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Introduction Rich Ponds Let's Begin This book has been developed over 4 years of research and trial and error. This book is for anyone who wishes to own, start or analyze a business. The basic premise of this book is ‘model-based thinking, which can be universally applied to any kind of business, in any industry or economy. The book has been designed using models that help understand critical areas and break down businesses, both qualitatively and quantitatively. The goal is to identify industries that are more attractive than others. This book mainly focuses on • Understanding the attractiveness of any given industry. • Industry level value proposition, followed by broad industry analysis. • Trends and practices in the industry, the evolution of the industry, and industry-related risks and growth potential are then discussed to know more about the industry. • Facilitating decision-making regarding attractive industries or what we call ‘rich ponds’ (potential fishing grounds) to find or start businesses with above-average profitability. 2 Introduction Rich Ponds This book can be used by entrepreneurs and business managers who actually carry out the business (whom we call practitioners) to analyze their ideas, the business, and the industry in which they operate. It will provide them with a framework to analyze industries and a list of all the important questions to ask. The ‘industry sheet’ will help them identify the health of the industry. It can even be used by investors and analysts to analyze their next investment ideas. 3 Content Introduction 08 Value Proposition 12 Gains, Pains & Risks 30 Broad Industry Analysis 62 First Tier Understanding Value Chain & Players in the Industry Second Tier Size, Stability & Profitability of the Industry 66 124 Third Tier Profit Forces affecting the Industry Fourth Tier 178 Industry Profitability, Growth & Investment needs 220 Evolution of the Industry 238 Trends & Practices 248 Risks & Growth Potential 260 Industry Sheet, Qualitatives & Conclusion 264 Further Reading 310 Before you end 312 References 314 Disclaimer 316 Credits 318 Introduction Rich Ponds Introduction 9- Point Business Circuit 8LI4SMRX&YWMRIWW'MVGYMXMWEJVEQI[SVOXSEREP]ÎER]KMZIRFYWMRIWWMRER]KMZIRMRHYWXV] Value Proposition People (Management) Accounting Story Business Model Industry Related Broad Industry Analysis Competitve Positioning Evolution of Industry Risks & Growth Potential Trends & Practices The remaining factors on the 9-Point Business Circuit are related to firm-specific factors. 2SXEPPMRHYWXVMIWTVSZMHIWMQMPEVSTTSVXYRMXMIWJSVTVSƼXEFMPMX]7SQIMRHYWXVMIWTVSZMHI FIXXIV WGIREVMSW JSV WYWXEMRIH TVSƼXEFMPMX] XLER SXLIVW 7MQMPEVP] RSX EPP FYWMRIWWIW [MXLMRERMRHYWXV]IEVRWMQMPEVTVSƼXEFMPMX]8LMWHMJJIVIRGIGSYPHFIHYIXSHMJJIVIRGIWMR FYWMRIWWQSHIPGSQTIXMXMZITSWMXMSRMRKETTVSEGLF]XLIQEREKIQIRXSVEGSQFMREXMSR SJXLIWIJEGXSVW;I[MPPJSGYWSRXLIMRHYWXV]WTIGMƼGJEGXSVWMHIRXMƼIHEFSZI 6 Introduction Rich Ponds Applying the models of the circuit will help identify industries that are UHODWLYHO\PRUHSURŢWDEOH DQGEXVLQHVVHVZLWKLQ WKHPWKDWSHUIRUPEHWWHU than their counterparts. 8LIQSHIPW[MPPEPWSLIPTMHIRXMJ]XLIƄ[L]ƅFILMRHWYGLSYXTIVJSVQERGI*SVXLSWI[LS [MWLXSS[RVYRSVEREP]WIER]FYWMRIWWXLIƄTSMRXGMVGYMXƅMWHIWMKRIHEWEJVEQI[SVO EVSYRH[LMGLXLI]GERFYMPHXLIMVEREP]WMW[MXLSYXFIMRKSZIV[LIPQIHF]XLIUYERXYQ SJVE[HEXETVIWIRXIH 7XEVXMRKMRER]MRHYWXV]SVZIRXYVMRKMRXSERMHIEJSVXLITYVTSWISJMRZIWXQIRXVIUYMVIW GSRGVIXIVIWIEVGLXSYRHIVWXERHXLIZEVMEFPIWSJXLIFYWMRIWW 2QFHDEXVLQHVVLV lying the models of App operational, help one ide of ntif they circuit will the PRVWGLIŢFXOWWDVNVLVWR industries that are GHWDFKRQHVHOIDQGORRNDW O\PRUHSURŢWDEOH UHODWLYH the industry level factorsDQGEXVLQHVVHVZLWKLQ ELJJHVWSLFWXUH:HZLOO PWKDWSHUIRUPEHWWHU WKH OHDUQDERXWLWLQWKHERRN than their counterparts. 8LI TSMRX GMVGYMX LIPTW EGLMIZI XLI WEQI -X EPWS LIPTW YRHIVWXERH XLI FEWMG GLEVEGXIVMWXMGWSJXLIMRHYWXV]MXWEXXVEGXMZIRIWWERHXLIOI]WYGGIWWJEGXSVWJSVƼVQWMR XLIMRHYWXV]8LIRMXGSRWXERXP]TVSZMHIWXLIUYIWXMSRWXLEX[MPPLIPTSRIXLMROSFNIGXMZIP] EFSYXXLIMRHYWXV] 7 Introduction Rich Ponds The key elements of the circuit are: Value Proposition :EPYI TVSTSWMXMSR LIPTW YRHIVWXERH XLI TVSHYGX GYWXSQIV ƼX ERH XLI ZEPYI GVIEXIH8LMW GER VIPEXI XS E WTIGMƼG MRHYWXV] FEWIH SR [LEX ZEPYI XLI MRHYWXV] GVIEXIW SV E WTIGMƼG ƼVQ )EGL ƼVQ GER X[IEO XLI ZEPYI TVSTSWMXMSR XS GVIEXI E WSYVGI SJ HMJJIVIRXMEXMSR )EGL RI[ MHIE XLEX SRI [MWLIW XS WXEVX [MXL WLSYPH FI YRHIVWXSSH FEWIH SR XLI ZEPYI MX [SYPH GVIEXI ERH XLI TVSHYGXGYWXSQIV ƼX MX[SYPHKIRIVEXI2S[JSVWXEVXYTWXLMWMWRSIEW] XEWOXSEGLIMZI&YXYRHIVWXERHMRKXLITVSHYGXERH GYWXSQIVLIPTWYRHIVWXERHXLIZEPYITVSTSWMXMSR Business Model &YWMRIWW QSHIP VIJIVW XS XLI [E] QSRI] MW IEVRIH ERH WTIRX ERH XLI QERRIV MR [LMGL EGXMZMXMIW EVI GEVVMIH SYX XS GVIEXI ZEPYI &YWMRIWW QSHIPW IZSPZI SZIV XMQI XLI] EVI KIRIVEPP] E VIWYPX SJ E WIVMIW SJ WQEPP HIGMWMSRW SZIV XMQI VEXLIV XLER SRI GSRWGMSYW HIGMWMSR 7SQI ƼVQW GER HIZMEXIJVSQXLIFEWMGQSHIPERHHSXLMRKW HMJJIVIRXP] &YWMRIWW QSHIP GER FI EHW WYFWGVMTXMSR TE] TIV YWI TYVGLEWI ERH WS SR8LMWGERIZIRFIHSRISRXLIGSWXWMHI Broad Industry Analysis 8LMW WXEKI VIPEXIW XS XLI MRHYWXV] PIZIP SRP] ERH MX LIPTWYRHIVWXERHXLIEXXVEGXMZIRIWWSJXLIMRHYWXV] 8LMWIPEFSVEXIWEWTIGXWWYGLEWZEPYIGLEMRVMWOW HIQERHWYTTP]WGIREVMSTVMGMRKTS[IVGSQTIXMXMSR [MXLMRXLIMRHYWXV]ERHWSSR 8 Introduction Rich Ponds Evolution of the Industry 8LI IZSPYXMSR SJ XLI MRHYWXV] ERH ZEVMSYW FYWMRIWWIW MR XLI MRHYWXV] LIPT MHIRXMJ] XLI OI] ZEVMEFPIW XLEX MQTEGX XLI MRHYWXV] ERH IWXEFPMWL ƄTVIGIHIRGIƅ VIKEVHMRK LS[ ƼVQW LEZI KIRIVEPP] WYGGIIHIH MR XLI MRHYWXV]MRXLITEWX Trends and Practices in the Industry 8LIKIRIVEPXVIRHW[MXRIWWIHMRXLIMRHYWXV]LIPTYRHIVWXERH XLITSWWMFPIGLERKIWERHWLMJXWXLIMRHYWXV]MWKSMRKXLVSYKL -XEPWSLIPTWYRHIVWXERHXLIGSQQSRTVEGXMGIWMRXLIMRHYWXV] 8LMW KMZIW YW STTSVXYRMXMIW XS GEXGL YT XLI RI[ XVIRHW ERH IRXIVXLIMRHYWXV]HSMRKWS Risks and Growth Potential 8LIWI VIPEXI XS FSXL XLI MRHYWXV] WTIGMƼG ERH GSQTER]VIPEXIH VMWOW 8LIVMWOWERHKVS[XLTSXIRXMEPSJER] MRHYWXV]ETTP]XSQSWXFYWMRIWWIW[MXL MX %PWS EW GSQTERMIW EVI HMJJIVIRXP] TPEGIH [MXL HMJJIVIRX GETEFMPMXMIW XLI] LEZI WTIGMƼG VMWOW ERH KVS[XL TSXIRXMEPXSSXLEXEVIWTIGMƼGXSXLIQ 9 Introduction Rich Ponds Competitive Positioning ;MXLMR ER] MRHYWXV] WSQI ƼVQW EVI TPEGIH EX ER EHZERXEKI XS SXLIVW 8LMW GSQTIXMXMZI TSWMXMSRMRK MW E GYQYPEXMZI VIWYPX SJ WQEPPIV HIGMWMSRW VIKEVHMRK HMJJIVIRXMEXMSR SZIV XMQI 'SQTIXMXMZI TSWMXMSRMRK MWEXEƼVQWTIGMƼG PIZIPSRP] ERHRSXEXXLIMRHYWXV]PIZIP Accounting Story 8LI RYQFIVW SJ E FYWMRIWW WE] E PSX EFSYX XLI FYWMRIWWƂWYGL EW MXW UYEPMX] XLI TISTPI ERH XLI GLERKIW TVSZMHIH XLI VMKLX UYIWXMSRW EVI EWOIH 8LMW WXEKI LIPT YRHIVWXERH XLIFYWMRIWWUYERXMXEXMZIP] People 8LITISTPI[LSVYRXLIFYWMRIWWEVI XLI QSWX MQTSVXERX EWTIGXW SJ XLI GMVGYMX8LI]MRƽYIRGIEPPXLITVIZMSYW PIZIPW SJ XLI GMVGYMX 9RHIVWXERHMRK XLI ZMWMSR QSXMZEXMSR ERH XLI EFMPMX] SJXLIQEREKIQIRX[LSEVIVYRRMRK XLIƼVQEVIGVMXMGEPEWTIGXW 10 Introduction Rich Ponds In this book, we will focus on the industry-specific factors. 11 12 Rich Ponds Value Proposition Value Proposition 13 Rich Ponds Value Proposition Value Proposition Rich Ponds :EPYI TVSTSWMXMSR VIJIVW XS XLI KEMRW XLEX E GSQTER]ƅW TVSHYGXW ERH WIVZMGIW GVIEXI SV XLI TEMRWXLI]VIPMIZIJSVEWIXSJGYWXSQIVWMRI\GLERKIJSV[LMGLXLI]I\TIGXXSIEVRETVSƼX8LI GSQTER]ƅW TVSHYGX ERH WIVZMGI SJJIVMRK QYWX QEXGL XLI EHIUYEXI WIX SJ GYWXSQIVW [LS EVI PSSOMRKXSVIPMIZIXLIQWIPZIWSJWMQMPEVTEMRSVLEZIWMQMPEVKEMRVIUYMVIQIRXW Active Readers Kindle Match Mass 0DUNHW Kindle Mismatch To elaborate, there must be a product-customer fit or match i.e. you must sell the right product to the right set of customers. For example, if you want to sell a Kindle, you must find people who are active readers and not look at the mass market. Strongest Value Proposition V/S Appeals to the Customer )EGL GSQTER] EPXIVW MXW ZEPYI TVSTSWMXMSRERHXVMIWXSFIWXVSRKIV XLERSXLIVWMRXLIWEQIMRHYWXV] 8LISRI[MXLXLIWXVSRKIWXZEPYI TVSTSWMXMSR KIXW FSYKLX F] XLI GYWXSQIV However, another important factor is the perception of value, which is subjective across different customers. Some customers may perceive a proposition to be very valuable whereas others may not even consider that proposition, depending on their pains and desired gains. 14 Value Proposition Rich Ponds ;LMPI HIWMKRMRK XLI ZEPYI TVSTSWMXMSR XLI GLEPPIRKI MW MR KIXXMRK XLI VMKLX QEXGL FIX[IIR XLI TVSHYGXWERHGYWXSQIVW TVSHYGXGYWXSQIVƼX Luxury Car in Country side Tough Car in Country side For example, while designing a car to be sold in the countryside, one must take into consideration the needs of the customers. A luxury car may not be as effective as a tough car with a high fuel economy and the ability to ride on rough roads. :EPYITVSTSWMXMSRWGERI\MWXEXXLIMRHYWXV]PIZIPEW[IPPEWXLIFYWMRIWWPIZIP;LIRGSQTEVMRK EXXLIMRHYWXV]PIZIPXLIZEPYITVSTSWMXMSRQYWXFIGSQTEVIHXSXLIZEPYISJJIVIHF]WYFWXMXYXI MRHYWXVMIW At Industry Level, Tea v/s Coffee 6XEVWLWXWH,QGXVWULHV EV Vehicles v/s Petrol/Diesel 6XEVWLWXWH,QGXVWULHV At Business Level, v/s v/s v/s v/s 15 Value Proposition Rich Ponds For example, V/S Petrol car makers must compare their value proposition with that of diesel and gasoline car makers. V/S Tea sellers should compare their proposition with coffee sellers. They should understand ZKDWJDLQVDUHEHLQJ created or what pains are EHLQJUHOLHYHG7KLVZLOOKHOS VHOOHUVLGHQWLI\WKHEX\HUV for their products and DOVRPDNHFKDQJHVWRWKH products to attract more EX\HUV %XXLIFYWMRIWWPIZIPƼVQWEVIƼKLXMRKEQSRKXLIQWIPZIWSR[LS[SYPHGVIEXIXLIWXVSRKIWX value proposition. %XXLIFYWMRIWWPIZIPƼVQWQYWXGSQTEVIXLIQWIPZIWERHXLIMVSJJIVMRKWXSXLSWISJSXLIVƼVQW [MXLMRXLIWEQIMRHYWXV]EW[IPPEWƼVQWMRWYFWXMXYXITVSHYGXMRHYWXVMIW7YFWXMXYXITVSHYGXWEVI XLSWIXLEXGERFIYWIHMRTPEGISJERSXLIV8LIƼVQGERXLIRHIGMHI[LMGLGYWXSQIVXSJSGYWSR [LMGLGYWXSQIVRSXXSJSGYWSRERHLS[MXWLSYPHEPXIVMXWTVSHYGXWERHWIVZMGIWXSFIXXIVQEXGL XLIGYWXSQIVƅWKEMRWERHTEMRW Approaches to establish Product - Market Fit Approach 1 16 Approach 2 I Product and Service Building I Selecting set of customers II Finding pains to be relieved and gains for similar customers II Designing a product or service for them ‘customers for products’ approach. Value Proposition The first approach is a Rich Ponds Customers for Products Here, we expect the customers to adopt to the value/features offered E\WKHSURGXFWDQGPD\EHHYHQ change their consumption style. 1EOMRKEKSSHTVSHYGXSVWIVZMGIMWEQSRYQIRXEPIJJSVX&YXƼRHMRKGYWXSQIVW[LSLEZIWMQMPEV TEMRWERHKEMRWVIUYMVIQIRXWEWSJJIVIHF]XLITVSHYGXMWIZIRQSVIHMƾGYPX %XXMQIWHIWTMXIXLITVSHYGXFIMRKEKVIEXTVSHYGXXLIVIQE]FIRSGYWXSQIVW[LSEVIPSSOMRK JSVXLIZEPYISJJIVIHF]XLITVSHYGX%PWSXLIIJJSVXQEKRMƼIWEWSJXIRXLIXIEQHIZIPSTMRKXLI TVSHYGXKIXWEXXEGLIHXSMXERHXLIMVFMEWIWQEOIMXHMƾGYPXJSVXLIQXSWIIXLITVSHYGXGYWXSQIV ƼXSFNIGXMZIP] Product - Market Fit Firstly, design a product so great that people forget their pains and gains and adapt to the value proposition offered by the product. 8LMW MW E X]TMGEP GEWI SJ TISTPI EHETXMRK XS TVSHYGXW VEXLIV XLER XLI TVSHYGXEHETXMRKXSTISTPI Secondly, the product is designed keeping a target group in mind. 8LIKVSYTMWXLIRWXYHMIHEXPEVKIVHIXEMP ERHETVSHYGXMWHIZIPSTIHXSWYMXXLIMVRIIHW When Steve Jobs said, “People hardly know what they want, until you show them,” he was referring to building such a great product that people adapt their expectations to match what the product offers. %PQSWX EPP FYWMRIWWIW EVSYRH WGMIRXMƼG MRRSZEXMSRW ERH HMWGSZIVMIW FIX SR GYWXSQIVW adapting to their products rather than vice versa. ,S[IZIVWYGLFYWMRIWWIWEVIZIV]VEVIERH XSYRHIVWXERHXLIQXLIXIGLRMGEPEWTIGXWSJXLITVSHYGXRIIHQSVIEXXIRXMSRXLERXLIIGSRSQMG EWTIGXWSJXLIFYWMRIWW7YGLEREP]WMWMWFI]SRHXLIWGSTISJXLMWFSSO 17 Value Proposition Rich Ponds Products for Customers The second approach is a ‘products for customers’ ,W LV UHODWLYHO\ PRUH HIILFLHQW WR study, predict and identify the needs of customers. Then one can design products that satisfy the pains and gains of the customers. approach. )ZIR GSQTERMIW XLEX MRMXMEPP] YWI XLI ƼVWX ETTVSEGL IZIRXYEPP] QSZI XS XLI WIGSRH ETTVSEGL [LMGLMWHIWMKRMRKTVSHYGXWJSVXLIMVI\MWXMRKGYWXSQIVW*SVMRWXERGIQER]XLMVHTEVX]PSKMWXMGW GSQTERMIWWXEVXIHTVSZMHMRKƼRERGMRKWSPYXMSRWXSXLIMVGPMIRXW[LIRXLI]WE[XLEXXLIMVGPMIRXW [IVIPSSOMRKJSVƼRERGMRKWSPYXMSRWJSVXLIMVMRZIRXSV] ;LIXLIVXLMWMWXLIETTVSEGLXLEXGSQTERMIWFIKMR[MXLSVIZIRXYEPP]EVVMZIEXXLMWMWXLIETTVSEGL XLEXMWYWIHJSVSYVEREP]WMW8SYRHIVWXERHXLIZEPYITVSTSWMXMSRSJER]MRHYWXV]SVƼVQIEGL GYWXSQIVWIKQIRXWLSYPHFIMHIRXMƼIHERHXLIRWLSYPHFIYRHIVWXSSHMRHIXEMP 18 For example, people of a similar religion FDQVKRZVLPLODUEX\LQJSDWWHUQVDQG WRJHWKHUIRUPDPDUNHWVHJPHQW Where? Value Proposition Who? 'YWXSQIVWGERFIWIKQIRXIHFEWIHSR[LSXLI]EVIMIXLIMVMHIRXMX] GSRWYQTXMSRTEXXIVRWXEWXIWERHTVIJIVIRGIW[LMGLQE]ZEV]FEWIH SRSVMKMR Rich Ponds 8LIVIEVIQYPXMTPI[E]WXSHMZMHIXLIQEVOIXMRXSGYWXSQIVWIKQIRXW8LI]GERFIMHIRXMƼIH FEWIHSRER]SJXLIJSPPS[MRKƼZIUYIWXMSRW 7IKQIRXEXMSRMWTSWWMFPIFEWIHSRXLIKISKVETLMGEPPSGEXMSR JVSQ[LIVIXLITVSHYGXMWXSFIFSYKLXWSPHSVGSRWYQIH )RUH[DPSOHFRQVXPHUVLQ1RUWKHUQ,QGLD EX\PRUHGLDPRQGVFRPSDUHGWRWKRVHLQ 6RXWKHUQ,QGLDZKRPRVWO\EX\JROG What? 7IKQIRXEXMSRGERFIHSRIFEWIHSR[LEXTISTPI[ERXSVI\TIGX JVSQEFYWMRIWW;LEXMWMXXLEXXLI]EVIXV]MRKXSEGLMIZIJVSQ XLITVSHYGX# For example, some people go to the VXSHUPDUNHWWREX\JURFHULHVZKLOH RWKHUVJRWRWKHVXSHUPDUNHWIRUGDLU\ SURGXFWVRUEDNHU\SURGXFWV Why? 'YWXSQIVWGERFIWIKQIRXIHFEWIHSR[L]XLI][MWLXSFY]E TVSHYGX SV WIVZMGI8LI QSXMZEXMSR GER FI XLI TEMRW XLEX [MPP FI VIPMIZIHSVXLIKEMRWXLEX[SYPHFIGVIEXIH )RU H[DPSOH VRPHRQH PD\ EX\ D FDU IRU WUDQVSRUWDWLRQ ZKHUHDV VRPHRQH HOVH PD\ EX\ LW IRU VRFLDO VWDWXV 6RPH SHRSOH EX\ MHZHOOHU\ IRU FRQVXPSWLRQZKLOHRWKHUVPD\EX\LWDVDQLQYHVWPHQW How? ,S[ XLI TVSHYGX [SYPH FI YWIH HIXIVQMRIW XLI WIKQIRXW MR XLI QEVOIX The needs of someone who wants a laptop for gaming ZRXOGEHGLIIHUHQWIURPVRPHRQHZKRUHTXLUHVLWIRU EDVLF06RIILFHXVH7KHQHHGVRIWKRVHZKRXVH LWGDLO\ZRXOGEHGLIIHUHQWIURPWKRVHZKRXVHWKH laptop once in a while. They are all different segments 19 Value Proposition Rich Ponds Customer Segmentation of Indian Agrochemical Industry $QLQGHSWKORRNLQWRKRZDQ,QGXVWU\ŒVFXVWRPHUVFDQEHVHJPHQWHG 8LI IRXMVI QEVOIX JSV EKVSGLIQMGEPW MR -RHME GER FI WIKQIRXIH FEWIH SR XLI JEGXSVW WLS[R FIPS[ )EGL WIKQIRX [MPP FILEZI HMJJIVIRXP] JVSQ XLI SXLIVW ERH [MPP LEZI E HMJJIVIRXGYWXSQIVTVSƼPI8LITVSHYGXERHWIVZMGIWWLSYPHFIHIWMKRIHHMJJIVIRXP]JSV IEGL WIKQIRX %W E VIWYPX HMJJIVIRX ƼVQW MR XLI MRHYWXV] GER GLSSWI XS XEVKIX SRI SV E JI[ SJ XLIWI WIKQIRXW 8EVKIXMRK IEGL WIKQIRX VIUYMVIW WMKRMƼGERX QEREKIQIRX FERH[MHXL Three Basis of Segmentation Crop Type Geography - wise Agrochem Type Cereals and grains, oils and pulses, fruits and vegetables Northern India, Southern India, Western India, Eastern India, Central India Herbicides, insecticides, fertilizers, genetically pesticides, QSHMƼIHWIIHW )EGL GYWXSQIV WIKQIRX MW MHIRXMƼIH F] E GSQFMREXMSR SJ EPP XLI HMJJIVIRX FEWIW SJ WIKQIRXEXMSR *SV I\EQTPI GIVIEP KVS[IVW MR 2SVXLIVR -RHME PSSOMRK JSV LIVFMGMHI EVI EWIKQIRX'LERKMRKIZIRSRIFEWMWGLERKIWXLIWIKQIRX'IVIEPKVS[IVWMR;IWXIVR -RHMEPSSOMRKJSVLIVFMGMHIW[MPPJSVQERSXLIVWIKQIRX%PWSXLIPIZIPSJHIXEMPMRKJSVIEGL WIKQIRXHITIRHWSRXLIWGSTISJEREP]WMW*SVI\EQTPIIEGLWXEXIGEREPWSFIYWIHMR TPEGISJVIKMSRWJSVKISKVETL][LMPIMHIRXMJ]MRKGYWXSQIVWIKQIRXW 20 In the book Value Proposition Design, written by Alex Osterwalder, Yvette Pigneur, Greg Bernarda, and Alan Smith, the authors propose a value proposition canvas. 8LIZEPYITVSTSWMXMSRQSHIP MRXLIEFSZIFSSO JSGYWIWSR TVSHYGXWERHWIVZMGIWXLI[E]XLI]GVIEXIKEMRWERHVIPMIZI TEMRWERHXLIGYWXSQIVTVSƼPIJSVIEGLGYWXSQIVWIKQIRX 8LI GYWXSQIV TVSƼPI LIVI [SYPH VIJIV XS EPP XLI KEMRW XLEX XLIGYWXSQIV[MWLIWXSGVIEXIERHXLITEMRWERHVMWOWXLEX LI [MWLIW XS VIPMIZI LMQWIPJ SJ YTSR GSRWYQTXMSR SJ XLI TVSHYGXSVXLIWIVZMGI8LI[SVHWKEMRWERHTEMRW[IVIƼVWX MRXVSHYGIHMRXLMWFSSOERHLEZIFIGSQITSTYPEVWMRGIXLIR Value Proposition 8SYRHIVWXERHXLIZEPYITVSTSWMXMSRSJXLIFYWMRIWWERHXLITVSHYGXGYWXSQIVƼXXLITVSHYGXW ERHGYWXSQIVWRIIHXSFIYRHIVWXSSHWITEVEXIP]ERHXLIRXSKIXLIVXSYRHIVWXERH[LIXLIVXLI KEMRWERHTEMRWEVIHIPMZIVIHSVRSXJSVXLIGSVVIWTSRHMRKGYWXSQIVWIKQIRXW Rich Ponds Value Proposition Design They say, “The value proposition canvas has two VLGHV:LWKWKHFXVWRPHU SURŢOH\RXFODULI\\RXU FXVWRPHUXQGHUVWDQGLQJ:LWK WKHYDOXHPDS\RXGHVFULEH how you intend to create value for the customer. You DFKLHYHŢWEHWZHHQWKHWZR when one meets the other.” 8LMWQSHIPWLSYPHFIETTPMIHJSVIEGLTVSHYGXERHWIVZMGISJXLIƼVQSVMRHYWXV]ERHJSVIEGL GYWXSQIVWIKQIRXXSYRHIVWXERH[LEXZEPYIMWFIMRKGVIEXIHERHLS[MXMWFIMRKGVIEXIH Gain Creators 5HTXLUHG Desired Gains Gains Pains Products and Services Unexpected Gains 5LVNV EHIRUHGXULQJ after) Customer Profile Pain Relievers 21 *Adopted from 'Value Proposition Design' Value Proposition Rich Ponds *SVXLSWITPERRMRKXSPEYRGLERI[TVSHYGXSVWIVZMGIEPPTSXIRXMEPGYWXSQIVKVSYTWQYWXFI PMWXIHERHXLIRWIKQIRXIHFEWIHSRXLIƼZIUYIWXMSRWQIRXMSRIHIEVPMIV%GSQFMREXMSRSJXLI WIKQIRXEXMSR JEGXSVW [LS [LEX LS[ [L] ERH [LIVI GER FI YWIH JSV IZIR QSVI WTIGMƼG GYWXSQIVWIKQIRXEXMSR Who? How? Where? Potential Customers What? Why? Customer Profile for each segment is created. 8LMWMWHSRIF]YRHIVWXERHMRKXLIRIIHWERH[ERXWTEMRWERHKEMRWJSVIEGLGYWXSQIVWIKQIRX 22 Value Proposition Rich Ponds 8LIGYWXSQIVTVSƼPISJIEGLWIKQIRXWLSYPHFIGVIEXIHERHXLIRXLITVSHYGXSVWIVZMGIXLEX MWFIMRKTVSTSWIHWLSYPHFIIZEPYEXIHERHEPXIVIHXSQIIXXLIRIIHWERHI\TIGXEXMSRWSJXLI GYWXSQIVWIKQIRXWWIPIGXIHSYXSJEPPXLITSXIRXMEPGYWXSQIVWIKQIRXWMRMXMEPP]MHIRXMƼIH Products and Services -XQIERWXLEXXLITVSHYGXW ERHWIVZMGIWVIPMIZITEMRW SVGVIEXIKEMRW FIT -X WLS[W [LMGL TEMRW ERH KEMRWEVIRSXEHHVIWWIHF] XLITVSHYGXWIVZMGI Potential Customer 3RGIXLITVSHYGXGVIEXIWXLIWEQIKEMRWERHVIPMIZIWXLIWEQITEMRWEWHIWMVIHF]XLIGYWXSQIVW XLITVSHYGXGYWXSQIVƼX[SYPHFIEGLMIZIHERHXLITVSHYGXMHIE[SYPHƼRHEQEVOIXJSVMX-JXLI TVSHYGXGYWXSQIVƼXMWRSXEGLMIZIHXLITVSHYGX[MPPRSXƼRHEQEVOIXJSVMXWIPJ8LIGYWXSQIV[MPP SRP]FI[MPPMRKXSTE]JSVXLITVSHYGXSRGIXLIƼXLEWFIIRIWXEFPMWLIH 23 As As the the sellers sellers are are already already selling selling the the products, products, they they do do have have a a product-customer product-customer fit. fit. The The objective objective here here is is to to evaluate evaluate how how strong strong the the fit fit is is and and see see if if anything anything could could be be changed changed to to increase increase the the strength. strength. Rich Ponds Value Proposition *SVXLSWIEREP]^MRKI\MWXMRKFYWMRIWWIWSVTVSHYGXW a slightly different approach is needed. Here again, based on the products and services sold, all potential customer segments must be identified. Each segment is then profiled and the best match for the products is identified. Who? How? Where? Potential Customers What? Why? FIT • • • 24 This is then compared to the segments being served by the business to identify if the correct segments are being served. Then the changes that could be made to the products to cater to other potential segments are identified. These changes would help the business serve more customers, identify growth avenues and also make the product-customer fit stronger. Value Proposition Rich Ponds Burgers *SVI\EQTPI[LIRUYMGOWIVZMGIVIWXEYVERXW 576W WYGLEW1G(SREPHƅW&YVKIV/MRKERH4M^Ê ,YXGEQIXS-RHMEXLI][IVIWIPPMRKTM^ÊFYVKIVWERHJVMIW7SQER]I\TIVXWERXMGMTEXIHXLIWI 576WXSWLMJXXSEQIRYFEWIHSR-RHMERXEWXIWERHEPWSSJJIVEJYPPQIEPQIRY8LMW[SYPHSTIR EFMKKIVQEVOIXJSV576WMR-RHMEI\TIVXWFIPMIZIH%RHXLMWHMHLETTIR'LERKIWQEHIXSXLI TVSHYGXQEHIXLITVSHYGXGYWXSQIVƼXEQYGLWXVSRKIVSRI This is the kind of mindset that a person needs to adopt when analyzing a value proposition, or working on building one. Gratin Croquette Burger India Japan French Fries Maple Bacon Poutine Soft Serve Maple Bacon Poutine Fries McChicken Burger Canada Desserts India India Germany 25 8LI ƼVWX WXIT EJXIV MHIRXMJ]MRK XLI TSXIRXMEP GYWXSQIV WIKQIRXW MW XS GVIEXI IEGL GYWXSQIV WIKQIRXƄWTVSƼPI'VIEXMRKEGYWXSQIVTVSƼPIVIUYMVIWXLIMRZIWXSVXS[IEVQER]LEXW Rich Ponds Value Proposition Customer Profile Identify the different customer segments Entrepreneur/ Investor For each customer segment, understand their current pains, gains, needs, wants, beliefs and so on. Understand and observe what, why and where they buy the products and so on. A detailed explaination will give a detailed customer profile. 26 Value Proposition Rich Ponds The process of customer profiling is largely open-ended and subjective to the analyst, but the underlying principle remains the same. Get as close to the customers and the buying process as possible. Some of the effective techniques to understand the customer better: • • • • • • • • Questionnaires Phone interviews of the customers Phone interviews of the middlemen Paid market research Online surveys of the past Videos on the lives of potential customer segments Physical presence at the point of sales Physical presence at the point of the utilization of the product 27 Value Proposition Rich Ponds Sample Questionnaire for Agrochemical Retailers Q Q Q Q Q Q Q Q How does the customer buy the product? What are the variables they consider while buying? What are the benefits and the major costs that the buyer perceives while buying agrochemicals? How are the buyers educated or trained? How do they receive information about the products? Do the customers buy mainly branded products or from unorganised players? Why? Is there any community pressure while making a purchase decision? Are the buyers confident about the use of agrochemicals? How much certainity do they have about the outcome after use? Is the required agrochemical adequately available? What are the payment terms for purchase by customers? Do they pay on time? These, along with other creative methods, can be used to collect data to draft the customer profile. Insights related to customer psychology should also be incorporated in the customer profile. 28 Rich Ponds Value Proposition Notes 29 Rich Ponds Gains, Pains & Rsiks 2 30 Gains, Pains & Risks 31 Rich Ponds Gains, Pains & Risks Gains, Pains & Rsiks Rich Ponds %WMRXVSHYGIHMRXLIFSSO:EPYI4VSTSWMXMSR(IWMKRXLIHMJJIVIRXIPIQIRXWSJGYWXSQIV TVSƼPIWEVIHMWGYWWIHKSMRKJSV[EVH Gains Pains They help to understand the EHQHILWVWKDWWKH customer is currently ORRNLQJIRUE\ consuming a product. They relate to the discomfort that the FXVWRPHULVORRNLQJ to get rid of upon consumption. Risks ,WUHIHUVWRWKHULVNV that they are trying to reduce. (MJJIVIRXGYWXSQIVWIKQIRXWLEZIHMJJIVIRXTEMRWKEMRWERHVMWOW Together they help create a profile for the customer, helping understand what the customer exactly wants, what he wants to get rid of, and what factors influence the purchase decision. 32 Gains, Pains & Risks -XVIJIVWXS[LEXXLIGYWXSQIVW[MWLXSEGGSQTPMWLFIRIƼXJVSQGSRWYQTXMSRSJETVSHYGXSV WIVZMGIGains and pain relievers are the fundamental units that together create value for the customers. The more the gains created, the higher the value created by the product. We will understand more about gain creators and pain relievers going ahead. Pictures Email Rich Ponds Gains Music Social Media and Status Update For example, when a person buys a smartphone, it creates multiple gains for them. ,S[IZIVXLITVMSVMX]SJYWEKIQE]ZEV]HITIRHMRKSRXLIGYWXSQIVWIKQIRX%PWSKEMRWGERFI HMJJIVIRXOMRHWJYRGXMSREPWSGMEPSVTW]GLSPSKMGEP Spending time with family Gathering new experiences Trying out new cuisines Exploring new places 5HOD[LQJIURPZRUN Meeting new people When a person signs up for a family vacation, it creates multiple gains for them. We need to understand which gains are the customers looking for the most. 33 Gains, Pains & Rsiks Rich Ponds Types of Gains Functional Gains Psychological Gains Social Gains Cost Saving Also, gains can further categorised based on its importance and priority to the consumer. The different types of gains are: 5HTXLUHG*DLQV Expected Gains Unexpected Gains Lets have a look at each one of them in greater detail! 34 8LIWI EVI XLI FEWMG KEMRW XLEX E GYWXSQIV VIUYMVIW 8LI] EVI QERHEXSV] [MXLSYX [LMGL XLI WSPYXMSRHSIWRSX[SVOERHZEPYIMWRSXGVIEXIH4VSHYGXQYWXGVIEXIVIUYMVIHKEMRW[LIRYWIH Cooling the room when using an airconditioner. 0DNLQJFDOOVZKHQ using a smartphone Gains, Pains & Risks 6IUYMVIH+EMRW Rich Ponds Types of Gains [Based on Utilities] 0RELOLW\ZKHQXVLQJ a car. These gains are fundamental to the product; the product can not exist without satisfying these gains. All successful products must fulfill these gains. %RMRZIWXSVIRXVITVIRIYVRIIHWXSTE]EXXIRXMSRXSXLIWIKEMRWEWHMJJIVIRXGYWXSQIVWIKQIRXW LEZIHMJJIVIRXVIUYMVIHKEMRWJSVXLIWEQITVSHYGXSVWIVZMGI8LMWEPPS[WXLIQXSMHIRXMJ]XLI GYWXSQIVWIKQIRXWXLEXWLSYPHFIWIVZIHERHXLSWIXLEXWLSYPHFIEZSMHIH ,ZDQWDUHVWDXUDQW ZLWKJUHDWDPELHQFH ,ZDQWD restaurant with a FKLOGUHQŒVSOD\DUHD ,ZDQWDUHVWDXUDQW that only serves YHJLWDULDQIRRG We can see that different customer segments have different required gains. They can have overlap in required gains but the priorities are different. This is why detailed customer research is very important. 35 8LIWI KEMRW EVI RSX JYRHEQIRXEP XS XLI TVSHYGX FYX EVI ƄHIWMVIHƅ F] XLI GYWXSQIV 'YWXSQIVW [SYPH[ERXXSLEZIMXMJXLI]GSYPH Rich Ponds Gains, Pains & Rsiks Desired Gains 3RZHUHIŢFLHQF\DQG silence in an air-conditioner Beautiful design in a smartphone Low maintenance and fuel economy in a car These gains allow the product to demand a premium. &YWMRIWWIW [MXL WYGL TVSHYGXW KEMR VIGSKRMXMSRSZIVXMQIERHFIGSQIWXVSRKFYWMRIWWIW[MXLWYWXEMRIHTVSƼXEFMPMX] Unexpected Gains 7SQIKEMRWEVIWYGLXLEXXLIGYWXSQIVWHSRSXI\TIGXXLIQ-RQER]GEWIWXLI]HSRSXIZIR ORS[ XLEX XLIWI KEMRW GER FI GVIEXIH F] XLI TVSHYGX SV WIVZMGI8LI] EVI TSWMXMZIP] WYVTVMWIH [LIR XLI] GSQI XS ORS[ EFSYX XLIWI YRI\TIGXIH KEMRW 3JXIR XLI GYWXSQIVW EVI RSX IZIR E[EVISJXLIWIKEMRWXMPPXLI]WXEVXGSRWYQMRKXLITVSHYGXSVWIVZMGI-XMWXLIWIKEMRWXLEXGVIEXI GYWXSQIVHIPMKLX For example, the experience that 6WDUEXFNVFUHDWHVLQWHUPVRIVHUYLFH DQGDPELDQFHFDQEHXQH[SHFWHGJDLQV IRUDQ\ŢUVWWLPHYLVLWRU The customization service that it offers can leave customers positively surprised. It is businesses with such products that create unexpected gains. They win loyal customers and, over time, they go on to become great businesses. 36 Required Gains • Expected Gains • • Unexpected Gains • • • • • • • • • • • • Gains, Pains & Risks Rich Ponds Gains Required by the Customers of the Agrochemical Industry Insecticides Segment 1IIXEHIUYEXIVIUYMVIQIRXWSJXLIGVSTWXLEXJEVQIV KVS[W FEWMGGVSTTVSXIGXMSR )RZMVSRQIRXJVMIRHP] %TTPMGEXMSRSJTVSHYGXTIVQMXXIHF]XLIKSZIVRQIRX 9WEKIKYMHERGITVSZMHIH *EVQIVƅWLIEPXLWLSYPHRSXFILEVQIHSRWYWXEMRIH YWEKI %[EVIRIWWGSRWYPXERG]ERHKYMHERGI 6IHYGIHIRXV]FEVVMIVWRSWTIGMEPIUYMTQIRXWLSYPHFI VIUYMVIHJSVETTPMGEXMSRSJXLIGSQTER]ƅWTVSHYGXW )RZMVSRQIRXJVMIRHP]JSVIRXMVIGSQQYRMX] *SGYWSRJEVQIVƅWPIEVRMRKGYVZI &VERHIHTVSHYGXWJSVTIVJSVQERGIEWWYVERGI 'SQQYRMX]EGGITXIHTVSHYGXXSVIHYGIWSGMEP TVIWWYVI 0S[[EWXEKIETTPMGEXMSRQIXLSHW JSVQYPEXMSRWERH IUYMTQIRXW 4VSQMWIHSVQSVIXLERI\TIGXIH]MIPH )EWIMRGVIHMXJEGMPMXMIW*EVQIVWTE]EWTIVXLIMVGVST TVSHYGXMSRMRXLIKMZIR]IEV +MZIELMKLIVWIRWISJWIGYVMX]MIVIHYGIHHSYFXXLEX GVSTWGSYPHFIHIWXVS]IHF]TIWXWHIWTMXIYWEKI 37 Gains, Pains & Rsiks Rich Ponds Types of Gains [Based on Nature] Functional Gains 8LI GYWXSQIV XVMIW XS GSQTPIXI E TEVXMGYPEV XEWO ERH XLI TVSHYGX EPPS[W XLIQ XS HS WS *SV I\EQTPIETIVWSRYWIWEGEVJSVEJYRGXMSREPKEMRƂXSKSJVSQTSMRX%XSTSMRX& The function of the car is to move from one place to another. A pen that writes provides a functional gain. All levels of gains can be functional in nature based on the manner in which they create ZEPYI[LIXLIVVIUYMVIHI\TIGXIHSVYRI\TIGXIH%R]TVSHYGXXLEXEPPS[WXLIGYWXSQIVXSHS something is a functional gain. Social Gains ,YQERW EVI WSGMEP FIMRKW [MXL E HIWMVI XS FIPSRK 8LMW HIWMVI MW HIWGVMFIH EW E JYRHEQIRXEP LYQER QSXMZEXMSRƂE GSVI JEGXSV XLEX HVMZIW IZIV]XLMRK [I EW LYQERW HS 'VIEXMRK E WIRWI SJ FIPSRKMRK [LIXLIV [MXL GS[SVOIVW JVMIRHW SV IZIR SRPMRIGSRRIGXMSRWMWIWWIRXMEPJSVSYVTW]GLSPSKMGEP[IPPFIMRK7SGMEPTVSSJEGXWEWE JYRHEQIRXEPFYMPHMRKFPSGOXSEGLMIZMRKXLMWWIRWISJFIPSRKMRK[1] gives the customer a VHQVHRIEHORQJLQJWR society. gain Creates Social Proof Social Status/ Acceptance Enhanced Perception of Society Product/ Service 7SQIKEMRWHIPMZIVIHF]XLITVSHYGXSVWIVZMGIGVIEXIWSGMEPTVSSJERHKMZIXLIGYWXSQIVEWIRWI SJFIPSRKMRKXSWSGMIX]8LMWGERFIMRXLIJSVQSJWSGMEPEGGITXERGISVWSGMEPWXEXYW[LMGLPIEHW XSERIRLERGIHTIVGITXMSRMRWSGMIX] 38 [1] https://www.entrepreneur.com/article/317725 Gains, Pains & Risks Expensive watches and MHZHOU\FUHDWHDSRVLWLYH social status. Rich Ponds Apart from offering good performance, premium cars create a social status. To some customers, this social gain is an important factor when a purchase decision is being made. The creation of such gains creates a tremendous loyalty toward the product and allows the brand to command a higher price. Psychological Gains ;LIRTISTPIQEOIGLSMGIWXLI]HSRSXEP[E]WHSWSSFNIGXMZIP]8LIWYFNIGXMZMX]MRIEGLHIGMWMSR MWLIEZMP]MRƽYIRGIHF]XLITIVWSRƅWTW]GLSPSKMGEPTVIJIVIRGIW8LIWITVIJIVIRGIWEVIGVIEXIH SZIVXMQIFEWIHSRTEWXI\TIVMIRGIW[MXLXLITVSHYGX 4VSHYGXWGVIEXIKEMRWXLEXEVITW]GLSPSKMGEPMRREXYVI[LIRXLI]LEZIE JIIPKSSH JEGXSVEFSYX XLIQ8LI]MRƽYIRGIXLIYWIV WFILEZMSYVWMKRMƼGERXP] $UHVWDXUDQWŒV DPELDQFH The designs offered E\DFORWKLQJEUDQG The sensory experience while using a particular perfume These are the gains that are psychological in nature and they impact the customers’ preferences and behaviour. These gains are different from social gains. Social gains are approved by society and one person cannot alter what is ‘accepted’. Whereas in psychological gains, the gains are very much personal and approved by the consumer. Products with such gains create immense attachment and customer loyalty. 