Pratibimb August 2011 - TAPMI's e-Magazine by Pratibimb TAPMI

PRATIBIMB Pratibimb | August 2011

The Reflection of Management

Volume II, Issue I1I

August 2011

A Bi-Monthly Magazine

A Students’ Initiative 1

Pratibimb | August 2011

About TAPMI T.A. Pai Management Institute (TAPMI) is a premier management institute situated in Manipal and is well known for its academic rigour & faculty-student interaction. The Institute has been recently ranked amongst top 1 per cent of B-schools in India & 4th in the South Zone by The Week Magazine. Founded by the visionary, Late Shri. T. A. Pai, TAPMI’s mission is to provide much needed impetus to the task of building professional management capability in the country. In the process, it has also played a role in strengthening the existing educational and health infrastructure of Manipal.

Mission We are committed to excellence in post-graduate management education, research, and practice by nurturing and developing global wealth creators and leaders. We shall continually benchmark ourselves against the best in class institutions. We shall foster continuous learning and reflection, achievement-orientation, creative interdependence and respect for diversity with a holistic concern for ethics, environment, and the society.

Recent Update TAPMI has been conferred with Dr. J. J. Irani award for the Best Management Institute by Dr. P. N. Singh Foundation, Mumbai. The award will be presented at the 13th Annual Convention on Leadership at IES Institute, Mumbai on 18th November, 2011 in the presence of 800 delegates. 2

Pratibimb | August 2011

About Pratibimb Pratibimb – The TAPMI’s e-Magazine - is the conglomeration of the various specializations in MBA (Marketing, Finance, HR, Systems and Operations). It is primarily intended to provide insights into the plethora of knowledge that relate to the various departments of Management and to give an opportunity to the students of TAPMI and the best brains across country to exhibit their creative cells. The magazine also strives to bring expert inputs from industries, thereby bringing the academia and industry together. Pratibimb the e-Magazine of TAPMI had its first issue in December 2010. The issue comprised of an interview of denoted writer Ms. Rashmi Bansal along with a series of articles by students and industry experts like MadhuSudan Rao (AVP-Delivery, Mahindra Satyam) & Ed Cohen who is a global leader and chief learning officer who led Booz Allen Hamilton & Satyam Computer Services to the first rank globally for learning & development . It also included a hugely successful and engrossing game for finance geeks called “Beat the Market” to bring out the application based knowledge of students by providing them the platform where they were expected to predict the stock prices of two selected stocks on a future date. The magazine is primarily intended for the development of all around management knowledge by providing unbiased critical insights into the modern developments. TAPMI believes that learning is a continuous process and is not limited to the four walls of the classroom. This viewpoint is further enhanced through Pratibimb wherein students manage and contribute to create a refreshing learning environment outside the classrooms which eventually leads to a holistic development process. The magazine provides a competitive platform and opportunity to the students where they can compete with the best brains of the country. The magazine also provides a platform for prominent industry stalwarts to communicate their views and learning about and from the recent developments from their respective fields of business which in turn helps to create a collaborative learning base for its readers. Pratibimb is committed in continuing this initiative by bringing in continuous improvement in the magazine by including quality articles related to various management issues and eventually creating a more engaging relationship with its readers by providing them a platform to showcase their talent. We invite all the best brains across country to be part of this initiative and help us take this to the next level. 3

MESSAGE

DIRECTOR’S

Previous Edition’s

Pratibimb | August 2011

I am pleased to state that the team members of PRATIBIMB have continued their sincere efforts to bring out this fifth issue in August 2011, despite the first year PGP students were busily engaged in their Summer Project work in April – May. The previous four issues had a number of management articles written by our students and faculty. This student magazine is also accessed and appreciated by our alumni and industry and business readers. The magazine provides a platform for our students to use their creativity, imagination and language skills to reflect upon various management areas i.e. operations, marketing, system, HR, finance and entrepreneurship as well as in areas of their interest. It also fosters research culture among students. Research orientation and sharpening analytical mind are crucial for their academic orientation. Generally literary work, research article writing and publication should become part of students’ learning goals while they are in the campus. This would perhaps sow seeds for pursuit for academic career by a few management students after their initial experience in industry and business. It has been observed that on comparison with fast developing country i.e., China in Asia, the focus on research and publishing from Indian students and faculty in management journals and pursuit of Ph.D. programme in leading universities has been moderate in recent past. This situation needs to be improved. To this extent our students and faculty can best express themselves about their creative thoughts, opinions, knowledge and interests by contributing to PRATIBIMB. Let PRATIBIMB grow in content and variety with thoughtful articles in months to come. I congratulate the persistence and continued efforts put in by the team members of PRATIBIMB for timely publishing this volume. I wish them higher performance, joy and success in their endeavor. Dr. A. S. Vasudev Rao

Editor’s Corner

Pratibimb | August 2011

Dear Readers, According to D&B, the Indian economy will grow to $5.6 trillion level by 2020 which will be a three-fold increase from its current level of $1.7 trillion. However, it might not be achievable due to the interconnectedness of economies across world which is quite evident from the fact that any crisis happening anywhere in the world spreads to other economies within a matter of time. The recent downgrade of US debt had quickly shown its effect on stock markets across world. Also, there is a growing fear among investors of the Eurozone crisis which has been aggravated by ongoing worries over double-dip recession in US. Though Indian growth may seem promising, we can not grow in isolation from world economies. We are pleased to present you the August issue of Pratibimb which will give an overview on world economies and how the recent happenings can affect the growth rate of emerging markets like India and China. Along with this, there are other interesting management articles that will certainly draw your attention. We are extremely pleased to introduce Abhishek Anupam, Abhishek Dubey, Bijoy Alokkan, Kapil Saraswat, Manish Mishra, Nandini Singh, Naveen N, Pranaynehru T, Shivesh Sinha, Sriparna Neogi and Sushmit Sinha as new members of Pratibimb. The highlight of this issue is the interview with Mr. Suresh Bose, Head—Human Resources, Sterlite Industries (India) Ltd., Vedanta Resources who shared his views on various areas of Human Resource with us. We are thankful to all the students from various colleges who put in great efforts in writing articles on various issues/topics and worked hard to send entries for “Beat The Market” and “Route To Market”. The articles have been selected by the Editorial Team whereas “Beat The Market” has been judged by Prof. Vrishali N Bhat and “Route To Market” has been judged by Prof. Vinod Madhavan. We thank them for their precious time. We also thank those who helped us in improving Pratibimb through their feedbacks. We would like to take this opportunity to extend our gratitude to Dr. A. S. Vasudev Rao, Director In-Charge & DeanAdministration, TAPMI, Prof. Chowdari Prasad, Prof. Gururaj Kidiyoor and all other faculties at TAPMI for their continued support, guidance, motivation and inspiration to take Pratibimb to the next level.

Chief-Editor

Editor Branding

Editor Creative Designer INTRODUCING SUB-EDITORS

Abhishek Anupam Abhishek Dubey Bijoy Alokkan

Kapil Saraswat

Manish Mishra

Nandini Singh

Naveen N

Pranaynehru T

Shivesh Sinha

Sriparna Neogi

Sushmit Sinha

Special Thanks Mr. Suresh Bose, Head—HR, Sterlite Industries (India) Ltd., Vedanta Resources Dr. A S Vasudev Rao, Director In-Charge & Dean-Administration, TAPMI Prof. Chowdari Prasad, Dean, TAPMI

Please continue to send in your valuable suggestions/feedbacks at pratibimb.tapmi@gmail.com so that we can make improvements in the coming issues. Happy Reading!! Rohit Kumar

Prof. (Dr.) Gururaj Kidiyoor, PGP-Chairman, TAPMI Prof. Vrishali N Bhat, TAPMI Prof. Vinod Madhavan, TAPMI Dr. Jaba M. Gupta, Associate Professor and Chairperson—eGPX, TAPMI

Contents World Economic Overview

Pratibimb | August 2011 7

Kaushik Suresh | Saurabh Paramveer, IIM A

The Practice of Practice

Prof. (Dr.) Gururaj Kidiyoor, PGP-Chairman, TAPMI

UID and Integration of Healthcare Industry

Vijayshree S Menon, Greatlakes Institute of Management

India’s Water Sector: Next Big Thing

Rajiv Lakra, IIM Kozhikode

Winning People by Crossing Self Barriers

Prasad Balakrishna Nayak H, TAPMI

Interview with Mr. Suresh Bose

Head - Human Resources, Sterlite Industries (India) Limited, Vedanta Resources

Marketing the Unmarketable: How To Make Consumers Electro-philic

Ankush Garg, IIM Rohtak

Crowdsourcing: Adapting to Harness the Power of Many

Gautam Prasad, TAPMI

Exchange-Traded Funds or Exotic Traded Funds - Boon or Bane?

Roy Paul Mathew, SJMSOM, IIT Mumbai

Diminishing Marginal Utility of Money

Navroz Singh Dhillon, XLRI

Pratibimb | August 2011

World Economic Overview Kaushik Suresh | Saurabh Paramveer, IIM A

Introduction The crisis in the financial and real sectors of major world economies that swept the world from 200709 was said to be the worst since the great depression. Fortunately, the last 2 years have witnessed relatively robust growth in emerging economies (especially the BRICS) and a tentative return of growth in the developed ones. However, the global economy is sending mixed signals – there appears to be a clear two way pull. On one hand, many expect sustainable future growth that would be driven primarily by the emerging markets for next two decades. On the other hand, there are several disturbances that threaten the currently fragile state of the recovery process. Developed economies are fighting issues like geopolitical shocks, increasing unemployment and bad debt whereas developing economies are facing issues like high inflation figures and volatility in capital flows. All of these may result in the future of the world economy being radically different from the present expectations. The rest of this article seeks to outline four major factors that are resulting in strong headwinds for the world economy and then make projections regarding the new world economic order that may develop over the next few decades.

the real economy worldwide. Given the much higher damage caused compared to the Kobe earthquake of 1995, weaker public finances (higher debt and lower sovereign debt rating), low benchmark rates precluding the possibility of monetary stimulus, reconstruction challenges and the shaky global environment, Japanese recovery is likely to be slow. Hence, the global production systems that have been disrupted would return to normalcy only gradually (Erian). Secondly, political turmoil in the middle-east and sub-Saharan Africa has raised concerns regarding smooth supplies of crude. While Saudi-Arabia and Iran remain stable and dissent by the “Shia” majority in Bahrain was suppressed using foreign help, Syria is destabilizing whereas the Libyan civil war has reached a stalemate. This coupled with political independence for oil rich southern Sudan and potential disturbances in Venezuela over Chavez’s continued rule raises questions regarding the ability of OPEC nations to meet the global oil demand.

