2009 Volume 1
AUDIRE
IIM ABC Consulting Review
2009, Volume 2
Featuring Articles from A. T. Kearney, Booz & Co., PRTM
Audire is a joint initiative of the student consulting clubs at IIM Ahmedabad, Bangalore & Calcutta.
IIM Ahmedabad
I n t h e bu s i n e s s o f B u s i n e s s
The IIMA Consult Club is a student-run organization with a mission to:
• Acquaint students about contemporary issues and foster
discussions on them
• Update students with the latest thoughts and ideas in the industry
• Provide information about careers in consulting via Industry
Workshops
The Club also takes up Recruitment focused initiatives for the students. It
can be reached at consultclub@iimahd.ernet.in
ICON, the IIMB Consult Club was set up as a student's organization in
1999 and works with a threefold objective:
• Provide high quality consulting services to the industry
• Give students an insight into the challenging world of consulting
• Assist consulting companies in enhancing their visibility and brand
image on campus
Image: © Marion Boddy-Evans, Creative Commons Attribution, Flickr
Consult
The club can be reached at icon@iimb.ernet.in
The IIMC Consulting Club aims to provide opportunities for the students
to participate in live consulting projects. The club arranges various
networking events to enable students to interact with the industry.
Lastly, it organizes consulting games, quizzes and case competitions to
enhance the skills of the students indirectly preparing them for the
consulting industry. The club can be reached at
consults@email.iimcal.ac.in
Other Articles: Telecom, Medical Tourism, Weather Derivatives, Port Economics
Sponsor
Table of Contents
Expert View
1
IS YOUR MARKETING SPEND WORKING HARD ENOUGH?
5 WARNING SIGNS FOR CMOS
5
IDEAS TO ACTION: CONVERTING BRIGHT IDEAS INTO PROFITABLE
BUSINESSES
9
HIGH GROWTH ENTREPRENEURS
13
TAMING TURBULENCE - CEOS IN ECONOMIST INTELLIGENCE UNIT/
PRTM SURVEY REVEAL HOW TO MANAGE RISK IN DISRUPTIVE TIMES
Campus Thoughts
21
INDIAN DOMESTIC AIRLINE INDUSTRY
27
INDIA'S PORT ECONOMICS :
DEVELOPING SEA PORTS AS STRATEGIC ASSETS
33
HOW OPEN SOURCE IS CHANGING THE WORLD
39
DOES DOWNSIZING & PRICE-CUTTING REALLY WORK?
43
DIVESTMENT IN PUBLIC SECTOR UNDERTAKINGS
47
WEATHER DERIVATIVES (AN INDIAN PERSPECTIVE)
51
WINNING IN A LOW ARPU MARKET : LESSONS FROM
INDIAN TELECOM
57
CAN MVNOS SURVIVE IN INDIA?
63
MEDICAL TOURISM – HEALING ABROAD
67
MOBILE TECHNOLOGY WARS A NEW LOOK
i
Editorial Note
Dear Readers,
As we present the second issue of Audire the IIM ABC Consulting Review, on behalf of the
editorial team I wish to thank the industry and the academia for their overwhelming support to
our magazine. Our first issue was well received by the readers and we would like to thank them for
their valuable feedback. We hope to bring to you an eclectic mix of insightful articles with this
issue.
The diversity of articles in this issue is a testimony to our rich pool of contributors. Our writers
have raised issues ranging from medical tourism to weather derivatives through their thought
provoking articles. The writers from industry have tried to foster entrepreneurial spirits through
articles on entrepreneurship in times of turbulence.
The role of industry in shaping a country's workforce is unarguably most important. Today,
industry requirements move at a fairly fast pace. However, the pace of change in academics is
relatively slower. This is where the industry can contribute to bridge the gap by providing support
in the areas of curriculum changes, faculty development and skill development. The industry can
attract students to research and innovation by giving them an opportunity to work on live
projects. Human capital is the key to a long-lasting sustainable advantage for nations as well as
organisations and India might lose its competitive edge if it does not encourage participatory
learning.
With this thought, on behalf of Team Audire, I would like to extend my heartfelt thanks to our
industry partners, UAE Exchange and the students of IIM Ahmedabad, Bangalore and Calcutta
who have full heartedly supported our endeavour. Our special thanks to Saurine M Doshi, Senior
Partner, A.T. Kearney ; Debashish Mukherjee, Principal, A.T. Kearney ; Utsav Garg, Manager,
A.T. Kearney ; Vikram Ramakrishnan, Principal, Booz & Company ; Piyush Doshi, Principal,
Booz & Company ; Malcolm Frank, Senior Vice President, Marketing and Strategy, Cognizant
for their valuable contribution to our magazine.
We hope to hear back from you, your suggestions and feedback on this issue of Audire. Please
feel free to write to us at audire.IIMABC@gmail.com.
Happy reading !
Team Audire
EDITORIAL TEAM
IIMB
IIMA
IIMC
Nishant
Shamiroh Tikoo
Madhulika Kaul
Prateek Bhargava
Varun Saini
Aditya Kumar
Deepak Baid
Gurveen Kaur Bedi
Shantanu Shekhar
Chandrima Das
Vaishnaovi Rastogi
Tushar Bohra
ii
AUDIRE - IIM ABC CONSULTING REVIEW
Is Your Marketing Spend Working Hard Enough?
5 Warning Signs for CMOs
Venkat, a marketing veteran, and now the CMO for a
large consumer durable company is a disappointed man
post his board meeting review. Despite his passionate
attempt to convince the board members that the company
needed to increase investments in its brands during the
downturn, he could not get the budget approvals. Instead,
the pressure is on him to cut back on marketing expenses
given the business downturn. One of the board members
even gave a competitor example on marketing spend
optimization. The CEO has already been asking him
take a hard look at marketing spends which have been
rising at a fast clip for last few years. Venkat is now
beginning to wonder if there is a real issue with the way
spends are being managed, which he can identify and fix.
He needs to quickly understand if there are issues with
efficiency and effectiveness of marketing spends and if he
is really getting the maximum bang for his marketing
rupee.
Marketing spends have grown at more than 20%
annually since 2005 and the overall media spend
figure crossed Rs. 22,000 Cr. in 2008. In the
recently concluded growth phase, Marketing
enjoyed significant war chests and creative
freedom – however in a rising tide, assessing the
effectiveness of these spends were not a priority.
Today, the economic slowdown is putting the
spotlight back on where marketing rupees are
spent, because as a whole, it can account for 610% of sales in many consumer-focused
industries. Reductions in advertising spends are
expected across most, if not all, sectors. In fact,
within board rooms, there is a call for greater
accountability of marketing spends.
The excesses of the last few years - proliferation
of products, brands and communication
platforms - resulted in over-communication, low
ways to burn fat and build muscle in marketing
spends. A starting point is to closely examine
five key signals of inefficiency – should they see
three or more of these warning signs, it's time
for some action. Our recent experience
indicates that a zero-based review of the
marketing spend, in these times, will generate
benefits of at least 5-15% in terms of improved
return on each Rupee spent – enough to fund
other business initiatives or simply, make a
valuable contribution to bottom line.
"Starting point for marketers is to
closely examine five key signals of
inefficiency – should they see three
or more of these warning signs, it's
timeforsomeaction"
brand-recall and consumer indifference. In this
scenario, it is imperative for CMOs to look for
1
Warning Sign 1: Little or no integration
and optimization across a range of
marketing initiatives
With leading marketers already adopting an
integrated approach across marketing levers, a
large number of players still do not display rigor
in understanding the true impact of each
customer-contact opportunity available to them.
Specifically, some key tradeoffs are not explored.
For example, should an integrated brand retailer
in a sales downturn situation, spend more on
catchment area promotion awareness or on
broad based TV advertising? How can OOH
spends be compared against those on traditional
media? Such questions are seldom asked or
answered in a rigorous fashion.
Attaining excellence in Brand activation calls for
defining guidelines for an integrated marketing
mix to bring alive the creative idea across all
consumer touch points. Often, spend analysis
across different marketing platform is
uncoordinated and unshared. To support an
integrated marketing mix plan, an integrated
briefing process is critical. This means not only
briefing across creative, BTL and PR agencies
but also including packaging, sales organization
and channel partners to truly magnify the impact
of the initiative. This can be supplemented
through periodic team meetings across various
marketing agencies and the internal organization
team which are useful for perspective building
2
and in determining a holistic and robust
marketing plan.
Warning Sign 2 : Lack of robust
guidelines and standard procedures for
media strategy, planning and buying
Adrenalin rush associated with overnight
responses to competitor initiatives is the stuff
that marketing legends are made of. Nobody can
deny the critical need for strong tactical
responses to competitor initiatives, especially
when the battle lines are clearly defined.
However, short term tactical responses become
an issue when they start to dictate strategy itself.
One of the soundest tests to gauge this is the
level of compliance to the strategic plans of the
brand and to the gate-keeping processes laid
down by the organization even for tactical
moves. If the marketing spend process
compliance is not very high, then either the
processes themselves need to be restructured or
there is a need to reinforce the need for
compliance. In many cases we observe, that the
rigor of challenging media planning and buying
decisions is not for malized through
standardized guidelines or documentation.
While in some cases, a lot of data is accessible
and a lot of presentations are made, robust
decision making frameworks are still not
available to the marketing teams. Is there a
standard checklist which marketing teams can
access to check if "Weeks on Air" (WOA) and
Frequency recommendations are logical for the
category? Is there dynamic buying framework
which allows for channel wise spend plans to be
reviewed based on leading predictive variables?
Is there sufficient analysis to justify the impact
buys? Players who are able to develop and
constantly stick to process guidelines and
strategic plans utilize their marketing rupees
significantly better. Some relevant indicators
tracked regularly in form of CMO level spend
efficiency dashboards can help estimate the
AUDIRE - IIM ABC CONSULTING REVIEW
magnitude of the issue – number of unplanned
'additional' campaigns launched, number of
campaigns with budget overruns, number of
campaigns with success rate in terms of reach
and frequency etc. Best practice companies
adopt process frameworks even for tactical
initiatives which can have built in flexibility to
ensure spend optimization without
compromising time to market.
Warning Sign 3: Limited focus on
building internal media capabilities
Marketing teams have traditionally focused on
activities that are generally considered to have a
significant bearing on top-line such as consumer
insights, market research, innovation channel /
distribution management and the like; media is
viewed often as a 'cost' item that needs to be
optimized, but not necessarily as a lever that can
actually improve returns based on microtargeting of the consumer. Hence marketers
today may not necessarily understand the
intricacies of media industry and its business
models. With an increasing focus on microtargeting the consumer in the media clutter, it is
imperative for the marketing team, the owners
of the brand, to strengthen their internal
capabilities. The added complication in the
Indian market place as compared to developed
markets such as US is the lack of transparent and
third party data around cost benchmarks and
actual performance in a medium like OOH.
Hence there is a high reliance on the media
agency in India to provide the baseline for any
such analysis resulting in a high dependence on
them for media ideation, campaign planning and
post-buy analysis. Marketing teams who
understand their target audience' media
consumption habits, competitive benchmarks
(spend, GRP/TRP deliveries etc) can contribute
to evaluation of media mix choices and brand
led media innovation. In fact our experience
shows that the marketing team can contribute
significantly to media buying negotiations along
with the agency. Ability to go beyond discounts
on "inflated" rate cards will require marketing
teams to develop knowledge about media at par
with their suppliers – best-practice Indian
companies have already started the process of
investing in internal capability building.
Warning Sign 4: Accountability for
results is not built into your partnership
contracts
The relationship between advertising and media
agencies with their clients is truly one of the long
standing examples of partnership and
collaboration across business functions. While a
relationship of trusted partnership with the
advertising and media agencies is essential, it is
also mutually important for the players to follow
a diligent and regular review process across all
aspects of the relationship. Apart from
adherence to processes and policies, a reassessment exercise re-calibrates and
authenticates existing contracts, spends and
execution pattern. Variable payments often are a
very small portion of the overall remuneration;
KPI-linked payments are few and far in between
and there are scope to improve transparency
around financial transactions. This exercise
should ideally leverage other internal
departments like Finance and Procurement as
well. If the relationship with the agencies is
based on very high mutual trust then it is easy to
make these assessments an intrinsic part of the
checks and balances regime. Key performance
aspects like agency remuneration, performancelinked spend analysis; assessment of media
campaign effectiveness and competitive
benchmarking should be a part of the scope.
Market leaders find that regular assessments
throw up insights and information that critically
determine how their marketing budgets can be
better utilized.
3
Warning Sign 5: Innovation streak has
not yet reached your media strategy
Given the widespread challenges advertisers
face in terms of communication clutter and
inability of people-meters to go beyond the
demographic variables, innovation in media
strategy is essential to enable brands to reach
their target segments effectively. Best practice
leaders have demonstrated that breakthrough
innovation is possible across channels - be it the
use of advertiser-funded programming or
innovation in outdoors through 3D billboards.
Hand on heart, not many marketing teams can
stake claim to breakthrough ways of reaching
their target audience and that points to capability
and process issues. Another area that Indian
advertisers as a whole have been slow to adapt is
the use of non-traditional media. While in most
developed countries TV and print contribute 5075% of all media spends, the number is still as
high as ~85% in India. While some brands have
adopted brand-led web-portals and targeted
sms-based promotion routes, this area remains
unexplored and unexploited. There is an urgent
need for brand teams to decipher and fully
understand the multiple forms of web
advertising, email ads, search engines ads and
now mobile advertising as consumers have taken
to these media at a rate much faster rate than
advertisers. Again, the key prerequisite for
innovation is for brand teams to build
capabilities which would have hitherto been
considered outside their domain.
Author (s)
Saurine M Doshi
Senior Partner, A.T. Kearney
Debashish Mukherjee
Principal, A.T. Kearney
Utsav Garg
Manager, A.T. Kearney
In summary, while there is immense pressure on
CMO's like Venkat to optimize spends; it is also a
great opportunity for them to fundamentally
alter the processes and capabilities which define
how they are able to invest in their brands over
times to come. A rigorous assessment of their
marketing organization process and capability
could not only lead to cost efficiencies in the
region of 5-15% but also infuse innovation and
energy into the marketing setups.
4
AUDIRE - IIM ABC CONSULTING REVIEW
Ideas to Action: Converting Bright
Ideas into Profitable Businesses
Ideas have the power to drive action leading to
results. In business, a viable idea that is executed
efficiently, taking into account all critical factors
and market forces, has high potential to translate
into a successful business model.
The leap from a great idea to a successful
business model requires three components:
vision, value proposition and competitive
differentiation. The vision needs to clearly
outline what the company stands for. As a
Japanese proverb says, action without vision is a
nightmare. It is imperative for any corporation
to lay down a vision statement that articulates
what it intends to become and achieve in the
future. Value proposition determines what value
a corporate adds to all its key stakeholders. It is
the benefit the corporation promises to
customers for by virtue of the relationship. An
imperative extension of this value proposition is
competitive differentiation. Competitive
differentiation depends on distinct quality, cost
per value, and timeliness attributes. Together,
these three characteristics comprise the unique
selling proposition (USP) of the product or
service. Companies must leverage the USP to
the maximum.
Having a winning idea is only 10% of the battle.
The real challenge starts when one sets about the
task of converting an idea into a value delivery
mechanism for customers while generating
economic returns for the entrepreneur. The
journey of converting an idea into a viable
business can be viewed across three
stages—planning, pilot, and ramp-up. The
challenges, hence the capabilities, required
within each stage vary widely and a successful
business must navigate through each
successfully. (See Exhibit 1.)
Exhibit 1: Journey to a Successful Business
Planning
Ramp-up
Pilot
Strategy & Plan
Finance
Team & Organization
Sales and Marketing
Production / Back Office
Support Functions
Process and Technology
Very Important
Less Important
5
A systematic approach to building scenarios
takes into account carefully selected possibilities
and develops contingency options to be
triggered as certain of these possibilities are
realized. A four step approach for planning
scenarios is presented in Exhibit 2.
Stage 1: Planning
No battle plan survives the first contact with the
enemy, goes the old adage. However, this does
not diminish the importance of planning. On
the contrary, planning and preparing for multiple
scenarios is essential to minimizing surprises.
Exhibit 2: Scenario Based Approach to Planning
2
Strategic
Actions
Possible
1
“Futures”
“Futures”
Robust &
flexible
long-term
strategy
Hedging 3
Options
“Things to
“Things
to
Watch”
Watch”
4
The other important factor in the planning stage
is funding. Unrealistic cash flow projections (and
lack of a back up plan when cash flow falls short)
is the single greatest reason early-stage
businesses fail. And accurately predicting cash
flow requirements is intrinsically linked to good
scenario-based planning. It is also important to
be open and transparent and choose an option
where there is the right level of mutual comfort
with investors, rather than going for an option
that looks outwardly most attractive.
Stage 2: Proof of concept / Pilot
You don't get a second chance to make a first
impression. The pilot phase is the best
opportunity to get things right prior to going
market. The exact scope of the pilot will depend
on the nature of the business.
6
Intrinsically, some business models are harder to
fully test, especially in cases where product
development entails long lead times. The pilot
may focus on a specific geography, market
segment, product segment or customer
segment. But it must accurately reflect the actual
market conditions the company is likely to
encounter during the wider rollout. For example,
spending Rs 1 Cr. on marketing and promotion
in a pilot city might produce misleading results if
the national budget for launch across 30 cities is
only Rs 5 Cr.
All the important assumptions, which will vary
by business, must be explicitly tested during the
pilot. These assumptions commonly include a
customer's willingness to pay for the product or
service and cost estimates. Companies must be
prepared to go back to the drawing board if
AUDIRE - IIM ABC CONSULTING REVIEW
consumers are not responding at a level that will
sustain the business; a full scale launch premised
on sheer optimism is a sure path to disaster.
Finally, apart from fine-tuning the product
offering, marketing strategy, pricing, and cost
estimates, the test stage cal be used to start
building the organization and the technology and
support infrastructure in preparation for the
ramp up.
Stage 3 : Ramp-up
The most important activities governing a
successful transition from pilot to ramp-up are
creating the right team and managing the rampup pace. As the business goes from planning and
pilot to ramp-up, an entrepreneur must
transform into a general manager. Several
entrepreneurs struggle as good managers when it
comes to handling detail and managing repetitive
activities. The successful ones recognize this
shortcoming and develop a team that collectively
possesses the skills they lack.
