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The Case of Weak, Non Linear Forces

December 7, 2012

What does the recently concluded 68th round of NSSO survey on household expenditure signal about the future of biscuit companies? How does the Srinath Reddy Panel Recommendations on Universal HealthCare affect Britannia’s long term business prospects?
What has ‘jugni’ grown in remote villages of Haryana got to do with growing urban prosperity?

In business like in real life, its not always the absolute performance that matters, but the relative one. To win in life, one need to be just marginally better than the rest of the peers and thats an unchangeable fact at the core of every competition. One may strive for kaizen but at the end,  even the perfect has to better himself to win if everyone else is also perfect. Business schools teach Porters five forces and the culmination of bandwagon effect, network effects and plain expert bias convinces everyone that these are the forces one must focus on. But since everyone is focussing on them, the marginal utility of leveraging that knowledge diminishes.

Instead what one must focus on, are the invisible forces. There are two invisible forces in business, weak ones and the non-linear ones.If a force is weak, it takes time for effects to show and we humans rarely have ability to understand and comprehend such slow changes.We never spot ourselves growing tall, or getting fat. We wake up one day and notice that the clothes dont fit anymore.In business world it is even more serious, one wakes up one day and sees his profit has dropped and then finds ways to explain it with the facts he knows without making the effort of seeing new perspectives.

Thats why it is invisible. It is invisible not because we can’t spot it even if we wanted to but its invisible because we dont give it a serious look. It is popularly called in esoteric circles as boiling frog syndrome.

A second type of invisible force is what the baseball fans call- curveball. A curveball is difficult to play because human mind is an able extrapolating machine. But it always extrapolates linearly. Very similar in business world is the presence of non-linear forces. No one finds rural household expenditure growth exceeding urban expenditure growth a worthy phenomenon to discuss. FMCG companies just one day find that rural demand is unrelenting whereas urban demand has lost its way and thus they keep shipping the same old products in an ever increasing numbers to the villages.

Noone sees it as a secular change and no one realises that for the first time exclusive product lines keeping exclusive rural needs in mind has become economically viable. Or take the fact that India today suffers from malnutrition as well as lifestyle diseases in equal measures. Government’s focus on making UHC affordable will lead to a better life for middle class elders,for whom till date 70% of their medical expenses were out of pocket(OOP). OOP expenses tend to be costly for the individual leading to a cascading effect of lower quality healthcare and at times even postponement of HC.

Srinath Reddy Panel’s recommendations makes it a priority in the coming years for government to focus on making HC affordable, cutting down OOP expenses and the works. Couple it with the paradigm change in pension structure(from fixed benefits to fixed contribution), one sees a veritable market open up for age-related nutrition products,lifestyle related nutrition etc.

Or take the fact that the growing middle class urban ‘tastes’ have undergone a more Continental shift- leading to economic viability of crops which were earlier not possible. Zucchini has entered the dining rooms and taken the Indian palates.Attached with the fact that government seldom tries to ‘protect’ horticulture farmers( which is a good thing), the vegetable growers of Haryana have become the Zucchini growers of Haryana because it fetches a remunerative price. Riding on the retail modernization trend, improving urban connectivity the farmer are able to send their zucchinis fresh and ‘pricey’. And by the way they pronounce it as ‘jugni’.

Right this moment there are millions of incremental changes, weak forces and non-linear effects playing out on one’s investments future prospects. Some positive, some negative. Investors need to analyze these possible forces and threats more accurately. He needs to put on the proverbial lenses to understand what can really kill his company.It is not easy,especially when we seek out confirming evidence. It wont be even complete or thorough or all-encompassing.But then, we need to be just a hair width better than everyone else and this is where the alpha is gonna come from.

After all, the last buggy whip maker didnt really know what hit him!

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