Recession and Organisational Restructuring

Cautious recovery of stock market and second innings of government has changed the Indian economic discussions from ‘recession’ to ‘growth’. Just few months back when various companies were innovative in changing practices to fight recession by reducing cost are now thinking optimistic for expansion and growth. I feel the greatest gain of last crisis to Indian industries are cost consciousness with eye on opportunity for growth.

In this blog i want to discuss the strategies adopted by various companies on their organizational restructuring by either splitting up for growth or consolidation for cost rationalization. Which strategy is better? Should it be a role of a recession manager or a regular activity in regular time.

Here are the examples of various companies who used either consolidation or expansion for efficiency or growth or vice-versa in last few months:

1. Bharati Airtel recasts business into nine arms to increase focus on non voice business like mobile commerce, entertainment, media, internet, enterprise services and small & medium businesses.

2. Dabur decides to split sales force, stockists to prop up market share

3. Tata Tea Brews plan for consolidation by merging tea, water and soft drink business into single entity to simplify operations and rationalize cost.

4. In the similar consolidation line Godrej announces merger of its three businesses; Godrej Consumer Products (GCPL) and two of its joint ventures — Godrej Sara Lee (GSL) and Godrej Hershey’s (GHL).

Correlation between new product introduction and share of market

Lot of companies use new product introduction as their key strategy to increase there market share. Recently two companies LG and SONY announced same strategy. (You may refer following links from Economic Times for the news: LG and SONY) . Though the strategy is commonly use by various companies, I tried to validate the hypothesis that new product introductions boost market share and found following parameters (related with new product introduction only ) determine correlation between new product introduction and market share growth:

1. New product introduction helps in companies top line growth as product realization increases with speed of introduction. It is simply correlated with the differentiation till the point when the new variant becomes commodity in market. Companies with strong R&D leverage it with new products all time. Because of differentiation they fetch better price too. However, competition catches very fast especially in consumer durable industry and so the price advantage of innovation starts eroding. New product introduction should be a continuous process for the companies having strong R&D.

2. Even though top line grows in revenue term in point no. 1 above, it does not guarantee growth in market share in terms of volume of turnover. Two factors determine change in market share. One the selling capability of the channel which could be measured by working capital of sellers which in totality remains constant. If working capital of a dealer is constant it will cannibalize existing product in very first stage itself. Two is the cannibalization, which if planned properly, can help to reduce competitors’ shelf share in multi franchise sellers’ network. To increase working capital of selling network, companies should focus on wider distribution by exploring new markets through efficient supply chain management.

3. Whether the new product is introduced in one of the existing categories in which company is present or in a new category itself. If it is in existing categories it should be targeted for better profit than market share. Introduction in new category can give incremental revenue subject to capability of selling network including the organization itself in terms of knowledge, experience, working capital, coverage and branding.

4. It’s not only quantity of new introduction which matters but also the speed at which it is introduced to end consumer. Assuming if the period required by competition to replicate the product after announcement of launch is fixed, a better speed of sampling, consumer awareness activities and distribution will uplift the revenue in launch to uptake period of product life before maturity, the point at which competitor enters with similar product.

There could me many more strategies to define growth in market share, however; the above argument is only limited to issues related with new product introduction only.

NANO, IPL and Politics

This month various news covered three different takes showing successful business strategies, government intelligence and fizzled opportunism. Nano, IPL and political fuzz summarize this week’s headline.

Nano was launched with not a real product but a promissory trust by Tata, which will be delivered from July this year to common people of India. The launch looked more like a financial strategy. By the way of advance booking Tata’s not only assessing their financial and supply chain requirement but also raising funds which could ease their financial hitch which is global in nature now. It makes good business sense. Nano is a real innovation which has demonstrated Indian capability in both manufacturing and strategy. Though, the people of India should be proud of it, a lot of anti Nano SMS campaign started rolling by some people I don’t know whom. But I know it is by those who lost the opportunity which was always there to explore but they did not dare to innovate. Tata’s should not worry about this negative propaganda as their target customers are those, most of whom are not very technology savvy. This is the case of lost opportunity but our political leaders do not lose many. Post IPL shifting news of political reactions, lot of leaders politicized this issue by criticizing government on the grounds of security and national pride. My personal views are in favor of government as they took a stand which seems to be hard and conservative but it is in favor of countries biggest event, the general elections. More than that I am sure it is based on some intelligence information. If it’s true, it’s good to hear that intelligence is in place and government has courage to keep national interest above their own political interests. BCCI, too, demonstrated a business innovation by making IPL, which is truly Indian domestic sport, a global brand. Except viewer’s turnover at the matches, all the business interests are saved. What a week with good show of business strategy, intelligence and opportunism.