The second big challenge is to ramp up at an
optimal rate. Ramping up too slowly could waste
precious advantage over competition, while
ramping up too fast can stretch cash and stress
the organization.
Most entrepreneurial ventures succeed not
because they do all things well but because they
do the few things that really matter, really well.
Among the most important to get right:
Understand the true source of your
§
competitive advantage: What is it that makes
your offer unique and valuable to a customer?
Use the answer to that question to guide
investment decisions and hone marketing
messages.. For example, no one goes to a hospital
because it has marble floors –patients care first
about quality of delivery and medical outcomes.
Balance thought and action in risk
§
management: Many businesses never get
beyond the ideas stage either because they spend
too much time analyzing the business plan
(analysis paralysis) or they jump in with
insufficient forethought. Successful companies
recognize explicitly the risks and test
assumptions that make them uncomfortable
during the pilot phase, well before launch.
Select the right partners: For any
§
successful venture, partnerships are essential,
and this is especially true for younger companies
where no single individual possesses all the
necessar y exper tise. Most successful
entrepreneurial ventures—Google, Microsoft,
and You Tube to name a few—have involved
more than one person.
§
Develop a simple to implement strategy:
any strategy has to be implemented well to deliver
results. An 80% intellectually pure strategy,
which can be easily implemented, is better than a
100% intellectually pure strategy that is difficult
to implement. For example, a large financial
service provider failed to fully deliver the
estimated benefits from a restructuring mainly
because the implementation effort required
more staff training than had been anticipated,
which caused the staff to reject the
transformation as impractical.
Converting ideas to action is at the core of
helping economies develop. Some of the
challenges that need to be overcome to achieve
results can seem daunting. However, great ideas
combined with realistic expectations,
determination, and the right support can
translate to world-class businesses that make us
all proud.
Author (s)
Vikram Ramakrishnan
Principal
Booz & Company
Piyush Doshi
Principal,
Booz & Company
7
Source - Image: (c) PinkMoose, Creative Commons, Flickr
High Growth Entrepreneurs
“In a rational world, a startup would not exist.”
- Alan Kay
Abstract
If money and ideas could flow in a friction-free manner
inside large, established corporations, startups would
never succeed. Large corporations – with their deep client
relationships, enormous R&D budgets and trusted
brands – would quickly recognize and successfully address
new market opportunities. But they fail to do so, with
amazing regularity.
Having spent the past two decades at four high-growth,
entrepreneurial high-tech companies, I have gained six
key insights. The first three concentrate on the early days
of an entrepreneurial venture, and the final three address
later days as the organization sees true success and begins
to scale.
Insight 1: Beware the Valley of Despair
Nothing is quite as exciting as the first six
months after launching a company. You
understand, in a very visceral way, that if you
don't show up to the company that day, things
simply won't happen. It's all about you, your
vision, your team and your precious few
resources.
At the same time, you're involved in this venture
not because you want to be, but because you
have to be. Most successful entrepreneurs I
know have had their epiphanous moments just
before starting their firms. BANG – multiple
elements come together, an idea is formed, and a
venture is started. It's that moment of clarity
when it's clear that the risk is not in starting a new
venture…the risk is in NOT starting it. Jeff
Bezos, upon launching Amazon, referred to this
as his “Regret Minimization Framework”.
In those initial weeks and months, your vision of
the market is so crystallized that you simply
know that it's going to take the world by storm.
During this early period, there's a sense of
holding on to a great secret, and that your
unlimited success is just a matter of time.
Then, reality hits.
In rapid succession when you ask customers,
investors and potential employees to commit to
your vision with their money or careers, you may
have a series of “failures”. They won't share your
vision and enthusiasm, will outline all of the
reasons you will fail, and thus don't feel
compelled to work with your new company.
Suddenly, your recent enthusiasm seems naïve, at
best. The team starts to ask: “What have we
gotten ourselves into?”
You've entered the valley of despair. It's a dark
place, one which you, as a leader, need to manage
through. That initial enthusiasm, which was
based on concepts, now needs to be replaced by
tangible evidence of success. It may feel like a
crisis, but remember, it isn't one, for this
sensation was created by your own overblown
expectations.
The Valley of Despair is often the first moment
of truth for a young venture. It's where your
team either gets galvanized or starts to fall apart.
And it's where the real insights that form a truly
successful venture are formed.
Insight 2: No firm is an island
Don't do it alone. There's a mythology about
entrepreneurs, particularly in the West, that they
represent a rugged individualism, and build their
ventures unaccompanied. Don't fall for this
myth. In my experience, most successful hightech ventures succeed with significant help from
9
a big brother or two - established companies or
organizations in the ecosystem that are more
than happy to provide you with business, and
even funding.
Tailor your value proposition as much to them as
you do to your end customers. During the
formative years of one of my previous
employers - Cambridge Technology Partners more than 80% of sales leads came from
established hardware vendors. Similarly, during
Cognizant's formative years in the mid-1990s,
much of Cognizant's business came through its
big brother, Dun & Bradstreet, which was
looking for high-quality global delivery of
computer services. Big brothers provide
stability. They also remove the perceived risk on
the part of your target customers. Suddenly,
customers see you as part of a total solution
from a larger vendor they already trust.
Also, big brothers force focus. You don't have to
worry about creating contextual aspects of your
business too soon, such as building distribution
channels, over-investing in your brand, etc. They
allow you to conduct “OPM” (using Other
People's Money) development. Find partners,
drive unique value for them, and they will assist
significantly in building your firm.
Insight 3: Avoid the “Boston Syndrome” and
pass the “Mother Test” – Keep your value
proposition simple
Don't over-think your offer. For some reason, a
lot of start-ups from Boston, Massachusetts,
suffer from over-engineering their companies.
This intellect doesn't turn into a value
proposition that captures wallet-share.
Don't attempt to dazzle with your brilliance.
Start with a simple and obsessive focus. Once
your offer looks complex, customers think, “I
need a complex organization to deliver this”.
They won't trust you and your (perceived) band
of gypsies.
10
If your offer doesn't pass the “Mother Test”,
you're in trouble. Call your mother on the phone,
and in one minute you need to communicate
your value proposition so she can fully
understand what your company does and why
you will win. If you can't pass this test, your offer
is too complex.
The “Mother Test” can be intimidating. After all,
you and your team are going to say, “If it's this
simple, anybody can replicate it.” Maybe, but
markets - and certainly large companies -don't
have the maniacal focus and passion that your
company does.
Insight 4: Dealing with success: Firms grow
in S Curves, not straight lines
Companies do not grow in straight lines. It's not
a simple extrapolation with your organizational
model, culture, customer relationships and
market environment - from pre-revenue, to a
$10-million run rate, to a $100-million run rate,
to a $1-billion run rate. Instead, it will feel as if
the firm is growing in a series of 'S' curves.
The value propositions for many key
constituents are different at each stage. One set
of recruits and clients is attracted to a $10
million revenue startup, another to a $500
million industry leader.
Recognizing and
managing through the 'S' curves is the toughest
lesson, for some of the behaviors and structures
that made you successful at one stage will
actually hurt you subsequently. The difficult part
is your management team needs to determine
what to keep and what to change.
You need to separate issues into two camps: 1)
those that made you distinctive and great, and
will be immutable as they transcend all market
and scale dynamics, and 2) those that you must
dispose off as they no longer suit your situation.
It's an ongoing and arduous challenge that
requires strong teamwork and objectivity to
overcome. It's a cruel irony - that your success
and growth may lead to your own failure - but it
occurs with great regularity.
AUDIRE - IIM ABC CONSULTING REVIEW
Insight 5: Dealing with success: You're a
darling today, but may be feared and loathed
tomorrow
product of me.”- Jack Nicholson as gangster
Frank Costello in the Academy Award-winning
film The Departed.
You'll know you've “made it” when you get enter
the “mutual admiration society” - that wonderful
sweet-spot where employees, customers, the
media and investors, all love you.
This hubris ultimately led to Costello's demise.
And, in our fast-changing markets, hubris often
leads to the demise of many market leaders. The
key to sustainable success is found in quickthinking and acting entrepreneurship, which
ensures that your firm can evolve as quickly as
the market does.
Enjoy the moment - it's not going to last.
Where you were once loved and admired, you
will soon be feared and criticized. Over the past
20 years, many high-growth firms have
experienced this — Microsoft, Oracle, SAP, and,
more recently, Salesforce.com and Google.
This market “change of heart” is driven by
several dynamics in parallel. First, the press is
often motivated by writing about the next “new”
thing. Your firm's initial ascent, for example, is
newsworthy. Additionally, your firm's success
may be an indication of a larger market trend,
driving more positive press. Eventually, no
writer wants to write, and few readers want to
read, the nth positive puff piece on your firm.
Plus, the market trend your firm rode on is now
well understood. So, the story now becomes
what's wrong with your firm.
A second dynamic is driven by your competitors.
By definition, your success will create
competitors. And competitors don't always play
fair. So these firms will seek the weaknesses in
your model, your firm, your product and your
client relationships. Upon finding chinks, they
will share this information with your customers,
prospects, recruits, industry analysts, investors
and the press. Recognize that it's a nice problem
to have, for it's a natural result of your market
prominence and success.
Insight 6: Maintaining entrepreneurialism
at scale
Entrepreneurialism is not about start-ups. It is
not a function of size. Entrepreneurialism is
about seeing and capturing new opportunities,
regardless of the size or age of the organization.
As Lou Gerstner recalled of his years at IBM, the
elephant can learn to dance. Gerstner's great gift
to IBM was instilling a sense of
entrepreneurialism into the organization, and
with it the inherent urgency, responsibility and
market focus.
Summary
In every entrepreneurial environment, there is
one constant; and that's an appetite and
enthusiasm for all that entrepreneurialism
entails. If you see the opportunity, and are deeply
motivated by the thrill of speed, then you may be
an entrepreneur at heart. If it's right for you,
then there's no professional journey more
exciting.
Author (s)
Malcolm Frank has two decades of experience
in the Information Technology industry. As the
Senior Vice President of Marketing and Strategy,
Malcolm's focus centers around Cognizant's
brand, driving business through the
vertical/horizontal structure and overseeing
Cognizant's corporate strategy.
“I don't want to be a product of my
environment. I want my environment to be a
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12
Source - Image: (c) Nick Hum, Creative Commons, Flickr
Taming Turbulence - CEOs in Economist
Intelligence Unit/PRTM Survey Reveal
How to Manage Risk in Disruptive Times
Abstract
Significant global forces are disrupting the operational
models of multinational companies worldwide.
According to our research, companies that proactively
adapt their operations are more successful than the
competition at mitigating the risks such disruptors pose.
By making operational changes that are more significant,
innovative, and pervasive, these companies create
important new sources of competitive advantage. Not
surprisingly, a proactive approach yields superior business
results: stronger revenue growth, greater profitability,
and higher return on invested capital.
As the current economic turmoil demonstrates,
the global business landscape is increasingly
vulnerable to disruptive forces with the potential
to drastically affect companies' operations and
perfor mance. Market disruptors cause
companies to change where and what they sell;
resource disruptors require companies to
change inputs, outputs, and processes to manage
cost and resource availability; and policy
disruptors require companies to change how
they manage and where they operate (Figure 1).
Figure 1: The Top Global Disruptive Forces
Three major categories of disruptors that can affect operations and performance
CATEGORY
DISRUPTOR
Market disruptors
Growth and decline of markets
Emergence of low-income and rural mass markets
Geopolitical instability and change
Resource disruptors
Global shifts in availability and access to labor and talent
Constraints in natural resource availability
Uncertain and Shifting global financial markets and sources
of capital
Policy disruptors
Increased complexity of operating in multiple social, political,
and regulatory environments
Growing requirements to manage resource consumption,
emissions, and disposal
Increasing requirements for making operations transparent and
accountable
Source : All charts that appear in this article were derived from research conducted by the Economist
Intelligence Unit and PRTM and published in Global disruptors : Steering through the storms (October 2008).
Understandably, the current credit crisisuncertain and shifting sources of capital-makes
other disruptors pale in comparison. But, as the
energy crisis that preceded it shows, any
disruptor can have a significant impact, and the
nature of that impact can change as well. What's
m o r e, s e ve r a l d i s r u p t o r s c a n o c c u r
simultaneously, affecting not only individual
companies, but whole industry sectors.
13
Most companies understand the importance of
developing operational strategies to mitigate the
risks such disruptions pose. Few companies,
however, have been able to execute those
strategies. According to a survey of global
executives conducted in 2008 by the Economist
Intelligence Unit and sponsored by PRTM,
these select firms act preemptively, making
significant changes in their business operations
to create new sources of competitive advantage.
Compared with their competitors, these early
movers:
§
View global disruptors as opportunities,
rather than threats
§
Take an enterprise-wide approach to
implementing and measuring change
§
Are more satisfied with the results of those
changes
§
Drive operational change from the C-suite
This proactive approach yields powerful results.
A much greater percentage of early movers
reported stronger performance than their
competitors on three key metrics—higher
revenue growth, profitability, and return on
invested capital (Figure 2).
§
Make operational changes that are more
radical and innovative
Figure 2: Financial Performance
How companies have performed over the past two years, compared to their main competitors
70%
60%
Early movers
Late movers
50%
Percentage of
early / late movers
60%
Percentage of
early / late movers
Early movers
Late movers
50%
40%
30%
40%
30%
20%
20%
10%
10%
0%
0%
Higher revenue Higher Higher return on
Profitability invested capital
growth
14
Have already made
significant operational
changes and may
be making more
AUDIRE - IIM ABC CONSULTING REVIEW
Have introduced
operational changes
new to industry or world
Proactive companies also have introduced more
substantial changes to specific operational areas.
A far greater percentage of early movers
claimed to have made radical change to their
customer operations. The same distinction
holds true for other areas, including product
operations, supply chain operations, and
organizational structure and talent
management.
It makes sense, then, that early movers are also
far more likely to implement innovative change.
Twenty-five percent said they had implemented
changes new to their industry or to the world, in
contrast to only 3% of late movers. That is a
significant difference, and surely a key reason
why early movers experience superior financial
results. One has only to think of companies like
Apple, whose iTunes business model was an
industry first, or Toyota, whose Prius led the way
in the hybrid auto market.
Taking an enterprise-wide approach. When it
comes to the scope of the operational changes
made, proactive firms again differ markedly
from their reactive peers. Approximately 70%
of early movers said they apply changes across
most business units and operational areas,
compared to 40% of late movers. Recognizing
the limited impact of point solutions, proactive
companies adopt change programs that reach
across functions, business units, and
geographies.
Early movers are also more likely to measure the
results of operational changes across the
enterprise. Twenty-eight percent have an
integrated enterprise-wide performance
management framework, twice the percentage
of late movers. Because of the complexity and
potential risk associated with enterprise-wide
programs, early movers assiduously track both
leading and lagging performance indicators.
They also regularly monitor each major initiative
and its impact on overall performance.
Driving change from the top. Nearly half of
early movers said their CEO drives operational
changes in response to global disruptors,
whereas only one-third of late movers made this
claim. The executive suite, especially the CEO,
needs to lead employees across the company in
dealing with disruptors so that everyone is
committed to implementing change wherever
needed.
Getting results. It should come as no surprise
that proactive firms stand in strong contrast with
reactive firms when it comes to success and
satisfaction rates. Twenty-one percent of early
movers said they were “highly successful” in
adapting to global forces, while none of the late
movers made this claim. At the same time, nearly
two-thirds of early movers expressed
satisfaction with their performance, in
comparison with only one-third of late movers.
The financial success of early movers is entirely
consistent with these findings: Companies that
experience strong er revenue g rowth,
profitability, and return on invested capital
would be more apt to rate their performance
highly.
The survey findings regarding companies'
dissatisfaction brought to light some reasons
why early movers generally fare better than their
peers. Respondents, as a whole, agreed that the
two most important causes of dissatisfaction are
short-term focus and underestimation of the
degree of organizational change required. But
late movers attributed dissatisfaction to other
reasons as well. Over half cited two in
particular—“lack of insight regarding
operational changes that need to be made” and
15
“insufficient understanding of the implications
of global forces”—while a much smaller
percentage of early movers were dissatisfied for
those reasons. We can surmise that proactive
companies are more adept at determining not
only which global forces can affect their
business, but also what changes need to be made
to respond to these forces.
View of opportunities and threats. Another
notable—yet predictable—difference between
proactive and reactive companies has to do with
outlook. Early movers are more optimistic than
late movers and are more likely to view a
disruptor as an opportunity rather than as an
obstacle.
Notably, the difference in outlook is most
pronounced regarding policy disruptors. For
example, 43% of early movers viewed
“increased complexity of operating in multiple
environments” as more of an opportunity than a
threat, compared to only 16% of late movers.
Similarly, a much higher percentage of early
movers saw “increasing requirements to make
operations transparent and accountable” as an
opportunity, and a much higher percentage of
late movers viewed this disruptor as a threat.
Early movers may be more optimistic about
policy disruptors because they are involved in
shaping these policies. For example, U.S. telecom
startup Cyren Call Communications is working
with policy makers to create nationwide wireless
broadband to be used exclusively by police and
other public safety officials. Not only will this
network solve a pressing need for better
emergency communications; it will create a
major market for Cyren Call and other wireless
providers to tap.
mission and brand. Take, for example, global
consumer products company SC Johnson,
known for being a friend of the environment
long before many of its competitors. In 1975,
t h e c o m p a n y vo l u n t a r i l y e l i m i n a t e d
chlorofluorocarbons (CFCs) from its aerosol
products, three years before the U.S.
government made this action mandatory. In
1992, SC Johnson became one of the first
consumer packaged goods companies to report
publicly on its sustainability programs. And, in
2003, the company began powering its
manufacturing plant with turbine engines that
run on methane gas, leading to a great drop in
carbon emissions as well as energy costs.
Initiatives such as these have made SC Johnson a
sustainability leader while broadening its brand
appeal to environmentally-conscious
consumers.
Responding to Disruptors
The findings regarding proactive companies are
all the more striking, given that survey
respondents, as a whole, agreed on the strategies
they need to alter in order to deal effectively with
disruptive forces. As Figure 3 demonstrates,
companies highlighted three in particular:
product, service, and technology strategy (i.e.,
which products and services to offer); target
market strategy (which customer segments to
focus on); and operational strategy (how to set
up the best operational model for making those
products and serving those customers).