39 Gains, Pains & Rsiks Rich Ponds Cost Savings 8LIGSWXSJGSRWYQTXMSRMWXLITVMGITEMHJSVYXMPM^MRKXLIZEPYIGVIEXIHF]XLITVSHYGX8LIGSWX GERFIMRXIVQWSJQSRI]EW[IPPEWXMQI High Cost of Consumption Low Strength of Value Proposition Some products do not particularly focus on enhancing the gains created or the pains relieved, but they focus on reducing the cost of consumption. By saving costs, they pitch themselves to be of higher value than their substitutes or similar products. In the process of reducing cost, the product may let go of some gain creators—the ones that are low on priority for the customers and make a cheap alternative available. *SVMRWXERGIFYHKIXEMVPMRIGSQTERMIWEGVSWWXLIKPSFILEZIGYXSYXJVMPPWPMOIJSSHERHTVSZMHIH GLIETIVJEVIW'SWXWEZMRKWEVIRSXEFSYXƼRERGMEPWEZMRKWEPSRI8LI]GSYPHEPWSFIMRXLIJSVQ SJIJJSVXWEZMRKWERHXMQIWEZMRKW Food Ordering Service Bill Payment Service Effort and Time Savings 'SRZIRMIRGITVSHYGXWWYGLEWSRPMRIFMPPTE]QIRXWERHJSSHSVHIVMRKLEZIJSYRHELYKIQEVOIX JSVXLIQWIPZIWEWXLI]WEZIEPSXSJXMQIERHIJJSVXJSVXLIGYWXSQIVWAll these enhance the value for the customer and act as gain creators. 40 Products that relieve the customers of their pains add value to the offering and strengthen the product-customer fit. Gains, Pains & Risks 4EMRW EVI SFWXEGPIW MRGSRZIRMIRGIW SV WSYVGIW SJ HMWWEXMWJEGXMSR JSV XLI GYWXSQIVW 8LI GYWXSQIVMWWIIOMRKXSKIXVIPMIJJVSQXLIWITEMRW4EMRMWER]XLMRKXLEXMWHMWPMOIHF]XLIGYWXSQIV ,ISVWLIGERRSXEJJSVHXSMKRSVIMXERH[MWLIWXSKIXVIPMIJJVSQMXERHMWIZIRVIEH]XSTE]JSVMX Rich Ponds Pains ,IWKHSDLQVRIWKHFXVWRPHUVDUH left unanswered or unattended, the SDLQVDFWDVőYDOXHGHVWUR\HUVŒRI WKHSURGXFWDQGWKHEXVLQHVV 'YWXSQIV TEMRW GER FI FIJSVI HYVMRK SV EJXIV XLI TVSGIWW SJ XV]MRK XS KIX E NSF HSRI )EGL HMWWEXMWJEGXMSRERHHMWPMOISJXLIGYWXSQIVWXLVSYKLXLIIRXMVITVSGIWWWLSYPHFIMHIRXMƼIHEW IEGLMWETSXIRXMEPTEMRTSMRXXLEXGERFIVIPMIZIH Pain removal is an illusion. Trying to relieve one pain creates another. The idea is to relieve more severe pains, even if they create a few less severe pains. 4EMRTSMRXWGSQIMREPPWLETIWERHWMÎW'SQTERMIW[MXLLEVHXSREZMKEXI[IFWMXITSSVPSKMWXMGW IXGGERFITEMRTSMRXW DZHEVLWHZLWKDQLQWHUIDFH WKDWLVGLIŢFXOWWRQDYLJDWH customer service that is not very responsive. DVHQVHRIEHLQJRYHUFKDUJHG ZKHQEX\LQJDSURGXFWRU service. Pain Points in Websites 41 Gains, Pains & Rsiks Products that have a high delivery charge Rich Ponds /DFNRIFODULW\LQ prices ODFNRIWUDQVSDUHQF\LQ the materials uses Pain Points in Online Shopping 9RHSYFXIHP] GYWXSQIV TEMRW EVI E GLEPPIRKI &YX XLI] EVI EPWS STTSVXYRMXMIW JSV FYWMRIWWIW XS X[IEO XLI TVSHYGXGYWXSQIV ƼX ERH GVIEXI E WSYVGI SJ HMJJIVIRXMEXMSR SZIV GSQTIXMXSVW SV WYFWXMXYXI MRHYWXVMIW 'YWXSQIV TEMRW GER FI SJ HMJJIVIRX X]TIW ZIV] QYGL WMQMPEV XS XLI GEXIKSVMIWSJKEMRW Types of Pains Functional Pains 8LIWIEVITEMRTSMRXWXLEXEVIVIPEXIHXSXLIJYRGXMSRSVTIVJSVQERGISJXLITVSHYGX*YRGXMSREP TEMRWGERFIGPEWWMƼIHMRXSJSYVQENSVX]TIW Financial Pain Points Functional Pains 8LIGYWXSQIVMWWTIRHMRKXSSQYGLQSRI]SRXLIGYVVIRXWIVZMGITVSZMHIVSV TVSHYGXERH[ERXWXSVIHYGIXLIWTIRHMRK Productivity Pain Points 8LI GYWXSQIV [EWXIW XSS QYGL XMQI YWMRK XLI GYVVIRX WIVZMGI TVSZMHIV SV TVSHYGXSV[ERXWXSYWIXMQIQSVIIƾGMIRXP] Process Pain Points 8LI GYWXSQIV [MWLIW XLI TVSGIWW FILMRH XLI ZEVMSYW XEWOW TIVJSVQIH XS FI MQTVSZIHMIQEHIWXVSRKIVERHQSVIIJJIGXMZI Support Pain Points 8LI GYWXSQIV HSIW RSX VIGIMZI XLI WYTTSVX RIIHIH EX GVMXMGEP WXEKIW SJ XLI GYWXSQIVNSYVRI]SVWEPIWTVSGIWW 42 For instance, poorly maintained DXWRPRELOHVWKDWGDPDJHWKH HQYLURQPHQWDUHORRNHGGRZQXSRQLQ certain developed countries. Gains, Pains & Risks 7SGMEP TEMRW EVI GEYWIH F] IZIRXW WYGL EW I\GPYWMSR JVSQ WSGMEP GSRRIGXMSRW SV EGXMZMXMIW VINIGXMSR SV FYPP]MRK8LMW MW HYI XS XLI GSRWYQTXMSR SJ TVSHYGXW XLEX EVI RSX EGGITXIH MR XLI MQQIHMEXIWYVVSYRHMRKWSJEGYWXSQIVERHMXGVIEXIWWSGMEPTEMRW Rich Ponds Social Pains 7SGMEPTEMRWMRER]GYWXSQIVWIKQIRXEVIVIPEXMZIXSXLIMQQIHMEXIWYVVSYRHMRKWSJXLIGYWXSQIV 7SQIXLMRK XLEX GVIEXIW WSGMEP KEMRW MR WSQI WYVVSYRHMRKW GER GVIEXI WSGMEP TEMRW MR SXLIVW FEWIHSRLS[XLITVSHYGXMWTIVGIMZIH*SVMRWXERGI[IEVMRKETEVXMGYPEVFVERHSJ[EXGLQE] GVIEXIWSGMEPKEMRWMRWSQIWYVVSYRHMRKW[LIVIEWTEMRMRSXLIVWYVVSYRHMRKW Psychological Pains 4W]GLSPSKMGEPTEMRWEVIGVIEXIHHYIXSFIPMIJWXLSYKLXWJIIPMRKWERHFILEZMSVXLEXEVMWIHYVMRK XLITVSGIWWSJGSRWYQTXMSRSJETVSHYGXSVWIVZMGISVGSQTPIXMSRSJEXEWO4VSHYGXWSVWIVZMGIW XLEXQEOIXLIGYWXSQIVFIPMIZIXLMROJIIPSVFILEZIRIKEXMZIP]GVIEXITW]GLSPSKMGEPTEMRW ,IWKHFXVWRPHUGRHVQRWOLNHWKHEX\LQJSURFHVVLWFDQFDXVH SV\FKRORJLFDOSDLQ,IWKHSHUVRQVHOOLQJWKHSURGXFWLVSHUFHLYHGDV very unfriendly and rude, this can also result in psychological pain. 4W]GLSPSKMGEP TEMRW ZEV] MR XLIMV MQTEGX ERH MRXIRWMX] JVSQ TIVWSR XS TIVWSR % GSQTPIXI YRHIVWXERHMRK SJ LYQER TW]GLSPSK] ERH GYWXSQIV FILEZMSV MW VIUYMVIH XS OIIT XVEGO SJ TW]GLSPSKMGEP TEMRW IRGSYRXIVIH F] XLI GYWXSQIV HYVMRK XLI TYVGLEWI ERH GSRWYQTXMSR TVSGIWWIW 43 Gains, Pains & Rsiks Rich Ponds Pains of Customers that need to be Relieved for Agrochemical IndustryPesticides Segment Before Use • • • • • • • 0EGOSJE[EVIRIWWEFSYX[LEXTVSHYGXXSFY] -RIƾGMIRXWIPPMRKF]YRSVKERMWIHVIXEMPIVW 7IRWISJFIMRKGLIEXIHGSQQSREQSRKWXJEVQIVW -QTVSTIVMRJSVQEXMSRF]VIXEMPIVWXSWIPPQSVI ,MKLETTPMGEXMSRIUYMTQIRXGSWXW 'SQQYRMX]TVIWWYVIEKEMRWXI\GIWWMZIYWISJTIWXMGMHIW 9RGIVXEMRMX]EFSYXTIVJSVQERGISJTVSHYGXERHVIXYVRSR MRZIWXQIRXELYKITW]GLSPSKMGEPFEVVMIV During Use • 0EGOSJORS[PIHKIEFSYXLS[XSYWIXLITVSHYGXERHMR [LEXUYERXMX] -QTVSTIVWEJIX]IUYMTQIRXERHLMKLGSWXWSJWEJIX] ,IEPXLLEÊVHWJSVXLIJEVQIVWHYIXSGLIQMGEP I\TSWYVI ;EWXEKIMRETTPMGEXMSRVIHYGIWIƾGMIRG]ERHMRGVIEWI GSWX 9RGIVXEMRMX]EFSYXSYXGSQIWGVIEXIWTW]GLSPSKMGEP FEVVMIVW • • • • After Use 44 • • • ,IEPXLIJJIGXWJSVXLIIRXMVIGSQQYRMX]HYIXSPSRK XIVQYWEKISJGLIQMGEPW 7SMPLIEPXLSJXLIPERHSR[LMGLGVSTMWFIMRKGYPXMZEXIH -REFMPMX]XSTE]JSVXLIGSWXWSJTIWXMGMHIWMJXLIGVSTMW HIWXVS]IHSVTSSVLEVZIWXMWSFXEMRIH 7KHULVNLVGLUHFWO\LQOLQHZLWKWKHDPRXQWRI XQFHUWDLQW\DERXWWKHIXWXUHPDNLQJDQ\FKRLFHV 6MWOEPWSEVMWIWHYVMRKXLITVSGIWWSJKIXXMRKEXEWOHSRI6MWOWEJJIGXXLIGYWXSQIVWTVIJIVIRGIW ERHFILEZMSYV Gains, Pains & Risks %PPHIGMWMSRWEVIWSQIWSVXSJXVEHISJJFIX[IIRXLIGSWXWERHFIRIƼXWSJTSXIRXMEPMXIQW%PWS IEGLHIGMWMSRFVMRKW[MXLMXYRGIVXEMRMX] Rich Ponds Risks Products or services that do not create any additional gain or relieve pain but reduce the risk in consumption create tremendous value for customers. The more severe the outcome of the risk could be, the greater the value created and the greater the ability of the business to demand a premium for it, by reducing that particular risk. ,QVXUDQFHSROLFLHVGRQRWFUHDWH DQ\ REYLRXV JDLQ RU UHOLHYH DQ\ REYLRXVSDLQ But they provide the customer FHUWDLQW\DERXWWKHIXWXUHDQG SURWHFWLRQLQFDVHWKHULVN materializes. $V FDU DFFLGHQWV EHFRPH PRUH DQG PRUHIUHTXHQWWKHVDIHW\IHDWXUHVRI WKH FDU EHFRPH DQ LPSRUWDQW IDFWRU ZKHQPDNLQJDSXUFKDVHGHFLVLRQ &DUVZLWKDLUEDJVDUHLQVWDQWO\ preferred as they reduce the impact in case of an accident. Products that reduce potential undesired outcomes can get recognition in the market and demand a premium. 45 Gains, Pains & Rsiks Rich Ponds Severity %PPTEMRWERHKEMRWEVIRSXIUYEPP]MQTSVXERX7SQITEMRWQE]FIQSVIMQTSVXERXERHTVIWWMRK XSFIVIPMIZIH XLERSXLIVWJSVTEVXMGYPEVGYWXSQIVWIKQIRX7SQITEMRWQE]FIPIWWMQTSVXERX SVYVKIRX %PWSHMJJIVIRXGYWXSQIVWIKQIRXWQE]FI[MPPMRKXSTE]HMJJIVIRXEQSYRXWJSVXLIWEQIKEMREW IEGLKEMRMWTIVGIMZIHHMJJIVIRXP],IRGIIEGLTEMRKEMRERHVMWORIIHWXSFITVMSVMXMÎHFEWIH SRMXWWIZIVMX]ERHVIPIZERGIXSXLIGYWXSQIVKVSYT 0 1 2 3 4 5 6 7 8 9 10 Severity Scale )EGLTEMRERHKEMRWLSYPHFIMHIRXMƼIHMRXIVQWSJXLIWIZIVMX][MXL[LMGLMXEJJIGXWXLIGYWXSQIV The performance of the car heater PD\QRWEHDVLPSRUWDQWLQ:HVWHUQ ,QGLDDVLWLVIRUWKHFXVWRPHUVRI 1RUWKHUQ,QGLD 7KHTXDOLW\RIWKHFDPHUDLQ a phone is more important to photographers than to others. ;LIRXV]MRKXSYRHIVWXERHXLIWIZIVMX]XLIIRXVITVIRIYVMRZIWXSVRIIHWXSPSSOMREWQYGLHITXL EWTSWWMFPIERHXEPOJEGXWERHRYQFIVW )RUH[DPSOHZKHQDFXVWRPHUJLYHVIHHGEDFNRQ DQ\DSSPHQWLRQLQJWKDWLWEHFRPHVERULQJDIWHUD SRLQWWKHDSSGHYHORSHUPXVWWU\WRORRNLQGHSWK and understand after how many minutes does it EHFRPHERULQJIRUWKHFXVWRPHU"$QGZK\" 3FNIGXMZMX]MWIWWIRXMEPMRYRHIVWXERHMRKXLIVIPEXMZIHMJJIVIRGIWFIX[IIRXLIWIZIVMX]SJZEVMSYW KEMRWTEMRWERHVMWOW 46 4VSHYGXW ERH WIVZMGIW EGX EW E ƄWXSVI SJ ZEPYIƅ JSV FYWMRIWWIW [LMGL EVI YPXMQEXIP] HIPMZIVIH XLVSYKLXLITYVGLEWIERHGSRWYQTXMSRTVSGIWW8LIUYEPMX]SJXLITVSHYGXWERHWIVZMGIWERHXLI SZIVEPPI\TIVMIRGIEXXEGLIHXSXLIQYPXMQEXIP]HIXIVQMRIXLIZEPYITVSTSWMXMSRSJXLITVSHYGXW SJJIVIHF]XLIGSQTER] Gains, Pains & Risks *SVGYWXSQIVWXLIZEPYIMWHIVMZIHJVSQTVSHYGXWERHWIVZMGIWSJXLIƼVQ3RGIXLIGYWXSQIVW LEZIFIIRWIKQIRXIHIEGLWIKQIRXLEWFIIRTVSƼPIHERHHMJJIVIRXKEMRWERHTEMRWLEZIFIIR QETTIHXLITVSHYGXWERHWIVZMGIWRIIHXSFIQEXGLIH[MXLXLIGYWXSQIVTVSƼPIW-XMWMQTSVXERX XLEXXLI]GVIEXIVIPIZERXZEPYIF]KIRIVEXMRKVIPIZERXKEMRWERHEHHVIWWMRKXLIGSVVIGXTEMRTSMRXW Rich Ponds Products and Services However, products and services do not create value by themselves. They must match the needs of targeted customer segments. FIT For example, an iPhone may be the best smartphone there is, but it is of very little value to someone who works on daily wages. FIT Cars may be a basic necessity to some, but they are of very little value to the residents of a remote island or village, which has no roads or fuel supply. 47 Gains, Pains & Rsiks Rich Ponds For existing businesses, products/services are pretty easy to identify. Each has to be understood based on how it solves the customer pains and gains. FIT Existing Product/ Service Existing Customer Segment Entrepreneurs must understand their product in and out and then try to figure out if any changes could be made to the product to serve newer segments of customers (other than existing customers). FIT New Customer Segment 48 Modified Product/ Service Gains, Pains & Risks Rich Ponds Businesses can also try to serve existing customers better and demand a higher premium from them. They must look for competitors that exist in the market and understand how they create value for customers. Microsoft Surface Duo 2 Samsung Galaxy Z Fold 4 Some offerings of these competitors that are important to the customers may even be incorporated into the firm’s products. All the propositions compete against each other and only the strongest proposition gets bought. The strongest proposition for each customer, the segment may vary but it is only the strongest proposition that each customer segment will buy. *SVRI[FYWMRIWWIWSVI\MWXMRKFYWMRIWWIWXLEXEVIXV]MRKXSHIWMKRERHPEYRGLERI[TVSHYGXXLI IRXMVITVSGIWWMRZSPZIWEPSXSJXVMEPERHIVVSVERHGSRXMRYSYWXIWXMRK3RGIXLIGYWXSQIVTVSƼPMRK MWHSRIXLIQSWXPYGVEXMZIWIXSJGYWXSQIVWXLEXWLSYPHFIWIVZMGIHMWMHIRXMƼIH8LITVSHYGX MWHIWMKRIHMRWYGLE[E]XLEXXLITEMRWERHKEMRWXLEXEVILMKLSRXLITVMSVMX]PMWXEVIWIVZMGIH MQQIHMEXIP] The product development process involves developing a prototype, testing it with a small trial group, making changes as per the feedback, and then testing marketing followed by the launch. Businesses must look for customer feedback and continuously monitor their experience and satisfaction. This must be done throughout the process and even after the launch for incremental improvements. 49 Gains, Pains & Rsiks Rich Ponds 8LIJIEXYVIWSJXLITVSHYGXWERHWIVZMGIWGERFIWIKVIKEXIHEWTEMRVIPMIZIVWERHKEMRGVIEXSVW 8LIJIEXYVIWXLEXVIPMIZIXLIGYWXSQIVWSJXLIMVTEMRMWETEMRVIPMIZIV[LIVIEWXLSWIXLEXGVIEXI FIRIƼXWJSVXLIQEVIKEMRGVIEXSVW8LMWXSS[EWƼVWXHMWGYWWIHMRXLIFSSO:EPYI4VSTSWMXMSR (IWMKR an easy interface LQDPRELOH application would EHDSDLQUHOLHYHU an easy interface in a food home delivery service of WKDWDSSZRXOGEH a gain creator. 4EMR VIPMIZIVW ERH KEMR GVIEXSVW SJ XLI TVSHYGX QYWX FI HIWMKRIH XS WYMX XLI TVSƼPI SJ XLI GYWXSQIVW Pain Relievers 4EMRVIPMIZIVWEVIXLIJIEXYVIWSJXLITVSHYGXSVWIVZMGIXLEXVIPMIZIXLIGYWXSQIVSJXLITEMRWXLEX XLI][IVII\TIVMIRGMRK8LI]JSGYWSRVIHYGMRKER]HMWGSQJSVXXLEXXLIGYWXSQIVQE]LEZI relieves pain Unhygienic Food, Poor Nutrition Value, Adulteration, Slow Service So, products should initially focus on the most severe pains and then, over time, add features that cater to the other pains of the customer. 8LI MQTSVXERGI ERH VIPIZERGI SJ XLI TEMR VIPMIZIV HITIRH SR XLI WIZIVMX] SJ XLI TEMR % TEMR VIPMIZIVXLEXVIPIEWIWEGYWXSQIVSJETEMRXLEXMWRSXZIV]LMKLSRTVMSVMX]MWRSXPMOIP]XSGVIEXIE PSXSJZEPYIJSVXLIGYWXSQIV 50 Gains, Pains & Risks Field Officers *MIPHSƾGIVWKSXSXLIƼIPHERHMRGVIEWIE[EVIRIWWEFSYXZEVMSYW TVSHYGXWERHLS[XSYWIXLIQ8LMWLIPTWXLIJEVQIVXSWXE]YTXS HEXI[MXLRI[SJJIVMRKW Rich Ponds Pain Relievers by Agrochemical Industry Community Engagement Activities %KVSGLIQMGEPGSQTERMIWSVKERMWIJEVQIVGSQQYRMX]IRKEKIQIRX IZIRXW8LIWIIZIRXWKMZIWSGMEPTVSSJXSXLITVSHYGXWERHVIHYGI GSQQYRMX]TVIWWYVIMRGEWISJJEMPYVI Safety Equipment and Knowledge 'SQTERMIWSJXIRTVSZMHIWEJIX]IUYMTQIRXXSJEVQIVWEXEPS[IV TVMGI8LI]EPWSTVSZMHIMRJSVQEXMSREFSYXXLIMVLIEPXLWEJIX]8LMW MWXSVIHYGILIEPXLLEÊVHWSJJEVQIVW Favourable forms of Application %KVSGLIQMGEP GSQTERMIW XV] XS QEOI EKVSGLIQMGEPW MR WYGL E JSVQXLEXETTPMGEXMSRLEWXLIPIEWX[EWXEKI*SVI\EQTPITS[HIVW SVHVMTETTPMGEXMSRQIXLSHW Brands and Lab test Approvals %KVSGLIQMGEP GSQTERMIW XV] XS FYMPH FVERHW ERH WLEVI PEF XIWX VITSVXWXSVIHYGIYRGIVXEMRX]VIPEXMRKXSYRHIVTIVJSVQERGIMRXLI JEVQIVƅWQMRH How to differentiate We see that not all pains are relieved by the current value propositions. 2I[ƼVQWGERGSQIYT[MXLMRRSZEXMZIWSPYXMSRWERHGVIEXIEWXVSRKIV proposition. Examples of initiatives: Give free application instruments or MRRSZEXMZIQIGLERMWQXSEPPS[GVIHMXƽI\MFMPMX] 51 Gains, Pains & Rsiks Rich Ponds Gain Creators .YWX PMOI TEMR VIPMIZIVW KEMR GVIEXSVW EVI XLI JIEXYVIW SJ XLI TVSHYGX SV WIVZMGI XLEX GVIEXI FIRIƼXJSVXLIGYWXSQIVW8LITVSGIWWSJGSRWYQTXMSRERHTYVGLEWIEPWSMRƽYIRGIWLS[XLI KEMRGVIEXSVWEVIHIPMZIVIHERHTIVGIMZIH+EMRGVIEXSVW[MPPHIGMHIMJXLIGYWXSQIVMWHIPMKLXIH QIVIP]WEXMWƼIHSVRSXMQTEGXIHF]XLIGSRWYQTXMSRSJXLITVSHYGX+EMRGVIEXSVWYPXMQEXIP]KIX FIRIƼXWXSXLIGYWXSQIVXLEXXLI]EVIPSSOMRKJSV creates gain • Good Taste • Clean & Hygienic FOod • Social Value of Dining Out • New Cuisines • Convenience Restaurants %PP XLI KEMRW VIUYMVIH F] E GYWXSQIV GERRSX FI GVIEXIH 7SQI KEMRW EVI LMKLIV SR priority and the corresponding gain creators are therefore higher in terms of value. Companies should address the most important gain and create what is called a ‘minimum viable product’ and then add features to it with time to cater to other gains. For instance, when purchasing a house, % QMRMQYQ ZMEFPI TVSHYGX MW ER ETEVXQIRX XLEX MW WEJIFYMPXSJKSSHQEXIVMEPWLEWERIEXHIWMKRERH LEWEHIUYEXITEVOMRK Good materials Safety Adequate Parking Neat Design Clubhouse Fitness Facilties Playhouse Minimum Viable Product 52 2WKHUIHDWXUHVPD\EHDGGHG along the way after the hygiene IDFWRUVDUHWDNHQFDUHRI the company may fall into the trap of doing too many things, at the same time. ,WPD\HQJDJHLQDFWLYLWLHVWKDWKDYH no direct impact on the customers: their pains and gains. Gains, Pains & Risks Rich Ponds In an attempt to create multiple gains or relieve multiple pains, The company may even end up targeting the wrong set of customers. )RXVITVIRIYVWEW[IPPEWXLIEREP]WXWQYWXFIGEVIJYPERHXV]XSMHIRXMJ]WYGL[EWXIHIJJSVXW 8LIWIEVIRSXNYWXE[EWXISJXMQIERHIJJSVXTIVWIFYXXLI]EPWSXEOIE[E]IRIVK]EXXIRXMSRERH VIWSYVGIWJVSQXLIZEPYIGVIEXMRKEGXMZMXMIW;LIRVIPIEWMRKETVSHYGXJSGYWSRGSVIJIEXYVIW ERHXLIVIWXGERFIEHHIHEPSRKXLI[E] 53 Gains, Pains & Rsiks Rich Ponds Gain Creators by Agrochemical Industry Lab-Tested Crop Solutions 0EFXIWXIH WSPYXMSRW GVIEXI QSVI EWWYVERGI MR XLI QMRHW SJ GYWXSQIVW EFSYX [LEX TIVJSVQEGI GER FI I\TIGXIH JVSQ XLI TVSHYGX Government Approved Product 2SXEPPEKVSGLIQMGEPWGERFIYWIHF]XLIJEVQIVW3RP]XLSWIXLEX EVIETTVSZIHF]XLIKSZIVRQIRXGERFIYWIH9RETTVSZIHTVSHYGXW MRZMXIWPMXMKEXMSRVMWOW Retailer Training 6IXEMPIVW RIIH XS FI XVEMRIH XS TVSZMHI MRJSVQEXMSR XS XLI FY]IVW EFSYX YWEKI &IWMHI YWEKI KYMHERGI XLI] GER EPWS LIPTT MR GVIEXMRKE[EVIRIWW Helpline 'SQTERMIW RIIH XS IWXEFPMWL E LIPTPMRI WS EW XS VIWSPZI WTIGMƼG JEVQIVUYIVMIWEXHMJJIVIRXWXEKIWSJXLIIRXMVITVSGIWW Standard Application Equipments 7SQITVSHYGXWVIUYMVIWTIGMEPMWIHETTPMGEXMSRIUYMTQIRX[LIVIEW SXLIVWGERYWIWXERHEVHIUYMTQIRX7XERHEVHETTPMGEXMSRVIHYGIW IRXV]FEVVMIVWERHGVIEXIWKEMRWJSVXLIGYWXSQIV Not all gains that are required can be created. Firms that can create more gains at a cheaper rate strengthen value proposition. 54 Gains, Pains & Risks To sum up the process: The gains/pains and the entire customer profile Identify features that create value The way value is creates VKRXOGEHDUWLFXODWHG However, this entire process assumes that customer profiling has been done properly. Complete value proposition model analysis Rich Ponds Customer segmentation and profiling These will form the pain relievers and gain creators. 7KHQWKH\VKRXOGEHUDQNHG LQRUGHURILPSRUWDQFHEDVHG on the severity of each pain DQGJDLQWREHDGGUHVVHG And then focus on few. 8LI ƼVWX WXIT MR FSXL EREP]^MRK I\MWXMRK TVSHYGXW ERH GVIEXMRK RI[ TVSHYGXW MW IJJIGXMZI GYWXSQIV TVSƼPMRK 2S EREP]WX SV IRXVITVIRIYVW WLSYPH VYWL HYVMRK XLI WXIT &IXXIV MW XLI YRHIVWXERHMRK SJ XLI GPMIRX TVSƼPIFIXXIVSYXGSQI[MPPGSQISYX When more and more time is spent on customer mapping, new insights will be gained, which will help strengthen the value proposition. Also, customers are continuously evolving and changing their requirements. 8LYWXLITVSGIWWSJGYWXSQIVTVSƼPMRKERHXLIREGGSVHMRKP]EHNYWXMRKXLIJIEXYVIWSJ TVSHYGXWERHWIVZMGIWVIQEMRWEGSRXMRYSYWSRI 55 Gains, Pains & Rsiks Rich Ponds 8LIJIEXYVIWXLEXGVIEXIZEPYIWLSYPHFIMHIRXMƼIHERHXLI[E]ZEPYIMWHIPMZIVIHWLSYPH FIEVXMGYPEXIH Take time to do the customer profiling. Do not rush this process. Customers keep changing. So, customer profiling and product changes are ongoing processes. ;LMPI IZEPYEXMRK HMWVYTXMSRW ERH XLIMV VMWOW XLI ZEPYI TVSTSWMXMSR QSHIP MW OI] XS GLIGOMRKMJXLIHMWVYTXSV[SYPHFIWYGGIWWJYPSVRSX8LMWLIPTWGSQTEVIERHGSRXVEWX XLIWYFWXMXYXIMRHYWXV]ERHXLISVMKMREPMRHYWXV]8LIMRHYWXV]XLEXGVIEXIWXLIQSWXZEPYI [MPPWYVZMZISZIVXLISXLIVW v/s Petroleum Vehicles Electronic Vehicles 8LI QSHIP [MPP TVSZMHI ER SFNIGXMZI VIKEVHMRK XLI TEMRW ERH KEMRW GVIEXIH F] FSXL MRHYWXVMIWLS[XLI]EVITIVGIMZIHF]XLIGYWXSQIVWERH[LMGLSJJIVWEWXVSRKIVZEPYI TVSTSWMXMSREKEMRWXXLITVMGITEMH8LISRI[MXLXLIWXVSRKIVTVSTSWMXMSRMRXLIMRHYWXV] [MPPHSFIXXIVKSMRKJSV[EVH 56 ;MXLMR MRHYWXVMIW XLI ZEPYI TVSTSWMXMSR QSHIP GER FI YWIH XS MHIRXMJ] XLI FYWMRIWWIW XLEXEVISJJIVMRKEWXVSRKIVZEPYITVSTSWMXMSRERHVITPEGIXLI[IEOIVSRIWKSMRKJSV[EVH 8LMWGERFIYWIHXSXVEGOER]MRRSZEXMSR[MXLMRXLIMRHYWXV]XSGVIEXIQSVIZEPYIJSVXLI GYWXSQIVW8LYWXLIZEPYITVSTSWMXMSRQSHIPWLSYPHFIYWIHEXFSXLXLIMRHYWXV]PIZIP ERHXLIFYWMRIWWPIZIP Gains, Pains & Risks Swiggy work and others failed? Rich Ponds Why did *SSHXIGLGSQTERMIWEGVSWWXLIKPSFI[IVIWXVYKKPMRKMRPEXI8LMW[EW[LIR7[MKK]GEQI YTMR&ERKEPSVIERHGLERKIHXLIMRHYWXV]8LIHMJJIVIRGI[EWXSFYMPHERS[RPSKMGXMGRIX[SVO VEXLIV XLER SYXWSYVGMRK MX ,IVI MW XLI GYWXSQIVW TVSƼPI [LMGL I\TPEMRW [L] S[R PSKMWXMGW RIX[SVOSJ7[MKK]WYGGIIHIH Pains of Customer Old Business Model Swiggy Model Gains Required by Customer Heavy Delivery Charges Free Food Delivered Slow and unreliable delivery Multiple Cuisines to choose from Lack of Standard Delivery across cities Single window food and delivery order Overcharged on Food Delivery Discount Offers on food Old Business Model Swiggy Model 4EMRWERHKEMRWEVIMRSVHIVSJWMKRMƼ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ains, Pains & Rsiks Rich Ponds Will &]NYƅW MW ER SRPMRI IHYGEXMSR ETT JSV -RHMER WXYHIRXW ERH TVSZMHIW SRHIQERH GPEWW JSV XLI WXYHIRXWMRZEVMSYWWYFNIGXW8LIETTLEWFIIR[IPPVIGIMZIHF]MRZIWXSVW8LIOI]UYIWXMSRMW [LIXLIVMX[MPPFIEWYGGIWWMR-RHMESV[MPPJEHIE[E]SZIVXMQI8LISXLIVUYIWXMSRMW[LIXLIVXLI -RHMERWXYHIRXW[SYPHW[MXGLXS&]NYƅWSVRSX Customer Profile Pains Gains Required Expensive Tuition Classes High quality result-oriented education for kids and for competitive exams Lack of standard quality teaching and faculty Big batches for students; inadequate attention One-size-fits-all way of teaching 58 Quality mentorship Personalised attention to each student Enough practice for the subjects Lack of flexibility in timing Regular performance reviews Travelling is an issue for remote areas Personal connect with the teacher Irregular and inefficient performance reviews Trust on the teachers and their style of teaching Gains, Pains & Risks work in Rich Ponds India? 3RGI XLI GYWXSQIV TVSƼPI MW ORS[R MX LEW FIIR IWXEFPMWLIH [LEX XLI GYWXSQIV [ERXW 8LMW WLSYPHXLIRFIGSQTEVIH[MXL[LEXMWFIMRKSJJIVIHXSXLIGYWXSQIV8LIJIEXYVIWSJXLITVSHYGX ERH WIVZMGI XLEX VIHYGI TEMR SV GVIEXI KEMR QYWX FI YRHIVWXSSH XS GSQTVILIRH XLI TVSHYGX GYWXSQIVƼX Value Proposition Pains Relievers Gains Required Moderate costs (neither too expensive, nor too cheap) Quality courses, created and curated by experts Standardised teaching practices Individual students, no batches Personalised performance based practice given Complete flexibility in timing Regular performance reviews Available over internet. No travel is needed. One on one attention given (personlised chats and calls arranged) Performance based practice given Weekly and monthly performance reviews given Parent’s can continuously keep a track a child’s progress 59 Gains, Pains & Rsiks Rich Ponds Conclusion A good understanding of the customer requirements and a good understanding of products - its features is required. This should help us understand the industry and its various companies. Also, all new ideas and products must be checked in a similar manner under the ‘value proposition map’ to see if they have a strong cutomer-market fit or not. Only ideas that pass this will find a market for themselves. ‘Customer profile’ is the key. 60 Rich Ponds Gains, Pains & Risks Notes 61 62 Rich Ponds Value Proposition Broad Industry Analysis Rich Ponds Broad Industry Analysis An overview: 63 Broad Industry Analysis Rich Ponds Once the value proposition by the industry and its players has been understood: More specifics about the industry’s activities, players, risks, and demand-supply scenario needs to be looked into. Further analysis is done to understand the industry size, stability, pricing power, disruptions, and regulations. The profitability trends in the past for the industry is analyzed and the future direction is sensed based on Michael Porter’s five forces framework. These together form the third point of the 9-point business circuit - Broad Industry Analysis 64 Value chain and players in the industry. The size, stability and profitibility of the industry Fourth Tier Third Tier Financial performance and future outlook Identifying how Porter’s five profit forces affect the industry Broad Industry Analysis Second Tier Rich Ponds First Tier This stage comprises a four-tiered analysis structure. • 8LIƼVWXXMIVKMZIW o ERYRHIVWXERHMRKSJXLIEGXMZMXMIWHSRIMRXLIMRHYWXV] o XLI TEVXMGMTERXW SJ XLI MRHYWXV] ERH SXLIV MRHYWXVMIW [MXL [LMGL XLI KMZIR MRHYWXV]XVERWEGXW o XLITVSƼXTSSP[MXLMRXLIWIGXSV o XLIQENSVVMWOW o XLIHIQERHWYTTP]WGIREVMS This stage explains the value chain and participants in the industry. • 8LIsecond tierKIXWHIITIVMRXSthe composition of the industry and the size, stability ERHTVSƼXMFMPMX]SJXLIMRHYWXV] o ,IVI XLI XSXEP QEVOIX WMÎ MW MHIRXMƼIH EPSRK [MXL XLI GSQTSWMXMSR SJ XLI SVKERMÎHERHYRSVKERMÎHQEVOIX o ,S[XLIQEVOIXLEWIZSPZIHMWEPWSYRHIVWXSSH o 8LI MRHYWXV] WXEFMPMX] MW WXYHMIH FEWIH SR XLI KEMRMRK ERH PSWMRK SJ QEVOIX WLEVIF]XLIXSTTPE]IVW o 8LITVMGMRKTS[IVSJZEVMSYWMRHYWXV]TEVXMGMTERXWMWEPWSEREP]ÎH o %XXIRXMSRMWKMZIRXSXLIGSQTIXMXMZIPMJIG]GPITSWMXMSRMRKSJXLITVSHYGXWERH XLIVMWOSJHMWVYTXMSRW o +SZIVRQIRX VIKYPEXMSRW JSV XLI MRHYWXV] VIGIRX RI[W VIPEXIH XS XLI MRHYWXV] ERHSRKSMRKXVIRHWMRXLIMRHYWXV]EVIEPWSMHIRXMƼIHMRXLIWIGSRHXMIV • 8LI third tier JSGYWIW SR MHIRXMJ]MRK LS[ 4SVXIVƅW ƼZI JSVGIW EJJIGX XLI MRHYWXV] and TVSZMHIEPMWXSJUYIWXMSRWXLEXGERLIPTNYHKIXLIWXVIRKXLSJMRƽYIRGISJIEGLJSVGI8LIVI MWEPWSERIQTLEWMWSRMHIRXMJ]MRKER]GLERKIWMRXLIJSVGIWERHXLIMRHYWXV]WXVYGXYVI KSMRKJSV[EVH • 8LIfourth tierMWQYGLQSVIUYERXMXEXMZI-XJSGYWIWSRTVSƼXEFMPMX]EWWIXMRXIRWMZIRIWW ERHYWISJHIFXF]XLIXSTGSQTERMIWSJXLIMRHYWXV]%XXMQIWXLMWWXITMWEJJIGXIHF] GSQTER]WTIGMƼGHIGMWMSRW&YXF]XEOMRKMRXSGSRWMHIVEXMSREPEVKIRYQFIVSJGSQTERMIW [IGERKIXEKSSHYRHIVWXERHMRKSJMRHYWXV] WEXXVEGXMSRW 65 1MGLEIP.1EYFSYWWMRERH(ER'EPPELERMHIRXMƼIHXLIGSRGITXSJERMRHYWXV]QETMRXLIMV KVSYRHFVIEOMRK TETIV Ƅ1IEWYVMRK XLI 1SEXƅ8LI] MHIRXMJ] MX EW E ZMWYEP VITVIWIRXEXMSR SJ EPP TPE]IVW MR ER MRHYWXV]ƂWYTTPMIVW QERYJEGXYVIVW HMWXVMFYXSVW GSRWYPXERXW MRƽYIRGIVW VIKYPEXSVWHIEPIVWERHGYWXSQIVWERHLS[QSRI]TVSHYGXWERHWIVZMGIWGLERKILERHW [MXLMRXLIMRHYWXV] Rich Ponds First Tier Industry Map The goal of an industry map is as follows: Identify the kind of economic relationship that the industry has with all support industries and institutions. Suppliers Customers Indian Premier League Teams External Forces It helps understand the different suppliers and customers and the bargaining power that each party has. It explains the dependent industries • • • • • • Players Support Staff Logistics Partners Accommodation Marketing Agencies Tournament Organisers • Stadium Suppliers Indian Premier League Teams • BCCI • IPL Governing Body External Forces • Broadcasters • Ticket Sales Partner • Ticket Sales • Food and Beverages • Sponsors • Merchandising Sale • Team's shows and events rights Customers 75 [5] http://analystreports.som.yale.edu/internal/F2013/MJ/Measuring%20the%20Moat.pdf Rich Ponds First Tier It shows how cash flows between different participants.[5] • Players 'EWL • Support Staff 'EWL • Logistics Partners 'EWL • Accommodation 'VIHMX • Marketing Agencies 'VIHMX • Tournament Organisers 'EWL • Stadium %HZERGI Indian Premier League Teams • BCCI • IPL Governing Body External Forces Suppliers • Broadcasters %HZERGI • Ticket Sales Partner 'EWL • Ticket Sales 'EWL • Food and Beverages 'EWL • Sponsors 'EWL • Merchandising Sale 'EWL • Team's shows and events rights %HZERGI Customers 8LIMRHYWXV]QETMWSRISJXLIWXVSRKQSHIPWXLEXKMZIEZMWYEPVITVIWIRXEXMSRSJEPPTPE]IVW MRZSPZIH MR XLI JYRGXMSRMRK SJ XLI MRHYWXV] XLIMV IGSRSQMG VIPEXMSRWLMT ERH XLIMV TSXIRXMEP MQTEGXSRTVSƼXEFMPMX]8LIGSRWXMXYIRXWSJXLIMRHYWXV]QETGERFIGPEWWMƼIHTVMQEVMP]MRXS XLVIIƂsuppliers, customers, and external forces. 