European problems The sovereign debt crisis that has plagued the European economy including its financial system

Obstacles to growth Geopolitical shocks The triple disaster that struck Japan earlier this year – earthquake, tsunami and nuclear crisis, has dealt a blow to the recovery of Source: http://financesjournal.com/blogs/lessons-eurozone-myth-global-reserve-currency-7819.html

Pratibimb | August 2011 continues to be a cause of concern worldwide. While Ireland has implemented stringent austerity measures and avoided use of any bailout by the EU, Greece’s inadequate cutbacks led to the need for a second aid package coupled with moves to permit rollover of bonds. The recent downgrading of Irish bonds to junk status despite fiscal discipline is indicative of the lack of confidence in possibilities of economic recovery. Introduction of deficit limiting legislation in France and Italian efforts to practice austerity can be seen as efforts to calm the capital markets. The problem at hand is not merely a liquidity crunch in a few peripheral European nations but a far more deep rooted issue – structural imbalances in the economies of several major countries. The large western European economies have suffered a loss in competitiveness in manufacturing and services to low cost hubs, both to Asia as well as eastern European nations like Poland that emerged from the iron curtain with a well educated population. Public confidence in the health of the financial sector may well decrease following the stress tests in banks and the possible need for recapitalization over the next few weeks. The rising fiscal deficit in France and a crisis of confidence in the Spanish banking system coupled with rising unemployment have led to greater uncertainty regarding the future of the Eurozone. All of these imply that a return to the path of growth based on export and investment would be difficult to implement. Balancing of budgets is essential, especially in countries like France where fiscal deficit is presently 7.1% of the GDP. This would require the dismantling of inefficient subsidy and tariff protection structures, especially in agriculture and the downsizing of over manned bureaucracies. While these plans may have the same long term effect as “Agenda 2010” that led to the German economic recovery, an increase in unemployment and public outrage over the removal of certain welfare measures can be seen in short term, as in the case of Greece.

Europe is important not merely because it forms major chunk of the world economy but also as a source of demand for rapidly growing nations such as China. Sluggish demand for goods and services from this region is likely to slow down manufacturing in the aforementioned countries, thereby interfering with the virtuous cycle of investment and growth.

Overheating in Emerging Economies The latest signs of overheating in Emerging Economies don’t augur well for the global economic growth. The current policies of most of the economies of the world are designed with assumptions of sustainable high growth rate from China and India for at least next ten years. However, this assumption may well prove unjustified. In India, RBI has already hiked its key policy rates eleven times since March last year. The aim was to tame inflation which is driven majorly from supply side. On one hand, hikes might have been the reason behind a moderate mitigation in food inflation rates from 17% in January 2011 to below 8% in June 2011, but its adverse effects on growth story decreased industrial growth to 5.6 percent for May as per latest IIP figures. Capital outflow in terms of foreign direct investment from India for the month of May has surged to $3.7 billion, nearly 60% from the same month last year (Contify Banking). Though foreign portfolio investments in India were at continuous uptrend in both 2009 and 2010 (both the years saw an increase in inflow by nearly 40%), the trend has not been very promising for last six months. Till June 2011, cumulative FII inflow in India has increased only by 2.5%. So, in many ways, year 2011 marks a change in trend of capital inflows in India (Equity Master). China is also trying to rein in looming inflation and has raised its key policy rates three times this year. This anti-inflation fight induces fears of the end of the 2 decade long breakneck growth rate. 8

Pratibimb | August 2011 China’s recently released growth figures of 9.5% for three months ending June couldn’t help much to allay these fears because the main factor fuelling good growth for last quarter are government investments, easy availability of credit and increasing exports. This over reliance of exports and expansion of money supply may cause a temporary boost to growth but in long run will lead to an asset bubble in China fuelling further inflation. The supply side excesses in terms of providing infrastructure are fueling a boom that may well be a bubble, especially in real estate. Many analysts see China as an economy driven

same. The story looks gloomier when compared to dollar returns of 11.6% for US for the same period. Continued uncertainty or any turmoil would catalyze the return of foreign investors to safe havens – a flight to quality (BBC), (Richard Milne).

Weakening of the US The position of the US as an economic behemoth capable of absorbing severe shocks is at risk today – a radical change from the situation during the crises of the last few decades. The last 10 years of uncontrolled spending, especially on 2 wars and

Source: http://www.wildfire-burning-thirsts.com/wildfire-prevention-and-the-global-financial-crisis.html

mainly by steroids and predict a bursting of the “bubble”, much like Japan in the early 1990s. These fears are accentuated by rising social tensions. Shocks in form of sharp rises in oil and commodity prices may also cause perturbations to the growth trajectory of Asian elephant and dragon. Meager returns of 3% YTD in dollar terms in the FTSE BRIC 50 index of leading firms from Brazil, Russia, India and China accentuate the

tax breaks, coupled with one of the lowest savings rates in the world have taken their toll. Currently, it is a debt ridden country with huge deficits and debt servicing costs which has resulted in the loss of the coveted AAA sovereign debt ratings In its recent report, IMF has criticized US for its indifference towards its increasing debt. For the current year, the US national deficit is $1.65 trillion and while its national debt is $14.3 trillion. Promises to tackle indebtedness were lost in the 9

Pratibimb | August 2011 bid to fight the economic downturn. Federal spending rose by more than 24% in the first two budgets by the Obama government. If the debt ceiling hike is ratified, the US may well end up with a debt to GDP ratio larger than 100% - for the first time since World-War II. S&P’s decision of decreasing the credit ratings of US created waves of disruptions across all the financial firms as most of them hold major chunk of their holding as US securities. The US is currently on the verge of hitting its debt ceiling. Latest NFP results show increasing unemployment and a lackluster real estate market despite several rounds of quantitative easing (AFP). Unlike countries like Greece and Ireland, the US is unable to agree on broad ranging deleveraging and structural adjustment measures. Partisan politics may well delay the reforms essential to restore long term US competitiveness in manufacturing – a sector that has provided the bulk of the blue collar jobs. The obstacles placed by them in the Doha round of talks indicates an increasing inclination towards protectionism – a trend that would prevent their taking the export led path towards economic recovery.

Conclusion Given the above factors, the world economic outlook may not be as pleasant as projected by several analysts. A dysfunctional US economy and a weak Europe facing deflation and currency devaluation would adversely impact the manufacturing and service sectors of the BRIC and ASEAN nations. India has legacy infrastructure issues, opaque regulations, restrictions on investment and issues related to corruption which needs to be resolved while China faces a growth slowdown following efforts by their Central Bank to prevent overheating of the real estate sector and inflation. Hence, growth in India and China could be in the neighborhood of 6-7% till 2015-16 until the world economy recovers and provides a market for

emerging nations. China would undoubtedly be the dominant nation in the new world order and would form a strong economic block along with ASEAN nations and India. Eastern Europe is also likely to play a greater role in world affairs since countries like Poland are bringing a skilled, low cost workforce to the market. With its huge resource base in a world that is likely to see greater competition for procuring energy, etc Russia could play a pivotal role provided it sorts out political concerns. What is clear is that the near 3 decades of US hegemony is at an end and no other nation is likely to attain that stature in the near future.

References 

AFP. (n.d.). Retrieved from http:// news.brisbanetimes.com.au/breaking-newsbusiness/imf-says-us-debt-unsustainable20110630-1grdr.html

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Bankrupting America. (n.d.). Retrieved from http:// www.bankruptingamerica.org/2011/04/ government-overspending-unsustainablespending/



BBC. (n.d.). Retrieved from http:// www.bbc.co.uk/news/business-14117778.



Contify Banking. (n.d.). Retrieved from http://banking.contify.com/story/indiasoverseas-direct-investment-surges-59-37-bln -may



Equity Master. (n.d.). Retrieved from http:// www.equitymaster.com/india-markets/fiis/ displayyearlyfii.asp

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Erian, M. A. (n.d.). www.projectsyndicate.org. Retrieved from http://www.projectsyndicate.org/ commentary/maelerian1/English

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Richard Milne. (n.d.). Retrieved from http:// cachef.ft.com/cms/s/0/47c36968-0c67-11e08408-00144feabdc0.html#ixzz1SCXtCqd3

