business-strategy on S Anand

A sense of proportion

Fri, 14 May 2010 08:44:30 +0000

So the problem is, a lot of business managers and especially business owners, they have no sense of probability. They can’t fathom that concept. So They treat the probability of 1 to 10 trillion as the same as a 1 to a 100. And like, “We’ve got to deal with this 1 to a trillion probability, because, what if it happens?”

No! Doesn’t matter! I mean, don’t care.

So as soon as that sense of probability spreads, that people can treat that reasonably, I think all this nonsense just goes away.

This lack of proportion, sadly, is at the heart of my every day problems. (Just watch the video!)

Comments

elbin 14 May 2010 5:49 pm: Money matters!

Resolving the Prisoners Dilemma

Sun, 17 Aug 2008 12:00:00 +0000

If you’re ever taken a course in Economics, and it discussed Game Theory, you may be familiar with The Prisoner’s Dilemma. Roughly, this is the problem.

Assume you possess copious quantities of some item (money, for example), and wish to obtain some amount of another item (perhaps stamps, groceries, diamonds). You arrange a mutually agreeable trade with the only dealer of that item known to you. You are both satisfied with the amounts you will be giving and getting. For some reason, though, your trade must take place in secret. Each of you agrees to leave a bag at a designated place in the forest, and to pick up the other’s bag at the other’s designated place. Suppose it is clear to both of you that the two of you will never meet or have further dealings with each other again.

Clearly, there is something for each of you to fear: namely, that the other one will leave an empty bag. Obviously, if you both leave full bags, you will both be satisfied; but equally obviously, getting something for nothing is even more satisfying. So you are tempted to leave an empty bag. In fact, you can even reason it through quite rigorously this way: “If the dealer brings a full bag, I’ll be better off having left an empty bag, because I’ll have gotten all that I wanted and given away nothing. If the dealer brings an empty bag, I’ll be better off having left an empty bag, because I’ll not have been cheated I’ll have gained nothing but lost nothing either. Thus it seems that no matte what the dealer chooses to do, I’m better off leaving an empty bag. So I’ll lease an empty bag.”

The dealer, meanwhile, being in more or less the same boat (though at the other end of it), thinks analogous thoughts and comes to the parallel conclusion that it is best to leave an empty bag. And so both of you, with your impeccable (or impeccable-seeming logic), leave empty bags, and go away empty-handed. How sad, for if you had both just cooperated, you could have each gained something you wanted to have. Does logic prevent cooperation? This is the issue of the Prisoner’s Dilemma.

There’s nothing wrong in the logic, actually. The key assumption is that it is clear to both of you that the two of you will never meet or have further dealings with each other again. If you’re never going to deal with someone again (and hence there is no question of retribution or any fallout), you really should cheat.

An aside. During my first few days at IIT, two third years were ragging me about my stance on pre-marital affairs. After trying my best at defending the moral standpoint, I finally confessed that it was only the fear of the after-effects that worried me.

“There’s this beautiful naked girl in your room,” they said. “You are guaranteed no repercussions. What will you do?”

“No repercussions?”

“None whatever.”

I thought for a while. “I’ll flip a coin.” :-)

Anyway, the aside aside, the solution to the one-off Prisoner’s Dilemma is for both people not to cooperate. If contracts are not enforceable, we’re all better off not trading. If there are no cops, we’re individually better off stealing.

But, of course, that’s not true in the real world. Most situations are repeatable, and you do tend to meet people again. Those you cheat may even have a motivation to meet you again.

This is the iterated Prisoner’s Dilemma. Douglas Hofstadter wrote about this in the May 1983 issue of Scientific American in his Metamagical Themas column (which, by the way, is brilliant). While the Prisoner’s Dilemma has a simple solution (don’t cooperate), the iterated Prisoner’s Dilemma does not have a predetermined solution. At best, you can have a strategy. (That can be proven. If there was a predetermined solution, your opponent would know it, and could beat you. One of those cases in mathematics where you are not guaranteed a solution.)

But is it possible for cooperation to emerge in an iterated Prisoner’s Dilemma? Can it beat competitiveness?

