When David beats Goliath: Crossing the Chasm

This weekend was memorable for a number of events. While at a personal level, it was memorable for my son getting his Karate Black Belt, for many it was memorable probably due to another famous Indian victory over Pakistan at the World Cup, and for some it was memorable due to Valentine Day.

But the one event that will probably have a much larger long term impact is the installation of the AAP government in Delhi. For a party less than 2 years old based on an anti-corruption movement of 3 years or so, and which, after showing early promise had almost messed it up last year, to come back to power with such a stunning majority, albeit in one city state, is nothing short of miraculous. Even David beating Goliath seems like an understatement.

My articles on AAP started with my initial thinking that AAP had reached a tipping point after its surprise 28 seats in Delhi, then moved to realizing that I was probably an early adopter of an uncommon man’s agenda, and finally, after a chain of events, theorizing that perhaps, AAP was a disruptive innovation that was getting stuck in the proverbial ‘chasm’ quite similar to how so many innovative products end up in technology marketing.

But the kind of sweeping victory that the AAP saw in Delhi is, perhaps, not possible unless it has moved out from being an ‘early adopters’ phenomenon stuck in the chasm (which it was thought to be) to at the very least ‘an early majority’ phenomenon (which it seems like now).

At the early adopter phase, an offering holds promise due to its disruptive idea, but it is backed largely by a smaller group which backs it based on mainly emotional or idealistic principles. Whereas in the ‘early majority’ phase, the offerings’ buyers consists of a pragmatic adopter base which is more solid because that group makes a rational choice after seeing the cost benefits and decides to give it a chance.

In a technology product marketing life cycle, generally after the early adopters have taken an innovative product up, there is huge ‘principles-based aspirational marketing’ based on superiority of the offering and bad mouthing the competition, which the AAP did early next year.

imagesUnfortunately, while this attracts the early adopters, it doesn’t work to convince the early or late majority who are looking for concrete reasons to make any changes to the status quo. Lack of such reasons is also why lots of products end up in a chasm which not many can easily come out of. Till the early majority sees some benefits compared to status quo, and decide rationally to give it a chance, they stay there, often forever.

The AAP with its disruptive idea of honest politics has definitely and quickly moved from the early adopter to the early majority stage.

And if this is true then it is bad news for people in power – who themselves capitalized on the promise of a credible alternative.

But the good news for the same people is – bear in mind – it is still a chance though a very rational one – meaning the disruptive innovation has moved a few steps forward in being mainstream but is still not mainstream.

The next stage in AAP’s emergence is typically adoption by the late majority which can make it completely mainstream.

If one goes back to the technology adoption life cycle, this typically happens when the early majority sees proven benefits for specific use cases after using the product for a while, the perceived risk and costs of adopting it go down, and the early adopters become the biggest influencer for starting adoption by the late majority.

And that is what is likely to happen with the AAP as well. At this stage is also when most of the competition starts to take notice of what was initially dismissed as something that doesn’t work.

Hence, from here on, it is simply a race between the incumbent and the disruptor – because neither has the luxury of the laurels of the past or the promises of the future.

We have seen this play out every time a new innovation comes in the market.

Success that leads to mainstream adoption depends largely on the ability of the disruptor to fulfil its original promise without the risks of disruption, as well as the approach of the incumbent to reinvent itself to compete on the new innovator’s standards without the arrogance of resorting to past laurels.

A famous example of an incumbent leader losing out over a prolonged period of time is how Kodak (a leader in films and film cameras) lost out to Canon when the digital camera slowly replaced film-based cameras with Kodak continuously resisting the shift, even after it was evident that the new technology had moved beyond early adopters.

Another recent and more drastic example of disruption is how Nokia and Blackberry who were undisputed mobile leaders lost out completely to Apple and Samsung in the mobile market in a space of just about 3 years due to the smartphone innovation which they didn’t see coming. We see Nokia coming back in its new Windows avatar largely due to a re-invention.

