product may either decompose into nature or is broken down to be used as raw material again.

- The product itself shall not cause any harm to environment during its useful life.

At first glance, these would look enough as qualifiers for sustainable design. But if one looks deeper, one will realize that the affects of processing and handling are not being considered. A mobile handset made of recycled parts can be hailed as a sustainable design, but what if the production process entails release of toxic chemicals, CO2, toxic gases and excessive water usage? What if the Palm oil production plant is very polluting though using the raw material from a sustainable source?

So we add one more qualifier to our list.

- The processing and handling of the product, till it reaches the customer hands, shall not harm the environment.

Closed-loop manufacturing and Green transportation are some means by which one can achieve the above qualifier.

Its easier said than done to make a integrated design which satisfies all the four qualifiers. Logistic partners, manufacturing partners, suppliers and even customers (to ensure proper disposal) have to work together to make a perfect sustainable system. Many companies attempt to do it in their own way and succeed in satisfying some of the qualifiers. Unilever works with suppliers. Walmart works with the logistics and stores design. Preserve, a recyclable plastic goods manufacturer, works with customers by establishing collection points at food stores.

While meeting the above qualifiers, it is important to avoid 'Over-Kill'. Its similar to over-design of a product without any value engineering. A real life example being, a British supermarket selling single bananas, each wrapped in recyclable paper tray covered with recyclable plastic. Now what stops them from selling cover-less single banana with price sticker on its skin? Similar is the case of Eco-blings, which cost lot more and do not provide any significant savings. Such designs do not add any significant value though they may fool one to believe so.

Now I wish to leave the readers with some food for thought. We are aware of motion sensors being used in restrooms and other places which switch on and off the lights. These devices are hailed as electricity savers. But on other hand such sensors continue to consume power throughout their life (also known as Phantom power). So is it a sustainable design? Or the old wisdom of switching the light on when entering and switching it off when leaving is too difficult for humans to follow. Can any technology that saves humans the effort which is rightfully theirs to do can be hailed as sustainable design?

Why the World may have a Stake in India's Growth?

China and India are two countries which missed out on the past industrial revolutions. Now both these countries are experiencing industrial revolution of their own. However the growth stories of both the countries are strikingly different. The Chinese growth has been phenomenal and Indian growth has not been that impressive. However looking beyond the GDP growth figures into social, economic and political dynamics of these two countries throws up some striking differences. These differences are enlightening if one does not get into usual quagmire of which one is better.

India's impressive 8% GDP growth has come from half of China’s domestic investment and 10% of China’s FDI. In 2003-2004, China invested about 50% of its GDP in domestic plant and equipment which is much higher than any other country. Based on similar other figures of capital and resource consumption, it is widely believed that massive resource consumption propelled China's remarkable growth whereas India’s growth comes from efficient use of existing resources. In the same breath one also says that China is Overbuilt and India is Underbuilt. The increased emphasis on infrastructure in India comes as no surprise with targets like building roads at the rate of 20km/day.

Coming to social aspects, China has more autocratic environment which contributes to speedy implementation. If a new highway or a plant has to be built, the Chinese Govt. can bulldoze the existing local inhabitants. No wonder that 'Avtaar' struck a strong chord in China where local inhabitants identified themselves as 'Navi'. In India the same issue will get mired in local opposition, political uproar and long legal suits. Tata's pullout from Singur, Failure of Arcelor-Mittal to get land for its steel-mills are some cases in point.

Coming to political aspects, India has huge ethnic, religious and lingual diversity and on top of it a democratic system. A democratic system in such diversity of views in not very conducive to industrial growth as there are frequent voices of dissent and consensus building takes time with ideas of socialism and communism still kicking. In China, the authoritarian rule removes these hurdles for the industrial growth. But this comes at a cost of poor human-rights record and censorship.

Even in international perspective, China has been able to maintain its currency undervalued for long time which has facilitated its export oriented growth. For India, such regulation would not seem possible. Also when I was talking to some Spanish companies, they find China easier to get in compared to India. In China, they deal with Chinese while standing behind interpreters, without engaging directly. In India, with a large English speaking population, the companies have no choice but to engage with Indians and deal with different social and cultural norms. The famous ones are 'The Indian Nod' and 'Indians neither say Yes nor No'. Also India requires persistence, 'Out of Sight is Out of Mind' in India. And not to speak of India's bureaucracy. Corruption is also high in India and so is in China.

China's growth story is a remarkable one and many in India itself take inspiration from it. China has a way low BPL % compared to India. However, India also realizes that she cannot have the kind of authoritarian and autocratic rule to achieve that kind of growth. And also India has been a relatively soft state in international affairs and like many other major countries is wary of China's expansionism.

Then why the world might have a stake in India's growth? Its because what kind of growth model the world wants to present in modern times to other developing and under-developed countries. The China one or India one. Further, how many countries can really follow the Chinese authoritarian and autocratic political system to achieve the stellar growth. I heard similar concerns being voiced during World Economic Forum at Davos. Success of India is essential to prove to the world that growth is possible in these modern times with less resources, in a diverse society with a democratic political system and freedom rights to its citizens. Though the growth may not be as stellar as that of China but still its possible.

'Jugaad' What does this New Management Lexicon Signifiy?

It came a bit of surprise to me when I learnt that 'Jugaad' (an Indian Hindi word) is making its way into management lexicons and McKinsey has been using it with its clients. 'Jugaad' has been something very obvious whenever I have employed it in my professional life. I never realized that it could be turned into a management concept. For those who wish to learn this supposedly the new management concept, like much of management concepts, 'Jugaad' is pure commonsense.