Pratibimb | August 2011

The Practice of Practice Prof. (Dr.) Gururaj H Kidiyoor, PGP-Chairman, TAPMI

Destiny is not a matter of chance; it is a matter of choice. It is not a thing to be waited for; it is a thing to be achieved. - William Jennings Bryan Going by my own assessment, I am neither an efficient worker nor an effective one. I always seem to have a hundred things pending and I hopelessly fall behind deadlines, extended deadlines and the “last and final” deadlines. Needless to say, I am compelled to take home my office work. I hated it initially. Later, after discovering that my wife hated it as well, I sort of started liking it (We have an unwritten rule at home – Whatever I like, my wife has to hate it and vice versa). One evening a few months ago, as I began opening my laptop at home, I noticed some smudges on the table where I usually do my work. Having learnt to stay non-inquisitive to avoid domestic perils, I cleaned the table with a piece of paper and continued with my work. I forgot all about this till the smudges were back on my table three days later. This time I cleaned it with a cloth while wondering what could have caused this. After a few more times of smudgy table and self-cleaning, I could not hold it any longer. “What are these smudges I keep seeing on my table?” I asked my wife. “Oh, it is all your mistake” replied my wife. “What do you mean by it’s my mistake? I am the one who is cleaning it always”. “Remember you bought a pack of different coloured clay lumps to our son? He has now started making models out of the clay and he does this on your work desk”. I got it now. A month ago, my 10 year old son had brought home a good looking report card after his

quarterly assessment. I had noticed quite a few A+’s , felt happy that he was performing notches above me ( I preferred to stay at Ds while in school) and decided to buy him something. My son had seen people doing amazing things with clay on the TV and hence wanted nothing but a set of clay moulds, and after I bought them for him, he had been regularly practicing clay model making, using my table as his shop floor. That explained the smudgy table and the cruelty of life. My son’s A pluses had landed me in a table cleaning job. Later that day I called my son and asked him to show me what was he up to with the clay. He ran into his room and returned with two faces made out of clay. “Hello.. Who is this?” I asked pointing to one of the faces. “Oh! It’s Mr. Thomson of Tin Tin comics” he said enthusiastically. “And who is the other fellow?”. “It’s his partner. Mr. Thompson”. “But my dear” I said “Aren’t Thomson & Thompson look alike in Tin Tin? Your Thomson & Thompson look like Laurel & Hardy to me” “Come on…He is a small boy after all and not Michelangelo” my wife came to his rescue immediately. “And mister, for your information, Thomson & Thompson are not look alike, their moustaches are different anyway”. Point well taken. My role as an art critique comes to an end. However, the smudgy tables continued, turning me into an excellent table cleaner. Gradually my son started making decent looking clay models. His specialty seemed to be human 11

Pratibimb | August 2011 faces of people who existed in their own world. One by one they all started emerging – Old man Getafix and the bard Cacofonix from Asterix comics, Aliens from Ben 10, the superheroes Spiderman, Batman and our own superhero, Rajnikanth from the movie ‘Robot’. He was getting better day by day. His one Thomson actually started looking like the other Thompson. Two months passed by and one evening as I returned home, my son was waiting at the door with a broad smile on his face. “What’s up champion? All A pluses again?” I asked him. “No Dad. It’s not that. I won the first prize in the school clay model making competition today. Everyone said the model I made was the best and much better than what others did”. “Oh that’s great news”, I said. I was really happy. “What did you make? Thomson & Thompson?”. “No Dad. I made Rajnikanth’s face with sunglasses and a beard. It was just like he looked in the movie ‘Robot’. Everyone simply went gaga over it. Even boys from the senior classes came to see it. Dad, I have become famous in the school and it feels out of this world”. No doubt I too felt good that he had won the first prize and was very happy, but I also wanted to see what had he learnt from this experience. “Tell me champion, how long did it take you to achieve this fame?” I asked. “About 50 minutes Dad” he immediately replied “We were given one hour, but I completed my clay Rajnikanth in about 45-50 minutes” “Oh. Just about an hour is it? Are you sure it was only that much” I looked at him smilingly. He was now a little confused. “Yes Dad, it was about an hour. Why do you ask this question again and again?” “Ok Champ, an hour it was. But tell me, would you have been able to make such a nice model if you were doing it for the first time?”.

He thought for a while and said “No, I guess. It was good because I have done it so many times earlier”. “That is the point champ” I said. “The 50 minutes you took to make the clay model was what you spent demonstrating a skill you had been perfecting since several months. So the fame that you are talking about came to you because of this hard work that went behind those 50 minutes. You will always remember these 50 minutes, but you should also not forget to respect those days where you put hours of hard practice. “I guess you are right Dad” he said nodding his head. Many of us forget that success is achieved mainly through sheer hard work and commitment. Perhaps this is the reason why millions participate in online lotteries, bet on cricket matches and lose their money in bogus companies. We forget that the probability of winning a lottery where ten persons have the ticket is one in ten while the probability of winning where ten persons are putting in hard work is one. The world around us also recognizes success, but overlooks the hard work behind it. For example, suppose a person practices high jump for years and then one fine day jumps over a 10 feet wall in front of large crowd. He is called a magician because everyone thinks jumping that high is humanly impossible. Such ‘magicians’ also seem to like being called so. A highly successful salesman would in all probability, attribute his success to the natural talent that he believes he possesses rather than the hard work he had put in mastering his craft. Carl Segan in his famous book “Cosmos” has said that the only thing natural to us is what is printed on our DNA and all other things are acquired or learnt. Our reflex action is natural, but our attitude is acquired. And any acquisition happens through some process. The danger of under emphasizing the processes is what I would call ‘leapfrogging’. This is a case of

Pratibimb | August 2011 the ‘throughput’ getting neglected in the classical model of input – throughput – output. We are now witnessing this all around us. The facet of marriages in India has changed drastically in recent years. While more and more young people are choosing their own life partners, the dimensions of arranged marriages have also changed drastically. They have become more business-like with a lot of “terms & conditions” being discussed between the two sides. The boys want the girls to be graduates with professional qualifications and an impeccable academic record so that they can secure employment in MNCs. Prospective brides these days are required to prepare a bio-data for marriage that looks more like a CV for a corporate job. On the other side, the girls want boys who do not stay with their parents (they do not want the parents to stay with their son) because they want to enjoy an independent life. The parties are so particular that engagements and even marriages are being called off for small reasons. A great degree of deliberations seem to take place before a marriage, but in spite of this we are witnessing more and more young couple getting separated from their spouses due to disappointment soon after their marriage. What these young people seem to be forgetting is, no matter whatever be the amount of diligence before marriage, the success lies in what happens after marriage. It is a process of adjustment, readjustment, compromise, creeping commitment and collaboration. This is what I call the throughput aspect of a marriage. Unless this is understood, young people will continue to be disappointed with marriage as an institution. This ‘throughput negligence’ is also seen among B -school students. In India nearly 500,000 candidates write competitive entrance exams such as CAT, JMAT, XAT and GMAT to secure admission into top management institutes in India and abroad. It is truly a high involvement activity where considerable amount of resources are spent. A lot of money is being spent on coaching centres

that prepare candidates for the entrance exams. A majority of the working executives spend their precious time into preparing for these exams. A hefty amount again is spent in purchasing the application forms of several top ranked b-schools. A second stage of this process is the frantic running between different locations to attend one admission interview after another. This means spending additional money on travel. Then the last leg is about choosing the right institute. Nothing less than a mini research is done for making this decision. Web sites are raided, social networking sites are visited repeatedly, and counselling is sought from coaching centre gurus, advice is taken from alumni of b-schools and media b-school rankings are considered before a candidate finally decides to choose an institute. With such an elaborate process going behind the choice of a b-school, one would expect the students to stay extremely focused during their two year stint at the school. But unfortunately, this does not seem to be happening. From the day they enter the b-school, the only priority seems to be campus placements which happens towards the end of their two years. This placement ‘mantra’ appears to be so strong that the series of activities that take place before placement are rendered useless. Securing admission in a reasonably good school appears to be very important, but the school’s offerings other than the placement seem to be viewed with disdain. No doubt with the high fee structures of good institutes, placement is important but it is equally important to keep in mind that there are takeaways in the curriculum that might help in placements immensely. A bschool experience is again all about adjustments, re-adjustments, commitments and collaborations. It is about changing and bringing about a change. A ‘leapfrogging’ attitude (from admission directly to placement) would not bring about any change in the student in which case it is pointless to enroll into a b-school anyway. The world around us is changing and changing fast. We also need to change and adapt, but we 13

Pratibimb | August 2011 seem to be in a tearing hurry to achieve this. We forget that there are processes to be followed to bring about changes in us and around us. We follow the processes and changes will happen. On the contrary, it would be stupid to assume that we

change just by intending to change and to expect the world to accept the way we are. The choice is ours – everyone dreams of success, but there are some who wake up and work hard to achieve it.

Beat the Market As Jim Cramer, a former hedge fund manager, and a best-selling author put it, “As long as you enjoy investing, you'll be willing to do the homework and stay in the game… I mean I'm not smarter than the market, but I can recognize a good tape and a bad tape. I recognize when it's right and when it's wrong and that's what my strength is.” Stock markets have never been predictable, you may apply the best of logic and reasoning, but there could be a possibility that you may falter if the emotions of the investors take control. The entries for this contest have been judged by Prof. Vrishali N Bhat, T.A. Pai Management Institute. The winning entry of ‘Beat the Market’, June 2011 edition is of Team “The Thunderstorm” whose members are Mr. Ameya Dilip Amlekar and Ms. Sneha Ghanshyam Porwal from Welingkar Institute of Management Development & Research, Mumbai!! Congratulations!! We thank all the participants for their effort. Beat the Market is a game designed to prove your mettle in stock market analysis. This time onwards, we will provide you the name of one listed company from NSE. You need to analyze stock movements of this company till 9th Sep, 2011. On the basis of fundamental and technical analysis you need to give us your share price estimate of this stock as on 23 rd Sep, 2011. Fundamental & Technical analysis will carry 70% weight while 30 % weight will be given to Accuracy of the estimated prices in the final score. The winning entry will receive a letter of appreciation and prize money of Rs. 1000 /Rules:  Company to be analyzed is K.S. Oils Ltd. (KSOILS)  You may analyze in a team of not more than 2 members  The file should not be more than 7 pages long including cover page, the cover page should contain the team name, team members name, Institute name, contact number  File name should be BTM_OCT_<TEAM_NAME>_<INSTITUTE_NAME>  Mail the file at pratibimb.tapmi@gmail.com by 11:59 PM, 10th September, 2011

Pratibimb | August 2011

UID and Integration of Healthcare Industry Vijayshree S Menon, Greatlakes Institute of Management

Mr. Vineeth, who is from Mumbai, is in Gurgaon for site visit for a week. But the very next day, he falls ill and is admitted in a large private hospital. The hospital requires his past medical history to start his treatment. The hospital uses his ID to retrieve his electronic medical record (EMR) and contact his insurance company. Mr. Vineeth is discharged from the hospital after a week of treatment, without any need for him to pay. The insurance company took care of his payment automatically. Meanwhile, the current status of Mr. Vineeth’s Health condition and the treatment that he had undergone is recorded in his EMR, for future access. Most of this, though partly imaginative in the present, could turn out to be true in the future. The entire nation has pinned large hopes on the Rs. 3000 Crores UID initiative which appears quite promising for the healthcare sector. The healthcare industry, which includes pharmaceuticals, biotechnology, medical devices and equipment provider, industry services, hospitals, health insurance, and medical tourism, has been touted as one of the sunrise industries in the last four years. According to a report by FICCI, growth in this sector will nearly touch $280 billion by 2020. However, despite its rapid growth, this sector has not achieved its potential. This can be attributed to some of the traditional and new challenges faced by the industry.