Robert Axelrod of U.Mich conducted a computer tournament to find out. He invited strategies from game theorists and wrote them as BASIC programs. Each program would be pitted against another. Every time, it could response with either C (cooperate) or D (defect). Cooperation gets both programs 3 points. If one defects, the defector gets 5 points and the cooperator gets nothing. Both defecting gets 1 point each. Axelrod ran each program against each other many times, and added up the scores.

The program that won was called TIT FOR TAT. It was the shortest program (4 lines of BASIC code). Here’s it’s strategy:

Cooperate the first time.

Do what your opponent does thereafter.

Think about it. TIT FOR TAT starts by being nice, and stays that way, unless you defect. Then TIT FOR TAT punishes. If you repent, TIT FOR TAT forgets and forgives. Interestingly, TIT FOR TAT can never win a game. It can, at best, draw a game, but never score more points than its opponent. It goes for winning the war by losing battles.

That’s four traits:

Being nice
Punishing immediately
Forgiving immediately
Willing to lose battles

After publishing these results, and having learnt a lot about different strategies, Axelrod repeated the tournament. Four times as many entries poured in. This time from world experts on game theory. It also included an improved TIT FOR TAT called TIT FOR TWO TATS, which is an improved TIT FOR TAT that does not fall into a C - D - C - D cycle when playing against TIT FOR TAT.

TIT FOR TAT won again.

Till date, TIT FOR TAT remains an unbeaten individual strategy, and people believe it may be optimal.

(PS: By individual strategy, I mean that there are multiple programs that can team together, losing to each other and making sure that one of them wins. This sort of thing can beat TIT FOR TAT. But no individual program beats TIT FOR TAT.)

In our first term at IIMB, we played a game in our organisational behaviour class, intended to help us understand inter-departmental cooperation (or rivalry). The class was split into two ‘companies’. Each company had four divisions.

The game had 10 rounds. In each round, every division could choose to cooperate or defect. If everyone cooperated, each division made 3 points. If any division defected, it would make 5 points, while all cooperating divisions made 0 points. If all divisions defected, they would all make 1 point. The divisions were not allowed to talk to each other.

The aim was to beat the other company. (Not other divisions, within or outside the company.)

Our company started off with 3 Cs and a D, which quickly deteriorated to 1 C with 3 Ds by round 6. At round 7, it was 4 Ds.

Before round 8, we were all given a chance to have a huddle. A representative from each division would come together and talk things through. We promised to cooperate, and thereafter, it was 4 Cs to the end.

We lost the game. The other ‘company’ had started off with 1C and 3Ds, but had learned to cooperate pretty quickly, aided, in Prof N M Agrawal’s words, by “… Aparajita threatening the other divisions with her glares.”

The reason there’s a Prisoner’s Dilemma is the inability to reliably communicate or enforce behaviour. Having a chat helps. Having laws that punish you helps. Having a bully threaten you helps. The thing is, you need a signal of some kind. And it needs to be an early signal, or you end up waiting till round 8 and lose the game.

If you’re ever in a situation where cooperation helps everyone, but it’s not in interest to cooperate, here’s what seems to work:

See if you can agree to cooperate before-hand
- Have a chat
- Find policies that punishes defectors
- Threaten if required
If not, then try to force cooperation by signaling.
- Be nice
- Punish defection immediately
- Forgive repentance immediately
- Lose battles to win the war

Comments

Dibyo 19 Aug 2008 1:05 am: I really liked this piece. It’s not a new concept to me, and I’ve understood it well before, but the TIT-FOR-TAT part really connected.

Dibyo
(IIMB too, but a couple of years junior - we only heard about Stud Anand)
S Anand 19 Aug 2008 11:03 am: @Dibyo: Even when playing the game at IIMB, a few of us knew about TIT FOR TAT. Didn’t help. Guess there’s a huge gap between understanding and practice…
Abhi 28 Aug 2008 5:33 am: Fantastic piece, very lucidly put.

