Mental models in action: How the knowledge of mental models can add value to your portfolio
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Mental Models to profit and detect opportunities Mental Models in Action Soham Das The Mental Models Guy
description
A presentation made to discuss about 3 basic mental models which drive business value in today's world. Appropriate examples from American as well as Indian companies are relevantly discussed
Transcript of Mental models in action: How the knowledge of mental models can add value to your portfolio
Mental Models to profit and detect opportunities
Mental Models in Action
Soham DasThe Mental Models Guy
The Speaker
Some words of praise
“Its nice to meet another investing fanatic.”
-John ChewCsinvesting.org
“I really enjoyed your work. Great job… keep it up.”
-John HuberSaber Capital LLC
“Thank you for the write up. Its one of the best I have ever read”
-@narasimhagm
The Mental Models for today
Search Costs +
Switching Costs
The Story of Astral Poly
How Sandeep Engineer tapped Network Effects
• Back in 2002, he was asked to address a conference of Brihanmumbai Plumbers Association
• Stellar Response from plumbers- they wanted training, plant visits and a strong engagement with the company
An ecosystem of active users
• This created an ecosystem of active users in and around his company.
• He decided to replicate this model across the entire country.
• Went on to conduct training workshops, conferences and seminars.
A growth of 45% + ! in Promotional Expenses
2007: 93 cr
2008: 149 cr
2012: 610 cr
Building an Ecosystem
What was he really doing?
• All of it was a pretence to create a user base who had strong engagement with a company and its products
• Result : An ecosystem of users who actively shared knowledge and built word-of-mouth for the company.
• But was it really an expenditure or investment?
• While expenditure is the cost of running a business, an investment is the cost of bringing growth
A continuous investment in building
an ecosystem
100x since 2009
Some examples of network effects
• MCX,NSE, Financial Exchanges – networks of financial intermediaries
• Facebook, Twitter- networks of social users
Best businesses have a …
Synergy of Mental Models
…Acting together
Search Costs
• What are search costs ?
The cost incurred by a user of a particular product to search for its alternative
Works great with brick and mortar businesses- something about internet which has completely annihiliated search costs
• Who is the largest retailer in the world?• Which is the largest financial supermarket in
the world?• In India- who is the biggest cafe chain ?
Walmart, Wells Fargo, Café Coffee Day
The world of Search Costs: WMT
An average American is 12.5 minutes “Walk” away from a Walmart
The world of Search Costs:Wells Fargo Corp
• Very difficult to compete with an organization which can put up a map like this.
• For a competitor to compete with these behemoths, he has to put up a “store” closer to the average user than these behemoths are.
Extrapolate across the country- he will have negative return on capital.
Some Indian Examples
• Astral Poly
• Indag Rubber
• V-Mart Retail
What is Switching Costs?
• Given an alternative to an existing product which the user is using- what is the cost incurred to switch.
• E.g. there is a high switching cost in favour of Maggi Noodles when compared to any other instant noodles in the market
Search and Switching Costs
• The Different kinds of switching costs- psychological, emotional, cognitive
• Price Cuts & Switching Costs
Psychological Switching Costs
Familiarity
Brand Loyalty
Peer Pressure
Emotional Switching Costs
Associating positive emotions with a brand.
Switching Cost & Emotions
Positive Emotions invoked was transplanted to the brand
As a result when you try to think of switching you will feel an internal resistance to switch
Cognitive Switching Costs
“Trust in highly sensitive information regimes”
e.g. co-research on Intellectual Properties, research on defense projects, research on pharma projects
A challenger can be caught in a suboptimal loop
• In these cases, no amount of convincing is enough to persuade a business entity to switch partners
• Why?
• “I can’t trust, because we never had a prior relationship.”
• Or in other words- “I can’t trust you today, because I didn’t trust you yesterday”
PI Industries & trust
Contract Manufacturing
= A game of trust
Tr ust = Swit ching
Cost !
Promotional Costs as a Percentage of Sales
2008: 1.7%
2009: 1.4%
2014: 1.2%
A 6x in 3 years
What are Mental Models?
• They are lenses to understand businesses• They are a way of seeing things.• Having a knowledge of models will enable
you to see a business decision in its true light.
• Thus preventing you from throwing away Astral Poly or Vmart or PI Ind as just costly overvalued stocks.
Can you identify how coke is improving its switching costs?
Thank You
