Till roughly  10,000 BC, humans subsisted in small wandering groups that hunted and gathered food for survival. Then, in the  Neolithic age  the Sumerian civilization of the Middle East domesticated animals and plants, settled in one place, founded villages and started farming.

A similar evolution is  underway in the financial services world. The great financial centres of today’s world, New York and London are probably the  equivalent of the  Sumerian civilization and are  working through the painful transition of the financial services world from the hunter- gatherer era to the farmer era. Just as Sumerian farmers had to learn to deal with the domestication of plants and animals (some were useful to man and some were dangerous), we are learning to deal with the world of financial derivatives -- how to make them useful and how to curb their dangers. The enormous pain that the world is going through now may just be the pain of this transition in which we are learning when and how to use derivatives and when and how not to use them.

One of the lessons we have learnt is that derivatives ought not have been used to solve a structural problem that banks face. Banks, Alan Greenspan points out in his memoir, “The Age of Turbulence”, have historically relied on passive depositors, mainly working and middle class people, who keep their savings in passbook accounts, as the source of funds. These depositors are happy to leave their money around in banks without worrying too much about the return they are getting from it and accounted for 95% for banks resources in the 1950’s in the United States.  They now account for only 60%, say Greenspan, making banks dependant on the same volatile investors that the securities market depends on.

Such expensive borrowings force banks into two risky moves- investing in mortgage-backed securities and taking on leverage. For example,  when a billion dollars gets a return of only $2 million you need to leverage your trade 20:1 or 30:1 to get a 20-30% return. The risk here is that should the trade go against you and you lose $2-3 million, that has effectively wiped out all your  capital. If The word gets around that such an event is likely to happen,  crowds may not form outside bank branches but  lenders   will instantly demand their money back forcing a bank into bankruptcy.

In other words, banks have to find a long-term solution to their financing problem now that passive, unsophisticated depositors are a fading breed.

While all this was unfolding, Mr Greenspan, inspired by his early contact with Ayn Rand, depended on innovative entrepreneurs and market forces rather than government intervention to find solutions to this explosive use of derivatives.

Not that its easy to regulate financial entities  by treating then as a homogeneous  group.  Doing that  is somewhat like trying to have a single set of traffic rules for cars, trains and commercial airplanes. The nature of risks that hedge funds , financial entities who are fervent believers in derivatives, for example,  deal with, are as varied as the risks facing car passengers are different from those facing train passengers as are those facing airplane passengers. Hedge funds that do options trading face what are called gamma risks, those that do relative value trading face risks with the sizing of trades and the usage of leverage and edge funds that deal in distressed debts face event risks specific to the firms they invest in. Having a common set of regulations to deal with all these risks has proven so far to be challenging.

While derivatives are a modern innovation like the microprocessor and antibiotics, we have clearly not learnt all that we need to know about this potent invention. Central to  derivatives  is that make computers crunch reams of historical data to detect discrepancies in the way prices moves across different tradable financial assets. This has been the classic way to diversify risks. But there are occasions, rare as they may be, when the prices of these assets instead of offsetting each other can all fall steeply and in unison. When that happens, all hell can break loose.

Then there are cases where good intentions can go wrong. Subprime mortgages, financial instruments whose original purpose was to make home-ownership possible for a class of citizens who were not eligible for home loans because normal lending standards were too high for them to qualify, is an example. The idea was that a higher interest rate would cover the possibility of higher delinquency, a classic free-market way of using price as a way of rationing credit. However, during the last few years, when interest rates dropped and remained low, many homeowners used subprime financing to repay their earlier loans and even get some cash released, called cash-out financing. According a study published in the Federal Reserve Bank of St Louis Review, “slightly over one half of subprime loan originations have been for cash-out refinancing.”

Earlier this week, I went for a stroll by the big, bronze statue of a crouching bull   near my office in New York. I could not help wondering whether, in times to come, this bull would  spring to life and bring back the good times of the past decade or whether, like the Tower of London, or Qutab Minar, it will merely be a curiosity for tourists, a reminder of the power that Wall Street once was.

END of Part 3 and the series

Some say that derivatives rank right up there with antibiotics and the microprocessor chip as one of the great innovations of the modern era.

Derivatives are financial instruments that are used to reduce financial risk just as a fire insurance policy is used to reduce the risk of a fire by compensating possible damage in the event of one .  Why did then, Warren Buffett, whose financial acumen is legendary, describe them recently as “weapons of mass destruction”? Where did they come from and how did they become such objects of veneration as well as hate?

In downtown Chicago stands the 45-story building that houses the Chicago Board of Trade, the institution that gave birth to the derivatives business. Beautiful as its art deco architecture is, there is nothing much to set it apart from the many other tall buildings that surround it. Except for one thing. Right at its very top there is a two-story tall statue of a Greek goddess. This is Ceres, the Greek goddess of grain from who the word “cereal” comes from.

