The Closure

Don was helpless. The high command wanted results. He had been successful in buying time till now but not anymore. Every single day without an order was becoming difficult. He had a terrible evening the day before in the company’s annual meet. Robert, the charismatic CEO of S.H.I.S. Inc had given an encouraging speech on the future prospects on the company. “We are ranked Number One in safety records. We are ranked Number One for being always on time. Number One in comfort and amenities. And this is all because of you wonderful people.” thundered Robert. Then he went into the philosophy on which the organization Second Home In Skies (S.H.I.S.) Inc  was started twenty years ago. He always liked repeating it and people always loved to listen to him. He discuss on every important project being undertaken by the company. There was no mention of DragonSpeed in the long 45 minutes speech he delivered.

DrangonSpeed was conceived five years ago – the most ambitious project the company had ever undertaken. DragonSpeed was set to beat all the records – 2x the speed of existing aircrafts, 3x the existing passenger capacity, manifold fuel efficiency and many more features while raising the safety standards of already high standards set by S.H.I.S itself. Don was brought in from academia to accomplish this. He was a superstar in his previous world with groundbreaking research and multiple papers and publications. He was offered the highest pay package, becoming the only one to draw more than even Robert, the CEO. He was given the best twenty engineers available in the organization. The board was gung-ho about the project. The revenue forecast for other aircrafts were dwarfed by the DragonSpeed’s numbers. The company was betting on it to get into the billion dollar valuation club with an IPO. The shine of IPO money was already visible in the eyes of board members.

Don team constituted brightest engineers graduated from leading educational institutes with excellent academic and professional records. They were all hungry for success and considered themselves lucky to be part of such a huge project. For most of them, it was the first job after graduation. They were all ready to take off for high-flying careers.

Fast forward five years. The DragonSpeed was ready to fly. The team delivered the DragonSpeed as was required. The simulator tests confirmed that it met all the specifications set. It had however slipped the schedule. By whopping two years. This was just one of the problems. There was nobody to buy or rather sell the Jumbo. The sales team of S.H.I.S had never sold anything like DragonSpeed and none of the customers they worked with wanted such an Aircraft. The company hired other marketing agencies to sell the plane. “My customer does not need such high-speed but need higher fuel efficiency than what is provided by DragonSpeed”, expressed one of the Marketing Associates located in Far East. Another associate suggested some more customizations. Don’s team worked hard to meed these requirements, but unfortunately the list of such requests was growing faster than they could work on.  In addition, Don was having hard time in managing the expectations of the team members. The DragonSpeed was as ready it could be, but had still not touched the skies. The high command needed a customer to fund the final flight testing of the DragonSpeed. It was a painful experience for engineers to watch their dream machine lying idle.

One early morning, Don found a note in his mailbox to meet Robert. “Don, we have really tried very hard, but nothing seems to work out. The board of directors have decided to end this project. We would not be able to invest in it any further. I am sorry, you will have to leave the organization.”  Don was given a day to clear up his personal belongings. The remaining twenty engineers were allocated to other revenue-generating projects.

This was the closure of DragonSpeed.

Industry analysis

People keep talking about great Indian (and China) juggernaut, that is taking these economies into new sphere. This is one camp. Another camp feel that great “India-shining” story is a hype. People comprising these camps are mostly Economists, Stock analysts, Businessmen and Politicians. I bet my two cents for the case somewhere in between these two camps. Perhaps little more biased towards the former. This is what I think about some of the industries:

1. IT industry: Most of the success has come because of outsourcing from the western world. If the “India/China” story is true, Rupee factor is going to haunt the Industry. Companies catering to developing economies can foster since the market size will be big but “20% salary hikes” may not work out. Companies in higher value chain and with competitive advantage will have pricing power and hence may do well. Economy of the industry can change drastically. The effects will be seen much later. And as theory of evolution says, only the fittest will survive. IMO, the inflexion point is going to come very soon in this Industry or we may be already in it.

