investing

The (Idea Of) Investing In Behavioural Infrastructure : Or, How Ecosystems Create Value

Sanjeev

Sanjeev

Mr. Lee Kuan Yew found it first. If you punish your citizens for spitting or littering, you get better citizens and you need fewer municipal workers. This a spectacular case of a Govt investing in the behavior of its people. A generation before me, rich people in India would go to see how clean Singapore was, and of course, they would wonder how people would stoop down to pick up their dog’s poop…

Disclaimer: This article was written originally in April 2008, so some data points may be outdated.

Technology has started to standardize procedures

Such stories help tourism, a return on investment that even Mr. Kew may not have anticipated.

For some time, I have seen smart cos invest in ‘behave havioralterns’, mostly with soft Process Management, TQM, Quality Processes, and whatnot. Technology has started to standardize procedures, and even convert them into processes.

Behavioral Investments

In the early stages of its development, there has been a lot of talk about ‘infrastructure’ in India. This kind of infrastructure needs Project Finance, and the assets depreciate.

Some cos and a radio station are investing in a “no honking” day in Mumbai. The slogan “Horn NOT OK Please” has been sold to sponsors, and ads exhort you to NOT honk, even in a crowd. Ad agencies are roped in, and the radio station makes money.

This kind of ‘behavioral investment’ pays off immediately. First, the ‘assets’ don’t depreciate; beyond a tipping point, peer pressure will ensure that more and more people fall in line, somewhat like the campaign on Global Warming, or the campaign against plastic bags. A brand or sponsor who gets associated with such a drive reaps inordinate benefits.

As companies grow, they soon realize that investment in physical assets does not pay off unless accompanied by a concomitant investment in ‘behavioral infrastructure’. That is when Human Resources, Process Documentation & ‘And ERP’ become important in holding the co together. Process Documentation is nothing but the codification of ‘good practices’ that lay out the rules of correct behavior, much like a Constitution lays out the basic framework of law for a country. ERP is nothing but the automation of that. And Human Resources seeks to build suitable attitudes that form the bedrock of such a network, through coaching/ mentoring and communication.

 The First Phase of Growth

In the first phase of growth that Indian cos are seeing, we are seeing a rush of investments, mostly into physical assets: land, plant & machinery, civil and logistics infrastructure, etc. Along with this, the people involved are seeing problems that the market is not seeing: project overruns, confusion, leakages, control problems, coordination and planning issues, and even plain corruption.

I don’t see any of the investment magazines discuss these coming problems, as big, new money ends up in the hands of people and companies who don’t know how to handle it; who don’t have the underlying ‘behavioral infrastructure’ to invest in and control output from such assets. This (behavioral) infrastructure may be both physical (behavior) and attitudinal, both of which can be understood if you are looking for it.

This is otherwise a complex point, but I will limit myself to the investing dimension. I don’t find enough mention of corporate behavior (or lack thereof) as an input into the invertibility of a company.

As markets seek a bottom, I should have been gloating at how I have been vindicated; steadfastly unshaken (even though continuously wrong) over the last 2 years. But I find myself too busy trying to now set the principles for locating the winners of tomorrow. I think I will choose ‘investment in behavioral infrastructure’ as a continuous theme for choosing tomorrow’s winners.

The Post-Globalizing World: Balance of Power

Soros (and some other pundits) have been saying for some time now that the US will go down deeper and longer than markets anticipate, so I will not repeat that. They point to the relative (economic and even geo-political) balance of power equalizing between the US and China-India in a post-globalizing world.

We can see the physical manifestations of these in energy, carbon, and even currency markets. No longer does the US sneeze and the world catch a cold? India and China have started to provide a useful counterbalance to US-led trends.

This is where they (i.e. China and India) split. China does what it does with physical infrastructure, which is obvious, measurable, and visible. India always deceives, positively or negatively, whichever way you look at it. That is because India performs (or otherwise) based on its behavioral infrastructure, which is not so obvious or measurable over the short term.

How many B. Coms from Room No. 25, St. Xavier’s College, Kolkata have become steel barons? I went through the same place….and look at me! You can’t look at any physical characteristic and predict the next Laxmi Mittal, not even if he has a Mittal surname. Ask Mr. P. K. Mittal…

The Indian  Growth

The same pundits who laud China for its build-up of physical infrastructure, privately say that India is a better, easier place to make money. India’s differentiator is its behavioral infrastructure, far more difficult to measure and duplicate. If this is sustained, its development will be chaotic, wasteful, and (for investors) heart-breaking with high failure rates. While China’s growth will be (relatively) orderly, India’s growth will be more sustainable and independent of its underlying economic infrastructure.

Mr. Mittal’s survival is now independent of the country he was born and bred in. Other Indian cos will follow. We just need to codify the principle that made him successful in the first place. If I had to capture it in one line: ‘Go where no man has gone before, do what nobody is willing to do..that creates a margin of safety.’

So have I told you anything new or not? I am running out of space, so let me simplify things. In addition to all the stuff that Benjamin Graham told you to do, look at one more factor when you make your next investment choice. For example, IT/ Pharma/ Auto has become nice and cheap, and they have been ‘ugly’ for a long. I don’t know the leaders of the next rally, but I would still think that a company that is investing in ‘behavioral infrastructure’ will outperform.

So who is diversifying its customer base, to bring in new markets to build volume, especially in Asia and Europe? Who is investing in people, building a bench, and increasing productivity (revenue/ margins per person)? Who is moving up the value chain, leaving the simplistic ‘input arbitrage’ models behind? Who is investing in ‘sustainability’ as opposed to growth, talking about ecosystems of repeat customers and ‘daily diet’ products, rather than one-time, hit-and-run sales?

I have more questions, but the point I am making is this: finding and articulating the answers is going to be difficult and today’s truth may not be tomorrow’s, but at least, you are looking at something that the market is ignoring. If you are right, you will have a clear driver of profit, i.e. you saw something of importance the market did not.

Just make sure this factor is important enough to create value beyond the expectations of the market.

Years ago, someone described heaven and hell in European terms.

“In heaven,” he said, “Your mechanic is German, your butler is English, your lover is Italian and your cook is French.”

“In hell,” on the other hand, “your mechanic is Italian; your cook is English, your lover is German and your butler is French.”

To translate this comparison into the world of high finance, I would suggest that in hell your banker is American, at least if you are a shareholder in the bank, and in heaven, ironically, your banker is French.

Try completing this jigsaw puzzle with a few Indian industries and you are on your way….

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