IITM - Mtech, we should have heard about Stud Anand.
deepak 30 May 2010 7:32 pm: We played the game in IIMB and ended up doing the same stuff and never getting it right. Dibyo, I think it was Prof. Reddy who made us play this game. But then I went to Solvay for Exchange - 2 each from IIMB and A , we tried TIT for TAT first( many teams too many combinations ), didnt help post the huddle while everyone else was trying for Tit for TAT we kept going against to drive home the message. The prof did mention that one enlightened party doesnt help unless everyone else gets the message :)
Prabu 10 Dec 2010 9:03 am: Hi Anand, Was going through your post. Just thought of this algorithm that would beat the TIT-FOR-TAT algo. it would be:
1. Never Co-operate. Now, this algo always either wins or draws individually. Group games are different. Thanks
S Anand 10 Dec 2010 2:56 pm: That’s an interesting point, Prabu: “group games are different”. Totally so. Your Never Cooperate algo, as you pointed out, always wins or draws. Tit-for-tat, interestingly, NEVER WINS AN INDIVIDUAL GAME. You can prove it, but this file is a demonstration: it plays random strategies out against Tit-for-tat. Tit for tat never wins. Maybe the lesson here is a stronger version of “Losing the battle, winning the war”. Perhaps it’s essential to lose the battle to win the war. (I’m probably oversimplifying, or in extrapolating analogies… anyway, just wanted to say: yes, never co-operate beats tit-for-tat on an individual game. Many other such strategies exist too. As you mentioned, group games are quite different)

Multicriteria decision making

Mon, 21 Aug 2006 12:00:00 +0000

Decisions are usually based on multiple criteria. You have to trade off between criteria. I’ve been involved many such decisions over the last 5 years.

Example 1: A conglomerate wanted to identify industries for growth. We shortlisted 19 industries, identified 12 criteria for the attractiveness of an industry, researched each one and plotted them on spidergraphs like below.

The intention was that, to identify the most favourable industries, you’d just pick the ones with the largest filled area.

Example 2: Another time, we had to decide among BPO vendors. Again, we picked a bunch of criteria and compared vendors against these criteria.

Example 3: Once, we had to identify stakeholders’ position on a project.

Those who were big on the right of the graph were for, and those who were big on the left were against.

In all the above cases, the same process was used for decision making.

List criteria exhaustively
Evaluate options against each criteria
Assign weights to criteria (equal weights implicitly assigned above)
Compare options

Having applied this methodology it several times, I am convinced this process is fundamentally flawed. See how in this post: Errors in multicriteria decision making.

Comments

Sandeep 8 Oct 2006 4:06 pm: I am curious to know what the flaw is. To me it seems a pretty well-set method to demonstrate the strengths and weaknesses of any case, very visually and clearly.
Gregory L. Chester 21 Aug 2006 12:00 pm: TO WHOM IT MAY CONCERN: RE: THE WORD “SPIDERGRAPH” The above word has a Registered Trademark # 2,688,910, dated Feb. 18, 2003, as received from the United States Patent and Trademark Office. Principal Registrant: Gregory L. Chester, President of GLC New Product Consultants, Previously located at 1349 Sharon Green Drive, Columbus, OH 43229-9013. Presently located at 1422 Pathfinder Road, Henderson, NV 89014-3011. This Trademark is for: Printed Material, namely, Printed Graphs and Charts for use in the comparison and analysis of alternative choices in Decision-Making Applications, in Class 16 (U.S. CLS. 2, 5, 22, 23,29,37,38, and 50). First Use: 1-17-1985; in Commerce 3-17-1986. SN 75-665,749, Filed 3-17-1999. Erica Glembocki, Examining Attorney QUESTION: Has your Company ever considered a Royalty Fee for your use of the above word or Ceasing the use thereof? Sincerely yours, Gregory L. Chester, President GLC New Product Consultants 1422 Pathfinder Road Henderson (Las Vegas), Nevada 89014-3011

Demand draft fees

Tue, 21 Mar 2006 12:00:00 +0000

Once, we were looking at whether banks made money on demand drafts (DDs).

DDs are costly. 90% of a bank’s costs are people-related, and it takes a fair bit of time (hence people) to process DDs. If you pay for DDs in cash, it costs even more because the teller has to count the notes.

To recover this cost, banks charge a fee. The fee increases with the size of the DD. A DD for Rs 10,000 may cost Rs 50, while one for Rs 100,000 may cost Rs 200.

But apart from the fee, banks also earn float on the DD. Let’s say you go to a bank, pay Rs 100,000, and take a DD. You mail the DD to someone, who cashes the DD three days later. The bank has your Rs 100,000 for 3 days, and earns the overnight interest rate at around 5%, netting Rs 41 in the process. This float is significant for large DDs.