A famous example where a disruptive innovation did not quite replace the incumbent is how IBM embraced the PC even when it was a highly successful mainframe leader, had grown based on it and at that time could have easily resisted the PC and dismissed it as a fad (which it initially did).

Another similar example is how electric cars somehow never managed to replace fuel-based vehicles despite clear innovation as they got stuck in the chasm after early adoption due to the risks of adoption by the majority.

A number of times the best thing for an incumbent to do is to embrace the disruptive innovation rather than to resist and fight it. It needs a proactive action to address a market that it has never addressed directly. Resistance often leads to further erosion till it reaches a point of no return.

In the fight for political space with the AAP, the worst thing for the BJP and other parties to do would be to resist it, have an obstructionist, elitist approach or to constantly communicate that they don’t believe in AAP’s ability or intention to deliver on its promises.

Due to the massive mandate AAP got in Delhi based on its disruptive idea, that kind of resistance is likely to work against BJP and turn the perception against them in the battle for the early majority in political space. While it is to be seen whether the AAP disruption spreads beyond Delhi, resisting it further will definitely not provide any benefits to the BJP – as the battle for early adopters and the early majority (in Delhi) has already been lost.

In order to stop the spread to the rest of the majority, embracing the idea of honest politics, reaching out to the new markets being captured by AAP and continuing to deliver on its own promises is what will help the BJP. So while it works on delivering its national agenda for development, it is important to be seen to be proactively constructive for Delhi, especially for the segment that has clearly moved to AAP.

It is a race. For the incumbent BJP, it is a race to hold on to its turf by delivering its original national promises and embrace the new disruptive idea constructively, and for the challenger AAP, it is a race to deliver on its Delhi agenda so that it does not remain an experiment and edges forward as a mainstream player with its national ambitions.

At the end of the day, it does look like the voter is the smartest of all. It has left both with little option but to deliver.

Nothing Succeeds like Failure

So 2014 saw a total of 75 NFOs (New Fund Offers by Mutual Funds) compared to 18 in 2013.

In 2012, there were 8 and in 2011 there were 11 NFOs. Last we saw anywhere close to so many NFOs was 41 in 2008 and 48 in 2007. And incidentally many of these 75 NFOs are close-ended, touting ‘the benefits of long-term investing’, but the real reason is ‘increased fees when money is there for the taking’.

It is said that nothing succeeds like success. But in this case, it is better said that nothing succeeds like failure. The only question is whose success and whose failure? In the case of NFOs and IPOs, it is clear that it is the success of the issuer and the failure of the investor.

Every time there is excitement in the market, the number of NFOs increase. The mutual fund industry can be trusted to raise money at exactly the right time for themselves, and the wrong time for the investor. So they always succeed in increasing their profitability (and this time it is even better with locked-in close ended funds for the long term!), and reducing that of investors.

It is rather surprising that the IPOs haven’t followed or preceded. It is probably because the promoters are smarter. Perhaps they want to wait till they can raise it at even better valuations. Perhaps their advisers are asking them to hold back till it is pretty clear to everyone that ‘this IPO cannot be missed’.

Make no mistake about it – they will come, and they will come at valuations that promise ‘a once in a lifetime opportunity for long term growth’. And they will come when people who refuse to take them up will look like utter fools then – for a while atleast.

The types of companies, the nature of NFOs and the stories for long term growth change, but the essence is really the same. Money is raised when it is available. It cannot be raised when it should be (at least for the investor!), simply because it is not available at that time at those valuations.

Therefore, there is no other option. A new generation of entrepreneurs will get richer. A new generation of merchant bankers and fund raisers will succeed. And a new generation of NFO and IPO investors will perhaps fail. I don’t know if it will happen this year or two years from now or five years from now. But make no mistake – happen it will.

And the signs are starting. As an old cliche said, the more things change, the more they remain the same. Nothing succeeds like failure.

Ending with excerpts from a 1959 speech by the legendary Ben Graham, which most of us would do well to remember, especially in times like today.