For some companies, the anticipation of major
shifts in policy can become integral to their
16
AUDIRE - IIM ABC CONSULTING REVIEW
Figure 3: Strategic Elements in Need of Significant Change
Most respondents agree that certain elements need to be
changed significantly to adapt to global disruptors
Multiple answers possible
Product Service and Technology Strategy
57%
Operational Strategy
55%
Target Market Strategy
55%
Competitive Strategy
49%
Geographic Strategy
45%
Business Structure
42%
Economic Model
35%
Financial Structure
26%
4%
There was also broad consensus on the specific
operational areas most in need of change:
customer operations, product operations,
supply chain operations, and organizational
structure and talent management (Figure 5). Not
coincidentally, these are also the areas
participants said contribute the most business
value. Companies, in general, realize it is
important to keep innovating the operational
areas core to competitive advantage. 2003, the
company began powering its manufacturing
plant with turbine engines that run on methane
gas, leading to a great drop in carbon emissions
as well as energy costs. Initiatives such as these
have made SC Johnson a sustainability leader
while broadening its brand appeal to
environmentally-conscious consumers.
Consider Quintiles, a global company that
conducts clinical trials for large pharmaceutical
companies. Quintiles invests heavily in two core
operational areas—global talent management
and customer operations—because they are the
source of the company's differentiation.
Quintiles knows that its pharmaceutical
customers outsource their clinical trials because
this aspect of R&D is not core, and that
outsourcing allows them to turn these fixed
costs into a variable cost. So the more Quintiles
invests in talent management and customer
operations, the more cost-effective its services
become—and the more compelling these
services are for the company's target customers.
Germany-based Bayer HealthCare is another
example. Twenty years ago, long before China
was on the radar, the firm began investing there
to gain access to lower-cost labor and materials
while tapping into an enormous source of new
customers. Leveraging this opportunity to the
hilt, Bayer made major changes in its product,
supply chain, and customer operations.
17
Figure 4: Operational Changes That Matter Most
The operational areas that require change are also the ones contributing the most business value
Multiple answers possible
Customer Operations
Product Operations
Supply chain
Organizational Structure
and talent management
Physical footprint
Networks of Partners in
the value chain
Information architecture
Operational areas
contributing the most business value
Others, please specify
Operational area
requiring significant change
None
Don't know
0
10 20 30 40 50
Companies (percentage)
To expand its product offerings in the region,
Bayer acquired the over-the-counter cough and
cold portfolio of Chinese Qidong Gaitianli
Pharmaceutical Company. In addition, Bayer
established four manufacturing facilities in the
region, and recently expanded its plant in Beijing.
The company also began sourcing raw materials
and services for global drug production from
various suppliers across greater China. And to
develop a strong customer base early on, Bayer
built a customer outreach center.
Turning Threats Into Opportunities
In today's world, disruptors spread far more
widely—and quickly—than in the past. Any one
disruptor can intensify, pushing other disruptors
into the background and catalyzing still others.
The current credit crisis, for example, has
lessened the turbulence over oil prices while
18
60
unleashing a number of other disruptorsincluding the meltdown of the financial services
industry, which, in turn, has prompted shifts in
other key industries.
Even when a disruptor is especially powerful, it
is not always easy to see it coming, as the
financial crisis has demonstrated. So, above all
else, companies must deploy operational
strategies that will enable them to quickly change
course when necessary. Three practices prove
crucial for success:
Build in flexibility. All companies, regardless of
industry, need to recognize that we live in an
increasingly unstable world. So they must build
flexibility into their operating models and
eliminate anything that prevents it. Each
company needs to determine what that means
for its own circumstances.
AUDIRE - IIM ABC CONSULTING REVIEW
Prepare on all major fronts. Since it's impossible
to predict which disruptors will strike next,
companies that want to succeed in the long term
need to simultaneously stay on top of all areas
key to competitive advantage. Successful
companies understand this and constantly
monitor their operational strategies so they can
quickly adapt them when the need arises.
Go on the offensive. Attack the disruptors
before they attack you. Companies that go on
the offensive increase their likelihood of a
positive net result. Those that take a defensive
position end up backtracking to repair damage,
and they lose the opportunity to develop
operational innovations essential for getting
ahead. Proactive companies follow these
practices religiously. Operating on the
assumption that the world is constantly in flux,
they are always looking ahead to anticipate the
impact of global disruptors on their businesses.
As a result, early movers develop operational
strategies that will support whatever business
strategies they choose to pursue. They not only
make operational changes earlier—they make
changes that are more significant, innovative,
and pervasive than the competition. These
proactive companies are, for the most part, more
successful, reaping stronger revenue, profit, and
return on capital than their competitors As we
look ahead to the next wave of disruptors, one
thing, at least, is predictable: The early movers
will not only weather the storms that arise—they
will also make any storm, however threatening,
work to their advantage.
Author (s)
Mark Deck, PRTM Director
The research in this article is based on an online
survey taken in 2008 by 242 senior executives
from around the world. Approximately 33% of
the executives' companies are headquartered in
North America, 31% in Europe, and 26% in the
Middle East, Africa, and the emerging markets
of the Asia-Pacific region.
The participant firms are almost equally divided
between products-based and services-based
businesses. Approximately 25% of the
respondents' organizations have annual
revenues of more than US$10 billion, while 35%
have revenues of more than US$500 million.
The survey was supplemented by in-depth
interviews with CEOs and COOs. These
executives came from Argentina, India, Turkey,
the UK and the United States, reflecting the
global spread of the survey sample itself. “Early
movers,” defined as firms that “proactively track
disruptors and try to act before competitors do,”
comprised 25% of respondents. Late movers,
companies that “act in response to forces
causing a shortfall in business performance,”
constituted 17%.
19
20
AUDIRE - IIM ABC CONSULTING REVIEW
Source - Image: (c) Cliff, Creative Commons, Flickr
Campus Thoughts
Indian Domestic Airline Industry
Abstract
This article traces the evolution of the Indian domestic
airline industry and looks at the key inflection points in
its timeline. The Low Fare Carrier (LFC) entry, the
regulatory structure and the downturn in the industry
from 2007-09 is also analyzed in detail. The key players
are examined with an eye towards possible future
strategies.
Evolution of the Indian Airline Industry
The airline industry in India started off with the
establishment of Tata Airlines in 1932 by J.R.D
Tata as a division of Tata Sons Ltd. It became a
public company named Air India in 1946. Indian
Airlines was founded in 1953 by the merger of
seven independent domestic airlines as part of
the nationalization resolution.
The story till 1990 remained one of near
monopoly of the state owned airlines till the
onset of liberalization in 1990-91. In 1990, a sea
change in the airline industry came about under
the 'open skies policy' where private airlines were
allowed to operate taxi services. The policy
quickly prompted the formation of Air Sahara
and Jet Airways in 1991-92. The period 19921995 saw the introduction of Modiluft,
Damania, and East West among others with
great fanfare.
After an initial bout of success, all the new
airlines ran into trouble – in part a mix of poor
management, over ambitious operations, the
capital intensive nature of the industry and in the
case of East-West, the shooting of its CEO in a
gangland style execution! Most of these airlines
closed down in 1995-96; Modiluft was however
revived in 2005 as SpiceJet.
Airline
Alliance Air
ArchanaAirways
Damania Airways
East-West Airlines
ModiLuft
NEPC Airlines
Commenced Ceased
Operations Operations
1996
1991
n.a
1992
1994
n.a
2007
1999
1995
1995
1996
1997
n.a: not available
Table 1: List of defunct airline car riers
(http://en.wikipedia.org/wiki/List_of_airlines_of_I
ndia, last accessed on: Jun 01, 2009)
The only survivors from this attrition phase were
Jet Airways and Air Sahara. These two players
along with the state run Air India + Indian
Airlines controlled the entire airline market till
2003 when the first of the Low Fare Carriers
(LFCs), Air Deccan entered the market.
This proved to be the major inflection point in
the history of the airline industry as passenger
volumes grew at an explosive CAGR of 29.5%
from 2003-04 to 2007-08 driven primarily by the
low cost airlines. The key driver behind this
explosive growth was the aggressive pricing
strategy followed by the LFCs which
benchmarked their prices against first class and
AC train fares in a strategy borrowed from Herb
Kelleher of Southwest Airlines. Combined with
the convenience of online ticketing, LFCs
fuelled a big rise in the number of first time
travellers. Air Deccan was soon followed by
SpiceJet, GoAir and IndiGo with each of them
adopting variations of the low cost strategy; the
market shares of LFCs consequently increased
dramatically to 29.5% in 2006-07.
The aggressive pricing strategy followed by the
LFCs put tremendous pressure on margins and
21
caused an all out price war. The resultant
escalating losses forced a period of
consolidation with Air Sahara being acquired by
Jet Airways and renamed as JetLite and Air
Deccan being acquired by Kingfisher Airlines (a
50
CAGR. c.30%
Advent of LFCs
40
40
30
30
20
20
(%)
Passenger Volumes (mm)
50
10
10
0
0
-10
1995-96
1997-98
1999-00
2001-02
Domestic passengers
2003-04
2005-06
2007-08
Growth (RHS)
Figure 1: Domestic passenger traffic growth Sharp growth with entry of LFCs (DGCA,
CRISIL report on Airline Services, Nov-2008)
Full Service Carrier started by Vijay Mallya in
2005). The two state owned carriers Indian
Airlines and Air India also merged in 2007 to
form a new company National Aviation
Company of India Limited (NACIL).
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
12.9%
10.3% 10.7%
Bleak 2007-09 – Severe Downturn in the
Indian airline industry
A combination of factors resulted in the
quagmire the airline industry finds itself in.
Ambitious fleet expansion put pressure on
poorly-equipped airports and decreased service
quality of airlines. Indian carriers became
overleveraged – the estimated combined debt of
the top three airlines, Air India, Kingfisher and
Jet, totalled USD 8bn. Further, Indian carriers
made staggering losses of USD 640mn in 2008.
The major reasons for this dismal performance
were the global downturn and the increase in
ATF prices through 2008. Although ATF prices
eased off during H2CY2008, the Mumbai
terrorist attacks and the decrease in travel within
the IT industry proved to be major dampeners.
Inefficiency in operations, lack of consolidation
in ground crew, archaic security regulations
necessitating excess staff and low passenger load
factors due to compulsory serving of nonprofitable sectors (regulatory constraint) all
resulted in falling profitability every year.
1,400
1,200
7.2% 6.6%
-3.6%
-15.0%
6.1%
-14.0%
-17.0%
-20.5%
-20.7%
-18.5%
-15.3%
1,000
800
600
400
200
0
Jan-08 Feb -08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug -08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb -09
Traffic Growth (LHS)
ATF Prices (US$/kl)
Figure 2: Passenger Traffic growth and ATF prices (Bloomberg, Ministry of Civil Aviation monthly statistics)
22
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
PLFs dropped as low as 66% in 2008-09 as
traffic contracted and fares zoomed due to
corresponding hike in ATF prices (fuel
surcharge). Infact Indian load factors are
significantly below Asia Pacific and global
averages.
50
400
300
200
0
100
0
-50
1997-981999-00 2001-022003-042005-06
Operating revenue (LHS)
Operating expenditure (LHS)
Figure 3: Financial performance of
Indian carriers (IATA, Dec-2008)
70%
68%
66%
64%
62%
60%
2008-09 (E)
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
58%
Figure 4: Passenger Load Factors of
Indian Carriers (Analyst Reports)
Company
FY2007
Jet Airways
54
58
58
Indian Airlines + Alliance Air
53
55
57
Go Air
5
6
6
Indigo
9
18
23
Air Sahara
24
24
23
Paramount
5
5
15
Spicejet
11
15
15
Kingfisher Red
41
41
37
Kingfisher
28
41
37
6
6
6
Jagson Airlines
FY2008 FY2009E
As a response to the downturn, carriers have
begun fleet rationalization – Paramount and
IndiGo being the notable exceptions.
Regulatory Trends
Under current regulations, foreign airlines are
prohibited from holding equity in Indian carriers
– this regulation is expected to be relaxed in 2009
to allow shareholding of up to 25%, still not
sufficient for management control. However,
foreign investors other than airlines are allowed
to hold up to 49% of the equity in Indian
carriers. Current regulations also require
domestic airlines to operate for at least 5 years
and operate a minimum fleet size of 20 aircraft
before being permitted to operate on
international routes.
The government, considering the strained
liquidity positions of the airlines, has provided
flexibility in clearing dues of oil companies.
Further, custom duties on ATF have been
reduced from 5% to 0%. There is substantial
competition in both domestic and international
segments. The airlines are allowed to operate any
domestic routes with no restrictions on pricing.
The Indian government has pushed for bilateral
air service agreements with overseas markets,
engendering greater access to foreign carriers. A
bill to establish the Aviation Economic
Regulatory Authority (AERA) was passed in Oct
'08 with responsibility for regulation of
aeronautical changes and to safeguard the
interest of stakeholders at Indian airports. The
Government is expected to continue to restrict
new airline entry in 2009, but may issue licenses
for airlines planning to commence operations in
2010.
Table 2: Order book for Indian Carriers (DGCA,
CRISIL report on Airline Services, Nov-2008)
23
Ministry of Civil Aviation
(MoCA)
Overall regulator of airlines &
airports in India
Airports Authority of India
(AAI)
Control and management of
Indian airspace-primarily
airports
DirectorateGeneral of Civil
Aviation (DGCA)
Bureau of Civil Aviation
Security (BCAS)
Regulation of airline carriers flying
to/from/within India
Regulation of civil aviation security
in the country
Air Traffic Control (ATC)
Regulator
Controls landing and
departure of flights
Central Industrial Security
Force (CISF)
Provides security functions at all
airports
Airline carriers
Services
Services
Figure 5: Regulatory Landscape in Indian Airline Industry (DGCA,
Analyst Reports, CRISIL Airline Services)
Growth Drivers
Economic growth has been a key determinant
of passenger traffic. With India recording
impressive growth rates of 8-9% in the last five
years, the industry experienced a significant
increase in passenger traffic. This was affected
by the global recession which depressed the
country's GDP growth to 6.5%. However, after
the re-election of Congress to power there is
increased confidence among the airlines
regarding the economic recovery. Domestic
passenger traffic growth is likely to moderate to
9.1% CAGR from 2007-08 to 2012-13. All the
Indian players operate a young and relatively
modern fleet, considering the fact that a majority
of their growth has occurred in the last four to
five years. This ensures a richer experience for
the passengers, greater safety and lower
operational and maintenance costs for the
airline.
Strategic Direction for Major Players
Kingfisher and Jet (both Full Service Carriers)
are the dominant players in the industry while
Indigo is the dominant pure LFC. There is a clear
trade-off between market share and profitability.
The rush to gain market share resulted in
plummeting margins and poor customer service
levels.
Jet Lite
13.50%
Air India
17.20%
Indigo
12.10%
Jet Airways
17.80%
Spice Jet 7.40%
Go Air 3%
Kingfisher
26.80%
Paramount
2.20%
Need to Deleverage
The Airline Industry has traditionally been
highly leveraged. With a majority of the
domestic players reporting marginal profits (and
losses in some cases), their debt levels have
become unsustainable.
Improving debtservicing capacity will require deleveraging at
least until the industry recovers and the players
24
start reporting consistent earnings.
Figure 6: Market Shares of Indian Carriers, 2009
(Centre for Asia Pacific Aviation, 2009)
With an alliance between Jet Airways and
Kingfisher, the two largest private players, there
would be greater cooperation in ground
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h a n d l i n g c r e w, p a r k i n g b ay s, r o u t e
rationalization all with a focus on reducing costs.
Unlike global airlines, domestic Figure airlines
hedge a lesser proportion of their fuel
requirement. This hurt their profitability
severely when the crude oil prices surged. But
with the crude prices expected to ease out in the
future, ATF prices would soften, boosting the
bottomline of the domestic players. We have
positioned the Indian
Jet Airways: Undertook several cost-cutting
measures including reduction in capacity and
Kingfisher: It overtook Jet Airways to become
the dominant player in January 2009. In
February, it flew close to a million passengers.
While it has announced opening up of new
international routes, the company continues to
be cash constrained and needs capital infusion.
In the near term, Kingfisher will be aggressive in
expanding its market share. It may increase its
capacity in its low-fare brand, Kingfisher Red, to
75%.
Air India: Constant bureaucratic interference in
its functioning, huge workforce and other
inefficiencies sent Air India's market share down
Unexplored opportunities
PARAMOUNT
AIRWAYS
A world of difference
MDLR AIRLINES
Short
Stage length
Long
Figure 7: Strategic Positioning of Indian Carriers
this resulted in handing over the lead to
Kingfisher. As of March 2009, Jet Airways
occupied 17.8% of the domestic market while
Kingfisher had 26.8% of the pie. In the near
term, the focus of Jet Airways has to be on
improving profitability even if it comes at the
cost of losing market share. Further, it will be
moving most of its capacity to its low-fare
offering JetKonnect.
to 17.2%. Its poor passenger load factor of 57%
coupled with higher ATF prices and operational
costs has resulted in the national carrier needing
a government bail-out. The government's
proposed restructuring plan involves modifying
productivity pay schemes, deferring aircraft
deliveries and debt obligations. We expect Air
India to focus on regaining profitability without
worrying about its market share in the near
future.
25
Spicejet: Due to the economic crisis, several
passengers shifted from full-fare airlines to lowcost ones benefitting low-fare players such as
Spicejet. Further, investments from private
equity firms such as Wilbur Ross and Ishtithmar
have boosted its equity base. Spicejet is looking
to expand its presence in the domestic market
and looking for potential acquisitions. In the
near term, we expect it to strengthen its market
share through consolidations.
GoAir: With the surge in ATF prices GoAir has
substantially reduced its fleet. It accounts for a
miniscule 3% of the domestic traffic as of
March 2009. The PLFs have hovered ~70%, a
low figure for a LFC. The promoters are looking
to offload their stake in a business that they
deem unviable due to the existing competition
and regulatory regime. From our viewpoint, the
ideal strategy for GoAir, if it continues to
operate, is to focus on rationalizing costs,
concentrate on high volume sectors and move
away from the low cost model.