8LIQETWLSYPHMHIRXMJ]EPPXLIGSRWXMXYIRXWERHGSQTERMIWXLEXQE]MRƽYIRGITVSƼXEFMPMX] -XWLSYPHEPWSMHIRXMJ]XLIZEVMSYWGSQTERMIWXLEXEVIHSQMRERXMRXLIVIPEXIHMRHYWXVMIW Explaining Industry Map 8LIEHNEGIRXHMEKVEQWLS[WXLIMRHYWXV]QETJSVVIXEMPFEROWJSV-RHME-XMRGPYHIWXLIZEVMSYW WYTTPMIVWERHFY]IVW[MXL[LSQXLIGSQTERMIWMRXLIMRHYWXV]RIIHXSMRXIVEGX-XWLS[WXLI OMRHSJIGSRSQMGVIPEXMSRXLIMRHYWXV]WLEVIW[MXLXLISXLIVW-XGERFIYWIHXSIZEPYEXIXLI ZEVMSYWTVSƼXJSVGIWERHXLIMQTEGXXLEXXLI]LEZISRXLIMRHYWXV] 8LI WEQI GER EPWS FI YWIH XS YRHIVWXERH XLI GEWL ƽS[ G]GPI SJ XLI MRHYWXV] -X WLS[W [LIXLIV I\TIRWIW EVI GEWL SV GVIHMX ERH WMQMPEVP] MRGSQI MW GEWL SV GVIHMX -X EPWS MW ER MRHMGEXSVSJGSQTER]ƅWFEVKEMRMRKTS[IVSZIVWYTTPMIVWERHGSQTIXMXMSVW %R]SJXLIWIMRHYWXVMIWSRXLIMRHYWXVXQETGEREJJIGXXLIKMZIRMRHYWXV]-XLIPTWXVEGOERH FIXXIVYRHIVWXERHXLIGLERKIW 76 [5] http://analystreports.som.yale.edu/internal/F2013/MJ/Measuring%20the%20Moat.pdf 'EWL RBI’s Money %HZERGI'EWL Media Outlets Depositor’s Ad Agencies money Software & Computer -RXIVIWX4EMH Third Party Professional Charges Employees Mastercard, VISA, etc. Brokerage on Real Estate Rent Investments Cash Logistic Companies Postal Services Suppliers -RXIVIWX)EVRIH 'VIHMX External Forces 6IZMI[ 'SQTPMERGI Govt. Agencies Rating Agencies 6IKYPEXSV RBI Indian Retail Banks Rich Ponds First Tier Borrowers RBI’s Investments Loans to other NBFCs Loan Distributor’s Commissions Brokerage earned Business Services Transaction Services Customers Industry Industry Map Map of of Indian Retail Banks 77 Fuel Building Maintenance %HZERGI'EWL 'VIHMX (E]W 'VIHMX (E]W 'EWL 'VIHMX (E]W 'VIHMX (E]W Air Freight Operators Brokers for Trucks Warehouse Warehouse Owners-Rent Equipmnets Truck Owners 78 Employees Suppliers Third Party Freight Operators Truck Maintenance Labour Boards Software & Computer External Forces 6IKYPEXMSRW Government Express Logistics Companies Agents/ Brokers B2C & Tie Up E-commerce with other Services Logistics Companies Branch B2B Bookings Customers Customers Rich Ponds First Tier Industry Industry Map Map for for Indian Express Logistics Industry Rich Ponds First Tier Notes 79 First Tier Rich Ponds The report ‘Measuring the Moat’ recommends the following points to be kept in mind while preparing industry map and profit pool: /LVWŢUPVLQWKHRUGHURI GRPLQDQFHW\SLFDOO\GHŢQHGDV őVL]HŒRUőPDUNHWVKDUHŒ Consider potential new entrants as well as existing players. Understand the nature of the HFRQRPLFLQWHUDFWLRQEHWZHHQ WKHŢUPV IRUH[DPSOH incentives, and payment terms). Evaluate any other factors that PD\LQţXHQFHSURŢWDELOLW\ IRU H[DPSOHODERUUHJXODWLRQV 6KRFNVWRRQHŢUPRULQGXVWU\ FDQULSSOHWKURXJKWRRWKHUŢUPV YLDVXSSO\RUGHPDQGOLQNV 80 :KHUHDUHWKHGLIIHUHQFHVLQ the patterns of revenue and SURILWFRQFHQWUDWLRQ" :KLFKYDOXHFKDLQ activities are the PRVWSURILWDEOH" First Tier 3RGI XLI EGXMZMXMIW WYTTSVX GSQTERMIW ERH GSRWXMXYIRXW SJ XLI MRHYWXV] EVI YRHIVWXSSH MX MW MQTSVXERXXSMHIRXMJ][LIVIERHLS[QSRI]MWFIMRKQEHIMRXLIMRHYWXV]7SQIUYIWXMSRWRIIH XSFIERW[IVIH Rich Ponds Profit Pool How do some players in the industry exert infl uence over the remaining players and VKDSHFRPSHWLWLRQ" 8LIERW[IVWXSXLIWIUYIWXMSRWEVIJSYRHMRERMQTSVXERXEREP]XMGEPXSSPGEPPIHƄTVSƼXTSSPƅ-XMWE QIXLSHGSRGIMZIHF]3VMX+EHMIWLERH.EQIW0+MPFIVXGSRWYPXERXWEX&EMR 'S Return on Capital Employed %TVSƼXTSSPMWEREREP]XMGEPXSSPXLEXGSQTEVIWTVSƼXEFMPMX]ERHWMÎMRXIVQWSJVIZIRYIJSVIEGL SJXLIZEPYIGLEMREGXMZMXMIWMRXLIMRHYWXV] Size of Industry It is a visual representation, wherein the x-axis constitutes the size of the activity, in terms of revenue, and the y axis constitutes the ROCE. 81 Rich Ponds First Tier 4VSƼX TSSP JSGYWIW SR HMWXVMFYXMSR SJ TVSƼXW [MXLMR XLI MRHYWXV] 4VSƼX TSSP LIPTWYWMHIRXMJ]XLIHMJJIVIRXEGXMZMXMIW[MXLMRERMRHYWXV]XLIWMÎSJIEGLEGXMZMX]ERH LS[TVSƼXEFPIMXMW-XLIPTWYWJSGYWSRXLIEGXMZMXMIWXLEXEVIFMKKIVMRWMÎSVXLISRIW XLEXEVIQSVITVSƼXEFPI?A Size of each activity How large is each activity in terms of size + Profitability of Each activity +RZSURI LWDEOHLV each activity &IJSVI GSRHYGXMRK E TVSƼX TSSP EREP]WMW SRI QYWX HIƼRI XLI TSSP8LMW VIJIVW XS HIƼRMRK XLI FSYRHEVMIW F] MHIRXMJ]MRK XLIZEPYIGLEMR EGXMZMXMIW XLEX EVIVIPIZERX XS XLIEREP]WMW ERH[MXLMR XLIWGSTISJXLIMRHYWXV]*SVEREP]WMWERHHIZIPSTMRKEWXVEXIK][LIVIWLSYPHXLIZEPYIGLEMR FIKMRERHIRH# E-COMMERCE MARKETPLACE BRAND For e-commerce PDUNHWSODFHVLQFOXGLQJ manufacturing activities LQWKHSRROPD\QRWEH directly relevant. For a manufacturer who sells through e-commerce PDUNHWSODFHVLWLVUHOHYDQW to add manufacturing and selling activities in the pool. Manufacturing Manufacturing 3RGIXLITVSƼXTSSPEGXMZMXMIWLEZIFIIRMHIRXMƼIHXLIWMÎSJIEGLEGXMZMX]MRXIVQWSJVIZIRYI ERH QEXGLMRK TVSƼXEFMPMX] RIIHW XS FI MHIRXMƼIH 8LI GLEPPIRKI LIVI MW XLEX XLI VITSVXMRK VIUYMVIQIRXWSJXLIGSQTERMIWHSRSXVIUYMVIXLIQXSVITSVXEGXMZMX][MWIHEXE%PWSGSQTERMIW GEVV]SYXEGSQFMREXMSRSJEGXMZMXMIWXLYWQEOMRKXLITVSGIWWSJSFXEMRMRKEGXMZMX][MWIRYQFIVW EGSQTPI\SRI8LITVSGIWWMWXLIREQEXXIVSJEKKVIKEXMRKERHHMWEKKVIKEXMRK 82 [4] https://www.science.gov/topicpages/t/triga+mark-iii+pool.html First Tier Rich Ponds Second Hand Dealers Service Centers Online Reviewers Insurance Most attractive EXVLQHVVHV return wise Auto Dealers Third Party Logistics Auto Ancillaries Raw Materials Biggest in terms of size Manufacturing ROCE Profit Pool for Indian Automobile Industry Revenue Share Here, 3PL and online reviewers are the most attractive businesses return-wise. However, manufacturing and auto ancillaries are the biggest in terms of size. Thus, it becomes a trade-off between size and returns. 83 First Tier Rich Ponds How to create Profit Pool and how to benefit from it? The scope of value chain is decided. It comprises of activities to be included in the profit pool. Next, size and profitability of each activity is identified. If exact value cannot be obtained, an estimate is used. It is then plotted on the graph to see which activity is the more attractive than others. For more details, each activity can be elaborated further. )RXVITVIRIYVW-RZIWXSVW WLSYPH YWI E TVSƼX TSSP XS MHIRXMJ] LS[ GSQTERMIW GER WGEPI F] TIVJSVQMRKGIVXEMREGXMZMXMIWERH[LEXVIXYVRWGERFII\TIGXIH-XMWEZIV]TS[IVJYPXSSP[LMPIXLI FYWMRIWWQSHIPSJEGSQTER]MWFIMRKHIZIPSTIH,IVIIEVP]WXEKIIRXVITVIRIYVWEVIFIXXIVSJJ JSGYWMRKSREGXMZMXMIWXLEXEVIQSVITVSƼXEFPIXLERSXLIVW 84 First Tier ,IVIMWLS[[IGERKSEFSYXGSPPIGXMRKHEXEJSVHMJJIVIRXEGXMZMXMIW Revenue Share Identifying the ‘pure’ players carrying out only a particular activity. 7KHDFWLYLW\SURILWDELOLW\FDQ EHHVWLPDWHGE\DJJUHJDWLQJ WKHSURŢWVRISXUHSOD\HUV Rich Ponds Operational Margin Operational Margin The first step to analyse is: Revenue Share Then the mixed players are identified, i.e. those who perform many different activities. (VWLPDWHVDUHWDNHQRQHDFK activities size and profits EDVHGRQGLVFORVXUHV Each company’s financial data and disclosures are disaggregated to arrive at estimates for each specific activity. By combining data from pure players as well as mixed players, an estimate of the size and profitability of activities is established. The profit pool is then analysed. The questions below need to be looked into. • :K\KDYHWKHSURILWSRROVIRUPHGZKHUH WKH\KDYH" • Are the forces that created these pools OLNHO\WRFKDQJH" • :LOO QHZ DQG PRUH SURILWDEOH EXVLQHVV PRGHOVHPHUJH" 7YGLUYIWXMSRWEPPS[WJSVPSXSJRI[FYWMRIWWSTTSVXYRMXMIW8LIWLETISJXLITVSƼXTSSPMWYWYEPP] GSQTPI\ERHVIƽIGXWXLIGSQTIXMXMZIH]REQMGWSJXLIMRHYWXV])ZIRZIV]GSQTIXMXMZIMRHYWXVMIW [MXL KIRIVEPP] PS[ TVSƼXEFMPMX] GER LEZI GIVXEMR EGXMZMXMIW [MXL LMKL TVSƼXEFMPMX] ,S[IZIV XLI TVSƼXEFMPMX]SJER]TEVXMGYPEVEGXMZMX]MRXLITSSPQE]ZEV][MXLGYWXSQIVKVSYTTVSHYGXGEXIKSV] KISKVETLMGEPQEVOIXERHHMWXVMFYXMSRGLERRIP 8LYW GEVV]MRK SYX E TVSƼX TSSP EREP]WMW EPPS[W YW XS YRHIVWXERH LS[ TVSƼX MW HMWXVMFYXIH ERH [LMGLEGXMZMX]EVIEW 85 ROCE Rich Ponds First Tier Profit Pool for Indian Footwear Industry Biggest in terms of size Retails Wholesellers Franchises Packaging Manufacturing Raw Materials Most attractive EXVLQHVVHV return wise Revenue Share Here, packaging and franchises are the most attractive businesses return-wise. However, manufacturing and retail are the biggest in terms of size. Thus, it becomes a trade-off between size and returns. 86 Rich Ponds First Tier 4 66 First Tier Rich Ponds First Tier Understanding Value Chain and Players in the Industry 67 First Tier Rich Ponds Value Chain Analysis 8LIZEPYIGLEMREREP]WMWJVEQI[SVO[EWƼVWXHIWGVMFIHF]1MGLEIP4SVXIVMRMRLMWFSSO Competitive Advantage.8LMWFSSOTVMQEVMP]JSGYWIWSREREP]WMWEXXLIGSQTER]WTIGMƼGPIZIP &YX[MXLXMQIXLIQSHIPLEWIZSPZIHMRXSWSQIXLMRKXLEXMWYWIHJSVEREP]WMWEXXLIMRHYWXV] WTIGMƼGPIZIPEW[IPP At the company level, 8LIQSHIPMWYWIHXSMHIRXMJ]EGXMZMXMIWXLEXGVIEXIEWSYVGISJHMJJIVIRXMEXMSR SVGSWXWEZMRK[MXLVIWTIGXXSGSQTIXMXSVW8LIZEPYIGLEMRVITVIWIRXWKIRIVMG MRXIVREPEGXMZMXMIWXLEXEƼVQIRKEKIWMRXSXVERWJSVQMRTYXWMRXSSYXTYXW At the industry level, 8LIZEPYIGLEMRMWYWIHXSYRHIVWXERHXLI[E]SJHSMRKFYWMRIWW ERHXLI[E]ZEPYIMWHIPMZIVIHF]XLIMRHYWXV]'SQTER]WTIGMƼG EGXMZMXMIWEVIIPMQMREXIHERHXLIIRXMVITVSGIWWSJZEPYIGVIEXMSR ERHHIPMZIV]MWYRHIVWXSSH:EPYIGLEMREREP]WMWEXXLIMRHYWXV] PIZIPEPPS[WXLITVSGIWWƽS[XSFIQETTIH-XWLS[WXLIQENSV EGXMZMXMIWGEVVMIHSYXF]EQENSVMX]SJXLIƼVQWMRXLIMRHYWXV] Raw Materials Intermediate Goods Manufacturing Process Marketing and Sales After Sales Service 68 Industry’s Value Chain 8LMW MW E KIRIVEP ƽS[ SJ EGXMZMXMIW JSV IEGL MRHYWXV] 7XITW ERH EGXMZMXMIW VIPEXMRK XS IEGL PIZIPMRXLITVSHYGXMSRTVSGIWWQYWXFIPMWXIH HS[R 7KHLQGXVWU\ŒVYDOXHFKDLQ is a generic set of activities done at each stage—right from procurement of raw materials to the activities done after the sale (aftersales service once the sale is made). Pharmaceutical Company Insurance Company Manufacturing Company 6IWIEVGLERH (IZIPSTQIRX%FMPMXMIW 1EREKIQIRXERH (MWXVMFYXMSR'ETEFMPMXMIW 4VSGYVIQIRX 'SWXW Rich Ponds For instance, First Tier )RXVITVIRYIVW-RZIWXSVWQYWXMHIRXMJ]XLIEGXMZMXMIWXLEXEVIQSWXGVMXMGEPJSVXLIWYGGIWWMRXLI MRHYWXV]'SQTERMIWXLEXHSXLMWEGMXMZMX][IPPWLSYPHI\GIPMRXLIMRHYWXV] The industry’s value chain helps identify all activities to be performed and those of critical importance for success within the industry. At the company level, the value chain analysis helps better understand the activities that lead to competitive advantage. One can begin with the generic value GLEMRERHXLIRMHIRXMJ]XLIVIPIZERXEGXMZMXMIWXLEXEVIWTIGMƼGXSXLEXGSQTER]SRP][2] Porter’s Value Chain %QSVIHIXEMPIHZEPYIGLEMRXLEXGERFIYWIHXSMRHYWXVMIWEW[IPPEWGSQTERMIW8LMWKMZIWE QSVILSPMWXMGZMI[SJXLIPMWXSJEGXMZMXMIW Support Activities Firm Infrastructure Human Resource Management MARGIN Technology Primary Activities Procurement Inbound Logistics Operations Outbound Logistics Marketing and Sales Service 69 [2] http://aronkiptarus.blogspot.com/2012/10/the-value-chain.html First Tier 8LIƼVQWTIGMƼGZEPYIGLEMRQSHIPMWXLISRITVSTSWIHF]1MGLEIP4SVXIVMR,IGEXIKSVMWIH EPPEGXMZMXMIWTIVJSVQIHF]EƼVQEWTVMQEV]EGXMZMXMIWSVWYTTSVXEGXMZMXMIW Rich Ponds Primary activitiesEHHZEPYIHMVIGXP]XSXLITVSHYGXMSRMIXLI]GSRXVMFYXIHMVIGXP]MRXVERWJSVQMRK MRTYXWMRXSSYXTYXWSupport activitiesEVIXLSWIXLEXEVIVIUYMVIHEXXLIƼVQPIZIPXLI]WYTTSVX I\IGYXMSRSJTVMQEV]EGXMZMXMIWVEXLIVXLERHMVIGXP]GSRXVMFYXIXSXLITVSHYGXMSRTVSGIWW Inbound Logistics 8LITVSGIWWSJVIGIMZMRKVE[QEXIVMEPWSVTEVXWJVSQXLI WYTTPMIVWERHWXSVMRKXLIQJSVXLITVSHYGXMSR Operations 8LI TVSGIWW SJ GSRZIVXMRK MRTYXW MRXS XLI ƼREP TVSHYGX SVWIVZMGI Outbound Logistics Primary Activities 8LI WXSVEKI ERH HMWXVMFYXMSR SJ XLI ƼREP TVSHYGX XS HMWXVMFYXMSR GIRXIVW [LSPIWEPIVW VIXEMPIVW ERH GYWXSQIVW Marketing and Sales 8LI TVSGIWW SJ XEVKIXMRK XLI TVSHYGX SV WIVZMGI XS XLI VMKLXGYWXSQIVWIKQIRXERHTVSQSXMSRSJXLITVSHYGX Service 8LI EGXMZMXMIW VIUYMVIH XS OIIT XLI TVSHYGX [SVOMRK IJJIGXMZIP] JSV XLI FY]IV WYGL EW MRWXEPPEXMSR XVEMRMRK VITEMVERHQEMRXIRERGI?A Technology Development 6IWIEVGL XS HIXIVQMRI LS[ XLI GSQTER] GER YWI XIGLRSPSK] XS EYXSQEXI TVSGIWWIW ERH HIZIPST RI[ TVSHYGXW Human Resource Management 8LI EGXMZMXMIW MRZSPZIH [MXL VIGVYMXMRK XVEMRMRK ERH VIXEMRMRKXLIIQTPS]IIWRIIHIH Procurement 8LIWSYVGMRKSJVE[QEXIVMEPWEXXLIGSVVIGXGSWXERH UYEPMX] Firm Infrastructure 8LI EGXMZMXMIW MRZSPZIH [MXL XLI GSQTER]ƅW WXVYGXYVI QEREKIQIRXTPERRMRKEGGSYRXMRKERHƼRERGIW?A 70 [3] https://www.lucidchart.com/blog/what-is-value-chain-analysis Support Activities 8LIZEPYIGLEMRHSIWRSXHMVIGXP]LIPTYRHIVWXERHXLIUYEPMX]SJXLIMRHYWXV]FYXMXLIPTW YRHIVWXERHLS[XLIMRHYWXV]STIVEXIW8LMW[MPPFIYWIJYPMRXLIEREP]WMWSJXLIMRHYWXV] ERHXLIGSQTERMIWSTIVEXMRKMRMX-X[MPPLIPTYWMHIRXMJ]XLIOI]MRHMGEXSVWJSVKVS[XL First Tier Rich Ponds %PPXLITVMQEV]ERHWIGSRHEV]EGXMZMXMIWRIIHWXSFIQETTIHXSKIXLIVJSVIEGLGSQTER] 8LMW EPPS[W XLI EREP]WX GSQTEVI XLI EGXMZMXMIW TIVJSVQIH ERH XLYW YRHIVWXERH XLI HMJJIVIRGIWXLEXPIEHXSHMJJIVIRXMEXMSRERHGSWXEHZERXEKIW8LIMRHYWXV]ZEPYIGLEMRGER EPWSFIGVIEXIHF]GSQFMRMRKHMJJIVIRXƼVQWTIGMƼGEGXMZMXMIW Value chain analysis is a popular model for analysis at the company level as well as indsutry level. Firstly, whichever industry is selected, an industry value chain must be created. This can be done using a simple industry value chain framework or the primary activities of Porter‘s value chain model. Then one must identify the activities that are critical to success in the industry. Once this is done, a value chain must be designed for individual companies in the industry. Then analysts must compare and contrast the individual value chains with each other and with that of the industry. = = Company Value Chain Industry Value Chain 8LI] [MPP WIPHSQ LEZI I\GITXMSREP VIXYVRW8LI][MPPQEOIEZIVEKIVIXYVRW MRXLIMRHYWXV] Company Value Chain Industry Value Chain 8LI] LEZI VSSQ JSV VIPEXMZI GSWX SV HMJJIVIRXMEXMSR EHZERXEKI 'SQTERMIW EVI GSQTIXMXMZIP] EHZERXEKIH SV HMWEHZERXEKIH 8LI] [MPP GPSGO EFSZI EZIVEKISVFIPS[EZIVEKIVIXYVRW 71 72 Firm Infrastructure 8MIYTW[MXL 0SKMWXMGW GSQTER] Inbound Logistics 6IKMWXVEXMSRWSJ RI[TVSHYGXW QERYJEGXYVMRK SJƼRMWLIH TVSHYGXW PMGIRWMRK EKVIIQIRXW ERHSXLIVW Operations 8MIYTW[MXL PSKMWXMGWTPE]IVW ERH40TPE]IVW QYPXMTPIWXSGO points at depots ERH' *EKIRXW LYFERHWTSOI HMWXVMFYXMSRYWIH Outbound Logistics &VERH VIGSKRMXMSR TVSKVEQQIW KPSFEPTVIWIRGI MRMXMEXMZIW I\GPYWMZI HMWXMVFYXMSR VMKLXW Marketing and Sales (IHMGEXIHXIEQJSVTVSGYVIQIRXRIEVQERYJEGXYVMRKWIXYTW Procurement 'YWXSQIV GSRRIGX MRMXMEXMZIW GSQQYRMX] IRKEKQIRX TVSKVEQQIW ƼIPHJSVGI LIPTPMRI RYQFIVWIXG Service 8MIYTW [MXL SXLIV GSQTERMIW ERH GSPPIKIWMRLSYWI 6 ( HMZMWMSR KPSFEP MRRSZEXSVW XMIYT TVSHYGXERHETTPMGEXMSRHIZIPSTQIRXIKQSPIGYPIHIWMKRVSYXMRIW]RXLIWMW Technology )QTPS]II QEREKIQIRX XIEQW GSPPIKI VIJIVVEP WGLIQIW MRXIVREP TVSQSXMSRWSRƼIPHWXEJJXVEMRMRK Human Resource Management 6 ('IRXIVW7%4ERH)64JSVSVKERMWEXMSRHEXEFEWISJJEVQIVW XMIYTW[MXLYRMZIVWMXMIW Rich Ponds First Tier Value Chain of Agrochemical Industry (QWUHSUHQHXUV,QYHVWRUVPXVWXQGHUVWDQGWKHDFWLYLWLHVWKDWDUHPRUH FULWLFDO2QO\WKHQFDQWKH\HYDOXDWHWKHVWUHQJWKVDQGZHDNQHVVHVRI the companies. They need to evaluate where does each company stand on those critical activities. Rich Ponds All players in the industry need to perform these activities to operate in WKHLQGXVWU\7KHVHDUHWKHDFWLYLWLHVWKDWQHHGWREHWDNHQFDUHRI,W LVWKHDELOLW\RIGLIIHUHQWFRPSDQLHVWRSHUIRUPWKHVHDFWLYLWLHVEHWWHU than others that determines their strengths. First Tier What it means? How to benefit from it? )EGLEGXMZMX]GERFIEWSYVGISJHMJJIVIRXMEXMSRJSVXLIGSQTERMIWMRXLIMRHYWXV] 8LIGSQTERMIWGERGLSSWIXSHSER]GSQFMREXMSRSJEGXMZMXMIWERHKIXXLI VIWXSYXWSYVGIH[MXLHMJJIVMRKMQTPMGEXMSRWSRXLIGSQTIXMXMZITSWMXMSRMRKSJ XLIGSQTER]8LIZEPYISJIEGLGSQTER]WMKRMƼGERXP]MRƽYIRGIWXLIGSWXERH VIZIRYIQSHIP Company A Company B In-house Activities Company C Outsourced Activities (MJJIVIRXGSQTERMIWGEREPWSGLSSWIXSHSEGXMZMXMIWXLEXEVISYXWMHIXLIZEPYI GLEMR[LMGLQMKLXKMZIXLIQEWSYVGISJHMJJIVIRXMEXMSRERHFIRIƼXJVSQXLI TSWMXMSR 8LSWI [ERXMRK XS WXEVX E FYWMRIWW MR XLI MRHYWXV] QYWX YRHIVWXERH ZEPYI GLEMR XLI GLEMR SJ EGXMZMXMIW XS FI TIVJSVQIH ERH XLI GETEFMPMX] VIUYMVIH XS TIVJSVQ XLIWI EGXMZMXMIW 8LI] RIIH XS XLIR IZEPYEXI MJ XLI] LEZI E TPER JSV HMJJIVIRXMEXMSR[MXLMRXLIMRHYWXV]SVRSX 73 First Tier Value System Rich Ponds 2S MRHYWXV] STIVEXIW MR E ZEGYYQ -RHYWXVMIW EVI PMROIH XS IEGL SXLIV EW WYTTPMIVWSVGYWXSQIVW8LIMRHYWXV]ƅWZEPYIGLEMRMWPMROIHXSXLIZEPYIGLEMRSJYTWXVIEQ WYTTPMIV MRHYWXVMIW ERH HS[RWXVIEQ FY]IV MRHYWXVMIW 8LI VIWYPX MW E PEVKIV WXVIEQ SJ EGXMZMXMIWORS[REWXLIZEPYIW]WXIQ-REZEPYIW]WXIQGLERKIWMRER]MRHYWXV]ƅWZEPYI GLEMR EJJIGX XLI SXLIV ZEPYI GLEMRW 8LIVIJSVI GLERKI MR ER] ZEPYI GLEMR EJJIGXW XLI IRXMVIZEPYIW]WXIQ[4] 8SVWUHDP,QGXVWU\ Supplier Industry Given Industry Consumer Industry 'RZQVWUHDP,QGXVWU\ VALUE SYSTEM With this, we end our discussion around value chain. Now, spend sometime sketching out value chain for businesses you know! 74 [4] https://www.lucidchart.com/blog/what-is-value-chain-analysis Major Industry Risks Internal Risks External Risks 5LVNVIURPZLWKLQWKH EXVLQHVVRUŢUP 5LVNVIURPRXWVLGHRUWKH EXVLQHVVHQYLURQPHQW Operational Risk Interest Rate Risk Legal Risk First Tier 6MWOVIJIVWXSER]JSVQSJYRGIVXEMRX]XLEXEJJIGXWXLIFYWMRIWWTSWMXMZIP]SVRIKEXMZIP]%PQSWXEPP FYWMRIWWIWLEZIWSQIJSVQSJYRGIVXEMRX]SVXLISXLIVERHEVIXLYWEJJIGXIHF]XLIVMWOW6MWOW ZEV]MRXLIJVIUYIRG][MXL[LMGLXLI]SGGYVERHXLIMQTEGXXLI]QE]LEZISRGIXLI]SGGYV8LI] EJJIGXEFYWMRIWWƅWEFMPMX]XSSTIVEXIHMVIGXP]SVMRHMVIGXP] Rich Ponds Major Industry Risks Political Risk ! Supply Chain Risk Human Factor Risk Regulatory Environmental Risk Risk Industry Specific Risks Two types of Risks 6MWOW XLEX EJJIGX EPP XLI TPE]IVW MR E KMZIR MRHYWXV] Firm Specific Risks 6MWOWXLEXEJJIGXWSRP] GIVXEMR TPE]IVW MR E KMZIRMRHYWXV] 8LMWWIGXMSRTVMQEVMP]JSGYWIWSRMHIRXMJ]MRKXLIMRHYWXV]WTIGMƼGVMWOWERHXVMIWXSIZEPYEXI XLIJVIUYIRG]ERHMQTEGXSJXLIWIVMWOW 87 Rich Ponds First Tier 3RISJXLIWMQTPI]IXTS[IVJYPVMWOQEREKIQIRXQSHIPWMWXLI6SFWSRVMWOQEREKIQIRXQSHIP 'VIEXIH F] (V 0MRHE 1 6SFWSR XLI QSHIP [EW ƼVWX GVIEXIH XS MHIRXMJ] ERH GSRXVSP MRHYWXV] WTIGMƼGVMWOWEJJIGXMRKXLIIZIRXWMRHYWXV] The First Step - Personal Risk Perception. 3RWHQWLDO5LVNV 3RWHQWLDO5LVNV Company A -X JSGYWIW SR XLI MHIRXMƼGEXMSR SJ ER] EGXMZMX] [MXLMR XLI MRHYWXV] XLEX MW TIVGIMZIH XS MRGVIEWIXLIYRGIVXEMRX]SJSYXGSQI(MJJIVIRXEGXMZMXMIWGERFITIVGIMZIH[MXLZEV]MRK PIZIPWSJVMWOF]HMJJIVIRXTISTPIActivities that are preceived to be partially risky should FIMHIRXMƼIH-HIRXMJ]EWQER]TSXIRXMEPVMWOWEWTSWWMFPI 7KLVWDVNLQYROYHVFUHDWLQJDOLVWRIDFWLYLWLHVDQG IDFWRUVWKDWPD\RUPD\QRWEHULVN\LQUHDOLW\EXWLV SHUFHLYHGWREHULVN\7KHVRXUFHRILQIRUPDWLRQFDQ EHSULPDU\DVZHOODVVHFRQGDU\ )RXVITVIRIYVW FYWMRIWW QEREKIVW ERH EREP]WXW QE] GSPPIGX HEXE JVSQ ZEVMSYW WSYVGIW PMOI industry publications, commentaries by various management experts, journals, or government statistics. 8LI] GER EPWS VIP] SR ƼVWX LERHI\TIVMIRGI[MXLMRXLIMRHYWXV][7] 3XEOLFDWLRQV Commentaries Statistics Journals 88 [7] https://www.specialevents.com/blog/creative-approach-risk-managementrobson-risk-management-model Likelihood of Risk - Frequency 1 Very unlikely Has happened only once in the industry. Very 4 Likely 2 3 Likely Unlikely Happens every 10 years or more in the industry. +DSSHQVDERXW once a year in the industry. First Tier 8LIWIGSRHWXITJSGYWIWSREWWIWWMRKXLIPIZIPWSJVMWOWJSVXLIZEVMSYWVMWOWMHIRXMƼIHMRXLI TVIZMSYWTLEWI8LIPIZIPSJVMWOMWFEWIHSRXLIWIZIVMX]ERHJVIUYIRG]SJMQTEGX Rich Ponds The Second Step - Risk Assessment Phase. Happens more than once a year in the industry. Consequences of Risk Hig h 2 3 1 4 e ver Se Low M te era od 8LIGSRWIUYIRGISJXLIVMWOMWIZEPYEXIHWYFNIGXMZIP]-XGERFIQEHIQSVISFNIGXMZIF]HIƼRMRK IEGLWXEKI8LIFEWMWSJXLIIZEPYEXMSRGERFIƼRERGMEPPSWWGYWXSQIVPSWWSVXIEQQSVEPIPSWW ,S[WIVMSYWEVMWOJEGXSVMWHIƼRIHF]PIZIPVMWO;IGERKIXMXF]QYPXMTP]MRKVMWOWIZIVMX]ERH PMOIPMLSSHSJMXLETTIRMRK Level of Risk = Consequence of Risk x Likelihood = 3 x 3 [likely risk with high consequences] =9 89 ;IGERPSSOEXXLIPIZIPSJVMWOFEWIHSRXLIQIXLSHMRXLITVIZMSYWTEKI,S[IZIVMXMWKSMRKXS FIEZIV]WYFNIGXMZII\IVGMWI Rich Ponds First Tier Level of Risk M era od te Hig h Low 8-12 1-4 12-16 e ver Se 4-8 The Third Step - Risk Strategies. 3RGIXLIVMWOLEWFIIREWWIWWIHMXWJVIUYIRG]ERHWIZIVMX]SJMQTEGXLEZIFIIRYRHIVWXSSH XLI RI\X TLEWI JSGYWIW SR VMWO WXVEXIKMIWƂ XLEX MW HIZIPSTMRK TSPMGMIW ERH TVSGIHYVIW JSV HIEPMRK[MXLVMWOWFSXLFIJSVIERHEJXIVXLI]LETTIR Strategy for Risk Accept Reduce Transfer Avoid Low Moderate High Severe Avoid VMWOWXLEXSGGYVZIV]JVIUYIRXP]ERH LEZI WMKRMƼGERX GSRWIUYIRGIW *MVQW QYWX ƼRH E [E] XS EZSMH VMWOW XLEX EJJIGX XLIMV WYVZMZEP %GGITXMRK WYGL VMWOW [SYPH PIEH XS GSRWXERX LMGGYTW SR XLI TEXL SJ KVS[XL SV WYVZMZEPGLEPPIRKIW[MXLXLIGSQTER] 90 Transfer VMWOW XLEX LEZI WMKRMƼGERX GSRWIUYIRGIW FYX HS RSX SGGYV ZIV] JVIUYIRXP]8VERWJIVXLIQXSSXLIVWF]TE]MRK E TVIQMYQ JSV XLI XVERWJIV 7SQI [E]W XS XVERWJIV VMWO XS ERSXLIV TEVX] EVI XLVSYKL MRWYVERGI SYXWSYVGMRK NSMRX ZIRXYVIW SV TEVXRIVWLMTW8LMW[E]XLIVMWOMWWLEVIH First Tier VMWOW XLEX LEZI QSHIVEXI GSRWIUYIRGIW 8LI PMOIPMLSSH ERH XLI GSRWIUYIRGIW SJ VMWO WLSYPH FI VIHYGIH XLVSYKLEGXMZIQIEWYVIW8LMWGERFIHSRI MRXLIJSPPS[MRK[E]W Rich Ponds Reduce Methods of Reducing Risk! Reduce the likelihood of the risk happening 5YEPMX]GSRXVSPWXEJJXVEMRMRKSVEYHMXMRK Reduce the impact of the risk that occurs. )QIVKIRG] TVSGIHYVIW WEJIX] IUYMTQIRX ERHQMRMQMWMRKI\TSWYVIWXSWSYVGIWSJVMWO Accept VMWOW XLEX HS RSX SGGYV JVIUYIRXP] ERH PIEZI E QMRMQEP MQTEGX 7YGL VMWOW EVI FIWX EGGITXIH XLI [E] XLI] EVI RS EGXMZI IJJSVXMWTYXMRVIHYGMRKWYGLVMWOW :EVMSYWVMWOPIZIPWLEZIHMJJIVIRXMHIEPWXVEXIKMIW,S[IZIVRSXEPPWXVEXIKMIWEVIJIEWMFPIMRIEGL WMXYEXMSR*SVMRWXERGIEVMWOXLEXQYWXFIXVERWJIVVIHQE]ƼRHMXWIPJFIMRKEGGITXIHHYIXSE ƼVQƅWMREFMPMX]XSXVERWJIVMX)EGLSJXLIVMWOWWLSYPHFIYRHIVWXSSHERHETTVSTVMEXIWXVEXIKMIW WLSYPHFIHIWMKRIH Geographical Concentration Risk +XJH5LVN Insurance Industry for 91 First Tier Rich Ponds 0EVKIƼVQWGER HMZIVWMJ]E[E] JVSQWYGLVMWOW Insurance Industry 7QEPPIVƼVQW GERRSXVIHYGI WYGLVMWOW %ƼVQƅWEFMPMX]SVHMWEFMPMX]XSGEVV]SYXXLIMHIEPWXVEXIK]JSVIEGLSJXLIMRHYWXV]VMWOWEJJIGXWMXW GSQTIXMXMZITSWMXMSR • %ƼVQQE]EGXMZIP]GLSSWIXSHIZMEXIJVSQXLIMHIEPWXVEXIK]JSVGSQTIXMXMZIVIEWSRW • *MVQW QMKLX HIGMHI XS MRWYVI VMWOW XLEX SXLIVW EGGITX SV GSQTPIXIP] VINIGX VMWOW XLEX SXLIVW MRWYVI • 7SQIƼVQWQE]ƼRHXLIQWIPZIWMRETSWMXMSRXSVIHYGISVEZSMHVMWOWXLEXSXLIVWGERRSXERH XLYWFITPEGIHEXETSWMXMSRSJEHZERXEKIGSQTEVIHXSSXLIVW The Fourth Step - Risk Evalution. 8LIPEWXTLEWISJXLIVMWOQEREKIQIRXTVSGIWWMWƄVMWOIZEPYEXMSRƅ8LMWTLEWIJSGYWIWSR[LIXLIV XLIVMWOQEREKIQIRXTVSGIWWMWIJJIGXMZISVRSX-XIRWYVIWXLEXIEGLWXITMWGEVVMIHSYXTVSTIVP]Ƃ XLIQENSVVMWOWEVIMHIRXMƼIHERHEWWIWWIHERHXLIRXLIGSVVIGXWXVEXIKMIWEVIMQTPIQIRXIH8LI GLEPPIRKIWXSXLIIRXMVITVSGIWWEVIMHIRXMƼIHEPSRK[MXLJIIHFEGO8LMWTLEWIMWQSVIETTPMGEFPI JSVIRXVITVIRIYVWVEXLIVXLEREREP]WXW 7KHPDMRUULVNVDUH LGHQWLŢHGDQGDVVHVVHG ,WHQVXUHVWKDWHDFK step is carried out properly. the correct strategies are implemented. 92 8LIGLEPPIRKIWXSXLIIRXMVITVSGIWWEVIMHIRXMƼIHEPSRK[MXLJIIHFEGO Rich Ponds First Tier 8LITVMQEV]TYVTSWISJXLIMRHYWXV]VMWOEREP]WMWMRXLIƼVWXXMIVSJXLIFVSEHMRHYWXV]EREP]WMW -HIRXMJ]ƼVQWXLEXEVI placed at an advantage or a disadvantage or how they individually tackle the risks. Identify the major risks Look for opporutnities affecting an industry, assess where entrepreneurs can XLIMVPIZIPERHƼREPP]ƼKYVISYX manage risk differently what can be done about them. than existing companies. -J E TEVXMGYPEV MRHYWXV] JEGIW WIZIVI SV LMKLPIZIP VMWOW ERH QSWX SJ XLI TPE]IVW MR XLI MRHYWXV] GERRSXEZSMHXLIQSVXVERWJIVXLIQERHEVIJSVGIHXSEGGITXXLIQXLIRMXQE]FIFIWXXSEZSMH XLIMRHYWXV]EWE[LSPI *SVI\EQTPIWQEPPIVFEROWXLEXPIRHSRP]XSETEVXMGYPEVMRHYWXV]SVTEVXMGYPEVKISKVETL]EVIFIWX EZSMHIHEWXLIWILEZILYKIPSERFSSOGSRGIRXVEXMSRVMWOW LGHQWLI\LQJLQGLYLGXDOULVNV 7KHULVNLQHVVRI operations in the industry FDQEHMXGJHGEDVHGRQ ascertaining the ideal versus actual response to them. 3RIJSVQSJVMWOXLEXEJJIGXWEPQSWXEPPMRHYWXVMIWMRZEV]MRKHIKVIIWMWthe risk of disruptions. • • • • 8LMW TEVXMGYPEV VMWO threatens the very existence of an industry MR XLI JSVQ SJ RI[IV FYWMRIWW QSHIPW ERH WXVSRKIV ZEPYI TVSTSWMXMSRW *MVQW MR EPP MRHYWXVMIW WLSYPH GSRWXERXP] PSSO SYXJSVWYGLVMWOW 8LMWVMWOQYWXFIIZEPYEXIHMRKVIEXIVHITXLMR XLIWIGSRHXMIVSJXLIFVSEHMRHYWXV]EREP]WMW %PP SXLIV MRHYWXV] VMWOW EVI YRHIVWXSSH ERH IZEPYEXIHEXXLMWWXEKI 93 First Tier Risks Identified Rich Ponds Seasonal fluctuations, climatic variations and rainfall Customers unable to pay credit purchase due to local economic conditions Risk of not getting all the required approvals Risk for Indian Agrochemical Companies Major risks for Agrochemical Industry include local, seasonal, and climatic factors, local economic conditions, counterfeit products, and slow industry growth that leads to cut-throat competition. Local factors affect all regional Agrochemical companies. However, UPL Ltd, the largest Indian Agrochemical Company, can avoid almost all local risks WYGL EW WIEWSREP ƽYGXYEXMSRW and geographical risks. Since the company operates in six continents, the effects and ƽYGXYEXMSRW SJ PSGEP JEGXSVW KIX neutralised. As a result, UPL is better equipped to handle risks than its local peers. 94 Brand image amongst farmers getting hurt Slow industry growth Fluctuations in price of commodities Counterfeit products Inadequate R&D pipeline Social Resistance against the use of Agrochemicals Hig h 3 1 era od te Low 1 M era od te era od te Low Low 3 M 4 era od te 3 M 4 Hig h 3 1 4 era od te te Low Low 4-8 te 4-8 First Tier Hig h 8-12 12-16 era od Rich Ponds Hig h 8-12 12-16 era od 1-4 8-12 12-16 1-4 M Hig h Hig h 8-12 12-16 e ver Se te 2 era od te e ver Se 2 era od 1-4 M Hig h 8-12 12-16 4-8 Hig h 1 te e ver Se 2 1 era od 1-4 M 8-12 12-16 4-8 Hig h Hig h e ver Se M 4 te 1-4 M 3 1 era od 4-8 Hig h Hig h 8-12 12-16 1-4 M 4 2 Low Hig h 3 te e ver Se 2 era od 4-8 Low 4 Low Low M Low 3 1 8-12 12-16 1-4 M Hig h e ver Se 2 Hig h Low te Low era od te 4-8 Low Low Low M era od 1-4 M 4 12-16 4-8 Low te 2 era od 8-12 e ver Se Low 4 Hig h e ver Se M 1-4 M 3 te e ver Se 2 1 era od 4-8 Hig h e ver Se Happens every 10 years or more in the industry. te e ver Se +DSSHQVDERXW once a year in the industry. era od e ver Se Happens more than once a year in the industry. 4 e ver Se Happens every 10 years or more in the industry. 3 1 M M e ver Se +DSSHQVDERXW once a year in the industry. 2 Hig h e ver Se Happens every 10 years or more in the industry. te e ver Se +DSSHQVDERXW once a year in the industry. era od e ver Se +DSSHQVDERXW once a year in the industry. M e ver Se +DSSHQVDERXW once a year in the industry. Risk Rating Severity Low Likelihood 95 First Tier Risks Identified Rich Ponds Any mishap can affect bank’s reputation considerably Concentration in loan book of any kind - customer-wise, geography-wise, industry-wise. Increase in NPA due to faulty credit appraisal process Risk for Indian Retail Banks Banks face a series of risks- assetliability match, asset quality risk, geographical concentration risk and so on. Some companies can manage it better than others. • • 96 For example, Kotak Mahindra Bank and HDFC Bank have negligible concentration risks as it is well spread out over products, geographies, and industries. ILF&S was running on an asset-liability mismatch. It was mainly because of longterm infrastructure projects FIMRKƼRERGIHF]WLSVXXIVQ loans. Different business models and value propositions affect each player’s ability to treat risk. Affected by macro-economics and market forces Asset-liability mismatch Interest rate risks Frauds with the system or cyber attacks Digital platforms may affect intermediate’s commissions Regulatory compliance charges Hig h 3 1 era od te Low 4 era od te Low M 4 era od te Low 3 M 4 era od te 3 M 4 Hig h 3 1 4 era od te te Low Low 4-8 8-12 te 4-8 First Tier Hig h 8-12 12-16 era od Rich Ponds Hig h 12-16 era od 1-4 8-12 12-16 1-4 M Hig h Hig h 8-12 12-16 e ver Se te 2 era od te e ver Se 2 era od 1-4 M Hig h 8-12 12-16 4-8 Hig h 1 te 1-4 M 8-12 e ver Se 2 1 era od 4-8 Hig h Hig h 12-16 1-4 M 3 te e ver Se 2 era od 4-8 Hig h 1 12-16 1-4 M 3 1 M Low Hig h Hig h 8-12 e ver Se 2 te 4-8 Low 4 Low Low M Low 3 1 era od 1-4 M 8-12 e ver Se 2 Hig h Low te Low era od Hig h 12-16 4-8 Low Low Low M te 1-4 M 4 era od 4-8 Low te 2 era od 12-16 e ver Se Low M 4 8-12 e ver Se 3 Hig h e ver Se 2 te 4-8 M 1 era od 1-4 Hig h e ver Se Happens every 10 years or more in the industry. te e ver Se +DSSHQVDERXW once a year in the industry. era od e ver Se +DSSHQVDERXW once a year in the industry. 4 e ver Se Happens more than once a year in the industry. 3 1 M M e ver Se +DSSHQVDERXW once a year in the industry. 