Strategy Digest Vol. 3 (Oct)

Indian Hotels Company does a Tata Motors

The Indian Hotels Company recently announced the launch of Vivanta by Taj, hotels in the upper upscale segment.

Taj has thus positioned itself in the hospitality space similar to what Tata Motors has done in the automotive space. Taj is positioned in the luxury space, Vivanta by Taj in the upper upscale segment, Gateway in upscale and Ginger in the economy segment. Tata Motors, on the other hand, has positioned The Nano at the entry level, Indigo at the upscale segment, Safari and Jaguar or Land Rover at the upper upscale and luxury segments.

The reason for this segmentation is not to dilute the Taj brand by operating every kind of hotel under the same brand. Also, it is an effort towards retaining their market share in the face of many new hotel brands entering India.

Homegrown mobile phone companies sign big stars

While we may not realize, homegrown mobile phone companies have captured more than 20 percent of the market share. And they are definitely hungry for more!

Companies like Zen, Micromax, Spice etc. are displaying their ambitions by signing big stars to promote their products, especially in the tier-II and tier-III towns of India. Micromax has Akshay Kumar as its brand ambassador while Spice Mobile has signed on Sonam Kapoor.

The latest to join the bandwagon is Zen Mobile which has signed on the biggest superstar Amitabh Bacchan as its brand ambassador. It is to be seen whether these companies will be successful in penetrating the urban markets as well.

Fortis to buy key subsidiaries of Quality Healthcare Asia

Fortis Healthcare will buy key subsidiaries of quality Healthcare Asia (QHA) for about Rs. 882 crore. The firms to be acquired by Fortis Healthcare include Quality Healthcare Medical Services, Quality Healthcare Services, Quality HealthCare, Quality HealthCare Medical Holdings, and Portex.

QHA is the largest private healthcare provider in Hong Kong and this acquisition would provide Fortis with a footprint in Hong Kong.

Fortis has been keen to have a presence in South-East Asia for some time now as was evident when it tried to acquire the Singapore-based hospital chain Parkway Holdings.

Microsoft launches smartphones

Smartphones are touted to be the next big thing in tomorrow's world. Microsoft clearly does not want to let go of this opportunity considering there are firms which have already this market.

The smartphone by Microsoft is supposed to look like the iPhone but with a more interactive interface and superior functionalities. It’s also got the Xbox which should appeal to the younger generation.

This is probably Microsoft's last and only attempt at gaining a hold in the smartphone industry since many players have launched their smartphones before Microsoft did.

Africa: The land of business opportunities

Africa – the first few thoughts that used to come to mind were apartheid, poverty, dictatorships, savannah grasslands and of course, lions. This perception has seen a polar shift in recent times. With an increase of 4.9% in real GDP from 2000 to 2008, Africa has experienced immense economic progress. Though still the poorest continent, it is perceived as a promising land with opportunities galore.

Why Africa?

Africa has abundant and varied natural resources ranging from diamonds to tropical fruits, gold to black gold, and other minerals and ores (like iron, cobalt, uranium, copper, bauxite). A majority of Africa’s resources are untapped even today. Given the rising prices of commodities one would believe Africa’s natural resources to be the only reason behind its rapid economic growth. However, natural resources directly account for only 24% of the GDP growth from 2000 to 2008. Many other factors have fuelled growth in Africa apart from its geological blessings.

Governance has improved drastically in Africa over the last decade. Macro and micro economic reforms along with a move to end armed conflicts have helped businesses grow. Several countries like Angola and Mozambique ended hostilities recently, creating political stability in the continent. Furthermore, Africa was able to reduce its inflation from 22% (1990s) to 8% (post 2000). Governments have shrunk fiscal deficits, decreased corporate taxes, removed trade barriers and strengthened regulatory systems. Privatisation has also played a role in improving the macro-economic environment.

Social and demographic trends in Africa are another reason for the continent’s growth. On one hand, the middle-class African consumer has emerged as a major growth driver. On the other, rapid urbanization which has led to an urban population of 40% is also a big factor. Incomes have risen steadily, 85m households in Africa have an annual income above $5000 (believed to be the point where a family starts discretionary spending). Such households are expected to increase by 50% in the next 10 years. Africa’s labour force is also expanding at the highest pace in the world. This large workforce could become a significant engine for consumption in future.

