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Theory driving Practice

December 8, 2010 Leave a comment

Often we hear that things in life are very different from what’s taught in theory. However, every activity or behavior in practice can be attributed to a theory. One such example is CK Prahlad’s idea of emerging markets.

In his thought provoking book ‘The Fortune at the Bottom of the Pyramid’ Prahlad predicted that there is great scope for retail sector in the lower middle class and poor masses. He referred these masses as Bottom of Pyramid (BOP). He advocated poverty alleviation by tapping BOP market and involving BOP in the economic activity.

He proved that the MNC strategy of focusing on middle and higher income group is self defeating. He also demonstrated that the profit margins at BOP are very high. Example- money credit is offered at annual interest of 600% (2% per day) compared to bank interest rates of 12% -15%. Same goes for oil, grocery and water.

And it seems that companies have taken his advice seriously (at least for tapping the BOP market).

Single serve packs for premium brands are now available at roadside shops and the sale from these shops makes a significant proportion of total sales volume. Branded hair oil is available in 1 Rs sachet and even a domestic maid living in Dharavi can buy it every day. She would not have even thought of buying a 200 ml bottle for 40 Rs.

Profit margins for many FMCG companies are now driven by small value items like Rs.1 hair oil, Rs.2 biscuit pack or Rs.5 mobile recharge. Here Prahlad’s theory actually showed direction to companies to build their marketing practices.

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Categories: Economy Tags: , , ,

Social Security and Family System

February 22, 2009 1 comment

 When we analyze root cause of a problem, usually we probe the same system. For example, while solving organizational problem we study the organizational environment and systems. However, at times the root cause lies in another system or environment. Here is a case:

Problem:

US social security is in crisis. Starting 2017 huge number of employees will be retiring and government will not have enough funds to provide the retirement benefits.

Reason: Scholars in America argue that the payroll taxes are lower and the benefits paid are higher. This is taking the social security program in trouble.

Here is another perspective:

In US, 90% population receives some form of social security benefit. Hence there is very high dependence on government. As life expectancy increases this problem aggravates.

People will live longer but general health will deteriorate. This will place huge burden on government funds.

 While a prosperous and advanced nation like US suffers from this problem, how come India is shielded from this crisis?

 The answer lies in our Family System: In India only 7% population is covered under social security. Yet, the other 93% people have some arrangement to take care of them when they grow old.

 The joint family (siblings staying together with family) as well as the combined family (parents staying with children) system takes care of this.

Even in nuclear families, children usually support their parents staying in hometown. The family system provides for the ‘old age benefits’ without depending on government.

 The family system also shields people from impact of economic downturns. If a person looses his job, he can turn to his brother or parents. In rural India, you would see good diversification of income sources. One brother looks after farming and other works in some factory. In case of drought, employed brother supports both families. In case he looses job, both families earn through farming!

A cultural practice can be a source of strong economic system! What do you think?

 

 

Factory Farming and Rise in Foodgrain Prices

June 12, 2008 1 comment

Foodgrain prices have zoomed up in almost all parts of the world. Ironically, last year agriculture production was normal and there was no famine. 

Fingers are being pointed to Economic slowdown or Ethanol or Oil Prices. Arun Firodia in his article in Economic Times rightly pointed at increased meat consumption for the present crisis. The author feels that if meet consumption reduces, there would be enough food for everyone.

 

However, meat consumption is increasing at an alarming rate and therefore the solution has to be based on the assumption that there would be great demand for meat especially in the developing countries. 

 

In developed countries Factory Farming is practiced for cattle breeding. Cattle are maintained in huge factories and are fed on foodgrains instead of grass. Inefficiency is built in the food chain as cattle eats huge amount of food to produce meat.

 

In developing countries the cattle breeding is largely decentralized. Great amount of meat is supplied by farmers and small breeders. Availability of huge farm waste and grazing grounds help reduce foodgrain intake by the cattle.

 

The demand for meat is increasing rapidly and big corporations are entering the market to fill this demand. Developing countries can not afford Factory Farming which consumes huge amount of foodgrain thereby reducing per capita foodgrain availability for the citizens.

 

Strengthening animal husbandry at village level has its merits:

  • Good use of farm waste as feeder for cattle
  • Generating employment for rural youth and curbing migration
  • Lesser risk of animal diseases and minimizing its impact

 

The demand for meat is going to rise. It’s up to the developing countries to decide how much foodgrain they want to waste or save on raising the cattle.

 

 

Categories: Economy Tags: , , ,

Inflation

February 1, 2008 1 comment

In India, inflation is calculated on the basis of wholesale price index which was calculated in 1993.

Is the consumption pattern today similar to that in 1993?

Consider this:

How much we used to spend on transport and communication in 1993? Compare your phone bill of 93 with all cell and landline bills of 2007! Earlier some families used to have vehicle. Now every family has 2-3 vehicles.

 What was the spread of service tax in 1993? Today tickting, beauty parlor, phone bills etc have service tax. Doesn’t this account for inflation?

 What do you eat? The WIP is full of commodities which are not at all significant today. With the villegers extensively using sugar as a sweetner, having jaggery in WIP with high weightage is not correct. And half of the city these days survives on Bread. However, increase in bread prices is not considered in inflation calculation.

 And finally EDUCATION! Seven years back I completed my engineering in 30K. Today, 30K will not even suffice for one year fees. With more and more people going for higher education and education getting costlier day by day (literally), can we afford to keep this out of inflation?

But the government will still refer the old WPI document. Because it helps them to show that inflation is only 5 to 6%.

Categories: Economy Tags: ,