Indigo : Voted as the most punctual airline of
the year in India, Indigo has rapidly grown its
market share from 2.6% in 2006-07 to 13.5% in
2009. Further, its strong cash position, low
gearing ratio and operation based on sale and
lease back of aircraft puts it in a prime position
to expand market share in the future. We foresee
it becoming an attractive buyout target for PE
firms and for international carriers (if FDI
restrictions are lifted). We also predict an active
foray into international routes – especially the
highly profitable short distance Middle East
sectors.
Paramount Airways: follows a unique business
model of short distance business only service
concentrated in Tier-2 business centres and has
been immensely successful. Its success in the
domestic market has propelled it to venture into
the overseas market. It has recently announced
plans to acquire aircrafts to kick-start its overseas
operations. We believe that a logical extension of
26
their strategy to northern India combined with
short distance international routes (Sri Lanka,
Middle East) would be the way forward for
Paramount Airways.
Conclusion
From the inception of the first carrier in 1932,
the Indian airline industry has gone through
three inflection points. The first was the
implementation of the Open Skies policy in
1991 which resulted in the first wave of Indian
private carriers. The second was the entry of the
Low Fare Carrier (LFC) Air Deccan in 2003 and
the third inflection point was the traumatic
2007-09 period of the global economic
downturn, the effects of which is still being felt
now. We foresee the emergence of niche
segments like business-only and premium long
haul in the near future apart from consolidation
among the LFCs.
Author (s)
Kaushik Sriram is a 2nd year PGP student at
IIM Bangalore. He holds a Bachelors degree in
Electronics & Communication Engineering
from National Institute of Technology (NIT)
Tri chy a n d c a n b e r e a ch e d a t
kaushik.sriram08@iimb.ernet.in.
Ganesh Kumar L is a 2nd year PGP student at
IIM Bangalore. He holds a Bachelors degree in
Computer Science Engineering from PSG Tech,
Coimbatore and can be reached at
ganesh.kumar08@iimb.ernet.in.
References
1.
http://home.airindia.in/SBCMS/
Webpages/JRD.aspx?MID=196
(Last accessed on: May 28, 2009)
2.
Tarun Shukla, Jun-2008, SpiceJet,
Modi call truce; to sell 11.5 mn shares,
& others
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India's Port Economics: Developing
Sea Ports as Strategic Assets
Abstract
For centuries, seaports have served as vital economic
lifelines by bringing goods and services to people around
the world. Today, seaports remain a critical component of
our nation's economy. Not only do seaports deliver goods
to consumers and export India-made products overseas,
they create millions of jobs and generate billions of
dollars in central, state and local tax revenue. However,
India's major seaports suffer from a few chronic
deficiencies, which are stifling its economic growth, and
require urgent attention.
Introduction
With the advent of globalization, India has
emerged as a major player in international trades,
with its foreign dealings of approximately USD
400 billion an year. More than 95% of these
trades are handled by ports. Fast-increasing
exports of India-made goods through India's
seaports to overseas buyers are helping buoy the
Indian economy. Port infrastructure thus is
expected to play a crucial role in boosting India's
status as a major global
12.00%
1.800
1.615
10.00%
1.417
1.600
9.60%
1.379
1.321
8.00%
1.228
7.40%
1371
7.00%
6.30%
6.00%
4.00%
1.200
1.000
5.10%
3.60%
1.400
0.800
3.90% 4.00%
0.600
2.90%
0.400
2.00%
0.200
0.000
0.00%
The 50's
The 60's
The 70's
CAGR Part Traffic %
The 80's
CAGR GOP %
The 90's
2000-2007
Ratio
Figure 1: Correlation between GDP growth
and Port traffic growth
economy. Sadly for us though, the lacklustre
performance by our seaports when compared to
their global counterparts has been preventing
Indian economy from realising its true potential.
In 2005-06, all Indian ports combined together
handled a total of about five million TEU
(twenty-foot equivalent units), whereas the
Chinese ports recorded a whopping throughput
of more than 74 million TEU. Many ports
internationally are preparing for the new
generation, ultra large container ships, capable
of carrying 12,500 TEUs, and Post-Suez-Max
(up to 18,000 TEUs) and Post-Malacca-Max
(over 18,000 TEUs) while JNPT in Mumbai,
despite being India's leading container port, is
still unable to handle 14-metre draught vessels
that can carry 6,000 TEUs. Larger mainline
vessels continue to bypass the Indian coast.
None of the top-10 container carriers in the
world – the 10th biggest has a capacity of 9,040TEU – can call on an Indian port now, or in the
immediate future.
Need for Port Development
Currently, Indian government follows a
demand-driven strategy when it comes to port
development. All the 12 major ports in the
country have been running at a capacity
utilization of more than 90%. Looking at the
strong correlation between GDP growth and
growth in port traffic, this puts a self-imposed
cap on the trading capacity of the country and
restrains the GDP growth.
With regards to infrastructure development, the
government needs to realize it always has to be
supply-leading-demand, with the supply
automatically generating demand after a certain
time lag.
27
The primary losers in the context of the
inefficient scenario prevailing in the port sector
are the Indian exporters and importers. The
global carriers are compelled to tranship more
than half of India's export-import containers at
foreign ports, with Indian companies having to
put up with higher costs and lost time. Thus,
despite the low labour costs and production
economies of Indian manufacturers, the
resulting higher landed costs render their
exports non-competitive vis-a-vis those
exported from other more efficient ports.
Major Ports:
West Coast
1.
Kandla (Gujarat)
2.
Mumbai (Maharashtra)
3.
Jawaharial Nehru (Maharashtra)
4.
Mamugao (Goa)
5.
New Mangalore (Karnataka)
6.
Cochin (Kerala)
East Coast
1.
Tuticorin (Tamil Nadu)
2.
Chennai (Tamil Nadu)
3.
Ennor (Tamil Nadu)
4.
Visakhapatnam (Andra Pradesh)
5.
Paradip (Orissa)
6.
Kolkata Haldia (West Bengal)
Figure 2: Location of major ports in India
The time delay in shipment prevents the Indian
exporters from availing “fixed-day-of-the-weekservices” offered by the liner industry at a time
when manufacturing and trading companies
abroad were increasingly selling and buying on a
“just-in-time” basis. Indian exporters have to
thus operating on the basis of substantial buffer
stocks, which made them even less competitive
in global markets.
Seaports represent a stable source of long-term
revenue and thus have the potential to attract
large number of investors, but a sceptical
attitude towards port development by the
government is preventing significant foreign
investments to flow into the country. Despite
being strategically located in close proximity to
28
450
120.00%
Capacity Utilization
500
96.56%
83.72% 86.50%
105.43%
400
88.46%
92.58%
96.48%
100.00%
350
80.00%
300
250
60.00%
200
40.00%
150
100
20.00%
50
0
0.00%
1999-00
2000-01
Traffic (MT)
2001-02
2002-03
2003-04
Traffic Capacity (MT)
2004-05
2005-06
Capacity Utilization
Figure 3: Capacity Utilization of Indian ports
major world shipping routes on both east coast
and west coast, India doesn't have any
transhipment hub, foregoing approximately Rs.
1000 crores every year in central, state and local
tax revenue. The port core sector constituted
around 4% of Hong Kong's GDP in 2002 and
about 110,000 jobs, or 3.4% of total
employment is closely linked to the port.
Compared to this, contribution from Ports to
India's GDP and employment is miniscule. For a
country with global aspirations and ambitions to
emerge as an economic giant, a burgeoning
external trade, a rich maritime history and a vast
coastline, this is a gloomy scenario.
Overall, the chronic congestion and inefficiency
in Indian ports could be the major stumbling
blocks that stifle the nation's industrial and
economic growth and require a paradigm shift in
operational philosophy.
Problems with current Infrastructure
The Indian ports are highly inefficient when
compared to international ports. The
inefficiency is clearly reflected from the fact that
Indian ports' average turnaround time is 3.85
days compared with 10 hours in Hong Kong.
The state-run ports take four times as long as
rivals elsewhere in Asia to unload and reload
container ships. As a result global carriers are
compelled to transship more than half of India's
export-import containers at foreign ports, with
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Indian shippers putting up with higher costs and
lost time. As a result of the uncertainty
associated with container movements in Indian
ports in general, the major container operators
resist sending their main-line (mother) vessels to
India. Thus, Indian exports and imports are
typically carried by feeder vessels through transshipment centres in Colombo, Singapore, and
Dubai. These additional cargo operations
increase the freight rate and chances of loss and
damage besides lengthening the cycle time
considerably, putting Indian products at a
competitive disadvantage in the global market.
It costs 50 per cent more to call on a port in
India, compared to Dubai, Singapore or
Colombo. Many a times, Indian port costs are
more than double other international ports.
According to a McKinsey study, the transit time
from Indian factories to retail outlets in the US
was 6-12 weeks in comparison with two or three
weeks from China. Road and rail systems are
deficient beyond the ports. Poor links raise
transport costs to 8-9% of total shipping costs,
compared with 3-4% in developed countries. A
multi-tiered bureaucracy with no real authority
vested in one source, and complex clearance and
taxation procedures compounds the problem.
Development and improvements are being held
back by poor planning, red tape and bureaucracy.
Other problems cited with Indian ports include
absence of equipment maintenance, lack of
coordination of port activities, shallow port
draft that preclude the handling of modern
container vessels, and a virtual nonchalant
attitude towards the changing nature of
international trade and technological advances.
In most of the ports while the main road is in
good shape, the feeder roads leading to
container freight stations are in a pathetic state.
Because of all this, trucks have to wait for several
hours, even days to clear cargo. A recent example
of this has been Nava Sheva Port where the pileup of trucks with export cargo hit an all-time
high with the waiting period going up to as much
as 40 days.
Strengths
Wearlesses
Opportunities
SWOT
Figure 4: SWOT analysis of Indian ports
Recommendations
Developing transhipment hub
According to the Tenth Plan document, India is
losing about Rs. 1,000 crores per annum for not
having a transshipment port. Currently, US $ 150
is levied in Colombo for trans-shipment and US
$ 130 in Dubai and Singapore for the same. A
single container trans-shipped from Colombo
port to Cochin incurs an expense of US $ 1,200.
If it directly landed at Cochin, it would have
costed only US $ 400. Therefore by developing a
well equipped trans-shipment hub, India can not
only garner a substantial portion of
transshipment fee, but also save a lot of money
charged by feeder vessels.
Marine
JMP
Mundra Cochin Chennai Visakha Dubai Singapure Hong Colombo
Change
Kong
Patnam
US$
Port
Dues
2.785 14,300
Pilotage 4,961
5,980
6,526
1,275
1,566
1,389 1,911
14,466 9,282
8,845
2,031 1,911
6,656
347
691
Tug
409
1,154
1,447 764
Berthing
259
166
148
447
1,535
967
15,818 2,290
5,112
5,982 4,696
Harbour
Dues
Berth
770
1,300
Total
8,515 15,600
Charges
2,059
601
23,182 15,863
109
Table 1: Cost structure of Indian vs other ports
29
India is strategically positioned on the world
geographic map, with proximity to international
shipping connecting Persian Gulf, Far East and
Australia route and East-West shipping axis also
supports the need for developing a transshipment hub. Its 7517 km long coastline has
many deepwater areas having deep drafts,
especially in Kerala, which allows the servicing
of large ships with capacities of more than 6000
containers. If need be, Andaman and Nicobar
Islands also provides a viable option.
A Greenfield transhipment port developed at a
suitable site would provide flexibility in design
and expansion so as to bring efficiencies in the
system and bring down the cost of shipment.
The Kwai Chung container port in Hong Kong
is the classic example of near-perfect market
dynamics. The prices of services provided are
determined by market forces, and not the
regulator. In India, Tariff Authority for Major Ports
(TAMP) is the central authority for fixing tariffs.
Tariffs at major ports are set on cost plus basis
guaranteeing ROCE of 15%, thus providing no
incentives for reducing costs and creating
competition.
Average Inventory days
32.5
24.2
19.5
Promoting Competition
Absence of inter-port and intra-port
competition which has been responsible for
substantial productivity increases in other
countries is absent in India due to poor inland
connectivity and a policy regime that protects
domestic ports against competitive pressures.
The port user does not in practice have the
option to shift his goods from one port to
another or between service providers within the
same port. It is only at JNPT that there are two
competing agencies handling container traffic,
and perhaps this is the reason behind JNPT
being the most efficient major port in India.
Brazil
China
India
Figure 6: Average Inventory days at different ports
TAMP needs to be specifically mandated to
improve efficiencies or lay down quality of
service standards in port operations. There is a
need for TAMP to develop a pricing mechanism
which relates tariff to efficiencies, and move
towards fixing uniform principles for fixation of
tariffs rather than fixing the tariffs itself.
Service Port Model to Landlord Port Model
Turnaround Time
at ports (hours)
7.0
7.0
Singapore
Hong Kong
84.0
India
Figure 5: Turnaround time at different ports
30
A 1997 review of the top 100 container ports of
the world showed that 88 out of 100 ports
conform to the Landlord Port model. As per this
model, the port authority consists of a landlord,
which manages the basic port assets by letting
land and infrastructure to port operators in an
efficient manner. The Landlord Port would be
involved in planning, lease negotiation, safety,
navigation and overall coordinating functions.
Other services like cargo, marine, ancillary,
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coal and iron ore and five hours for ships that
haul cargo-laden containers.
berths etc are privatised on captive/BOT basis
to the primary port users. Port operators and
other concerned entities which need to be
located in the Port, lease the land, infrastructure
and associated services and provide them to the
secondary users - cargo owners, ship owners and
cargo ship owners.
Reforming clearance mode
Efforts should be made to simplify port
clearance procedures including customs, which
are considered as a major bottleneck in the
export and import transactions. Advance
declaration and goods released upon arrival;
implementation of an IT-system for Electronic
Data Interchange (EDI) paperless clearance;
and promotion of logistics companies dedicated
to assisting in port clearance could be some of
the methods to make progress in the clearance
procedures.
With intense competition, the role of Indian
ports has to change from a Service port model to
a Landlord port model.
Round the Clock Operations
Indian ports don't work round the clock.
According to an estimate, if the non-working
time is reduced from three hours to half an
hour each day, the turnaround time of ships
will reduce by 10%. This would save 12 hours
for dry-and-break bulk carriers calling at these
ports to load and unload cargoes such as steel,
Simplifying tax regime
Currently, India levies a dozen of taxes from
shipping companies, which makes them hesitant
to do business here. India should take a lesson
lndia
China
25%
Current Traffic
8-9%
5 millon TEU
TAT
84 hours
7 hours
Projected Growth
Servicing charges per vessel of 2500 TEU USS8000-23000
74 million TEU
USS 5000-6000
Contribution to GDP
Transporation cost (as a % of total
8-9%
3-4%
Policy making
Centralied
Decentralized
Tariff
Cast-plus
Competition-driven
Investment in ports
Demand-driven
Supply-driven
lnvenlory Days
32.5
24
Transit time to US delivery
6-12weeks
2-3 weeks
Shipping cost)
Table 2: Qualitative and quantitative comparison of Indian vs Chinese ports
31
from Singapore where the presence of a single
tonnage tax has been a major attraction to
shipping companies.
Hinterland Connectivity
An efficient multi-modal system, which uses the
most efficient mode of transport from origin to
destination, is a prerequisite for smooth
functioning of any port. This necessitates
coordinating rail and road networks to ensure
good connectivity between ports and the
hinterland. Besides, it is required that laying,
strengthening and widening of roads is done on
a regular basis for connecting the ports. These
projects provide a good opportunity for private
sector to create infrastructure in India.
Author (s)
Ajay Jain is a 2nd year PGP student at IIM
Bangalore. He holds a Bachelors degree in
Electrical Engineering from Indian Institute of
Technology (IIT) Roorkee and can be reached at
ajay.jain08@iimb.ernet.in.
Atishay Jain is a 2nd year PGP student at IIM
Bangalore. He holds a Bachelors degree in
Civil Engineering from Indian Institute of
Technology (IIT) Delhi and can be reached at
atishay.jain08@iimb.ernet.in.
References
1.
Iyer, Ramnath, 2008, “Port: Sector
Trends?, CRISIL Infrastructure Advisory
2.
http://www.indiacore.com/ports.html
3.
http://ennoreport.gov.in/landlord.html
4.
http://www.ibef.org/artdisplay.aspx?
cat_id=114&art_id=2255
Define Common performance measures
These can be turn around time of ships in hours
from outer anchorage to berth and outbound
voyage, of trucks in minutes, trains in hours,
documentation processing speed, customs and
clearance speed, to mention a few. There is a
need to check the performance of different
supply chain partners with the benchmark, and
any deviation gaps must be addressed.
32
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How Open Source is changing the world
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Does downsizing & price-cutting really work?
Abstract
Desperate situations call for desperate measures. General
Motors (GM), which declared bankruptcy recently, has
announced that it will downsize salaried employment by
20% (around 6000 positions) as part of its restructuring
operations (Green, 2009). Experts have opined that it has
to reduce the prices of some of its models by at least 40%
in order to meet sales targets (Reiter, 2009). GM is not the
only company to adopt such measures. Downsizing and
price-cutting are widely believed to be the ultimate
weapons to improve cash flow problems. What is the
reason behind this perception? Do these always yield the
desired results? What are its inherent risks? Let's
explore.
Introduction
In the current recessionary environment,
companies might at times face short-term cash
flow problems. Managers often respond to such
situations by downsizing and/or slashing prices,
as they don't have sufficient time to analyze and
choose other better alternatives. Also, these
steps are considered to give definite results.
However, contrary to popular belief, these
measures do not yield the desired benefits in all
situations. Besides, these measures could cause
some irreparable damage, which might
eventually lead to the company's downfall. This
article explores the reasons why such measures
fail and highlights the risks in adopting them so
that managers are in a better position to decide
by weighing the potential costs and perceived
benefits.
Why downsizing?
Proponents of the organizational learning curve
theory argue that as an organization progresses
along the learning curve, its productivity
increases and fewer people are required to do the
same job (Fioretti, 2007). Therefore, it is believed
that as an organization grows, it 'accumulates
fat', i.e. it will have more employees than actually
required. Further, people costs constitute 3080% of the general and administrative costs of
most companies. Hence, downsizing is believed
to achieve the dual objective of reducing costs
and increasing productivity. Organizations are
expected to become 'lean and mean' by 'cutting
the fat' (Cascio F.W, 1993).
Does downsizing work?
A 1991 study of 1,005 firms by Wyatt Company
revealed that only 46% of the companies were
able to achieve satisfactory cost reductions
through downsizing. Even the productivity
improvement was negligible. Moreover, in 80%
of the cases, managers eventually replaced the
people who had been dismissed (Cascio .F.W, 1993).