RURAL CONSUMPTION AND GROWTH

One of the key indicators of domestic consumption is agricultural growth. Agriculture and allied activities contribute around 20 % of GDP and feeds more than 58 % population. Now in the recent economic crisis when we started looking inward, which was right in place earlier too, for overall growth, the emerging concern is the growth of Agriculture which defines consumption pattern of India. During tenth plan (2002 to 2007) agriculture grew by merely 2.3 % against 7.6% of overall GDP growth rate.
The key issues I want to raise is the role of Indian industries and government in developing rural infrastructure, education and health, deploying policy and participating in rural value chain, pricing, insurance, credit and microcredit. Recent global economic turmoil forced us to think beyond urban population to ensure sustainable growth. Companies like Hero Honda, Marico, HUL are outperforming in today’s scenario only because of their rural penetration. Two things are common in these companies. One their product is well designed product to suit rural taste supported by (two) matching delivery mechanism. Take example of Hero Honda whose basic models (main volume and revenue generators) are well positioned for common man’s requirement like fuel efficiency and reliability. Along with their product they have matching delivery network too with widest coverage in tier two and tier three cities. Bajaj, one of the competitors of Hero Honda, closely matched their rural network compared to Hero Honda but failed to position right product. But all these strategies are meant only to take share of rural expenditure. The Indian industries should think beyond that towards participation in rural value chain and infrastructure developments. ITC’s e-Choupal is a good example where the model is not only participating in farmer’s value chain but also simplifying companies supply chain. Such innovation creates value for both company and customer. From government perspective, we need radical changes in agriculture policy, pricing mechanism, credit and insurance to farmers. Along with these a healthy investment in infrastructure, education and health will give sustainable results in long term.

Realty and Retail

Though India’s GDP projections look good as made by World Economic Outlook (WEO) released recently by the IMF, India is likely to register a Gross Domestic Product (GDP) growth of 7.9 per cent in 2008-09, which may slip to 6.9 per cent in 2009-10; the effect of credit crunch is visible in two sectors; realty and retail.

In Mumbai most of the developers have discovered credit route from private financers at a very high cost of borrowing varies from 36 to 48% in last one to two months. This is in anticipation of better comeback of property demand. However the recent property expo was disappointing for such developers. The prices depend on demand which is most uncertain. Bangalore and Gurgaon prices have seen significant corrections and Mumbai it is expected soon by a minimum 20 to 30%.

Full post at wealthyson

Fundamentals of Indian economy

One financial crisis in US and the equity market in the whole world shaken up with significant decline. Fundamental equations of various industries are questioned and depression took over. How safe is Indian market? All analysis indicates no fundamental error but global depression and rumors have sufficient potential to prove these analysis wrong. I should be positive but negatives can not be ignored in sudden panic environment all across.
Can you estimate how much a panic environment may create a damage? Recent rumors on ICICI bank followed by crash of its stock price is just one of the several such examples. Deposit ratios and leverage of Indian banks are much healthier than that of several top performing banks of US and Europe and still the prices are falling. Again fundamentally nothing is that bad as it is reflected in falling stock prices. Another potential damage is redemption pressure on mutual funds creating a negative cycle of further depression by killing the option of Indian MFs to use their liquidity to invest in declining market.
Let us park rumors and depression aside for a moment and try to analyze some of the fundamental issues of Indian equity market which may affect future of market after stabilizing from current turmoil.
1. First and foremost is the question of decoupling of Indian economy from US. Is it really possible? In one of the interview with Uday Kotak, director of Kotak Mahindra bank recommends that India should stop depending on global flows and start relying more on its domestic savings and domestic ability. The only question to address is the future of globalised Indian industry like IT which triggered Indian GDP growth to more than 8% in past few years and attracted most of global inflows.
2. Second is actual estimate of GDP growth. If the current situation stays for some more time, it will affect the demand. Maintaining more than 7.5% growth will be a challenge. If it drops below 6.5% which is very unlikely as the fundamentals are still okay, the global inflows will be affected.
3. Third is competition with other emerging economies especially China for preferred investment destination. Both economies are having various strengths. The differences to asses are types of governance, service vs. manufacturing capabilities and fiscal deficit vs. fiscal surplus.
4. Fourth is monetary policy. On one hand; RBI announcing further rate cut by 150 basis point, on the other inflation is still above 11%. Further cut in CRR and SLR is expected to manage the current liquidity crisis with some boost to GDP. Monetary policy will be interesting to watch if the objective is to decouple Indian economies from developed countries as I discussed in point no one above. The challenge for the policy makers is how to address issues of both Inflation and growth together.
5. And finally Upcoming union elections and the result.