Challenges faced by the Industry The Indian healthcare industry faces huge challenges in terms of financing and delivery aspects of the system. The healthcare delivery is marred by infrastructural shortages and inability to keep track of the health condition of entire

Source: http://www.andhrabreakingnews.com/aadhar-enrolment-is-compulsory-from-august-1st/

population and forecast demand of services needed. On the other hand, problems like insufficient government spending, slow penetration of health insurance despite having huge potential market, lack of efficient payment mechanism hinder the financing aspect of healthcare. Some of the other crucial problems are lack of target population profile which hinders the provision of focussed services either by the government or by private players. Also, poor tracking of health condition of an average Indian, lack of means to maintain and share a single patient’s medical history has resulted in inefficient delivery system. When it comes to the financing aspect, the cost of medical services in India has been rising constantly over the last few years. There has been a rising trend of chronic or lifestyle diseases among the average Indian masses, adding pressure to the rising healthcare cost in India. The current means of capturing information about this problem through surveys has not provided any concrete result and have proved ineffective. Lack of such information makes situation difficult for the government to intervene and bring any reforms to control cost. This has led to the government’s inability to roll out National Health Insurance on a large scale. Also, many insurance companies are 15

Pratibimb | August 2011 unable to correctly price their products, leading to high premiums, thereby raising the healthcare cost.

How can UID provide solution to these problems? The UID Initiative, though has started on smooth note, is still going quite slow. Till now, only 1.6 Million people have been assigned UID cards. While the task of identifying the Billion plus population is still in progress, once implemented, the UID will have tremendous positive implications on the healthcare system of India.

Insurance scheme in Andhra Pradesh. UID can also help insurance companies to segment the population by clearly targeting them on the basis of their medical needs. This will enable them to better forecast the healthcare cost and design products appropriately. There can be better emergence of public-private partnership in financing the health insurance.

Concerns over data security

Though the potential of UID in Healthcare is unquestionable, there exists a fear of loss or theft of Personal Health The UID could information. There help to track and are also concerns store the routine regarding the health information, maintenance of thereby enabling EMR. Such the generation of concerns have been Health information prevalent in Systems. Creation developed of Health countries like US information system where such EMR and maintenance of facilities have Electronic Medical already been records of people implemented. using UID enables However, as the seamless transfer Healthcare system Source: http://blog.bioethics.net/2008/11/future-of-healthcare-is-technology/ of critical health on the whole information of the population. Traditionally, this information always becomes pervasive, EMR will be inevitable for remained in stockroom as the identifier effective health care delivery. In such case, information which was neither captured in a implementation of UID will facilitate better standardized format nor accurately. Such handling of the EMR and the privacy of the information could play a vital role in handling medical records. unforeseen epidemics by public and private hospitals. Also, this will help government in bridging the large supply and demand gap in the primary healthcare system. For instance, nearly 58% of the Indian children below two years are not vaccinated in India. The implementation of UID will help to keep track of such programmes on a Pan- Indian level and play a key role in implementation of national level health insurance schemes like Rajiv Arogyasari

Conclusion In the long run, UID can be seen as a mechanism to effectively bridge the demand–supply gap of healthcare industry and at the same time, seamlessly integrate the delivery and financing aspect of health care.

Pratibimb | August 2011

India’s Water Sector: Next Big Thing Rajiv Lakra, IIM Kozhikode

It’s an irony that we waste water and pay for packaged water. It’s a global issue now; clean water for all is a basic human need which is not addressed adequately. The challenge of meeting India's need for infrastructure development in a sustainable manner for water sector needs to be addressed. PPP (Public Private Partnership) models are the backbone for improvement in this market. There is also a hue and cry for privatization of water sector, but the government is trying to balance its pros and cons, and thereby making huge opportunity for the private sector to participate.

officials claim is cost recovery. Due to loss in revenue caused by non recovery of dues, they do not have capital to invest in maintenance and non revenue generating water (water wasted due to leakage) which accounts 32 per cent of total water supply results in severe inhibitors for development of water supply infrastructure. Government claims for water supply in every house, 24*7 water supply, hygienic tap water, proper sanitation, sewage treatment etc. which it cannot provide adequately. This makes an opportunity for private player to pitch into this water sector.

The water sector Introduction All of us have seen Mild Steel (MS) pipe carrying and distributing water throughout our home town, but we hardly trace back that same MS pipe. Let me give some insights about how it’s operated; water supply is under the jurisdiction of our city municipalities or local government institutions, apart from water they manage all other utilities that we enjoy at our home. Average tariff of water supply in India is 4.9 per cubic meter for all consumers including industrial, commercial and public consumers. Despite government subsidies cost recovery is only 50%-60%; this varies from city to city. If we look towards performance and service level of these municipalities, it fails to meet the demand of water supply in their cities. There are many reasons to it; but what most senior

According to the government assessment, the water requirement for industrial use will increase from the current 30 billion cubic meters to 120 billion cubic meters by 2025. The bottled water

Source: http://www.marka-cevre.com/en/services.html

market is growing at 55 per cent annually. The overall water sector growth is 15%-20% annually.

Pratibimb | August 2011

Waste water

Water treatment

Currently, India has 231 waste water plants for municipal use and another 38 are being built. Industrial sector has 88 plants for waste water management. With growing urbanization, sewer system needs to keep pace with it. At present most of the sewer systems are in very bad condition and need maintenance and some needs replacement. According to the United Nations Millennium Development Goals Report 2011, India tops in bad sanitation despite of having huge health issues.

This segment is crowded with many small and medium size companies, but still upgraded technology and equipments are required to meet the demands to rising population. This creates ample opportunities for foreign players to enter into market as consultant and establish their base in India.

Trade of equipment and technology With latest technology like DAF (Dissolved air

Fig: A typical dissolved air floatation unit, Source—http://en.wikipedia.org/wiki/File:DAF_Unit.png

Drinking water With growing health consciousness coupled with deteriorating water quality, bottled water has gained mileage compared to normal tap water. For house hold purpose 50 litres of packaged water cost 50 in city like Kolkata. For travelling purpose dozens of brands are flooded in market.

flotation), IGF (Induced Gas Flotation), automation of treatment plants etc., India needs to make their market open for upcoming technology. There are huge business opportunities for dealers, distributers and logistic based organizations.

Competition With open policies and the legislative changes 18

Pratibimb | August 2011

Fig: New water plant with capacity of 185 million litres per day. (Photograph courtesy of M.C. Shrikant, New Tirupur Area Development Corporation), Source—http://www.water-technology.net/projects/tirupur/ tirupur3.html

provided by the government India has turned one of the best countries for investment in the water sector. Policies like JNNURM and Vikas Yojna supports financially for project work related to water sector. Indian companies like JUSCO, Hydro Purification Technologies Ltd, Reliance infrastructure, Tata Blue Scope, Subash waters, L&T, IVRCL, Nagarjuna construction, Voltas etc are few names that are into water sector. Company like Mahindra & Mahindra and General Electric are coming to this field making it more competitive. Through joint ventures and consortium international players like Veolia Water, Degremont, Thames Water, Dupont, Emerson and Ranhill have already entered the Indian market. JUSCO and Ranhill Utilities Malaysia has a consortium for India's First concession cum BOT Project at Haldia for water treatment plant, Mahindra & Mahindra / Larsen & Toubro joint venture along with many small players are working for Tirupur Water and

Wastewater Treatment Project , likewise there is large number of project going across India.

Why India? The population of 1.21 billion makes India the house of 16 per cent of world’s population. The existing water recourses are depleting rapidly with the same rate demand for water is increasing. Also 37.7 million Indians are affected by waterborne diseases annually; 1.5 million children are estimated to die of diarrhoea alone, untreated or inadequately treated municipal sewage is a major source of groundwater and surface water pollution in the developing countries. The problem of inexorable irregular drinking water supplies and distribution networks for water has left no option with municipalities or local government institutions. According to World Bank study for cities with population of over 19

Pratibimb | August 2011

Source: - http://www.outlookindia.com/article.aspx?240637

1,000,000, Chennai and Delhi are ranked worst metro city for hours of water supply per day, Mumbai and Kolkata stand third and fourth, Cities like Jamshedpur and Chandigarh are the best cities in hours of water supply per day and clean water supply. In the absence of reliable data, industry sources estimate that the Indian water supply and distribution market is worth approximately $1 billion. Currently, water requirement for industrial use is 30 billion cubic meters and it is estimated that this requirement will rise to 120 billion cubic meters by 2025. The wastewater treatment market segment is highly fragmented and unorganized. The government of India has allotted 3 per cent of its national budget and there is lot more of opportunity for government and private player to look into this sector. Total Indian market constitutes of USD 15 billion and government is supporting by 50 per cent and rest by private players. CAGR is 18 per cent which is quite lucrative for venture capitalist

companies.

Privatization and its controversy There are many successful models of water privatization; countries such as USA, UK and Canada have exemplified the privatization of water. It involves transfer of water control fully/ partially to private companies. Many developing countries like India, Bolivia, Nicaragua and Ghana have started adopting this model. Water control involves treatment, distribution, sanitation, waste water treatment and cost recovery. There are several model of water privatization based on the degree of involvement of private players. Service contracts: This contract allows public authority to retain overall authority and second party has authority over maintenance, meter reading, billing and collection as per contract. 20

Pratibimb | August 2011 Design, Built, Operate, Own and Transfer: Such contract allows private companies to develop infrastructure for complete control over water within government norms for a certain period of time and then transfer back to public authority, condition may vary as per contract.

and legislations government is trying to balance pros and cons of water privatization, and making huge opportunity for private sectors to participate.