This is where it all started. A group of merchants trading in the food grains grown in the surrounding Midwest came up with the ingenious and useful idea of offering farmers a firm “future” price for their crop many months before it came to the market reducing the risks that farmers took  during their  long season of labour. Grain “futures” prospered   for decades till the US government, in the 1960’s  started offering a minimum price for  the crop. This considerably slowed down the grain futures trade. The Chicago grain future traders  sat around their trading pits for a while , smoking cigars and reading newspapers with nothing much to do  till one of them thought of the idea of starting trading in another kind of futures:  using the Dow Jones Industrial Average of equity shares in the New York Stock Exchange as the “underlier” instead of grain.

But, before starting off this new line of business, they solve a problem.:   how to put a  price  on this  new form of “future”. An out-of-the-box thinker among them, Mathew Gladstein, asked for help from a group of  local Chicago economists,  Merton, Black and Scholes. The mathematical model they came up with, the Black-Scholes model did its job of pricing options so well that Gladstein made tons of money using it, Merton and Scholes won the Nobel Prize in Economics for it,  and started the rush of mathematicians to the stock market.

Soon, other enterprising people thought up other “derived” financial instruments based on many other “underliers”: bonds issued by companies and municipalities, mortgages that people took out on their homes….

It is not hard to see why such “derived” securities or “derivatives” have become so popular. A bank that makes a loan, for example, for    a house,  faces many different types of risk. . The borrower, for instance, may not be able to return the loan on due date. Or, he may not be able to keep up with  interest payments. Or, the market interest rate may rise far above the rate the bank has given the loan leaving the bank stuck with a loan at a low interest rate. Or an earthquake might hit the area demolishing the borrower’s business.    Or, high inflation may reduce the value  of the loan by the time it gets repaid.. Derivatives are a way to “hedge” against these risks.

For example, a housing loan to a  borrower in say Cochin can be combined with a housing loan  in Bombay and another one  in Bangalore under one common instrument and this  combined “derivative” can be sold to an investor. This combination reduces the risk of  disparate housing markets such as Cochin, Bombay and Bangalore all  suffering  downturns at the same time  The investor in this derivative rightly believes that the instrument he holds has a balanced risk.

If derivatives can diversify risk, as described above, what can go wrong?  For one, the borrowers  may have  mis-represented their income. Or, the loan issuer may not have verified their incomes. Or, they may have borrowed 95% of the value of their houses such that if property prices decline by say 20%, the asset cover may become inadequate. In all of these cases, should  interest rates rise sharply, from say, 6% to 10%, these borrowers may  longer be able to meet their monthly payments. When Mr Greenspan, who was Chairman of the US Federal Reserve Board was told about similar issues developing in the US mortgage securities market  he believed  that  such problems in the housing sector would  be restricted to a city  and could never become a national let alone an international problem.

This would normally have been true, but  mortgaged backed securities were sold not only nationally in the United States but also throughout Europe and Asia. When the US housing bubble burst and  borrowers in  the United States started defaulting on their mortgage payments, the value of the mortgage securities fell precipitously.The shock waves were transmitted throughout the world. What started as a crisis in some specific parts of the US now became a word-wide financial crisis.

In the next and final part we’ll examine why so many smart people in storied investment banks like Morgan Stanley,  Lehman Brothers and Bear Stearns, in powerhouses such as Citigroup and Royal Bank of Scotland found these derivatives so attractive that they just couldn’t  resist them.