2 Hig h e ver Se Happens every 10 years or more in the industry. te e ver Se +DSSHQVDERXW once a year in the industry. era od e ver Se Happens every 10 years or more in the industry. M e ver Se +DSSHQVDERXW once a year in the industry. Risk Rating Severity Low Likelihood 97 First Tier %PPMRHYWXVMIWLEZIXLIMVTVSƼXEFMPMX]HIXIVQMRIHF]XLIHIQERHERHWYTTP]JSVGIWEJJIGXMRKXLI MRHYWXV][LIXLIVXLI]EVIWIEWSREPG]GPMGEPSVWXVYGXYVEP*MVQWMRER]MRHYWXV]EVIMQTEGXIHF] XLIYRHIVGETEGMX]ERHSZIVGETEGMX]MRXLIMRHYWXV]8LITVSƼXMFMPMX]JSVXLIƼVQGLERKIWEPSRK [MXLHIQERHERHWYTTP]GLERKIW Price and Profitibility Rich Ponds Demand-Supply Scenario in Industry Demand & Prices Supply 3 Demand Prices Demand Prices 2 4 New Equilibrium Demand Prices 1 5 Time The ƼZITLEWIW of the business cycle are: Phase 1 -R TLEWI ER MRGVIEWI MR HIQERH JSV XLI TVSHYGX GEYWIW MX XS I\GIIH MXW WYTTP] ;LIR HIQERH I\GIIHW WYTTP] FSXL TVMGI ERH TVSƼXEFMPMX] VMWI 8LI WYVKI MR HIQERH VIPEXIW XS IGSRSQMG KVS[XL MRGVIEWIH MRRSZEXMSR SV FEWMG IGSRSQMGW [LIVI PS[IV TVMGIW PIEH XS LMKLIVHIQERH?A Phase 2 %WTVMGIWWXEVXVMWMRKQSVITVSHYGIVWWIIXLIMVQEVKMRWI\TERH8LMWGEPPWJSVPEVKIVGETMXEP WTIRHMRK XS MRGVIEWI TVSHYGXMSR EW [IPP EW E JVIWL IRXV] JVSQ SYXWMHIVW (YVMRK XLMW XMQI TVMGIWGSRXMRYIXSVMWILMKLIVXLYWGSRXMRYSYWP]MRZMXMRKJVIWLGETMXEP 98 Phase 4 7YTTP] JVSQ RI[ TVSHYGXMSR SZIV[LIPQW HIQERH ERH TVMGIW FIKMR XS JEPP 8LMW LYVXW TVSƼXEFMPMX]?A First Tier %W GETMXEP I\TIRHMXYVI VEQTW YT GETEGMX] MW MRGVIEWIH 8LMW FVMRKW QSVI WYTTP] MRXS XLI QEVOIX[LMGLGEYWIWIRGSYVEKIWTVMGIWXSWXEFMPMÎ?A Rich Ponds Phase 3 Phase 5 3RGIXLIVIEPMX]SJPS[IVTVMGIWLMXWXLIQEVOIXQER]TPE]IVWI\MXXLIMRHYWXV]8LMWHVEMRSJ WYTTP]JVSQXLIQEVOIXGVIEXIWERI[IUYMPMFVMYQXLEXFIGSQIWEG]GPMGEPFSXXSQ3RGIXLI GETEGMX]VIHYGIWMXTVSZMHIWWTEGIJSVYRHIVGETEGMX]ERHTMGOWYTTVSƼXEFMPMX]ERHXLIG]GPI XYVRWEVSYRHEWTLEWISRIVITIEXWMXWIPJ?A The cycle is spread out over years and there is no definite point where the industry can be said to move from one phase to another. To understand the demand-supply scenario, analysts, as well as entrepreneurs, must carry out the following steps: Demand forecasting Supply capacity analysis Capacity utilisation Supply strategies 99 [8] https://www.daytrading.com/commodity-cycle First Tier Rich Ponds Demand Forecasting Historical Sales Data used to Future Customer Demand $QHVWLPDWHRIWKHQXPEHU of goods and services the LQGXVWU\ŒVFXVWRPHUVZLOO purchase. Demand Forecasting It is one of the important functions as strategic and operational plans are devised around the forecasted demand. (IQERHJSVIGEWXMRKGERFIFVSEHP]GPEWWMƼIHMRXSXLI level of detailing, timespan considered, and the scope of the market forecasted. Level of Detailing 100 Forecasting Growth Plan Level of Detailing Passive Forecasting Stable Businesses with Conservative Growth Plans Low Level Detailing Active Forecasting Businesses with Agressive Growth Plans High Level Detailing Product analysis or Competitor analysis. Time Span Period Evaluation Short Term 3-12 months Year-specific and seasonal demand for the product. Rich Ponds (IQERHJSVIGEWXMRKERHEREP]WMWGERFIHSRIJSVXLIshort, medium, and long terms. First Tier Timespan 6HDVRQDOLW\PXVWEHFDUHIXOO\HYDOXDWHG as it is a recurring phenomenon. Medium Term 12-36 months The demand against the capacity in the industry and where the industry is placed cyclically. This helps evaluate the cyclicality of the LQGXVWU\ŒVSURŢWDELOLW\ Long Term More than 36 months Focuses more on the survival of the industry, its evolution, and the effects of disruption.[9] This is more structural, as, in the long run, the effects of seasonality and cyclicality are neutralized. Scope of Market [9] QSR Industry Business Macro-level demand forecasting JSGYWIW QSVI SR XLI HIQERH JVSQ GSRWYQIVW EX XLIQEGVSPIZIP[LMGLQIERWEXXLIPIZIP SJXLIIGSRSQ]SVXLIMRHYWXV] Business-level demand forecasting JSGYWIWSRƼVQWTIGMƼGHIQERHFEWIH SR JEGXSVW WYGL EW TVSHYGX GEXIKSV] WEPIWHMZMWMSRERHƼRERGMEPHMZMWMSR https://blog.arkieva.com/demand-forecasting/ 101 8LIYPXMQEXISFNIGXMZIJSVFSXL&&ERH&'FYWMRIWWIWMWXSYRHIVWXERHXLIIRHGYWXSQIV HIQERHFEWIHSRXLIHIQSKVETLMGWSJXLIGYWXSQIVWIKQIRXERHXLIFY]MRKIRZMVSRQIRX ERHXLIRWXE]ELIEHSJXLIWEQI Rich Ponds First Tier Indicators of Demand Forecasting demand is an exercise to collect cues and trends from multiple sources. Then they are compiled together to form an analysis or forecast of the demand from the end consumer. These hints are indicators of demand and they help the entrepreneurs stay ahead of the demand. 3RISJXLIQSWXMQTSVXERXMRHMGEXSVWSJHIQERHMWXLIdemand forecast and demand scenario for the suppliers and distributorsMRXLIZEPYIGLEMR • • • • 8LIMRZIRXSV]PIZIPWLIPTXSMHIRXMJ]XLIHIQERHWGIREVMS 8LI MRHYWXV] HIQERH MW LMKLP] GSVIPEXIH EW XLI] GEXIV XS XLI WEQI IRHGYWXSQIV HIQERH 8LIHIQERHJSVIGEWXGERFIMHIRXMƼIHF]XLIGSQQYRMGEXMSRJVSQXLIQEREKIQIRX SJXLIWIGSQTERMIW (IQERH GER FI XVEGOIH F] XLIMV WXEJJ VIGVYMXQIRX MR VIGIRX XMQIW SYXKSMRK ERH MRGSQMRKPSKMWXMGWERHGETEGMX]EHHMXMSRW ,S[IZIV KIXXMRK EPP XLI VIUYMWMXI MRJSVQEXMSR EFSYX XLI MRHYWXVMIW ERH GSQTERMIW MW E GLEPPIRKI ERH IRXVITVIRIYVW RIIH XS VIWSVX XS GVIEXMZI TVEGXMGIW XS KIX XLI VIUYMVIH MRJSVQEXMSR 102 First Tier Rich Ponds -RZIRXSV]PIZIPWERHGLERKIWMRMRZIRXSV]PIZIPWEGVSWWXLIZEPYIGLEMRMWERMQTSVXERXMRHMGEXSV SJHIQERH Raw Materials Finished Product %DFNZDUGDQGIRUZDUG ŢUPVZLWKULVLQJUDZ material levels indicate WKDWŢUPVDUHSRVLWLYH DERXWWKHLQGXVWU\ demand in the short run. Firms with a rising ŢQLVKHGSURGXFWLQYHQWRU\ show slowing demand. Inventory levels are also indicative of business optimism across channels. 3RISJXLIQIXLSHWXSOIITXVEGOSJXLIIRHGYWXSQIVMWXSGSRHYGXHIXEMPIHQEVOIXVIWIEVGLERH MHIRXMJ]OI]ZEVMEFPIWXLEXHVMZIXLIMRHYWXV]HIQERHMRXLEXTEVXMGYPEVMRHYWXV] Sales DIIHFWHGE\ Liquidity and lending rates in financial markets. Monsoon Season New vehicle launch 3RGI XLIWI JEGXSVW LEZI FIIR MHIRXMƼIH GSQTERMIW WLSYPH OIIT XVEGO SJ XLIWI ZEVMEFPIW ERH GSRHYGXVIKYPEVIRHGYWXSQIVEREP]WIW8LMW[SYPHLIPTXLITPE]IVWWXE]ELIEHSJXLIHIQERHMR XLIMRHYWXV]ERHVIKYPEVP]YTHEXIXLIGYWXSQIVTVSƼPI 103 First Tier I Rich Ponds ;LMPIEREP]^MRKMRHYWXV]HIQERH II 'SRWXERXP] IZEPYEXI XLI MQTEGX SJ WYFWXMXYXIW ERH MRHYWXVMEP HMWVYTXMSR JSVGIW EJJIGXMRKXLIMRHYWXV] Substitute offering Lower Prices Industry demand may take a hit III Firms in Industry should keep a track of substitute’s value proposition and demand. IV This helps them decide how to adapt and whether to participate in the substitute industry. V This will favorably influence the demand scenario for the firm. Also, new products, new business models, and new value chains affect the industry generally in an irreversible manner. These changes can take away the demand from traditional businesses and more than towards newer ones within the same industry. VI 104 3XLIV JEGXSVW XLEX MRHMGEXI HIQERH MRGPYHI XLI pricing within the industry and its impact on demand, based on price elasticity.%RMRHYWXV]ƅWKVS[XLGERFIMRXIVQWSJZEPYISVZSPYQISV FSXL • -RHYWXVMIW[MXLLMKLTVMGIIPEWXMGMX]ƼRHMXHMƾGYPXXSMRGVIEWITVMGIWERHKIRIVEPP]KVS[SRP] MRZSPYQIXIVQW Consumer Electronics • First Tier Rich Ponds 8LYWERIRXVITVIRIYVQYWXWXE]ELIEHSJWYGLHMWVYTXMZIJSVGIWXSLEZIERYRHIVWXERHMRKSJXLI HIQERH8LIFSXXSQPMRI[LMPIEREP]^MRKWYFWXMXYXIWERHHMWVYTXMSRWMWXLEXXLIFYWMRIWWƼVQ [MXLEWXVSRKIVZEPYITVSTSWMXMSRJSVXLIGYWXSQIVW[MPPEXXVEGXHIQERH Most consumer electronics grow in volume terms without much increase in price. They can increase prices only when a new innovative product is launched. -RHYWXVMIW[MXLPS[IPEWXMGMX]SJTVMGIGEROIITMRGVIEWMRKTVMGIWERH]IXƼRHZSPYQIKVS[XL ,QHODVWLFLWHPVVXFKDV medicines can grow in volume as well as value terms over time. Medicines 8LI TVMGMRK TS[IV MW IZEPYEXIH EPSRK [MXL XLI ZEPYI TVSTSWMXMSR WS XLEX XLI MRHYWXV] SJJIVW E WXVSRKIVZEPYITVSTSWMXMSRSZIVMXWWYFWXMXYXIW %RSXLIV JEGXSV XLEX EJJIGXW XLI PSRKXIVQ HIQERH JSV E TVSHYGX MW XLI change in industry dynamics. *SVMRWXERGIQSVITPE]IVWIRXIVMRKERI[MRHYWXV]GEYWIWQSVIEHZIVXMWIQIRXERH XLYWMRGVIEWIWPSRKXIVQHIQERHJSVXLITVSHYGX 105 First Tier Rich Ponds Primary Sources 'SRHYGXSRKVSYRHVIWIEVGL ERHEHQMRMWXIVUYIWXMSRREMVIW Data Sources for Forecasting Demand Secondary Sources -RXIVZMI[WNSYVREPWERH EVXMGPIW 8LI WYVZI] MW ER IJJIGXMZI TVMQEV] EW [IPP EW E WIGSRHEV] WSYVGI SJ HEXE *SV FYWMRIWWQIR IRXVITVIRIYVWLS[IZIVMXMWZIV]IEW]XSFIFMEWIHERHJEPPTVI]XS[MWLJYPXLMROMRK[LMGLXEOIW XLIQE[E]JVSQXLIVIEPMX]SJXLIHIQERHWGIREVMS8LYWEPPJSVIGEWXMRKWLSYPHLEZIERSFNIGXMZI ERHUYERXMXEXMZIFEWMWXSWSQII\XIRXGSQFMRIH[MXLKIRIVEPWYVZI]WXLEXEVIWYFNIGXMZI Demand Analysis for Indian Cement Industry. 350.00 FY 14 272.00 249.00 FY 13 269.00 243.00 200.00 230.00 250.00 257.00 FY 16 FY 17 328.00 300.00 296.00 ^CAGR 4.29% 150.00 100.00 50.00 0.00 106 FY 12 FY 15 Source: IBEF report on cement industry - July 2019 FY 18 FY 19 o o o o • • +SZIVRQIRX MRMXMEXMZIW KSMRK JSV[EVH WQEVX GMXMIW 41%= ERH TYWL SR MRJVEWXVYGXYVI 7XVSRKKVS[XLMRVYVEPLSYWMRK *EZSYVEFPIHIQSKVETLMGW 6MWMRKHIQERHMRMRHYWXVMEPWIGXSV First Tier 'IQIRXGSRWYQTXMSRLEWKVS[REXE'%+6SJ WMRGI 8LIMRHYWXV]MWI\TIGXIHXSKVS[ MRZSPYQIXIVQWXMPP*= +VS[XLHVMZIVWKSMRKJSV[EVHW Rich Ponds • • • 8LIQIXLSHYWIHJSVWYGLFEWMGHIQERHEREP]WMWMWWIGSRHEV]HEXEJVSQMRHYWXV]VIWIEVGL VITSVXW,S[IZIVXLMWLEWEPWSFIIRGSRƼVQIHJVSQMRHMZMHYEPQEREKIQIRXGSQQIRXEV] 8LIVIMWRSWYFWXMXYXIJSVGIQIRX4VMGIWEVIHIXIVQMRIHMRGSQQSHMX]QEVOIXW[LMGLEVI VIKMSRWTIGMƼG So, we can conclude that the cement industry has a stable and steady demand growth outlook. 107 First Tier Rich Ponds Supply Capacity Analysis 3RGIERYRHIVWXERHMRKSJXLIMRHYWXV]HIQERHMWIWXEFPMWLIH[IQYWXJSGYWSRYRHIVWXERHMRK SJXLIMRHYWXV]WYTTP]XSHIXIVQMRITVSƼXEFMPMX] Steps for analysing the industry’s supply: 1. Analyze the industry’s current supply. )RXVITVIRIYVWQYWXGSPPIGXMRJSVQEXMSR EFSYXXLIGYVVIRXWYTTP]GETEGMX]MRXLIMRHYWXV]MRZSPYQIXIVQWERHXLIXIGLRSPSKMGEP WXEXYWSJXLMWGETEGMX] the capacity that will come shortly. 8LMWGSRGIVRWXLISRKSMRKERH 2. Research TPERRIHGETMXEPI\TIRHMXYVIF]XLITPE]IVWMRXLIMRHYWXV] Industries with few large firms Data can be collected by adding the supply and GETMXEPI\TIRHMXYVITPERWSJXLIƼVQW The availability of information remains a challenge. Industries with fragmented nature • • • )RXVITVIRIYVWQYWXVIP]SRMRJSVQEXMSREZEMPEFPIMR NSYVREPW RI[WTETIVW QEKE^MRIW MRHYWXV] VITSVXW ERHKSZIVRQIRXWXEXMWXMGW -J WYTTP] GETEGMX] GERRSX FI EWGIVXEMRIH EREP]WXW GER KIX E WIRWI SJ XLI HIQERHWYTTP] WGIREVMS YWMRK XLI GETEGMX] YXMPMÊXMSR EGVSWW XLI WQEPPIV ƼVQWMRXLIJVEKQIRXIHMRHYWXV] 'ETMXEPI\TIRHMXYVITPERWGERFINYHKIHF]XLIWEPIW ERH SVHIV FSSO SJ GETMXEP KSSHW GSQTERMIW XLEX TVSZMHIXLIEWWIXWJSVXLII\TERWMSRSJXLIMRHYWXV] Commodity Prices important factor to analyze is the lead time for new capacity 3. Another to come up. o 8LIMRHYWXV]ƅW TVSƼXEFMPMX]QSZIWMR EG]GPIWMQMPEVXSXLI GSQQSHMX]G]GPIEW WLS[RIEVPMIVXMQI XEOIRJSVXLIMRHYWXV] XSW[MXGLFIX[IIR TLEWIWHITIRHWSRXLI XMQIXEOIRJSVGETEGMX] XSIRXIVERHI\MXXLI MRHYWXV] Demand & Prices Supply 3 Demand Prices Demand Prices 2 4 New Equilibrium Demand Prices 1 5 108 Time For industries where the time between capital expenditure planning and production WXEVXMWPIWWXLIGLERKIMRTVSƼXEFMPMX]HYIXSXLIHIQERHWYTTP]WGIREVMSMWUYMGO 4. %REP]ÎXLIVIUYMVIQIRXJSVRI[GETEGMX]ERHEZEMPEFMPMX]SJVIWSYVGIW o First Tier Rich Ponds o -J XLI PIEH XMQI MW LMKL MI RI[ WYTTP] XEOIW XMQI XS FYMPH XLI MRHYWXV] [MPP IRNS] E PSRKIVTLEWISJLMKLTVSƼXEFMPMX]Ƃ[LIVIXLIHIQERHMWKVIEXIVXLERXLIWYTTP]JSVE PSRKIVTIVMSH o 8LIRMXQSZIWXSXLIRI\XTLEWI[LIVIXLIWYTTP]GEXGLIWYTXLYWVIHYGMRKTVSƼXEFMPMX] %HHMRKGETEGMX]VIUYMVIWEPPJEGXSVWSJTVSHYGXMSR Land at correct location Labor with relevant skills Adequate financing at adequate rates Relevant physical capital %ZEMPEFMPMX]SJEPPXLIVIWSYVGIWMRXLIVIUYMVIHUYERXMX]SJXIRFIGSQIWEGLEPPIRKIERH sometimes even a hindrance to capacity expansion. 5. *SVEREP]WXWMXMWMQTSVXERXXSMHIRXMJ]the expansion constraints and their MQTEGX SR XLI MRHYWXV]ƅW WYTTP] ERH TVSƼXEFMPMX] % JEGXSV ZIV] GPSWIP] PMROIHXSI\TERWMSRGSRWXVEMRXWMWFEVVMIVWXSIRXV] o &EVVMIVW XS IRXV] MRXS ER MRHYWXV] EVI XLSWI JEGXSVW XLEX VIWXVMGX XLI IRXV] SJ RI[ TPE]IVW MRXS XLI MRHYWXV]XLI]QE]IZIRQEOII\TERWMSRHMƾGYPXJSV I\MWXMRKTPE]IVW o 8LIWIJEGXSVWQEOIMXHMƾGYPXJSVWYTTP]XSMRGVIEWI UYMGOP] ERH GEYWI XLI I\MWXMRK TPE]IVW XS IRNS] KVIEXIVTVSƼXEFMPMX]JSVEPSRKIVTIVMSH 109 o Rich Ponds First Tier geographical EDUULHUV 7SQI SJ XLI JEGXSVW GER PIEH XS LMKL FEVVMIVW XS IRXV] MR ER MRHYWXV] EUDQGOR\DOW\ o ecoconomies of scale intellectual property rights %REP]WXWQYWXMHIRXMJ]XLIFEVVMIVWXSIRXV]MRERMRHYWXV]EWXLI]QEOIMXHMƾGYPXXS EHHRI[GETEGMX]UYMGOP]XLYWEPPS[MRKI\MWXMRKTPE]IVWXSIEVRWYTIVMSVTVSƼXEFMPMX] JSVEPSRK 6. %REP]WXW WLSYPH EPWS OIIT XVEGO SJ XLI supply scenario of substitute product industries. May offer the product at a lower price. Building new Supply Capacity Subtitute Industries Value proposition of the Substitutes becomes stronger. o 8LMW [SYPH PIEH XS E WLMJX MR HIQERH JVSQ XLI KMZIR MRHYWXV] XS XLI WYFWXMXYXI MRHYWXV]ERHXLYWQEOIXLIHIQERHWYTTP]WGIREVMSYRJEZSVEFPIXSXLIMRHYWXV]F] FYMPHMRKSZIVGETEGMX] o ,S[IZIV XLI EFMPMX] SJ XLI GYWXSQIVW XS W[MXGL XS XLI WYFWXMXYXI MRHYWXV] MW HIXIVQMRIHF]ERMQTSVXERXJEGXSVGEPPIHswitching costs.7[MXGLMRKGSWXWVIJIVXS XLIGSWXWJSVXLIFY]IV[LMPIW[MXGLMRKXSEWYFWXMXYXITVSHYGXEKEMRWXXLIFIRIƼXW VIGIMZIH[MXLW[MXGLMRK Using Switch to ,SKRQHV 110 Android Phones Switching Cost • Technology and technical NQRZKRZ • Knowledge and training • &RPSDWLELOLW\RIWZR products • Prior data with the company • Financial cost • Hassle (psychological pain) • +DELW • Complexity in usage First Tier Rich Ponds Some causes of high switching costs: Analysts must identify the switching costs, as high switching costs limit the ability of a substitute product to take away demand from any given industry. 7. 8LIƼREPJEGXSVWXLEXWLSYPHFIEREP]ÎHEVIXLII\MXSJƼVQWJVSQER industry and the exit barriers along with it. $VVXSSO\EHJLQVWRRYHUZKHOPGHPDQGDQGSULFHV EHJLQWRIDOOŢUPVORVHWKHLUSURŢWDELOLW\6RPH LQGXVWULHVHYHQEHFRPHORVVPDNLQJRQHVWKXV HQFRXUDJLQJH[LWVE\PXOWLSOHSOD\HUV o o 8LMWI\MXF]TPE]IVWPMQMXWWYTTP][MXLMRERMRHYWXV]ERHXLYWVIWXSVIWTVSƼXEFMPMX]JSV XLIVIQEMRMRKƼVQW ,S[IZIVXLIEFMPMX]SJƼVQWXSI\MXXLIFYWMRIWWERHVIHYGIWYTTP]MWHIXIVQMRIHF] XLII\MXFEVVMIVWMRXLIMRHYWXV]ERHXLIXMQIXEOIRXSI\MX Some common exit barriers: o o o -RZIWXQIRX MR WTIGMEPMWX IUYMTQIRX XLEX GERRSXFIYWIHMRSXLIVMRHYWXVMIWXIRHWXS MQTIHIPIEZMRKXLIMRHYWXV] Highly specialized skills by industry participantsXLEXGERRSXFIYXMPMÎHMRSXLIV MRHYWXVMIWMQTIHII\MXWJVSQXLIMRHYWXV] ,MKL PIZIPW SJ HIHMGEXIH Ƽ\IH GSWXW QE] EPWSMQTIHIPIEZMRKXLIMRHYWXV] 111 400.00 350.00 ^CAGR 4.35% FY 16 FY 17 297.56 FY 14 279.81 255.83 FY 13 283.46 248.23 200.00 230.49 250.00 270.04 300.00 337.32 First Tier Rich Ponds Supply Analysis for Indian Cement Industry. 150.00 100.00 50.00 0.00 FY 12 FY 15 FY 18 FY 19 Source: IBEF report on cement industry - July 2019 • • • • • • 'IQIRXWYTTP]LEWKVS[REXE'%+6SJ WMRGI*= 8LIMRHYWXV]MWI\TIGXIHXSMRGVIEWIMRPMRI[MXLHIQERH 2I[WYTTP]MRGVIEWIWHITIRHMRKYTSRPMQIWXSRIVIWIVZIEZEMPEFMPMX],S[IZIVXLIVI MWEQTPIMHPIGETEGMX]XSMRGIRXMZMWIPIWWEKKVIWWMZII\TERWMSRTPERWF]GSQTERMIW %PWSGIQIRXTPERXWEVII\TIRWMZI7SSYXWMHIIRXV]MWHMƾGYPX 8LI QIXLSH YWIH JSV WYGL FEWMG HIQERH EREP]WMW MW WIGSRHEV] VIWIEVGL JVSQ MRHYWXV] VIWIEVGLVITSVXWEPWSGSRƼVQIHZMEMRHMZMHYEPQEREKIQIRXGSQQIRXEV] 7SYVGIWYWIHMRGPYHIQIHMEWSYVGIW'6-7-0'%6)6EXMRKWERH9PXVEXIGL'IQIRX%6 Conclusion 112 The cement industry has a supply and capacity outlook that is in line with demand growth. An oversupply scenario is unlikely. Supply Rich Ponds 3RGIXLIHIQERHERHWYTTP]WGIREVMSWLEZIFIIRYRHIVWXSSHWITEVEXIP]XLIMVXSXEPMQTEGXQYWX FIWXYHMIHF]EREP]^MRKGETEGMX]YXMPMÊXMSRPIZIPWEGVSWWXLIMRHYWXV] First Tier Capacity Utilisation Demand Net impact must be studied by analyzing capacity utilization levels across the industry. Demand Supply Demand Supply Favourable Scenario Unfavourable Scenario Demand > Supply Demand < Supply Whether an industry has a favorable or unfavorable demand-supply scenario, is reflected in the capacity utilization levels. 'ETEGMX] YXMPMÊXMSR PIZIPW LIPT MR HIXIVQMRMRK TVSƼXEFMPMX] 2S[ EW E KVIEXIV TIVGIRXEKI SJ GETEGMX]MWYWIHXLIƼ\IHGSWXWEVIWTVIEHSZIVEPEVKIVFEWI8LYWƼ\IHGSWXTIVYRMXKSIWHS[R MRGVIEWMRKTVSƼXEFMPMX]8LIVIZIVWIMWEPWSXVYI'ETEGMX]YXMPMÊXMSRMWQIEWYVIHMRTIVGIRXEKI XIVQW Total Capacity = 100 units Total Capacity = Capacity utilised = Fixed Cost = Fixed Cost per unit = Capacity Utilised = 50 units 100 Units 50% ₹ 100 ₹ 100/50 units =₹ 2 113 Total Capacity = Capacity utilised = Fixed Cost = Fixed Cost per unit = Rich Ponds First Tier Total Capacity = 100 units 100 Units 80% ₹ 100 ₹ 100/80 units = ₹ 1.25 Capacity Utilised = 80 units 7S[IWIIƼ\IHGSWXTIVYRMXKSIWHS[R'ETEGMX]YXMPMÊXMSRMWRIMXLIVEPEKKMRKMRHMGEXSVRSVE PIEHMRKMRHMGEXSVFYXMXMWEGSRGYVVIRXMRHMGEXSVSJXLIƼVQƅWTVSƼXEFMPMX] Capacity Utilisation Levels 8QIDYRXUDEOH Scenario )DYRXUDEOH Scenario Overcapacity Undercapacity ŢUPVZRXOGEH 2SHUDWLQJXQSURŢWDEO\ ŢUPV2SHUDWHZLWK VXSHULRUSURŢWDEO\ Seasonal Structural Seasonal Structural Seasonal Overcapacity & Undercapacity: Determines profitability for a given year Structural Overcapacity & Undercapacity: Determines profitability for a long term 114 )RXVITVIRIYVWERHEREP]WXWRIIHXSFISRXLIGSRWXERXPSSOSYXJSVRI[IRXVMIWMRXLIMRHYWXV] IRXV]FEVVMIVWPIEHXMQIIXG2I[WYTTP]GVIEXIHMRXLIMRHYWXV]GERVIHYGITVSƼXEFMPMX] UNSOLD Unsold Goods First Tier Rich Ponds -RHYWXVMIW XLEX [SVO [MXL SZIVGETEGMX] EVI QSVI GSQTPMGEXIH XS STIVEXI EW QSWX ƼVQW MR XLI MRHYWXV]GSYPHFISTIVEXMRKYRTVSƼXEFP]7SQISJXLITVSFPIQWEWWSGMEXIH[MXLSZIVGETEGMX]XLEX GERFIYWIHXSMHIRXMJ]MX Unfair Trading Practices Wage cuts or Unemployment Reduced Profits to the collapse of the company 3ZIVXMQIXLIMRHYWXV]KSIWXLVSYKLWIZIVEP[EZIWSJGSRWSPMHEXMSRERHWLEOISYX[LIVIMRRI[IV ERHWXVSRKIVƼVQWIQIVKIERH[IEOIVSRIWEVIEFWSVFIH Industries with overcapicity Needs to lower prices Forcing the industries into cost reduction At customer’s expense (feature failure, lower quality) Distribution Conflicts Manufacturers shift their margin pressure onto their channels of distribution. 3ZIVXMQIXLIMRHYWXV]KSIWXLVSYKLWIZIVEP[EZIWSJGSRWSPMHEXMSRERHWLEOISYX[LIVIMR RI[IVERHWXVSRKIVƼVQWIQIVKIERH[IEOIVSRIWEVIEFWSVFIH 115 First Tier Rich Ponds Market Share Shift within Industry Less Reliable Competitors More Reliable Competitors Inefficient Comapnies Efficient Companies *SVI\EQTPI[LIR.MSIRXIVIHXLIXIPIGSQMRHYWXV] • -XPIHXSSZIVGETEGMX]MRXLIMRHYWXV] • *SVGIH SXLIV GSQTERMIW MR XLI MRHYWXV] MRXS GSWX VIHYGXMSR EGXMZMXMIW XS QEMRXEMR XLIMVGYWXSQIVFEWI • 8LI GLERKIW MR ZEPYI TVSTSWMXMSRW GVIEXIH WTEGI JSV QEVOIX WLEVI WLMJXW MR XLI MRHYWXV] • %JXIV[EZIWSJGSRWSPMHEXMSR[IEOIVGSQTERMIW[IVIEFWSVFIHF]PEVKIVSRIWERH RI[IVERHWXVSRKIVƼVQWIQIVKIH?A )RXVITVIRIYVWERHEREP]WXWQYWXFIGEVIJYP[LMPIHIEPMRK[MXLMRHYWXVMIW[MXLSZIVWYTTP]EWSRP] WXVSRKTPE]IVW[MPPWYVZMZIERHXLI[IEOSRIW[MPPHMIYRPMOIMRHYWXVMIW[MXLYRHIVWYTTP][LIVI EPQSWXEPPXLIƼVQWFIRIƼX3ZIVWYTTP]MWEGLEPPIRKIJSV[IEOƼVQW ,S[IZIVMXGEREPWSFIERSTTSVXYRMX]JSVXLIWXVSRKIVSRIW3RIGVMXMGEPEVIEXSFIVIZMI[IHMW XLMWhow long is the industry expected to stay in a state of oversupply?*SVMRHYWXVMIW[MXLLMKL I\MXFEVVMIVWWYGLXMQIWGERFIXSYKLERHGLEPPIRKMRKJSVEPPƼVQW&EWIHSRGETEGMX]YXMPMÊXMSR ERHYRHIVWYTTP]SZIVWYTTP]ƼVQW[SYPHLEZIXSWXVEXIKMÎXLI[E]JSV[EVHJSVXLIQ 116 [10] http://www.strategystreet.com/blog/causes_and_symptoms_of_overcapacity First Tier Rich Ponds Capacity Utilisation Analysis for Indian Cement Industry North 5DMDVWKDQ3XQMDE Haryana) 85.6 MTPA Central (Uttar Pradesh, Madhya Pradesh) 52.8 MTPA East :HVW%HQJDO&KKDWWLVJDUK 2GLVKD-KDUNKDQG 073$ :HVW *XMDUDW Maharashtra) 57.6 MTPA South (Tamil Nadu, Andhra 3UDGHVK.DUQDWDND 073$ Source: IBEF report on cement industry - July 2019 • • • • • 'YVVIRXMRWXEPPIHGETEGMX] ETTVS\EWMR.YP] 184% 'YVVIRXTVSHYGXMSR184% 'ETEGMX]9XMPMWEXMSR +SMRKELIEHTVSHYGXMSRGETEGMX]MWI\TIGXIHXSMRGVIEWIF]184%IEGL]IEVSZIVXLI RI\XX[S]IEVW (IQERHWLEPPMRGVIEWIEXETEGIJEWXIVXLERXLEXERHXLIVIJSVIGETEGMX]YXMPMWEXMSR WLEPP KSYT Conclusion *As on 2019-2020 In the cement industry, capacity utilisation can be expected to improve slightly over the medium term. 117 First Tier Rich Ponds Supply Strategies *MVQWGEREPXIVXLIMRHYWXV]WYTTP]GSPPIGXMZIP]FEWIHSRXLIHIGMWMSRWXLI]QEOI8LIWYQSJ MRHMZMHYEPWXVEXIKMIWKSMRKELIEHHIXIVQMRIWXLIMRHYWXV]WYTTP] For situations of undersupply, the incentive is to increase supply by capacity addition. The decision firms have to take is: whether to participate in the capacity expansion or not. • Expansion often involves use of resources and OHYHUDJH WR EHQHILW IURP LQFUHDVHG SURILWDELOLW\ due to undersupply. • 7KHXQGHUO\LQJDVVXPSWLRQLVWKDWWKHSURILWDELOLW\ will sustain and not fall going forward. However, as new supply comes up, the industry is no longer in a state of undersupply, and profitability reduces. This leaves the firm in a weak spot, as, with increased leverage and reduced profitability, the firm finds it difficult to operate efficiently going forward. 118 Here, the analyst should focus on the demand-supply gap in quantity terms. • How much new CAPEX LVEHLQJSURSRVHG" • How much time will it WDNHIRUQHZFDSDFLW\ WRFRPHXS" Based on the answers to these questions, the analyst should decide how much time it will take for undersupply to go away. Based on this decision, the analyst must strategize whether to participate or stay away from expansion when all others are doing it. First Tier Rich Ponds 7MXYEXMSRWSJSZIVWYTTP]GERFIEGLEPPIRKIEW[IPPEWERSTTSVXYRMX]JSVƼVQWMRERMRHYWXV] Aggressive Approach Firms that have expanded capacity at a fast pace see their profitability reduce and find their balance sheets stretched with leveraged assets. 6XFKILUPVŢQGRYHUVXSSO\FKDOOHQJLQJ Conservative Approach Whereas firms that had resisted capacity expansion with a conservative approach find their balance sheets to be strong and they can navigate through tough times in the industry. • $Q RSSRUWXQLW\ DULVHV IRU WKHP ZKHQ WKH ZHDN FRPSDQLHVJREDQNUXSWRUZLVKWRH[LWWKHLQGXVWU\ and sell assets at cheap prices. • The stronger ones get an opportunity to consolidate operations at cheap prices and they emerge stronger when oversupply corrects itself. )RXVITVIRIYVW ERH EREP]WXW XLYW RIIH XS WXVEXIKMÎ ETTVSTVMEXIP] EFSYX [LIR XS MRGVIEWI WYTTP]ERH[LIRRSXXSWSXLEXXLIMVƼVQWEVIFIWXTPEGIHXSFIRIƼX[LIRXLISTTSVXYRMX] EVMWIW 119 Rich Ponds First Tier Demand - Supply Scenario for Indian Cement Industry - Conclusion • Demand growth outlook for cement industry is stable and steady. • There is no erratic or abrupt capacity expansion planned going forward. • As a result, capacity utilisation is expected to improve going forward over medium term. • However, there can be cyclical or shortterm factors that affect the demand-supply scenario in the short term. But, in the medium term and long term, the balance seems to be stable. • However this can change as external news comes so a constant tracking is needed. Companies in the Cement Industry shall enjoy increased profitability over the medium term. The structural outlook for long term too looks stable. (YHQ VXFK EDVLF DQDO\VLV DQG FRQVWDQW XSGDWHV KHOSWKHLQYHVWRUDQGEXVLQHVVPDQDJHUUHFRJQLVHVWUXFWXUDO changes in the demand-supply scenario. )RU PRUH GHWDLOHG UHVHDUFK PRUH HPSKDVLV VKRXOG EH SXW over the individual factors that affect demand and supply.) 120 Rich Ponds for Paper Industry First Tier Demand - Supply Scenario Demand expectation • Current industry demand (2019) - 17 MTPA • Expected growth growing forward - 7-8% p.a. • Expected industry size 2024-25 - 23.5 MTPA Supply Scenario • Current industry production capacity (2019) -15 MTPA • Expected production capacity 2024-25 - 22 MTPA *RLQJIRUZDUGWKH3DSHU,QGXVWU\FDQH[SHFWDVLPLODU EDODQFHEHWZHHQGHPDQGDQGVXSSO\7KHSURŢWDELOLW\PLJKW FKDQJHLQDF\FOLFPDQQHUEXWLWVKDOOEHVWDEOHLQWKHORQJWHUP For a more detailed analysis, factors affecting the demand DQGVXSSO\FDQEHHYDOXDWHGLQGLYLGXDOO\ 121 Rich Ponds First Tier Impact of Overcapicity- Indian Automobile Industry 2018-2019 Industry Scenario • In 2018-19, the Indian automobile sector went through a deep recession. An NBFC crisis in the country led to poor demand and lack of financiers. • Y-o-Y monthly sales had fallen by upto 30% for companies. Signs to spot oversupply in industry • Distribution channels filled with inventory. • Deep discounts being offered to customers. • All players in value chain - auto ancillaries, tyre manufacturers, etc - negative about outlook. Impact of the slowdown on the industry • Companies did not initially reduce production. But once inventory had pilled up, capacity utilisation had to come down. • Fixed costs continued. • Also, prices fell once discounts were offered. • Automobile companies faced significant drop in profits in the short run. Even though the structural outlook remained good, the companies were struggling in the short term and medium term. 122 Rich Ponds First Tier Notes 123 124 Rich Ponds Second Tier Second Tier Rich Ponds Second Tier Size, Stability and Profitability of the Industry 125 Second Tier Rich Ponds Market Size Study 8LIQEVOIXWMÎSJERMRHYWXV]MWXLIXSXEPWMÎSJXLIQEVOIX MRZEPYIXIVQWSVZSPYQIXIVQW SJ XLIGYWXSQIVW[LSFY]XLIMRHYWXV]ƅWTVSHYGXSVWIVZMGIMREKMZIRTIVMSH-XMWXLIXSXEPVIZIRYISV WEPIMRZEPYIXIVQWSJEPPXLITPE]IVWMRXLIMRHYWXV]-XLIPTWYRHIVWXERHXLIEXXVEGXMZIRIWWSJER MRHYWXV]F]MHIRXMJ]MRKXLIWMÎSJXLISTTSVXYRMX],S[FMKGEREGSQER]FIGSQI# 1EVOIXWMÎGERFIMHIRXMƼIHF]XLVIIIPIQIRXW Market size = Population x Adoption Ratio x Penetration Ratio Population -XVIJIVWXSXLIXSXEPRYQFIVSJTISTPI[MXLMRXLI KISKVETLMGEPFSYRHEVMIW8LITSTYPEXMSRMWXLI XSXEPRYQFIVSJTISTPIERHIEGLTIVWSRGERFI ETSXIRXMEPGYWXSQIVSJXLIMRHYWXV],S[IZIV RSXEPPTVSHYGXWEVIRIIHIHF]IZIV]TIVWSR Adoption Ratio -XVIJIVWXSXLIRYQFIVSJTISTPISYXSJXLIXSXEP TSTYPEXMSR[LSQE]YWIXLIMRHYWXV]TVSHYGXW MIXLI]LEZIERIIHJSVXLIWEQI Penetration Ratio Population Adoption Ratio 126 Penetration Ratio -X VIJIVW XS XLI TIVGIRXEKI SJ TSXIRXMEP GYWXSQIVW[LSEVIGYVVIRXP]FIMRKWIVZMGIHF] XLITPE]IVWMRXLIMRHYWXV] Low Adoption Ratio 8LI TVSHYGX MW RSX RIIHIH F] XLI KIRIVEP TSTYPEXMSR EX PIEWX EX XLEX QSQIRX ;LMPI XLMW MW GIVXEMRP]EGLEPPIRKIMXGEREPWS FIZMI[IHEWERSTTSVXYRMX] 8LI TVSHYGX MW RIIHIH F] E QENSVMX] SJ XLI TSTYPEXMSR -X MWEQEWWQEVOIXMXIQ ,IPRUHSHRSOHDGRSW (the product) going forward, it will lead to potential growth in the industry size. Rich Ponds High Adoption Ratio Second Tier Adoption Ratio However, if people do not adapt, it reduces WKHPDUNHWVL]HDQG thus the size of the opportunity. Penetration Ratio High Penetration Ratio Low Penetration Ratio 8LI MRHYWXV] PMQMXW KVS[XL XLVSYKLTIRIXVEXMSR (IWTMXIEWIGXMSRSJXLITSTYPEXMSR FIMRK TSXIRXMEP GYWXSQIVW XLI MRHYWXV]QE]RSXFIEFPIXSWIVZMGI XLIQ HYI XS FEVVMIVW WYGL EW HMWXVMFYXMSRGLEPPIRKIW ,S[IZIVEPS[TIRIXVEXMSRVEXMSMW ERSTTSVXYRMX]EWXLIMRHYWXV]GER TSXIRXMEPP] KVS[ƂF] [SVOMRK SR XLIGLEPPIRKIW 127 Second Tier Rich Ponds 7S[IGERWIIXLEXXLIMRHYWXV]GERKVS[[MXLE • KVS[MRKTSTYPEXMSR • ERHQSVITISTPIEHETXMRKXSXLIKMZIRTVSHYGXWIVZMGI • MRHYWXV]ƅWEFMPMX]XSWIVZMGIQSVISJMXWHIQERH Another potential source of growth in the industry is the formalization of the industry. It is seen that a part of the industry is served by the organised sector and the rest is served by unorganised sector. Industry Organised Sector Unorganised Sector 8LI YRSVKERMÎH WLEVI MW QEVOIH F] JVEKQIRXIH WXVYGXYVI TSSV IƾGMIRG]ERHPEGOSJWGEPI Gradual Shift Thus, it stands at a relative disadvantage to organized competitors. From unorganised sector to organised players. This shift is evident in industries such as the paint, apparel industry, and footwear. Industries with a high share of unorganized players have an advantage for growth vis-à-vis the organized industry due to the migration from unorganized to organized. )WXMQEXMRKQEVOIXWMÎMWF]RSQIERWERI\EGXWGMIRGI(MJJIVIRXWYVZI]WERHHMJJIVIRXTPE]IVW MHIRXMJ]HMJJIVIRXWMÎWJSVXLIWEQIMRHYWXV]FEWIHSRXLIJEGXSVWXLI]YWIXSHIXIVQMRIXLIWMÎ SJXLIMRHYWXV],S[IZIV[IGERKIXGPSWIXSVIEPMX]F]JSPPS[MRKEKIRIVEPMÎHETTVSEGL 128 Second Tier 8LITVSGIWWSJMHIRXMJ]MRKXLITVMQEV]IWXMQEXIJSVMRHYWXV]WMÎGERFIXMQIXEOMRK I\TIRWMZIERHRSXZIV]VI[EVHMRKJSVXLIEQSYRXSJIJJSVXWTIRX8LYWWIGSRHEV] IWXMQEXIW JSV MRHYWXV] WMÎW QE] FI YWIH 8LIWI MRGPYHI KSZIVRQIRX HEXE XVEHI EWWSGMEXMSR HEXE ERH ƼRERGMEP HEXE JVSQ QENSV TPE]IVW -RJSVQEXMSR JVSQ XLIWI WSYVGIWLIPTWIWXMQEXIXLIMRHYWXV]WMÎ Rich Ponds Estimating Market Size Steps for determining the size of the industry: 1 Determining the boundaries of the industryactivity-wise and geography-wise. 2 Determine a time horizon i.e. monthly, annual, or even for a longer horizon. 3 A population estimate for the geographical area is established. 