In India 'Jugaad' is often inspired by lack of resources and time. During the house-keeping, we could not find suitable size plastic bins in-house for odd-shape aircraft parts. Instead of waiting for procurement action, we just picked up the raw Aluminium sheets (Rejected and Quarantined) and turned them into suitable containers (with hinged covers, the hinges coming from non-moving stock of another aircraft program) in a single day. Similarly, some test equipments were made in a week with available materials saving time and money that would be lost in design and procurement action. In product design, often mock-up parts were made to try out new design concepts and evaluate their efficacy. My entrepreneur friend, developed a low-cost windmill in his small workshop with locally available material.

His design is more effective and cost-efficient than numerous others listed on web. The whole 'Jugaad' approach is very hands-on, resorted to when one wish to save time, material and money.

One may now wonder that how is it any different form 'Garage Works'. Well! it is the same to a great degree. However, Jugaad may extend further into other aspects of life. It further signifies ' achieving something with any means possible'. The passengers travelling on roofs of trains and buses, children playing cricket in constrained spaces with some additional rules like a direct hit on a wall is an 'Out' etc. The list would be endless. However, this term has negative connotations too. Giving bribe or leveraging high-placed connections to get some favour are also considered a 'Jugaad'. I would like to clarify that, I have not resorted to this extended use of this supposedly management concept.

So what managers can learn from 'Jugaad' with caveats of course. The first thing would be that inventions and innovation does not necessarily require a large capital and time outlay. Something which western corporations can use at these times of recession. Capital and other resources have always been in short supply in India and yet companies and entrepreneurs have found their way. The message is relatively simple and straight but its the caveats I would like to emphasis on. For instance, we had to take care that rejected Aluminium sheets do not by any mistake find their way into actual aircraft production. The make-shift test equipments are replaced by procuring more reliable and sturdy test-equipment as we move towards series production, rather than dragging that make-shift all along. Travelling on roof of buses and trains is risky and cannot be taken up as a hobby. Bribery and corruption is not an ethical mean of getting the work done.

Let 'Jugaad' be that word in management jargon which would remind one that innovation can be pursued cheaper and that too in lesser time. Before abandoning any development projects prematurely due to lack of funds, remind yourself 'There is always Jugaad'.

Copenhagen: The Need to Develop A Fair System

It all started with UNFCCC 1992. The resolution was passed to fight climate change with equitable measures from all nations while recognizing the developmental needs of the developing nations.

The Kyoto protocol of 1997 took the UNFCCC resolution further by creating the carbon market place on the principle of 'Polluter Pays'. The carbon trading market took-off in spite of several developed nations not joining it.

In last few years, the climate change issue has gathered steam and every nation is under the pressure to act. But at the same time every nation wants to adapt the approach taken to tackle climate change to serve its own interest. Lets look at the how the perceptions vary:

• Is the Per-Capita Emission more relevant or the Emission at Country level:

Per-capita emission of a person in US is 20 times than a person in a developing country. However, US supports lesser percentage of humanity than developing countries like India and China. Hence on national level these countries will have higher emissions in future. So the question is which measure to be used? Per Capita or Per Country? Each measure tilts the scale.

While one decides, bear following in mind:

- Who is the polluting entity? A Country or an Individual? A country does not pollute. Its the individuals and the factories/plants that pollute.

- Can all countries be treated as same? Consider a country with a small population burning coal, oil and gas (a very high per capita emission) but its total emission being less than other larger countries. Is that country therefore, less responsible?
- Effective reinforcement occurs at which level? An individual may self-enforce some bindings but laws are framed and reinforced at country level. Only at a country level policy decisions can be taken which promotes a mass uptake of clean technology.

• Does past actions have any bearing?

Are the historic emitters who have pumped the carbon in atmosphere have greater responsibility or the responsibility lies now only with the new emitters to pay for the past and future?

The historic emitters (more often developed countries) who have reaped the benefits of increased emission would argue that they are already there. They are first. They cannot roll back. Only developing nations can do that.

However, a developing nation may see this as unfair, as they are not responsbile for the extent of carbon in atmosphere. Why should they pay for it?

An interesting debate brokeout in Germany that whether the citizens in Germany should pay taxes to help developing nations reduce the emissions? Many would say No! Why should we? But the answer from other side will be 'Don't pay us. Instead use that money to reduce your per capita consumption to that of our level'. And interestingly, Kyoto protocol addressed this issue. Realizing that developed nations cannot roll back the polluting technologies based industries and power plants in few years, Kyoto protocol suggested that they provide resources to reduce equivalent emissions in any other part of the world.

• Are resources available to shift to clean economy?

The shift will require huge resources, both technological and financial. Both of these resources are scarce with developing countries who hold larger potential of mitigation and adaption. So should resources be given to them by developed countries who are enjoying the fruits of a carbon based economic growth?

• Is climate change the only issue?

Climate change is serious issue but its not an exact science. There are those who challenge it scientifically. However, the issue has been inflated to the extent that several human developmental needs like poverty eradication, education are taking back seat. The developmental needs of poor developing countries is being ignored.

• The trade angle?

During pre-negotiations at Barcelona, trade issues were being mixed with climate change. Products of a polluting company may cost more and become uncompetitive in market if they are asked to shell out for their emission. And companies in developed countries will suffer more.

• Sovereignty Issue?

The call for legal bindings on developing countries will be perceived as infringement on their sovereignty. One should not forget that many of the developing countries were under imperial control and will detest any similar control. Further, there has been bad examples set by many developed nations who did not fulfill their obligations under Kyoto protocol and no action was taken against them.