In some cases, employees might be entitled to
benefits equivalent to their salary if they are
dismissed. When some steel producers in USA
laid off their senior employees, they discovered
that the union contracts committed them to pay
a substantial portion of the salary to the
employees even after their dismissal (Nagle .T.T
and Hogan .J.E, 2009).
Risks in downsizing
Research has proven that downsizing has some
permanent psychological effects on the
employees in the organization (Kets de Vries M F R
and Balazs K, 1997). Employee morale lowers,
productivity dips and distrust of the
management develops (Cascio .F.W, 1993). This can
in effect impede organizational growth.
39
Why price-cutting?
Alternatives to improve cash flow
While downsizing is expected to improve cash
flows by reducing labour overhead, price-cutting
is expected to do the same by increasing sales
revenue. The belief that price-cutting will
increase sales can be traced to the fundamentals
of economics. Most managers, having studied
economics, believe that demand is inversely
related to price. People working in marketing will
vouch that this assumption doesn't always hold
(Trout .J, 2000).
In order to improve short term cash flows
without downsizing, an equivalent reduction in
wages can achieve the objective without the
undesirable side-effects. Wage reduction is often
not preferred because it might reduce the
company's competitiveness in the labour
market. However, recessionary times are an
employer's market and an organization that
doesn't downsize is likely to be in a position of
strength in the labour market. Such measures
have already been successfully adopted in South
Korea which shows that this is a feasible solution
(Ramstad .E, 2009). This is just one of the
possible alternatives that could be explored.
Does price-cutting work?
Study of customer buying patterns has shown
that price is never the sole parameter on which
the buying decision is made (Nagle .T.T and
Hogan .J.E, 2009). Therefore, understanding
customer needs and working towards satisfying
them better is a more definite route to increasing
sales. In fact, price cuts can prove
counterproductive. Price cutting can lead to
lowering of perceived product quality in the
consumer's mind, which will lead to decrease in
sales (Shawyer .D, Norman .F and McGann .A,
1972). Moreover, price-cuts can result in price
wars where competitors keep reducing prices
until the business itself becomes unsustainable.
Risks in cutting prices
For any product, the reference price is a
psychological reference point in the consumer's
mind. A consumer mentally compares the
product's price with its reference price and buys
it only if he feels that it is fairly priced
(Gurumurthy .K and Winer .R.S, 1995).
Companies, by maintaining perceptions, try to
keep the reference price high so as to earn
maximum margins. Price cuts result in a
permanent lowering of reference prices. This
results in a regular loss of margins. In addition to
this, the lower reference price reduces perceived
product quality, which further reduces sales.
40
When it comes to increasing sales, only the
company that can understand the consumer's
varying psychology and can tailor its offering
accordingly will emerge triumphant. Take the
case of Hyundai for example. It is understood
that the decreasing auto sales in USA were
because consumers feared losing their jobs.
Even those who had relatively secure jobs were
reluctant to buy cars. So it introduced a scheme
where customers could return their cars if they
lost their jobs (Vlades .P.D, 2009). While other
auto majors like GM were experiencing a drop in
sales, Hyundai was among the rare few who
registered a rise in sales. The risk of customers
returning cars was also low as only those who
were relatively secure about their jobs availed
this scheme.
Conclusion
Downsizing and price-cutting can have a long
lasting impact on the performance of the
organization. Any action that has such an
enduring impact should be in alignment with the
organization's vision and goals. The belief that
downsizing and price-cutting are powerful tools
for solving cash flow problems rests on some
impractical assumptions. Hence, considering the
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
long-term and undesirable side-effects, a
manager has to first exhaust all other options
and only then, after carefully weighing the costs
and benefits, adopt such measures if necessary.
Else, as the old saying goes, haste makes waste.
6.
Nagle .T.T and Hogan .J.E, 2009, The
Strategy and Tactics of Pricing, New Delhi:
Dorling Kindersley, pp. 17-28, 177
7.
Ramstad .E, 2009, “Koreans Take Pay
Cuts to Stop Layoffs”, Wall Street Journal,
Mar 2009,
http://online.wsj.com/article/SB1236039
44366614685.html (Last accessed on: Jul
10, 2009)
8.
Reiter .C, 2009, “Opel May Slash Prices
40% to Boost Sales, Save Jobs ”, Bloomberg,
Jun 2009,
http://www.bloomberg.com/apps/news?
pid=20601087&sid=aBK5dmsP375w
(Last accessed on: Jul 10, 2009)
9.
Shawyer .D, Norman .F and McGann .A,
1972, “The effect of price cues on
perceived product quality in a grocery
shopping simulation”, European Journal of
Marketing, Vol. 6 Issue. 4, 1972, pp. 217222
Author (s)
M Arun is a 2nd year PGP student at IIM
Ahmedabad. He completed his Bachelor's
degree in Mechanical Engineering from
National Institute of Technology (NIT) Calicut
and can be reached at 8marun@iimahd.ernet.in.
References
1.
Cascio .F.W, 1993, “Downsizing: What do
we know? What have we learned?”,
Academy of Management Executive, Vol. 7
No. I, 1993, pp. 96-104.
2.
Fioretti .G, 2007, “The organizational
learning curve”, European Journal of
Operational Research, Vol. 177, 2007, pp.
1375-1384.
3.
Green .J, 2009, “New GM Will Build on
'Battlefield Triage' Intensity ”, Bloomberg,
Jul 2009,
http://www.bloomberg.com/apps/news?
pid=20601087&sid=aaRDCZaKYJcY
(Last accessed on: Jul 10, 2009)
4.
Gurumurthy .K and Winer .R.S, 1995,
“Empirical generalisations from reference
price research”, Marketing Science, Vol. 14
No. 3, 1995, pp. 161-169
5.
Kets de Vries M F R and Balazs K, 1997,
“The downside of downsizing”, Human
Relations (USA), Vol. 50 Issue 1, Jan 1997,
pp. 11-50.
10. Trout .J, 2000, “Why Price Cutting Is a
Poor Marketing Tool”, Differentiate or Die:
Survival in Our Era of Killer Competition,
2000,
http://www.businessweek.com/smallbiz/
0006/bk000605.htm (Last accessed on: Jul
10, 2009)
11. Vlades .P.D, 2009, “Laid off ? Hyundai will
take your car back”, CNN, Jan 2009,
http://money.cnn.com/2009/01/05/auto
s/hyundai_assurance/index.htm (Last
accessed on: Jul 10, 2009)
41
Source - Image: (c) Rennet Stowe, Creative Commons, Flickr
Campus Thoughts
Divestment in Public Sector Undertakings
Abstract
This article discusses the much debated divestment plans
of the government from the various Central Public Sector
Undertakings popularly called PSU. How divestment
will impact these PSUs? Is it necessary at all for the
government to divest in the first place? We can analyze the
arguments both in favor as well as against the divestment
in PSUs in this article.
get rid of these loss making PSUs so that the
g over nment can concentrate on the
development activities of the nation. In the wake
of fiscal deficit ballooning to 6% of the GDP
and worse even more, it also made more sense if
it was financed from the divestment of these
PSUs hence the voice grew louder and stronger.
Introduction
Post independence period the Indian
entrepreneurs were yet to sprout and the capital
was scarce to invest. So, in the second five year
plan, in the fifties, it was decided that
government will step in as an entrepreneur in
some key sectors like the heavy industrial sector
that would make the country self reliant. The
number of PSUs then over the period grew to a
total of 242 which are classified into four
schedules, 52 in schedule 'A', 83 in schedule 'B',
64 in schedule 'C', 11 in schedule 'D', and 32 as
uncategorized. (Ref:http://persmin.nic.in/ pesb/
pesb-psu-completelist.htm). These are also
categ orized as Navaratna, Miniratna
(Category I and II).
Glimpse of PSUs
Before we frame our point of view let us have a
glimpse facts about the performance of the
PSUs. Considering the PSUs which have
turnover of over Rs 2 bn which are about 123
out of the total 242 contributed together an
aggregate annual total income of Rs 13,037.62
bn and net profit of Rs 1,128.15 bn in FY07. In
fact, the aggregate total income of the profiled
companies is equivalent to 31% of the country's
gross domestic product at current prices for the
fiscal 2007. The profit margins of the top PSUs
are listed in the figure 2. The profit margin of
almost all the sectors with the exception of
Insurance and trading sectors are healthy and
comparable to the private sectors. The Return
on capital employed on the top 10 PSUs are also
as is evident from the figure 3 is healthy.
Failure of PSUs
These PSUs which were created to give impetus
to the economy and help the private sector to
grow later became burden for the government in
the form of loss making bodies. Various factors
attributed to the failures of the PSUs are
bureaucracy, inefficiency in operation, lack of
technological innovation and otherwise. Also
one of the major reasons of the failure was that
in the post independence period these PSUs
were majorly export pessimistic and worked on
the principle of 'import substitution' hence were
technologically lagging. Thus there were calls to
In 2008, the public sector companies paid over
33.5% of their net profits as dividends, whereas
their private sector counterparts paid 20.6% of
their profits as dividends. Now, to finance the
fiscal deficit if the government is planning to
disinvest from these firms it will be a one time
return and will have to forego the dividends
from these firms (at least the part that was
divested). The government might also not want
to divest more than 49% and thereby retain the
management control of these organizations. In
that case removing inefficiency by any major
decision that will have a political impact will be
43
Sector-wise Net Profit Margin (%)
40
36.44
35
Percentage
30
28.90
22.42
25
18.81 18.71
20
14.62
12.01 11.32
15
10.39
5.82
10
2.60
5
0.68
Ot
he
rs
S
&
n
teg
He
ee
av
l
yE
ng
g
Ba
nk
in g
Oi
l&
Ga
s
In
su
ra
nc
e
Tr
ad
ing
Tr icait Tele
an
on
sp
or
ati
on
Ir
o
we
r
Po
m
m
un
Co
Po
rt
S
Pr erv
ov ic
id e
er
Co
al
0
Figure 1: Port services and Coal emerged as the most profitable sectors,
with Net Profit Margins of 36.4% and 28.9% respectively
ROCE-wise (%) Top 10 PSUs
Hindustan Aerocautics Ltd
84.3
STCL Ltd
72.5
National Mineral Development Corporation Ltd
60.6
National Buildings Construction Corpn Ltd
58.0
56.5
Orissa Minerals Development Co Ltd
Mazagon Dock Limited
51.6
PEC Ltd
48.9
Indian Railway Cateriang & Tourism Corpn Ltd
47.7
47.6
National Aluminium Company Ltd
Mahandi Coalfields Ltd
47.5
0
10
20
30
40
50
60
70
80
90
100
Return on Capital Employed (%)
ruled out which in turn will mean that it will still
be under the clutches of bureaucracy. Thus the
following points for divestment in the PSUs
becomes invalid
In 2008, the public sector companies paid over
33.5% of their net profits as dividends, whereas
their private sector counterparts paid 20.6% of
their profits as dividends. Now, to finance the
44
fiscal deficit if the government is planning to
disinvest from these firms it will be a one time
return and will have to forego the dividends
from these firms (at least the part that was
divested). The government might also not want
to divest more than 49% and thereby retain the
management control of these organizations. In
that case removing inefficiency by any major
decision that will have a political impact will be
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
ruled out which in turn will mean that it will still
be under the clutches of bureaucracy.
Thus the following points for divestment in the
PSUs becomes invalid
·
The PSUs are loss making bodies or give
low profits
·
They give low return on investment and
pays less dividends
·
The inefficiencies can be removed if
divested
·
The divestment will provide a better way to
make money for the government.
Or is it?
Reasons for Divestment
If the PSUs are so profitable then why should
the government go for divestment? There are
various factors involved. Many of the PSU firms
is in their sectors enjoy a near monopoly or these
firms are heavily subsidized and hence enjoy the
benefits that no other private firm can have.
Also, not all PSUs are profit making. There are
many PSUs that are incurring losses. To improve
the efficiency of these firms would require
major restructuring (read right sizing) of the
firm which cannot be done under the
government due to political reasons. But these
can be done under the banner of a public listed
company.
Further, the funds obtained from the divestment
of these firms can of course be used to finance
the current fiscal deficit as any money made out
of these loss making PSUs do benefit the
government. Also if these PSUs are turned
profitable, government can also enjoy the
dividend which would then become a win-win
situation. The assumption here is that the
revamp of the firm will be carried out smoothly
without the state intervention in the operational
(including labor) matters.
Conclusion
The figure below shows the number of state
owned in various OECD countries. It only
shows that the presence of SOE is not
uncommon even in the developed countries.
PSUs are not necessarily inefficient or against
the market (private firms). So, government
should not divest in the PSUs for the sake of it or
to just satisfy the investors and show the pro
capitalist nature of the government. The
government also should take care that the firms
that are in need of fresh capital are adequately
served by divesting in these firms and bringing in
fresh capital and fresh management to sort out
the inefficiencies in those firms while it can
continue to benefit from the dividends from the
profit making PSUs. These PSUs are created
with a purpose to create large benefits to the
society. So, a balanced approach towards
maintaining profitability and competitiveness of
the firm as well as the social good to the society
derived from these PSUs.
Author (s)
st
Praveen Karthick S is a 1 year student
at IIM Calcutta and can be reached at
praveens2011@email.iimcal.ac.in
References
1 http://www.dnb.co.in/TopPSUs/
overview.asp
2 http://www.dnb.co.in/TopPSUs/
industryinsights.asp
3 http://economictimes.indiatimes.com/
articleshow/msid-3967558,prtpage-1.cms
4 http://persmin.nic.in/pesb/pesb-psucompletelist.htm
45
Source - Image: (c) Ron Almog, Creative Commons, Flickr
Campus Thoughts
Weather Derivatives (An Indian Perspective)
Abstract
In today's world, weather is not merely an environmental
factor, but a major economic factor as well1. Many
industries are significantly impacted by the weather
directly, and this might have an indirect chain impact on
other upstream or downstream industries. Hence, a
hedging against the risk posed by weather by various
businesses whose revenues and profits are impacted by
variations in weather is a very viable activity.
Introduction
It is estimated that nearly 20% of the US
economy is directly impacted by the weather,
and that the profitability and revenues of
virtually every other industry – agriculture,
energy, entertainment, construction, travel and
others – depend on the vagaries of temperature1.
Weather insurance did exist earlier, to provide
cover against certain eventualities related to
weather. However, this usually covered events
occurring with low probability, and posing high
risk, usually resulting in heavy losses (like a
hurricane). The insurance policies were highly
tailored, and usually expensive. Moreover, it
required a 'demonstration' of the loss, which
might be an uphill task given the strict legal
covenants, however real the loss might be.
Weather derivatives emerged as an instrument to
hedge against the risk posed by low-risk, highprobability events in weather, which might not
lead to a heavy loss in earnings or losses of
assets, but slight variations in earnings. In 1997
the first OTC weather derivative trade took
place, and the field of weather risk management
was born1. In 1999, the Chicago Mercantile
Exchange (CME) took weather derivatives a step
further and introduced exchange-traded weather
futures and options on futures - the first
products of their kind1.
Just as an option on a commodity has as its
underlying asset the price of the commodity, a
weather derivative has as its underlying 'asset', a
weather measure2. In US, where the market for
weather derivatives, both the OTC and the
standardized CME version, has reached some
maturity, the underlying measure is usually
temperature3. Energy companies are primarily
the hedgers in the OTC segment of the market.
In the exchange traded version, the individual
contracts are calendar-month futures (swap)
contracts on heating degree days (HDD) and
3
cooling degree days (CDD) .
A degree-day (DD) has emerged as a common
measure of temperature, and measures the
deviation of a day's average temperature from
the reference. An HDD occurs when the average
temperature is below the reference and a CDD
when the average temperature is above. The
futures contracts pay $100 per each point
movement in the index. Earth Satellite
Corporation, an independent entity, calculates
the indexes ensuring transparency and
independence in the benchmark1.
Indian Context
In the Indian context, our economy would be
dependent on the Rainfall, and not temperature,
as in the case of US. Fifty per cent of agriculture
is based on rain-fed irrigation, and monsoons
determine rural demand patterns4. Thus the
industries providing inputs to agriculture, such
as fertilizers, genetically treated, or normally
generated seeds, agricultural tools like tractors,
combine harvesters, pesticides etc, as well as
47
industries selling consumer goods to rural
markets, the top and bottom line of all would be
impacted by weather patterns. Moreover, there
are urban industries like Airlines, Travel and
Tourism, entities like Shopping Malls,
Amusement Parks, Restaurants, or even Large
sporting events like the World Cup or IPL, which
are significantly impacted by rainfall (negatively,
in most cases). Hence there is indeed a huge
scope for introducing Rainfall derivatives in
India.
Devising new instruments for India
As of today, there are no standardized Rainfall
based derivatives traded anywhere in the world.
Hence a major challenge lies in devising and
standardizing such derivatives.
The average rainfall in India is about 117cm a
year, with about 75% of that coming in the
monsoon months of June to September5. From
this data, we can calculate an average rainfall per
day, in the monsoon months (comes to 1 cm or
10 mm per day). Of course, this will come out to
be different for different parts of the country,
and those differences would also have to be
taken into account, but for the sake of simplicity,
let us consider this to be the average expected
rainfall per day.
Futures: A Rupee value can be assigned to each
millimetre of rainfall, and Futures contracts can
be traded on an exchange (like CME does), with
certain parties which benefit from rain, like
agriculture or related industries assuming
counter-positions against parties to whom rain is
detrimental, like certain urban sectors and
entities talked about earlier. The futures
accounts will be marked to market (in this case,
the payoffs made based on the rainfall data of
the previous day to the involved parties).
Forwards: OTC forward contracts can also
come into play, in which the sum total of rainfall
46
over the given period can be evaluated against
the average rainfall benchmark, and the contract
can be settled accordingly.
Options: Another alternative can be Introducing
concepts of Wet days or Dry days, similar to the
HDD and CDD in US markets. These would be
calculated as:
Wet Day = max (0, Real Rainfall –
Average benchmark Rainfall)
Dry Day = max
(0, Average Benchmark Rainfall – Real Rainfall)
The number of Wet or Dry days would
accumulate over a period of time. Option
contracts can thus be sold with the WD or DD
indexes as the underlying. Notional Rupee
amounts will have to be allotted to them, in order
to determine the payoffs.