Speculative Excesses in the Current Market
In this connection, I arrive finally at a “law” about human nature that cannot be repealed and it is unlikely to be modified to any great extent. This law says that people without experience or superior abilities may make a lot of money fast in the stock market, but most cannot keep what they make, and most of them will end up as net losers. (This is true even though the long-term trend of stock prices has been definitely upward.)
This is a particular application of a much wider natural law which may be stated simply as: “There is no such thing as a free lunch,” for those too young to remember, was offered in the good old days to patrons of the corner saloon.
The stock market has undoubtedly reached a stage where there are many people interested in free lunches. The extraordinary price levels of stock of rather new companies in the electronics and similar fields, the spate of new common-stock offerings of small enterprises at prices twenty five or more times their average earnings and three times their net worth (with immediate price advances upon issuance), the completely unwarranted price discrepancies indicate reckless elements in the present stock market picture which foretell serious trouble ahead, if past experience means anything at all.
Let me conclude with one of my favorite clichés – the French saying: “The more it changes the more it’s the same thing.” I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of this proverb is the phrase “the more it changes.” The economic world has changed radically and it will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound – and a cliché’s only excuse, I suppose, is that it is sound – then the stock market will continue to be essentially what it always was in the past – a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of experience, I think the present level of the stock market is an extremely dangerous one.

Sensex at 25 Lakhs by 2050

It is difficult to make predictions, specially about the future said somebody famous. And now that I got the attention due to the headline, let me clarify that this post is not about predictions for the Sensex.

I just thought it may be interesting to present a set of figures on long term returns from Indian equity over the past 15 years, and try to make a case for long term investing in equity – like people do in real estate in our country.

The HDFC Mutual fund site has an interesting tool which allows you to enter a starting date and provides Sensex returns values over various rolling periods from that date i.e. 1 year to 15 years. So I put in 1 Jan 1999, and here is the summary of observations:

Summary of Observations
Returns (%)
Date SENSEX 1 Year 3 Years 5 Years 7 Years 10 Years 12 Years 15 Years
1-Jan-99 3060
30-Dec-99 5006 63.57
1-Jan-01 3955 -20.99
1-Jan-02 3246 -17.92 1.98
1-Jan-03 3390 4.44 -12.18
1-Jan-04 5915 74.49 14.36 14.09
31-Dec-04 6603 11.62 26.7 5.69
30-Dec-05 9398 42.33 40.48 18.9 17.38
29-Dec-06 13787 46.7 32.58 33.54 15.57
1-Jan-08 20301 47.25 45.41 43.04 26.32
1-Jan-09 9903 -51.22 1.76 10.86 17.27 12.46
31-Dec-09 17465 76.35 8.2 21.48 26.39 13.31
31-Dec-10 20509 17.43 0.34 16.89 19.44 17.89 17.18
30-Dec-11 15455 -24.64 15.99 2.31 12.92 16.89 9.85
1-Jan-13 19581 26.7 3.89 -0.72 11.06 19.17 14.26
1-Jan-14 21140 7.97 1.02 16.38 6.3 13.58 16.9 13.75
1-Jan-15 27507 30.11 25.99
Yearly Rolling Returns 15 13 11 9 6 4 1
Negative Returns 4 1 1 0 0 0 0

As is evident, for all the ups and downs over the past 15 years, we have been lucky to have had only 4 years really with a negative return out of the past 15 years.

And as the rolling number of years increase, the variation in returns and number of negative return sets reduce.

In every 1 to 3 year period, there is a high chance of losses based on when you enter.

If one stayed invested during any 7 year period in Indian markets in the last 15 years, it would be improbable to lose money irrespective of when you entered.

I could not include 1-Jan-2015 in these calculations – in which case I am sure the numbers would have looked even more positive – given the record highs during the past year or so.

Any 10 year period of staying in the market almost guarantees no losses and a reasonably good return. That in itself should make a case for real long term investing in equities. And the same continues and gets surer over 12 or 15 year periods.

And if I simply take the 13.75% over the past 15 years and extrapolate it to 2050, simple mathematics says that 25 lakhs on the Sensex is likely!