4 Once the population is known, a sample survey is conducted to know the adoption rate and the penetration rate. 5 These ratios are multiplied by the population size to estimate the industry size. This gives a primary estimate of the industry size. 129 Second Tier Rich Ponds Hair Oil Market in India Indian Hair Oil Market 2007 2010 2015 2019 2025E Total Market Size (in Rs.) 2,827 Cr 5,044 Cr 9,390 Cr 13,168 Cr 20,000 Cr Organised Market Share 40% - - 65% - Unorganised Market Share 60% - - 35% - Source: Bajaj Consumer Care Ltd Annual Reports, FY19 • 1EVOIX WMÎ HEXE MW SFXEMRIH XLVSYKL E WIGSRHEV] WSYVGI MI E GSQTER] HMWGPSWYVI (EXE VIKEVHMRKIZSPYXMSRSJMRHYWXV]WMÎERHWLMJXJVSQYRSVKERMWIHXSSVKERMWIHWIGXSVMWSFXEMRIH • -X GER FI SFWIVZIH XLEX XLI MRHYWXV] LEW KVS[R EX E HIGIRX TEGI +SMRK ELIEH EW [IPP XLI MRHYWXV] SYXPSSO WIIQW KSSH % GSQTER] W TSXIRXMEP WGEPMRK GETEGMX] MR XLI MRHYWXV] MW HIXIVQMRIHF]XLIMRHYWXV]WMÎ 130 Second Tier Rich Ponds The major purpose of an industry size analysis: • 8SMHIRXMJ]XLITSXIRXMEPWMÎSJXLISTTSVXYRMX]ERHXLITSXIRXMEPKVS[XLKSMRKJSV[EVH • 8LIMRHYWXV]WMÎXVIRHMWSFWIVZIHSZIVXMQIXSKIXLMRXWJSVXLIJYXYVI • 8LIMRHYWXV]WMÎMWFVSOIRHS[RMRXSWQEPPIVIPIQIRXWXSMHIRXMJ]KVS[XLTSXIRXMEP • -XMWTSWWMFPIJSVMRHYWXVMIWXSWXE]WXEFPIMRZSPYQIXIVQWFYXKVS[WMRZEPYIXIVQW • %WXLIKVS[XLSJFMKKIVGSQTERMIWMWHMVIGXP]PMROIH[MXLXLIKVS[XLSJXLIMRHYWXV]1EVOIX WMÎEREP]WMWFIGSQIWQYGLQSVIMQTSVXERX • %KVS[MRKMRHYWXV]LS[IZIVQEOIWMXIEWMIVJSVEPPTPE]IVWƂFMKSVWQEPPƂXSKVS[EXEHIGIRX TEGI Technical Textiles Market in India: Indian Technical Textile Market 2008 2013 2018 2021E Total Market Size (in Rs.) 36,775 Cr 65,920 Cr 1,16,217 Cr 2,00,823 Cr Organised Market Share 90% - 85% - Unorganised Market Share 10% - 15% - • -XMWWIIRXLEXXLIMRHYWXV]MWKVS[MRKEXEHIGIRXTEGIERHXLIWMÎSJSTTSVXYRMX]MWVIPEXMZIP] PEVKI • %R] ƼVQ XLEX MW EFPI XS WGEPI WYGGIWWJYPP] MR XIGLRMGEP XI\XMPIW GER FIGSQI FMK HYI XS PEVKI QEVOIXWMÎ,S[IZIVXLIƼVQ[SYPHLEZIXSSTIVEXIEGVSWWWYFWIKQIRXW 131 Second Tier Rich Ponds Industry Stability -RHYWXV] WXEFMPMX] HIXIVQMRIW LS[ UYMGOP] TPE]IVW MR XLI MRHYWXV] KEMR ERH PSWI QEVOIX WLEVI 8LMWMWERMRHMGEXSVSJXLIVIPEXMZIGSQTIXMXMZIRIWWSVWXVIRKXLSJXLIGSQTER]ƅWTVSHYGXWERH WIVZMGIW-RHYWXV]WXEFMPMX]WLS[WMJ[MRRIVWVIQEMR[MRRIVWJSVZIV]PSRKMRXLIMRHYWXV]SVHSRI[ TPE]IVWOIITSRGSQMRKMRXSXLIMRHYWXV] Industry Stability Volatile Industries Stable Industries • +EMRERHPSWIQEVOIXWLEVI UYMGOP] • )RXV] ERH WGEPMRK YT GER FI VIPEXMZIP] UYMGOIV ERH IEWMIV FYX FIRIƼXXMRK JVSQ KEMRIH QEVOIX WLEVI ERH QEMRXEMRMRKMXSZIVXMQIGER FIZIV]HMƾGYPX • 8EOIXMQIXSKEMRERHPSWI QEVOIXWLEVI • )RXV]GERXEOIXMQIERHGER FI ZIV] HMƾGYPX FYX SRGI XLIQEVOIXWLEVIMWKEMRIH MX GER FI QEMRXEMRIH JSV E [LMPI ERH XLI ƼVQW GER FIRIƼXJVSQXLIMVTSWMXMSR 1ER] JEGXSVW HIXIVQMRI XLI WXEFMPMX] SJ ER] MRHYWXV] 8LI] EVI HMWGYWWIH MR XLI JSPPS[MRK TEVEKVETLW Constant Product Innovation 'SRWXERXTVSHYGXMRRSZEXMSRF]GSQTERMIWMRXLIMRHYWXV]PIEHWXSGSQTERMIWGSQMRKYT[MXL TVSHYGXWXLEXI\GIIHXLISJJIVMRKWSJXLITVIZMSYWFIWXTVSHYGXMRXLIQEVOIX8LMWGEYWIWQEVOIX WLEVI XS WLMJX XS[EVHW XLI ƼVQ [MXL XLI RI[ SJJIVMRK 8LMW [MPP PEXIV WLMJX XS ERSXLIV ƼVQ XLEX GSQIWYT[MXLERIZIRFIXXIVSJJIVMRK;LIRXLMWLETTIRWEXEJEWXTEGIMXPIEHWXSMRWXEFMPMX]MR XLIMRHYWXV]MRXIVQWSJQEVOIXWLEVI 132 V/S • 2I[FYWMRIWWQSHIPWQEOIXLISPHIVSRIW SFWSPIXI XLYW GEYWMRK GLERKIW MR QEVOIX WLEVI • %RSXLIV GSQQSR JEGXSV MW XLI IEWI SJ ƼRERGMRKEZEMPEFPIEVSYRHXLIMRHYWXV] • Industries that are ‘hot’ and ‘favourite’ currently attract a lot of new capital.0EVKI EQSYRXW SJ GETMXEP JSV RI[ ƼVQW EPPS[ XLIQ XS HS XLMRKW EX WGEPI XLYW XEOMRK E[E]XLIEHZERXEKISJXLIWGEPISJI\MWXMRK ƼVQW Second Tier New business models constantly coming up in the industry leads to disruptive forces in the industry. ,IRGI IWXEFPMWLIH ƼVQW PSWI QEVOIXWLEVIXSRI[IVƼVQW Rich Ponds New Business Models 7KLVFDXVHVVRPHVKLIWLQWKHPDUNHW VKDUHIURPH[LVWLQJWRQHZŢUPV Lowering of Entry Barriers and Switching Costs -RHYWXVMIW JEGMRK ZEPYI QMKVEXMSR WII RI[ [MRRIVW IQIVKMRK ERH IWXEFPMWLIH TPE]IVW PSWMRK QEVOIX WLEVI 8[S JEGXSVW XLEXGSRXVMFYXIXSXLMWERHVIHYGIMRHYWXV] WXEFMPMX]EVI • Lowering of Entry Barriers %W IRXV] FEVVMIVW VIHYGI RI[ ƼVQW [MXL MRRSZEXMZIZEPYITVSTSWMXMSRWERHFYWMRIWW QSHIPWGERNSMRXLIMRHYWXV]ERHGLEPPIRKI XLIIWXEFPMWLIHTPE]IVWMRXLIMRHYWXV] 1HZ:LQQHULQ$XWRPRELOH,QGXVWU\ LQ,QGLD • Lowering Switching Costs %PWS PS[IVMRK W[MXGLMRK GSWXW JSV XLI GYWXSQIVW GER EPPS[ XLIQ XS PSSO JSV GSQTIXMXSVWƅTVSHYGXWXLYWGEYWMRKWLMJXW MRXLIQEVOIXWLEVIMRXLIMRHYWXV] &2PSDQLHVWKDWORVWPDUNHWVKDUH 133 %RSXLIV JEGXSV XLEX GSRXVMFYXIW XS MRHYWXV] MRWXEFMPMX]MWXLIMQTEGXSJKSZIVRQIRXVIKYPEXMSRW +SZIVRQIRXVIKYPEXMSRWGERSZIVRMKLXXEOIE[E] XLIEHZERXEKIWSJIWXEFPMWLIHTPE]IVWERHGVIEXI WTEGIJSVRI[ƼVQWXSNSMRXLIMRHYWXV]ERHVETMHP] KEMRQEVOIXWLEVI'SRWXERXVIKYPEXSV]GLERKIW GEYWIƼVQWXSKEMRERHPSWIQEVOIXWLEVIUYMGOP] XLYWQEOMRKXLIMRHYWXV]YRWXEFPI Rich Ponds Second Tier Government Regulations Business Cycle Peak ns io Exp a ep re ssio n n R sion es ec er ov Rec Exp an si Peak sion es ec R on y D Trough 8LIPEWXGSRXVMFYXMRKJEGXSVMWXLIFYWMRIWWG]GPI8LMWMWTEVXMGYPEVP]XLIGEWI[MXLGSQQSHMX] MRHYWXVMIWERHMRHYWXVMIW[MXLEVIPEXMZIP]WLSVXFYWMRIWWG]GPI(YVMRKTIVMSHWSJI\TERWMSRSJXLI MRHYWXV]RI[TPE]IVWNSMRXLIMRHYWXV]ERHI\MWXMRKSRIWMRGVIEWIGETEGMX]ERHKEMRQEVOIXWLEVI ,S[IZIVHYVMRKTIVMSHWSJHS[RXYVRSRP]XLIWXVSRKGSQTERMIWGERWYVZMZI[LIVIEWXLSWI[MXL EWXVIXGLIHFEPERGIWLIIXJEMPXSWYVZMZIERHEVIFSYKLXSZIVF]XLII\MWXMRKƼVQW8LYWWIZIVI QEVOIXWLEVIWLMJXWSGGYVSZIVZEVMSYWWXEKIWSJXLIFYWMRIWWG]GPI Understanding industry stability is important for both the entrepreneur as well as the MRZIWXSV-XMWIEWMIVXSIRXIVERHKEMRQEVOIXWLEVIWMRZSPEXMPIMRHYWXVMIWFYXHMƾGYPXXS maintain. Thus, the entrepreneur and investor must know the degree of stability in their industry as it will determine the longevity of returns for them. In other words, industry stability determines the balance between the pace of growth and longevity of returns. 134 Smartphone Players FY2014 FY2016 FY2019 21% 13% 1.1% 1% 12% 0.1% 8% 6% 1.2% 9.6% 4% 0.2% - 9% 29% - 1% 12% - - 7% - 3% 7% 25% 24% 23% Second Tier Rich Ponds Industry Stability Indian Smartphone Players Source: Media Outlets We see that the market share of the companies is changing quickly. Thus, the industry can be counted as an unstable one, prone to quick market share shifts. 135 Second Tier Rich Ponds Industry Stability Indian Paints Industry Companies Total 2010 2015 2019 59.4% 57.5% 57% 16.9% 17.6% 18.6% 15.3% 14.6% 15.34% 8.2% 10.39% 8.65% 100% 100% 100% The revenue of top 4 players is studied to understand the industry stability. We see that the top 4 players (which form 70% of the market) have hardly moved over 10 years. So we can conclude that it is a very stable industry and it is difficult to gain and lose market share. 136 Pricing Power dependent on Supply and Demand for the product Shell Petroleum Smartphones % GSQTER] SV MRHYWXV] HSIW RSX LEZI QYGL TVMGMRK TS[IV MJ ER MRGVIEWI MR TVMGIW[SYPHVIHYGIXLIHIQERHJSVXLIMV TVSHYGXW % GSQTER] SV MRHYWXV] HSIW RSX LEZI QYGLTVMGMRKTS[IVMJMRGVIEWIMRTVMGIW GER GEYWI RI[ IRXVERXW XS XLI MRHYWXV] ERHMRGVIEWIWYTTP]MRXLIMRHYWXV] This phenomenon is captured in the price elasticity of supply. This phenomenon is captured in the price elasticity of demand. Price elasticity of demand MWXLIHIKVII XS [LMGL GSRWYQIVW GLERKI XLIMV HIQERHMRUYERXMX]XIVQWMRVIWTSRWIXS GLERKIWMRXLITVMGISJXLITVSHYGX Second Tier 8LITVMGMRKTS[IVSJER]ƼVQMWMXWEFMPMX]XSMRGVIEWIXLIQEVOIXTVMGISJXLIKSSHWSVWIVZMGIW XLEXMXSJJIVWSZIVERHEFSZIXLIMRGVIEWIMRXLIVE[QEXIVMEPTVMGIW Rich Ponds Pricing Power in the Industry Price elasticity of supplyMWXLIHIKVIIXS [LMGLTVSHYGIVWGERGLERKIXLIMVWYTTP] MRZSPYQIXIVQWMRVIWTSRWIXSGLERKIW MRXLITVMGISJXLITVSHYGX[11] Here, neither new supply comes in when prices rise nor do the consumers reduce their demand. Industries in which the price elasticity of demand and supply, are low have the highest pricing power. [11] https://www.investopedia.com/terms/p/pricingpower.asp 137 Second Tier Rich Ponds In industries in which either the demand or supply (or both) is IPEWXMGƼVQWƼRHMXHMƾGYPXXSLEZI high pricing power. 7IZIVEPJEGXSVWMRƽYIRGIXLITVMGIIPEWXMGMX]SJHIQERHERHWYTTP]8LIWIWLSYPHFIEWWIWWIH XSHIXIVQMRIXLIMRHYWXVMIW[MXLELMKLTVMGMRKTS[IV Factors That Affect Price Elasticity of Demand Several close substitutes -JETVSHYGXLEWWIZIVEPGPSWIWYFWXMXYXIWMXPIEHWXSGSRWYQIVWW[MXGLMRK FIX[IIRXLIWYFWXMXYXIWMRVIWTSRWIXSTVMGIGLERKIW8LYWXLITVSHYGX LEWELMKLTVMGIIPEWXMGMX]7YGLTVSHYGXWƼRHMXHMƾGYPXXSLEZITVMGMRK power. V/S Air travel has no close VXEVWLWXWHIRULQWHU continental travel. Trains and cars are close VXEVWLWXWHVIRUMRXUQH\V DURXQGŏNP Cost of switching 7[MXGLMRKGSWXWHIXIVQMRIXLIIEWI[MXL[LMGLGSRWYQIVWGERW[MXGLFIX[IIR TVSHYGXWThe higher the switching costs, the more inelastic the demand. 6ZLWFKLQJFRVWVLQFOXGHŢQDQFLDO costs, psychological costs, hassle, and technical training. *SVMRWXERGIETIVWSRXVEMRIHMRSRIEGGSYRXMRKWSJX[EVIQE]RSXW[MXGLXS ERSXLIVEWLI[SYPHRIIHXSVIXVEMRLMQWIPJMRXLIRI[WSJX[EVI8LMWEGXWEW EW[MXGLMRKGSWX 138 Rich Ponds 2IGIWWMXMIW XIRH XS LEZI ER MRIPEWXMG HIQERH [LIVIEW KSSHW XLEX EVI PY\YVMIWEVIQSVIIPEWXMGMRHIQERH Second Tier Degree of necessity 1HFHVVLWLHVOLNHSXOVHVVSLFHV and fruits remain inelastic The prices of fancy clothes and PRELOHSKRQHVDUHUHODWLYHO\HODVWLF The proportion of income allocated to spending on the product -JETVSHYGXJSVQWEPEVKITVSTSVXMSRSJXSXEPWTIRHMRKF]XLIGSRWYQIVXLI GSRWYQIVXIRHWXSFIQSVIGSRGIVRIHEFSYXXLITVMGIERHXLYWXLITVMGIMW QSVIIPEWXMG%XXLIWEQIXMQIJSVMXIQWXLEXJSVQEWQEPPTIVGIRXEKISJXSXEP GSRWYQTXMSRXLIHIQERHMWMRIPEWXMG The demand for a car is elastic. Total spending of a consumer The demand for a pair of glasses is inelastic. Whether the product is subject to habitual consumption 7SQITVSHYGXWFIGSQILEFMXWJSVXLIGSRWYQIVERHXLIMVGSRWYQTXMSR FIGSQIWPIWWTVMGIIPEWXMG-XFIGSQIWEHIJEYPXGLSMGI 7REDFFR Alcohol 139 Second Tier Rich Ponds 4VSHYGXWXLEXLEZIEPS[TVMGIIPEWXMGMX]SJHIQERHHSRSXWIIGSRWYQIVWQSZMRKE[E]MR VIWTSRWIXSMRGVIEWIWMRTVMGIW8LIWITVSHYGXWLEZIVIPEXMZIP]LMKLIVTVMGMRKTS[IV%PWSXLI TVMGIIPEWXMGMX]SJWYTTP]QYWXFIYRHIVWXSSH Factors That Affect Price Elasticity of Supply Ability to store output +SSHW XLEX GER FI WEJIP] WXSVIH LEZI E VIPEXMZIP] IPEWXMG WYTTP] SZIV TIVMWLEFPIKSSHWXLEXGERRSXFIWXSVIHJSVPSRK &RQVXPHUGXUDEOHVFDQEHVWRUHG and have an elastic supply. )UXLWVDQGYHJHWDEOHV FDQQRWEHVWRUHGIRUORQJ so inelastic supply. Factor mobility -JXLIJEGXSVWSJTVSHYGXMSRGERFIQSZIHIEWMP]JVSQSRIYWIXSERSXLIV ERHEVIRSXMRHYWXV]WTIGMƼGXLI][MPPEJJIGXXLIIPEWXMGMX]SJWYTTP] 7KHKLJKHUWKHPRELOLW\RIWKH factors, the more elastic the supply. Industry B Industry C Industry A 140 $MREWKDWGRHVQRW UHTXLUHDQ\VSHFLŢF VNLOOVHW /DERXU IURP RWKHU LQGXVWULHV FDQ PRYH WR WKLV LQGXVWU\LQSHULRGVRIKLJKSURGXFWLRQUHTXLUHPHQWV ZKHQWKHLQGXVWU\ŒVVHUYLFHVDUHLQRYHUGHPDQG Availability of resources: Second Tier ;MXL XLI MRGVIEWI MR SYXTYX MJ XLI GSWX SJ TVSHYGXMSR MRGVIEWIW ERH XLI TVSƼXEFMPMX]JEPPWTVSHYGIVW[SYPHRSXMRGVIEWIWYTTP]XLYWQEOMRKWYTTP] PIWWIPEWXMG Rich Ponds Changes in the cost of production: 3RISJXLIQSWXMQTSVXERXJEGXSVWXSMRGVIEWIWYTTP]MWXLIEZEMPEFMPMX]SJ EHIUYEXIVIWSYVGIW Land /DERXU Capital Technology ,IODQGODERXUFDSLWDODQGWHFKQRORJ\DUHDGHTXDWHO\DYDLODEOH ZLWKHDVHWKHVXSSO\ZLOOEHHODVWLF Price elasticity of demand and supply together determine the changes in demand and supply in response to the price of the product, thus determining the pricing power of the product. ,S[IZIV XLIVI EVI SXLIV JEGXSVWXLEXEPWSGSRXVMFYXIXSHIXIVQMRIXLITVMGMRKTS[IVMRER]MRHYWXV] Other Factors That Determine Pricing Power Product differentiation -J E TPE]IV MR ER MRHYWXV] GER TVSZMHI HMJJIVIRXMEXIH TVSHYGXW ERH WIVZMGIW XLEXEVIRIIHIHF]ETEVXMGYPEVGYWXSQIVWIKQIRXXLIƼVQ[MPPIRNS]TVMGMRK TS[IVEWXLIVIMWRSGPSWIWYFWXMXYXIEZEMPEFPI For instance, a pharmaceutical company developing a drug after years of research and development will have immense pricing power. 141 4VSHYGXWXLEXEVIFEGOIHF]TS[IVJYPFVERHWGERGLEVKIXLIGYWXSQIVE TVIQMYQ8LIWIFVERHWKMZIXLIQTVMGMRKTS[IVSZIVWMQMPEVWYFWXMXYXIW Rich Ponds Second Tier Brand Power: 0DJJLQRRGOHVDQG3DUOH*ELVFXLWVDOORZWKHFRPSDQLHV1HVWOH and Parle Products to charge a premium. Regulatory factors: 6IKYPEXSV]JEGXSVWGERFSXLMRGVIEWIEW[IPPEWHIGVIEWITVMGMRKTS[IV [MXLMRER]MRHYWXV] • They can limit entry into any industry and thus reduce the price elasticity of supply. • 7KH\FDQDOVRHQDEOHH[LVWLQJ players to increase their prices DQGHQMR\LQFUHDVHGSURŢWDELOLW\ • At the same time, some industries have their prices UHJXODWHG,QVXFKFDVHV despite the companies KDYLQJWKHPDUNHWSRZHU to increase prices, they DUHQRWDEOHWRGRVR7KLV leads to poor pricing power. • for ex: petrol, sugar, coal Many pharmaceutical drugs have their prices regulated, thus leaving no pricing power to such companies. 142 Based on the factors discussed above, the pricing power of various players in the industry is understood. Entrepreneurs and analysts must look for industries that command higher pricing power. However, it is difficult to enter such industries. But once entry is established, the players can be highly profitable. FY2015 FY2016 FY2017 FY2018 FY2019 Revenue 3,981 Cr 3,868 Cr 3,981 Cr 4,187 Cr 4,462 Cr Direct Costs 2,027 Cr 2,150 Cr 2,183 Cr 2,225 Cr 2,321 Cr Gross Profit Margin (%) 49.08% 44.42% 45.16% 46.86% 47.98% Rich Ponds Second Tier Pricing Power Colgate - Palmolive (India) Ltd. (in Rs. unless stated otherwise) So, it is seen that Colgate India can increase prices over and above their raw material's costs without impacting their sales. Gross profit margins can be used as an indicator to check pricing power in any industry. If GPM can be increased with ease, the industry or firm has price power. 143 Life Cycle ,QQRYDWLRQ Rich Ponds Second Tier Competitive Growth Maturity Decline 144 Second Tier 2I[YRMUYITVSHYGXSJJIVMRKWEVIHIZIPSTIHF]RI[ƼVQWSVIZIRI\MWXMRKSRIW8LYWERI[ MRHYWXV]FIKMRW8LMWMRHYWXV]XLIRXEOIWXMQIXSTVSZIMXWGSRGITXXSEWQEPPKVSYTSJGYWXSQIVW FIJSVI MX MW EHSTXIH F] XLI QEWWIW 3ZIV XMQI RI[ GSQTIXMXSVW NSMR XLI MRHYWXV] *MREPP] XLI MRHYWXV]HIGPMRIW[MXLJEPPMRKTVSƼXEFMPMX]8LIKVS[XLSJERMRHYWXV]ƅWWEPIWSZIVXMQIMWYWIHXS GLEVXMXWPMJIG]GPI(MJJIVIRXWXEKIWMRXLIMRHYWXV]ƅWPMJIG]GPIEVIMHIRXMƼIHFEWIHSRXLIFILEZMSYV SJXLIWEPIW Rich Ponds -RHYWXVMIWGSQTERMIWERHTVSHYGXWLEZIEGIVXEMRPMJIG]GPI[LIVIXLI]EVII\TIGXIHXSKSJVSQ SRWXEKIXSERSXLIV8LMWMWGEPPIHGSQTIXMXMZIPMJIG]GPI0IXWWIILS[MXPSSOW )RULQVWDQFHZKHQWDEOHWVZHUHLQWURGXFHG they were met with a lot of fanfare and they found success. Now the sales of WDEOHWVKDYHVWDELOLVHG Industry Sales 8LIVIMWSRP]PMRIEVKVS[XLERHRSI\TSRIRXMEPKVS[XLXLYWQEVOMRKEQEXYVIWXEKI/RS[MRK [LMGLWXEKISJXLIPMJIG]GPIXLIMRHYWXV]MWMRMWMQTSVXERXJSVFSXLXLIIRXVITVIRIYVEW[IPPXLI MRZIWXSV )EGL WXEKI LEW HMJJIVIRX GLEVEGXIVMWXMGW MR XIVQW SJ LS[ TVSƼXW VIZIRYI ERH EWWIXW FILEZIERHXLIRYQFIVSJGSQTIXMXSVWMRXLIQEVOIX Based on the stage and *SV MRZIWXSVW XLI EQSYRX SJ GEWL VIUYMVIH F] XLI FYWMRIWW ERH XLI VIXYVRW XLEX XLI] GER I\TIGX ZEV] its characteristics, the WMKRMƼGERXP] EXVLQHVVVWUDWHJ\GLIIHUV Innovation Growth Maturity Decline Time Lets look at these phases one by one. 145 Second Tier Rich Ponds Innovation Innovation Industry Sales 8LIƼVWXWXEKIMW[LIRERI[ERHYRMUYISJJIVMRKLEWFIIRHIZIPSTIHF]EWQEPPIRXVITVIRIYVMEP GSQTER]SVIZIRETVSZIRGSQTER][LMGLHIZIPSTWWSQIXLMRKRI[XLVSYKLMXWVIWIEVGLERH HIZIPSTQIRXIJJSVXW8LMWQEVOWXLIFIKMRRMRKSJERI[MRHYWXV] Innovation -RRSZEXMSR GER GSQI MR ZEVMSYW JSVQWƂMX QE]FIETVSHYGXXLEXSTIRWYTERIRXMVIP] RI[QEVOIXVITPEGIWERI\MWXMRKTVSHYGX SVWMKRMƼGERXP]FVSEHIRWXLIQEVOIXJSVER I\MWXMRKTVSHYGX?A Time :KHQVXFKDQHZSURGXFWLVEURXJKWWRWKHPDUNHW Customer demand is limited due WRXQIDPLOLDULW\ZLWKWKHSURGXFWŒV features and performance. 'LVWULEXWLRQ FKDQQHOV DQG WKH relevant supporting infrastructure >@ are still underdeveloped. The complementary goods UHTXLUHGIRUXVHRIWKHSURGXFW DUHQRWDGHTXDWHO\DYDLODEOH 0DUNHWLQJ VWUDWHJLHV LQWHQG WR H[SODLQ the product and its uses to the consumers and thus create awareness for the product and the industry.>@ 146 [12] ?A https://www.slideshare.net/ashishKPD/product-life-cycle-26664029 LXXTWGSVTSVEXIƼRERGIMRWXMXYXIGSQVIWSYVGIWORS[PIHKIWXVEXIK]MRHYWXV]PMJIG]GPI Second Tier The major characteristics of this stage are: Rich Ponds %X XLI MRXVSHYGXMSR WXEKI XLI TVSHYGXƅW YWI ERH QEVOIX EVI RSX TVSZIR 8LYW SRP] XLI IEVP] EHSTXIVWEVIXV]MRKXLITVSHYGXEXXLMWWXEKI%WEVIWYPXWEPIWEVIPS[ERHWPS[%PWSTIVYRMX GSWXWSJQERYJEGXYVMRKEVILMKL8LYWPS[TVSƼXWERHLIEZ]GEWLMRZIWXQIRXWQEVOXLMWWXEKI • Low and slow sales • ,MKLTVSHYGXTVMGI • ,IEZ]TVSQSXMSREPI\TIRWI • 0EGOSJORS[PIHKI • 0S[TVSƼXW • 2EVVS[TVSHYGXPMRIW[14] %XXLMWWXEKIƼVQWWLSYPHJSGYWSREHZIVXMWMRKXLEXMWMRJSVQEXMZIXSTSXIRXMEPFY]IVW %WXLITVSHYGXMWRI[ƼVQWWLSYPHRSXLSPHFEGOSRLIEZ]EHZIVXMWMRKERHTVSQSXMSREP I\TIRWIW8LIƼVQWWLSYPHEPWSJSGYWSRWIPIGXMZIHMWXVMFYXMSRERHWIKQIRXW[LIVI XLI]GERƼRHIEVP]EHSTXIVW 147 [14] https://pt.scribd.com/document/67260150/stm Second Tier Rich Ponds Autonomous Cars Industry - Industry in Innovation Phase Companies across the globe are working on developing and innovating various models of autonomous cars. A variety of Indian startups are working on the same. • Hi Tech Robotic Systemz: Gurgaon-based startup that developed Novus Drive - a completely autonomous EV. • ATI Motors: Bangalore-based company that is designing electric cargo vehicles. • Auro Robotics: Developed self-driving shuttle, being run in University of Santa Clara. • Fisheyebox: Kolkata-based startup that has an autonomous Celerio that can be run by a joystick. *As of 2020 Various other companies are working on products with varying degrees of success. A lot of Japanese, American and Chinese players are also working on the same. Characteristics of the Industry • Lack of knowledge among customers • Low and Slow Sales • Proof of concept not yet established • High prices • Narrow product lines 148 The above feature can help us identify the industries in the innovation phase. Second Tier Rich Ponds Industry Sales Growth Growth Innovation Growth 3RP] MJ E RI[ TVSHYGX WEXMWƼIW XLI RIIHW SJ E QEVOIX MX [MPP IRXIV XLI KVS[XLWXEKI[LIVIMRRI[GYWXSQIVW GSQI ERH WEPIW MRGVIEWIWEX E JEWX TEGI $VDELJJHUSDUWRI PDUNHWLVDWWUDFWHG to the product, new FRPSDQLHVDOVRMRLQWKH industry. This causes a fall in prices. As production volume increases, cost per unit also falls, and WKXVSURŢWDELOLW\VWDUWVWRULVH As the product price goes down, customer demand increases. Time Here, Complementary products are also DYDLODEOHLQWKHPDUNHW so people have JUHDWHUEHQHIL WVIURP purchasing the product and its components. The major characteristics of this stage are: • 6ETMHMRGVIEWIMRWEPIW • 4VSHYGXMQTVSZIQIRXW • -RGVIEWIMRGSQTIXMXMSR • -RGVIEWIMRTVSƼXW • 6IHYGXMSRMRTVMGI • 7XVIRKXLIRMRKXLIHMWXVMFYXMSRGLERRIP 149 Second Tier At this stage, firms should focus on improving product quality, features and performance. They may enter new market areas. Rich Ponds New versions and models at different price points should be introduced to cater to the requirements of different types of buyers. Firms should focus on brand image creation of the product through promotional activities. The growth stage can be extended with frequent product upgrades and enhancements that slow down movement into maturity.[15] If product innovation has not kept pace with competing products and services or if innovations and technological changes have caused the industry to become obsolete, sales will suffer and the life cycle will experience a phase of decline.[16] 150 ?A [16] LXXT[[[MEPGSVKƼPIHSGYQIRXW[SVOWLSTWVSYIR-RHYWXV]CPMJIG]GPICWIQMREVCLERHSYXTHJ https://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacstranscripts-and-maps/industry-life-cycle Second Tier Rich Ponds Ed Tech Industry in India A Growing Industry • A lot of Indian Ed Tech companies have been gaining attraction in the recent past. • Companies like BYJU's, Unacademy and UpGrad have been finding acceptance in the market and have been effectively replacing traditional modes of education. • Tech-enabled education firms have been accepted by the Indian parents and have picked up in the last few years. Characteristics of the Industry • Rapid increase in sales • Product improvements and product line expansion. • Increase in competition • Increase in profits for the companies • Reduction in price of the product • Focus on distribution channel expansion. Due to the above characteristics of the industry, the industry can be identified as a growth industry. 151 Industry Sales Rich Ponds Second Tier Maturity Maturity Innovation Growth Maturity %XXLIQEXYVMX]WXEKI • 6IZIRYI KVS[XL GEWL ƽS[W ERH TVSƼXWXEVXWPS[MRKHS[R • 'SQTERMIW VIEPMWI QE\MQYQ VIZIRYI TVSƼXW ERH GEWLƽS[W FIGEYWIGYWXSQIVHIQERHMWJEMVP] LMKLERHGSRWMWXIRX Time $PDMRULW\RIWKH companies in the industry are wellHVWDEOLVKHGDQGWKH industry reaches its saturation point. Some firms are naturally eliminated as WKH\DUHXQDEOHWRJURZ along with the industry, thus still generating negative cash flows. ,QQRYDWLRQVFRQWLQXHLQ the industry. But they are not as radical as EHIRUHDQGPD\RQO\ EHVOLJKWLPSURYHPHQWV in colour or formulation WRVWUHVVWKHőQHZŒDQG őLPSURYHGŒDVSHFWV The major characteristics of this stage are: • 7EPIWMRGVIEWIWEXEHIGVIEWMRKVEXI • 2SVQEPTVSQSXMSREPI\TIRWIW • 9RMJSVQERHPS[IVTVMGIW • 4VSHYGXQSHMƼGEXMSRW • (IEPIVWYTTSVX • 4VSƼXQEVKMRHIGVIEWIW[17] ,IVIƼVQWQYWXJSGYWSRMQTVSZMRKXLIUYEPMX]SJXLITVSHYGXERHMRXVSHYGMRKRI[QSHIPW8LI] must also focus on increasing usage among current customers and pursue the development of new uses of the product. They must try to convert non-users into users of the product. 152 ?A LXXTWGSVTSVEXIƼRERGIMRWXMXYXIGSQVIWSYVGIWORS[PIHKIWXVEXIK]MRHYWXV]PMJIG]GPI Second Tier Rich Ponds Industry Sales Decline Decline Innovation Growth Maturity Decline 7EPIW IZIRXYEPP] FIKMRW XS JEPP HYI XS RI[ TVSHYGX GSQTIXMXMSR ERH GLERKMRKGSRWYQIVFILEZMSYV Time To deal with the decline, The sales and profits companies may choose fall sharply and, as to focus on their most a result, promotional SURILWDEOHSURGXFWOLQHV H[SHQGLWXUHKDVWREH or services to maximise cut down drastically. profits and stay in the industry. Some large companies focus on DFTXLULQJVPDOOHURU failing competitors WREHFRPHWKH dominant player.>@ The major characteristics of this stage are: • 6ETMHHIGVIEWIMRWEPIW • *YVXLIVHIGVIEWIMRTVMGIW • 2SSVZIV]PMXXPITVSQSXMSREPI\TIRWIW 153 ?A LXXTWGSVTSVEXIƼRERGIMRWXMXYXIGSQVIWSYVGIWORS[PIHKIWXVEXIK]MRHYWXV]PMJIG]GPI Second Tier 2SXEPPTVSHYGXWRIIHXSKSXLVSYKLEPPXLIWXEKIWWSQIJEMPEXXLIMRMXMEPWXEKI[LMPISXLIVWQE] VIEGLXLIHIGPMRIWXEKIHMVIGXP]WOMTTMRKXLIQEXYVMX]WXEKI%PWS[LIRERMRHYWXV]QSZIWJVSQ SRIWXEKIXSERSXLIVXLIXVERWMXMSRSGGYVWSZIVETIVMSHSJXMQI Rich Ponds 8LIPMJIG]GPISJERMRHYWXV]HITIRHWSRZEVMSYWJEGXSVW • 6EXISJXIGLRSPSKMGEPGLERKI • 6EXISJQEVOIXEGGITXERGI • 'SQTIXMXSVƅWIRXV] • )GSRSQMGERHQEREKIVMEPJSVGIW • 6MWOFIEVMRKGETEGMX] • +SZIVRQIRXTSPMG]?A )ZIR[MXLMRXLIWEQIMRHYWXV]ZEVMSYWƼVQWQE]FIEXHMJJIVIRXPMJIG]GPIWXEKIW8LMWMWFIGEYWI WSQIƼVQWGERƼRHRI[YWIWJSVXLIMVHIGPMRMRKTVSHYGXWXLYWI\XIRHMRKXLIMVPMJIG]GPI*MVQW LEZIZEV]MRKEFMPMXMIWXSTVSPSRKXLIMVPMJIG]GPIFEWIHSRXLIMVWXVEXIKMGGLSMGIW?A 7SQISJXLIGSQQSRWXVEXIKMIWXSI\XIRHTVSHYGXPMJIG]GPIEVI • 4VSHYGXQSHMƼGEXMSR • )RXV]MRXSERI[QEVOIX • 4VSQSXMRKJVIUYIRXYWI • (IZIPSTMRKHMJJIVIRXYWEKI • 9WISJEKKVIWWMZIEHZIVXMWMRKERHWEPIWTVSQSXMSRXIGLRMUYIW?A 7SEWERIRXVITVIRIYVSVEREP]WX[IRIIHXSYRHIVWXERH[LEXTLEWIMWXLIMRHYWXV]GYVVIRXP]MR ERH[LEXGER[IHSXSFIRIƼXJVSQXLIWEQISVGLERKIXLIPMJIG]GPI 154 [19] [20] https://www.slideshare.net/ashishKPD/product-life-cycle-26664029 https://pt.scribd.com/document/67260150/stm • Indian Handicrafts have been losing market to machinery manufactured fabrics for a few decades now. • The industry finds it difficult to compete in terms of manufacturing cost to mass manufactured textiles. • Even though the quality and art in handicrafts is considered superior, customers prefer the cheaper mass manufactured product. • As a result, the industry has been squeezing the falling profits. Second Tier Rich Ponds Handicraft Industry in India A declining industry Characteristics of the Industry • Decrease in prices. • Decrease in volumes and sales. • Low expenses on promotions. • Distribution channels refusing to stock inventory and give retail space to the new industries. • Old companies are exiting the industry. Due to the above characteristics of the industry, the industry can be identified as an industry in decline phase. 155 Second Tier Rich Ponds Disruptions ,QGXVWU\GLVUXSWLRQLVDWRSLFWKDWLQWHUHVWVDOOŢUPVELJDQGVPDOODOLNHDVLW DOORZVDVPDOOHUŢUPLQWKHLQGXVWU\RUHYHQDVWDUWXSZLWKIHZHUUHVRXUFHV WRVXFFHVVIXOO\FKDOOHQJHWKHHVWDEOLVKHGLQFXPEHQWEXVLQHVVHV Myths about Disruptions %R]XLMRKXLEXMWWPMKLXP]HMJJIVIRXJVSQ XLIWXEXYWUYSERHGERQEOIMXWQEVO MWWEMHXSFI‘disruptive’ in nature. %R]XLMRK XLEX WPMKLXP] QSHMƼIW XLI GYVVIRX QEVOIX SV IRLERGIW XLI value proposition is considered to be ‘disruptive’. )RULQVWDQFHŢQGLQJQHZPRGHV RIGLVWULEXWLRQRUDGGLQJQHZ features to the product is often VDLGWREHDGLVUXSWLRQ True disruption happens when something displaces something else to create something very new. Harvard Business School professor and disruption guru Clayton Christensen says that a disruption displaces an existing market, industry, or technology and produces something new, more efficient, and worthwhile. It is at once destructive as well as creative. 8SHE] QSWX MRHYWXVMIW JEGI XLI VMWO SJ HMWVYTXMSR HYI XS RI[ I\XIVREP JEGXSVW KEMRMRK TVSQMRIRGI7SQISJXLIWIJSVGIWXLEXEJJIGXEPPFYWMRIWWIWEVI • 2I[FYWMRIWWQSHIPWXLEXFVMRKEVSYRHRI[GSQTIXMXMZIH]REQMGWXSI\MWXMRKƼVQW [LIVI[LEX[EWEREHZERXEKIJSVXLIQXYVRWMRXSEHMWEHZERXEKI V/S 156 Traditional Model Subscription Model 8LIVMWOSJMRHYWXV]HMWVYTXMSRWMWSRISJXLIQSWXWMKRMƼGERXVMWOWXLEX[SVV]IRXVITVIRIYVW ERHMRZIWXSVWSJIWXEFPMWLIHGSQTERMIW8LMWMWTVMQEVMP]FIGEYWI • 8LI ƼVQƅW TVSHYGX SV FYWMRIWW QSHIP QE] FIGSQI SFWSPIXI ERH PSWI QEVOIX XS HMWVYTXMZIJSVGIW • 8LI]EVII\TIGXIHXS Second Tier Rich Ponds • 6IKYPEXSV] GLERKIW WLMJX XLI H]REQMGW SJ XLI MRHYWXV] JVSQ SRI WIX SJ TPE]IVW ERH GVIEXIWTEGIJSVRI[TPE]IVW • *SVGIWSJXIGLRSPSK]LEZIEPPS[IHXLIGIRXVEPMÊXMSRSJWSQIMRHYWXVMIWEXXLIWEQI XMQIHIQSGVEXM^MRKWSQI • Respond and thrive in the face of disruption. • .HHSWKHLUŢUPLWVEXVLQHVVPRGHODQGLWV SHRSOHIOH[LEOHHQRXJKVRWKDWWKH\EHQHŢWLQ case of any disruptive force rather than stand at a position of disadvantage due to their rigidity. T A R T In the beginning, almost all challengers look like the previous ones that had failed. 1SWXSJXLIMRGYQFIRXƼVQWEVIWOITXMGEPXLEXMRRSZEXMSRERHHMWVYTXMSR[MPPXEOITPEGI so, they adopt a wait-and-see approach to the new challengers. S Challenger S T A R T As the challenger grows and gains scale and it becomes clearer that the business model is viable, incumbents start responding. Lets look at the different linds of disruptions as discussed by Clayton Christensen. 157 Second Tier Sustaining Innovation Rich Ponds Sustaining Innovation improves Existing Products &UHDWHQHZPDUNHWV 'HVWUR\VH[LVWLQJPDUNHWV (QKDQFHVH[LVWLQJSURGXFWVZLWKEHWWHUYDOXHSURSRVLWLRQ 7YWXEMRMRKMRRSZEXMSRMWHSRI[MXLMRXLIWEQIZEPYIGLEMRXLEXXLIMRHYWXV][SVOWSR7YWXEMRMRK -RRSZEXMSRPIEHWXSFIXXIVTVSHYGXWEHZERGIHXIGLRSPSK]ERHFIXXIVVE[QEXIVMEPW Sustaining innovation strategy is at the core of iPhone's success. Sustaining innovation is the way firms within an industry compete. 7SQI WYWXEMRMRK MRRSZEXMSRW EVI MRGVIQIRXEP ]IEVF]]IEV MQTVSZIQIRXW [LMGL EPP KSSH GSQTERMIWKVMRHSYX 3XLIV WYWXEMRMRK MRRSZEXMSRW EVI FVIEOXLVSYKL MRRSZEXMSRW [LIVIMR XLI TVSHYGX PIETJVSKW FI]SRH XLI GSQTIXMXMSRƅW TVSHYGXW?A 158 [21] https://medium.com/@tom_bartman/confronting-a-new-market-disruptionwhen-disrupting-the-disruptor-is-the-onlyway-to-succeed-f02355ad919b [22] http://www.slideshare.net/prateekjaiswal/3a-new-product-development 7KHEHVWVWUDWHJ\IRUŢUPVWR respond to such sustaining innovations is to participate in this innovative process or change as it is generally a one-way street. Second Tier Rich Ponds -X HSIW RSX QEXXIV LS[ XIGLRSPSKMGEPP] HMƾGYPX XLI MRRSZEXMSR MW MX MW EPQSWX EP[E]W XLEX IWXEFPMWLIHGSQTIXMXSVW[MRXLIFEXXPISJWYWXEMRMRKMRRSZEXMSRJVSQXLIGLEPPIRKIVW7YWXEMRMRK MRRSZEXMSRMWRSXHMWVYTXMZIERHHSIWRSXGLERKIXLITPERISJGSQTIXMXMSR Those who do not change as per the changing consumer needs are RIWHQOHIWEHKLQGDQGRYHUWLPH WKH\ORVHPDUNHWVKDUH 8LI ƼVQW WLSYPH XV] ERH FI XLI TMSRIIVW SJ XLIWI MRRSZEXMZI GLERKIW XLVSYKL VIWIEVGL ERH HIZIPSTQIRXIJJSVXW,S[IZIVXLSWIPIJXFILMRHWLSYPHJSPPS[EƄJEWXJSPPS[IVƅETTVSEGL Amazon Kindle - A Sustaining Innovation • &SSOW LEZI FIIR TVMRXIH JSV GIRXYVMIW8LI][IVII\TIRWMZIERH HMƾGYPXXSƼRH • 8LIR GEQI IVIEHIVW PMOI /MRHPI XLEX TVSZMHIH E WMQMPEV I\TIVMIRGI FYX[EWQSVIGSRZIRMIRX • 8LI FSSOW GSYPH WMQTP] FI FSYKLX ERHHS[RPSEHIH E-reader makes the book cheap and more accessible. It is a sustaining innovation that complements paperback books. Traditional publishers now publish all books in an e-book version. 