END of Part 2

Downstairs from my office in New York around the corner from Wall Street and the New York Stock Exchange is the gigantic 3 ½ ton bronze statue of the bull that  symbolizes Wall Street. On a recent cool October morning, I found myself watching  the  morning sun bounce off the shoulders of the bull and wondering where to start the search for the meaning of the financial meltdown that has destroyed names like Lehman Brothers and Bear Stearns and forced proud and independent institutions like Morgan Stanley, Goldman Sachs, Royal Bank of Scotland and countless others seek solace in the arms of their governments.     Is it just the greed of Wall Street chieftains that brought this catastrophe about? Or is  just   a part of a natural business cycle where a boom that is set off by  low interest rates  winds down  only to rise again and  for good times to return?
     Then it struck me. Perhaps  the answer lies in Atlas Shrugged, Ayn Rand’s  1950’s novel.
     Atlas Shrugged follows the fortunes of a woman, Daggny Taggart as she fights to keep her family’s railway business alive in a futurist America where “looters” and “moochers” run rife. “Looters” are government tax collectors who promptly confiscate other people’s earnings and “moochers” are people who demand other people’s earnings because they are unable to earn money themselves. Looters and moochers hate the talented that have the ability to earn the money that they themselves cannot earn. In protest, all the talented people in this society decide to go on strike by withdrawing from it. No longer will they contribute their ideas, their inventions, their scientific research or their business leadership to the rest of the world. In other words, they are like the Greek hero Atlas who has finally decided to shrug off the burden of the world that he has had to carry for so long.
     Atlas Shrugged epitomized  Ayn Rand’s faith  in an unbridled  free enterprise system; the belief that the clear separation of the economy and state was as central to human progress as the separation of the church and the state had been in an earlier era. And the belief that  any form of state intervention in society is  fatally flawed and  would leave to stagnation.
     Alan Greenspan, who, first as Chairman of the Council of Economic Affairs and later as  Chairman of the Federal Reserve Bank of the US was at the center of economic decision making for two decades right up to  2006 was a great admirer of Ayn Rand and a true believer in the philosophy she espoused in Atlas Shrugged. “I became a regular at the weekly gatherings in her apartment,” he says in his autobiography, The Age of Turbulence  and   was captivated by her philosophy that  “… individuals have innate nobility and that the highest duty of every individual is to flourish by realizing his potential…” When Greenspan took his oath of office at the White House for his first public policy job as the Chairman of the Council of Economic Advisers, he had Ayn Rand standing beside him.
     As Chairman of the Federal Reserve Bank, when confronted with a seemingly un-ending series of financial calamities- the bursting of the technology stock bubble, the 9/1 attacks, the invasion of Iraq and Afghanistan, Greenspan was steadfast in his belief in  this laissez-faire philosophy, cut interest rates to rock bottom levels and kept it low for a long period. His belief was that this low interest rate would ignite entrepreneurial activity in US housing construction   which in turn would stimulate other entrepreneurial economic activity and stop  the US from sliding  into a recession. This happened exactly as  Greenspan predicted: housing construction and prices zoomed upwards, thousands of new jobs were created and the US economic growth leapt forward.
     A  few  observers did express concern that a housing bubble was under way and would cause a mess when it burst, but Greenspan waved them away. Speculative selling or buying  of houses is not as easy as  speculating in  securities, he said. Sellers have to incur substantial transaction costs like brokerage fees and taxes and these costs act as dampeners to speculation. In any event, there is no national market for housing, he said and thus,  even if  housing bubbles do form and then burst they are likely to be localized to some towns or at worst some regions. Such phenomena cannot affect any other part of the United States let alone any other part of the world.
     But in holding steadfastly to this laissez–faire philosophy, , Greenspan was overlooking another development: a financial innovation called “mortgage- backed securities” an example of the new world of “derivatives”.  These securities would, when the housing bubble burst, carry “the mess they created” not only to other parts of the United States but also to other parts of the world.
     Such destructive power would derivatives wield  that Warren Buffett, the man whose financial acumen American’s respect the most,  would describe them later as “weapons of mass destruction”, “contracts devised by madmen” and the derivatives business itself as  “ like hell…easy to enter and almost impossible to exit.”
     But others have described derivatives as a modern invention that ranks up there with the microprocessor and antibiotics in its potential to benefit mankind. In the next part of this three-part series, we’ll try and understand what these derivatives are, how they came to be objects of such veneration and hate.

END of Part 1

The dog, with 10 new-born puppies, was trapped in Parel’s Dalvi building, which came crashing down on Monday. Sanjay, a resident of the area, risked his life to save her.

     The greater love is mother’s; then comes a dog’s; then a sweetheart’s.  This Polish proverb found a meaning on monday when a man risked his life to save a dog and her new-born puppies from Parel’s Dalvi building even as it was crumbling and coming down.

     The building, which once housed the CPI headquarters and was the battleground between cadres of the Left and a rising Sena in the late ‘60s, was evacuated two years ago as its fall looked imminent.

     On monday, half of the four storeyed building came tumbling down first.  As fire brigade officials rushed to the spot on being informed, they were told by the crowd assembled in the adjacent building that the dog, Rani, which had given birth to 10 puppies just four days ago, was trapped on the second floor.

     Though the firemen were ready to go inside the building that was still coming down, they had one apprehension – the dog would pounce on them fearing harm to the puppies.

     As they stood there undecided, Sadanand Sawardekar, who lives in the next building, suddenly remembered the man who could do the job.  It was Sanjay Satpal, an HDEFC executive who used to feed the puppies with milk and biscuits and had thus earned the love of their mother as well.

     Sadanand then called up Sanjay, who rushed upon learning about the incident. Once on the spot, Sanjay, escorted by three firemen, hurried up to the second floor where Rani, though scared herself amid raining bricks and stones, was resolutely guarding her puppies lest any harm come to them.