This is a food for thought for anyone who wonders that why the countries are not coming to consensus on a critical issue which challenges the whole mankind. Climate change is a serious issue. No doubt about it. And such serious issue can be combated only through fair and just means. An unfair system will face opposition and fail. The mankind doesn't have time to absorb a failure and then readjust the course in future. The fair system has to be evolved now if one hopes for any serious action by every nation of the world. The UNFCCC was a good start and should be taken further in same spirit without contamination of nation's self-interests.

Is Financial Markets' Behaviour Beyond Our Comprehension?

Uncertainty is neither good for business nor for markets. Physicist, Statisticians, Mathematicians try to measure the uncertainties and quantify it. More one can measure and predict outcomes in a market, more the market grows. Having modelled as 'Efficient Markets', the financial markets grew by leaps and bounds and left behind the real economy in recent decade. However, the present financial crisis has again put the question mark on our understanding of market behaviour. The risk assessment methodologies behind MBS credit ratings failed. The bell curve of risk distribution developed fatter tails during crisis. 'Efficient market' theory has crumbled under the weight of these failures.

Efforts are on to develop better theories which will incorporate not only market mechanics but also market participants. The big question is that how does one model the irrationality of market participants?

• Considering markets as 'Turbulent' systems allows one to apply physics of wind and turbulence.
• Considering markets as complex and evolving ecosystems, one can apply Charles Darwin theories.
• And third possibility is to study it on behavioural lines which use human psychology studies to explain the irrational behaviour of individuals and markets.

Regardless of the theory and approach taken, the market participants seek mathematical rigor and precision which can measure all the uncertainties for them and aid in decision making.

However, 'Is it really possible to capture the human irrationality and market mechanics.. all together in statistical and mathematical models?'. Can we replace the human judgement? This is precisely the point of debate between 'Principle based regulation' and 'Rule based regulation' of financial sector. Principle based regulation allows a level of discretion to regulatory authorities where they can apply their judgement and intervene only when required. Rule based regulation with elaborate rules (based on 'Efficient Market' theory) turned out to be inadequate to prevent the market participants from taking irrational decisions and the crisis ensued. One cannot blame the researchers behind the credit risk model of CDOs for the failure. They had clearly communicated the limitations of the model, but the bankers chose to ignore them. '...As long as the music is playing, you've to get up and dance...' Charles Prince, CEO, Citigroup.

As we wait for the mathematicians, statisticians, physicist, psychologist, anthropologist and others to work out the mathematical model to describe market behaviour, which would be more complex than ever, till then....... Lets embrace 'Prudence' along with conventional knowledge.

Both Precision and Prudence will have to go together if we wish to understand markets and avoid such crisis in future.

Where Does the Responsibility Ends?

A company facing protests in media because somewhere down the supply chain, the raw material is causing deforestation.

A celebrity being hackled for endorsing a brand because the company has been discovered to have connections with sweat shops in third world countries.

An industry cannot buy land just by giving fair price. It has to ensure that displaced people are located at other place and have employment.

A pharmaceutical firm, which has found a cure for a disease after huge R&D investment, cannot charge high prices and is forced to subsidies the drug in poor third world countries or risk patent infringement.

Is it a curb on freedom of speech and creativity if a TV series is being banned for being perceived as bad influence on children, if a painter is being banned for the paintings can offend some sections of society?

Whether we like it or not, the responsibility of ours as an individual or a company extends beyond our usual circle of concern. My Prof Mr. David Bach once mentioned that being not responsible for a problem does not absolve one of the responsibility to find the solution.

As global problems surface like climate change, energy crisis, terrorism and others, the individual and companies will soon find themselves being help responsible for lot of things which they would not have imagined earlier.

For instance, no sooner, everyone (individual and companies alike) may have to answer for their carbon footprint.

Are we (individuals and companies) ready for taking more responsibilities?

Is world economy held to ransom by consumerism?

This discussion that I posted on linkedin attracted diverse views. It makes a very good reading as it introduces one to different perspectives on economic activity drivers, free market, role of Govt. and sustainability.

Ashutosh

Is world economy held to ransom by consumerism? Requesting views...
What is the way out of recession? Increase consumption... Wars bring us out of recession because they stimulate fresh demand.
For fast economy growth? Again stimulate demand and increase consumption.
Just consume and consume and keep creating piles of waste.
We are living in age of consumerism. Everywhere, be it on tv, roads, we are being exhorted to consume. The consumption is key to welfare of our economy and the only way forward.

What happens if people become spiritual and lower their demand of material pleasures? Will the world economy collapse? Can the world economy survive with its citizens being less demanding, less consuming and simple living?

Comments (15)

Jeff Hardy
Vice President of Business Operations at SmarterTools

I have heard variants of this line of thinking in the past. Let me see if I can clear it up a little for you.
People consume because of only three things: they have disposable income, they feel economically and physically secure, and they are free to allocate as they see fit. If people did not consume, then there would be less incentive for them to generate work and value. They generate excess work and value specifically because they have something that they want to buy. Having the opportunity to have disposable income is the result of efficiency and security. Equally, if they are not free to spend their money as they see fit, the incentive to create excess value is diminished. The economy is therefore not held captive by consumerism. Rather thriving economies generate consumerism and synergy is built.

If a reduction in consumerism is to be attempted through socio-economic or political processes, it can be curtailed by reducing the productivity and income of individuals, making them feel less secure, and/or making them less free. You will find me strongly resistant to such efforts.