A Few Stray Thoughts (all my own work), of Gandhi and Einstein

And for a Friday (because this is a long weekend), a few stray thoughts and a few general observations and a few points of view (all my own work):

Like the two great minds that influenced the 20th century the most were Gandhi and Einstein. Einstein changed the way we think about what the world is, and Gandhi changed the way we think about how to live in it. And this is what Einstein said about Gandhi: ‘Generations to come, it may well be, will scarce believe, that such a man as this one ever in flesh and blood walked upon this earth.’

Like while Einstein was a philosopher scientist who philosophized the practical world into scientific theories, Gandhi was a scientific philosopher who experimented with his philosophies before implementing them.

einstein-and-gandhi-e1357105119213Like while we idolize Einstein for the rationality, there is so much philosophy he left behind, and while we idolize Gandhi for being a philosopher-saint, there is so much rationale in how and why he did what he did.

Like between Gandhi’s and Einstein’s work, life, writings and specially the simple quotes they left behind, so many things in today’s world can be explained.

Like when I see our PM sweeping to launch the Clean India movement, I wonder if Gandhi would have said ‘Be the change you want to see in the world.’

Like when I see the new Tamil Nadu CM and his ministers cry while taking oath looking at their jailed leader’s photo, I wonder if Einstein would have said ‘Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.’

Like when I see the stupendous success of the Mars mission, I wonder if Gandhi would have said ‘A man is but a product of his thoughts. What he thinks, he becomes.’

Like when I think of why our Prime Minister talked to China about culture and business (and not peace and border issues!) and talked to US about peace and partnership (and not business and Pakistan issues!), I wonder whether Einstein would have said ‘A clever person solves a problem. A wise person avoids it.’

Like when I think of why the Shiv Sena split with BJP in Maharashtra before the elections, may be Gandhi would have said ‘The Earth provides enough to satisfy every man’s need, but not every man’s greed.’

Like when I look at Alibaba (not अलीबाबा और चालीस चोर but the Chinese e-commerce company, not sure if it is different though!), and see it’s entangled legal structure, it’s business and the overpriced IPO of an entity that gives no control to investors in running the real Alibaba, I wonder whether Einstein would have said ‘A question that sometimes drives me hazy is: am I or are the others crazy?’

Like when I see the female Indian boxer who got an unfair decision at the Asian Games and, presumably overwhelmed with anger and emotion, acted the way she did, I wonder if Gandhi would have said ‘The weak can never forgive. Forgiveness is the attribute of the strong.’

Like when Swami, who last invested in the markets in 2008 and turned away for 5 years, asks Jigneshbhai with enthusiasm where he should invest (after the markets are up 50% in the past year), I wonder if Einstein would have said ‘Insanity is doing the same thing over and over again and expecting different results.’

And this final stray thought: after Modi became PM, I have started watching Doordarshan which seems like a calm pond after the stormy agitations on private channels. Perhaps, Einstein might have said ‘There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle.’

छप्पर फाड़ कर

Till the morning of May 16th, nobody was sure, but India finally has a government, and how!

The people have delivered a verdict that leaves no excuses for performance, and have put a man who promised that at the helm.

No more whining about coalition compulsions and dual power centers with no will or abilities for the job and all the other non-sense related to governance that we saw over the past 5 years. For the past 5 years and to a large extent over close to 20 years, we have been told that for a country ‘as diverse as India’ and with ‘compulsions of democracy’, this is our fate.

But now there is hope – no guarantees, but surely and truly, fresh hope based on an electorate’s collective mandate.

Of course, nothing as far as the situation on the ground is concerned has changed immediately. But the biggest and weakest link in India’s growth – that of government – seems to have been unchained by the people themselves.

The overwhelming numbers along with the people who got them provide that hope, though their tasks especially over the next few months will not be easy. But one can expect a firm will in operation and a resolute hand in action, that will be well supported by the electoral numbers that enable them to move forward.

But along with this hope, this mandate has also provided existential threats to a number of people and various power centers in politics and thereabouts, whose bread depended on caste, religion and division.