     Upon seeing Sanjay, Rani seemed reassured and showed no protest when he started keeping all 10 puppies in a gunny bag he had carried with him.  All along, the firemen with him stood at a discreet distance.

     The story didn’t end here. Even as Sanjay was taking the puppies out of the gunny bag placed at a safe distance from the crumbling building, Rani the mother instinctively snatched one of them and ran back towards the building, little knowing the danger that awaited her.

      But Sanjay did not give up.  He knew Rani trusted him.  He once again went in to the building dodging raining bricks and found Rani crouching with the puppy in a safe corner.  After getting a tender pat, Rani obliged and came out with him and the puppy.

      Finally, Rani and her puppies were put up at a community centre in the adjacent housing society.

For a word that has its origins in 14^th century Anglo-French, “excellence” has done very well. One can hardly ever attend a meeting of top policy makers in business or education or science without somebody or the other raising the question, “Are we striving enough to achieve excellence in our field?” For policy makers, “excellence” is one of those unquestionable goals.

            For  the  cult following that “excellence” enjoys among policy makers we have to thank Tom Peters and Bob Waterman and their 1982 book, “In Search of Excellence.”  They were consultants at McKinsey when they wrote this  book which went on to sell 3 million copies in the first four years of its existence and is believed to be the most widely held book in libraries in the United States.

            Peters and Waterman observed  traits that  successful companies had in common. Things like a readiness to take  quick action (as opposed to procrastination), a willingness to listen carefully to customers (as opposed to a take-it-or-leave-it attitude), and the discipline to  “stick to their  knitting” (as opposed to venturing into  unrelated businesses).

            These ideas seemed so stunningly obvious  and something that anybody could practice that  the notion for striving for excellence quickly became a corner of management thinking. It soon found its way well beyond the business world and into areas like educational and government policy making.       It mattered little that in a   short few years  after the book came out  several of these “excellent”  companies  ( Atari, Data General, Wang, to name a few) had collapsed financially. The search for excellence marched forward among policy makers.

The idea of searching for excellence has been around in education for a while in an equally unquestioned way.    In engineering education, for example, it led to the starting of a half dozen institutions, equipping them with more and better classrooms, more and better teachers and more and better labs and you now have a half-dozen IITs that meet the criteria of  “excellence.”

            The search for excellence in management education led to the founding if another half dozen institutions , equipping them with more and better classrooms, more and better teachers and more and better libraries and you now have a half-dozen IIMs that meet the criteria of “excellence.”

            And this was repeated in medical studies, in Design education, in Architecture and many other fields..

            All this is very comforting till you start counting the “others”. The several thousand “other” engineering colleges, the two thousand “other” management schools, the several hundred “other” medical, Design and Architecture schools that have not been favored with these extra resources.

            The theory of excellence works on the principle that if in a population of 100, five perform exceedingly well, the job is done. It does not pay attention to the other 95.

            Maybe it is time that we set these excellence theories aside and look to the teachings of William Deming, a .  philosophy that is exactly the opposite of the excellence theorists'. Up until then achieving manufacturing quality meant posting an inspector at the end of a production process to pick out the excellently produced items and send back the others to be reworked or discarded. Much like how we use tough entrance exams to select 0.5 to 1% of applicants to IITs and IIMs and forget  the others.

            Deming’s view was that when a production system turns out items of varying quality, we must ask  “what is the variation trying to tell us about the process?” There are two parts to this variation he pointed out. The first part is  intrinsic to the process.. He called these the “common causes” of variation.  And the second part  is because of things like an  operator falling asleep on his shift or  a particularly poor batch of raw material. These he called the “special causes”.

            The “special causes”  are relatively easy to fix  and can often be fixed by the people directly involved in the production process: the worker who operates the machine needs to get a proper night sleep and not fall asleep at the machine, the man who buys the raw material needs to avoid poor batches.

            The “common causes”, he said is the more insidious part of the variation of quality.  They  are often outside the control of workers and others directly involved in the production process and can only be fixed by those in management positions. Perhaps the product design itself is defective, maybe the operating processes are poorly defined, and maybe the working conditions are too poor.

            Using Deming’s methods, Japanese auto and electronics companies learned to produce 100% of their output of high quality and with little or no rejects.

            When we praise the excellence of our IITs and IIMs and a handful of other elite institutions we may merely be praising the work of pre-Deming quality control inspectors.

            This is perfectly in keeping with the origins of the word “excellence.”  It originates from the 14^th century Anglo-French word “excellere” which means someone or something that is much better than others. Intrinsic to it is the idea of selecting a few and not worrying about the rest.