This is not to say that there is no arguement to be made for a simpler life lived with a focus more on spirituality and less on materialism. But such a discussion is a philosophical and religious one.


Ashutosh

Thanks for your detailed explanation. The points you have made are very valid. I am not at all for any coercive means of reducing consumerism.
Maybe my discussion is more on philosophical side.

I agree that efficiency and security are important. But the way the world is consuming, we are depleting resources, generating waste and stress in people' lives. Pursuit for better living standards and lifestyle is right of every person. But what if it comes at a cost. All the development till date has come at a cost to environment and society.

How can we have thriving economies which don’t cost us or coming generations?


Jeff Hardy
Vice President of Business Operations at SmarterTools

Economics is not a zero-sum mechanism. All economic activity has costs. The magic is in the free-market allocation of resources that have alternative uses—hopefully they are directed to the highest-best use.

Remember that there is a great chasm of a difference between price and cost. You are correct that costs are not always measured in currency (I might argue rarely) and that costs can be measured in resource utilization, time, effort, and opportunity (among other things perhaps).

In your two posts you also repeated the concept of “waste.” First—from a purely physical perspective—it has been estimated that all of the trash generated by all of humanity for the next hundred years would fit into a landfill of average depth 40 by 40 miles square; which is approximately 800 square miles or a little more than 1/1,000th or 1% of the world’s land area. Considering that the world is made up of….well, there is no other way to say it…the world is made of resources.

This is not to say that we should not be good stewards and plant two trees for each one that we harvest (etc.) and that we should not pollute beyond the natural ability of the environment to adapt and recover (etc.). But this suit to point out that the steel we produce to make our cars and televisions creates much economic good for ourselves and our posterity--and since steel is a recyclable, we use it again and again. We therefore "consume" many cars and gain substantial economic and social benefit with minimal waste--less and less waste with each passing year. And the parts of that car those are not recyclable and end up in a landfill? Well, that is likely the smallest part of the whole equation.

The news is not all bad. And technological innovations make for cleaner manufacturing processes, more efficient uses of power, and much more. Economic activity is a “good” in and of itself that gets forgotten far too quickly.

You may not think that the glass is half full, but at least consider that the glass might not be half empty.


Ashutosh

Thanks for sharing your views. I agree that its not that bad, glass is half full and some technological innovations are in right directions.

But I doubt that market forces alone can guarantee best allocation of resources. I may be wrong. But in my opinion there is need to actively divert resources towards right cause rather than leaving it on market forces. Do we have a market force which pushes a company to check its pollution to environment? There could be similar other examples.

To solve world problems like climate change, energy and water shortage, in my opinion conditions have to be created for directing market forces towards these problems. Carbon trading, preferential tariffs for renewable sources are steps in that direction, but they are with government support. I believe in power of market forces but doubt their judgement of what is good or bad for society as a whole.

Directing market forces on sustainability issues can also generate economic growth, jobs etc. But in the absence of such focus, I get the impression that present economic growth drivers are capable of doing much harm. The sub-prime crisis is a good example.


Christian Bieck
Insurance Practice Leader, IBM Institute for Business Value at IBM

Starting from the OP "What happens if people become spiritual and lower their demand of material pleasures? Will the world economy collapse? Can the world economy survive with its citizens being less demanding, less consuming and simple living?"

If people become spiritual, they raise their demand for "spirituality services" - you can be pretty sure that there will be a thriving spirituality industry. Consumption does not have to mean material goods, and indeed, if I look at my personal budget, a large part is dedicated to services of some kind. Even spirituality services will be wasteful in some way (everything that needs energy is) but there is nothing good or bad about it, and no reason to think the economy will suffer.

On the matter of the mythical beast "Market" - as you say, Jeff, players play within the rules set. Only in theory does the market produce an efficient outcome - in reality, the assumptions needed for efficiency are impossible to meet, starting with the assumption that market actors are rational. (Humans are very seldom rational - why should they magically become so when entering "the market"? I recommend reading Dan Arielly's "Predicably Irrational"). It always reminds me of the joke about the economist starving in the closed room, with the tin of food before him chanting "I define you to be open"... ;-)

The rules are there to try to approach the theoretical assumptions needed to make the market efficient, starting with such obvious stuff as "don't shoot the other guy, make a contract with him". You wouldn't want to live in a world without rules affecting the market, and it is not at all obvious where the boundaries are where we should start leaving the market alone. (If market actors, i.e. humans, were rational, we wouldn't need the "don't shoot rule" - we could be sure that the few shooting there are would be in the best interest of all, even of the one being shot.)

The rules we have don't allow for market efficiency in the resource area, simply because prices don't reflect (long-term) costs when it comes to the "free" resources like water and air. Why should they? Humans (not being rational) seldom on their own think long term - some less, some more, mostly culturally determined. Without subsidies (which I agree are not the best way to steer) and "free-market restricting" rules there probably wouldn't be a single renewable energy industry, and a lot more Chernobils.

A final comment: in Friedman's heyday, this discussion was really more of academic interest, and we could afford to be wrong about trying as much free market as possible, because not much could happen - economy was always local. Today, that is not the case - the world is so interconnected that single events can bring the card house down. That is why the rule structure needs to be robust enough to ensure that the house is not built of cards but something more durable - and there is no reason to believe "the market" on its own will accomplish that...