Our client bank was making a small loss on DDs. Every DD less than Rs 50,000 caused a loss (even after including float). And 3 out of every DDs was smaller than Rs 50,000.

Then we had this bright idea: let’s lower fee for large DDs, attract of them, and get more float income. DDs above Rs 50,000 are profitable. So big DDs are worth going after. 80% of the float income comes from the top 22% of DDs. So surely, the big DDs are worth going after. Float income increases forever, whereas fee income is capped. So big DDs could absolutely be terrific.

We were thrilled. Here was a revolutionary counter-intuitive idea: have lower charges for DDs to get more money. We kept talking about it to our client. But at the end, we didn’t suggest it. It got left behind the conventional idea of increasing the fee for small DDs.

We were a bit disappointed, and kept cursing the conservatism of public sector banks. Goes to show how the bright young consultants can be naive. For, as it later turned out, the bulk of DD revenues is really fee income (88%), not float income. Had we lowered the fee income, there’s would’ve been no chance for the float income to make up for it.

Why did we miss that? A couple of reasons. The simple one was, though the float income increases forever, doesn’t beat fee income until the DD is about Rs 2 crores. DDs typically stay with you for a few days, and you can’t earn much interest on that.

The other reason was subtler. We had assumed that the float income for a DD of Rs 100,000 is 100 times that of the DD income for Rs 1,000. But the float income does not increase linearly! Someone who gets a DD for Rs 1,000 doesn’t mind waiting a bit to present it, but someone who gets a DD for a lakh would walk to the bank the very same day. The chart below shows how long customers wait to cash DDs. The X-axis is the size of the DD. The Y-axis is the number of days they wait. It shows a clear diminishing trend.

Lesson: Conservative bankers might make more money not listening to hotshot consultants.

Comments

Shreyas 27 Mar 2006 10:22 am: Very insightful case study! But did increasing the fees for smaller DDs help boost the profits? Did it not reduce the number of customers taking DDs?
S Anand 27 Mar 2006 12:08 pm: We didn’t measure that. But even if it reduced the number of customers it would have (in the long run) increased profits, since they were losing money on every small DD sold! They would be able to shift someone from the DD section elsewhere, and avoid having to recruit a new person.
ronnie 21 Mar 2006 12:00 pm: Hello i like to join and i wish to be a member of demand draft so mail me pls
Walter Atkinson 21 Mar 2006 12:00 pm: I was looking to this information and was helpful…ok Best Regards Walter http://www.surveynew.com Premier Paid Survey Company.
ritu raj 17 Nov 2008 7:32 am: what doc need to be presented to the bank for the dd of 375000 to be paid in cash?
uss 8 Jul 2011 6:42 pm: but there is no dd charges for current account in private bank.ll it cost loss to the bank
Vignesh 23 Oct 2012 9:22 am: Beautifully written. I liked your articulation.
pradeep kumar 16 Jun 2015 3:29 am: This article is very nice and informative. Came here while searching for something related and found it very informative. Thank you very much.
Donga Satyanarayana 28 Feb 2017 8:20 am: Some private banks are fee DD charges allowed with simple amount deposit. But our Bank is world wise national Bank . This Bank is some lakhs of crores rotining services. Better to allow free DD charges atleast a limited amount. Thanking you

Math will rock your world

Sat, 14 Jan 2006 12:00:00 +0000

It’s a good time to be a mathematician.

Market emergence - fan bartering

Thu, 05 Jan 2006 12:00:00 +0000

Over my last few years as a consultant, I’ve seen many interesting ways in which markets have emerged where they shouldn’t have, creating havoc in pricing and scarcity. Fixed prices fluctuate, free goods acquire a value, and non-tradeable goods are traded. I’ll share a few of these examples over the next few weeks.

Once, a fan manufacturer asked us, We did an analysis and found that our wholesalers’ margins fluctuate. How could that happen, when we are fixing their buying and selling prices?

The manufacturer sells several popular fans. Their highest selling fan (call it HS), for instance, was sold to wholesalers at Rs 1,089, who would then sell it to retailers at Rs 1,100. No question of margin fluctuation.