            Is it time we abandoned this search of excellence, embrace the methods of Deming and identify the “common causes” that cause such quality variations in our education system?

END

Comments welcome at ajitb@rediffmail.com

The monsoon in Mumbai was winding down and Ganesh Chaturthi had just been celebrated when it struck me that this would be a good time to pay my respects to a man I much admire. So, on a recent bright and clear morning, on my way to work, I stopped by at Chowpatty Beach , that small stretch of sand at the start of Marine Drive that is an island of calm in hectic Mumbai.

            It was nearing nine that morning and everyone other a few stragglers had finished  their morning exercise walk and gone. The few men and women still lounging around the benches strewn along the edge of the beach were, I guess, folks who had no particular place to go or nothing particularly important to do. On nearby Marine Drive, cars whizzed by in both directions, Mumbaites in their usual demonic  hurry to get to work.

            What I’d come to see was there alright, if anything taller than I remember- nearly ten feet tall and when you add another ten feet for the pedestal it rested on , it was not easy from nearby to take the whole picture in.

            There he stood, Bal Gangadhar Tilak, veteran of many a battle, forever impatient to set his country free now caught in an unhurried pose. One hand clutching a book, perhaps the Bhagwad Gita commentary that he wrote when the British incarcerated him for six long years in a tiny cell in remote jail. The other held a walking stick lightly. One foot was slightly ahead of the other as if he was setting out on a march for one of the many causes he felt so passionate about. He stood there alert as if watching carefully all who entered Chowpatty Beach. On Ganesh Chaturti day, millions pour past his watchful eye to immerse the Ganesh idol into the sea here. And as every school boy in India is taught, it was Tilak who thought up the public version of what was till then a private festival to get around a fearful British colonial government prohibition of large numbers of Indian gathering at one place.  Early Ganesh processions even carried pictures of Garibaldi  the unfier of Italy.

            I wonder whether school children get taught nowadays why Tilak was sent for his first spell in prison. It was nearing the end of the 19^th century, Mumbai and Poona were being ravaged by plague which had spread here through merchant ships that traded with Hong Kong. The British colonial administration started forcibly removing plague victims and isolating them in “plague hospitals”. 19^th century science knew of no other solution to plague other than isolating people who already got it to prevent the disease from spreading to others. The high-handed way this isolation was done created an outcry among the population. Things came to a head when the British official in charge of this segregation effort was assassinated in Poona. Tilak was implicated, probably falsely, as a conspirator and sent to jail. All this may make Tilak look like an obscurantist who came in the way of medical progress he was far from that. In the middle of this turmoil, his newspapers in Poona were carrying up to date accounts of what Koch, the German scientist, was doing to isolate the plague virus. I wonder whether our school children are taught to make this distinction about Tilak’s actions- the nationalist who objected to the way citizens were being herded into plague hospitals and the modernist who followed eagerly the progress that science was making in finding an answer to the plague problem.

            From where I stood beside Tilak I could see that Tilak’s gaze would have taken in the row of glitzy shops  that have sprung up across the road on Marine Drive:  a Levi jeans shop, a Renault car showroom, one for Arrow shirts, an immensely popular outlet of Café Coffee Day that is packed at all times of the day or night with young trendy, jeans-wearing college students. What would Tilak have made of all this?  When he died, in 1920, it was far from clear whether or when India would wrest Independence and Tilak till his end was uncompromising in his demand for Swaraj. But he was also the man who in 1880 had co-founded an English medium school in Pune, “The New English School”, and an English language newspaper, “The Maratha” .

            For that matter what would Tilak have made of what some environmentalists say- that the immensely popular Ganesh festivities that culminate in thousands of Ganesh statues being immersed in the sea cause environmental damage. The Ganesh statues were, in Tilak’s time, made of harmless clay and  painted over with vegetable dyes, but present-day versions are made of plaster of paris that, environmentalists say, contains gypsum, sulphur, phosphorus and magnesium and are painted over with chemical paints that contain mercury, cadmium, lead and carbon.

Tilak, ever the modernist, would probably have led another movement, this time at the head of the environmentalists who suggest that permanent idols made of brass or stone be used, that a symbolic immersion be done so that the same idol could be used again the next year and oppose the use of thermocole and plastic in decorations. And, ever the great activist, he may have carefully watched the immersions from his vantage point at Chowpatty to make sure that these socially important directions are followed.

Comments welcome at ajitb@rediffmail.com

It is early January here in New York and the weather had no right to be as warm and sunny as it is today. By any account it has to be freezing and below zero Celsius and the streets have to be speckled with dirty, melting snow puddles. These pigeons that we see hopping along in the square ought to be hiding from the cold in a warm nook of some building. The streets are bustling with people. This is not a sight for early January. People ought to be indoor and the streets ought to wear the deserted January   look.