Ashutosh

Thanks for the comments Mr. Beick .
I agree that human beings are not rational. Moral hazard lurks everywhere. Market forces have not always achieved the desired ends.
In India, Govt. promoted competition and market forces in telecommunications and aviation. Both produced good results, but simple thing like catering in railways did not. The quality of the food deteriorated and cost went up, when it was thrown up to private players.
Proper rules are required. The Bloomberg article suggested from Mr. Jeff also points out that how Govt. failed to bring a regulation which might have avoided sub-prime crisis.
Mr Jame talked about growth rate. Quick growth or steady growth. Thinking from a corporate view, any growth more than sustainable growth rate is not healthy. The sustainable growth rate can be calculated before hand based on return on equity and other parameters.
Do such thing is applicable for any country or sector also? Was the dream of providing a house to every American (though everyone could not afford it) was ill-founded? Apparently yes. What could be a sustainable growth rate for a sector or even for a country? Or should one just go for unbridled growth?


Jame Rasheed
Experienced Business Development, Product Designing and Market Developer

Sustainable growth can be valued under certain parameters however; it has become obvious asymmetric information in the valuation system is often to aggressive and over shadows the obvious short comings of the valuation systems. The corporate valuation systems are usually need a balance of the numeric valuation and perceptive valuation both of which are crucial.
One of the obvious problem that came about from this economic down turn is that even though the projections were accurate numerically their perceptive projections were often did not correspond to the upcoming problems that were more of a phenomenon. What is effective is a check and balance system of the process. What we are facing is either a complete privatization of the economy or complete regulated economy such as preached in communism. Irony is that both are like sides of a coin with no balance adding to this is the obvious environmental problems that has risen from the ashes of the decades over usage of the natural resources. I would say is that, it would not be question whether we should be thinking about unbridle growth or vice versa what we should start thinking about at how we should grow without over depleting the existing resource that we have and how we can go towards more efficient form of growth with less with a check and balance ideology.


Tom Stroud
President and General Manager AFFINEX, LLC

The US economy is facing a reduced-consumption profile. The savings rate is up and retail sales and resource consumption falter.

Companies with high fixed costs and some form of monopoly and/or government support are responding with raised prices. For example, electric utilities are imposing new surcharges. Containership consortia are colluding to raise prices to cover high fixed costs even though their individual inputs (fuel etc) have declined. Credit card companies see declining use so impose new fees upon current balances.

Since the price raisers generally own our politicians, it is hard to see this cycle ending. We will continue to see 'necessity' inflation.

Meanwhile, back at the clothing store or electronics big box, expect to see some offsetting deflation. But, this will be dulled by that drop in consumption. The biggest impact will be further and expanding collapse of the commercial real estate market. Expect TARP 2. More money will go to bad banks who will in turn reward bad bankers.

Needless to say, the unwinding of consumption proves most aggravating.

To paraphrase Frank Rich's Sunday NYT article, prudence is being punked.


Ashutosh

Thanks for your views Mr. Tom. Recently I read that Chinese government is working on motivating chinese people to spend. Chinese are known for high savings and Govt wish to change this habit. :)

As you said 'Prudence is being punked'.


Tom Stroud
President and General Manager AFFINEX, LLC

Perhaps the most perplexing issue: what can replace consumption as the primary economic driver?

Of course, one method is to merely charge more dearly form necessary consumption. But that does not generally lead to full employment.

Another method is to publicly fund more 'common- experience' consumption such as public squares, museums, mass transit....

What are your thoughts?


Ashutosh

When money changes hand, so also goods and services. I agree that more and more people have to involve in economic activity so that necessary goods and services can reach them. This promotes economic well being in the society. Increased consumption facilitates this as more and more people get involved in creation of goods and services. Its not the consumption per se but the nature of the consumption is what we need to look into. Is the consumption pattern sustainable?

When one changes his iphone after 3 months to a new model, where does the old model land? In a landfill or in a recycling process and finds its way back into other electronic components? How much waste a industry generates while producing a product? Nature produces hard corel shell without using high temperatures and generating waste. Can our manufacturing process mimic nature and produce without generating waste? Is our consumption of energy today creating a scarcity for the coming generations? When a person takes a mortgage for a house, is he in position to pay it back?

Blatant, unbridled consumption is akin to deforestation, where the whole forest is wiped out without bothering to grow it back.

Taking more debt to finance one's consumption and taking further debt to pay off previous debt and more consumption is no different from a Ponzi Scheme. Referring to the China, which has high savings rate, does lead to sustainable consumption. It gives a confidence that any house mortgage will be repaid. The government can take that people’s savings and invest to generate more economic activity. Creating goods of common consumption can certainly do so.

As every human being aspires for better living standard, consumption will remain the driving force behind the economy. But one can control the consumption pattern. People can be persuaded to use recycled paper instead of normal paper. Its possible to invest more and improve mass transportation and persuade people to travel in it rather than individual cars. The need is to revisit our consumption pattern and ensure that it is sustainable. I would put it like this. Eating is essential to survive and everyone aspires for better food, but only right eating habits provides health and long life. Only right consumption pattern will provide a healthy and sustainable economy.

Tired of Change or the word 'Change' ?

Picture this! Launch of a 'Change' with great fanfare. Sleek toolkits being distributed. Meetings happening to convince people. Slogans pasted all around exhorting one to embrace the new way. People looking at them with tired eyes muttering 'Now What!'. Some roll up their eyes, others shrug with a sense of deja vu. The tool kits neatly lying on shelf, hardly opened. People sitting unitnerested in meetings counting away the time. Does it sound familiar?
Commonly known as 'Change Fatigue', it happens when people get tired of being part of incomplete or failed 'Change' projects.