159 Second Tier Low-end Innovation (Disruptive) Rich Ponds • 0S[IRHMRRSZEXMSRLETTIRW[LIRERI[ZEPYIGLEMRMWGVIEXIHF]SJJIVMRKERI\MWXMRKTVSHYGX EX E GLIETIV IEWMIVXSYWI QERRIV XLYW EXXVEGXMRK XLI PIEWXHIQERHMRK GYWXSQIVW SJ XLI EPVIEH]I\MWXMRKMRHYWXV]XS[EVHWMX • 8LIGSQTERMIWEHSTXERI[STIVEXMRKSVƼRERGMEPETTVSEGLERHYWIXLIWIPS[GSWXFYWMRIWW QSHIPWXLEXTMGOJVSQXLIPIEWXEXXVEGXMZIGYWXSQIVWSJIWXEFPMWLIHƼVQW Low-end innovations are disruptive as they can create, over time, new markets that are distinct from the mainstream market and displace them as more and more people switch.[22] The most ideal strategy • 8LIGSQTER]WLSYPH VIWTSRHXSIRXVERXWMRXLI PS[IRHSJXLIQEVOIX This is not easy as it is YHU\GLIŢFXOWWRLGHQWLI\ successful challengers as HYHU\RQHORRNVVLPLODUDW the start. Keeping the entry doors closed through the low-end market is an essential activity that managers should keep in mind. Otherwise, a successful disruptor FDQWDNHDZD\LWVPDUNHWVKDUH Companies can consider a second EUDQGWRWDSWKHORZHQGRIWKH PDUNHW Oyo Hotel Services 160 Mitti Cool Refrigerator [23] https://medium.com/@imnotjk/the-end-of-disruption-ab11fffa34fd • 8SQEOIGEVWQSVIEJJSVHEFPIERHEGGIWWMFPI 8EXE1SXSWMR-RHMEGVIEXIH2ERS • -X QEHI GEVW QSVI EGGIWWMFPI F] VIQSZMRK QER]I\XVEJIEXYVIW • 8LIGEVGVIEXIHMQQIRWIJYRGMXSREPYXMPMX] • ,S[IZIVXLIGEVJEMPIHMRGVIEXMRKWSGMEPYXMPMX] -X[EWPSSOIHHS[RYTSR Second Tier Rich Ponds Tata Nano - A Low-End Disruption However, the concept of Nano was a low-end disruption that allowed many to give up two-wheelers and become first-time car owners. Virtual Schools - A Low-End Disruption • 8VEHMXMSREP WGLSSPW LEZI FIIR TVSZMHMRK E PSX SJ FIRIƼXW SRISRSRI EXXIRXMSR ERH WYTIVZMWMSR • ,S[IZIVRSXIZIV]SRIRIIHWWYGLEXXIRXMSR • 7SQI[MWLXSPIEVREXXLIS[RWTIIHERHEXEGLIETIVVEXI • %PWSWSQIWXE]MRHMƾGYPXKISKVETLMGEPPSGEXMSRW • 8LMWMW[L]ZMVXYEPWGLSSPWERHSRPMRIGSYVWIWLEZIJSYRHKVIEXWYGGIWW Online courses and virtual schools have allowed many students to learn otherwise expensive skills. As a result, many offline institutions have also opened virtual training divisions. 161 Second Tier Rich Ponds New Market Innovations • 2I[QEVOIXHMWVYTXMSRWMRZSPZIQEOMRKETVSHYGXQSVIEJJSVHEFPIXSS[RSVIEWMIVXSYWIXLYW EPPS[MRKERI[TSTYPEXMSRXSI\TIVMIRGIXLITVSHYGX This leads to the creation RIDQHZPDUNHW • ,IVIXLIGLEPPIRKIV[MXLLMWZEPYITVSTSWMXMSRMWGSQTIXMRKEKEMRWXXLIƄRSRGSRWYQTXMSRƅSJ XLII\MWXMRKTVSHYGX • 8LMWSTIRWYTERHI\TERHWEREPPRI[QEVOIXJSVXLITVSHYGX[MXLXLIYWIVW • 8LIVIMWRSGPIEVWXVEXIK]SRLS[MRGYQFIRXWWLSYPHFILEZIMRRI[QEVOIXHMWVYTXMSRW if if The new market created has the potential to replace the existing one. • 8LI ƼVQ WLSYPH VIWTSRH IMXLIV by trying to outcompete the challenger in the initial days • Get involved in the new market along with the challengers. The incumbent is confident that the disruption would not take away their market but only create a new one, they may choose to ignore it. +RZHYHUWKHULVNUHPDLQVWKDWWKHFKDOOHQJHU may later alter the value proposition DQG EHFRPH D GLUHFW FRPSHWLWRU LQ WKH LQFXPEHQWŒVLQGXVWU\ 8SHE]EPPMRHYWXVMIWJEGIXLIVMWOSJFIMRKHMWVYTXIH[MXLRI[XIGLRSPSKMIWERHFYWMRIWWQSHIPW GSQMRKMR%PPIRXVITVIRIYVWERHMRZIWXSVWWLSYPHWIIXLMWEWEGLEPPIRKIEW[IPPEWERSTTSVXYRMX] 8LITSXIRXMEPXLVIEXWSJHMWVYTXMSRJSVGIWSJHMWVYTXMSRERHHIKVIISJGSQTIXMXMSRF]GLEPPIRKIVW EVIXSTMGWXLEXWLSYPHFIYRHIVWXSSHF]IZIV]SRIFIJSVIIRXIVMRKER]MRHYWXV] 162 Second Tier Rich Ponds Social Media Ads New Market Disruption for Advertisers • Traditional advertising was expensive and could only be done by bigger companies with huge budgets. • Social media allowed targeted ads for as little as ₹200. • It allows a completely new set of users to access the advertising market. As social media allows an entirely new set of advertisers, it creates a new market for the media industry, disrupting what existed earlier with direct competition. As it creates new users, it is a new-market disruption. So, these are the different kinds of disruptions that may take place. Before entering any industry, we must evaluate the disruptive forces acting on it. Lets now move on to understadning regulations. 163 Second Tier Government Regulations about the Industry Rich Ponds +SZIVRQIRXWIWXEFPMWLQER]VIKYPEXMSRWERHTSPMGMIWXLEXKYMHIFYWMRIWWIW8LIWITSPMGMIWGER FIMRHYWXV]WTIGMƼGSVFYWMRIWWWTIGMƼG Industry Specific Government Policies Business Specific 8LIWITSPMGMIWRSXSRP]ETTP]EXXLIREXMSREPPIZIPFYX EPWSETTP]QSVIPSGEPP]EWWXEXIWERHQYRMGMTEPMXMIW LEZIXLIMVS[RWIXSJVYPIW8LIVIEVIMRXIVREXMSREP XVIEXMIWXLEXMRƽYIRGIXLI[E]FYWMRIWWMWHSRI $VWDEOHSROLWLFDOV\VWHPFDQ PDNHEXVLQHVVIULHQGO\GHFLVLRQV $QXQVWDEOHV\VWHPKDUPVWKH EXVLQHVVHQYLURQPHQW )RXVITVIRIYVWFYWMRIWWQEREKIVWERHMRZIWXSVWRIIHXSORS[EFSYXTSPMGMIWERHVIKYPEXMSRW EJJIGXMRKXLIMVGSRGIVRIHMRHYWXVMIW4SPMGMIWLEZIXLITS[IVXSEGXEWEQEVOIXGEXEP]WXEW[IPP EWZEPYIHIWXVS]IVWJSVSXLIVQEVOIXW The government can help the development of any particular industry as well as limit growth for others. 164 Providing special incentives and devising initiatives. Imposing more taxes and duties 8LI]GERTVSZMHIXE\ERHHYX] I\IQTXMSRWXSHMJJIVIRXWIGXSVW XLEX[MPPXVMKKIVMRZIWXQIRXERH KVS[XLMRXLEXWIGXSV -RZIWXSVWPSWIXLIMVMRXIVIWXMR XLEXTEVXMGYPEVWIGXSV -RHYWXVMIW XLEX XLI KSZIVRQIRX [MWLIW XSTVSQSXI Rich Ponds Industry Taxes Second Tier &IJSVIKIXXMRKMRXSER]MRHYWXV]SRIWLSYPHLEZIERYRHIVWXERHMRKSJXLIGYVVIRXKSZIVRQIRXƅW EXXMXYHIXS[EVHWXLITEVXMGYPEVMRHYWXV] -RHYWXVMIW XLEX XLI KSZIVRQIRX [MWLIW XSVIWXVMGX Excess Taxes Tax Incentives Why? 'VIEXIWIQTPS]QIRX TVSXIGXWXLI environment or in line [MXLREXMSREPMRXIVIWXW GST [Goods and Service Tax] Why? • %HHMXMSREPXE\IWEVI MQTSWIHXSHMWGSYVEKI MRZIWXQIRXW • )RZMVSRIQRXEPP] YRJVMIRHP] • 2SXMRPMRI[MXL REXMSREPMRXIVIWXW • -QTSWIHSRHMJJIVIRXKSSHW • &SVRIF]XLIIRHGYWXSQIV • 8LI] TE] XLI ƼREP TVMGI SJ XLI TVSHYGX Regulation 0S[IV PIZIPW SJ +78 VIHYGI XLI ƼREP TVMGI SJ XLI TVSHYGX XLYW IRGSYVEKMRKGSRWYQTXMSR )RXVITVIRIYVW ERH MRZIWXSVW QYWX ORS[ EFSYX WTIGMEP XE\IW ERH WYFWMHMIW EJJIGXMRK XLIMV MRHYWXVMIW 165 Second Tier Rich Ponds Export-Import Duties 2SXEPPMRHYWXVMIWMRZSPZIXLIMQTSVXERHI\TSVXSJKSSHWERHWIVZMGIW&YXXLSWIXLEXHSRIIHXS TE]HMJJIVMRKEQSYRXWSJHYXMIWJSVIEGLREXMSRXLEXXLI]MQTSVXJVSQSVI\TSVXXS Balance of Trade Export-Import Duties Depends on Balance of payments of the country with other nations Government’s Focus on the Sector )RXVITVIRIYVWERHFYWMRIWWQEREKIVWQYWXYRHIVWXERHXLII\TSVXERHMQTSVXHYXMIWGLEVKIHF] FSXLXLIGSYRXVMIWƂXLIWSYVGIERHXLIHIWXMREXMSRGSYRXV] Policy Changes ,QGXVWU\ VKULQNV Market Size Duties or Imposition of Tax P Ch oli an cy ge s ,QGXVWU\ expands. Tax Incentives 166 %REP]WXWERHQEREKIVWQYWXFIE[EVISJER]MRXIVREXMSREPXVIEX]MRZSPZMRKXLIMRHYWXV]ERHXLI ZEVMSYWTIVQMXWERHVIWXVMGXMSRWSRJSVIMKRXVEHIMRXLEXTEVXMGYPEVTVSHYGXSVMRHYWXV] Rich Ponds USA-China Trade War Second Tier Foreign Tax Changes and Implications Duties on ,PSRUWV USA Duties on ,PSRUWV China • USA-China Trade War since 2017, has caused both the countries to put duties on imports from goods manufactured in the other country. • This has caused industries in both the countries to suffer as it makes the existing supply incompetent. Indian Steel and Aluminium Industry Raised import duties USA India • For India, USA imposed raised import duties from 10% to 25% for steel and aluminium products which significantly impacted the industry. 167 *As of 2019-2020 Second Tier Rich Ponds Environmental Laws 1SWX GSQQIVGMEP EGXMZMXMIW RIKEXMZIP] MQTEGX XLI IRZMVSRQIRX -RXIVREXMSREP XVIEXMIW ERH KIRIVEP TYFPMG TVIWWYVI JSVGI KSZIVRQIRXW XS QEOI PE[W XLEX PMQMX SV VIKYPEXI XLI EQSYRX SJ IRZMVSRQIRXEPHEQEKI 0DQ\ DUHDV DUH LGHQWLILHG WR EH QRORJJLQJ ]RQHV ZKHUH QR ZRRGFDQEHFXWIRUWLPEHU 7KHFDUERQIRRWSULQWRIQDWLRQVDQGLQGXVWULHVDQG WKH OLTXLG GLVFKDUJH E\ LQGXVWULHV DUH PRQLWRUHG WR NHHSDFKHFNRQWKHH[WHQWRIHQYLURQPHQWDOGDPDJH done. )RXVITVIRIYVW ERH MRZIWXSVW QYWX ORS[ XLI I\XIRX SJ IRZMVSRQIRXEP HEQEKI HSRI F] XLIMV MRHYWXVMIWXLIMRHYWXV]WTIGMƼGVYPIWERHXLIIRZMVSRQIRXEPGPIEVERGIWVIUYMVIHXSSTIVEXI%R] GLERKI MR IRZMVSRQIRXVIPEXIH PE[W SV ZMSPEXMSR F] XLI GSQTERMIW QMKLX EJJIGX XLI MRHYWXV] W TVSƼXMFMPMX] Legal Acts/Provisions/Notices +SZIVRQIRXWIWXEFPMWLWTIGMEPEGXWSVTVSZMWMSRWXLEXQERHEXILS[ERMRHYWXV]WLSYPHFILEZI-R QSVIVMKMHJSVQXLIWIEGXWIWXEFPMWLVIKYPEXSV]EKIRGMIWXLEXVIKYPEXIXLIMRHYWXV])RXVITVIRIYVW QYWXYRHIVWXERHXLIZEVMSYWPE[WEGXWERHTVSZMWMSRWXLEXEJJIGXXLIMRHYWXV]8LI]WLSYPHEPWS OIITXVEGOSJXLIHIZIPSTQIRXWMRXLIVIKYPEXSV]FSH]ƅWHIGMWMSRWVIKEVHMRKXLIMRHYWXV] regulates Banks in India RBI regulates 168 SEBI Investment Firms in India Second Tier Textile Industry Rich Ponds regulates regulates Defence Manufacturers 8LYWEREP]WXWERHFYWMRIWWQEREKIVWWLSYPHOIITXVEGOSJHIZIPSTQIRXWMRXLIWIQMRMWXVMIW ERHEPWSWXE]YTHEXIHEFSYXXLIPEXIWXHIZIPSTQIRXW[MXLMRXLIMRHYWXV]%PWSWXE]MRKEFVIEWXSJ QMRMWXV][IFWMXIW[MPPEPPS[XLIQXSMHIRXMJ]STTSVXYRMXMIWTVIWIRXIHF]XLIKSZIVRQIRX Ownership-related Laws %JI[MRHYWXVMIWEVIVIGSKRMWIHXSFIWIRWMXMZIXSEGSYRXV]ƅWMRXIVIWX*SVMRWXERGIEGSQTER] XLEXS[RWEPEVKIEQSYRXSJOI]REXYVEPVIWSYVGIWSJXLIGSYRXV] Zn Vedanta Limited 9HGDQWD/LPLWHGLV,QGLD VODUJHVW]LQF miner and currently holds 72% PDUNHW share LQ,QGLD V=LQFLQGXVWU\ 7S JSV GSQTERMIW ERH MRHYWXVMIW XLEX EVI GVMXMGEP XS E GSYRXV]ƅW KIRIVEP MRXIVIWXW S[RIVWLMT VIPEXIHPE[WEVIVIWXVMGXMZI8LIWIPMQMXXLIEFMPMX]XSS[RGSQTERMIWMRXLEXMRHYWXV]6IWXVMGXMZI TVEGXMGIW PMQMX XLI KVS[XL SJ MRHYWXVMIW %REP]WXW ERH IRXVITVIRIYVW QYWX ORS[ EFSYX WYGL S[RIVWLMTVIPEXIHPE[WXSTPERJSVXLIQEGGSVHMRKP][IPPMRXMQI 169 Second Tier Ownership Related Policies FDI Increase Rich Ponds (Retail Sales) 49% 100% Brands that entered India Case of Single Brand Retail • • • 170 7MRKPIFVERHVIXEMPMR-RHMELEHMXW*(-GETTIHJSVEZIV]PSRKXMQIEX SRXLIKVSYRHWSJ MXFIMRKEXLVIEXXSPSGEPJEVQIVWWQEPPEVXMWXWWQEPPWLSTS[RIVWIXG 8LIKSZIVRQIRXEPXIVPSRKHIFEXIWEPPS[IH *(--XEPWSEPPS[IHS[RMRKHMVIGXSRPMRI WXSVIWFIJSVITL]WMGEPWXSVIWMR-RHME 8LMWEPPS[IHXLIPMOIWSJ-/)%ERH;EPQEVX XLVSYKL*PMTOEVXEGUYMWMXMSR XSIRXIV-RHMEERH LEHMQTPMGEXMSRWF]GLERKMRKXLIH]REQMGWSJZEVMSYWMRHYWXVMIW Rich Ponds :EVMSYWSXLIVMRHYWXV]WTIGMƼGQIEWYVIWERHVIKYPEXMSRWRIIHXSFIJSPPS[IHXSSTIVEXIMRXLI MRHYWXV] Second Tier Other industry-specific regulations Many industries need their products and machines to EHTXDOLW\DQG standards-compliant. Many industries need their premises to EHFRPSXOVRULO\ ŢUHFRPSOLDQW 2WKHULQGXVWULHVPD\KDYHVSHFLŢF ODERXUODZV Diamond and Textile Industry 7YGLPE[WERHVIKYPEXMSRWXLEXEVIWTIGMƼGXSXLIMRHYWXV]QYWXFIYRHIVWXSSHF]IRXVITVIRIYVW ERHFYWMRIWWQEREKIVW *67KDGEHHQLQWURGXFHGE\WKHJRYHUQPHQW on goods and services which acts as a central mechanism for collection of taxes. Every HQWUHSUHQHXUQHHGVWRNQRZWKH*67EUDFNHW where their products and purchases fall. 171 Second Tier Rich Ponds Regulations Steel Industry in India Taxes • GST - 18% (better than earlier 19.5% indirect taxes) • Corporate tax reduced to 25% in 2019. Export/ Import regulations • From a controlled import regime, industry has moved to a free import regime. • However, anti-dumping and safeguard duties are often used. • Free export is allowed; also at times promoted. Environmental regulations • Covered under Environment Protection Act and Ministry of Environment and Forest. • All new plants and substantial expansions require permission under PEA. • Install specific pollution control equipment. Investment related regulations • Until 1991, only government sector companies were allowed. In 1991, private sector was allowed. • 100% FDI is allowed. Other industry-specific regulations 172 • Pricing and distribution deregulated from January 1992. • National Steel Policy drafted in 2005 acts as basis for all government planning about the industry. • Energy consumption laws put obsolete factories out of use. • Government pledged to reduce GHG emission by the industry by 33-35% under Intended Nationally Determined Contribution. • OHDYHWKHEXVLQHVVYXOQHUDEOHWRQHZWUHQGVDQGXSVWDUWV • OHDGWRXQNQRZLQJO\IDLOLQJWRFRPSO\ZLWKQHZUHJXODWLRQV • ULVN RI ORVLQJ RXW WR FRPSHWLWRUV E\ IDLOLQJ WR GHOLYHU consumers what they want. Second Tier 8LIMQTSVXERGISJFIMRKIHYGEXIHEFSYXXLIPEXIWXMRHYWXV]YTHEXIWGERRSXFIYRHIVIWXMQEXIH -X HSIW RSX QEXXIV [LEX X]TI SJ FYWMRIWW MX MW RSX OIITMRK YT XS HEXI [MXL [LEX MW RI[ MR XLI MRHYWXV]GSYPH Rich Ponds Recent News Related to the Industry 7XE]MRKYTHEXIHMWXLISRP][E]MR[LMGLQEREKIVWGERMHIRXMJ]JSVXLGSQMRKGLERKIWERHWLMJXW MRXLIMRHYWXV]IEVP]IRSYKLERHFIRIƼXJVSQXLIQ?A 7SQISJXLIGSQQSRFIRIƼXWSJOIITMRKEREGXMZIXVEGOSJXLIMRHYWXV]EVI • ,QGXVWU\XSGDWHV and compliance with regulations. • Being aware of industry updates allows one to identify new opportunities and threats at an early stage. • 8VLQJWKHNQRZOHGJHWR understand and deliver what customers want. • ,QFUHDVHVDZDUHQHVVRI security issues. • +HOSVNHHSDKHDGRIWKH competition. 6IGIRXRI[WEFSYXXLIGSQTERMIWMRXLIMRHYWXV]GERGSQIMRZEVMSYWJSVQWERHJVSQQYPXMTPI WSYVGIW%PPJSVQWSJRI[WXLEXMRƽYIRGIXLIFYWMRIWWIRZMVSRQIRXSJXLIƼVQERHXLIMRHYWXV] EVISJVIPIZERGIXSXLIIRXVITVIRIYV • 2I[WXLEXMRƽYIRGIWXLIFYWMRIWWIRZMVSRQIRXVIJIVWXSRI[WXLEXEJJIGXWXLIJEGXSVWSJXLI FYWMRIWWIRZMVSRQIRX o 8LIJEGXSVWMRGPYHITSPMXMGEPWSGMEPIGSRSQMGXIGLRSPSKMGEPERHPIKEPJEGXSVW • 'SQTER]WTIGMƼGYTHEXIWEVIEWMQTSVXERXEWMRHYWXV]YTHEXIW 173 [24] https://preferredpayments.com/importance-being-know-industry-news Second Tier Rich Ponds Government updates like recent circulars, updates and interviews. Regulatory bodies, Relevant ministries, and key people in the government ,W LV LPSRUWDQW WR NQRZ DQG NHHS WUDFN RI JRYHUQPHQW SROLFLHV NH\ technological upgrades around the LQGXVWU\ DQG FKDQJHV LQ FXVWRPHUVŒ tastes and preferences. However, what remains a challenge is not just knowing the news that is relevant but also having a relevant understanding of the consequences that the news will have. Being open to and listening to multiple interpretations and views remains one of the best defences of an entrepreneur or investor. 8LIMQTSVXERXWSYVGIWSJMRHYWXV]RI[WEVI • Newspaper and TV • <RX7XEHFKDQQHOV DERXWWKHLQGXVWU\ HV • %RRNVDQGPDJD]LQ ws vie • Management inter at and commentary events 174 • Ministry circulars and UHJXODWRUŒVFLUFXODUV • *RRJOHDOHUWVDERXW the industry • ,QWHUQDWLRQDOQHZV DERXWWKHLQGXVWU\LQ other countries All communication by the competitor is broken down into parts and different segments— assumptions, strategy, capabilities, and goals. Second Tier Rich Ponds 3RISJXLIMQTSVXERXEWTIGXWLIVIMWXSGSVVIGXP]YRHIVWXERHERHGSQTVILIRHXLIGSQTIXMXSVƅW MRXIVZMI[W ERH MRXIVTVIXEXMSRW Here, an important model suggested by Michael Porter— Competitor Analysis— is used. Parts of interviews are identified, which helps one understand the competitors’ goals, the strategy followed to get there, competitors’ capabilities, which include strengths and weaknesses, and lastly, the underlying assumptions of the management. Once an understanding of different players is achieved, the firm can decide on the goals that they wish to achieve and the strategies they wish to follow. This is one of the critical exercises on being updated about the industry and its participants. 175 176 Rich Ponds Gains, Pains & Rsiks Notes Rich Ponds Gains, Pains & Risks Notes 177 178 Rich Ponds Third Tier Third Tier Rich Ponds Third Tier Profit Forces affecting the Industry 179 Third Tier Rich Ponds In the first tier, a macro scenario of the industry, the players involved, and the value chain was understood. The second tier of the broad industry analysis focused on more objective topics such as market size, pricing power, and government regulations. With this, an understanding of the structure of the industry being analysed was understood. In the third tier, we determine the industry profitability based on the influence of the industry, participants, suppliers and customers. • 7KLV WLHU LV EXLOW DURXQG WKH FRQFHSW RI )LYH &RPSHWLWLYH )RUFHV IRU ,QGXVWU\ $QDO\VLV VXJJHVWHGE\0LFKDHO3RUWHU • 7KLVWLHUIRFXVHVRQWKHDELOLW\RIDQLQGXVWU\WR UHWDLQLWVSURŢWDELOLW\EDVHGRQWKHFRPSHWLWLYH forces acting on it. Porter’s Five Forces MWEQSHIPXLEXMHIRXMƼIWERHEREP]WIWXLIƼZIGSQTIXMXMZI JSVGIWXLEXWLETIIZIV]MRHYWXV][LMGLLIPTdetermine an industry’s weaknesses and strengths.-XMWEFYWMRIWWEREP]WMWJVEQI[SVOXLEXLIPTWI\TPEMR[L]HMJJIVIRXMRHYWXVMIW EVIEFPIXSWYWXEMRHMJJIVIRXPIZIPWSJTVSƼXEFMPMX]?A 180 [25] https://www.investopedia.com/terms/p/porter.asp Third Tier Rich Ponds Supplier Power Competitive Intensity within the Industry Porter's Five Forces Threat of Entry Buyer Power Threat of Substitution • 7KHPRGHOŒVELJJHVWVWUHQJWKLVWKDWLWFDQEHDSSOLHGWRDQ\LQGVXWU\ of the economy. • 7KHPRGHOZDVŢUVWSXEOLVKHGLQ0LFKDHO(3RUWHUŒVERRN&RPSHWLWLYH 6WUDWHJ\7HFKQLTXHVIRU$QDO\VLQJ,QGXVWULHVDQG&RPSHWLWRUVLQ • 3RUWHU LGHQWLŢHV WKH ŢYH IRUFHV WKDW DFW RQ HDFK LQGXVWU\ DQG DUH XVHGWRPHDVXUHFRPSHWLWLYHLQWHQVLW\DWWUDFWLYHQHVVDQGSURŢWDELOLW\ • $QXQDWWUDFWLYHLQGXVWU\LVRQHLQZKLFKWKHHIIHFWRIWKHVHŢYHIRUFHV UHGXFHVWKHRYHUDOOSURŢWDELOLW\>@ 181 [26] https://thejournal.ng/2020/01/15/porters-5-forces-jim-chappelow/ Third Tier Rich Ponds -RWXIEHSJHIZIPSTMRKEWYFNIGXMZISTMRMSRSRXLIMRƽYIRGISJIEGLJSVGISRXLIMRHYWXV]XLI[I QYWXQEOIERIJJSVXXSFVMRKSFNIGXMZMX]XSXLITVSGIWW8LMWMWHSRIF]FVIEOMRKHS[RIEGLJSVGI MRXS E WIVMIW SJ UYIWXMSRW ERH XV]MRK XS IZEPYEXI XLI MQTEGX XLVSYKL IEGL SJ XLIWI UYIWXMSRW 8LIWIUYIWXMSRWVIPEXIXSXLIJEGXSVWXLEXHIXIVQMRIXLISZIVEPPMRƽYIRGISJIEGLJSVGISRXLI TVSƼXEFMPMX]SJXLIMRHYWXV] Supplier Power 7YTTPMIVTS[IVVIJIVWXS • 7KHEDUJDLQLQJSRZHUWKDWVXSSOLHUVRIGLIIHUHQWUDZ materials have over industry participants. • 7KHLUDELOLW\WRGULYHXSWKHSULFHVRIWKHUDZPDWHULDOV Suppliers with High High Bargaining Power Low The Profitability of the industry can Price of new materials 8LI MRHYWXV] QYWX GLIGO XLI WYTTPMIV TS[IV SJ XLI WYTTPMIV KVSYT JSV IEGL VE[ QEXIVMEP *SV EREP]XMGEP TYVTSWIW PEFSYV KVSYTW EVI EPWS WIIR EW WYTTPMIVW SJ IJJSVX 8LYW XLMW EREP]XMGEP JVEQI[SVOWLSYPHFIETTPMIHJSVWYTTPMIVTS[IVSJPEFSYVERHWXEJJEW[IPP 182 7YTTPMIVTS[IVMRERMRHYWXV]GERFINYHKIHF]QYPXMTPIJEGXSVW8LIWIJEGXSVWXSKIXLIVHIGMHIXLI WYTTPMIVTS[IVMRXLIMRHYWXV] (Monopoly/Duopoly/Few/Many/Excess Supply) 8LIKVIEXIVXLIRYQFIVSJWYTTPMIVWJSVETVSHYGXXLIPIWWIVXLIWYTTPMIVTS[IVXLEXXLIMRHYWXV] [MPPJEGI8LMWMWFIGEYWIQSVIƼVQWEVI[MPPMRKXSWIPPXLIWEQITVSHYGXEPPS[MRKXLIFY]IVXLI STXMSRXSGLSSWIJVSQEGSQTIXMXMZIQEVOIX8LYWRSWYTTPMIVGERHMGXEXIXIVQW Rich Ponds Third Tier No. of suppliers in the market In the past, Other Suppliers Single Supplier In a monopoly, XLIVI MW E WMRKPI WSYVGI SJ WYTTP] ERH XLIWYTTPMIVGERHMGXEXIXIVQWEFSYXXLIWYTTP]SJXLI TVSHYGX Market In a duopoly and oligopoly,MXMWXLIGSQTIXMXMZIVIPEXMSR ERH GSSVHMREXMSR FIX[IIR XLI ƼVQW XLEX HIXIVQMRI TVSƼXEFMPMX]-JXLIƼVQWEVI[IPPGSSVHMREXIHERHHSRSX MRHYPKIMRTVMGIGSQTIXMXMSRXLIWYTTPMIVWEWEKVSYT[MPP LEZILMKLFEVKEMRMRKTS[IV Market Handicarft Suppliers When there are many suppliers or excess supply, it KIRIVEPP] XYVRW SYX XS FI E FY]IVWƅ QEVOIX [MXL PS[IV FEVKEMRMRKTS[IVJSVWYTTPMIVW Market 8LYWXLIRYQFIVSJWYTTPMIVWMWERMQTSVXERXJEGXSVXSNYHKIWYTTPMIVTS[IV*SVPEFSYVERHWXEJJ WYTTPMIV TS[IV GER FI NYHKIH F] LS[ [IPP SVKERMWIH XLI PEFSYV KVSYTW EVI 3VKERMWIH PEFSYV YRMSRWMRGVIEWIXLIMVFEVKEMRMRKTS[IVJSVXLIQ 183 (DV\0RGHUDWH'LIŢFXOW6HDVRQDORU1RQ6HDVRQDO 2SXEPPVE[QEXIVMEPWEVIEZEMPEFPIEPPXLIXMQI[MXLIEWI te Hig h 2 3 era od 1 M 4 te Hig h 2 3 era od 1 4 e ver Se Regular Supply/ Availability is easy M e ver Se Irregular Supply/ Availability is difficult Supplier Power Low Degree of Supply Low Third Tier Rich Ponds Availability of Regular Supply Note -X VIUYMVIW ƼVQW XS plan and maintain FYJJIV WXSGOW SJ VE[ QEXIVMEPW XS EZSMH PSWMRKTVSHYGXMSRXMQI -J EZEMPEFMPMX] MW IEW] ƼVQWMRXLIMRHYWXV][MPP EP[E]W LEZI E GLSMGI ERH XLYW JEGI PS[ WYTTPMIVTS[IV %X XMQIW XLIVI GER FI PSRK HV] WTIPPW SJ WYTTP] ;LIR WYTTP] GSQIW FEGO WYTTPMIVW GER ƼRH XLIQWIPZIW[MXLLMKLWYTTPMIVTS[IVERHMRGVIEWITVMGIW %PWSWYTTP]GERFIWIEWSREP-JMXMWWSXLITVSHYGXLEWXSFIWXSVIH(YIXSEWTMOIMRHIQERH WYTTPMIVWGERLEZIWMKRMƼGERXFEVKEMRMRKTS[IVHYVMRKTIVMSHWSJWYTTP] 5DLQFRDW%RRWVDQG8PEUHOODV used in monsoons. 184 )UXLWMXLFHVXVHVHDVRQDOUDZ materials. Third Tier Rich Ponds Uniqueness of Services (Availability of Substitutes for Raw Materials) &ORVHVXEVWLWXWHV'LVWDQWVXEVWLWXWHV1RVXEVWLWXWHV No Substitute UNIQUE! 2SXEJJIGXIHF] XLITVMGIWSJER] WYTTPIQIRXEV]TVSHYGX MRHYWXV] Supplier Bargaining Power High Distant Substitute Not UNIQUE! -RHYWXV]TEVXMGMTERXW [MPPW[MXGLSRP]MJ XLIHMJJIVIRGIMWXSS PEVKI Moderate Supplier Bargaining Power Close Substitute Not UNIQUE! (Industry will have a choice) 7YTTPMIVWGERRSX MRGVIEWITVMGIWEX [MPP Supplier Bargaining Power Low 185 Third Tier Ability to Substitute (Cost/Technology/Time/Effort) Rich Ponds (DV\0RGHUDWH'LIŢFXOW&DQQRWVZLWFK LOW LOW HIGH HIGH Difficult to substitute (IWTMXIEZEMPEFMPMX]XLI suppliers see it as an STTSVXYRMX] Switching is possible 2SWYTTPMIVTS[IV Prices High Supplier Bargaining High Power Switching Cost (Cost/Technology/Time/Effort/ Production Loss) HIGH HIGH 186 LOW LOW 8LIMRHYWXV]HSIWRSX W[MXGLXSWYFWXMXYXIW IEWMP] %PPS[WXLIMRHYWXV]XS RIKSXMEXI[MXLWYTTPMIVW Supplier Bargaining Power Supplier Bargaining Power High Low (High/Moderate/Low) Dependency Supplier Power Industry More Dependent Supplier Bargaining Power Indsutry Less Dependent High Third Tier (Suppliers Needs the Industry Less Than Industry Needs Them) Rich Ponds Dependency of Industry on Them Supplier Bargaining Low Power 7SQIMRHYWXVMIWEVILMKLP]HITIRHIRXSRETEVXMGYPEVWYTTPMIVMRHYWXV]JSVXLIMVWYVZMZEP[LMPI SXLIVWYTTPMIVWEVIPIWWGVMXMGEPJSVXLIWYGGIWWSJXLIKMZIRMRHYWXV] Can the Industry Threaten to Vertically Integrate into its Suppliers Business? (Yes/No) Yes Threat to Suppliers No Low Supplier Bargaining Power High Supplier Bargaining Power -JXLIMRHYWXV]XLVIEXIRWXSZIVXMGEPP]MRXIKVEXIMRXSMXWWYTTPMIVW FYWMRIWWXLIWYTTPMIVW[SYPH EP[E]WFIYRHIVXLVIEXSJRI[IRXV]ERH[SYPHFIEXEGSQTIXMXMZIHMWEHZERXEKI%WEVIWYPX XLI][MPPLEZIPS[FEVKEMRMRKTS[IV 187 Third Tier Rich Ponds Importance of Volume to Suppliers (High/Moderate/Low) 7SQI WYTTPMIVW XLI] SRP] QEOI TVSƼX [LIR XLI] TVSHYGI MR PEVKI ZSPYQIW :SPYQI MW ZIV] MQTSVXERXXSXLIQ % of fixed costs High against total costs. Business that has Low Requires volume in business Profit margins In such industries, supplier cannot afford to lose volume. Low Supplier Bargaining Power Suppliers cannot increase the prices aggressively. Payment Power With Buyer (Trade Credit Given) Credit Period Supplier Power Shorter Credit Duration Supplier Bargaining Power Longer Credit Duration 188 High Supplier Bargaining Low Power 4E]QIRXXIVQWEVISRISJXLIGPIEVMRHMGEXSVWSJWYTTPMIVTS[IVSZIVXLIMRHYWXV]7LSVXIVGVIHMX HYVEXMSRQIERWLMKLWYTTPMIVTS[IV[LIVIEWPSRKERHYRHMWGMTPMRIHGVIHMXHYVEXMSRQIERWPS[ WYTTPMIVTS[IV%LMKLWYTTPMIVTS[IVQEOIWXLIMRHYWXV]PIWWEXXVEGXMZIEWXLIWYTTPMIVWLEZIER MQTEGXSRXLIMRHYWXV]ƅWTVSƼXEFMPMX];IRIIHXSIZEPYEXIXLIMRHYWXV]YWMRKEFSZIUYIWXMSRWERH WIIMJWYTTPMIVWGERWYGOSYXQSXQSWXSJXLITVSƼXMFMPMX]JVSQXLIMRHYWXV] Third Tier &Y]IVTS[IVVIJIVWXSXLITS[IVXLEXFY]IVWLEZI SZIV XLI MRHYWXV] &Y]IVW LEZI LMKL FEVKEMRMRK TS[IV MJ ƼVQW ƼRH MX HMƾGYPX XS MRGVIEWI XLI TVMGIW MR XLI MRHYWXV] 8LI GYWXSQIVW GER TYX TVIWWYVI SR XLI ƼVQ XS OIIT XLI ƼREP TVMGI SJ XLI TVSHYGX PS[ ERH ƼVQW XV] XS FVMRK HS[R XLI GYWXSQIV W FEVKEMRMRK TS[IV -J GYWXSQIVW GSPPIGXMZIP] GER HVMZI HS[R TVMGIW XLIR MX MW E LMKLGYWXSQIVFEVKEMRMRKTS[IVERHZMGIZIVWE Rich Ponds Buyer Power Number of Buyers/Customers (Single/Few/Many/Mass) Concentration of Buyer Only one or few buyers )RUHJ2ULJLQDO(TXLSPHQW Manufacturers Large number of buyers For eg. Consumer Products Buyer Power Note Buyer Bargaining High Power &Y]IVWEVIEFPIXS HMGXEXIXLIXIVQW Buyer Bargaining Low Power 2SWMRKPIFY]IVGER HMGXEXIXIVQWFYX GSPPIGXMZIP]ERHƼVQ GERMRGVIEWITVMGIW 8LIGSRGIRXVEXMSRSJFY]IVWMRERMRHYWXV]MRƽYIRGIWXLIFEVKEMRMRKTS[IVSJFY]IVW-JXLIVIEVI QER]FY]IVWXLIFEVKEMRMRKTS[IVSJFY]IVWMWPS[ 189 Third Tier Rich Ponds Size of Buyers/Orders (Several small orders/A few medium-sized/Single very large order) 8LI WMÎ ERH JVIUYIRG] SJ SVHIVW F] FY]IVW EVI MQTSVXERX JEGXSVW MRƽYIRGMRK XLI FY]IVƅW FEVKEMRMRKTS[IV Earnings from small orders. Earnings from single large orders. Air Conditioner Earnings • -JXLIVIEVIWIZIVEPWQEPPSVHIVWTPEGIHF]XLIFY]IVWthe industry’s dependence on any single order decreases,XLYWHIGVIEWMRKXLIFY]IVƅWFEVKEMRMRKTS[IV • ;LIR FY]IVW TPEGI E JI[ QIHMYQWMÎH SVHIVW SV E WMRKPI ZIV] PEVKI SVHIV each order becomes critical for the industry and the industry players cannot lose orders in negotiations. 8LMWVIHYGIWXLIMRHYWXV]ƅWFEVKEMRMRKTS[IVERHXLIFY]IVWEVIWYGGIWWJYPP]EFPIXSTVIWWYVMÎ XLIMRHYWXV]XSVIHYGITVMGIWXLYWMQTEGXMRKMRHYWXV]TVSƼXEFMPMX] How Informed are the Buyers? 9HU\LQIRUPHG0RGHUDWHO\LQIRUPHG8QLQIRUPHG,JQRUDQW -R XLMW EKI SJ MRJSVQEXMSR ER] MRJSVQEXMSR VIKEVHMRK ER] TYVGLEWI HIGMWMSR XLEX RIIHW XS FI QEHIMWZIV]VIEHMP]MRJSVQIHF]XLIMRHYWXV]1SWXFY]IVWXSHE]HSXLIMVVIWIEVGLFIJSVIXLI] KSSYXXSQEOIETYVGLEWI-RXLITVSGIWWXLI]ƼKYVISYXEPPXLIZEVMSYWSTXMSRWXLEXXLI]LEZIƂ TVMGIWSJXLITVSHYGXWZEPYITVSTSWMXMSRWXLI]EVISJJIVIHIXG 190 Third Tier Rich Ponds Informed Buyer :KHQEX\HUVDUHPRUH informed, they select the option that is the EHVWŢWIRUWKHLUQHHGV at the lowest price, which reduces industry SURŢWDELOLW\ Uninformed Buyer Uninformed Buyer ,QLQGXVWULHV ZKHUHWKH EX\HUVDUHQ RWYHU\ ZHOOLQIRUPH GŢUPVFDQ increase the prices, as WKHEX\HULV QRWDZDUH RISRVVLEOHF KHDSHU FKRLFHVDQG RWKHUSRVV LEOH choices. ,QPDQ\FDVHVWKH SXUFKDVHPD\QRWEHYHU\ FULWLFDODVLWFDQEHDRQH time purchase or a small percentage of the total LQFRPHDQGWKXVWKHEX\HU is ignorant of the choices that they may have. 191 3HUIHFWO\LQHODVWLF,QHODVWLF(ODVWLF3HUIHFWO\HODVWLF Rich Ponds Third Tier Price Sensitivity An inelastic demand allows the industry to increase prices, as increase in prices does not reduce the demand. Amul Milk (ODVWLF GHPDQG JLYHV EX\HUV D KLJKHU EDUJDLQLQJ power, as they can reduce consumption and therefore pressurise the industry to reduce prices. Event Tickets Demand-Supply Scenario ([FHVVGHPDQGEDODQFHH[FHVVVXSSO\ Supply Demand Buyer Bargaining Power Low 8LI WIPPIVW EVI XLI WIPIGXSVW ERH XLI] GERHIXIVQMRITVMGIW Supply < Demand Demand Supply High Buyer Bargaining Power 8LI FY]IVW EVI XLI WIPIGXSVW ERH XLI] KEMRFY]IVTS[IV 192 Supply > Demand (Yes/No) &Y]IVWGERXLVIEXIRXSZIVXMGEPP]MRXIKVEXIMRXSFYWMRIWWFYXXLMWGSQIWEXEGSWX-JXLIFY]IVW GERFEGO[EVHMRXIKVEXIERHVITPEGIXLIWYTTPMIVƼVQXLI]WXERHXSKEMRWMKRMƼGERXFEVKEMRMRK TS[IVSZIVXLIMRHYWXV]8LIFY]IVWGERGSRWXERXP]TVIWWYVMWIXLIWYTTPMIVWXSRSXMRGVIEWIXLI TVMGIWSVXLI]XLIQWIPZIWQE]FEGO[EVHMRXIKVEXI Third Tier Rich Ponds Can the Buyers Threaten to Vertically Integrate into Business? Mercedes Showroom Forward Integration When Mercedes integrates forward by putting up its own showroom. (Customer) Backward Integration When Mercedes integrates backwars by manufacturing its own tyres. Tyre Manufacturers Payment Power With Buyers &Y]IVTS[IVGERFINYHKIHF]XLIXIVQWSJGVIHMXKMZIR%PSRKGVIHMXTIVMSH[SYPHEPPS[FY]IVWXS I\TERHFYXEWLSVXGVIHMXTIVMSH[SYPHPMQMXXLMWKVS[XL8LIFY]IV[LSGERRIKSXMEXIJEZSVEFPI GVIHMXXIVQWLEWLMKLIVFEVKEMRMRKTS[IVSZIVXLIMRHYWXV] Credit Period Long Duration Buyer Bargaining High Power Short Duration Buyer Bargaining Low Power 193 Third Tier Rich Ponds Threat of Substitution $VXEVWLWXWHSURGXFWXVHVD alternate solution to try and solve the same economic need.