Performance Indicators-FMCG industry

Tons of technical analysis is available online on ways to pick a stock. I considered few and got confused. Why investment decisions are supported with too many technical analysis and forecasts? Interesting thing is that the rules of the game are variable and so it is not so simple. Still I dare to find some simple ways and try to understand rules of the game. To start with I’ve taken one of the largest industries, the FMCG industry. The basic question I tried to answer about the variables affecting the industry performance. Stock pick would be automatically in place if the performance indicators are known.
First and foremost is changing market dynamics with fluctuating crude oil prices and inflation. Last few months were terrible. On one side input prices are increasing resulting in thinner margin to manufacturers. On the other side the share of wallet of consumer is decreasing. Overall decrease in category demand is now become visible. Companies with better brand equity are successful in transferring this burden to consumers. However with high competition already in place every time price increase will not be a viable solution.
Second emerging market dynamics is the emergence of organized retail. In this new format, relatively weaker brands also get equal opportunity to place their products and offerings along side a stronger brand. Two things will distinctly visible in such situation. Either exclusively differentiated product or the most cost effective product will get lead in the battle. In high inflationary situation consumer would tend to choose second option in order to control the outflow from their wallets. So brand loyalty earned by various major players will be at stake. Product with very high brand equity could maintain their position till the situation improves. Weaker or moderate brands will be the target of new cost effective products or brands.
Third is the cost leadership. A company’s pro activeness towards innovation, rationalization of cost structure, capabilities in manufacturing and in outsourcing gives a long term perspective of their approach towards cost leadership.Take the example of shampoo in which a crude oil derivative is used in packaging shampoos, while PET, a petroleum-based plastic product, is employed in manufacturing hair oil bottles and packaged water bottles. Crude oil derivatives account for almost 17 per cent of the total cost of corrugated boxes. Which company is working towards other innovative solutions? Another cost iscost of distribution which is very high in FMCG sector. So efficiency of supply chain and logistics adds significant value to cost leadership.
Fourth is competition with unorganized sector and regional players. Their overhead costs are much lower than a company with national presence. Being ‘local’ gives them a very cost effective advantage of distribution and logistics. Their presence can be felt at remote rural level. But since they are small the effect of inflation are even bigger for them. Poor management and poor cash flows are other prominent concerns. So a comprehensive consolidation can also be seen in next 2 to 5 years. The companies with better cash will take this.
Let me summaries the performance indicators to address health of a FMCG company in following parameters:
1. Brand equity with competitive advantage
2. Operating profit margin to understand cost advantage
3. Distribution efficiency by evaluating rural presence
4. Proportion of outsourced manufacturing
5. Cash in hand

Brand Managers! What are you building, a category or a brand?

One distribution channel is setting up the rules of game in today’s environment is multi franchise organized retail. Now a days the only distribution channel is prominent for the most of the consumer durable and FMCG product is organized retail. This multi franchise model is redefining challenges of branding and product management.
The older brand building activities now become category building activity. For example, imagine a manufacturer of refrigerator who successfully builds a brand and in turn customers turn up to the retail store. But inside the store, story is different. The need trigger or decision to have a refrigerator could have been augmented by the said manufacturer, but inside the store customer is open to buy any brand. For a walk in customer inside a store there are lot of variables available to take a purchase decision. It may or may not be dependent on the branding of the company which prompted the customer to consider the product.
This case implies that the older way of advertising and branding are basically building more of a category than a brand. At this point positioning of product plays a key role. The brand managers should think of which gap or problem they are solving by making a positioning of a product. Because a slight differentiation if exploited properly could play a major role in making purchase decision. These gaps or points of differentiation are available everywhere. It could be price point, product features, point of entry in customer home, geography, channel or even variables like buying need of customer, perceived value of product by the customers etc.
While positioning a product one should be very clear on competitive strategy. As in multi franchise sales network a wrong strategy will give opportunity to competition to win and set the direction of game. It’s a zero sum game. Its like a game of cards where you keep guessing of available cards with the opponents. You check your strong and weak cards along with setting trump card. You make a plan with a sequence of moves. And if your sequence of moves are ideal you can even win with your weaker cards, because you are setting the direction and opponents have to react to your move. But there is one flaw. The whole strategy is based on few real things ( strong and weak cards, trump etc) and more guess work like who are the opponents having cards stronger than your weaker cards. And an assumption that all the best cards are not in one opponents basket. So it is risky. And so it is challenging. When you put a wrong move someone else wins and then he starts setting directions to the game. Since guess work and risk are still on the table, you’ll have to wait for next opportunity to win a move and take the commands of the game back in your folds. Strong and weak cards can be replaced by competitive strengths and weaknesses of any organization.