Divestiture or Concession: In this model government gives complete ownership to private player on the renewable basis for 20 -30 years.



Shannyn S., Water in Crisis – Spotlight on India, thewaterproject.org, October 2010, http://thewaterproject.org/water-in-crisisindia.asp



Anitha S., Balakrishnan K., Chandrika R., Hozefa H., Rajesh R., Ravishankar A., Sandhya G., Vennila T., Vishv J. , Water Privatization and Implications in India, http://studentorgs.utexas.edu/aidaustin/ water/water_privatization.pdf

Looking towards controversy over privatization, issues like price hike, inexplicable water digging, water monopolies, corruption and water quality comes into picture. These question need to addressed along with privatization, a balanced model covering all the controversies is required for water sector to thrive. With their new policies

References

Route to Market Winning Entry of June Edition:: Abhishek Tripathi, NITIE Mumbai Congratulations !! We thank all the participants for their effort. The entries for this contest have been judged by Prof. Vinod Madhavan, T.A. Pai Management Institute. The market has always been unpredictable for the companies. This holds more significance in the case of international brands trying to enter new emerging markets. Every brand wants to be recognized globally so that they can tap the new markets easily. The role of marketing managers in this age of globalization becomes more important in providing the companies with correct strategy to enter new market. We give our readers a platform to experience this challenge through “Route To Market”. The primary objective that the participant is expected to fulfill is to provide a “Market entry strategy” for an international brand/product into the Indian market. The overall strategy would be divided into three stages:

1st Stage - Market Assessment (Weightage -35%) Key Deliverables:  Customer Assessment (Segmentation, Targeting)  Market Competitive Assessment  Distribution Channel Assessment

2nd Stage – Communication strategy (Weightage -30%)

3rd Stage – Implementation & Go Live (Weightage -35%)

Key Deliverables:  Positioning  Promotion (Creative required)

Key Deliverables:  Test market geography selection.  Launch Price (Exact price to be mentioned)  Performance measurement metric selection

Strategy not

Rules: 

Brand for which entry strategy needs to be crafted is “Dippin’ Dots”

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The participant is expected to justify his stand – point in each deliverable

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Send entries with file name as “RTM_OCT_<PARTICIPANT pratibimb.tapmi@gmail.com by 11:59 pm, 10th Sep, 2011

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NAME>_<INSTITUTE

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Pratibimb | August 2011

Winning People By Crossing Self Barriers Prasad Balakrishna Nayak H, TAPMI

The foremost stride to overcome barriers to success is to identify what are the barriers to success? What is it that prevents you from achieving what you want?

Braille script, who didn’t let blindness conquer his mind but helped many blind see light through education.

This article provides an overview of building winning relations by surmounting self-barriers. It includes a description of the various self-barriers inherent in people; ways to deal with them and in the process achieve growth.

More often than not barriers to success are notional than being tangible. The prime factor besides the lack of confidence and hence personality being fear of the unknown. ‘FEAR’ as Patricia Fripp delineates is False Evidence Appearing Real. We humans have an inherent tendency to anticipate how things may shape up in the future and safeguard against the perceived threats, in the process forgetting about the changing variables and thus an underlying solution. The best way to counter fear is by not being afraid. It means being open to Source: http://www.kabbalahblog.info/2008/10/crossing-the-machsom/ new situations, taking the initiative to be involved and never to stop the learning process. It is these experiences that enrich a person and help build confidence.

Introduction “There are no constraints on the human mind, no walls around the human spirit, no barriers to our progress except those we ourselves erect.” - Ronald Reagan In today’s dynamic world, every situation throws up new challenges and demands for the best possible response. Under such premise an individual enjoys the freedom to perceive challenges as barriers to success or to boldly exploit the opportunity veiled under the problem. If one looks back through the pages of history, achievers have been individuals who identified and worked consciously towards overcoming their weakness. An excellent example for us to emulate is Louis Braille, inventor of

Overcoming Barriers to Success

We have been taught right since inception that our actions become our habits, habits when pursued shapes the character and character over the time determines one’s destiny. Once a person builds confidence the next step is to have a Vision and to articulate associated ‘SMARTER’ goals towards materializing it. This assumes importance from the 22

Pratibimb | August 2011 fact that a person without a goal is a person who is ignorant about his own potential. It also calls to think big, but to start small and once started, to never stop. The next hurdle to success is procrastination. Procrastination is delaying actions as much as one can until finally the action itself assumes urgency. We have learnt that Time and Money waits for none. But, today, to amass any kind of wealth proper time utilization is requisite. This can be easily achieved by learning to prioritize tasks thereby eliminating non-essentials that consume time with no productive output. Another outlook which may motivate an individual to utilize time efficiently and effectively is to discover the passion, hot imperative that lies embedded somewhere within. All great achievers were people who pursued their areas of interest with zeal and determination. As humans, we always want to do what we like to do, so if one chooses it to be some productive avocation the very drive will inspire to employ time fruitfully. Another couple of personal attributes to hone before one can actually start building winning relationships are listening skills and body language. A study by Judith E. Pearson explains that 55% of the meaning is conveyed through body language, 38% through delivery or tonality and words assume only 7% share in putting one’s message across. Body language and listening skills could be developed over time with conscious efforts. Paying heed to someone assumes importance from the fact that if you lend your ear to someone it will most likely be reciprocated back. Thus the onus to establish a cord has to be taken individually by the person. Once a person has conquered fear, know the value of time, overcome the language barriers and perfected listening skills the following step is to be a competent, motivated growth seeker. With mundane work, monotony creeps in over a period of time and things seem to be stagnant or moving

sluggishly. It is during these times hobbies, encouragement from peers, training do wonders and provide the necessary thrust that helps one bounce back with renewed vigour. Again the initiative to attend training, workshops has to be taken by the individual thus learning virtues like team building, leadership in the process. It is for this very reason that organizations today invest heavily in training their employees both to enhance their personality and technical competency. Having perfected all the above said traits, an individual is completely ready to build winning relationships that would be mutually beneficial. But just like each flower’s distinct fragrance makes it more blissful, an individual should strive to bestow his own personal touch. This can be achieved by being a good finder or by using positive words. One has to realize that everybody wants to be right, desires to be understood, loves to be appreciated and wishes to be respected. Knowing this simple truth would enable an individual to deal effectively with people and at the same time, being empathetic to their concerns. An example of how positive words can make difference can be seen in an organization. Often deadlines take toll and people tend to do mistakes. Now instead of criticizing the performer, a better option would be to criticize the performance. Doing so would not only make an employee aware of his mistake, but also help him build confidence.

Conclusion The Law of Attraction always works and the universe always responds with dream manifestation. We should commemorate Newton’s Third Law of Motion- ‘for every action, there is an equal and opposite reaction’. Similarly for ever committed initiation, there is an equal and productive payback.

Pratibimb | August 2011

An Interview with

Mr. Suresh Bose

Head—Human Resources, Sterlite Industries (India) Limited, Vedanta Resources

Human Resource is perhaps the most talked about subject in any organization. The role of HR personnel is significant in every organization and they play a very important role of managing people. The motivation of employees has a huge bearing on their productivity which in turn impacts the profitability of the organization. The role of HR managers has become more important because of the growing size of the organizations. The future HR managers need to understand the issues faced by organizations and how they should handle people when they join the organization.

He has an MA in Employment and Labour Studies from Institute of Social Studies and an alumnus of Tata Institute of Social Sciences. He has an experience of more than 17 years in companies like Larsen & Toubro Ltd., Ford India, Mahindra & Mahindra and Ararat Gold Recovery Company. During his interaction with Pratibimb, he shared his views and experiences on various areas of Human Resource Management with us. He also talked about various HR issues and the broader role that HRs play in any organization. We are extremely thankful to him for his precious time. Mr. Suresh Bose in conversation with Pratibimb:

In this issue, we talk to Mr. Suresh Bose, Head— Human Resources, Sterlite Industries (India) Ltd., Vedanta Resources. 24

Pratibimb | August 2011 Pratibimb: You have a diverse experience of around two decades in various countries. What are your views on cultural differences in Human Resource Management practices? Mr. Suresh: Working in different countries has definitely been an advantage for me. There are differences in rules and regulations based on culture across countries. If you talk about country specific practices, then as an example Russia has a strong leading culture while in Armenia, it is a well laid down structure with different Acts binding and holding the people and management strongly. It is a full proof system. It is like a system in which the progress report is maintained and reviewed for every employee. There are rules and regulations which are necessary from both employees’ and organization’s perspective. There are many advantages also. In Netherlands, it is a structured system. It is a win-win situation for both employees and HR person. Our system is altogether a different system which has a lot of harmony among the people. The written procedures and Acts together make our system rigid.

Pratibimb: What kind of structure employees including HR people should follow for achieving organizational excellence and objectives? Mr. Suresh: The employees should follow Standard Operating Procedure and work with people which is the basic necessity for smooth work culture in a function and organization which in turn paves the way for the organizational objective to be achieved.

Pratibimb: You are a sociologist too. How the sociological ideas have helped you being a Human Resource Manager? Mr. Suresh: Juxtaposing and comparing Sociology and Human Resources, one realizes that both have people at the heart of their systems. Sociology and psychology both are related with

Human Resource Management. The strong basics of Sociology have helped me to understand small and big issues in detail. People management is an art and having a deep thinking in area of sociology has benefited me a lot to create efficient work atmosphere.

Pratibimb: Sometimes employees have biases towards the Human Resource Department. They generally account HR department for upper management rather than for employees. How can an HR manager eliminate such biases among employees? Mr. Suresh: Working with the people and team builds a productive system. As an HR manager, one needs to work with people, and hence this is people management. An HR person should always be in touch with the employees whenever they need or even if they do not. The presence of an HR person in such cases eliminates all issues. Being in touch with employees as a business partner, they help the teams to achieve operational, organizational and HR objectives. Hence, working as a team is key for achieving all goals.

