Thursday, October 25, 2007

License Raj and Entrepreneurship

India was in the system of License Raj prior to the reforms in 1991. It began with the Industries Act of 1951, which required an entrepreneur to get a license to set up a new unit, to expand it, or to change the product mix. The purpose of the licensing was to a)to create a planned pattern of investment, b)to counteract monopoly and the concentration of wealth, c)to maintain regional balance in locating industries, d) to protect the interests of small-scale producers and encourage the entry of new entrepreneurs etc. All these were with good intensions, but the way the bureaucracy went about administring the licensing system created a nightmare for the entrepreneurs.
An untrained army of underpaid, third-rate engineers at the Directorate General of Technical Development, operating on the basis of inadequate and ill-organized information and without clear-cut criteria vetted thousands of applications on an ad hoc basis. The low level functionaries took months in futile microview of an application and finally sent it for approval to the administrative ministry. The ministry again lost months reviewing the same data before it sent the application to an interministerial licensing committee of senior bureaucrats, who were equally ignorant of entrepreneurship realities, and who also operated upon an ad hoc criteria in the absence of well ordered priorities. Once that got cleared from licensing committee, it was sent to the minister for approval. After the minister's approval, the investor had to seek approval from import of machinery from the capital goods licensing committee. If a foreign collaboration was involved, an interministerial foreign agreements committee also had to give its consent. If finance was needed from a state finance institution, the same scrutiny had to be repeated afresh. The result was enormous delays, sometimes lasting years, with staggering opportunities for corruption. By the time the backbreaking process of moving files from office to office was completed, many an entrepreneur had lost heart!
Large business houses set up parallel bureacracies in Delhi to follow up on their files, organize bribes and win licenses. If the entrepreneur did finally get started and made success of his enterprise, he was again in trouble. It was an offense punishable under law to manufacture beyond the capacity granted by the license. We became the only country in the non-communist world where the production of goods sorely needed by the people was punishable by law!
Thus licensing fostered monopolies and encouraged uneconomic-scale plants employing second-rate technology in remote, uncompetitive locations. The endless delay in clearing applications discouraged the entry of efficient and honest entrants and rewarded wily, inefficient producers who could manipulate the system. Thus licensing was an unmitigated disaster. We killed at birth any hope for an industrial revolution.
This is pre-reforms in India, but I wonder how it is for an entrepreneur to start up business in India presently. Considering that India is ranked 120th among 178 countries in "Doing Business -2008" report by World Bank, has anything changed atall??

Thursday, August 16, 2007

A company's bottomline...

I've learnt in my accounting and finance courses that the primary objective of any organization is to maximize profit. I had no doubts about the statement then and have completely agreed with it untill I recently read what Peter Drucker(The Management Guru) had thought about it. He wrote and I quote "What is the measurement of performance in a business? The bottom line is the standard answer. But how does one truly measure the bottom line? Everyone talks of profit, but what is profit really? How does any business, its executives, its investors, its employees, know whether the company's reported profit is good or inadequate?"
So the question arises, what profit is actually good or adequate to say that the company is de-facto performing well? He says that profit does not measure such unquantifiable factors as the failure to identify and implement new opportunities, the development of human assets, and the recognition of negative externalities threatening the firm. Thus Drucker concluded that the fundamental interpretation of corporate profit was too internally focused.
It is quite amusing to imagine a world where every company is making profit gains without a single loss making organization. Capital will be directed towards the defense of yesterday's products rather than encouragement of tomorrow's opportunities. So basically the world will miss out on a lot of interesting opportunities.
Drucker beautifully explains that profit should be optimized(as in, a good ratio of risk and opportunity) and it should be viewed as future cost. But modern day accounting's time frame is the past and it would measure only past business costs - which fundamentally sounds flawed to me!!!
We can conclude that since organizations are externally focused and profit which is internally focused is not its primary motive, it is the creation and satisfaction of a customer which is the primary objective of a company in this society. Doesn't this make marketing the bottomline for all companies??

Monday, August 13, 2007

Purpose of life..

Erik Erikson's 8 Stages of Psychosocial Development divides a normal human being's life into different stages with each stage having some special significance. Starting from feeding, toilet training, independence, schooling, peer relationships, love relationships, parenting to finally reflecting on and accepting one's life.
If you consider what one goes through at these different stages and what exactly is the motive for these stages, they all seem to be pretty independent of one another though learnings from one stage are taken over to the forthcoming stages.
I think the first 5 years of our life we just get to adjust to the world and get to know our family and environment - We can call this the gestation period.
After that till the age of around 21 when most of us graduate, schooling is the major event and there's a complete formation of a character and an individuality to everyone of us - This I'd like to call the grooming period. In this period academic learning is the prime focus and we basically try to find the right path to take in the future.
From then on till the age of 65 is mostly career oriented and we try to get better positions in bigger organizations and have a healthier lifestyle. And then on, its mostly reflection and acceptance of our life till death.
In all these stages one thing that is missed out is the bigger picture. What exactly is the purpose of our life on this planet? Has each individual taken birth to learn how to live in the first quarter, work towards better life for himself(maybe for others too) in the next half, and retire reflecting, in the last quarter? This seems a little weird to me. Aren't we humans on earth for some purpose which is beyond the normal "self-growth"?? Isn't there a vision and a mission for the human race, a target to achieve within some period of time..?? I think there should be some overall goal towards which we humans should march, but is there one???