For example consider a WD call option with 100
Wet Days as the 'Strike', paying Rs 100 per Wet
day.
Payoff = Rs 100 * Max [0 , CDD(actual) –
100(strike)]
Combinations of Options or Special types of
Options: Collars, Caps etc can be implemented
on Options to make them more appealing to
investors. Combinations of options such as
Butterfly spread with puts (going long on put at a
low price, long on put at a higher price, and short
on 2 put options with an intermediate price),
Candor spread with calls (Long call at low price,
Short call at higher price, Short another call at an
even higher price, and Long a call at the highest
price) etc, might also provide specific returns to
investors with specialized needs. I have detailed
one such combination (Straddle) below, which I
feel is ideal for the Indian farmer.
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
Straddle, The ideal instrument for the
Indian farmer: This is the ideal security from
the perspective of an Indian Farmer. A long
straddle is an option combination strategy where
the investor simultaneously goes long on several
a put and a call option with the same strike
amount and the same expiration date. This
means a payoff curve like the one in Figure 1.
Profit
or Loss
LONG STRADDLE
SO
30
40
50
Stock Price
at Expiration
-S400
Figure 1: Payoff of a Long Straddle6
A straddle limits the loss, but gives the potential
for unlimited profit in both directions. From the
perspective of a farmer, even too much rain is
detrimental to the crop. Hence, the strike should
be chosen as to the optimal amount of rain for
the crop. In case of the optimal amount of rain,
the farmer will have to pay out the maximum
amount, which would be the combined
premium for both his positions. However, in the
event of a bumper crop, this should not be a
problem. In the event of slightly heavy or
slightly low rainfall, which might not lead to a
bumper crop but neither lead to a famine, the
farmer would have to pay but a lesser amount. In
case of very heavy or very low rainfall, in which
case the crop is significantly affected, the farmer
would receive payments to the extent of the
magnitude of the heavy or low rainfall.
The short party to these straddles can be a firm,
which will receive payoffs when the rains are
between two extremes. These firms can gain
from selling these straddles to farmers across the
country, as there is almost never a case when the
entire country has either too heavy, or too low a
rainfall in all its parts. Furthermore, to hedge
against such an eventuality, the firm can
purchase insurance. This is easier than individual
farmers purchasing insurance.
Another way can be to bundle the short
positions on straddles and sell these positions to
large institutional investors who are themselves
looking for new asset classes not correlated with
existing markets, or who can sell these off to
retail investors seeking to diversify their
portfolios with a new security. Once end-users
determine that weather too is a risk they would
like to actively manage and hedge, there is
unlikely to be a shortage of counterparts4.
Challenges related to Rainfall Derivatives in
India
Challenges in Implementation at Grassroots
level: Penetrating the Indian rural market is a
enormous challenge, and requires an well
thought out strategy. The lack of awareness and
illiteracy of farmers might be a roadblock, as is
having such a huge distribution network so as to
connect with every individual farmer. A way to
do this might be to seek governmental help and
use governmental distribution channels, as this is
a socially beneficial venture for it seeks the
betterment of farmers. Another option can be
to take the help of NGO's operating in certain
areas for the implementation of this in those
areas. The third way would be to interact with a
certain educated person, or leader of the village,
e.g. the Sarpanch, in each village, educate him as
to the pros of these securities which he in turn
explains to the villagers and sell securities and
collect or distribute payments in his particular
village through him.
49
Challenges in Pricing of Rainfall Options:
A premium for these options would be the
payoff for the short party on the options. Black
Scholes model is the most popular model used to
price options based on financial variables.
However, it has certain underlying assumptions
that do not hold true for weather derivatives.
The main assumption of Black Scholes model is
that the underlying follows a random walk, with
no mean-reversion. This means that the
variability of the underlying increases with time,
and after a significant amount of time, the
underlying can take any value whatsoever. This is
not true for weather variables like temperature
or rainfall, because these almost always assume
values within a certain predictable range and the
variability is not observed to increase with time.
However, ways have been devised to price
temperature based options, and the same can be
applied to weather derivatives. One such method
is Simple option pricing using Expected value,
which can be calculated by integrating the
probability of occurrence of a certain WD (or
DD) multiplied by the payoff of that WD (or
DD). The problem with this, and other such
models is that they are not standardized as yet.
The Standardized usage of Black Scholes model
across markets was what propelled the growth
of the options markets in the 80's, and till such a
standardized model is available for weather
derivatives, we might not see a rapid growth in
this segment.
would have to be devised, and among these, the
Straddle looks the most promising.
Author (s)
Nitin Pahwa is a 1 st year student at
IIM Calcutta and he can be reached at
nitinp2011@iimcal.ac.in
References:
1. http://www.investopedia.com
2. Weather derivatives: Instruments and
Pricing issues. Robert Erickson et al,
Environmental Finance (March 2000)
3. Introduction to Weather derivatives, by
Geoffrey Considine, Weather Derivatives
group, Aquila Energy
4. Weather derivatives can easily be adapted in
India , by Vivek Mohindra (Article published
in Financial Express, dated September 27,
1999)
5. India's fluctuating rainfall pattern, Article
published in Livemint, dated August 18,
2008
6. http://www.theoptionsguide.com
Conclusion
Despite the challenges in implementation and
pricing, Rainfall derivatives have a huge potential
for implementation and growth in the Indian
markets, and can be both a socially beneficial as
well as an economically viable venture. New
instruments pertaining to the needs of Indian
investors (mainly from the perspective of the
agricultural sector and its impacted sectors)
50
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
Winning in a Low ARPU market:
Lessons from Indian Telecom
Abstract
Reason 1: Operating Model Innovation
Despite having significantly lower ARPUs than
European and US operators, Indian mobile players
exhibit similar or higher EBITDA margins as compared
to their western peers. Indian operators have been able to
boost mobile penetration and usage without sacrificing
margins by employing a number of cost-optimization
levers such as network and IT outsourcing, infrastructure
sharing, encouraging customers to use self-service and
maintaining low subscriber acquisition and retention
costs. Operators in emerging markets can attempt to
replicate the Indian model to drive profitable growth,
while operators in developed markets can adopt some of
the initiatives of Indian mobile operators to reduce
CAPEX and OPEX, and improve margins.
1. a Network and IT outsourcing
Introduction
The Indian Telecom industry is the 2nd largest
mobile market by the number of subscribers and
has been growing at a CAGR of 65% since 2001,
with an average of more than 8.5 million
subscribers added per month since June 2006
and an astonishing 11.90 million mobile
subscribers added in April 2009. Moreover, only
around 400 million of India's population of over
1.1 billion were mobile subscribers in May 2009.
As a result of efforts made by Indian mobile
operators to drive adoption and usage of mobile
services, India has very low per minute call
charges and ARPUs. Despite such low values for
revenue drivers, major Indian mobile operators
exhibit high EBITDA margins of around 40%.
This article tries to investigate the drivers which
enable the high profitability of the Indian
players in this low ARPU environment.
Network outsourcing was pioneered in India by
Bharti Airtel when it outsourced capacity
management of network for 8 circles to Nokia
Siemens in 2004. Apart from enabling operators
to reduce OPEX and CAPEX out sourcing of
Network operations provides other benefits like;
ability to focus on core/important functions like
customer acquisition and retention, it reduces
operational and organizational complexity for
telecom operators. Post Airtel all Indian
Telecom operators have followed suit and
outsourced their network operations. Following
outsourcing map displays the scope and extent
of network operations by 7 lead operators in
India.
Estimated reduction in Network Operations
OPEX due to Network Outsourcing is
approximately 15-20% resulting in Total OPEX
reduction of 6% as Network Operations forms
approximately 30% of Total OPEX.
IT outsourcing : Indian Telecom Operators
have again partially or completely outsourced
their IT requirements. e.g.: Bharti Airtel
outsourced its complete IT requirements to IBM
in 2004. IT outsourcing provides similar
advantages as network outsourcing, moreover
presence of global IT majors and Indian based
IT majors provides low cost out sourcing
options to Indian telecom players.
Since network and IT operations have been
commoditized for the telecom operators and
network not being a differentiation factor for
51
Outsourced
Reliance
BSNL
Vodafone
Outsourced
Partial No of circles
All circles
Extent of Network Outsourcing by Indian Opertors
Aircel
Telecom Operators enables them to outsource
these operations to achieve significant OPEX
reduction. It provides added advantage of ability
to focus on sales and marketing which plays a
major role in customer acquisition and retention.
1.b Infrastructure Sharing
Infrastructure sharing (passive) helps bring
down network costs per subscriber as it brings
down the rental costs for Network operators.
Moreover, other synergy elements which
contribute to savings due to infrastructure
sharing are power & fuel, passive maintenance &
logistics costs. Infrastructure sharing is majorly
affected by regulation position of regulatory
1.5
1
0.5
0
Europe
Tower Tenancy Ratio India Vs Europe 5
52
Idea
Tata Indicom
Network Capacity Management Outsourced
Network Services Outsourced
India
Airtel
body of the country. TRAI allows passive
infrastructure sharing which has enabled Indian
operators to work at tower tenancy ratio of 1.4
(2008)5, which is expected to go up to 1.7 in the
next couple of years. At present Infrastructure
sharing provides a total OPEX reduction close
to 2% for operators.
Reason 2: Scale effects for operating in India
Wide Network
Sizes of operations provide cost economies and
better utilization of resources in all categories of
operations: Network and IT costs, Sales and
Marketing costs, Customer Care costs and
Admin costs. Scale of operations in India can be
estimated simply by looking at the number of
BTS a Telecom Operator in India operates
compared to European or Middle East
Operators. Bharti Airtel operates close to 65,000
BTS (2008), Reliance operates close to 45,000
BTS(2008) whereas Telecom operators in
Europe operate close to 10,000 to 17,000 BTS
per country where as Telecom operators in
Middle East operate close to 7,000 to 10,000
BTS per country.
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Campus Thoughts
Reason 3: Keeping Low Subscriber
Acquisition Cost
Subscriber Acquisition Cost includes cost
incurred in connection with acquiring new
customers in one period. This is made up of
subsidies for handsets, dealer commission,
subsidies for third party channels, sales aids and
advertising cost subsidies.
The following is a representative set of SACs of
operators across India, US and Europe.
The handset subsidies are an unnecessary cost
that operators incur only because the operator is
Customer Acquisition Cost
Idea
SACs
(USD)
T-mobile
Netherlands
T-mobile USA
Orange Spain
Orange UK
OrangeFrance
doing it, and the SAC becomes unusually high as
a result. Handset subsidies are a negative element
for developing the market and operators who do
it find themselves in a prisoner's dilemma: they do it
because the competitor is doing it, but actually it
is in no one's interest to do it. Hence unless one
imposes high termination costs, subsidies to
handsets are a major cost component in SAC.
Prepaid cards have advantages for both
operators and users. For the operator it reduces
acquisition costs, avoids billing cost, reduces bad
debts and permits tapping into new customer
segments. On the other hand, since the average
airtime charges are much lower, it will not take
away intense users. For the user it means
avoiding a rental and better control over
expenses.
Reason 4: Savings on Customer Service
Indian mobile operators encourage their pre-
paid subscribers to use self-service routines,
directly accessible via the customer's mobile
handset, for micro recharging transactions,
balance and validity enquiries. Other operators
also offer similar self-service facilities, which not
only increase customer convenience but also
help in reducing calls made to customer contact
centres as well as the sales commission and
distribution costs associated with selling prepaid recharge vouchers.
Availability of recharge coupons and recharge
through a retailer using easy e-recharge is
another point of contact that operators have
leveraged efficiently. Operators have pervaded
retails and the retailer is well versed to educate
the customers about tariff plans and standard
enquiries which substantially reduce the
enquiries directed to customer service free of
charge for the operator.
Reason 5: Distribution and Sales
Indian operators have come with a matchbox
model, where they have started distributing
telecom services like an FMCG product with a
focus on maintaining a lean operating model to
keep their costs low. They have built large
distribution chains spanning the length and
breadth of India by leveraging a large number of
third-party distribution outlets to sell SIM-cards
and recharges which has brought down the
overall cost of customer servicing.
Reason 6: Regulations
The first order of business for the government
in developing a successful national telecom
policy is to stay out of regulator y
implementation and instead set up an
independent body to carry out regulatory policy.
The government must allow it independence
from political influence by giving it a distinct
legal mandate and appointing regulators for
53
fixed periods.
How India achieved it?
The Telecom Regulatory Authority of India
(TRAI) is functional since January 1997, with a
mandate to provide an effective regulatory
framework and adequate safeguards to ensure
fair competition and protection to consumer
interests. Currently the main role of TRAI is that
of an adjudicator and arbitrator, whereas the
Department of Telecommunications (DOT)
looks after policy making, licensing and
coordination.
Second, the government must set policies that
reduce its degree of ownership in the sector's
incumbent players. Curtailing the level of
government ownership leads to an increase in
foreign investment and encourages new
entrants. The government must however carry
on working with regulators and industry players
to create a strong, competitive market.
How India achieved it?
The New Telecom Policy, 1999 (NTP-99) was
approved on 26th March, 1999 and was effective
from 1st April, 1999. NTP-99 laid down a clear
roadmap for future reforms that contemplated
the opening up of all the segments of the
telecom sector for private sector participation.
The regulatory regime was changed through
significant amendments to the TRAI Act, which
clearly defined the role of the regulator and also
facilitated the setting up of TDSAT (Telecom
Dispute Settlement and Appellate Tribunal) to
allow all disputes arising in the telecom sector to
be settled by this special Tribunal.
Third, the government needs to institute
guidelines for the financial obligations of
telecom operators, removing payments as
royalties some governments still demand from
telecom operators, but maintaining corporate
taxes at levels that will sustain the government's
54
regulatory efforts, research programs, and
Universal Service Funds for promoting telecom
service in rural and less-developed parts of the
country. This would boost innovation by
encouraging industry players to reinvest at
higher rates and bring new players to the market.
How India achieved it?
Unified Access Licensing Regime (UALR)
The establishment of the UALR (2003)
eliminated the need for separate licenses for
different services. Players are allowed to offer
both mobile and fixed-line services under a
single license after paying an additional entry fee.
The UALR signaled the beginning of TRAI's
efforts to move towards a 'service and
technology neutral' convergence license.
Reducing Access Deficit Charge (ADC)
ADC makes it essential for the service provider
at the caller's end to share a certain percentage of
the revenue earned with the service provider at
the receiver's end in long distance telephony.
This actually subsidizes the infrastructure costs
of a service provider enabling access at receiver's
end, especially because rental for fixed-line
services is low. ADC was reduced, bringing
downward pressure on tariffs and was gradually
phased out and completely eliminated by 2008.
Calling Party Pays (CPP) Regime, making
mobile service cheaper, fixing low termination
charges for mobile coupled with the freedom to
fix outgoing call charges by the operators thus
enhancing competition in the sector.
Conclusion: It is true that telecom markets have
their unique features and replication is not
straightforward. The i-mode success of NTT
Docomo has not caught on in Europe. However,
it is believed that there are a few key lessons that
can be looked at by operators.
Firstly, the way the Indian telecom market
evolved - the handset manufacturer and the
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
Effect of Regulations on Tariff and Penetration
160
140
120
100
CPP implemented
UALR established
ILD services
open to
competition
80
ADC
Lowered
60
40
Reduction of
Licence fees
NTP 99
20
0
1998 1999
2000 2001
2002 2003 2004 2005
2006 2007
Cellular Tariff (INR)
16
16
8
5
4
4
3
2
1
1
Total Subscribers (millions)
0
0
3
5
10
15
35
55
90
145
service providers were decoupled. This has
proved to be of great benefit as most operators
do not bundle their offers with subsidized
mobile phones. In fact, the few that do so haven't
done that great. This results in huge savings in
the SAC for operators.
roshan.agarwal08@iimb.ernet.in
Sourav Dutta is a second year PGDM student
from IIM Bangalore. He holds a Bachelor's
degree in Electronics and Communications
Engineering from Nirma, Ahmedabad and can
be reached at sourav.dutta08@iimb.ernet.in
Secondly, increasing infrastructure sharing and
tower tenancy ratio can help reduce network
costs. Operators in Europe should aim to
achieve higher infrastr ucture sharing.
Additionally, IT outsourcing which is happening
at certain levels in outer geographies can be
taken to next step.
Tuhin Chatterjee is a second year PGDM
student from IIM Bangalore. He holds a Dual
degree in Chemical Engineering from IIT
Kharag pur and can be reached at
tuhin.chatterjee08@iimb.ernet.in
Back Home, it is also important to mention that
the dynamics of the Indian playground is bound
to change with the entry of 4 new operators and
introduction of 3G. While new operators and
MNP regulation signal further pressure on tariff
and costs; new technologies like 3G and
WIMAX indicate boost to data revenues and
stem decline in ARPU.
1.
Source: Livemint: India's mobile
subscriber base crosses 400 million:
Posted: Tue, Jun 2 2009
2.
As compared to the European Market
3.
Company press releases and Annual
Report
4.
Reliance Equity research report, IBEF &
Merrill Lynch Telecom Global Report
5.
Swisscom Definition
6.
Quarter Results and Annual Reports
7.
Economics of Mobile Telecommunication
References
Author (s)
Roshan Agarwal is a second year PGDM
student from IIM Bangalore. He holds a
Bachelor's degree in Mechanical Engineering
from IIT Kharagpur and can be reached at
55
Source - Image: (c) Nagoya, Creative Commons, Flickr
Campus Thoughts
Can MVNOs Survive in India?
Abstract
India is one of the fastest growing telecom markets in the
world with a subscriber base of approximately 350
million in 2008. The market is highly competitive and
this sector is often considered to be the closest to a 'perfect
competition'. Even though the high competition has
benefited the consumers in terms of declining call tariffs, it
has squeezed out the margins of operators; making it very
difficult for a new operator to enter the market. In this
scenario, one viable option for an operator is to enter as a
mobile virtual network operator (MVNO). This paper
examines what are the conditions under which MVNOs
can operate and whether they can compete with the existing
players in the Indian market.