2. Logistics: India spends more proportion of GDP in transporting and supply chain than most of the countries. This is leading to a very systematic Logistics Industry with most of the companies outsourcing their logistics need to logistics companies. This will help companies in saving some cost by outsourcing to more efficient companies specialized in doing this stuff.

3. Cement/Steel/Pharma/FMCG/Consumer Durables – I dont see big change in these industries. With more consumers and more purchasing power, all these may do ok.

4. Premium Segments: There is new market coming up for luxury products. And contrary to what we may feel, it is not limited to Metro cities. I heard Merc sells more cars in Ludhiana than any other city in India. Be it slim TVs, ACs, Cars, Clothes, beauty products, companies capturing the nerves of consumer can strike it big.

5. Agriculture: There are lots of problems in Indian agriculture. Companies with right business model can solve these problems and generate lot of profits too. Check out my previous post

6. Education: After being neglected for so many years, recently education sector has become very hot. And when something becomes hot, imitators follow innovators and then come the incompetents. And the best example of this would be the following industries.

7. Real Estate/Infrastructure/Power/Telecom: Lot of people trying to solve the same problem. Result: lower profit margins. Only the companies with Moat will do well.

8. Entertainment: If we go by the numbers of IPL, there is lot to come in this sector.

I might have left out lot of other industries. Will add to this if I remember something later.

Great businesses and macro economy

Indian stock market is down on latest inflation report. In fact it has been on downward trajectory for quite some time. All the people who used to go ga-ga over the great indian story are either quite or they have changed their opinion. What has changed – the IIP numbers which are coming are not very exciting, the inflation is on stairway up, corporate numbers or okaish, Oil is 140+ mark. So basically the macro conditions are not looking too rosy. I have no idea whether this is just a blip or this is going to continue for quite some time. It it few months, 1-2 years, or more than 5 years. Theres is certainly lot of uncertainty in the financial environment. And uncertainty is the word that most investors hate.

Macro conditions do affect even the great businesses. Mainly, the cost of raw material increases and hence the profit margin squeezes. Some businesses can have pricing power but there is a limit for that. Also in these situations consumers become cautious and spends lesser. The impact can even go to companies like infotech where direct impact of inflation is much lower. The only companies possibly benefitting from such scenario are the ones generating basic commodities.

But history suggests that such macro economic conditions are generally cyclical. So great businesses may not do too good in tough times but they start rocking once the conditions improve.

So what are the businesses that can rock even in such macroeconomic tough situations for long time.

Good company vs great company

Many books have been written about building great companies. Authors try to list down some common characteristics that these great companies possess. Some say that in order to be great there are some quintessential qualities that are required. Now I wonder, if these authors know so much about building great companies, why don’t they start building them instead of writing books.. Of course, I agree that writing books is also one form of business.

There is another viewpoint by Nassem Taleb that these authors are being “fooled by randomness”. or perhaps they are not but they are trying to leverage the current ignorance of readers and making them more susceptible to “fooled by randomness”. After all they are doing some form of business, (may not be great business though as you may be sharing the success with publisher and prone to piracy)…

Whatever it may, everybody has something to suggest. But some people, i.e. authors, suggest without doing anything. They are actually like consultants, who in exchange for money, provide bull-shit to readers. So although Taleb may be right, but since he is also a writer, which makes him same type of consultant whom I hate.

Okay enough of diversion from the topic. There may not be a sure-shot way to build a great company. But for sure we can find out if a company is great at a particular time (it is almost imposible to say that a company will be great forever…isnt it?). Now you look at the company’s numbers like high ROIC and high profit margins and say “Oh this company is great”. But if this model is so good, others can easily imitate it. Thats where competitive advantage comes in. How can you stop somebody copying your idea…

There are couple of things which can work like technical edge, strong networking, brand etc. But these also may not last forever. So how do we make sure that this competitive advantage is retained.

But currently, i am stuck with even a bigger question: How to built such a competitive advantage when you are just starting off?