Simple mathematics of votes suggests that a number of people made their living by catering to, or pretending to cater to specific segments within the electorate, and that made sense for a long time in the political scenarios then.

Now their survival is in jeopardy, and they won’t give up in a hurry. So expect a lot of communal vs secular arguments, caste based disturbances and even unexpected shocks over the coming months as the euphoria regarding this government settles down.

Markets and investments are not always rational so there are never any guarantees, and hence there is no need for drastic changes in investing strategy as such. But suffice it to say that Mr Market is likely to be in a good mood for a while, and it will take a lot of doing to depress him over the next few weeks and months at least.

But that is only one part of this story and its impact, and there will be occasions to make one’s own assessments on that from time to time.

Be that as it may, but for now, the probabilities of a new dawn increase from here.

The people have given themselves a fresh lease of life and a hope of a better future, and now it is up to the government to play its part and enable it. Its time starts now!!

Disruptive Innovation and India’s Tryst with Destiny

Very many years ago I had read a book considered by many as a classic in technology marketing – “Crossing the Chasm – by Geoffrey Moore”.

It describes the challenges faced by technology marketers, most of whom, at some point, have to sell a product or service that has definite value that will change its market, but is at a price early on which doesn’t make sense given the state of the market. Moore presented a theory of the technology adoption life cycle and how people with different mindsets buy technology products at different stages of their life cycle for different reasons.

Below is an extract from the 1998 edition of this classic:

“As the revised edition of this book is being written, it is 1998, and for this time we have seen a commercial release of the electric car. General Motors makes one, and Ford and Chrysler are sure to follow. Let’s assume the cars work like any other, except they are quieter and better for the environment. Now the question is: When are you going to buy one?

Your answer to the preceding question will tell a lot about how you relate to the Technology Adoption Life Cycle., a model for understanding the acceptance of new products. If your answer is, “Not until hell freezes over,” you are probably a very late adopter of technology, what we call in the model a laggard. If your answer is, “When I have seen electric cars prove themselves and when there are enough service stations on the road,” you might be a middle-of-the-road adopter, or in the model, the early majority. If you say, “Not until most people have made the switch and it becomes really inconvenient to drive a gasoline car,” you are probably more of a follower, a member of the late majority. If, on the other hand, you want to be the first one on your block with an electric car, you are apt to be an early adopter.”

Most successful technology products sell to the early adopters and makes it easy for the early majority to buy them early. Later they make it imperative for the late majority and the laggards to gconsumer_mapping003-001et on board too. Between the early adopters and the early majority is the scary chasm to cross. Technology products and services, many of which are ‘disruptive innovations’ become truly successful when they cross that chasm.

As India goes to the elections next month, the voter is faced with choices spread across the spectrum of old age decadence to new age disruption.

On the one hand is an aging product losing market share and voter credibility with little signs of revival by a confused young leadership (represented by the Congress led by Rahul).

Then there is a product of some credibility in a me-too company, promising past established benefits to a larger geography (represented by Modi in an old-world, factional BJP).

And the new choice is what could potentially be called a disruptive innovation that promises the value of market-changing idealism but no one is sure at what price (represented by Kejriwal and his haphazard medley of AAP).

The disruption of the kind represented by AAP, while often promising value, is not accepted well by the Indian establishment, and perhaps, also not by the Indian voter – specially because of the perceived fear of the price one pays for disruption.

This is true of the Indian technology buyer too – something that most technology marketers in India know. Most products face a wide chasm before they become truly accepted.

On similar lines, this reality of the Indian voter is what most politicians in India know. And it is due to this reality, that it is easy for established companies (and established political parties) to cloud the perception of a new disruptive innovator with more of disruption and less of innovation. The disruptive innovator’s DNA makes it easy to do so too.

The parallels in the AAP and technology marketing don’t end there.

Most disruptive innovations need early adopters to tolerate some early failures (even disasters) for the pride of being an early adopter. In the early life cycle, innovative products fail unexpectedly, or can’t provide service, or are inconvenient or downright embarrassing to own sometimes. Early adopters generally don’t perceive those risks because they see the benefits of market changing value that the disruptive innovator promises.