          I find myself strolling back from lunch with a prominent technology guru of a prominent Wall Street bank.

“I have finally figured out what ‘one lac’ means,” he had said to me.

“How come?”  I asked, genuinely surprised. There have many things I have tried explaining about India to our western friends, but not our numerical system of ‘lacs’ and ‘crores’. I thought we had left that safely behind in favour of ‘hundreds of thousands’ and ‘millions’. The term ‘lac’ had seemed so archaic. But here it was, back in the world’s headlines with the ‘Rupees One Lac car” from the Tatas.

“I believe what the Tata’s are unveiling today, their Rs one lac car, is going to change the way the world looks at Indian companies,” my tech guru friend had said.

“When the Indian software industry, made its mark,” he had continued, “the rest of the world had understood how they did it; Indian programmers were a tenth as expensive as programmers in the West. Then the Indian rupee steeply devalued from Rs 8 per dollar in the mid-1980’s to Rs 45+ per dollar in the mid 1990’s making the cost competitiveness case even more compelling. But the Rs 1 lac car is different. They will get to this target not by using cheaper labour or cheaper materials available only in India. They are going to get to this by bringing into play product design skills, consumer insights, management systems, perhaps even a new business design. In other words, they are going to compete on capabilities not resources. That’s why it is sending a shudder down the spine of many Western executives, not just car industry executives.”

As I walked back to my office my mind strayed to other such moments in industrial history.

Take, for instance, Richard Arkwright’s successful effort in the early part of the 19^th century to make machines spin yarn of a quality equal to or better than that spun by skilled, hand spinners in India. His innovation made yarn cheaper and thus made cotton cloth woven from it affordable not merely by the very wealthy and it had been till then. What Arkwright did was not save labor costs by using machines instead of labour because any such savings were more than offset by the cost of equipment and factory buildings... His real innovation was in the design of work such that workers would all congregate at a fixed place of work (a “factory”) and thus work for predictable hours and under tight supervision as opposed to working odd hours at home. Superior work organization allowed output to be dramatically increased and made cotton yarn widely available, a feat that home-based spinners could not achieve.       The rise of the Western world was predicated first on this idea- the use machines to do at one central place what hitherto human muscle power had done in decentralized home based activity. Then came the use of chemistry to make synthetically and in plenty materials that had been hitherto available in nature in restricted quantities and in varying quality levels and consequentially at higher prices. Thus indigo from India was synthetically produced and became available in vast quantities and at a fraction of the price of natural indigo; aspirin, hitherto distilled from the bark of willow, was similarly synthesized and millions of ordinary citizens benefited.

Henry Ford created another revolution when he launched his Model T car and brought cars within the reach of ordinary people. He did this by deploying “mass production” techniques- a new system of arranging a sequence of metal working machine which did repetitive operations reliably and which could be supervised by the illiterate, unskilled immigrant labor coming off the impoverished farms of Ireland and Southern Italy- the only kind of labour available to him at that time. Ford’s  “big idea’, mass production, then got deployed in a wide variety of metal working industries and made such objects like the sewing machine and bicycles affordable by all.

The “big idea” behind the Rs 1 Lac Tata car is this- an Indian company, has dreamt up a management system and a business design to build cars that are affordable by people who had never dared dream  of owning a car..

The real message of the Rs 1 Lac car is that in one stroke, it is showing the way to Indian managements that a new era awaits- one where you compete on superior management capability leaving behind decades of attempting to compete on cheaper labour or cheaper natural resources.

Its like the early coming of spring after a long cold winter.