Pratibimb: What are your views on HR? Should this be Human Resource Management or Human Relationship Management? Mr. Suresh: It deals mostly with people management. Employees are the most important asset and an employee should be nurtured and trained continuously. The right input should be given to everyone. This can be possible when we look towards the scenarios as a human being. As a human being, we should be cordial and guide each other in right direction. Working under the guidance of seniors is a way of achieving objectives. Thus, it helps in organizations growth. Many people perceive HRs as a policeman which is really not the fact. HR persons are the ones who imbibe the motivational aspects in the organization and also keep a continuous check on rules and regulations; if someone breaks any rules and 25

Pratibimb | August 2011 regulations, they penalize the responsible person. Hence, in such scenarios, the HR persons are portrayed in a negative way, which is incorrect. HR persons play the role of a regulator and they need to be in such a role. On the whole, HR persons are acting as business partners and helping the organizations in generating higher profits. Thus, it is a two way role of Human Resource and Human Relationship Management.

Pratibimb: How is diversity maintained in Sterlite Industries? Mr. Suresh: Sterlite Industries is a global organization under Vedanta Group and Vedanta Group has branches in India and overseas. We are into manufacturing copper, aluminium, zinc and other products. Vedanta group has immense diversity - having its presence in various countries like Namibia, Australia, Ireland and others. Hence, we are working as a global workforce. The talent is generated all over the world and diverse workforce is maintained all over the branches. After two or three years, an individual gets an opportunity to work in different units. He may opt for job rotation and can opt for altogether a different area of function like a person can move from commercial function to finance function and vice versa. This is an advantage for the employee

and organization both. The employee can increase his skill set and organization gets employees with diverse backgrounds and area of expertise. Even in Sterlite Tuticorin, you can find a diverse workforce all over from different parts of India. In a global organization like Vedanta, people get opportunity to work in different locations and functions. Due to comprehensive efforts, the women workforce is bringing in more diversity at a greater number and many females hold important positions in this organization. Diverse workforce is the most important aspect of this organization.

Pratibimb: What are your suggestions for the younger generation about work culture? Mr. Suresh: I suggest younger generation to have impedance and integrity. Being in a performance driven culture, the younger generation should ensure to complete the groundwork. They should not look for short-cuts. The more they will contribute, the more they can get from their work. There is no substitute for hard work in this world and harder you work, the more you have in the form of monetary benefits and job satisfaction.

Pratibimb | August 2011

Marketing the Unmarketable: How to Make Consumers Electro-philic Ankush Garg, IIM Rohtak

As long as the light burns, Indian households are not terribly excited by electricity. The question is “How to sell what doesn’t excite the market?”. An often-cited, yet far from reality, solution is promising consumers smaller bills and better service. Often companies in Energy sector hire consultants to drive growth of their organization. The electricity market has opened up in the

country in the last decade and private players have started wooing the customers away from traditional power suppliers e.g. Tata Power added over one lakh customers to its base last year, majority of whom shifted from its biggest competitor, Reliance Energy. How it managed to raise its Brand Equity when the product i.e. electricity is totally indistinguishable? There are still ways to make customers Electro-philic or having an affinity with

electricity, so to say.

What can be done in Indian Context? Even if the power company is well-positioned and generating hefty revenues, there is a constant need of providing enough incentives to hook the customer. Indian Energy sector is still a decade behind its western counterpart. At the time when western power companies are looking for

alternative and more renewable sources of energy, Indian power sector is still struggling to cope up with power thefts and faulty meters. And yet there are a few areas which can give the industry a push. Following are the parameters or in marketing terms – “Positioning” which proactively strengthens the brand equity among its various stakeholders. To create a niche for itself, the company should 27

Pratibimb | August 2011 target four of these positioning and distinguish itself from others.

should be widely used apart from the regular methods.

First and foremost, instead of aiming to be a leader in power sector, the company should aim for a more relevant approach like- “Leader in Green and Eco-Friendly initiatives”.

Go Viral

Green Power Initiative In a recent power industry survey by Nielsen, 94 percent of respondents voted that they will prefer to buy power from the utility producing through renewable/green sources. It gives a huge potential to bank upon. For example, Tata power can initiate a program on the similar lines of “Green power” program in Australia. Green Power is a government accreditation program for renewable energy. It is bought by the energy provider on customer’s behalf. The energy provider will obtain energy from environment-friendly generating sources located within its service area as they become available. It also purchases renewable energy from third parties in the form of renewable energy certificates. The energy provider charges a very nominal fee from the customer for this. The customer can get a sense of contributing to the environment. He will also come to know that Tata Power is working for safeguarding the environment. A similar initiative is being done by Duke Energy of US and other big power utilities. Customers are charged $1 per week to ensure that the power coming to them is generated from renewable sources. Initially, a pilot project can be done; depending upon the response and the customer’s willingness to pay the nominal fee, it can be further extended to the whole city. This way the customers get a feeling of contributing to the well -being of environment by reducing their carbon footprints. They also get to know that Tata Power is doing something for the environment.

Leveraging the advertisement locations available in mass transports like BEST buses and Delhi Metro can attract many.

Popular Parks Lots of people go for an evening stroll in these parks. Small banners alongside the walkway depicting green initiatives by Tata Power can be put up. A kiosk placed in the middle of the park that informs them the benefits of saving electricity, an initiative of Tata Power can give mileage at a low price.

Hit hard, Below the Line At Malls & Shopping Centers There should be a counter with decorated gifts and toys for kids at the centre of a mall or at food courts. The kids can be engaged with innovative games like “Carbon Credit Calculation of their house”. Winners could be given attractive prizes. In this way the parents can also be made aware of the advantages of saving power and its benefits. A special event like Tata Power presents “GreenExotica”: A full day Proprietary Energy Festival of TATA Power can also give substantial leverage to the publicity of the initiative. Promotional campaigns on media like “GreenExotica takes care of Mumbai on World Earth Day” can also be used for publicity.

For communicating this initiative, social media 28

Pratibimb | August 2011

It’s about communicating well through Online Social Media A creative video can be created depicting benefits of saving power and promoting alternative

sources. Videos of satisfied customers using BEE rated appliances can be easily shared on YouTube, Facebook or other video streaming sites. The video can also be shown at kiosks and stalls put up by the company. Benefits: Large Internet penetration, No advertising cost and Effective lead generation

For promoting it’s positioning as a leader in CSR and sustainability, “Calendars” or stationary depicting visuals of Tata Power’s green initiatives should be distributed to customers and other stakeholders. Though it is seen that marketing electricity which is a commodity is a difficult initiative but with appropriate communication strategy and branding initiatives this commodity can be shown to provide tangible benefits in the form of Green Energy to the consumer. It signifies the need for hiring of reputed consultants to devise an appropriate marketing strategy for electricity which was initially thought to be unmarketable.

Inviting Articles “Best Article”: Kaushik Suresh and Saurabh Paramveer, IIM A

Congratulations!! The winner will receive a cash prize of Rs. 1000 & a letter of appreciation. We are inviting articles from all the B-schools of India. The articles can be on any field of business from Marketing, Finance, Operations, HR to Systems. You can send us articles on:  Recent developments or trends in any of these fields  Articles covering latest trends, innovative practices, strategies, etc. in the global perspective  We also invite articles on management thinker similar to the current section  Apart from above, creative works in relation to any of the fields will be equally appreciated The best entry will receive a letter of appreciation and a cash prize of Rs 1000/-. The format of the file should be MS Word doc/docx. Articles should not be more than 2500 words. The last date of receiving all entries is 15th September, 2011. Please send your entries marked as BAC_OCT_<ARTICLE NAME>_<SENDERS’ NAMES>_<INSTITUTE> to: pratibimb.tapmi@gmail.com 29

Pratibimb | August 2011

Crowdsourcing: Adapting to Harness the Power of Many Gautam Prasad, TAPMI

Introduction Crowdsourcing is the outsourcing of an activity (which was traditionally carried out by the institution’s employees) to unknown and external group of people through an open call. Take crowdspring.com as an example. The website is a platform for institutions to Crowdsource activities, such as logo design, website design etc. which were earlier carried out by their employees or contractors, to unknown group of individuals. These unknown groups who have access to infrastructure and knowledge to collaborate and execute, come up with various designs for their client. The client can then choose his/her favourite design and then collaborate with the concerned artists to come up with the final design.

the three models based on the number of contributors required for a particular activity and the number of beneficiaries of that activity. 1.

Open source: Linux is a classic example. As the ideas for the operating system are generated from a vast community of developers, the expected institutional cost is expected to be very high. Further, the operating system is free for usage. Hence, the product is directly used by a large number of beneficiaries.

Traditional Institutions: Here, the ability as well as the infrastructure required to carry on a project is held by a handful of individuals. These individuals then use these resources at a relatively high productivity to deliver value to a large number of end customers. Their high productivity justifies the incurred institutional cost.

Crowdsource: Here, the project is needed by a handful of people (mostly institutions), but it is carried out by external collaborating

Merits of crowdsourcing: 1.

Little or no institutional cost incurred

Access to a vast pool of human resources

Low dependence on any individual(s)

Demerits of crowdsourcing: 1.

Lack of control over the Crowd

Uncertainty in terms of the final outcome

Cost to locate the ‘required’ crowd. e.g. advertisement expenditure etc.

Open source, Crowds and Institutions: Why do they exist? The reason for the existence of Open source, Crowdsource or traditional institutions is value creation. But to understand their effectiveness based on their comparative effectiveness is slightly more complex. The above matrix explains the characteristics of

Pratibimb | August 2011 individuals (crowds). The result may then further be used to deliver a product to the masses, but at this level it is only beneficial to the institution in play e.g. a graphic taken from iStockphoto.com cannot be immediately delivered to end users. Instead it may first have to be used as a company logo, graphic in a print ad etc. The fact that the content is generated by hundreds of contributors means that the institutional cost of hiring them all must be avoided.

