Day 23, Wednesday Sept 29th, 2010

Today is a special day – Sustainability day. Though we did discuss the water crisis in Mexico City and the prospect of Wind farms in Europe, I was not sure why this was marked as a sustainability day ! Maybe there is something I am not seeing. In fact the most anticipated session was a lecture by Prof. Clay Christensen.

The first session on the Water Shortage was related to property investing in Mexico City. The “water gap” is of increasing prominence and concern all over the world. And since water is so crucial, it affects property investments in those regions. With more than three billion people across the world expected to move into the cities, it is expected to put a lot of pressure on water systems. This session was by a new professor – Prof John Macomber. He seemed quite aware of the Indian problems and talked about some examples from India as well.

Mexico city is special in many ways – it is a great global capital, a vast city, has plentiful rain water, experiences regular ad severe flooding – and has an intense and perpetual shortage of clear water for its citizens. Sounds like a familiar problem to me and also shows that it is not the availability of water, but the management of water is the key issue.

Mexico City, with 28m inhabitants, was built on a lake bed. This causes a unique problem, since the surface of lakes is typically clay and hence water does not percolate into the ground. In a city like Delhi for example, the water does percolate into the ground and feeds the ground water systems. Mexico has another issue – residents cannot drill bore wells, as constitutionally all ground water belongs to all the citizens. I wish we had such a law in India, as it would prevent indiscriminate drilling of bore wells. The issue is the distribution of water, preventing leakage, fixing of fees, installing meters and collecting the money – all of which seems to contribute to the issue in Mexico City. Some other interesting nuggets:

• In many states in the US like Colorado and Utah, residents legally cannot collect rainwater – because by law, the rain water belongs to the people who live downstream in Las Vegas and Los Angeles!
• In Australia, authorities want citizens to use the grid water and pay for it.
• Water politics is common across the world. Water and electricity have different characteristics, because of which, Electricity systems tends to be centralized, whereas water systems tend to be chaotic. Water can be stored unlike electricity, but electricity can be transported rather easily, whereas transporting water is an expensive task.
• It is tough to educate people on conservation, if water is available at very low cost
• Different kind of Public Private Partnerships (PPP) as formed depending on the kind of work; it is also linked to asset ownership, operations and maintenance, capital investments needed, commercial risks and terms of the contract.
• PPP makes sense only under the following conditions:
• Payment terms are clear
• Tariffs match costs and financing
• In high capital/low tariff kind of services, the government should put up the initial capital
• Guarantees are adequate
• High probability to be able contain political and currency risks

The second session was by the only lady professor in the AMP program – Prof Rebecca Henderson – and she was quite energetic and passionate – she also teaches strategy, which led one of my colleagues to point out that all people who teach strategy are passionate and energetic – Prof. Rivkin being the other strategy person.

She discussed a case of an European organization wanting to setup a “Supergrid” of wind farms, both offshore and on-shore. And in the process, I learnt a lot about wind power, the challenges, the costs, the politics and issues.

Prof. Rebecca made an interesting observation, which I am not sure how many people realized. She said, that large organizations have been criticized more than needed and these organizations are one of the greatest 20th century institutions. Come to think of it, it is true – once an organization becomes large and successful, it sort of becomes the “whipping boy” for every one – from the government, the NGO’s, the public and media and even the teaching staff ! She said this in the context of the fact that more than 25% of these large organizations actually reinvent themselves – which is remarkable.

Wind energy, have many obvious and some not-so-obvious advantages:

• No waste
• No increase in carbon output
• Safe
• Reduce dependence on oil
  

However there are some challenges as well; the costs involved are huge, the ability to install offshore (which means in the high seas) is complex and very few organizations can do it, wind has huge variability, and issues related to AC current collection from the turbines. The technology used today for collecting power from the offshore wind turbines is high voltage AC transmission via submarine cables to shore. However AC current has shortcomings with regards to distance, controllable, cost and synchronization. Incidentally, ABB has a trademarked technology called HVDC Light – which allows the power to be converted to DC using semiconductor devices and transmitted over long distances with relatively small losses in voltage.

In the supply chain of wind energy, there are many parties involved – the question is who makes the money and why ? It looks like the operator will make the most money, however he is likely to be squeezed from both sides – one by the distributor who operates in a highly regulated market and by the few builders who have the expertise. Not a good situation to be in.

Prof. Henderson had another plenary session with us on scenario planning, which was quite interesting. Incidentally, Prof Henderson is a professor of environmental management at HBS. She was speaking to us about this powerful, but not effectively used, tool called scenario analysis.  Come to think about it, in way it is closely linked to strategy. Formulating a robust strategy requires a lot of judgment about the future, which is hard to predict and complex. So, what to managers and leaders do - assume that the future will be like today and ignore it. Many successful companies and leaders have fallen into this trap.

Scenario analysis in itself is a very simple process - it involves three steps:

• List out an exhaustive set of uncertainties
• Pick out two of these, which have a reasonably high impact and  a reasonably high probability
• Draw a map with these two uncertainties as x and y axis

Once we are done with this, we examine what will be our strategies for each of the quadrants.

The final session of the day was the much anticipated lecture by Prof. Clay Christensen. It was a fine gesture by the professor to even show up. He has had a set of serious health problems, which has slowed him down significantly and even has trouble remembering some words. He still made it to the session and delivered a fine lecture to an indebted audience, who thanked him with a standing ovation. His session was on "Creating new growth and managing it more effectively". A leading authority on disruptive innovation, he studied in BYU in Salt Lake City and got his doctorate in Business Administration.

Why is success so difficult to sustain ? Is innovation and growth so difficult that only 10% of the companies achieve it ? According to Prof. Clay, many principles that is taught in a traditional manner are not always true, for example:

• Focus investments where returns are most attractive
• Big markets generate bigger businesses than small markets
• Outsource low value-adding activities that aren’t your core competence
• Ignore sunk and fixed costs; make decisions based upon marginal costs and marginal revenues
• Understanding the customer is the key to successful innovation

He gave many examples when these principles, when applied, has resulted in disastrous results; and conversely he also talked of many situations, where these principles were ignored and hence resulted in disruptive innovations.  Interestingly, in many industries the incumbents win sustaining battles, but the new entrants typically win at disruptions.




Prof. Clay Christensen - picture taken by my friend Tae Hyung