End

Twenty six of us were seated around a long U-shaped table. It was late in the afternoon. The room was semi-dark. Each of us had a plate of sweets and a bottle of mineral water in front. A third of the people seated here were CEO’s of large and famous Indian companies, some recently retired, others still very active in business.  Another third were high-level civil servants. The rest was a mix of senior company executives and academics. A slightly graying 40-something man stood at the head of the U in front of a brightly-lit screen. Everyone was intently focused on what the man was saying straining to take in every word above the whirring sound of the air conditioners valiantly battling to tone down the heat from the October afternoon sun.
 We were at IIM Calcutta’s quarterly board meeting. The Professor at the podium was walking us through some pretty revolutionary ideas for updating the curriculum for the flagship two-year Post Graduate Programme in Management- the result of nearly three years of debate within the faculty. A mandatory course in a foreign language, other than English, was the first of the many revolutionary ideas.  The world is increasingly globalized, explained the professor, and our students need to be comfortable in dealing with people of other cultures. It was one of those ideas that catch you by surprise because once you hear it you wonder why you didn’t think of it earlier.
 A compulsory course on Ethics was the next big idea. Of course, the professor quickly added, it’s not that we think we can “teach” people issues like ethics but it certainly was worthwhile to explore with young and impressionable minds what constitutes unethical behavior in business. Explore with them how to deal with bosses who sail too close to the wind in ethical matters. Perhaps even demonstrate to students that ethical companies get practical rewards such as higher stock market valuations. None of us around the table could quarrel with this either.
 There were a few murmurs around the table when the professor mooted his next big idea- increase and emphasize the mathematical content of the programme. More and more stock trading is being done based on mathematical models, he pointed out and since the majority of the graduating class finds its way to financial service and consulting companies, being adept at mathematical modeling is likely to be a useful thing.
 That’s when a really revolutionary idea was sprung on us. By a board member, a retired CEO. Is it possible, he asked, that our IIMs, espouse essentially an American way of managing businesses? Should we not be opening our minds to looking at other ways of managing too? Aren’t there lessons to be learnt, for example, from successful Japanese companies?  Companies such as Toyota have used a subcontracting system to rise to the top of the world auto industry. What are the practices they have instituted that makes co-operation with suppliers possible over the long term? What makes it possible for Japanese companies and their partners to exploit complementary assets? What allows them to have a convergence of purpose with their suppliers? How do they so successfully manage the interface between themselves and their suppliers? Is this something in the Japanese industry structure? Or something in Japanese society?
 While our meeting ended with all of us promising to think about this issue, that evening as I drove back into Calcutta city along the Ganges, I asked myself: are ways of managing businesses different across countries?
Prof Bruce Kogut of Wharton and INSEAD, writing in the journal, “Management Science”, is someone who believes that the institutional environment in which large firms operate differs significantly across countries. Boards of US companies, for example, are much more powerful than boards in France or Japan. Institutional investors have a large say in how large US firms are run whereas in France and Japan it’s not institutional investors but government bureaucrats that wield this kind of power. In Germany, commercial banks and labor unions have strong voices on company boards.  Again, in Germany, there are few industrial groups whereas in Japan groups of large companies are tied together in keiretsu with a large firm and a bank as the hub. These differences in the institutional environment play a crucial role in how management plays out.
Maybe management thought, to be powerful, ought be like the Ganges itself- springing from many different sources. The Alaknanda river meets the Dhauliganga, then the Mandakini at Nandprayag, then the Pindar at Karnaprayag, and finally the Bhagirathi at Devaprayag to form the Ganges. Then the Ganges emerges from the Himalayas at Haridwar, and flows for 800 km till the Yamuna joins it at Allahabad.  Then it picks up speed  as rivers such as the Kosi, Son, Gandak and Ghaghra join it. When it reaches Bengal, the Meghna River joins it before it flows into the Bay of Bengal.
 Maybe, what we teach at our IIMs need to be like the Ganges, nourished from many different sources.

READERS WRITE

Ajit,
 
I read with great interest your article on whether IIM's are overly US looking.  I strongly agree with your thoughts.
 
The US is head and shoulders above other countries in terms of management research output. Add to it the fact that business schools across the world have come to rely on textbooks written by American professors and you have an American focus on management education.  
 
When I did an executive education program at IIM Ahmedabad in 2000, I remember a marketing professor taking us through an HBS case about the Suzuki Samurai. A group of people who had never been to the US, had little knowledge of the market environment were analyzing why a concept did not work. Obviously, the learning we derived from it was suboptimal. I am sure this situation is changing as the IIMs produce more case studies and research.
 
The graduates of 2009 should be exposed to the world order they will be function in (BRIC countries contributing disproportionately to world growth, shrinking populations & relative importance of Europe/Japan). In this regard, any steps taken by IIM Calcutta to modify the curriculum would benefit graduates tremendously.
 
I enjoy reading your notes about taking IIM C forward. Thank you for sharing them.
 
Krishna  
Krishna Hegde krishna.hegde@gmail.com

Ajit:

Big fan of rediff and India Abroad.   Congrats on building a great media business.

On your recent article about the philosophy of MBA programs, you had ended the article with a provocative question around whether our MBA programs need to be nourished like the Ganges and essentially saying we need to accommodate philosophies from multiple sources.  I tend to cringe whenever I hear folks espousing multiplicity for multiplicity's sake.  We need our MBA's programs to follow the "right" philosophy and if it does happen so that the "right" philosophy is an amalgam of various things from various cultures than we should do so.  The idea of a global buffet based educational philosophy where you pick things just because they are different does not make sense to me. 

Most MBA programs adopt an US centric view because the US centric view optimizes around capital and return on capital (not saying that this is a good or bad thing but just stating the fact).  Optimizing around capital has many social and labor implications - the Japanese optimize around market share and maximum production even if it undermines return on capital.  As a venture capitalist, there is no doubt which philosophy I believe in ;-) ;-).  If your goal is to maximize wealth creation (again not saying that is a good or bad thing) then the US centric philosophy is the way to go.