Business
Model
MNO
MVNO
Resale traffic
MVNO branded
Wholesale of
Mobile traffic
Customer
Main
activities
- Network Roll-out
- Network administration
(infrastructure. spectrum,
numbering etc)
- Other services (Marketing,
CRM, Sales)
- Focus on marketing, sales
and distribution
- Value proposition for the
final client
Economics
- High CAPEX (-10-15% Sales)
- High fixed costs
- High EBITDA Margin
(-20-40% Sales)
- Investments : -2.5% Sales
- Mainly variable costs
- Low EBITDA Margin : -1015% Sales
Rs.
Rs.
Indian Mobile Market A Context
India is one of the fastest growing mobile
markets in the world. For the last 3 years, India
has been adding nearly 6 million new subscribers
every month and is projected to network i.e. the
mobile spectrum, from traditional mobile
network operators (MNOs) and provide
services under their own brand name (Exhibit
1). Around the world, companies running
MVNO operations vary from mobile operators
and retail chains to TV channels. These
companies buy airtime in bulk from existing
operators and sell it to targeted customer
segments capitalising on factors such as their
brand image, loyal customer base or an extensive
distribution network.
Indian Mobile Market A Context
Cash flow
trend
t
(MNOs) and provide services under their own
brand name (Exhibit 1). Around the world,
companies running MVNO operations vary
from mobile operators and retail chains to TV
channels. These companies buy airtime in bulk
from existing operators and sell it to targeted
customer segments capitalising on factors such
as their brand image, loyal customer base or an
extensive distribution network.
t
Exhibit : Comparison between MNOs and MVNOs
Source: Research Analysis
What is a MVNO?
A MVNO is a type of mobile operator which
offers voice and data services without owning
any part of the network infrastructure. MVNOs
typically “rent” both the access network and the
transport network i.e. the mobile spectrum,
from traditional mobile network operators
India is one of the fastest growing mobile
markets in the world. For the last 3 years, India
has been adding nearly 6 million new subscribers
every month and is projected to grow at a CAGR
23% till FY 2012. In spite of the rapid growth,
the penetration of telecom services in India is
close to 37%, indicating that there is still
potential for expansion.
At present, there are 5 mobile operators which
have a Pan-India coverage (Airtel, Vodafone,
BSNL, Idea and Reliance) while many others are
seeking to build a national presence. High
57
competition between the incumbents over the
last few years has resulted in declining mobile
tariffs, and today the call rates in India are
amongst the lowest in the world. However, the
fall in the ARPU has been more than
compensated by rapidly growing subscriber base
and the MoUs (minutes of usage), because of
which the existing companies have been
exhibiting double digit growth rates. (Exhibit 2)
Over the last one year, the Department of
Telecom (DoT) has granted telecom licenses to
7 new players which include companies such as
Telenor-Unitech, Swan-Etisalat etc. The Indian
market is already very competitive and entry of
new service providers at this point of time raises
questions on their survival. Under this scenario,
the MVNO model presents itself as a probable
option for new operators given that it requires
lower capex and allows a faster service roll-out.
Emergence of MVNOs in a Market
The emergence of MVNOs in a market can be
driven by both supply-side and demand-side
factors. From the supply-side, the entry of
MVNOs in a market can be because of existing
operators wanting to partner with MVNOs for
RPM
MoU
0.77
468
475
482
489
492
512
514
517
504
509
502
507
499
0.50
0.50
0.49
0.49
0.49
0.49
0.49
0.49
2016E
2017E 2018E 2019E
422
0.61
0.58
0.56
0.54
2006
2007
2008
2009E
0.52
2010E 2011E 2012E
2013E 2014E 2015E
Exhibit 2: Mobile Phone Usage Trends in India
Source: TRAI Quarterly Benchmarking Report
commercial reasons. Operators with surplus
capacity on their networks have a low capacity
utilisation; in order to increase their operational
58
efficiencies they have the option of either
growing their subscriber base organically or by
selling their airtime on a wholesale basis to a
reseller, or a combination of both.
From the demand-side, launch of MVNOs is
facilitated in markets where low competition
between mobile operators has led to a situation
where the needs of a few customer segments are
not fulfilled. This could be due to poorly
designed products and services for the
customers, or a mismatch between the
individual's lifestyles and the operator's brand
image. The underlying reason for this
phenomenon is that mobile operators often
suffer from the limitations of a 'one size fits all'
strategy. Such an approach may lead to higher
economies scale and lower costs but it will
ultimately lead to dissatisfied customers and a
higher churn rate.
MVNO Business Models and Value
Positioning
Exhibit 3 gives the value chain of the various
operations carried out by a mobile operator.
Depending on what part of the value chain the
MVNOs decide to operate in, they can enter a
market using a variety of models.
At one end, a MVNO could act as a “Pure
Reseller” where it purchases the airtime in bulk,
rebrands it under its own name and sells the
service through its distribution channel. At the
other end, the player can also operate as a “Pure
MVNO” where it carries out all activities of a
mobile value chain except the laying of physical
infrastructure.
The decision to adopt a given business model is
governed by several factors including the scale
of the business, telecom expertise, investments
required, and the level of risk the MVNO is
willing to take. The entry of MVNOs in a market
also leads to the emergence of third-party
players which provide services and platforms to
support the MVNOs. Such service providers are
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
referred to as Mobile Virtual Network Enablers
or MVNEs. They facilitate the growth of
MVNOs by reducing the complexity of
operations and the investment required.
Depending on the customer segment which they
target, MVNOs can position themselves as
premium, focused or discount players (Exhibit
4). MVNOs around the World Europe, North
America and Latin America are the largest
markets for MVNO services with a cumulative
subscriber base of 89 million in 2008. The first
commercially successful MVNO was introduced
in the UK in 1999 by Virgin Mobile UK.
Targeted at the youth, the service rapidly grew in
popularity and today enjoys a subscriber base of
4 million subscribers. Currently, there are
approximately 360 planned and operational.
MVNOs around the world.
MVNO penetration is lagging behind in AsiaPacific and the Middle East however, they will
offer the highest growth potential over the
coming few years. Telecom regulators in many
of these countries are also in favour of MVNOs
for reasons that it improves competition and
enhances customer experience.
Retail is one of the most active sectors driving
Network
Interconnection
service
& operations
MNO
Back office
& Customer
Care
Mobile Data
Platforms
the growth of MVNOs, mainly because retail
players are well positioned on key dimensions
which are necessary for success established
brand recognition, a captive customer base
which can be leveraged to reach a critical mass
and a wide distribution network which
maximizes the cross-selling potential of mobile
services). Examples of retail chains running
MVNOs include Tesco, Sainsbury, Carrefour
and Breizh among others.
Case: Development of MVNOs in Europe
Europe is the largest market of MVNO services
in the world, with the first MVNO being
launched as early as 1999. However, within
Europe itself different countries are in different
development phases with regard to the
commercial and regulatory aspects governing
MVNOs.
Key Success Factors for MVNOs
Experiences from different mobile markets
around the world have shown that the success of
MVNOs depends on a number of economic,
regulatory, demographic and company-specific
factors such as:
?
Extent of Competition : Markets with
high competition offer high barriers to
Mobile
Handsets
Pricing & Offer
Development
Marketing &
Distribution
Full MVNO
Pure
Reseller
MNO
MVNE (Mobile Vittual Network Enabler)
MNO
MVNO
Investment
required
Exhibit 3: Different MVNO Models
Source: Diamond Consulting – India MVNO Report, Research Analysis
59
?
Distribution Network : As MVNOs
entry because not only are most of the
segments already covered, but the pricecutting also ensures that charging a
premium from a particular user-group will
be difficult.
usually compete in niche markets, targeting
the right customer segment is critical.
Therefore it is necessary to have the right
distribution channels.
Regulatory Constraints for MVNOs in India
?
Regulatory Framework : Most countries
The rapidly growing Indian telecom market has
meant that the regulations in India are evolving
rapidly. However; the DoT still has not clearly
laid down the guidelines for the regulation of
MVNOs. The issues which can potentially
impact MVNOs can be grouped into two
categories:
across the world do not allow active
infrastructure sharing between MNOs and
the entry of MVNOs is often disputed to
be a case of active sharing. Consequently,
clearly laid-down guidelines are necessary
for MVNOs to operate.
?
Brand Strength : The MVNO's existing
Full Optional
Premium Players
This is the typical
positioning of the
traditional MNOs
- Focus on product
development and
innovation
- High quality and service
levels
Service differentiation
- High investments into
brand (mass advertising)
Typically targeted at
youth or regional /
ethnic community
Focused Players
- Focus on customizing
offer to a specific target
- Innovative tariff portfolio
- Competitive prices for
specific usages
- Targeted Marketing
- Specific content / services
Discount Players
Typically used by
supermarkets.
telecom operators
- Focus on price
differentiation
- Standard services only
(Voice, SMS)
These are the
positioning options
for the MVNOs
- Few (one) easy-tounderstand tariffs
No frills
Premium Price
Price differentiation
Discount
Exhibit 4: Positioning of MVNOs in a Market
Source: Research Analysis
brand awareness is a key factor w hich can
determine success, especially for well
established brands with international
presence.
60
Industry Structure
?FDI Regulations for MVNOs: Indian has
different FDI regulations for each industry.
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
Given that MVNOs will most likely be
launched by non-telecom players,
regulations governing foreign investments
will require a greater clarity.
Restrictions on MNOs investing in
?
MVNOs: If the regulator requires the
network operators (i.e. MNOs) to be
separate from the service providers (i.e.
MVNOs) then it will have to stipulate the
maximum equity that the MNOs can hold
in their partner MVNO.
?
Tax structure of MVNOs: The current
tax structure imposes a tax of 17-26% on
telecom players, which is one of the highest
in the world. Since MVNOs would
essentially be working on thin margins, high
tax rates could prove to a big hurdle towards
a viable business model.
Spectrum and Licensing
?Use of
USO Fund: The regulator needs to
clarify whether the MVNOs will have
access to the USO Fund to provide service
in rural areas.
?
Sharing of Spectrum: MVNOs would
benefit if spectrum sharing and trading are
allowed as it will give them greater
flexibility.
Can MVNOs Succeed in India?
In general, the success of MVNOs in India will
depend upon a combination of factors which
include mobile penetration, extent of
competition, evolution of regulations, and the
changing needs of the consumer segments.
Studies conducted across various mobile
markets have indicated that the success of
MVNOs is largely dependent on market
penetration and the extent of competition in the
market. In telecom markets, a penetration of
40% is seen as the threshold beyond which the
existing MNOs are likely to partner with
MVNOs. Secondly, the markets with low
competition or high degree of consolidation
have also favoured their launch.
Exhibit 5 gives the HHI, market penetration and
size for different countries. When benchmarking
the Indian telecom market against other
countries on these parameters, it can be
observed that even though the Indian market
has low penetration and is one of the fastest
growing markets in the world, it may not be
conducive for the entry of MVNOs. This is
because of the high degree of competition in
India, which is indicated by the HHI Index of
1656, and can be categorised as being “highly
competitive” under the guidelines of the
Competition Commission.
The biggest testaments to the extent of the
competition are the continuously falling ARPUs
and a tariff structure which is the lowest in the
world. Another consequence of the high degree
of competition is that with 10 operators
competing to provide services to the same pool
of people, nearly all customer-segments are
already being served. Given the squeezed
margins prevailing in the industry, MVNOs will
find it very difficult to target a specific customer
segment and earn their required rate of return,
even though they require lower investments to
roll out their network.
Apart from the doubtful financial viability, there
are a number of regulatory issues as well, which
need to be addressed by all the stakeholders
involved before MVNOs can be successful.
Even if the market offers some opportunities
for MVNOs, the absence of clearly defined
regulations will be a significant hurdle for their
entry. Virgin Mobile, India's first MVNO was
launched last year and this is too short a time to
gauge whether the Indian market is ripe for the
entry of other MVNOs. Only time will tell if
MVNOs will be able to compete in India's 'dog-
61
eat-dog' mobile market, although casualties can
be expected.
http://www.intelligencecentre.net/2009/03/05/
india-awaits-mvnos-but-market-will-be-judge
(Last accessed on 12 July 2009)
7000
China
6000
HHI Index
5000
France
4000
3000
India
Pakistan
Russia
Italy
US
Germany
2000
UK
Brazil
1000
0
0%
50%
100%
Mobile Penetration
150%
200%
Exhibit : HHI Index and Mobile Penetration for Selected Countries (2008)
Source: EIU
4
Kabeer Chawla is a 2nd year PGP student at IIM
Ahmedabad. He holds a Bachelors degree in
Polymer Science and Chemical Technology
from Delhi College of Engineering and can be
reached at 8kabeerc@iimahd.ernet.in
Prasad, Swati, “Foreign Telcos to enter India
through MVNO route”, March 2009,
http://www.zdnetasia.com/news/communication
s/0,39044192,62053749,00.htm (Last accessed on
12 July 2009)
5
NA, “ Recommendations on Mobile Virtual
Network Operator” , April 2009,
http://www.ictregulationtoolkit.org/en/Publicatio
n.3636.html (last accessed on 12 July 2009)
References
6
Prasad, Swati, “Can MVNOs bailout India's small
players”, May 2009,
http://www.zdnetasia.com/news/communication
s/0,39044192,62041295,00.htm (Last accessed on
12 July 2009)
7
Mysore, Mathew, Nair, “Is the Indian market
ready to go virtual for mobile”, 2006,
www.diamondconsultants.com/.../India%20MVN
Os_Diamond.pdf (Last accessed on 12 July 2009)
Author (s)
1
Rao, Malovika, “MVNO A profitable strategy”,
March 2007,
http://voicendata.ciol.com/content/goldbook/go
ldbook07/107031228.asp, (Last accessed on July
12 2009)
2
NA, “MVNO Services in India”, August 2007,
http://iete-elan.ac.in:8080/elan/mvno.htm (Last
accessed on 12 July 2009)
3
Garland, Chris, “India awaits MVNOs”, March
2009,
62
AUDIRE - IIM ABC CONSULTING REVIEW
Campus Thoughts
Medical Tourism – Healing Abroad
Abstract
The economic recession has provided Indian Medical
Tourism industry with a golden opportunity. Job cuts and
reduction of employee healthcare benefits have forced
Westerners to explore affordable alternatives for good
quality healthcare.
India is well-placed to take advantage of this as it already
has several good private hospitals and skilled manpower.
It is highly competitive on costs and is marketing itself
aggressively as a healthcare destination. However, it needs
to develop its public infrastructure and tourism industry,
as well as shed the tag of being a third-world nation in
order to capture a significant portion of the global medical
tourism market.
Medical Tourism
“Sunshine, sea, sand, surgery
a brilliant
combination which enticed me to come to
Chennai for my knee replacement surgery”
- Jacqueline J., British Citizen
This is a trend that is growing with each passing
day in the developed world and has resulted in
the flourishing of a new industry Medical
Tourism. Medical tourism refers to the act of
traveling to another country to seek specialized
or economical health care, well being and
recuperation, of acceptable quality with the help
of a support system (Deloitte 2008).
Most of the traffic is directed from the
developed world to the developing countries.
High costs and long wait times in health care
institutions, the ease and affordability of
international travel and improvements in
standard of health care in many developing
countries are the key factors driving this
industry. Another factor which has helped
expedite growth is the penetration of the
Internet. It has provided the health care
institutions in India and the rest of the
developing world with a credible platform to
demonstrate the efficiency, quality and cost
saving of this option.
More than 2.9 million patients visited India,
Singapore, Thailand, Malaysia and the
Philippines for medical tourism in 2007 and the
Asian medical tourism industry is expected to
grow at a CAGR of 17.6% between 2007 and
2012 (Asian Medical Tourism Analysis (20082012) 2008)
With its pristine natural beauty and incredible
bio-diversity India has always been one of the
most favorable tourist locations in the world.
Now with world-class facilities like AIIMS,
Apollo Group, Escorts Hospitals in New Delhi
and Jaslok Hospitals in Mumbai to name a few,
medical tourism is booming in India.
The recent move by the Tourism Ministry to
extend Market Development Assistance to Joint
Commission International (JCI) certified
hospitals shows that the government is putting
its weight behind the industry (Thukral 2009).
Various state tourism boards and even the
private sector consisting of travel agents, tour
operators, hotel companies etc. are eying
medical tourism as a segment with tremendous
potential for future growth.
Effect of recession on the sector
Owing to recession, companies are looking to
reduce employee healthcare benefits or
eliminate them altogether (Maltby 2008).
Struggling insurance majors such as the AIG
Group have been forced to increase deductibles
on health insurance plans (Andrews 2008).
Already, cosmetic and dental surgeries are not
63
covered in health benefits. These factors make
surgery and subsequent recuperation abroad an
attractive option for people.
In the US, as the share of government spending
on healthcare decreases and the fiscal gap
widens, people are becoming increasingly
apprehensive about the ability of the American
healthcare system to provide adequate care. This
has created a gap for some firms to exploit.
Insurance companies are increasingly coming up
with plans which encourage medical tourism.
From January 2009, Well Point, the secondlargest American health insurer, will offer
employees of Serigraph Inc. the option of
traveling to India for non-emergency
procedures (Meehan 2009). Other companies
such as North Carolina-based IndUShealth act
as facilitators for US medical tourists.
India is well poised to take advantage of this
situation and to act as a destination of choice.
With the gradual opening up of the Indian
economy, private hospital chains such as Fortis
Healthcare (14 hospitals), Max Hospital (8
hospitals), Wockhardt Healthcare (12 hospitals)
and Apollo Hospitals (43 hospitals) have jumped
into the fray and are aggressively wooing medical
tourists.
Steps taken by Indian Hospitals
Expansion: Indian hospitals are expanding
rapidly to meet the increasing demand. Apollo
Hospitals has finalised plans to increase its
capacity by 2000 beds by investing Rs 1500
crores (Business Standard 2009). Fortis
Healthcare has ventured into a “medi-city” in
Gurgaon, expected to be operational by 2010
(Business Standard 2009).
Hospitals are also investing in capability
expansion - hiring and training better talent and
acquiring new facilities. Over the past one year,
Apollo Hospitals has developed capabilities to
conduct complex procedures like Birmingham
64
hip replacement surgery and Cyberknife robotic
Radio surgery (Apollo Hospitals 2009).
Accreditation: To allay the medical tourists'
concern for quality, Indian hospitals are
investing huge sums of money (approximately
$40,000 per hospital per year) to get themselves
accredited by international bodies like JCI.
These accreditations have put these hospitals on
world map as centres of excellence in healthcare.
Also, accreditation is important because only
patients treated in accredited hospitals are
eligible to claim refunds under some insurance
schemes.