Attracted by the high rates of return, investors have flocked Africa in the recent years, increasing total capital inflows from $15 billion in 2000 to $87 billion in 2008. Companies investing in Africa not only provide capital but also bring technological and managerial know-how. Although this might harm regional players in the short term, it bodes well for long-term growth.

Booming Sectors

Global demand is likely to remain high for oil, coal and gas which account for 85% of Africa’s current resource production. With growth in African economies, the continent will have a flourishing market within itself and might not even need to rely on importers outside Africa. Smaller mining companies (Katanga Mining Company) or large companies from developing countries (Vedanta from India) seem most prepared to enter unexplored and unstable African countries. Such companies have more experience in working in developing countries and understand the risks present in setting up business in Africa.

With 60% of the world’s uncultivated arable land and low crop yields, Africa is waiting for a “Green revolution”. The continent’s agricultural output could increase from $280 billion a year today to $500 billion by 2020 and as much as $880 billion by 2030 according to a report by McKinsey Global Institute. This sector promises enormous potential to any player in the industry, be it a fertiliser/pesticides manufacturer, seeds supplier, machinery manufacturer or food processor. Although the know-how for a transformation in the agricultural sector is easily available, bringing about a change is easier said than done. The entire agricultural value chain has barriers that cannot be overcome by a single player. A comprehensive policy change with regards to supply, technology, distribution, availability of finance, better tax and land laws is the way to go forward. African governments have increased investments in agriculture and are open to involving the private sector, making this one of the most lucrative and easy to enter industries in Africa.

Consumer sectors in Africa are growing two to three times as fast as those in the countries belonging to the Organization for Economic Co-operation and Development (OECD). Spending patterns tend to change as discretionary household spending increases. Hence, consumer facing industries like retail banking, telecom, education, health-care and other consumer goods and services are expected to experience higher growth. One of the major challenges faced by such industries is the lack of infrastructure. So, companies entering Africa need to come up with innovative strategies for sales and merchandizing. Also, just like in India, companies cannot afford to concentrate only on the high-income segment of customers.

Africa has the distinction of being the first continent in the world where cellular telephony outnumbered the fixed line network. In recent years, Africa has witnessed massive reforms and development in the ICT (Information and Communication Technologies) sector. Mobile penetration is 42% while internet penetration stands at 8%. It comes as no surprise that Bharti would look attentively towards South Africa and make an all-out attempt to participate in the budding market.

A comparison of Africa with BRIC countries in terms of infrastructure reveals that the former lags far behind. The BRIC’s power consumption is twice that of Africa’s and road density is five times that of Africa. According to World Bank estimates, Africa needs an investment of $118 billion a year to cover its backlog. This need for infrastructure has implications for African governments as well as private players all over the world. Currently, 65% of infrastructure funding comes from the continent’s governments. In order to increase growth, governments would have to encourage the entry of private players in this sector. Although private investment has been growing at 13% since 2000, minimal support from the government and prevalence of unhealthy trade practices have discouraged private companies from entering the market.

Should I ...

Companies which wish to enter Africa should plan to build their consumer base in a range of African countries. Since nations vary widely in terms of stability, profitability and risk characteristics this strategy will help in hedging a company’s risks. The company could benefit from good infrastructure in a relatively developed country like South Africa and provide services across the continent, cashing in on the high growth in undeveloped countries.

Companies that engage in socio-economic development in Africa seem to perform better. Investing in communities by building plants, creating job opportunities or encouraging entrepreneurs help a company in establishing a stronghold by building a good rapport with consumers and governments.

.. or should I not?

Most companies take the rosy pictures of growth and potential opportunities with a pinch of salt. African countries differ greatly in their individual circumstances but the problems plaguing them are very basic and similar. Poverty, high mortality rates, unstable governments leading to frequent breaches in peace, highly unstable economies are few of the plethora of problems faced. Regulatory challenges also form major barriers to entry for companies. Most government processes are inefficient and involve extensive paperwork. Also, rules and processes are unclear and implemented badly, leading to corruption.