I took a trip to Lohar Chawl, the wholesale fan market, to get to the bottom of this. After a few conversations in dingy warehourses, here’s what I discovered. Fans are bartered. Wholesalers keep as little cash and inventory on hand. Often, a retailer would order a fan (say X) not in stock. The wholesaler doesn’t want to lose the deal, and doesn’t have cash, but he would have some inventory of HS, since it’s such a high-selling fan. He goes to another wholesaler, and says,

“Give me some fan X, and I’ll give you some HS fans instead. You’ll be able to sell these HS fans fairly quickly anyway.”

“Why should I? Tell me your customers name and I’ll sell it to him myself, and make the profit.”

“Tell you what. I’ll give you my HS fans for Rs 1,079 instead of Rs 1,089. You’ll get a higher margin when you sell it.”

This is a routine matter in Lohar Chawl. If you don’t have a fan, barter it for another (often HS) at a discounted price. So the wholesaler’s margin would depend on how many fans they bought at a bartered price!

Poaching was another reason for the margin fluctuation. The manufacturer demarcated territories for each wholesaler, saying “You can sell the these 20 retailers, you can sell to those 18, and so on.” Ambitious wholesalers, or those with inventory to dump, would do a side deal with a retailer.

Look, your wholesaler charges Rs 1,100 for this fan. I’ll sell you this lot for Rs 1,095. And let’s keep it quiet."

Yet another reason for margin fluctuation was smuggling. Sometimes, the wholesalers would be able to smuggle fans into Mumbai without paying octroi. And sometimes they wouldn’t.

The biggest lesson for me from this was, It’s bloody tough to restrict a free market. I’ll tell you more about this shortly.

Comments

ritzkini 6 Jan 2006 6:25 am: :) Bloody tough indeed ! lemme guess,these were all gujjus !rite ?? ingenuous, i tell you,these guys..
Arun 6 Jan 2006 8:27 am: Neat! Thanks for those Excel tips. And look forward to more of these!
Madhu 6 Jan 2006 12:10 pm: I have noticed instances where a TN Auto Distributor comes and sells his stuff to a Karnataka retailer! How did you solve this problem? in my case, which was personal advice to a friend, we wrote to the company with some of the fake bills etc and asked for a higher discount for my friend who is a karnataka distributor, things like CST also start to matter in inter-state things. now the problem has come down bcos of VAT
S Anand 6 Jan 2006 4:50 pm: I did this work as part of a proposal. We finally didn’t get the project. But I suspect (and will try and show over the next few posts) that this is a problem that’s probably not worth fighting. The market will eventually win!
Madhu 7 Jan 2006 11:53 am: Ideally a very good supply chain management system will help solve this problem atleast. For eg: If i can order and get it immediately instead of having to bargain. Another issue is how was fan X priced? If its lower than 1089, it will also solve the problem
S Anand 7 Jan 2006 7:15 pm: The problem wasn’t supply chain lead-time, but shortage of cash for inventory among wholesalers. Whenever they were short of stock in one fan, they’d sell some other fan they had as inventory to get the fan they were short of. They can’t order it from the manufacturer, remember: they’re short of cash. They NEED to barter.
joe 7 Jan 2006 11:39 pm: the fan company had no clue why the margins were fluctuating ? scary thought. how could they not know about this. I presume it is top management that did not know this
Madhu 8 Jan 2006 3:53 am: Ok. A SCM which can even take in account demand considerations is ideal. But how can the HS and X be priced the same to the retailers? Isnt that failure of the market? Shouldnt a HS fan be priced different(higher?) than some random fan X?
S Anand 8 Jan 2006 10:52 am: Madhu, you’re right. The fans ARE priced differently. So it won’t be a one-to-one barter. If Fan X is priced at 1000, the wholesaler will give agree to sell 10 HS fans at Rs 1079, give 10 HS fans PLUS 790 Rs, and get 10 Fan X in return.
S Anand 8 Jan 2006 10:54 am: Joe, even the line mgmt didn’t know about this bartering! One of my colleagues discovered it. This guy’s a god of black money market operations, incidentally :-)
shyam 9 Jan 2006 10:07 am: This is something similar to the SJP Road market in Bangalore where u can buy computer parts at " SJP Road price “. the shopkeepers will undercut even the wholesaler price and sell it for " cash "

Business continuity planning

Fri, 28 Oct 2005 12:00:00 +0000

The Economist on Business Continuity Planning.