Reasons for crowdsourcing

the

emergence

Infeasibility to bear the institutional cost to harness the power of ‘many’

been endangered: 1.

Availability of Infrastructure: Thanks to technological development, an increasing number of individuals have gained access to infrastructure such as software tools, equipment etc.

Increase in the knowledge: The ability of individuals to contribute in various projects and business processes have increased due to easy access of information.

Cognitive surplus: Every year trillions of hours of man power are wasted around the world as the individuals have nothing to do! This has presented itself as a great opportunity for organizations. All these factors have caused the contribution curve (figure 1) to shift upwards. Now, the nth individual is capable of contributing much more than s/ he could before. This is referred to as Mass Amateurization. These trends have put the traditional institutional model in jeopardy. Coase’s law states that an institution will continue to grow until "the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction in the open market."

Figure 1 Increase in the ability of the 'Nth' individual with mass amateurization Traditional institutions have existed due to the concentration of ability. There have always been just those few individuals out of the entire population who had the ability to carry out a certain activity. Hence, it made sense to incur the institutional cost by hiring those individuals. Another factor supporting this approach was the high productivity expected from these ‘employees’. Though, due to certain changes, this model has

Hence, as the ability to contribute continued to increase, the institutions found it infeasible to bear the institutional cost. This infeasibility also arose from the low productivity of these new found amateurs. Coming back to the 1/N curve, it is important to understand the relevance of both, the institutional model as well as the crowdsourcing model. Firstly, the institutional model is feasible only for those individuals whose productivity justifies hiring them (institutional cost). This is because they will be a cost to the company for a long 31

Pratibimb | August 2011

Rise of the Prosumers Producer + Consumer = Prosumer The term Prosumer was coined Alvin Toffler in his book “The Third Wave” (1980). Prosumers are those consumers who are involved in the production of the goods and services that they will ultimately consume. Alvin Toffler classified the evolution of societies into three phases: Figure 2 Tapping the contribution of the Nth individual

1st Wave

period (in terms of wages etc.). Hence, their output must be sustainable over the long run. These individuals are found on the left side of the curve (figure 2).

2nd Wave

On the other hand, crowdsourcing can be effectively used to gather the potential of the rest of the individuals. These individuals generate probably ‘that one great idea’, though at a very low productivity. An example could be of a freelance software developer who fixes that one very critical bug in software. It will not be feasible to incur the institutional cost on this individual on a regular basis just for ‘that one critical fix’. Here, the crowdsourcing model in terms of a competition could be more effective. The following strategies have appeared due to this approach: Strategies

Examples

Competition Platforms

crowdSPRING, Ideabounty, TopCoder etc.

Service Marketplace

Freelancer, scriptlance, projectforhire etc.

Reference Content

Wikipedia, Wikihow etc.

Microtasks

microWorkers

Content Markets

iStockphoto, Netflix etc.

3rd Wave

Describes the first agrarian societies that replaced the nomadic huntergatherer cultures Industrial societies based on centralized mass-production, massconsumption, mass-education, and mass-media Technology and information powered shift away from bureaucracy towards decentralized power and production

Figure 3 The three phases of the evolution of society, Online Source: http:// www.onpostmodernism.com/articles/ crowdsourcing_prosumer.aspx The advent of the 3rd phase can be seen in the shift from mass production to mass customization and now slowly towards customerization. The role of the Prosumers is critical in the 3rd wave. The 2nd wave required the companies to go out and find out the customer needs and produce products accordingly. But thanks to the advent of Web 2.0, now the companies can indulge in co-production of goods and services with their customers. Hence, the institutions will become nothing more than middle men. Their reason for existence will come down to their possession of the necessary infrastructure to produce the ‘final’ goods and services. On the other hand, Prosumers will directly communicate their needs and requirements via the process of co-production and will also eventually consume the final product. 32

Pratibimb | August 2011 The 3rd wave is yet to be fully experienced, and the Prosumers are still few in numbers. Still, crowdsourcing can be effectively used to address the growing trend. Crowdsourcing not only can keep the organizations abreast with the changes, but also can be used effectively to address the “Buzz” factor of marketing also called word of mouth publicity. If channels such as social media are used, the consumers’ involvement in the brand as well as the product can be greatly increased by crowdsourcing. An example of this trend is ideastorm.com. The website encourages crowds to come up with their very own ideas about any of Dell’s products. Some of the ideas, based on their feasibility and potential, are eventually implemented by Dell. Hence, the Prosumers responsible for generating the ideas eventually benefit from them. The following strategies have emerged from this approach: Strategies

Examples

Content rating

StumbleUpon, digg, delicious etc. IdeaStorm, Ideascale, spigit etc. Ideasculture, Nine Sigma etc. Dead cell zones, Root wireless CrowdWorx, Intrade etc.

Idea Platforms Distributed Innovation Data Sharing Prediction Markets

content aggregators and organizers to become increasingly important. On the institutional side of the story, a lot of institutions will become obsolete as the crowds start to co-produce. Even the market research processes of an organization would have to be relooked at as the Prosumers start communicating their needs directly via co-production. At the end of the day, crowdsourcing can become a very powerful tool in the hands of the organization that chooses to accept the changing nature of the market and their position in the value chain. The same cannot be said about those who choose to live in denial.

References 

Crowdsourcing: Rise (and Con) of the Prosumer, onpostmodernism.com, February 2007, http://www.onpostmodernism.com/ articles/crowdsourcing_prosumer.aspx



Paul A. Strassmann, Outsourcing the IT Infrastructure, strassmann.com, January 2004, http://www.strassmann.com/pubs/cw/ outsourcing-it.shtml



Chris G., Why the open source way trumps the crowdsourcing way, opensource.com, April 2010, http://opensource.com/ business/10/4/why-open-source-way-trumps -crowdsourcing-way



Steve B., How CloudCrowd’s crowdsourcing business model adds value, October 2010, http:// futureofcrowdsourcingsummit.com/blog/ how-cloudcrowds-crowdsourcing-businessmodel-adds-value/

The future The user generated content on Web 2.0 continues to grow rapidly and has definitely outpaced the traditional media. Specifically, the business model of SaaS and IaaS (to a lesser extent PaaS) supports the consumption trends and needs of the crowds. Hence, as their prevalence increases, crowds will get more empowered. As this happens, one would expect the role of

Pratibimb | August 2011

Exchange-Traded Funds or Exotic Traded Funds—Boon or Bane? Roy Paul Mathew, SJMSOM, IIT Mumbai

Exchange traded funds, a low-cost form of investment which has immense popularity among retail investors, is becoming an increased source of fear of it being the source in waiting of a systemic institutional risk which can in turn lead to a financial scandal. This article analyses the functioning of ETF, its advantages and disadvantages and the growing concern of ETF being a source of a future scandal instead of a revolution by attaching too much risk and complicating a simple idea.

What is ETF? ETFs are part fund, part stock schemes which does not need active management and the investment portfolio lies in securities like equity shares. Though ETF gets itself traded in the secondary market like a stock and it effectively tracks an index like Nifty or Sensex, a comparison can be drawn between an ETF and a Mutual Fund. Another striking difference lies in the fact that price of an ETF is volatile on a daily basis; adjusting itself with the demand supply equilibrium existing in the secondary market. Mutual Fund, on the other hand, has its Net Asset Value (NAV) computed at the end of each trading day. ETF does not aim to outperform their Benchmark indices

but rather follows passive tracking. ETFs first hit the market in 1990 and some of the popular ETFs are Spider (SPDR trading under symbol SPY) which tracks the S&P 500 index and examples of ETF providers are Barclays Global Investors (BGI) and State Street. ETFs can be basically of 2 types 1.

Leveraged ETFs - Leveraged ETFs offers a geared return on a given index

Inverse ETFs - Inverse ETFs aims to go down when the bench mark goes up and goes up when the corresponding bench mark goes down.

Pratibimb | August 2011 The performance of ETFs are shown below:

Advantages of an ETF 1.

Automated Mechanism - ETF’s work on an automated mechanism and can be employed by investors who want to avoid the fund managers. Hence, ETFs are better products with more features for a lesser amount of money. ETFs are listed in stock exchanges which enables investors buying and selling and unlike conventional MF’s, ETFs can be traded all day long. Diversification coupled with flexibility of a stock - An ETF gives the advantage of diversifying an index fund. Since shares of ETF gets traded in the secondary market, basic operations on a security is tenable for an investor like its purchase, short sell, margin buy etc. It leads to financial democratisation because small or big investors can trade on same terms. Nowadays ETFs which tracks private equity, vaccine stocks, clean energy, gold etc. are available apart from the regular bets on standard indexes Lower Expense Ratio compared to Mutual Funds - Since the cost of active tracking by fund managers is nullified by its automated mechanism, the brokers are being paid the same commission as a regular trader while buying and selling ETFs. It allows investors to get “beta” (market returns) at cheaper rates, while MF’s strive hard to achieve “alpha” (extra returns through skill), charging more for the privilege. Greater Tax Efficiency and Liquidity Since creation and dissolution of ETF units happen in secondary market against trading shares, there is a constant cash component. Since the responsibility to create ETF units rests with the market maker, they need not

pay brokerages to stock brokers because ETF does not buy or sell securities in the market.

How does an ETF work? The market makers in the stock market are appointed by fund house who are entrusted with the responsibility of buying the basket of securities (e.g. market index scrips) and by a process called “Unit Creation”, these securities are exchanged for a certain number of units by the Fund House. The market maker splits these units which are sold separately on the stock exchange. Once these split units are sold, it is up to the investors to buy and sell these units from the stock exchanges. Financial institutions facilitate the purchase and sale of ETF shares normally in bulk blocks and are called creation units. Institutional investors receive or contribute a basket of securities of the same type and amount held by the concerned ETF. The portfolios of ETFs are transparent and hence it is helpful for institutional investors to decide the assembly of portfolio assets for purchase of a creation unit.