>@ V/S Books Kindle 8LMWVIJIVWXSXLIEXXIQTXXSGVIEXIWMQMPEVKEMRWSVVIPMIZIXLIWEQITEMRWIZIRXLSYKLHMJJIVIRX XIGLRSPSK]MWYWIH ,QGXVWULHVWKDWKDYHFORVH VXEVWLWXWHVDUHDOZD\VXQGHU WKUHDWRIEHLQJUHSODFHGE\ other products. ,QGXVWULHVWKDWKDYHQRFORVH VXEVWLWXWHVDOORZWKHLUILUPV more power to increase prices DQGORFNLQPRUHIDYRUDEOHWHUPV 8LIQSQIRXXLIZEPYITVSTSWMXMSRSJSXLIVTVSHYGXFIGSQIWWXVSRKIVXLERXLITVSHYGXXLI]EVI GYVVIRXP]YWMRKXLI]QE]WXEVXW[MXGLMRKSZIV 194 ?A LXXTW]SYVJVIIXIQTPEXIWGSQTSVXIVWƼZIJSVGIWXIQTPEXI Rich Ponds CNG Third Tier Availability of Substitutes Petrol Substitute Products ;LIRGPSWIWYFWXMXYXIWEVIEZEMPEFPIXLIXLVIEXSJWYFWXMXYXMSRMWLMKLIWX-JXLIWYFWXMXYXISJJIVW IZIREWPMKLXP]FIXXIVZEPYIJSVXLITVMGITEMHXLIGYWXSQIV[MPPW[MXGLSZIV Ability to Substitute Ability to Substitute High Threat of Substitution High Low Threat of Low Substitution 8LIEFMPMX]SJFY]IVWXSWYFWXMXYXITVSHYGXWHITIRHWSRXLIHMƾGYPX]SJXLIWYFWXMXYXMSR-JXLIEFMP MX]MWLMKLMIGYWXSQIVGERW[MXGLIEWMP]XLIXLVIEXSJWYFWXMXYXMSRMWLMKLERHXLIMRHYWXV]TVSƼXW [SYPHFIVIHYGIH-JLMKLW[MXGLMRKGSWXWEVIMRZSPZIHXIRXLVIEXSJWYFWXMXYXIWQE]KSHS[R Price Performance of Substitute Compared to Industry’s Product %HWWHUSULFH%HWWHUSHUIRUPDQFH8QIDYRXUDEOH 8LITVMGITIVJSVQERGISJXLIWYFWXMXYXIEKEMRWXXLIMRHYWXV] WTVSHYGXHIXIVQMRIWXLIXLVIEXSJ WYFWXMXYXMSR ERH XLI ZEPYI TVSTSWMXMSR WXVIRKXL SJ XLI TVSHYGX 8LI TVSHYGX [MXL XLI WXVSRKIV TVSTSWMXMSRKIXWEGGITXIH8LITSMRXMWXSƼKYVISYXMJXLIWYFWXMXYXIMWGLIETIVXLERXLIMRHYWXV]ƅW TVSHYGX[MXLEQEXGLMRKTIVJSVQERGISVMJMXTIVJSVQWFIXXIVEXXLIWEQITVMGI Price Pizza Hut Domino's Pizza Appeals to the Customer 195 Third Tier Rich Ponds Threat of Entry 4VSƼXEFPI MRHYWXVMIW XLEX ]MIPH LMKL VIXYVRW EVI EXXVEGXMZI XS RI[ IRXVERXW 2I[ IRXVERXW [MPP HIGVIEWIXLITVSƼXEFMPMX]SJSXLIVƼVQWMRXLIMRHYWXV]YRPIWWIRXV]GERFIQEHIHMƾGYPXJSVXLIWI RI[ƼVQWF]GVIEXMRKIRXV]FEVVMIVW?A 8LIPIWWXMQIERHQSRI]MXXEOIWJSVEGSQTIXMXSVXSIRXIVEGSQTER]ƅWQEVOIXERHFIERIJJIGXMZI GSQTIXMXSVXLIQSVIZYPRIVEFPIXLIMRHYWXV][SYPHFIXSXLIXLVIEXSJRI[IRXVERXW,IVIEVIXLI JEGXSVWXLEXEJJIGXIRXV] Time and Cost of Sizeable Entry (Very High/High/Moderate/Low) High Time and Cost Low Time and Cost ,S[IZIV RI[IV FYWMRIWW QSHIPW ERH ZEPYI TVSTSWMXMSRW FEGOIH F] ZIRXYVI GETMXEPMWXW ERH TVMZEXIIUYMX]ƼVQWLEZISJXIRFIIREFPIXSSZIVGSQIERSXLIV[MWII\TIRWMZIIRXV]FEVVMIV 196 [28] https://en.wikipedia.org/wiki/Substitute_product Rich Ponds Third Tier Economies of Scale V/S Early-mover Advantage Late Entrants 8LI LMKLIV XLI IGSRSQMIW SJ WGEPI MR XLI MRHYWXV] XLI LMKLIV [MPP FI XLI VIPEXMZI GSQTIXMXMZI EHZERXEKISJXLIMRGYQFIRXWSVRI[IRXVERXW • %WXLIWIƼVQWEVIMRETSWMXMSRSJEHZERXEKIRI[IVHIQERH[MPPEPWSQSZIXS[EVHWXLIQ • %WZSPYQIEHZERXEKIXSXLIMRGYQFIRXOIITWKIXXMRKFMKKIVERHFMKKIVRI[IRXVERXWƼRH MXZIV]HMƾGYPXXSWYGGIWWJYPP]IRXIVXLIMRHYWXV] Distribution Strength Required 7SQIMRHYWXVMIWEVIHIWMKRIHMRWYGLEQERRIVXLEXXLI]RIIHHMWXVMFYXMSRWXVIRKXLJSVWYGGIWW &YMPHMRKHMWXVMFYXMSRWXVIRKXLVIUYMVIWXMQIIJJSVXERHGSWXERHXLIWIGERFIIRXV]FEVVMIVWSV IZIRGSQTIXMXMZIHEQEKI Distribution Strength Branches Staff ATMs - 22,000 + 245,642 50,000 + Distribution Strength Branches Staff ATMs - 580 + 20,222 732 It will also be more expensive for an entrant to build distribution channels as they will have to offer higher margins to the middlemen. ,S[IZIV MRHYWXVMIW WLSYPH FI [EV] EFSYX RI[ XIGLRSPSKMIW ERH FYWMRIWW QSHIPW XLEX GER VIHYGIXLIRIIHJSVXVEHMXMSREPHMWXVMFYXMSRWXVIRKXL 197 Third Tier Rich Ponds Cost Advantages to Existing Players (Location/Unique Resources) (Yes/No) 0SGEXMSRSVEGGIWWXSYRMUYIVIWSYVGIWGERFIEKVIEXWSYVGISJGSQTIXMXMZIEHZERXEKIXSXLI I\MWXMRKTPE]IVWMRER]MRHYWXV] Location • Location can reduce logistics costs for players if they are strategically located near the UDZPDWHULDOVRUWKHPDUNHWV • 7KHUHPLJKWEHORZDYDLODELOLW\ of space in the surroundings for new entrants to set shop, thus forcing them to a location that is relatively less attractive. Source: https://www.investopedia.com/terms/p/porter.asp 7YGLGSWXEHZERXEKIWJSVI\MWXMRKTPE]IVWGERQEOIEGGIWWXSXLIMRHYWXV]HMƾGYPXXLYWVIHYGMRK XLIXLVIEXSJIRXVERXW Unique Resources %PWSYRMUYIVIWSYVGIW[MXLEƼVQGERRSXFIEGGIWWIHF]ER]SXLIVIRXVERX'SWXFIRIƼXWJVSQ XLIWIVIWSYVGIWGERRSXFIGSTMIHF]IRXVERXWXLYWQEOMRKIRXV]MRXSXLIMRHYWXV]HMƾGYPX 198 Algorithms developed DUHXQLTXH Raw material is the XQLTXHUHVRXUFH (Cost/Technology/Hassle/Habit/Knowledge/Dependency/None) 7[MXGLMRK FIX[IIR XLI TPE]IVW SJ XLI WEQI MRHYWXV] XLEX LEZI WMQMPEV SJJIVMRKW EPWS MRZSPZIW GSWXW8LI]MRGPYHI Third Tier Rich Ponds Switching Costs for Customers Within the Industry Financial Costs High Switching Cost Technological Reorientation High Switching Cost Blackboard EduBoard Psychological Costs High Switching Cost Offline Learning Online Learning 7[MXGLMRKEXXMQIWVIUYMVIWEPSXSJIJJSVX1ER]XMQIWMXQMKLXIZIRFIEZIV]GSQTPI\KSEPXS EGLMIZI8LMWEPPS[WIWXEFPMWLIHTPE]IVWKVIEXIVTVMGMRKTS[IVSZIVXLIMVTVSHYGXWƁF]VIHYGMRK XLIXLVIEXSJRI[IRXVERXW 199 Third Tier Rich Ponds Asset Specificity in Industry (Geographical specificity/dedicated assets/Human specificity) 7SQIMRHYWXVMIWLEZIEWWIXWXLEXEVIWTIGMƼGXSXLIQERHXLIWIGERRSXFITYXXSER]EPXIVREXMZI YWI,MKLI\MXGSWXWERHVMWO]GETMXEPI\TIRHMXYVIYTJVSRXHMWGSYVEKIRI[MRZIWXQIRXW • *SVMRWXERGIWSQIEWWIXWXLEXLEZIFIIRYWIHMRETEVXMGYPEVKISKVETL]GERRSXFIWLMJXIHSV QSZIHXSERSXLIVYWI8LI]GERFIYWIHSRP]JSVXLEXTEVXMGYPEVTYVTSWI ,IWKHEXVLQHVVEHFRPHV XQYLDEOHLQDSDUWLFXODU JHRJUDSK\QRWPXFKFDQEH done to shift the assets or put them to a different use. Warehouse and Metro projects These are dedicated digital DVVHWVZKLFKDUHEXLOWVSHFLŢFDOO\ IRUWKHQHHGVRIWKHEX\HUVRU for particular orders, and they FDQQRWEHSXWWRDQ\RWKHUXVH Interior Design • ,MKL EWWIX WTIGMƼGMX] MR XLI MRHYWXV] VIHYGIW XLI XLVIEX SJ IRXV] MRXS XLI MRHYWXV] 3RGI PEFSVIVWEVIXVEMRIHJSVETEVXMGYPEVMRHYWXV]MXQE]FIZIV]HMƾGYPXJSVXLIQXS[SVOMRER] SXLIVMRHYWXV]7YGLWTIGMƼGMX]MREWWIXWQEOIWMRZIWXQIRXWVMWO]ERHHMWGSYVEKIWIRXV]MRXS ERMRHYWXV] 200 8[SKIRIVMGWXVEXIKMIWGERFITYVWYIHƁ Being the lowest cost producer in the industry Third Tier (High/Medium/Low) Rich Ponds Proprietary Product Difference Being a player with of differentiation • -RMRHYWXVMIW[LIVIƼVQWLEZIWYGGIWWJYPP]HMJJIVIRXMEXIH XLIMVTVSHYGXWIRXV]FIGSQIWHMƾGYPXJSVRI[TPE]IVWEW XLIVIMWRSKIRIVMGTVSHYGXXSGSQTIXI[MXLMRMXMEPP] • -JXLIWSYVGIWSJHMJJIVIRXMEXMSREVITVSTVMIXEV]XLIIRXVERXW GERRSX IZIR QEOI PS[GSWX ZEVMERXW SV IZIR QEXGL XLI TVSHYGXWSJXLII\MWXMRKTPE]IVWPIXEPSRISYXTIVJSVQXLIQ Network Effect of the Product (Yes/No) The key question to ask when identifying network effect is: how does a customer benefit if more consumers use the product? Marketplace Events Business Newsfeed Ads • % RIX[SVO IJJIGX MW MQTSVXERX FIGEYWI MX KMZIW E LYKI ƼVWXQSZIV EHZERXEKI XS XLI MRGYQFIRXW %W E WQEPP RIX[SVO MW IWXEFPMWLIH SR E TPEXJSVQ QSVI ERH QSVI GSRWYQIVW EVI EXXVEGXIH XS MX SZIV XMQI MX KEMRW MR WMÎ ERH XLI RIX[SVO IJJIGX FIGSQIWWXVSRKIVERHWXVSRKIV • 8LIGLEPPIRKIVWƼRHMXZIV]HMƾGYPXXSIRXIV ƁEWXLIRIX[SVOXIRHWXSFIZIV]WXMGO]ERH HSIWRSXQSZIYRPIWWXLIHMJJIVIRGIMRXLI SJJIVMRKMWLYKI 201 Third Tier Rich Ponds Protection Against New Entrants (Patents/Licences/Technology intellectual property/Trademarks/ Proprietary intangible assets) • )WXEFPMWLIH ƼVQW EVI TVSXIGXIH EKEMRWX RI[ IRXVERXW HYI XS XLI PIKEP TVSXIGXMSR XLI] LEZI IEVRIHSRXLIEWWIXWXLI]LEZIGVIEXIHSZIVXMQI trademark Companies in the Industry Special Protection on Recipe/Product ,IWKLVSURWHFWLRQLVRQDVVHWV that are critical for success in the industry, new entrants would QRWEHDEOHWRDFFHVVWKHP7KLV reduces the threat of new entrants. • -XEPPS[WIWXEFPMWLIHƼVQWXLIƽI\MFMPMX]XSTVMGIXLIMVTVSHYGXWERHMRGVIEWITVSƼXEFMPMX] Brand Identity (High/Moderate/Low) 3RI SJ XLI MQTSVXERX MRXERKMFPIW XLEX TVSXIGX MRHYWXVMIW EKEMRWX RI[ ƼVQW MW XLI TS[IV SJ XLI IWXEFPMWLIHFVERHWSJMRGYQFIRXW %UDQGV LVRQHRIWKHNH\IDFWRUVLQDFRPSDQ\ V VXFFHVVRUIDLOXUHDQGLWFDQEHGLIŢFXOWIRUQHZ HQWUDQWVWREUHDNLQWRDQLQGXVWU\LIWKH\GRQRW DOUHDG\KDYHVWURQJHQRXJK EUDQG UHFRJQLWLRQ 202 Third Tier Brand Power Low Brand Power Rich Ponds High Low Threat of New Entrants High Pricing Power • 8LIVIJSVIXLIW[MXGLJVSQSPHƼVQWXSRI[IRXVERXWFIGSQIWZIV]HMƾGYPX • -XGERFIWEMHXLEXXLILMKLIVXLIMQTSVXERGISJFVERHW[LMPIQEOMRKXLITYVGLEWIHIGMWMSR ERHXLIQSVITS[IVJYPXLIFVERHWSJIWXEFPMWLIHƼVQWEVIXLIPS[IV[SYPHFIXLIXLVIEXSJ RI[IRXVERXW • 4VMGMRKTS[IV[MXLIWXEFPMWLIHƼVQW[SYPHRSXEPPS[RI[IRXVERXWXSVIHYGITVSƼXEFMPMX] If brands are not very critical when making the purchase decision, (YHQWKHH[LVWHQFHRIVWURQJEUDQGV cannot stop the low-end entrants to the industry. 203 Third Tier Rich Ponds Reputation of Existing Businesses (Important for success/Not important for success) 7SQIFYWMRIWWIWEVIFYWMRIWWIWSJVITYXEXMSRSVKSSH[MPPEWVITYXEXMSRMWVIUYMVIHJSVWYGGIWW MRXLIMRHYWXV] • )RULQVWDQFHLQPRVWŢQDQFLDO LQVWLWXWLRQVEXVLQHVVLVDFKLHYHGRQO\ LIWKHŢUPKDVDJRRGUHSXWDWLRQ • ,QVXFKEXVLQHVVHVHQWUDQWV FDQQRWEXLOGDUHSXWDWLRQRYHUQLJKW DQGWKLVDFWVDVDELJFRPSHWLWLYH GLVDGYDQWDJHIRUWKHPPDNLQJHQWU\ LWVHOIGLIŢFXOW Expected Reaction by Established Firms to New Entrants (Panic/Moderate strategic response/No reaction) )ZIV]IRXVERXXSXLIMRHYWXV]MWQIX[MXLVIXEPMEXMSRF]XLII\MWXMRKGSQTERMIWSJHMJJIVIRXHIKVIIW FEWIHSRXLISYXGSQII\TIGXIHSJXLIRI[IRXV] Panic 7SQIPEVKIIRXVERXWEVIJIEVIHF]XLIIWXEFPMWLIHTPE]IVW ERHXLIIRXV]SJWYGLIRXVERXWGVIEXIWTERMGMRXLIMRHYWXV] • 8LI IWXEFPMWLIH TPE]IVW VIXEPMEXI [MXL EKKVIWWMZI QIEWYVIWWYGLEWTVMGI[EVWEHZIVXMWIQIRX[EVWERH TVSHYGX PEYRGLIW ERH XLI] QSWXP] IRH YT LYVXMRK XLI MRHYWXV]TVSƼXEFMPMX] 204 • 7YGLEVIWTSRWIEMQWXSHIEP[MXLIRXVERXWWXVEXIKMGEPP] QEOMRKMXHMƾGYPXJSVXLIQXSKEMRWMÎF]TYXXMRKXLIQ EXETSWMXMSRSJGSQTIXMXMZIHMWEHZERXEKI • 7YGL MRHYWXVMIW QSVI SJXIR XLER RSX HS RSX LYVX XLI MRHYWXV] WTVSƼXEFMPMX] • ,S[IZIVXLIVMWOVIQEMRWXLEXMJXLIWXVEXIKMGVIWTSRWI KSIW[VSRKƼVQWQE]PSWIQEVOIXXSXLIIRXVERX Third Tier 3XLIVƼVQWVIGIMZIEQSHIVEXIVIWTSRWIXLEXMWWXVEXIKMG ERHXEOIWXMQI Rich Ponds Moderate Strategic Response No reaction 1ER] IRXVERXW QE] VIGIMZI RS VIEGXMSR EX EPP JVSQ IWXEFPMWLIHƼVQW • )WXEFPMWLIH ƼVQW HS RSX WII XLI IRXVERXW EW XLVIEXW ERHHIGMHIXSRSXVIEGXXSXLIQ • 7YGLEWXVEXIK]HSIWRSXLYVXTVSƼXEFMPMX]MRXLIWLSVX VYRFYXMXLEWXLIVMWOSJXLIIRXVERXXEOMRKE[E]XLI QEVOIXJVSQXLIIWXEFPMWLIHTPE]IVW 8LIWIXSKIXLIVHIXIVQMRIXLIXLVIEXSJIRXV]XSI\MWXMRKƼVQW8LILMKLIVXLIXLVIEXXLIPS[IV [SYPHFIXLITVSƼXEFMPMX]SJXLIMRHYWXV] 205 Third Tier Rich Ponds Competitive Rivalry *SV QSWX MRHYWXVMIW XLI MRXIRWMX] SJ GSQTIXMXMZI VMZEPV] MW SRI SJ XLI QENSV HIXIVQMRERXW SJ MRHYWXV]TVSƼXEFMPMX]-RWSQIMRHYWXVMIW Competitive Rivalry Cut-throat Competiton • 8LI LMKLIV XLI EFMPMX] ERH [MPPMRKRIWWXLIQSVI[MPPXLI GSQTERMIW YRHIVGYX IEGL SXLIV XLYW VIHYGMRK XLI SZIVEPPMRHYWXV]TVSƼXEFMPMX] 206 [29] Moderate Rivalry • )EGL SJ XLIQ ƼRHW E TPEGI MRXLIQEVOIXJSVXLIQWIPZIW ERH HSIW RSX I]I IEGL SXLIVƅW QEVOIX WLEVI XSS EKKVIWWMZIP] • 7YTTPMIVWERHFY]IVWPSSOXS MRXIVEGX [MXL MRHYWXVMIW [MXL E LMKL GSQTIXMXMZI MRXIRWMX] EW XLI] GER KIX E FIXXIV HIEP SV PS[IV TVMGIW HYI XS GSQTIXMXMSR • ;LIR GSQTIXMXMZI VMZEPV] MW PS[EGSQTER]LEWKVIEXIV TS[IV XS GLEVKI LMKLIV TVMGIW ERH WIX XLI XIVQW SJ HIEPW?A Cosmetics Home Appliances https://www.investopedia.com/terms/p/porter.asp $IHZ0DQ\ 8LIGSQTIXMXMZIMRXIRWMX]SJERMRHYWXV]HITIRHWYTSRXLIEFMPMX]SJGSQTIXMXSVWXSGSQQYRMGEXI [MXLIEGLSXLIVERH[SVOLEVQSRMSYWP] Third Tier Number of Major Competitors in the Industry Rich Ponds ,IVIEVIXLIJEGXSVWXLEXMRƽYIRGIGSQTIXMXMZIVMZEPV] • 8LILMKLIVXLIRYQFIVSJGSQTIXMXSVWXLIQSVIHMƾGYPXJSVXLIGSQTIXMXSVWXS[SVOMRLEVQSR] • %PEVKIRYQFIVSJƼVQWQIERWEPEVKIRYQFIVSJHMJJIVIRXWXVEXIKMIWFIMRKYWIHIEGLLEZMRK XLITSXIRXMEPXSLYVXMRHYWXV]TVSƼXEFMPMX] High No. of Competitors High Competitive Intensity General Industry Profitibility Low How Concentrated is the Industry? (Concentrated/Moderately diluted/Very dilute) %RSXLIVJEGXSVMRPMRI[MXLXLIRYQFIVSJGSQTIXMXSVWMRXLIMRHYWXV][LMGLMRƽYIRGIWXLIVMZEPV] MWXLIGSRGIRXVEXMSRSJXLIMRHYWXV]8LI[E]QEVOIXWLEVIMWHMWXVMFYXIHEQSRKXLIGSQTIXMXSVW LEWEQENSVMQTEGXSRXLIMVEFMPMX]XSHMGXEXIXIVQWERHMQTEGXGSQTIXMXMZIVMZEPV] Others 10% 20% 70% ,IDVLQJOHŢUPRUDIHZODUJHILUPVKDYH DPDMRULW\PDUNHWVKDUHDQGWKH\GRQRW indulge in intense rivalry, the remaining firms DUHPHUHO\IROORZHUVDQGWKH\ZLOOQRWEH DEOHWRLQWHQVLI\WKHFRPSHWLWLRQDORW 207 Third Tier Rich Ponds Others The more concentrated the industry, the lower would EHWKHSUREDELOLW\RIŢUPV that get involved in intense competition. This will allow the LQGXVWU\WRUHWDLQSURŢWDELOLW\ and increase attractiveness. Others ,QGXVWULHVWKDWDUHPRGHUDWHO\ GLOXWHGLQWHUPVRIGLVWULEXWLRQRI PDUNHWVKDUHŢQGLWYHU\GLIŢFXOWWR communicate effectively. Due to the DEVHQFHRIDFOHDUPDUNHWOHDGHU DOOŢUPVFDQLPSDFWWKHLQWHQVLW\RI FRPSHWLWLRQE\LQLWLDWLQJSULFHFXWV Differences in Product Quality +RPRJHQRXV0LQRUGLIIHUHQFHV0DMRUGLIIHUHQFHV %RMQTSVXERXJEGXSVXLEXMQTEGXWXLIGLEPPIRKIVƅWEFMPMX]XSYRHIVGYXTVMGIWERHWIPPXLIMVTVSHYGXW MWXLIHMJJIVIRGIFIX[IIRXLIUYEPMX]SJTVSHYGXWSJXLIZEVMSYWGSQTIXMXSVW If the products are homogenous or have minor differences, the purchase decision depends on the price alone. 208 7KHŢUPVFDQVXFFHVVIXOO\XQGHUFXWHDFKRWKHU WRJDLQPDUNHWVKDUH Rich Ponds +HUHWKHILUPVFDQQRWXQGHUFXWHDFKRWKHUWRJDLQPDUNHWVKDUH V/S Superior Quality will still attract business Third Tier -JXLIHMJJIVIRGIWEVIQENSVSVIPWITIVGITXMSRSJUYEPMX]MWLMKLXLITYVGLEWIHIGMWMSRWEVIRSX solely based on prices. Major differences in quality but not understood by the buyers Then the competitors will gain the power to undercut each other. Cost of Switching (Brand/Cost/Technology/Hassle/Habit/Knowledge/ Dependency/ None) Electric 2-wheeler v/s Petrol 2-wheeler 7[MXGLMRKGSWXWEXXMQIWVIHYGIXLIFY]IVƅWEFMPMX]XSW[MXGLEXSXLIVXMQIWXLI]HIQSXMZEXIXLI FY]IVJVSQW[MXGLMRKXSERSXLIVTVSHYGX3RP]MJXLIFIRIƼXMWWYFWXERXMEP[MPPXLIGYWXSQIVFI [MPPMRK XS W[MXGL 8LMW GERRSX FI EGLMIZIH F] QIVIP] YRHIVGYXXMRK XLI GSQTIXMXMSR 8LYW XLI LMKLIVXLIW[MXGLMRKGSWXWXLIPS[IV[SYPHFIXLIGSQTIXMXMZIMRXIRWMX][MXLMRXLIMRHYWXV] 209 Third Tier Rich Ponds Is the Industry Growing? )DVWJURZWK0RGHUDWHJURZWK=HURJURZWK1HJDWLYHJURZWK 2SWMRKPIƼVQLEWGSRXVSPSZIVXLITEGISJMRHYWXV]KVS[XL*MVQWGERVIP]SRP]SREKKVIWWMSRJSV QEVOIXWLEVIKEMRSVGLSSWIXSIRXIVRI[MRHYWXVMIW8LITEGISJERMRHYWXV] WKVS[XLMWGVMXMGEP MRHIXIVQMRMRKXLIMRXIRWMX]SJGSQTIXMXMSRXLEXƼVQW[MPPJEGIEWXLI]WIIOXSWYVZMZI If the industry is growing fast, all competitors can grow by gaining more from the new business. The faster the industry grows, WKHORZHUZRXOGEHWKHLQWHQVLW\ of competition. If the industry is growing slowly, the major source of gain is market share growth. ,QVORZJURZWKLQGXVWULHVWKH competitors tend to compete very intensely with each other, as each RIWKHPZLVKHVWREHQHŢWIURP WKHRWKHUŢUPŒVPDUNHWVKDUH 210 (High/Medium/Low) -RHYWXVMIWGERLEZITIVQERIRXEW[IPPEWWIEWSREPI\GIWWMRWXEPPIHGETEGMX]ERHYRHIVYXMPMÊXMSR • 7IEWSREP JEGXSVW HS RSX EJJIGX XLI GSQTIXMXMZI MRXIRWMX] EW QYGL EW TIVQERIRX SZIVGETEGMX] • 7XVYGXYVEP ERH PSRKXIVQ MRHYWXV] SZIVGETEGMX] MRGIRXMZMÎW GSQTIXMXSVW XS FI QSVI EKKVIWWMZI Third Tier (Permanent/ Seasonal) Rich Ponds Overcapacity in the Industry 8LI]XV]XSKEMRQEVOIXWLEVIXSMQTVSZITVSHYGXMSRMRZSPYQIXIVQW High Low Intense Competition More Overcapacity Intense Overcapacity Less Competition Fixed Costs in the Industry (High/Medium/Low) Variable Costs Fixed Costs Volume Production High Per Unit Fixed Cost Low If more volumes are produced, the fixed cost price unit will go down. So, to increase volume where fixed costs are high, the competitive intensity is also high. As a result, the competitors undercut each other to gain volume. 211 Third Tier Rich Ponds Exit Barriers in the Industry (High/Medium/Low) %WTIVXLIPE[WSJIGSRSQMGWƼVQWXIRHXSSTIVEXIXMPPXLIXMQIXLI]GERGSZIVXLIMVƼ\IHGSWXW &IPS[ XLMW XLI] VIEGL XLIMV WLYXHS[R TSMRX ERH XLI] WLSYPHR X GSRXMRYI STIVEXMRK ,S[IZIV WSQIMRHYWXVMIWLEZII\MXFEVVMIVWEWWSGMEXIH[MXLXLIQERHƼVQWGSRXMRYIXSSTIVEXIPSRKEJXIV XLI]WLSYPHRSX I Inability to collect account receivables in time II Inability to sell physical assets Firms continue to manufacture and sell, despite reaching their shutdown level, and excess capacity tends to stay with the industry. This excess capacity does not allow the supply-demand situation to turn more favorable, and firms are forced to compete in an oversupplied market. 212 8LMW GEYWIW XLIQ XS MRHYPKI MR YRHIVGYXXMRK IEGL SXLIV 8LYW LMKL I\MX FEVVMIVW MR MRHYWXV] VIHYGIWSZIVEPPTVSƼXEFMPMX]F]MRXIRWMJ]MRKGSQTIXMXMZIVMZEPV] 2SXEPPGSQTIXMXMSRVIHYGIWTVSƼXEFMPMX]7SQIJSVQWSJGSQTIXMXMSRGERFIRIƼXXLIMRHYWXV]EW [IPP'SQTIXMXSVW[MXLMRERMRHYWXV]GSQTIXISRZEVMSYWKVSYRHWƂ Third Tier (Price advertising/Advertising/New products/Customer service) Rich Ponds Basis of Competition in the Industry Price 'SQTIXMXMSR FEWIH SR XLI TVMGI PIEHW XS ƼVQW YRHIVGYXXMRK IEGL SXLIV ERH XLMW MQTEGXWXLITVSƼXEFMPMX]SJXLIMRHYWXV] Effectiveness of Advertising 'SQTIXMXMSR GSRGIVRMRK EHZIVXMWMRK EHHW XSXLIƼVQƅWGSWXWFYXMXQE]EPWSMRGVIEWI E[EVIRIWW EFSYX XLI MRHYWXV] ERH EPPS[ ƼVQWXSTVMGIXLIMVTVSHYGXWFIXXIV 6XFKFRPSHWLWLRQFDQEHEHQHŢFLDO for the overall industry as well. New Products Launch 'SQTIXMXMSRXLVSYKLXLIPEYRGLSJTVSHYGXW LEW GSWXW EWWSGMEXIH [MXL MX FYX MX LIPTW I\TERHXLIWGSTISJXLIMRHYWXV]ERHEPPS[W ƼVQW XS KVS[ JEWXIV HYI XS RI[ MRRSZEXMZI TVSHYGXW[MXLQSVIJIEXYVIWERHYWIW 213 Third Tier Rich Ponds Customer Service Provided )RLERGIHGYWXSQIVWIVZMGIEPWSEHHWXSXLI GSWXFYXMXMRGVIEWIWGYWXSQIVWEXMWJEGXMSR XLYW MRGVIEWMRK XLI GYWXSQIVƅW [MPPMRKRIWW XSTE] 8LIFEWMWSJGSQTIXMXMSRHIXIVQMRIW[LIXLIVXLIMRXIRWMX]SJGSQTIXMXMSR[MPPFIRIƼXSVLYVXXLI MRHYWXV]%JEZSVEFPIFEWMWSJGSQTIXMXMSRGERFIEFSSQJSVXLIMRHYWXV] 8LI MRXIRWMX] SJ GSQTIXMXMSR [MXLMR ER MRHYWXV] HIXIVQMRIW XLI MQTEGX XLEX GSQTIXMXMSR [MPP LEZISRXLISZIVEPPMRHYWXV]TVSƼXEFMPMX]%ZIVEKIƼVQWMREKSSHMRHYWXV]QMKLXFIEXTEV[MXL KSSHƼVQWMREREZIVEKIMRHYWXV]-RHYWXV]TVSƼXEFMPMX]OIITWGLERKMRKEWƼVQWHITPS]HMJJIVIRX WXVEXIKMIWERHMRHYWXVMIWIZSPZI8LIVSPISJXLIIRXVITVIRIYVMWXSƼRHSYXMRHYWXVMIW[LIVIXLI EZIVEKITVSƼXEFMPMX]MWLMKL8LIMHIEMWXSIZEPYEXIER]MRHYWXV]YWMRKXLIWIJSVGIWERHWII[LS KIXWXSOIITQSWXSJXLITVSƼXW Porter's Five Forces for Logistics Industry Supplier Power Cost of Substitution No Substitutes Number of Suppliers Many Availability of Regular Supply Easy Availability of Substitutes 214 No Substitutes Dependency of the industry on Suppliers Moderate Do Suppliers threaten vertical integration? No Importance of volume to Suppliers Low Payment Power with Suppliers Cash Payment Many Size of Buyers A few medium sized How informed are the Buyers? Very Informed Price Sensitivity Demand-Supply Scenario Do Buyers threaten vertical integration? Payment Power with Buyers Rich Ponds Number of Buyers Third Tier Buyer Power Inelastic Excess demand in organised segment Yes Credit (15-30 days) Threat of Substitution Availability of Substitutes No Ability to Substitute No Cost of Substituting No Price Performance of Substitute against Industry's Product None 215 Third Tier Rich Ponds Threat of Entrants Time and Cost of Sizeable Entry Economies of Scale High Distribution Strength Required High Cost Advantages to Existing PLayers No Switching Costs for Customers Hassle, Technology, Dependence Asset Specificity in the Industry High Geographic Specificality Proprietory Product Difference Low Network Effect of the Product Yes IP Protection Against New Entrants No Protection Reputation of Existing Companies Reputation important to get orders Expected response to entry by existing companies 216 Moderate Moderate Strategic Reponse Number of Major Competitors A few larger one and many small ones How concentrated or diluted is the Industry? Moderately dilute DIfference in Product Quality Minor Cost of Switching Players Dependency and hassle Growth in the Industry Fast Growth Overcapacity in the Industry Seasonal Fixed Costs in the Industry High Exit barriers in the Industry Moderate Exit Barrier Basis of competition in the Industry Price and Service Competition • 7QEPPIVTPE]IVWLEZIRSTS[IVFYXPEVKIVSRIWPMOI%QE^SRERH*PMTOEVXLEZIWMKRMƼGERXTS[IV LIRGIXLI]TSWWIWWQSHIVEXIFY]IVTS[IV • 7XEJJƽIIXS[RIVWERH[EVILSYWIS[RIVWEVIXLIWYTTPMIVW8MPPXLIXMQIXLI]EVIRSXSVKERMWIH XLI]LEZIPS[FEVKEMRMRKTS[IV,IRGIXLI]LEZIPS[IVWYTTPMIVTS[IV • 2SXLVIEXSJ7YFWXMXYXMSR • *MVQWGERWXEVXERHKEMRWGEPIMRTSGOIXWSJXLIQEVOIXFYXKEMRMRK4ER-RHMEWGEPIMWHMƾGYPX 1SHIVEXIVMWOEWXLVIEXSJIRXV]XLVSYKLEGUYMWMXMSRI\MWXW • 1SHIVEXIGSQTIXMXMSREWLSQSKIRISYWTVSHYGXMREJEWXKVS[MRKMRHYWXV]GSQTIXMRKSRTVMGI ERHWIVZMGI • 0SKMWXMGWWLSYPHIRNS]EZIVEKITVSƼXEFMPMX]HYIXSXLIEFSZIWEMHMQTEGXSJXLIƼZIJSVGIW 8LMW[E]EREREP]WXSVERIRXVITVIRIYVRIIHWXSYRHIVWXERHXLIMVMRHYWXV]YWMRKXLIWIƼZIJSVGIW ERHWIILS[EXXVEGXMZIXLISZIVEPPMRHYWXV]MW Rich Ponds Third Tier Competitive Rivalry within Industry 217 218 Rich Ponds Gains, Pains & Rsiks Notes Rich Ponds Gains, Pains & Risks Notes 219 220 Rich Ponds Fourth Tier Fourth Tier Rich Ponds Fourth Tier Industry Profitability, Growth and Investment Needs 221 Tier 1,2 and 3 Fourth Tier Rich Ponds Focus ,QGXVWU\2SHUDWLRQV Value Chain Value Map 0DUNHW6L]H ,QGXVWU\6WDELOLW\ Pricing Power Government Regulations Understanding the Porter's Five Forces 7YTTPMIV 4S[IV Tier 4 ed dat Vali ough thr 8LVIEXSJ 7YFWXMXYXMSR 8LVIEXSJ )RXV] 'SQTIXMXMZI -HIRXMX][MXLMRXLI -RHYWXV] Qualitative understanding of how the industry's placed. Quantitative understanding of the attractiveness of the industry. • • 222 &Y]IV 4S[IV ,WFRPSDUHVUHWXUQPHWULFVFDVKţRZDQGLQYHVWPHQW UHTXLUHPHQWVRISOD\HUVLQWKHLQGXVWU\ 7KHTXDOLWDWLYHIDFWRUVRIWKHLQGXVWU\FDQEHYDOLGDWHG WKURXJKWKHTXDQWLWDWLYHSHUIRUPDQFHRIŢUPVLQWKH industry. Fourth Tier Rich Ponds -RXLMWXMIVGIVXEMRƼVQWLEZIXSFIWIPIGXIHJVSQXLIMRHYWXV] Chosen Companies • 8LI] WLSYPH FI GLSWIR FEWIH SR QEVOIX WLEVI SV XLVSYKL VERHSQRIWWMIYWMRKRSƼPXIVEX EPP • 8LI PIWW GSRGIRXVEXIH XLI MRHYWXV]MWXLILMKLIVXLIRYQFIV SJƼVQWXLEXWLSYPHFIGLSWIR As a rule of thumb, four-five players give a good enough understanding of the whole industry. Chosen Companies • -J XLIVI MW E TSWWMFMPMX] XLEX ƼVQ WTIGMƼG JEGXSVW SJ XLI TPE]IVW ƼVQW GER EJJIGX SYV EREP]WMW MX GER FI VIHYGIH JYVXLIV F] MRGVIEWMRKXLIRYQFIVSJƼVQWMR XLIWEQTPI 223 Fourth Tier Rich Ponds 8LI GSQQSR QIXVMGW PMOI VIXYVR SR IUYMX] ERH VIXYVR SR GETMXEP ERH FVIEOMRK XLIQ HS[R JSV (Y4SRXEREP]WMWEVIIZEPYEXIHXSYRHIVWXERHXLIUYERXMXEXMZITIVJSVQERGISJXLIMRHYWXV] • *YVXLIVMRZIWXQIRXRIIHWERHGEWLƽS[KIRIVEXMRKEFMPMX]SJXLIMRHYWXV]EVIIZEPYEXIH 8LIGSQQSRQIXVMGWXSIZEPYEXIXLIUYERXMXEXMZITIVJSVQERGISJXLIMRHYWXV]EVI ROE - Return on Equity 6IXYVRSRIUYMX] 63) VIJIVWXSTVSƼXIEVRIHEJXIVXE\IWSRIEGLVYTIIMRZIWXIHEWIUYMX]MRXLI FYWMRIWW )UYMX] VIJIVW XS XLI EQSYRX MRZIWXIH F] XLI S[RIVW MR XLI FYWMRIWW ERH XLI WYQ SJ IEVRMRKWVIXEMRIH[MXLMRXLIFYWMRIWWSZIVXLI]IEVW;IGERWIIXLEXWLEVILSPHIVWGETMXEPMRXLI FEPERGIWLIIX Invested Shareholders Company Profit Earned on each rupee invested Company Profit Earned and Retained in the business 8LILMKLIVXLIVIXYVRSRIUYMX]XLIPS[IV[SYPHFIXLIIUYMX]MRZIWXQIRXVIUYMVIHXSTVSHYGIE GIVXEMRTVSƼX Return on Equity 224 R O E +LJK52(EXVLQHVVHV are valued very highly. Poorly performing Business PAT Margin or Net Profit Margin x PAT/ Revenue High margins mean the industry must EHDWWUDFWLYH TXDOLWDWLYHO\RUHOVH the margin would not sustain. Asset Turnover x Fourth Tier ROE = PAT/ Shareholder's Equity Rich Ponds 63) GER FI FVSOIR HS[R MRXS XLVII GSQTSRIRXW XS YRHIVWXERH XLI WSYVGI SJ VIXYVR JSV XLI FYWMRIWW Leverage Revenue/Assets %WWIXW)UYMX] A high turnover EXVLQHVVLVJHQHUDWHG when the assets are HIŢFLHQWO\XWLOL]HGDQG WKHEXVLQHVVGRHV QRWUHTXLUHH[FHVVLYH capital investment. A higher ROE can also EHJHQHUDWHGWKURXJK greater leverage in WKHLQGXVWU\E\XVLQJ PRUHRIGHEWWKDQ HTXLW\WRIXQGWKH company. • Though this increases the ROE, higher leverage can be risky for the company. • 8LMW MW FIGEYWI EW MX QEKRMƼIW TVSƼXW MX EPWS QEKRMƼIWPSWWIWERHXLIMVMQTEGX 2IX1EVKMRGERFIJYVXLIVHIGSQTSWIHXSWITEVEXIXLIIJJIGXWSJXE\ERHMRXIVIWXThis is called 5 Step DuPont Analysis. Tax Burden PAT/EBT x Interest Burden EBT/EBIT x EBIT Margin EBIT/Revenue 8LIXVIRHMR63)SZIVXMQIJSVZEVMSYWGSQTERMIWMRXLIMRHYWXV]ERHXLIWSYVGISJ63)HIXIVQMRI XLIUYERXMXEXMZIEXXVEGXMZIRIWWSJXLIMRHYWXV] 225 Fourth Tier Rich Ponds ROCE - Return on Capital Employed %RSXLIVQIXVMGXLEXMWYWIHXSHIXIVQMRIUYERXMXEXMZITIVJSVQERGIMW6IXYVRSRGETMXEPIQTPS]IH 63') -X VIJIVW XS XLI VIXYVR IEVRIH SR EPP GETMXEP MRZIWXIH MR XLI FYWMRIWW MI IUYMX] ERH HIFX 63') IZEPYEXIWXLISZIVEPPSTIVEXMRKVIXYVRWJVSQXLIFYWMRIWWERHRSXNYWXJSVXLIS[RIV Shareholders + Capital Employed Company Debt Providers Profit Earned on Capital Employed Company 226 Dividends paid, and profit retained in the business EBIT/Revenue Rich Ponds ROCE = EBIT/ Capital Employed Fourth Tier (%,7 (DUQLQJVEHIRUH,QWHUHVWDQG7D[ x Revenue/ Capital Employed EBIT Margin Capital Turnover ROCE mainly comes from two sources – margins and turnover. 63') MW RSX EJJIGXIH F] XLI ƼRERGMRKHIGMWMSRWSJXLIMRHYWXV] 7KLVLVWKHSULPDU\UHDVRQZK\52&(XVHVHDUQLQJVEHIRUH LQWHUHVWDQGWD[ (%,7 DQGQRWQHWSURŢWDIWHUWD[EHFDXVH ZHZDQWWRFDOFXODWHUHWXUQVWRGHEWKROGHUVDVZHOO ROCE is compared with the cost of capital. The cost of which the FRPSDQ\JHWVGHEWDV ZHOODVHTXLW\ ROCE Cost of Capital A business that earns less than its cost of capital would destroy the value of its owners. ROCE Cost of Capital A business that earns more than the cost of capital would create value for all shareholders. 227 Fourth Tier Rich Ponds 8LI GSWX SJ GETMXEP GSQTVMWIW QENSV TEVXW GSWX SJ IUYMX] ERH GSWX SJ HIFX 8LMW QIXLSH MW XIGLRMGEPP]XIVQIHEW;IMKLXIHEZIVEKIGSWXSJGETMXEPFYXPIXƅWRSXKIXXSSXIGLRMGEPERHJSGYW SRXLIFEWMGW %RSXLIVMQTSVXERXQIXVMGXLEXWLS[WXLIUYERXMXEXMZITIVJSVQERGISJXLIMRHYWXV]MWXLIKVS[XL VEXI[MXLMRXLIMRHYWXV]6IZIRYIKVS[XLVEXIERHTVSƼXKVS[XLVEXISZIVXMQIWLS[XLIKVS[XL SJZEVMSYWƼVQWMRXLIMRHYWXV]8LI]GERMRHMGEXIXLISZIVEPPFILEZMSVSJXLIMRHYWXV]SZIVXMQI Growth Rate = (Ending Value - Beginning Value) Beginning Value x 100 Growth Rate Sustainable Growth Rate 7KHJURZWKUDWHPXVWEH FRPSDUHGWRWKHVXVWDLQDEOH growth rate within the industry. A sustainable growth rate (SGR) is the rate of growth a company can sustain without any external capital, TVSZMHIH MXW 63) HSIW RSX GLERKI -X MW GEPGYPEXIH EW JSPPS[W Retention Ratio SGR = ROE (1 - Dividend Payout Ratio) Dividend Payout Ratio= Total Dividend/Net Income if ROE = 15% Dividend Payout = 33% SGR = 15%(1-0.33)= 10% 228 % GSQTER] GER KVS[ FI]SRH MXW WYWXEMREFPI KVS[XL VEXI GSRXMRYSYWP] IMXLIV XLVSYKL XLI MRZIWXQIRXSJRI[GETMXEPSVF]MQTVSZMRKMXW63)KSMRKJSV[EVH,S[IZIV7+6EREP]WMWSJXLI MRHYWXV]MWEJJIGXIHF]XLIHMZMHIRHTE]SYXWXVEXIKMIWSJZEVMSYWƼVQW&YXMXGERKMZIERSZIVEPP YRHIVWXERHMRKSJKVS[XLMRXLIMRHYWXV]ERHXLIRIIHJSVI\XIVREPGETMXEPJSVWYGLKVS[XL 2016 2017 2018 2019 Equity 6525 7604 8410 9520 PAT 1745 1939 2039 2159 Return on Equity 26.74% 25.50% 24.24% 22.68% Revenue 14271 15062 16825 19342 Operating Assets 4956 5412 5755 8356 Margin 12.22% 12.87% 12.11% 11.11% Assets Turnover 2.88 2.78 2.92 2.31 Leverage 0.76 0.72 0.68 0.87 EBIT 2725 2994 3204 3530 Return on Assets 54.98% 55.32% 55.67% 42.24% Dividend Payout Ratio 41% 51% 41% 47% Sustainable Growth Rate 15.76% 12.38% 14.31% 12.02% Revenue Growth 4.9% 5.55% 11.71% 14.95% PAT Growth 25.09% 11.11% 5.16% 5.88% Rich Ponds (All amounts are in Rs. crores) Fourth Tier ROE and ROCE Analysis for Indian Paint Industry Free Cash Flow Analysis of • 7S [I WII XLEX %WMER 4EMRXW MR XLI 4EMRX -RHYWXV] LEW E QEVKMR" %WWIX 8YVRIV" ERH 0IZIVEKI 8LIGSQTER]WLS[WHIGIRXKVS[XL • 7YGLEREP]WMWGERFIHSRIJSVQSVIGSQTERMIWMRXLIWEQIMRHYWXV]XSHVE[KIRIVEPMWEXMSR EFSYXXLIIRXMVIMRHYWXV]-JEPPGSQTERMIWWLS[KVS[XL[IGERWE]XLEXMRHYWXV]EWE[LSPI MWKVS[MRK 229 • Some businesses are cash-seeking businesses. Rich Ponds Fourth Tier Free Cash Flow Analysis Cement Industry Solar Power Industry • Some businesses are cash-producing E-Commerce Education • This means they are always in need of additional cash. • ,WLVYHU\GLIŢFXOWWRVFDOH FDVKKHDY\EXVLQHVVHV as every leg of growth UHTXLUHVLQFUHPHQWDO investments. • They produce more cash than they need. • &DVKSURGXFLQJEXVLQHVVHV can fund themselves due to their cash-producing DELOLW\ *VII GEWL ƽS[ MW E QIEWYVI YWIH XS IZEPYEXI XLI MRHYWXV]ƅW GEWL VIUYMVIQIRXW -X LEW X[S GSQTSRIRXW Free Cash Flow Cash Flow from Operations 8LIGEWLEFYWMRIWW KIRIVEXIWJVSQXLI RSVQEPGSYVWISJFYWMRIWW EJXIV[SVOMRKGETMXEP MRZIWXQIRXW 230 &)2LVJHQHUDWHGE\WKH EXVLQHVVHYHU\\HDU - Cash Flow from Investing 8LIGEWLKIRIVEXIHJVSQ XLIMRZIWXQIRXWJSVE TIVMSHPSRKIVXLERE]IEV Excess cash left after meeting the investment needs of the business is called Free Cash Flow. Fourth Tier - Cash Flow from Investing Rich Ponds Cash Flow from Operations Cash-producing industries and firms can generate ample free cash flows. 7KH\GRQRWUHTXLUHPXFK cash investment. Cash-seeking industries may even produce a negative free cash flow. They are structurally such that they have regular cash fl ow UHTXLUHPHQWV *VIIGEWLƽS[EWETIVGIRXEKISJVIZIRYIQYWXFIYWIHXSGSQTEVIXLIGEWLTVSHYGMRKEFMPMXMIW SJƼVQWEGVSWWMRHYWXVMIWVIPEXMZIXSXLIMVWMÎ Free Cash Flow as a % of revenue Cash Producing Ability 231 The investment needs of businesses may not be linear; they may be rather lumpy. Rich Ponds Fourth Tier ,S[IZIVSRIQYWXTE]EXXIRXMSRXSXLIJSPPS[MRKJEGX 2017 2018 2019 2020 2021 2022 ₹400 ₹600 - ₹600 - ₹400 ₹700 ₹600 &RPSDQLHVLQWKHPLGGOHRIVLJQLŢFDQW expansion may have a temporary negative free cash fl ow. Free cash flow should always be seen over a few years and not for any particular year. 232 Rich Ponds Fourth Tier Free Cash Flow Generated by (All amounts are in Rs. crores) 2016 2017 2018 2019 CFO 2243 1527 2113 2214 Interest Paid 49 37 41 56 Fixed Capital Investment (817) (684) (1425) (1150) Free Cash Flow 1475 880 729 1120 Revenues 14271 15062 16825 19342 FCF/Revenues 10.33% 5.84% 4.33% 5.79% • -X MW WIIR XLEX XLI GSQTER] GSRZIVXW SJ MXW VIZIRYIW EW JVII GEWL ƽS[W 8LI GSQTER]MWEPWSRSXXSSƼ\IHGETMXEPMRZIWXQIRXMRXIRWMZIERHMWGSRXMRYSYWP]EFPIXS GVIEXI*'* • +IRIVEPMWEXMSRW EFSYX XLI MRHYWXV] GER FI HVE[R EJXIV WMQMPEV EREP]WMW JSV GSQTERMIWMRXLIWEQIMRHYWXV] 233 Fourth Tier Rich Ponds Industry Investment Requirements (MJJIVIRXMRHYWXVMIWLEZIHMJJIVIRXMRZIWXQIRXVIUYMVIQIRXWFEWIHSRXLIMVGLEVEGXIVMWXMGW • • • ;SVOMRKGETMXEPLIEZ] ,MKLƼ\IHGETMXEPMRZIWXQIRXW Very low investments. 