A few countries like Mozambique have started marketing themselves proactively. The president of Mozambique was in India recently, promoting his country as an economically and politically stable nation in order to encourage investments. International institutions have played an important role in bringing about peace and reducing mortality in the continent but most countries still have a long way to go.

References: Lions on the move: The progress and potential of African economies – McKinsey Global Insitute

Strategy Digest Vol. 2 (Oct)

M&M enters bike market

The competitive and high-volume bike industry recently saw another new entrant in the form of the conglomerate Mahindra & Mahindra. Mahindra & Mahindra has vehicles in the MUV, LCV, tractor and the two-wheeler car segments. The market currently is dominated primarily by Hero Honda and Bajaj Auto. They have been market leaders for some time now and it will be difficult to penetrate the motorcycle market.

However, Mahindra & Mahindra is relying on its branding and distribution networks to make it big in the bike segment. They intend to appeal to the cost-sensitive customers by launching the 110cc Stallio and to the more affluent customers by launching the 300cc Mojo.

Marlboro enters regular cigarette market

Marlboro, which entered the Indian markets with the king-size cigarette, has finally decided to enter the regular cigarette market. The regular cigarette market has high volumes and the company, Godfrey Philips, wants to get pie of this share. It will soon launch a campaign regarding this new foray.

The market leader in this segment is ITC. The Marlboro Gold Advance Impact, as the new brand launched by Marlboro will be known, will be priced at rs. 3.50 per stick. In response, ITC is launching a new product in the regular market segment called the Players Gold Leaf which will cost Rs. per stick. This reaction clearly suggests that it recognizes the dangers posed by this move by Marlboro.

Back to its roots

We observe that most commodity companies desire to move up the value chain and build itself a brand name. In this context, the decision of Tata Coffee to transfer its brands to Tata Global Beverages and focus instead on excelling in the coffee commodity business comes as a surprise.

This move has been undertaken by the management of Tata Coffee to focus on B2B business by consolidating their commodity business ranging from plantation to packaging. This is in stark contrast to what most coffee-making companies are doing. They are looking at taking advantage of the fact that a lot of unbranded coffee is sold to consumers.

Tata Coffee is expanding its coffee plantations not only in India but also in African countries. Along with this, Tata Coffee will need to strengthen its distribution network and enter into agreements with coffee brands and retailers.

Reliance Retail banks on toys

After Hamly's, Reliance Retail is now poised to enter into a joint venture with the US-based toy retailer Toys "R" Us. Toys "R" Us has over a 1000 stores across the world and owns brands such as Babies "R" Us and KB Toys. Hamly's and Toys "R" Us, however, operate in different operate in different price segments, with Hamly's catering to the upper class segments while Toys "R" Us caters to the middle and upper-middle class segments.

Reliance Retail wants to be in a position to take advantage of increasing consumer demand and clearly believes that there is huge potential in the Rs. 6,000 crore Indian toy market where over 60% of the market still belongs to the unorganized players.

Article of the month contest

We take immense pleasure in announcing a competition for all our readers - the “Article of the month” contest. Now you will be involved with the blog not just by reading it, but by using it as a forum to express your views. Also you will have the chance to grab some moolah while doing this!

The topic for this month is “Diversification”.

Diversification to an extent, is considered a necessity in order for an enterprise to grow and expand; but isn't too much diversification a dilution of the enterprise's strategy? At one time, the world of business spoke of the merits of synergised diversification, but now there are numerous examples of companies opting for unrelated diversification as well. Thus arises the question, how much diversification is really good for a firm?

Please express your views on the topic with specific examples from industry and make yourself heard. The best article will win a Rs. 1000 book voucher from Flipkart and the best few articles will be posted on our blog. Send in your entries by the 20th of October.

Rules

1. The article should be between 500-800 words and should be an original piece of work.

2. All sources should be duly acknowledged.

3. All articles that get posted on the blog will become the property of the Consult Club, and should not be used anywhere else.

4. Send in your entries to consultclub@iimahd.ernet.in.

5. The decision of Consult Club will be final and binding.

We hope to see an enthusiastic response from all our readers!