But the early majority doesn’t – and hence the chasm.

The AAP and the criticism it received for the 49 days of governance in Delhi is an example of how disruptive innovations can dismay even the staunchest of early adopters.

Despite that, many early adopter voters are prepared to support it for the innovation of honest politics that it promises. But many early majority voters are also willing to settle for Modi’s promise of development and governance, without any major impact of corruption, due to the fear of the price of disruption.

Most disruptive innovations also need the early majority and the late majority to adopt it to become truly successful.

It looks like the AAP, at the current time, like many disruptive innovations, is stuck in the chasm currently between early adopters and the early majority.

But there are no hard figures to prove or disprove the same. May be it has crossed the chasm if you believe their staunchest supporters, may be it is stuck there for ever, if you listen to their biggest detractors.

Like most disruptive innovations, unless the results are out, one can never be sure.  While the Modi-led NDA’s ascent and the Grand Old Party’s decadence seem to be the ‘givens’, where in the life cycle the AAP lies is perhaps the biggest ‘unknown’ in these elections – an unknown that can surprise either way, like most disruptive innovations.

The next few weeks will determine what is contemporary India’s Tryst with Destiny.

We will wait and see.

Data, Optimism and The Art of Denial

“I’m not strange, weird, off, nor crazy, my reality is just different from yours” wrote Lewis Carroll, the author of Alice’s Adventures in Wonderland and Through the Looking Glass.

My adventures with data and analytics have often landed me in situations where I have wondered whose version of reality is the right one. In some cases there are genuine doubts, in most others, it is plain mind games and politics at work. Like in some recent situations.

If one listened to our Test captain Dhoni’s recent press conference after the drawn New Zealand test, one would have felt optimistic about India’s overseas test prospects.

The captain focused on how things were getting better series by series, how matches are getting closer and we are getting into situations of strength but not winning, and how our team was getting useful overseas experience and some good performances.

One would have almost missed the fact that the Indian cricket team managed to save in five days, a test that they should have won in three and a half days. The facts also say that we have won none and lost 10 tests overseas since mid-2011 when Dravid, Tendulkar and Laxman were still playing. It essentially means there is a problem.

But optimism and positive thinking, skillfully used, can help shield denial and justify one’s fantastical version of reality!

denialSimilarly, I remembered the Congress party’s stance after it lost 4 out of 5 assembly elections last December. Many of their leaders kept saying that they won Mizoram and in Chattisgarh the contest was quite close, and if one looked at the vote share, it wasn’t that bad, after all.

In their view, it did not mean anything, because even in the past, BJP had won assembly elections but lost the general elections in six months after that.

It is quite easy to interpret data to suit one’s purposes and tell lies skillfully. When the news is bad, it is better to not look at the figures that matter and do your interpretations creatively, hence mastering the art of denial, and creating your own version of reality.

I saw our finance minister do the same earlier this week during the interim budget.

In underplaying the lack of even decent growth in India’s economy, the minister compared India’s growth with other developing economies (which were carefully selected) – and then India suddenly started looking not that bad.

The facts, though, say that India’s growth over the past 3 years compared to even itself a few years earlier, coupled with consistent 9% (or more?) inflation is not enough to even generate the number of jobs India needs to keep its youth gainfully employed.

But in not looking at the data that matters, the minister skilfully demonstrated the power of positive thinking and, in the process, mastered the art of denial, thereby creating his own version of reality.

I have experienced this often, and while I spend my working day trying to convince clients on the power of data and analytics, I often wonder whether anyone is really interested in seeing or showing or doing anything about the real data.

While using the data to suit your own circumstances and position is fairly common; but when confronted with bad news that is plain to see, most people neglect the data, and shield denial with a face of optimism, creating their own version of a reality that doesn’t really exist.

Optimism is great but when the message is bad, closing your eyes does not mean that everyone else is blind.

Perhaps there is some truth in what the French philosopher Jules de Gaultier once said, that “Imagination is the only weapon in the war against reality.”

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