Venky
Venky Ganesan vganesan@globespancapital.com
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Dear Ajit,
 
I read your article in rediff.com with great relish. I admire the way you have steered rediff to become one of the foremost india based internet portals.
 
Regarding your article, while the argument is not very old that we are following US in terms of evrything we do, we will have to look at it from a different light. I feel that there is nothing wrong in accepting what is good from other cultures and countries. Looking at the specific aspect of curriculum, it is important to note that the number of electives offered by american graduate schools are far more than indian schools. Faculty shortage is one major concern, i agree.
 
You mentioned three different topics that was discussed, language course, ethics and more mathematical courses. I am especially keen that all bschools start full fledged course modules in ethics and CSR. These courses should be made mandatory and a clear expectation should be set as to what it means and how important these subjects are.
 
As such these are extremely important for any new bschool graduate, but there are some areas where i feel indian management schools should give more importance. For e.g it would be great if there is a course on new venture planning in indian context. This could include courses, workshops and meeting with people, like you for e.g., who have successfully established brands and companies in india and also india specific venture capitalists. This could also include how to deal with issues related to IP.
 
Another area is Knowledge Management. This century is touted as the knowledge century and the ability to develop, manage, dissiminate and profit from knowledge is of great importance. Again this is a concept that the japanese have used successfully to build their global dominance.
 
The internet has changed the world interacts and this has significant impact of business. You being the head of one of the leading global internet portal would vouch for that. The future business models would involve understand the social aspects of internet and how that can inspire and invigorate businesses. So the sociology of the internet and the concept of Web 2.0 should be made part of the tool set for future managers.
 
Finally i feel that project management should also become part of the new manager. With a lot of developments happening in the infrastructure development in india, it would be important for people to have a good grasp of the project management methodologies.
 
Knowledge mgmt and project mgmt are offered as part of the PGESM program at IIMB. but it is necessary to offer these courses as part fo the normal MBA as well. I feel that these courses would significantly help the young student become a better manager.

Sathya Pandalai spandalai@yahoo.com
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Dear Ajit

After reading, Are Our IIMs Over US-Centric, I thought our International Conference, " Expanding Horizons of Indian Business & Indian Management"  would interest u. It is being organised by  Indian Business Academy in association with WISDOM, Banasthali  on Jan 15-16, at IBA Bangalore and Feb 19-20 at IBA Greater Noida. This would be a path breaking conf.  like the earlier conferences that we had at IISc and WISDOM. The attached brochure provides the outline of the conference and its themes.

We look forward to your support for the conference and invite u to present ur views. Already leading academicans such as Prof S. K. Chakraborty, Dr M B Athreya, Dr Gustavsson from Swedish Business School,  have confirmed their participation as key note speakers

Subhash Sharma
subhash sharma re_see@rediffmail.com
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Hi Ajit,

Here's what I feel about Ethics being "taught" being a "course" (as in, being part of syllabus).

We are a country of "moral science" classes being part of curriculum in schools.  Colleges dont have them, coz.it is felt that the kids have got the foundation right already, based on which the next lessons are taught.

Times when ethics / corporate governance is taught in Company Secretaries / Chartered Accountants course; governed as clause 49 of listing agreement; or regulated, you would always see that the "words" are what is met, "spirit" is what a few follow (largely because of the person's values in life, upbringing and the eco-system that person is working in).  Example, think of corporate governance in Real estate industry...

While the thought of the IIM Prof is laudable, I think his 'exploration' might remain a survey / research paper on the subject.

Sharda Balaji
Legal Counsel, corporate advisor, aspiring enterprenuer
sharda  balaji <sharda_balaji@rediffmail.com>
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Dear Shri Ajit Balakrishnan,

I am a regular reader of Business Standard and  read  your
article regularly.
I am eager to know:
"Were you born in a village? or do you have any ancestral village in India?
Have you ever solved one or two problems of the said village or town?
What were those problems?
How did you solve them?
Were the solutions economical?

With regards,
S.C. Aggarwal,
Founder, Poverty Trust,
aggarwal@indiainfo.com

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Dear Mr Balakrishnan,

I enjoyed reading your column today. It is most unusual for the chairman
of a board to make public any item discussed in a board meeting- excuses
for not parting with nformation are more common.

I had occasion to post a comment in my blog. The link is attached.

http://ttrammohan.blogspot.com/

regards,

Dr.T T Ram Mohan              
Finance & Accounting Area          
Indian Institute of Management        
Vastrapur, Ahmedabad-380015