In case of any doubts, you can mail us at consultclub@iimahd.ernet.in.

Also, we just launched our new website that can be accessed at http://stdwww.iimahd.ernet.in/consultclub/. The website contains a lot of information about Consult Club’s initiatives, including the events that we organize over the year, our various publications and newsletters etc. Feel free to drop in comments and suggestions at consultclub@iimahd.ernet.in.

Professional Consulting and Political Campaigns

Cash guzzling political campaigns are the talk of the town whenever the election season arrives. With the world zooming into the 21^st century, these campaigns have evolved into a serious business of complex strategic planning and mass marketing with a single aim of getting the candidate into power. The advent of technology and a high degree of professionalism into this field has led to a ripened business of niche consulting catering to politicians and political parties.

Consultants and political advisors have been around forever, but the modern political consultants differ from their traditional counterparts in two major aspects:

• Traditional political consultants tend to have personal interests in the candidate, the office and the issues. Election work is not their primary source of income nor is it their full time profession. On the other hand professional political consultants completely redefine this image. They often possess a certain level of emotional detachment from the candidate and the campaign. They possess expertise in specialized aspects and treat politicians like clients rather than partners in victory.
• In the era prior to the 1990s, political advisors were experienced people with a strong insight into the strategy game and were considered political gurus. They have been relied upon for many years but are almost always limited in their reach and resources, but with the rapid progress in technology, rising campaign budgets and focus on results in the past two decades, the professional consultants have revolutionized campaigning for political parties. They rely upon solid business fundamentals and research to develop efficient and effective strategies for their clients.

Professional political consultants undertake projects under three major aspects of political campaigning.

1. Generating financial resources

The Obama-McCain presidential race in 2008 alone cost a staggering $2.4 billion. This showcases the need for massive funding and thus the expertise that is required to raise the money. This has been a major area where political parties turn to experienced professional political consultants.

2. Designing strategies

Voter base profiling, ground research and hours of analysis go into collecting data to build a strong foundation for a successful political campaign. Consultants specialize in these activities and can be the difference between success and failure.

3. Promotion and advertising

Developing promotional and advertising programmes has been the most dominant work for the political consulting firms. This area of work has evolved hugely with technology, web based campaigning and a constant need for breakthrough promotion strategies.

Political Consulting in India

The developed form of political consulting as described above is an evident characteristic of political campaigns in the United States but it is yet to find its feet in young democracies such as India. The political scenario in India is hugely different and more volatile than those in countries like the United States. As a result, dependence on new age professional consulting firms is limited to advertising, promotional activities and analytics. However, the Indian political picture is changing rapidly and professionalism seems to be the way to go. With young leaders bursting onto the scene and a spark of development politics, there is huge scope for such consulting expertise in India. Although it would still take some time before we see all this in mainstream action, budding firms (eg. Leadtech) are slowly gaining acceptance in India.

Strategy Digest Vol 1 (Oct)

Bharti Retail to enter western India, follow its cluster strategy

After the north, Bharti Retail will soon enter western India with its first hypermarket in Mumbai followed by 20 more stores in cities such as Mumbai, Pune and Nanded. The retailer is also planning to set up a mother distribution centre on the Mumbai-Pune highway.

Unlike other retailers such as Reliance Retail, which set up stores across the country in one go, Bharti is focusing on creating a cluster in one region before entering another. This consolidation before further geographic expansion results in efficiencies in supply chain and logistics, which require significant investment.

SpiceJet to double fleet by end-2013; add more routes

Gurgaon-based low-cost carrier SpiceJet said today it would double its current 22-plane fleet by the end of 2013 which will be utilised on the 12 new domestic routes being planned. The company is also starting an international service. It already has rights to fly to Dhaka and Male and they feel the expansion will be easy given the similar demographic profile in these destinations. These routes are being based on a hub-and-spoke model so that the additional costs are minimised. Colombo, for example, will be a spoke from the Chennai airport, which acts as the hub.