The effect on Ericsson, a Swedish mobile-phone company, of a fire in a New Mexico chipmaking plant belonging to the Dutch firm Philips, has become a legend. The fire, in March 2000, started by a bolt of lightning, lasted less than 10 minutes, but it caused havoc to the super-clean environment that chipmaking requires. Ericsson, unable to find an alternative source of supply, went on to report a loss of over $2 billion in its mobile-phone division that year, a loss that left it as an also-ran in an industry where it had once been a leader.

i2 to delist

Tue, 08 Apr 2003 12:00:00 +0000

i2 may have to delist. And delisting may be good for them.

Microsoft vs IBM

Sun, 17 Nov 2002 12:00:00 +0000

Microsoft (2002) vs IBM (1982). An article on whether Microsoft will go the IBM Way.

Microsoft’s ability to adapt and prosper hinges on meeting a third main challenge: creating trust.

What Microsoft is up to

Thu, 22 Aug 2002 12:00:00 +0000

Good summary of what Microsoft is up to at the Economist.

The 7-column blueprint

Tue, 30 Apr 2002 12:00:00 +0000

I was traveling from VT to Ullas Nagar to buy furniture. Since it’s an hour-and-half, I had taken a printout of an article on Scenario Planning to read. Being the gripping reading that it was, I’d fallen asleep on page 4, when I feel a gentle tap on my shoulder.

“Excuse me, are you reading this?”

Since I was asleep, I clearly wasn’t. But I looked at him, just to make sure he hadn’t mistaken it for a newspaper or something. He had a moustache, was wearing a blue shirt, and didn’t looked like the type who could mistake Scenario Planning with the latest political gossip.

“Could I have a look?”

He sure could. The article had made no sense to me so far. If it helped him, great! He started leafing through it.

“Did you download it?”

I had. I nodded. Then I went back to sleep. After a few minutes, when I woke up to see what station had arrived, he started off again.

“So are you studying this only now?” (His tone was like, “So, are you learning to read at THIS age?”)

I said, “Yeah.”

“Haven’t you taken any classes on strategy before?”

Now, how do I explain that I work for a strategy consulting firm? But then, that wasn’t his question was it? To be honest, I’ve taken only one class on strategy, and I’m not really sure I understand it, so I said “No.”

“I work for BPL Mobile, you see,” he continued. “We had this class on strategy where they gave out this blueprint. You should read it.”

Well, if he’s from BPL Mobile, I have a few strong thoughts as a customer that I’d want to share with him. But then again… maybe I’d learn something. I asked, “Blueprint? What’s that?”

“Oh, it’s a sheet that has 7 columns. It tells you what all you have to do for a company’s strategy – from deciding everyone’s designation to putting names in each of the boxes and so on. It’s really detailed. It has 7 columns. You should get it and read it.”

“Oh, you mean a business plan!”

“No, no, no. This has 7 columns. It’s a blueprint. You should read it.”

Of course. 7 columns. Should anyone spot a blueprint with 7 columns, do pass it to me. I should read it. In the meantime, I’ll stick to sleeping on trains.

Digitally certified video conferences

Sun, 02 Dec 2001 12:00:00 +0000

This is something I hadn’t thought of when we wrote our business plan. Digitally certified video-conferences. But we did think of insuring ourselves.

GartnerG2

Thu, 21 Jun 2001 12:00:00 +0000

The Gartner Group, which focused on IT strategy, has launched GartnerG2, which will talk about business strategy.

Unhappy workers are better than happy ones

Fri, 15 Jun 2001 12:00:00 +0000

Here’s a new one. A study shows that unhappy workers are better than happy ones. Throw the Hawthorne effect out of the window.

Investors are smart

Tue, 30 Jan 2001 12:00:00 +0000

Investors are smart. Disney kills Go.com. Stock rises. Sega kills Dreamcast. Stock rises. Lesson: kill it if it won’t work.

Krislyn strictly business sites

Sun, 01 Oct 2000 12:00:00 +0000

Krislyn’s Strictly Business sites is a portal for business sites. It’s appeal is in its flat structure and small list of good sites.

Strategy and Business

Sat, 22 Jul 2000 12:00:00 +0000

I found some interesting articles on Strategy & Business magazine. How Novell manages their reseller channel, how brick-and-mortar companies can brand on the Internet and corporate culture on the Internet.