Growing Trend of ETF to become Exotic Traded Funds Newer types of ETF fail to give the cheapness and diversification of the traditional ones. ETFs are increasingly becoming a source for hedge funds to hedge and speculate on the stock market throughout the span of trading day which in turn allows complex bets on highly illiquid asset classes. The earlier concept of ETFs to encompass a broad range of stocks is quickly giving way to derivative position with counterparty being an investment bank. This growing trend is worrying and it has certainly caught the eye of financial regulators. The Financial Stability Board (FSB) published a report of caution on ETFs. The IMF and Bank for International Settlements (BIS) published global financial stability report and 35

Pratibimb | August 2011 research paper on “Market Structures and Systemic Risks of Exchange-Traded Funds”. The biggest worry for the regulator surrounds the “Synthetic” ETFs and derivative linked products popularly known as ETPs (Exchange traded products) of which Exchange-traded notes (ETNs) and Exchange-traded vehicles (ETVs) are popular. An ETN is basically a debt security issued by a bank or an index provider which gets traded on the market. An ETV is a debt security issued by a special-purpose vehicle.

Since it is almost impractical to replicate a targeted index, most of the ETF provider usually enters into a transaction known as total return swap with a leading bank. The bank is then entrusted with a tedious responsibility and risk of

replicating the index. The bank, on the other hand, agrees to pay the provider an amount almost equivalent to the return on the chosen index benchmark. Since ETF provider has an inherent fear of the bank going bust and hence requires the bank to provide collateral. There is a big underlying risk in this financial model. The collateral collected from the bank may have no relevance with the index. Sometimes the collateral can be in the form of equities and bonds. Most of the bonds will be unrated and equity shares have no connection with the index. If the bank fail, the index provider will be left with assets which have no correlation whatsoever with the targeted portfolio. 1. ETFs as dumping ground for Unwanted Securities—For an Investment Bank to take up the role of market maker, it necessitates to keep an inventory of debt bonds, equity stocks so as to enable itself with the volatile demands of buying and selling of the client. If the underlying securities are illiquid, the funding can be indeed costly. Once these stocks and bonds become collateral assets to the ETF provider, the investment banks gets an added advantage of reduced warehousing costs for these assets. Hence the bank raises fund against an illiquid portfolio which left to itself has no ways of funding. 36

Pratibimb | August 2011 2.

Lack of Liquidity—Not all ETFs enjoy a good liquidity. Since most of the actively managed funds, through their expertise fund managers, have always managed to outperform ETFs, it leads to lack of attention towards ETFs e.g. Sensex Prudential ICICI Exchange-Traded Fund (SPICE) is a typical example of poor liquidity. Another striking example is the “Flash Crash” which happened on 6th May 2010 where Dow Jones Industrial Average shed around 1000 points. Around 75% of the trades were in ETF. Nowadays, most ETFs offer an additional window which facilitates the redemption in the event of inconsistency in the sale of units. Since agents have an instinct to sell products which would fetch them higher commission, ETFs being low-cost products does not pay much of commission failing to attract a rally in market and hence is not a major paying proposition. Exposure to Asset Classes like Gold—There has been a spur of interest in Gold ETFs due to a rise in the bullion price. Gold ETFs has seen a mass inflow to the tune of $12 billion in 2009 and $9 billion in 2010. The largest gold ETF piled up more bullion than almost all of the world’s central banks. If, all of a sudden, investors lose faith, markets can behave haywire as firms compete to take part of their profits. ETFs - Bad products for volatile markets like India—For stock markets like that of India where there is large amount of volatility, indices are often subjected to periodic churn of going in and going out. This adds a lot of pressure on fund managers to sell off scrip which moves out of the

index and buy in the scrip which makes a cut into the index. Whenever the ETF fund manager performs the rebalancing act of the portfolio, the scheme has to bear the cost. Hence for unstable indexes which are subjected to constant change in the index to the tune of 10-20%, ETFs are not a good bet. Growing tendency of ETF managers to top up their income with fees for lending the securities in their portfolio has led to forceful recall of loans in the event of ETF investors wanting their money back in periods of market disruption leading to liquidity pressures.

Conclusion With the underlying assets being illiquid, ETF is transforming itself into a bet on the credit worthiness of a bank and parallels are being drawn with the failure of mortgage-backed securities. Despite these pitfalls which regulator should take care of, ETFs remain as good low cost product which can be a part of the portfolio.

References 

Boston and San Francisco, Exchange-traded funds: Revolution or pollution?, economist.com, April 2007, http:// www.economist.com/node/9044408



Ari I. Weinberg, When ETFs are lenders, wsj.com, July 2011, http://online.wsj.com/ article/ SB100014240527023038231045763915737 04929238.html



Kayezad E. Adajania, Are ETFs doomed to fail in India?, livemint.com, April 2011, http:// www.livemint.com/2011/04/03223636/AreETFs-doomed-to-fail-in-Ind.html

Pratibimb | August 2011

Diminishing Marginal Utility of Money Navroz Singh Dhillon, XLRI

Introduction Marginal Utility can be defined as “the utility gained (or lost) from an increase (or decrease) in the consumption” [1]. The aforesaid definition is for goods and services. But it also applies to money. The marginal utility of money increases slower and slower as the amount of money increases. This is the diminishing marginal utility of money. Fiat money, defined as “money that has value only because of government regulation or law” [2], is used in all the major economies of the world, including India. As it is without any intrinsic value, its only use is to purchase goods and services, as a store of value, and as a measure of value. In this article we will focus on the value of money for an individual. The graph between the amount of money an individual has and the total value that the individual associates with this amount of money is as follows:

Figure 1: Graph between the amount of money an individual has and the value associated with it Notice that initially, when the amount of money increases, the value of money increases rapidly. The initial money that an individual has will be

used to purchase necessities like food, clothes, hygiene products, medicines etc. These things are most important and are necessary for an individual. And since money has no intrinsic value, we can imply that the money used to purchase these goods and services is the most important “money” to the said individual and has the greatest value attached to it. But as the amount of money increases, the incremental (marginal) value attached to it keeps on decreasing. Consider that the same individual is very rich, and has access to all the basic necessities and luxuries that money can buy. Now, assume his total wealth increases by the amount which he spent on purchasing food. This extra increase in wealth will not be so valuable to him. He will be spending it on goods/services not as important as food. Hence the value of this new money will be lesser. To give another example, consider two persons A and B. A earns Rs. 20,000 per month and B earns Rs. 120,000 per month. Now reduce their monthly incomes by Rs. 19,999 and think of how this action would affect them due to the decrease in the value of their money. Clearly the decrease in value would be much larger for A than for B. This implies that the incremental increase in value of money for an individual becomes lesser and lesser as the total amount of money increases.

Applications Loss Aversion: It is believed that people perceive gains and losses of equal amounts differently. In other words, a loss of Rs. X is “more bad” than a gain of Rs. X is “good”. This is the well known 38

Pratibimb | August 2011 theory of loss aversion: “Behavioral finance uses models in which some agents are not fully rational, either because of preferences or because of mistaken beliefs. An example of an assumption about preferences is that people are loss averse - a $2 gain might make people feel better by as much as a $1 loss makes them feel worse.” [3] In other words, we can say that a $2 gain makes people feel less better than a $2 loss makes them feel worse. This can be shown using the relation between value and quantity of money, as shown in Figure 1. Let an individual is at any point on the curve. It can be interpreted from the figure that if he loses Rs. X of money, the decrease in value will be more than the increase in value if he gains Rs. X. Thus a $2 gain will make people feel less better than a $2 loss will make them feel worse. Risk Aversion: Risk averse investors prefer less risk to more risk. Given two choices A and B, both with equal expected return but A with lesser risk, a risk averse investor will choose A. For example, let A and B are as follows: A: a certain return of Rs. 50. Expected return = 1*50 = Rs. 50 B: an unbiased coin is tossed. If head comes up, one gets Rs. 100. If tails come up one gets nothing. Expected return = 0.5*100+0.5*0 = Rs. 50 Note that the expected return in both the cases is same i.e. Rs. 50. But the risk involved in choice A (which a risk averse investor chooses) is less. Given the risk return principle i.e. for more risk investors demand more return, the above behaviour is predictable. But such behaviour can also be explained by the diminishing utility of money in the following manner. From Figure 1, it can be interpreted that the increase in value for an investor from gaining Rs. 100 is not exactly twice the increase in value from gaining Rs. 50. In fact it

will be lesser than twice. Hence the expected return from choice B is less than the expected return from choice A if we see it in terms of value of money rather than amount of money. So, given that A has lower risk and higher return, the obvious choice is A. Risk Appetite: Risk appetite, among factors like attitude and perceptions of individual, also depends on his/her total wealth. A wealthy person is more prone to take risks than a poor person (here the only distinction between the two is that a wealthy person is ahead on the Figure 1 curve than a poor person). Again we can explain it using marginal utility of money: The loss in value for the wealthy person will be less than for the poor person when both lose equal amount of money. In other words, to achieve an equal loss/gain in value, a rich person loses/gains more money than a poor person does. As risk is related to quantity of money gained/lost (rather than its value), the wealthy person can take relatively more risk i.e. his risk appetite is more.

Conclusion We saw that money, like other goods and services too has a diminishing marginal return. This notion can be applied to explain some ideas of behavioural finance like loss aversion, risk aversion and risk appetite. Thus, it can be used to explain certain characteristics of investor behaviour.

References 

Retrieved July 9, 2011, from wikipedia.org: http://en.wikipedia.org/wiki/Marginal_utility



Retrieved July 16, 2011, from wikipedia.org: http://en.wikipedia.org/wiki/Fiat_money



Ritter, J. R. (2002). Behavioral Finance

Pratibimb | August 2011

Join us on: Contact Us: pratibimb@tapmi.edu.in / pratibimb.tapmi@gmail.com Visit: http://www.tapmi.edu.in/student-life/pratibimb/overview/ Team Pratibimb TAPMI Post Bag No. 9 Manipal—576104