More players looking at premium personal care market

The high-end or premium segment of the personal care market in India has been growing at about 35 per cent per annum. This segment, pegged at over Rs 1,000 crore, has a small base but is growing fast. Major companies such as HUL, P&G are already devoting their attention to the premium end of the market. J&J has jumped in, too with its skin care product, Neutrogena, last year. Some of this focus also comes from the fact that the customers have been moving up the value chain in terms of their needs.

Elder Healthcare, the FMCG Company which has brands such as Tiger Balm, AMPM Mouthwash and FairOne fairness cream in its portfolio, is a new entrant. It plans to focus its attention on the premium end of the personal care market, with in-licensed products. It has tied up with companies such as Uriage Laboratories of France and POLA Chemicals of Japan already.

Coffee Day may buy logistics company

There is a buzz that Coffee Day Holdings is trying to acquire a logistics company. Analysts believe there could be a merit in doing so as the group has close to 1,000 CCD outlets spread across the country, most of which are supported by a centralized kitchen in Koramangala, Bangalore, hence requiring a periodic replenishment of coffee beans, raw materials and other consumables. There is also the need to carry furniture for existing and new outlets from its furniture factory in Chikmagalur. The firm also exports coffee abroad. Hence, acquiring logistics assets with a retail connect , not one that involves huge cargo movement, might be on the cards.

ONGC ventures into shale exploration

Oil and Natural Gas Corporation (ONGC) has ventured into shale gas exploration by spudding the first shale gas well near Durgapur in Burdwan district of West Bengal. The country’s biggest energy explorer also notified two new discoveries in the KG onshore basin and Cambay Basin to upstream regulator Directorate General of Hydrocarbons.

Shale gas is a natural gas contained within shale formations. Shale gas exploration and production has witnessed a surge in activity recently and is making substantial contribution to gas production. Shale gas is often regarded as a game changer in the hydrocarbon industry. In the US, shale gas production contributes to nearly 17 per cent of their total gas production. ONGC's move seen in this light, is a move to not miss the bus as competitor's like Reliance and Bharat Petroleum Corporation have already begun exploration.

Role of consulting in M&A

It is a statistically proven and a widely known fact, that only 3 in 10 big mergers and acquisitions create meaningful value for shareholders, while 5 out of 10 actually destroy value. In spite of the oddly skewed statistics, mergers and acquisitions continue to be a popular way for organizations to grow - horizontally, vertically, across the border- and to diversify - synergistically or unrelated.

When a firm decides on starting the process of merger and acquisition with another firm, it hires a gamut of outside professionals – investment bankers, consultants, valuation experts, accountants, attorneys. These professionals help with various steps of the M&A process right from scouting for firms to acquire or merge with, to aiding in the post-merger integration of firms. This article concentrates on the role of consultants in the process.

The first stage at which consultants are involved, is the M&A strategy phase. Consulting firms do a lot of projects with companies to formulate their growth strategy. Hence, the M&A strategy work is an extension of the same. Consultants are hired to form a detailed M&A program that consists of conceptualising the goals, areas to grow in, kind of partnership vehicle to be preferred (M&A, Joint venture, Alliance etc.) etc. The next stage is the screening of acquisition targets. This includes generating a list of potential targets based on criteria decided by the M&A strategy, creating profile and investment thesis for targets, and then developing an approach plan for the targets. The third stage at which consultants enter is strategic due diligence. Strategic due diligence involves detailed study of the target to confirm the investment thesis, establishment of possible synergies, forecasting of market trends etc. The fourth stage, which is also the most crucial stage because of its high contribution to failure or success of the merger, is the merger integration. In this stage, value from the merger needs to be extracted, but with as less friction as possible. Apart from the operational decisions that need to be taken, a lot of cultural issues need to be sorted out in a speedy manner - organization structure, a shared decision-making system etc. A consulting firm may aid the company through all four stages or may make an entrance at any intermediate stage of the process.

M&A activity had taken a hit in the initial phase of recession, but now private equity players are back in the game and the credit and equity markets are again financing M&A deals. This will boost the M&A activity in the near future, which spells good news for the consulting industry.

Source: http://www.bain.com/bainweb/Consulting_Expertise/capabilities_detail.asp?capID=9