While Apollo has got JCI accreditation for 6 of
its hospitals (Apollo Hospitals 2009), Wockhardt
has got itself registered as an associate hospital
of Harvard Medical International (Wockhardt
2009).
Inter national Collaborations: Indian
Healthcare providers have entered into strategic
alliances with overseas insurance companies and
referral agencies. An example of one such deal is
the Wockhardt-IndUShealth deal. IndUShealth
acts as a link between companies trying to save
up on medical costs and Wockhardt chain of
hospitals in India (Wockhardt 2009). Similarly,
Apollo Hospitals have tied up with Well-Point, a
US based insurance company. This deal helps
keep costs low for Well-Point and assures a
constant revenue stream for Apollo Hospitals.
Apollo has similar alliances with AIG, GMC
services, Emergency Services (Japan) etc. Fortis
has also, recently, entered into similar
agreements with Aenta, BUPA, and CIGNA.
Indian chains are also tying-up with American
hospitals, which often turn away uninsured
patients (currently the primary focus of Indian
marketing efforts), and refer them to their
Indian counterparts. (Narayanan, 2008).
End-to-end services: In order to attract
medical tourists, Indian hospitals now provide a
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Campus Thoughts
one stop solution to their international visitors.
Fortis for example, provides services like
airport pickup, visa assistance, cost estimation,
hotel bookings, sight-seeing, foreign exchange
and insurance (Fortis Healthcare 2009).
Marketing initiatives: Indian hospitals are now
marketing themselves much more aggressively.
Aesthetically designed websites provide
information regarding facilities, doctors etc.
They also contain testimonials from other
patients regarding quality of healthcare and
hospitality. Also, Indian hospitals regularly
advertise on blogs, websites and YouTube
(Apollo Hospitals 2009, Fortis Healthcare
2009).
In addition to the online campaigns companies
are also investing in PR initiatives. For example,
Apollo Hospitals recently sponsored an event
for benefit managers in New York where they
outlined cost advantages of having an employee
healthcare outsourced to India (Narayanan
2008).
Challenges for India
However, not everything is as rosy as it seems,
and India has some challenges it needs to
address before it can become a global
powerhouse in medical tourism. For instance, it
has to shed the age-old third-world nation tag.
India's vast slums and open sewers raise doubts
about the level of public sanitation and hygiene
in the country, which serve as a deterrent to
many foreigners (Marcelo 2003). Moreover, the
recent Mumbai terror attacks in which
foreigners were singled out will perhaps achieve
exactly what it set out to do hurt India's
economy by reducing tourist and medical tourist
inflow. Already, the US State Department and
the governments of several other countries have
expressed serious concerns about the safety of
their citizens in India. The growing market for
medical tourism also translates into a potentially
large illegal market for tissue and organ
donation, which may lead to public outrage and
subsequent government regulation of the
industry. Often, the hapless victims, such as
those in the recent kidney scam (IANS 2008),
have little or no awareness of the risks involved
in organ donation, and are forced to undergo
complex surgery in highly unsanitary and
dangerous conditions.
The Ethical Dilemma
Medical tourism also raises the broader ethical
dilemma of whether Indian doctors, who are
already hard-pressed to treat the country's sick,
should spend their time treating higher-paying
foreign patients who often jump the queue.
However, there is another side to this argument,
and there are studies which say that the
secondary effects of medical tourism are
positive for domestic seekers of medical care.
Enhanced prestige and international repute
(which enable hospitals to tap more sources of
funding), as well as increased revenue from
foreign patients means that hospitals can invest
in better infrastructure and offer better salaries
that attract more expatriate doctors back home.
However, another deterrent to foreign medical
tourists is the absence of adequate legal
remedies and a culture of litigation in India, as
opposed to the US. Therefore, lawsuits for
medical malpractice in India often take far
longer to get resolved, if they are resolved at all,
as compared to those in American courts. Even
successful litigants are often awarded only token
damages by courts. Perhaps the most significant
challenge that India faces is increased
competition from other countries such as
Thailand, Singapore, Spain and Brazil (Waddock
and Richardson 2007).While Singapore has a
significantly better infrastructure and public
health system, Thailand has the advantage of
being perceived as a more exotic tourist
destination than India. These factors offset
slightly higher prices than those in India. Brazil is
well-placed because of its proximity to the US,
65
while Spain, although significantly higher priced
than India, has the advantages of being a
developed country and having a medical care
system of repute, while still providing healthcare
at lower prices than in the US (Connell 2006).
Conclusion
In conclusion, we would like to say that the
global recession offers a tremendous
opportunity to the Indian medical tourism
industry. It already has hospitals in place and is
competitive on cost with most other countries. It
needs to counter its image as a third-world
nation with aggressive marketing through
foreign media channels, perhaps even leveraging
the Indian Diaspora abroad. Also, since reports
indicate that most medical tourism in the future
will be undertaken only to obtain quality
healthcare abroad, India needs to invest even
more heavily in developing its infrastructure.
Infrastructural development needs to take place
not only in the medical sector but also in sectors
such as tourism, which can enjoy the fringe
benefits of medical tourism. What is especially
encouraging is that the Indian government has
made positive policy moves to promote medical
tourism. We believe that the Indian medical
tourism industry has strong fundamentals in
place and an encouraging future.
Author (s)
Deepti Gunjikar is a PGP2 student at IIM
Ahmedabad. She holds a B.E. degree in
Electronics from Mumbai University and can be
reached at 8deeptig@iimahd.ernet.in
Gourav Bhattacharya is a PGP2 student at IIM
Ahmedabad. He holds a B.Tech in Metallurgial
Engineering from IIT Bombay and can be
reached at 8gouravb@iimahd.ernet.in
References
1. Andrews, M, September 25, 2008, "Surprise!
premiums are up again", U.S. News,
http://www.usnews.com/blogs/onhealth-and-money/2008/9/index.html
(accessed July 16, 2009).
2. Apollo Hospitals, 2009,
http://www.apollohospitals.com/
(accessed July 16, 2009).
3. Asian Medical Tourism Analysis (20082012), Bharat book Bureau, 2008.
4. Business Standard, "Apollo Hospitals
achieves Rs 1.5K cr financial closure for
expansion", June 30, 2009,
http://www.businessstandard.com/india/storypage.php?auton
o=362500 (accessed July 16, 2009).
5. Business Standard, "First Phase of Fortis
Medicity to be operational by 2010”, July
14, 2009, http://www.businessstandard.com/india/news/firstphasefortis-medicity-to-be-operational-by2010/363874/ (accessed July 16, 2009).
6. Connell, James, "Medical Tourism: Sea,
sun, sand and surgery”, Tourism
Management, 2006: 1093-1100.
7. Deloitte, "Medical Tourism- Consumers in
Search of value”, August 2008,
http://www.deloitte.com/dtt/cda/doc/co
ntent/us_chs_MedicalTourismStudy(1).pd
f (accessed July 16, 2009).
& others
Himanshu Sharma is a PGP2 student at IIM
Ahmedabad. He holds a B.Tech/M.Tech Dual
degree in Biotechnology and biochemical
engineering from IIT Kharagpur and can be
reachd at 8himanshus@iimahd.ernet.in
66
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Campus Thoughts
Mobile Technology Wars A New Look
Abstract
The US market is predominantly CDMA, whereas the
European markets follow the GSM technology. India,
the second largest mobile market in the world, follows a
mix of CDMA and GSM. Right from its launch,
experts have commented that CDMA cannot survive in a
market such as India. However, it has now crossed 100
million subscribers. But, CDMA operators are now
beginning to setup GSM networks. What is the future for
the two technologies?
Introduction
CDMA was launched in India in December
2002. Few years after its launch, industry experts
were of the opinion that CDMA may not be the
right mobile technology for India. But today,
CDMA's subscriber base has crossed a
phenomenal mark of 100 million users and
currently this number stands at nearly one-third
of the total subscriber base of India. Also, new
entrants into the mobile space, like MTS are
relying on CDMA technology to reach their
customers. If CDMA is doomed to die, then
how is its subscriber base growing at such a
break-neck speed? Why are new operators still
relying on CDMA technology? On the other
hand, GSM is not lagging behind. India's largest
GSM operator, Airtel, crossed its 100 million
subscriber mark recently. So, which of these will
be the technology of tomorrow? Will one win
over the other? Let us analyse further to answer
these questions and predict what is at stake for us
in the future.
Understanding the technologies
GSM (Global System for Mobile
communications) and CDMA (Code Division
Multiple Access) are the two popular
technologies in mobile communication. GSM
works on time sharing basis on multiple narrow
channels, whereas CDMA works on a special
type of randomized digital modulation which is
spread over a wide channel. An apt analogy in
Wikipedia makes the concept behind the two
technologies clear without using any technical
jargons. Imagine a cocktail party, where couples
are talking to each other in a single room. The
room represents the available bandwidth. In
GSM, a speaker takes turns talking to a listener.
The speaker talks for a short time and then stops
to let another pair talk. There is never more than
one speaker talking in the room, no one has to
worry about two conversations mixing. In
CDMA, any speaker can talk at any time;
however each uses a different language. Each
listener can only understand the language of
their partner. As more and more couples talk, the
background noise (representing the noise floor)
gets louder, but because of the difference in
languages, conversations do not mix. To
understand more about these technologies, let's
do a comparison on a few basic parameters as
depicted in a Table 1.
Indian Story: GSM vs CDMA
India's mobile story is predominantly a GSM
story, with around two-thirds of the population
owing a connection provided by a GSM
operator. The country's leading mobile
operators Bharti Airtel and Vodafone operate
pure GSM networks.
The leading CDMA operators are Reliance
Communication (RCom) and Tata Teleservices.
CDMA operators have historically experienced
lower ARPU's (Average Revenue per User) than
the GSM operators, as shown in figure 1. While
the ARPU's have been declining for the industry
67
GSM vs CDMA
GSM
CDMA
Generation
2G
2G
Year of birth
1991
1995
Global market
72%
12%
share
n
Presence
in all countries
n
Worldwide
n
Presence
international roaming
in US, Asia Pacific, Russia, Latin America
n
International
roaming is limited
- US, India and China are the major CDMA hubs
Spectrum
Cell Size
Less efficient
More efficient
n
1Mhz
n
1Mhz
spectrum can support up to 80 simultaneous calls
spectrum can support up to 288 simultaneous calls
Suited for smaller cells as against larger ones
Suited for larger cells as against smaller ones
n
Adjacent
n
All cells
cells can operate on different base
frequencies, hence cell size can be very small in the
order of few hundreds of meters
operate at same frequency. Hence, adjacent
cells must have a minimum distance of 500 meters
n
Operates
Operates
n
in 900/1800Mhz ranges (in India). High
frequency leads to high attenuation and 35 km is the
hard limit
Handset
Flexible
Rigid
n
Handset
n
Handset
interoperability is easy since the SIM card in
unlocked
n
Battery
Governing bodies
life is better because of simple protocol
Subscriber Growth - CDMA
300
n
Battery
life is bad because of higher demands of CDMA
power control
discounts and the unbelievable number of free
minutes offered by certain CDMA operators
such as Reliance.
180%
ARPU - GSM
interoperability is not possible since it is operator
locked
CDG (CDMA Development Group) & Qualcomm
ITU and few major operators
ARPU - CDMA
350
at 800MHz (in India). Hence, attenuation is low
due to relatively low base frequency, and also low
transmitter power encourages larger cell size
160%
Subscriber Growth - GSM
120%
200
100%
150
80%
60%
100
Subscriber Growth
ARPU (Rs / month)
140%
250
40%
50
20%
0
0%
Jan-07
Jan-08
Jan-09
Figure 1 – Comparison of CDMA and
GSM technologies – Subscribers and ARPU
over the past few years due to increasing focus
on tapping the rural markets, those of the
CDMA players have been declining at a faster
clip. Industry experts attribute this to the huge
68
Telecom : Circle-wise analysis
Metro circle consist of the metro cities – Delhi,
Mumbai, Chennai and Kolkata. These are some
of the most competitive markets in India, with
Delhi having in excess of 100% mobile
penetration. Mobile Circle A consists of
Maharashtra, Gujarat, Andhra Pradesh,
Karnataka and Tamil Nadu. Circle B consists of
Kerala, Punjab, Haryana, Uttar Pradesh (East
and West), Rajasthan, Madhya Pradesh and West
Bengal and Andaman and Nicobar Islands.
Circle C consists of Himachal Pradesh, Bihar,
Orissa, Assam, Jammu and Kashmir and the
North East. The A and B circles are the fastest
growing in terms of mobile subscribers,
growing at over 3% month-on-month.
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Campus Thoughts
GSM Metro Circle
275
ARPU (Rs. / month)
GSM Circle A
GSM Circle B
225
GSM Circle C
175
CDMA Metro Circle
125
CDMA Circle A
75
30.00%
40.00%
CDMA Circle C
CDMA Circle B
50.00%
60.00%
70.00%
Figure 2 – Comparison of CDMA and GSM
statistics across different circles
GSM Circle A and Circle B have the largest
subscriber base of around 100 million people
each. The remaining 150 million of India's
subscribers may be found in the other circles.
GSM Metro segment displays the lowest
subscriber growth, due to the high current
penetration. It, however, has the highest ARPU
with GPRS and value added services being
commonly used. Circle B and Circle C are rapidly
growing in subscriber strength. This is because
of the rapid development of these states and the
increasing per-capita incomes. For CDMA,
ARPU's are relatively consistent across circles
because of the low fares offered to all by players
like Reliance.
The CDMA operators bundle the handset along
with the connection and are able to offer them at
highly subsidized prices. It is for this reason that
CDMA has taken off in a big way in rural areas,
where price is the primary driver of purchase.
According to the CDMA Development Group,
the industry group that promotes CDMA
technology, acquiring a CDMA subscriber has
become almost Rs 1,000 to Rs 1,400 cheaper
than a GSM subscriber. Customer gross adds is
also supported by Reliance's aggressive selling
strategies and efficient distribution networks.
However, though the market is extremely large,
the willingness to pay is low. To tap into the
pockets of the large Indian middle class, they
had to shift their focus to the urban centres,
where the GSM players already had a stronghold. The advantage that GSM offered to the
consumers was that the phone was not bundled
with the connection and hence, it provides the
consumer the dual convenience of switching
operators at their choice as well as purchasing
the mobile phone they want. Reliance has
recently begun offering GSM services, primarily
aimed at attracting existing Airtel and Vodafone
users. While, this may be seen by some as a sign
that CDMA has poor chances of survival in the
long run, it is also worthwhile to note that many
of the new entrants in the market such as MTS
have chosen to go for CDMA networks.
New entrants
For a new entrant, in this highly competitive
market, launching a GSM network is relatively
easy, due to the possibility of sharing existing
networks. Shared infrastructure operators such
as Indus Towers make this sharing of towers
feasible for the new comers. However, the fact
that MTS has chosen to go with CDMA has
suggested that there is still some hope left. In
order to draw subscribers away from the bigger
players, MTS is offering innovative low-cost
schemes where customers are able to make Local
and STD calls at just 35 paisa to anywhere in
India on the MTS network.
Suppliers
When it comes to handsets, CDMA operators
rule the roost in terms of price differential. The
average cost of CDMA handset is less than Rs
1,500 whereas the average cost of a GSM phone
is Rs 4,355. Even the CDMA entry-level phone
costs $8-10 cheaper than a GSM phone.
Recently, Chinese and Taiwanese CDMA phone
manufacturers like ZTE, Huawei, CalComp,
PanTech, Kyocera and Kinto have entered
Indian market with their low price tags driving
69
the prices further down. For example, Reliance
Communication starts its offering with a
bundled offering at Rs 777. The CDMA
operators have taken advantage of the low-cost
manufacturers in reaching out to rural areas with
an ultra-thin price tag, a perfect serving that rural
India always wanted in its plate.
Distribution
CDMA operators have established an advantage
when it comes to hassle-free delivery of service
in acquiring and sustaining customers in rural
areas. For example, RCom sells its mobile
connections, handsets, fixed wireless phones
and data cards in villages through any kind of
outlet like a tailor shop, a grocery or fertilizer or
seed seller. Although, GSM operators too have
tie-ups with small outlets in providing mobile
connections, they don't offer the bundled
package. A villager will always look for an option
that will meet his need in a one-stop service
location which simplifies the process of buying a
handset and a phone connection at the same
point. Also, he/she doesn't have the technical
know-how to choose the handset by features,
and his choice is usually determined by lowest
price offering. So, in terms of distribution
mechanism and price point CDMA is a perfect
fit for delivering mobile service to rural
community. On the other hand, GSM scores
over CDMA when it comes to urban audience
who are looking for variety and features in
selecting handsets of their choice. Urban
customers are not averse to buying handset and
phone connection at different outlets. In fact,
they prefer that way, because the phone is not
only a communicating medium it is also a status
symbol and an entertainment device.
70
Conclusion
Telecom as an industry has been through a rapid
growth phase in the past few years and there is
no doubt that it will continue to grow in the
future. When it comes to the future of the two
prevalent technologies, it becomes evident from
our analysis that both GSM and CDMA will
have their share of the cake and neither of them
is going to lose out on the race. The difference is
going to come in the portion of the cake which
each one of them is going to devour. GSM will
scrape through the top creamy layer of the urban
markets and CDMA will have the bulky bread
portion of rural markets for its part.
Author (s)
nd
Arun Manohar is a 2 year PGP student at IIM
Bangalore. He holds a Bachelors degree in
Electrical Engineering from Indian Institute of
Technology (IIT) Madras and can be reached at
arun.manohar08@iimb.ernet.in
nd
Prasad Gopal is a 2 year PGP student at IIM
Bangalore. He holds a Bachelors degree in
Electronics and Communication Engineering
f r o m P S G C o l l e g e o f Te c h n o l o g y,
Coimbatore and can be reached at
prasad.gopal08@iimb.ernet.in
References
1.
Joshi, Priyanka, “CDMA handsets to
dominate entry level market”, Rediff News,
Jun 2007,http://www.rediff.com/money/
2007/jun/11cdma.htm (Last accessed on:
Jul 18, 2009)
2.
Anurag Prasad, 2007, “A call from the
bottom”, Outlook Business, Nov 2007,
http://business.outlookindia.com/inner.as
px?articleid=596&subcatgid=470&edition
id=21&catgid=29 (Last accessed on: July
18, 2009)
& others
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