I remember an incident from my professional life where Quality Circles were initiated with great fanfare, but lost steam midway. Later when we wanted people onboard for Kaizens, we had the scepticism and passive resistance. Luckily we did not fail this time otherwise for any other new project we would had then an active and vocal resistance.

But aren’t the failures a part of life. Does every new project succeeds? Is there any company which succeeded in every new endeavour? Isn't it also important to manage the change fatigue in face of failures and launch of new programs. Managing Change is important and widely researched area, but managing 'Change Fatigue' has also been a talking point for a while.

As one has rightly said 'People don’t resist change, they resist being changed'. Does the change program always need to be initiated with great fanfare? Why it cannot be subtle? So subtle that they don’t feel scared that a big tsunami of change is going to engulf them and no one knows what will be left after the water recedes.

'Create urgency for change', the popular first step of change management can also be done in subtle and quiet way. When we introduced Kaizens, we did not harp much on the word 'Kaizen' or 'Change'. We just worked on desire of people to improve their working environment and contribute to growth of the company. A 5 day session was introduced to implement their desires. Though the 5 day program was kaizen format but we refrained from using the word much. The goal was to institutionalise ‘continues improvement culture’, not to do 'Kaizens'.

The subtle approach has other advantages. If the project fails, people don’t feel that a big 'Change' has failed. They forget it sooner and move on to the next. Maybe heroic change management works for the start. But what when the hero leaves? A change can survive in spite of its hero only if it is embraced by employees as their own and not associated with any person or department.

For a company which desires to imbibe change in its culture, if takes a subtle approach, people will not feel threatened but welcome it. It’s not the change which people abhor over time. It’s the word 'Change' which brings back and sums up all the unpleasant memories of past failures.

Base of Pyramid Opportunities: Are You Missing the Bus?

Bottom of pyramid has come out of closed room management talk to out in open reality. Yesterday businesses talked about its potential, today its the mainstream business for some. 4 Billion people worldwide constitute the base of pyramid market. Out of that 800 Million are in rural India. According to a report, 2008 saw Indian rural market grow at the rate of 20-25%. 60% of sales of FMCG companies come from rural markets. They account for one-third of sales of India's largest automobile company. Telecommunication revolution in rural India is a thing of the past. How are some companies succeeding where so many have failed.

It was a surprising blow when I saw a list of push and pull products in rural market. Gold-coins, TVs, Cupboards are in big demand followed by fertilisers, livestock and two-wheelers. Insurance, water-filters and solar lanterns which carry a social value are push products. This awareness is a key factor as to understand where your product stands in rural market.

The other key success factor has been 'Co-creation'. Rural market has special needs and companies have been successful by involving locals in product design down to size, technology, material used and colour. Several rounds of feedback sessions, alterations and trial runs with the consumers have led to product design which is strikingly different from its urban counterpart. But Co-creation extends beyond physical design to the way its sold. One has to get the credit terms and the channel right. A recent visit to a company that sells solar panels shows that how a push product when adapted to the rural need becomes successful. Bajaj sells its insurance by modelling it more as a saving instrument.

The channel is another key factor. Its not the conventional distributors, but rural SHGs (Self Help Groups) and MFIs (Micro Finance Institutions) which form the channel. They are closest to the customers and have their trust. They have the market intelligence, the last mile approach and the distribution infrastructure. Customer acquisition costs are way low for them. Companies make a mistake of treating them like any other distributors. The rules of game are different as these are socially motivated micro-entrepreneurs.

Base of pyramid is a reality today. For companies not there yet, it is an opportunity slipping away, a blue ocean turning red slowly. The best part which I like is the corporate social responsibility inherent in it in form of empowerment of rural population, promotion of entrepreneurship, infrastructure development and improved living standards.

"Lean is Green..." Can changing management style help fight climate change?

A key element of Lean philosophy is to reduce waste. Or in other words to achieve more while using same or lesser resources. We have seen Lean more from management lens till now and have acknowledged its benefits in productivity, quality, response time, cost and other measures.

But when one looks in detail, one can also see that Lean based improvements also result in lesser usage of electricity(results in energy efficiency) , land area (more land available for forestation and plantation), transportation (saving fuel), processing (lesser discharge of chemicals and lesser usage of power), defects (lesser waste discharged in environment) etc.. Looking back and analysing my experiences in lean management with a fresh mind, I can now clearly see as how the improvements always resulted in lesser wastage of resources either directly or indirectly. Even a Kaizen on 'workplace safety' also contributes toward a green and clean earth.

Thinking broadly, one can say that what mankind produces is derived from nature and if we produce at a faster rate than nature can replenish or recycle, then we have got a sustainability problem. Reducing wastage in our operations can reduce our off-take from nature and give nature some more time to recover.

I think this perspective is important as it looks into the present day climate and energy problems from demand side. This allows everyone to engage in protecting and saving earth irrespective of the field in which they work.

Scenario Planning-Energy

Recently I have come across two energy scenarios till 2050 which may play out in future, called 'Scramble' and 'Blueprint'. Check out following link for a preliminary idea on what these scenario means http://dotearth.blogs.nytimes.com/2008/04/18/looking-forward-an-energy-scramble-or-a-blueprint/

In a workshop we later worked on same scenarios for EU and China. When asked that which of these scenarios is more likely to work out, majority said 'Scramble'. A 'Scramble' scenario seems plausible where every country is for himself and is more likely given today’s recessionary scenario and rising protectionism sentiments.

But there is a hope that countries may not 'Scramble' in the end, just because they now are educated about the possible scenarios and know the benefits of 'Blueprint'. Hence armed with both the scenarios and an informed knowledge about how future can turn out depending on today's action, there might be a conscious efforts from countries to take the 'Blueprint' way.

I feel, to ensure good decision making, one need to educate the decision-makers the alternate realities that may occur and the actions which lead to it. The decision maker then due to very human nature to do good, will take the right and proactive steps rather than being reactive to incidents and taking short-sighted decisions.

Will they come back, When the tide turns?

Everyone know that recession is temporary and is not going to last forever. It’s like a storm through which ships have to sail through. But it seems most of the ships are losing their bearing and getting disoriented. When the storm ends, will they be able reach where they had intended to go.

Employees and Customers are raison d'être for the companies. And there is a risk that in these hard times, myopic companies may loose them both.

Employees: During Oil Embargo, there were mass layoffs from affected oil companies. When the embargo ended, the employees were not willing to join back. They had lost their confidence in the companies.
This can be very well the case with companies today who are laying-off. Will the employees like to return to these companies? And even if they return, will they be as motivated and loyal as before.
Offering pay-cuts instead makes sense, since you provide security to an employee, don’t loose the tacit knowledge base and also create a sort of emotional bond and loyalty in hard times. A caveat though, the pay-cut should be non-discriminatory, i.e. everyone from top to bottom should take the cut.

Customers: Marketing is the first casualty in cost-reduction during recession, which can be justified to some extent. But a company needs to take care that it does not disappear from the minds of the people and when the economy recovers, customers have totally forgotten about the company. Then it will take more effort to gain back the share of customers mind and also the market. It’s critical for companies to preserve their market share at these times. A customer may not buy today, but if remembers you, then he may buy tomorrow.

E-Waste Recycling: A Cash Machine....

As part of our MBA, a team of me and my friends prepared a Business Plan for E-waste Recycling in Madrid. The opportunity is huge in Spain, in fact it is a big market all over the world.
E-waste (computers, laptops, mobiles, printers etc..), constitutes of plastics and many rare earth metals which pollute environment. And surprisingly, 95% of an E-waste can be recycled. A kilo of E-waste has more concentration of gold than what one gets from gold mines.

A large portion of E-waste generated in the world lands up in China and India, where it is processed by unorganised and informal players. According to a survey by IRG systems South Asia, a subsidiary of the IRG, Washington DC, USA, the total waste from electronic and electrical equipment in India has been estimated to be 1,46,180 tonnes per year. Add to this the E-waste shipped from developed nations and the opportunity becomes huge.

While collecting data and crunching numbers, the profitablility became glaring. Its the adoption of the idea that has been slow and many investors are not aware of this emerging sector.

How a bad mortgage got high rating when securitised?

I wondered how a pool of bad mortgages when securitised got high rating? There is extensive academic knowledge available on framework and calculations to assess risk. Then where did they fail to assess the risk?

As I sought the answer, I stumbled on the following blog, thanks to my Finance professor.
http://finance.blogs.ie.edu/archives/2009/03/li-a-revolution-after-black-scholes-formula.php

The risk assessment model 'Normal Copula' which failed is not to be blamed though for the crisis. The academic world was aware of its limitations but Bankers still embraced it for its simplicity and potential to devise new trading instruments.

Can Philanthropy be considered as part of Corporate Social Responsibility?

Following are excerpts from an interesting discussion I had on Linkedin.

Ashutosh Agrawal
MBA Student at IE (Instituto de Empresa) Business School, Madrid

Many companies, whose products do not directly benefit society, resort to philanthropy. Telephone companies giving away free telephones, companies giving away money to charities etc. What other means are available to them to highlight their social responsibility? Individuals do charities, so why not companies? Or they should just stick to making their operations (manufacturing, distribution, office buildings etc.) society & environment friendly?

Comments (4)

Liz Maw
Executive Director, Net Impact

I think so. Kellie McElhaney's book (Just Good Business) gives great examples of strategic and aligned Philanthropy, such as Whirlpool supporting Habitat for Humanity, and then donating appliances to the new houses. Kellie also talks about instances when philanthropy is not aligned or strategic, and questions whether that is the best idea. For example, she talks about Ford Motor Company supporting breast cancer, and suggests that they could focus instead on alternative energy / environment. (Note I may be getting this slightly wrong, but hopefully you get the gist of it!)


Ashutosh Agrawal
MBA Student at IE (Instituto de Empresa) Business School, Madrid

Thanks Liz. You brought out a good point that Philanthropy can be related to the area in which company is working. Then it makes sense..... But still Philanthropy in non-related areas (Ford example) can not be bad if the management feels passionate about the cause, or the cause is something important universally ( like AIDS, Cancer etc. ) I dont know... Its just my opinion.....


Josh Cleveland
Program Manager at Net Impact

I think you're right Ashutosh, that philanthropy is never going to be "bad" per se. I do think though, that some forms of it are unsustainable. I couldnt find any up to date stats but it would certainly seem that Ford would cut their breast cancer work in a downturn faster than Whirlpool. Why? because Whirlpool's philanthropy happens to be getting them into markets and building their brand in a way that Ford isn't. (Think of how the "Ford Tough" motto is strengthened by supporting breast cancer - doesnt seem that strategic.) That can be damaging to nonprofits that rely on those funds and then get left out in the cold eventually.


Ashutosh Agrawal
MBA Student at IE (Instituto de Empresa) Business School, Madrid

Thanks Josh for giving a new angle. U linked the sustainability effort with the organisation strategy. Then sustainability becomes a tool for branding and profits. I might be exaggerating but then for some companies, sustainability is a way to boost brand image or even customer base. I dont think that is bad since it is 'Win Win' situation and as u told, they will continue the efforts in downturn. But still it does not sound right..... Its the intention that matters. Maybe this downturn can be a litmus test for companies like Ford and others, as to whether they are really committed to sustainability?

M&A vs Organic Growth

Mergers & Acquisitions(M&A) has become a preferred vehicle to grow and expand in both related and unrelated areas. Cost reduction, economies of scale, acquiring competence, fewer competition, faster growth are some of the benefits of taking M&A route rather than organic growth.
But I was surprised to come to know that on average an M&A fail.

Mckinsey Qrtrly mentions that 40% of mergers fail to capture the identified cost synergies.

This is indeed very surprising. Some say that M&A only happens to increase the pay of top executives whose pay depends on size of the company. Others say that the failure to manage the change and cultural-fit is the main reason.

But it would be wrong to conclude that M&A are bad and one should go for only organic growth (There are many successful companies who have grown organically). The real challenge is to make M&A work and manage the associated change.

How Work Place Ethos Subdue Moral Judgements

Citibank orders a jet. Merrill Lynch CEO demands for a bonus and renovates the office. All of these at times of crisis (which was their own doing) and after receiving the public money for bailout. It makes me wonder how these powerful individuals are insensitive to what is happening outside. How toxic is the culture in these power corridors that one is unable to discern right from wrong? Or is the path to such positions filled with experiences that change a person and his value system.

Media has been harsh on such news, which is rightly justified. But also we need to look into what shapes a toxic corporate culture and how it can be avoided. Maybe Organisational Behaviour specialists can provide some answers.

But I have another serious concern. How does one protect himself from influences of a toxic culture when he walks in corporate corridors?

How practical is Closed Loop Manufacturing?

I was impressed by the concept of closed loop manufacturing, to model manufacturing units like biological units which use each other's output and there is no release of waste in environment. One can read more about it in the article http://www.kk.org/outofcontrol/ch10-e.html .

First I thought it was impractical because one will need to use suitable machinery, locate the industries near to each other and connect them. And how financially feasible it will be? But then I came across E-waste recycling and felt that it might not be that difficult. One can recycle 95% of any electronic waste which can go back into electronics and other products. The rest 5% waste, as the article (indicated above) suggests, the mother nature has the capability to absorb and recycle.

I hope closed loop manufacturing becomes a reality or else...... I am reminded of the opening scene of Hollywood movie 'Wall-E', with piles of waste everywhere and humans in space.

Who will be the Next Manufacturing Superpower?

This was exactly the question asked in cover story of DARE (a leading Indian business magazine) in its Aug 2008 edition. Responses were invited in form of essays and the contest was thrown open to all. The two best analyses get Blackberry. I never had a Blackberry before and was excited when I got one. The two best analysis, one of which is mine, can be read on the following link.

http://www.dare.co.in/announcements/contest/analyses-on-who-will-be-the-next-manufacturing-superpower-that-won-blackberry-bold.htm

A crucial point to be noted is that the essay is about 'Manufacturing' superpower not 'Economic' superpower. A manufacturing power does not necessarily mean economic power too.

Readers are invited to post their views.

How Satyam CEO went astray?

Satyam scandal shocked the corporate India. Many could not believe that a person like Ram Linga Raju did this. How could a shy and quiet person known for his rural initiatives and philantrophy succumbed to commit a fraud? Lets look at the issue with some compassion. He did not commit this fraud to amass immense wealth. Did he love his company so much, that he could not bear to see it ruined. Or did he succumbed to pressure from shareholders?

In any case, the question is back to ethics. At IE business school, we had one session on ethics and leadership which delved on how leaders go astray? How the surroundings affect them that they loose the ability to seperate wrong from right. Its good to know what factors cause derailment, but is selfawareness enough to prevent the leaders from making such mistakes. I doubt it. What is that one thing that can guide the executive in toughest of times? What can ensure ethics in face of severe dilemnas?

'Spirituality is the soul of ethics'. If that is true, which I do believe is true, then can spirituality help our leaders? I can hardly contemplate any spiritual person making such frauds? Should spirituality be made an integral part of any management training course?

Equity or Equality

A unionised environment poses a typical challenge to manager to strike a balance between equity and equality.

Equity : Treating everyone according to what they deserve.
Equality: Treating everyone same, without accounting for individual merit.
If a manager appreciates high performers, others see it as favouritism and oppose the move.
If manager treats everyone equally, the high performers get no motivation to perform well and may reduce their performance to the level of others.
So what does a manager do?

From my experience, equality is an easy way out, there will be no discontent, everyone is happy and performing at same (lower) level. On the other hand, practicing equity is lot more challenging, but yields higher performance.

Undoubtedly practicing equity is good, but its a tight rope walk for any manager in a highly unionised environment.

Spirituality in Management

During the advanced course of Art of Living at Bangalore Ashram, I met a person who had founded a small service company in Chennai. He had made everyone in his staff, do the Art of Living basic course and noticed a marked improvement in productivity and sales. I was surprised after hearing that.

In MBA at IE, as we discussed the challenges of implementing multi-teams and shared-leadership in an organisation, I was reminded of the words of that person. Many big companies in India, are motivating people to join spiritual courses and yoga. Spirituality should not be confused with religion. MIT Sloan research mentions benefits of a spiritual workforce. A spiritual workforce does not resist changes, is cooperative, happy and performs well in turbulent times. American companies are showing increasing interest in integrating spirituality into management. But is spirituality just another fad or has deeper roots, is left to be seen.