6XFKEXVLQHVVHVVFDOHYHU\TXLFNO\ Fixed Capital Investment Determines the investment requirement of businesses in the Industry Calculated as % of Revenue Working Capital Investment The lower the investment VIUYMVIHEKEMRWXVIZIRYIXLI more attractive is the industry. Value Proposition People (Management) Accounting Story Competitve Positioning Business Model 9- Point Business Circuit Evolution of Industry Risks & Growth Potential Trends & Practices 234 Broad Industry Analysis The four tiers together form WKHőEDVLFLQGXVWU\DQDO\VLV ,WJLYHVDQXQGHUVWDQGLQJRIWKH overall processes in the industry DQGWKHSURŢWDELOLW\FKDUDFWHULVWLFV 8LMW WXEKI MW SRI SJ XLI QSWX GVMXMGEP WXEKIW [LIR EXXIQTXMRK XS YRHIVWXERH ER] TEVXMGYPEV FYWMRIWW8LMWJSYVXMIVIHWXVYGXYVIMWIUYEPP]ZEPMHJSVXLSWIPSSOMRKXSMRZIWXMRFYWMRIWWIWEW [IPPEWXLSWIPSSOMRKXSWXEVXXLIMVS[RFYWMRIWW7YGLEREREP]WMWGERFISJKVIEXLIPTXSIZIR XLSWI[LSEVIEPVIEH]VYRRMRKFYWMRIWWIWSJER]OMRH Rich Ponds Fourth Tier Investment Needs of (All amounts are in Rs. crores) 2016 2017 2018 2019 Fixed Capital Investment 817 684 1425 1150 Working Capital Investment (197) 602 79 427 Total Investments 620 1286 1504 1577 Revenues 14271 15062 16825 19342 Investments/Revenues 4.33% 8.53% 8.93% 8.15% • -XMWWIIRXLEXXLIGSQTER]LEWFIIRMRZIWXMRK SJMXWVIZIRYIWMRXSƼ\IHGETMXEP ERH [SVOMRK GETMXEP JSV XLI PEWX ]IEVW 1SWX SJ XLI MRZIWXQIRXW EVI XS[EVHW Ƽ\IH EWWIXW;IWIIXLEXXLIGSQTER]MWRSXSTIVEXMRKMREREWWIXMRXIRWMZIMRHYWXV]EWSRP] EJVEGXMSRSJVIZIRYIMWVIMRZIWXIHIEGL]IEV • +IRIVEPMWEXMSRW EFSYX XLI MRHYWXV] GER FI HVE[R EJXIV WMQMPEV EREP]WMW JSV GSQTERMIWMRXLIWEQIMRHYWXV] 235 236 Rich Ponds Gains, Pains & Rsiks Notes Rich Ponds Gains, Pains & Risks Notes 237 238 Rich Ponds Evolution of the Industry Evolution of the Industry 239 Rich Ponds Evolution of the Industry Evolution of the Industry Evolution of Industry Rich Ponds 8LITSMRXƄIZSPYXMSRSJMRHYWXV]ERHFYWMRIWWIWƅHIEPW[MXLLS[XLIMRHYWXV]MXWTVSHYGXWERHXLI ZEVMSYWƼVQW[MXLMRMXLEZIIZSPZIHSZIVXLI]IEVWXSEVVMZIEXXLIGYVVIRXWXEKI Evolution 1990 2000 2003 2010 Now It gives a perspective of the history of the industry and thus allows entrepreneurs and investors to reason about the current state more rationally. It gives them an understanding of what has worked in the industry in the past and what has not. )ZSPYXMSRMWXLISRP]I\TPEREXMSRJSVHMZIVWMX]MRFYWMRIWWIW • -X EPWS I\TPEMRW XLI WMQMPEVMXMIW ERH HMJJIVIRGIW MR ETTVSEGLIW WXVEXIKMIW ERH FYWMRIWW QSHIPW[MXLMRXLIMRHYWXV] • -XXLVS[WPMKLXSRXLIGLERKIWXLEXLETTIRXSXLIRIIHWSJGYWXSQIVWLS[XLIMVTEMRWERH KEMRVIUYMVIQIRXW[IVIFSVRLS[XLI]LEZIGLERKIHSZIVXMQIERH[LEXHMJJIVIRXSJJIVMRKW [IVIGVIEXIHMRHYIGSYVWI *MVQWYRHIVKSGLERKIW[LMGLEGGSVHMRKXSXLIQWLEPPMRGVIEWIXLIMVGLERGIWSJWYVZMZEPERH LIPTXLIQWXE]VIPIZERXJSVEPSRKIVTIVMSH8LIƼVQWXLEXYRHIVKSEHETXEXMSRERHQEOIVIPIZERX GLERKIW GSRXMRYSYWP] EVI XLI SRIW XLEX WYVZMZI PSRKIV [LMPI XLI [IEOIV SRIW HMI %R] KMZIR MRHYWXV]KSIWXLVSYKLQYPXMTPIVSYRHWSJHMWVYTXMSR[LMGLI\TERHMXWPMJIWTERFIJSVIMXGIEWIWXS I\MWX)MXLIVXLIRIIHXSWYVZMZIKSIWE[E]SVEWYFWXMXYXIMRHYWXV]VITPEGIWMX When a new business model comes along, every player in the industry tries different strategies and creates new product offerings. Companies adapt to survive. 240 [30] https://www.nhm.ac.uk/discover/what-is-natural-selection.html Helps to Reason why things are the way they are in the industry. Evolution of the Industry Identify what has worked and what has failed in the industry. Rich Ponds Understanding Evolution Prevents repeating any prior mistakes made. *SVRI[FYWMRIWWIWXLEXEVIFIMRKWXEVXIH[LMGLWLEPPIWXEFPMWLERI[MRHYWXV]KSMRKJSV[EVHXLI VIWIEVGLWLSYPHJSGYWSRYRHIVWXERHMRKXLIIZSPYXMSRSJXLIRIIHWSJXLIGYWXSQIVWIKQIRXW 7KHTXHVWLRQVWKDWVKRXOGEHDVNHGLQFOXGHZKHQGLG WKHQHHGDULVHŢUVWKRZGLGLWDULVHKRZZDVLWEHLQJ IXOŢOOHGWRGDWHDQGKRZWKHQHHGFKDQJHGRYHUWLPH -XMWMQTSVXERXXSYRHIVWXERHXLIRIIHXSGVIEXIETVSHYGXXLEXWEXMWƼIWXLIGYWXSQIV Why Study the History of the Industry and the Firms in it? 7XYH]MRKXLILMWXSV]SJMRHYWXVMIWMWMQTSVXERXFIGEYWIMXEPPS[WXLIIRXVITVIRIYVWXSYRHIVWXERH XLIJSPPS[MRK • 7YGGIWWIWERHJEMPYVIWSJXLITEWX +HOSVWKHPWRDYRLGUHSHDWLQJWKHVDPHPLVWDNHVLQIXWXUH • 4VIWIRX • 7XVEXIKMÎJSVXLIJYXYVIMREFIXXIVQERRIV • ;L]XLIMRHYWXV]MWXLI[E]MXMW# In business, it is often said, “History never repeats but it always rhymes.” [31] https://www.historians.org/about-aha-and-membership/aha-history-andarchives/historical-archives/ why-study-history-(1998) 241 Evolution of the Industry Rich Ponds The study of the history of the industry helps entrepreneurs and managers in the decision-making process. This happens in the following ways: Ability to assess evidence and check assumptions The study of the industry's history allows entrepreneurs to make concrete arguments based on a variety of data/evidence and put together the most accurate picture of the past and present. Such databacked research allows the entrepreneurs to verify the correctness of assumptions that they had made earlier.[31] Ability to assess conflicting interpretations Evaluating an industry’s history means sorting through HMZIVWI ERH SJXIR GSRƽMGXMRK MRXIVTVIXEXMSRW VIKEVHMRK business models and value propositions. Examining past situations provides entrepreneurs the ability to be a critic of different approaches and understand the behavior of the industry more objectively. [31] Experience in assessing past examples of change Experience in assessing past examples of change is vital to understanding changes in the industry today. Comparing particular changes with relevant examples from the past helps the entrepreneur to understand the magnitude and WMKRMƼGERGI SJ XLI GLERKI 8LMW MR XYVR EPPS[W them to take decisions objectively.[31] 242 [31] https://www.historians.org/about-aha-and-membership/aha-history-andarchives/historical-archives/ why-study-history-(1998) 8LMWMWEFVSEHFYXRSXI\LEYWXMZIPMWXSJUYIWXMSRWXLEXWLSYPHFIEWOIHXSYRHIVWXERHMRHYWXV] LMWXSV]ERHIZSPYXMSR Q Q Q Q Q Q Q Q Q Q Q Q Q When was the need for the product first felt? Evolution of the Industry Rich Ponds 8LIVIMWRSI\EGXWGMIRGIXSYRHIVWXERHXLILMWXSV]ERHIZSPYXMSRSJER]KMZIRMRHYWXV])ZIV]XLMRK FSMPW HS[R XS YRHIVWXERHMRK XLI SVMKMRW SJ XLI MRHYWXV] ERH LS[ FMK GSQTERMIW LEZI WGEPIH YT ERH [L] SXLIVW LEZI JEMPIH MR XLI MRHYWXV] 8LMW VIUYMVIW MRXIRWI VIEHMRK SJ LS[ ZEVMSYW GSQTERMIWWXEVXIHERHXLIMVWXVEXIKMIWSZIVXLI]IEVW What were the gains that the customers were trying to receive or the pains they were trying to relieve? Which was the first company started in the industry? How and when did the other companies start? Which are the companies that have gone on to become industry leaders? How were they established? When were they established? What strategies did they use for growing and scaling up their business? Which are the companies that started but have failed? Why did they fail? What strategies were they using for growth and scale-up? How has the need changed over time? How has the product changed over time? 243 Evolution of the Industry Rich Ponds Q Q Q Q Is the history of the industry similar in other markets and geographies? How has the government’s attitude been towards the industry? What has been the biggest challenge for the industry over the years? How has the industry tried to solve them? 8LIWIUYIWXMSRWXSKIXLIVJSVQXLIFEWMWJSVVIEHMRKERHYRHIVWXERHMRKXLILMWXSV]ERHIZSPYXMSR SJERMRHYWXV]ERHXLIƼVQWMRMX )RXVITVIRIYVWSJXIRJEPPMRXSXLIXVETSJMKRSVMRKXLMWWXEKIERHXLI]IRHYTVITIEXMRKXLIQMWXEOIW XLEX[IVIQEHIIEVPMIV &RSLHGWKH:HVWHUQ players at a cheaper price point. Foreign players came at a lower price point or with more innovative products at low prices. 244 Sold to less demanding Indian masses, and made a name for themselves. The Indian firms found themselves at a position of disadvantage and were unable to maintain their position. ,EHXLIWIƼVQWJSGYWWIHSRMRRSZEXMSRJVSQXLIFIKMRRMRKXLI]QMKLXLEZILEHHMJJIVIRXPIZIPW SJWYGGIWW8V]ERHYRHIVWXERHXLIVIEWSRWFILMRH[L]XLMRKWEVIEGIVXEMR[E]YRHIVWXERHMRK MRLMWXSV]ERHIZSPYXMSR Evolution of the Industry Rich Ponds Logistics Industry History • *MVWXWIVMSYWPSKMWXMGWEXXIQTXW[IVIQEHIHYVMRKWYTTPMIWSJJSSH[EVJEVIQEXIVMEP 8LI]FIGEQIGVMXMGEPJEGXSVWFILMRH[MRRMRKERHPSWMRK[EVW7MRGIXLIRPSKMWXMGWLEW IZSPZIHWXIEHMP]ERHGSRXMRYIHXSVIQEMRGVMXMGEPSZIVXMQI • 6EMPVSEHWWXIEQIRKMRIWWLMTWEYXSQSFMPIWJSPPS[IHF]TPERIWGEQIXSGLERKIXLI JEGISJPSKMWXMGWMRHYWXV]ERHWXEVXIHGSQTERMIWXLEX[IWIIXSHE] • %WMRHYWXVMIWFIGEQIPEVKIVERHGSQQYRMGEXMSRFIGEQIIEWMIVPSKMWXMGWGSQTERMIW GSYPHKVS[XSEWGEPIYRMQEKMRIHFIJSVI • 'SQTERMIW PMOI *IH)\ 947 2MTTSR )\TVIWW ERH (,0 [IRX SR XS FIGSQI MRHYWXV] PIEHIVW • 1SWXSJXLIWIGSQTERMWWXEVXIHIEVP]ERHEWMRHYWXVMEPVIZSPYXMSRGEYKLXYTMRXLSWI GSYRXVMIW XLI] KVI[ [MXL XLIQ EGLMIZMRK IGSRSQMGW SJ WGEPI 3RGI XLI] LEH WGEPI XLI]GSYPHTMGOERHGLSSWIRI[QEVOIXWERHXLI]FIKERXSHSQMREXIXLIQSZIVXMQI • 3XLIVW[LSLEHWXEVXIHJEMPIHEWXLI]GSYPHRSXEGLMIZIIGSRSQMGWSJWGEPI • (,0 WXEVXIH EW E WQEPP GSQTER] MR XLI 97 FYX [EW FSYKLX SZIV F] (IYXWGLI 4SWX +VSYT 4SWX EGUYMWMXMSR MX KEMRIH WGEPI QIVMXW ERH EGGIWW XS (IYXWGLI 4SWX W XVERWTSVXEXMSRRIX[SVO7SMXWYGGIIHIHGETMXEPMWMRKSRXLISTTSVXYRMX]YWMRK1 % • 2MTTSR)\TVIWW[EWWXEVXIHMRERH[EWQEMRP]YWIHJSV[EVXMQIQEXIVMEPERH TIVWSRRIPXVERWTSVX8LEXMW[LIVIMXKSXEGGIWWXSIEVP]WGEPIEHZERXEKIW • <43783=83ERH7*)\TVIWWEVI'LMRIWIGSQTERMIWXLEXKVI[[MXLXLIWYTTSVXSJ %PMFEFEERH'LMRIWI)GSQQIVGI • *IH)\FIKERMRERHTMSRIIVIHPMZIXVEGOMRKSJTEGOEKIW[LMGLMRWXERXP]KSXMX ZSPYQIW-XGETMXEPMWIHSRXLIEHZERXEKIWYWMRK1 %XSKEMRWGEPIFIRIƼXW • /YIRLI2EKIP[EWYWIHF]XLI2E^MWEWERSƾGMEPXVERWTSVXGSQTER]8LYWMXLEH IEVP]ERHI\GPYWMZIEGGIWWXSWGEPI • 8LITVSHYGXJSVWYGLGSQTERMIWLEWIZSPZIHJVSQQENSVP]PEVKI&&TEVGIPWXSWQEPP &'SVHIVWXLEXRIIHXSFIHIPMZIVIHXSVIXEMPGYWXSQIVW • 8LIGSQTERMIWRIIHUYMGOEGGIWWMFPIERHVIPMERXPSKMWXMGTVSZMHIVW • 8LI FMKKIWX GLEPPIRKI JSV XLI MRHYWXV] LEW FIIR STIVEXMRK PIZIVEKI LMKL ƽIIX ERH TIVWSRRIPQEMRXIRERGI 245 246 Rich Ponds Gains, Pains & Rsiks Notes Rich Ponds Gains, Pains & Risks Notes 247 248 Rich Ponds Trends and Practices Trends and Practices 249 Rich Ponds Trends and Practices Trends and Practices Rich Ponds -RHYWXV]XVIRHWWLIHPMKLXSRXLIHMVIGXMSRMR[LMGLXLIMRHYWXV]MWQSZMRK-XLIPTWMRZMWYEPM^MRK XLISYXGSQISJXLIMRHYWXV]-XJSGYWIWSRXLIGYVVIRXWXEXISJXLIMRHYWXV]ERHXLI[E]XLMRKWEVI HSRIMRXLIMRHYWXV] • -XEPWSJSGYWIWSRXLIWXERHEVHTVEGXMGIWJSPPS[IHMRXLIMRHYWXV]ERHXLIOI]GLERKIWXLEX EVIYRHIV[E] • These practices can relate WRDQ\DFWLYLW\ELJRUVPDOOLQ the industry and any vertical within the industry. • ,WFDQDOVRUHODWHWR the industry practices LQPDUNHWLQJSURGXFW development, and financing and so on. (IƼRMRKƄMRHYWXV]TVEGXMGIƅMWHMƾGYPX3RITPEYWMFPIHIƼRMXMSRMWERMRHYWXV]EGGITXIH[E]SJ HSMRKWSQIXLMRKXLEX[SVOW0IXYW[SVO[MXLXLMWHIƼRMXMSRJSVRS[ERHTVSGIIH Standard Practices 8LI [E] QSWX ƼVQW in the industry do things. Industry Practices Best Practices A method or XIGLRMUYIXLEXLEW consistently shown results superior to those achieved using other means.[32] %HVWSUDFWLFHFDQDWWLPHVDOVREH the most common practice used in the industry i.e. the standard practice in the industry. Both kinds of practices can relate to any vertical or a function in the industry. 250 [32] https://judithcurry.com/2013/07/29/uncertainty-lost-in-translation/ Trends and Practices Value Chain ,QGXVWU\SUDFWLFHVGHDO ZLWKőKRZLWLVEHLQJGRQH Value Chain deals with őZKDWLVEHLQJGRQH Rich Ponds relates to Standard and Best Practices An understanding of the value chain from the first tier of the broad industry analysis would help in understanding the industry practices. Multiple Brands Multiple Brands New Order New Order 10 Minutes Left ACCEPT REJECT 2UGHU$FFHSWDQFH'DVKERDUG KDS - Kitchen Display System Food 3DFNDJLQJ Telephonic orders 2QOLQH)RRG7UDFNLQJ Standard and Best Practices Benefits Problems They are already being deployed by other players and the results are known, expected, and tested in the market. There is evidence that a particular practice works and will produce results. They are being done by other players too and the results are known and expected. As other players are EPVIEH] TVEGXMGMRK XLIQ XLIWI ƼVQW enjoy an early-mover advantage. ,IRGIRI[ƼVQWWXERHEXETSWMXMSR of disadvantage. Also, the results are known and expected by all. 251 Trends and Practices Rich Ponds 7XEVXMRKWYGLEFYWMRIWWSVMRZIWXMRKMRSRIXLEXJSPPS[WEPPXLIMRHYWXV]WXERHEVHTVEGXMGIWMWE HIƼRMXI[E]XSGVIEXIEƄQIXSSƅFYWMRIWW[LIVIMRXLITVSƼXEFMPMX][SYPHEP[E]WFIYRHIVXLVIEX JVSQHMVIGXGSQTIXMXMSR So, why should the entrepreneur understand the industry practices? Simply because it gives him/her decision-making power To decide the activities to go with or against the industry Where to defy the best practices/standard practices and experiment new things. Try something of his own, in which the result may be unknown to others Industry Value Chain Company Value Chain ,WDOORZVWKHHQWUHSUHQHXUDVRXUFH of potential differentiation in the PDMRUDFWLYLWLHVRIWKHYDOXHFKDLQ which are critical to success. 8LMWGERWEZILMQLIVXLILEWWPISJVIMRZIRXMRKXLI[LIIPJSVPIWWGVMXMGEPEGXMZMXMIWMRXLIZEPYI GLEMREGXMZMXMIW*MVQWGERWXMGOXSMRHYWXV]TVEGXMGIWMREVIEWXLEXEVIPIWWGVMXMGEPJSVWYGGIWW 8LMW [SYPH WEZI XLIQ XMQI ERH IJJSVX ERH EPWS KMZI WSQI TVIHMGXEFMPMX] SJ XLI SYXGSQIW ERH EPPS[WXLIQXSI\TIVMQIRXMREVIEWGVMXMGEPJSVWYGGIWW 252 Trends and Practices Rich Ponds Sunscreens available in India MCaffeine Sunscreen Powder Uses coffee as a raw material Uses most of Industry Practices +RZWKLQJVDUHEHLQJGRQH in the industry Potential Outcome of defying Best Practices ,WVDYHVWKHHQWUHSUHQHXUDQG EXVLQHVVPDQDJHUIURPFUHDWLQJD őPHWRRŒFRPSDQ\DQGDSURGXFWDQG allows them a chance to stand out in the industry. It may cause failure OR It also has a potential of a much higher return if the approach works. Industry Value Chain Company Value Chain ,WPD\HYHQOHDGWRRWKHUVVKLIWLQJWRWKLVQHZőEHVWSUDFWLFHŒ and starting at a position of relative disadvantage. 253 Trends and Practices Rich Ponds • 8LIIRXVITVIRIYVRIIHWXSFIE[EVISJLS[XLMRKWEVIFIMRKHSRIMRXLIMRHYWXV]WSXLEXLI ORS[W[LEXXSI\TIGXJVSQHMJJIVIRXTPE]IVW[LSEVIJSPPS[MRKHMJJIVIRXTVEGXMGIW • 8LMW ORS[PIHKI KMZIW XLI IRXVITVIRIYV XLI EFMPMX] XS WTSX ƼVQW [MXLMR XLI MRHYWXV] XLEX EVI HSMRKXLMRKWHMJJIVIRXP] • -X EPWS EPPS[W XLI IRXVITVIRIYV XS GSQTVILIRH QEREKIQIRX GSQQYRMGEXMSR ERH JYXYVI WXVEXIKMIWMREQYGLFIXXIVQERRIV %W E VIWYPX MX GER FI GSRGPYHIH XLEX ORS[PIHKI SJ LS[ XLMRKW EVI HSRI GSQTPIQIRXW XLI ORS[PIHKI SJ [LEX XLMRKW EVI FIMRK HSRI /RS[PIHKI SJ LS[ XLMRKW EVI FIMRK HSRI MRHYWXV] TVEGXMGIW MRZSPZIWERW[IVMRKUYIWXMSRWWYGLEWXLIWI Q Q Q Q Q Q Q Q Q Q 254 How are employees hired and trained in the industry? How are technology upgrades installed? What software does the industry use for its operations? How does the R&D department work? What is the product innovation process? How are the raw materials procured? How are logistics, warehousing of raw materials and finished products done? What manufacturing process is being used? What technology is being used? How are marketing and sales done? How is after-sales service provided and feedback collected from the customers? 8LIUYIWXMSRWEVIWEQTPIUYIWXMSRWXLEXEPPS[ERYRHIVWXERHMRKSJMRHYWXV]TVEGXMGIW8LIPMWXF] RSQIERWMWI\LEYWXMZIƄ,S[ƅUYIWXMSRWGERFIEWOIHJSVEPQSWXIZIV]EGXMZMX]HSRIF]XLIƼVQW MRERMRHYWXV]8LIIRXVITVIRIYVSVFYWMRIWWQEREKIVWLSYPHXV]ERHMHIRXMJ]GVMXMGEPEGXMZMXMIWJSV WYGGIWWMRXLIMRHYWXV]XLVSYKLEXLSVSYKLVIEHMRKSJXLIMRHYWXV]ƅWLMWXSV]ERHXV]HSMRKXLMRKW HMJJIVIRXP] ,S[IZIV XLMW WLSYPH RSX FI HSRI QIVIP] JSV XLI WEOI SJ FIMRK E GSRXVEVMER MR XLI MRHYWXV]8LIEXXIQTXQYWXFIFEGOIHF]TVSTIVVIWIEVGLERHPSKMG Major industry practices include: Trends and Practices Rich Ponds Major Practices in Logistics Industry • Renting the warehouses instead of owning them. • Owning the warehouse equipment, designed by the company at times. • Owning a small part of the fleet while outsourcing major requirements. • Asset-light model to scale the business. • Working based on collaborations, particularly by smaller players. The players can decide based on strategic-planning that they wish to follow industry practices or defy them and try to create a source of differentiation. 255 Trends and Practices Rich Ponds Trends in the Industry % XVIRH MR KIRIVEP VIJIVW XS XLI KIRIVEP HMVIGXMSR MR [LMGL WSQIXLMRK MW HIZIPSTMRKSVGLERKMRK-RXLIFYWMRIWWWGIREVMSERMRHYWXV]XVIRHVIJIVWXSXLIHMVIGXMSR MR[LMGLER]MRHYWXV]MWQSZMRKSVLS[MXMWHIZIPSTMRK-RHYWXV]XVIRHWEVII\EQMRIHXS JSVIWII[LEXXLIMRHYWXV]WLSYPHPSSOPMOIMRXLIJYXYVIERHXSQEOITVIHMGXMSRW8LIWI XVIRHW GSYPH VIPEXI XS GSRWYQIV FILEZMSV IQTPS]QIRX XIGLRSPSKMGEP EHZERGIQIRXW RI[TVSHYGXHIZIPSTQIRXGSQTIXMXMSRERHKSZIVRQIRXRSVQW?A 9RHIVWXERHMRK XLI MRHYWXV] XVIRHW MW MQTSVXERX XS E GSQTER]ƅW WYGGIWW ERH WMKRMƼGERGI -X JSVIXIPPWXLIJYXYVIERHEPWSMQTEGXWXLITVIWIRX,S[IZIVSRIXLMRKXSFIOITXMRQMRHMWXLEX XLIMRHYWXV]XVIRHWEVIRSXJEHWXLEXGSQIERHKS8LI]EVIKIRIVEPP]WYWXEMREFPIERHPSRKXIVQ VSYXIWXLEXXLIMRHYWXV]XEOIWERHXLIVIMWKIRIVEPP]RSKSMRKFEGOSRGIXLIMRHYWXV]EHSTXWXLIQ 8VIRHW HIXIVQMRI LS[ XLI MRHYWXV] WLEPP PSSO MR XLI JYXYVI 8LMW EPPS[W FYWMRIWW QEREKIVW ERH IRXVITVIRIYVW XS FI TVITEVIH ERH TSWMXMSR XLIQWIPZIW MR XLI MRHYWXV] MR WYGL E [E] XLEX XLI] FIRIƼX [LIR XLI XMQI GSQIW VEXLIV XLER WXERH EX E TSWMXMSR SJ HMWEHZERXEKI 8LI] GER TEVXMGMTEXIMRXLIGLERKIXLEXLETTIRWERHFIRIƼX[LIRMXKIXWFMKKIV%PWSXVIRHWLIPTMRZIWXSVW MHIRXMJ]EVIEWSJMRXIVIWXERHEVIEWJVSQ[LMGLXLI]WLSYPHWXE]E[E]%GSVVIGXYRHIVWXERHMRKSJ XVIRHWLIPTWKEMRMRWMKLXWMRXSXLIMRHYWXV]ERHMXWJYXYVI ,IDQHQWUHSUHQHXURU LQYHVWRUSLFNVXSWKH wrong changes as trends, their vision for the future RIWKHLQGXVWU\PD\EH very different from reality. ,WPD\WDNHWKHPDORQJDGLIIHUHQW path, which can even turn out to ORVVPDNLQJLQWKHIXWXUH Trends for Social Media to 3KRWR$OEXPV 256 ?A ,QVWDJUDP3URILOH LXXTW[[[ƼRERGMEPI\TVIWWGSQSTMRMSRI\TPEMRIHXLIHMJJIVIRGIFIX[IIRWIGXSVERHMRHYWXV] Trends and Practices <RXWXEH7LNWRN Rich Ponds to Video Tapes 1ER]WYGGIWWJYPFYWMRIWWIW[IVIWXEVXIHF]IRXVITVIRIYVW[LSGSYPHWTSXXVIRHWFIJSVIER]SRI IPWI8LI][IVIEFPIXSGETMXEPMÎSRXLIMVMRWMKLXWMRERI[ERHGVIEXMZI[E] 8LYWIJJSVXWXSMHIRXMJ]RI[GLERKIWEJJIGXMRKXLIMRHYWXV]ERHXLIHMVIGXMSRMR[LMGLXLIMRHYWXV] MWQSZMRKGERRSXSRP]WEZIƼVQWJVSQPSWWIWFYXEPWSLIPTXLIQWXE]FIXXIVTVITEVIH[LIRXLI XMQIJSVGLERKIGSQIW)JJSVXWERHVIWSYVGIWWLSYPHFIEPPSGEXIHXSWYGLXVIRHWTSXXMRK 257 Trends and Practices Rich Ponds Major Trends affecting Logistics Industry in India Major trends that are affecting the logistics segment include: • Focus on automation • Asset-light model • Focus on technological advancements in various fields relation to logistics • Modern warehouses over traditional warehouses • Multi-modal integrated network • Extended use of 3PL services by different sectors • Last-mile delivery analytics • Making the logistics network more flexible and adaptive Investors as well as business analysts must be on the lookout to see how these trends would affect the industry going forward and how they can benefit from them. 258 Rich Ponds Trends and Practices Notes 259 260 Rich Ponds Risks and Growth Potential Risks and Growth Potential 261 Rich Ponds Risks and Growth Potential Risks and Growth Potential Rich Ponds Covered in Broad ,QGXVWU\$QDO\VLV Industry Level Analysis Value Proposition People (Management) Accounting Story Competitve Positioning Business Model 9- Point Business Circuit Evolution of Industry Risks & Growth Potential )LUPVSHFLŢFRU ,QGXVWU\VSHFLŢF Broad Industry Analysis Trends & Practices 6MWOW EWWSGMEXIH [MXL XLI MRHYWXV] QYWX FI VIZMWMXIH XS WLEVTIR XLI YRHIVWXERHMRK EJXIV XLI GSPPIGXMSR SJ RI[ MRJSVQEXMSR MR XLI ZEVMSYW WXEKIW SJ XLI TSMRX EREP]WMW 8LI TYVTSWI MW XS QEOIWYVIXLEXER]QENSVVMWOVIPEXMRKXSXLIMRHYWXV]HSIWRSXKSYRRSXMGIH;IGERGSRGPYHI XLIMRHYWXV]EREP]WMWF]XV]MRKXSYRHIVWXERHMXWKVS[XLTSXIRXMEP8LIKSEPMWXSYRHIVWXERHLS[ ƼVQWKVS[MRXLIMRHYWXV]ERHLS[XLISZIVEPPMRHYWXV]KVS[W8LISZIVEPPMRHYWXV]KVS[XLMW[LEX HIXIVQMRIWXLITSXIRXMEPQEVOIXWMÎ XLMW[EWGSZIVIHMRXLIWIGSRHXMIVSJXLIFVSEHMRHYWXV] EREP]WMW -XHITIRHWSRJEGXSVWWYGLEW • 4STYPEXMSRWMÎ • 4IRIXVEXMSRVEXI • %HSTXMSRVEXMS • 1SVIYWIWSJXLIWEQITVSHYGX • *SVQEPMÊXMSRSJXLIMRHYWXV] %JXIV ƼRMWLMRK EPP XLI WXITW MR XLI MRHYWXV] EREP]WMW EREP]WXW ERH IRXVITVIRIYVW WLSYPH VIZMWMX XLI VMWOW ERH KVS[XL TSXIRXMEP [LMPI HIGMHMRK XS IRXIV XLI MRHYWXV] 6MWOW VIPEXI XS [LEX GSYPH KSEKEMRWXXLIQMRXLIMRHYWXV]%PWSEJEZSVEFPIKVS[XLSYXPSSOJSVXLISZIVEPPMRHYWXV]MWKSSH RI[WJSVER]ƼVQSTIVEXMRKMRMX8LIWIX[SJEGXSVWEVIGVYGMEPFIJSVIQEOMRKXLIƼREPHIGMWMSR XSIRXIVXLIMRHYWXV] 262 Risks and Growth Potential Rich Ponds 5LVNVDQGJURZWKQHHGDEDODQFHEHWZHHQWKHP $WRRULVN\EXVLQHVVZLWKKLJKJURZWKSURVSHFWVPD\ QRWEHWKHEHVWFKRLFHIRUDQHQWUHSUHQHXURULQYHVWRU 6LPLODUO\DYHU\SRRUJURZWKSRWHQWLDOEXWORZULVNV ZLOODOVREHXQDWWUDFWLYHWRPDQ\$EDODQFHLVQHHGHG EHWZHHQJURZWKDQGULVNV 8LIƼJXLWXEKIMWXLIPEWXMRGSRHYGXMRKER]MRHYWXV]EREP]WMW%XXLMWWXEKIIRSYKLMRJSVQEXMSR LEW FIIR GSPPIGXIH MR E WXVYGXYVIH QERRIV 8LMW MRJSVQEXMSR [MPP IREFPI ER] IRXVITVIRIYV SV MRZIWXSVXSHIGMHIVEXMSREPP][LIXLIVXSIRXIVXLIMRHYWXV]SVRSX 263 264 Rich Ponds Industry Sheets, Qualitatives and Conclusions Industry Sheet, Qualitatives & Conclusion 265 Rich Ponds Industry Sheets, Qualitatives and Conclusions Industry Sheets, Qualitatives and Conclusions The Purpose of the Sheets 3RGIXLIƼZITSMRXWSJXLITSMRXFYWMRIWWGMVGYMX[LMGLVIPEXIWXSXLIMRHYWXV]EREP]WMWLEZI FIIRHMWGYWWIHERHYRHIVWXSSHXLI]GERFIXSKIXLIVYWIHXSJSVQ[LEXMWGEPPIHERƄMRHYWXV] WLIIXƅ Industry sheet:8SMHIRXMJ]XLIMRHYWXVMIWXLEXEVIMRLIVIRXP]QSVIEXXVEGXMZIXLERSXLIVW-RHYWXV] WLIIXWGSQTEVIZEVMSYWMRHYWXVMIWSRGSQQSRKVSYRHWERHLIPTMHIRXMJ]XLIWXVSRKIVSVQSVI EXXVEGXMZISRIW Rich Ponds -RHYWXV]WLIIXMWERMRWTMVEXMSRJVSQFEPERGIWLIIXXSFVMRKQSVIWXVYGXYVIXSMRHYWXV] VIWIEVGL0MOIFEPERGIWLIIXWMRHYWXV]WLIIXWIRLERGIWƄYRHIVWXERHEFMPMX]MREZIV]WXVYGXYVIH [E]ƅ8LI]TVSZMHIMRJSVQEXMSRXLEXMWVIEHMP]YRHIVWXERHEFPI8LMWQIERWHEXEMWTVIWIRXIH[MXL EHHMXMSREP MRJSVQEXMSR WYTTPMIH EW WYTTSVXMRK JSSXRSXIW EW RIIHIH XS EWWMWX MR GPEVMƼGEXMSR 8LYWMRHYWXV]WLIIXKMZIWEWRETZMI[SJXLIMRHYWXV][MXLHIXEMPIHI\TPEREXMSRWMRXLIJSSXRSXIW ?A 8LMWFSSOTEVXMGYPEVP]XEPOWEFSYXXLIMRHYWXV]ERHXLYWMRXVSHYGIWXLIMRHYWXV]WLIIX ERHXLIMRHYWXV]WLIIXXIQTPEXI-XWETTPMGEXMSRMRZEVMSYWMRHYWXVMIWLEWEPWSFIIRWLS[R+SMRK ELIEHXLIIRXVITVIRIYVQYWXYTHEXIXLIMRHYWXV]WLIIXIZIV]]IEVXSMHIRXMJ]RI[HIZIPSTQIRXW ;MXLEKETSJEJI[]IEVWXLIMRHYWXV]WLIIXGERFIGSQTEVIH[MXLTEWXWLIIXWXSMHIRXMJ]LS[ XLIMRHYWXV]LEWGLERKIH %W ER IRXVITVIRIYV SV EREP]WX WTIRH XMQI [MXL XLI MRHYWXV] WLIIX JSV XLI RI\X WIGXSV ]SY EVI IZEPYEXMRK-XWLSYPHEGXEWEWXVYGXYVIHJVEQI[SVOXSHIXIVQMRIXLIEXXVEGXMZIRIWWSJXLIMRHYWXV] 266 [34] http://accountingtools1.squarespace.com/questions-andanswers/?currentPage=1088 As on xx/xx/xxxx Factors Note Particulars 1. Value Proposition Customer Segments Who, When, Where, What, Why Customer Gains Required, Desired, Unexpected Gains Customer Pains Pains, Risks Products and Services Features, Pain Relievers, Gain Creators Industry Sheets, Qualitatives and Conclusions For XYZ Industry Rich Ponds Industry Sheet Template 2. Activities and Participants Value Chain Direct and Support Activities Industry Map Suppliers, External Forces, Middlemen, Customers Profit Pool Segment-wise ROI, Revenue Demand-Supply Scenario Demand, Supply, Capacity Utilisation 3. Industry Characteristics Market Size Study Size, Growth Industry Stability Market Share Pricing Power Price, Volume Competitive Life Cycle Stage, Characteristics Disruptions Threat Sustaining, Low End, New Market Regulations Taxes and Duties, Legal Acts, Ownership Related, Industry Specific 267 Industry Sheets, Qualitatives and Conclusions Rich Ponds Factors Note Particulars 4. Profit Forces Supplier Power - Buyer Power - Threat of Substitution - Threat of Entry - Competitive Rivalry in the Industry - 5. Financial Health ROE and DuPont Analysis PAT Margin, Asset Turnover, Leverage Growth PAT Growth, Revenue Growth Investment Needs FCF, Fixed Investment, Working Capital Investment 6. Outlook Trends in Industry 268 Same Market, Different Markets Industry-Specific Risks - Growth Factors - Variables for Success in Industry - As on 30/06/2019 Factors Note Particulars 1 • Urban and Rural Markets • B2B and B2C 1. Value Proposition Customer Segments • • • • • • Clean and Fresh Nutrition Value Consistency New Products Regular Supply Price 2,3,4 • • • • • Adulteration Inconsistent Products Irregular Supply Logistic Issues Door Delivery 2,3,4 • • • • • • Liquid Milk Butter Ghee Paneer Cheese Value-Added Products Customer Gains 2,3,4 Customer Pains Products and Services Industry Sheets, Qualitatives and Conclusions For Indian Private Dairy Industry Rich Ponds Industry Sheet 2. Activities and Participants Value Chain 5 Key Activities • Farmer Procurement • Transport to Village Milk Collection Center • Transport to Milk Processing Unit • Processed and Packaged • Distribution Channels • Brand building activities Industry Map 6 Key Players: Farmers, Agents, Logistics Partners, Distributors, Retail Players, FSSAI 269 Industry Sheets, Qualitatives and Conclusions Rich Ponds Factors Note Profit Pool 7 Activities in order of attractivess: Milk, Curd, Paneer, Ghee, Cheese Demand - Supply Scenario 8 Seasonality in Milk Production; Low in Summer Months • • • • • 2000 - 78 mn MT 2010 - 116 mn MT 2017 - 169 mn MT 2020E - 188 mn MT 2027E - 244 mn MT 3. Industry Characteristics Market Size Study 270 Particulars 9 Total Milk Production Self-consumption Surplus Sold Unorganised Organised - $107 bn $58 bn $49 bn $34 bn $15 bn Industry Stability Amul has been the leader for decades in the cooperative sector. Private players have slowly gained and maintained share. Thus, it is a stable industry. Pricing Power Cooperatives set the selling prices Thus, private players have no pricing power. Competitive Life Cycle Milk is at growth stage; premium products are at growth stage. Disruptions Threat There is no disruption threat. There is sustaining innovation with value - added products. Disruptions Threat • FSSAI • Ministry of Animal Husbandry • National Dairy Development Board of India Particulars 4. Profit Forces Supplier Power 10 High Buyer Power 11 Low Threat of Substitution 12 Low Threat of Entry 13 Moderate Competitive Rivalry in the Industry 14 Moderate (Healthy) 15 • Parag Milk Foods(FY19) - 5% X 3.5x X 1x = 17.5% • Hatsun Agro - 2.8% X 3x X 2x = 16.8% • Heritage Foods - 3.2% X 4x X 0.7x = 9.4% Industry Sheets, Qualitatives and Conclusions Note Rich Ponds Factors 5. Financial Health ROE and DuPont Analysis (PAT Margin x Operating Asset Turnover x Leverage) The industry is a low-margin, moderately-high-turnover business. Growth 16 • Parag Milk Foods(5 yr CAGR) o PAT - 49.32% o Revenue - 17.10% • Hatsun Agro(5 yr CAGR) o PAT - 9.07% o Revenue - 13.81% • Heritage Foods (5 yr CAGR) o PAT - 12.61% o Revenue - 7.87% The firms in the industry have been growing at low teens. 271 Industry Sheets, Qualitatives and Conclusions Rich Ponds 272 Factors Investment Needs Note 17 Particulars • Parag Milk Foods - Regular Fixed and W/c investment • Hatsun Agro - Very High fixed capital investment • Heritage Foods - High fixed capital investment Thus, the industry shows high capital investment. 6. Outlook Trends in Industry 18,19,20,21 • Rise of private players. • Direct procurement from farmers - no agents. • Companies have grown through M&A of regional companies. • Increase focus on nutrition by customers. Industry-specific RIsks • Selling prices determined by cooperatives. • Supply issue with raw milk. • Difficulty in getting distribution space. • SMP Price fluctuations. • Changes in customer behaviour. Growth Factors • Vegeterian population with protein deficiency. • Rising share of organised sector. • Faster growth in value-added products. • Premiumisation. • Westernisation of meals. • Increase in eating-out population. Variables for Success in Industry • Procurement network stable. • Product mix (Value-added products) • Distribution Strength • Manufacturing Distribution • Branding 3RXLIFEWMWSJƄ[LIVIƅMXMWGSRWYQIHERHX]TMGEPFILEZMSYVSJGSRWYQIVWXLIVIƁ Urban and Rural 3RXLIFEWMWSJ [LS MWXLIFY]IV&&ERH&' 2. Urban buyers - customer profile Gains • 6IUYMVIH+EMRW o 'PIERPMRIWWERHJVIWLRIWW o Nutrition o 9RMRXIVVYTXIHWYTTP] • Desired Gains o 2I[ƽEZSYVWERHZEVMIXMIWMRQMPOTVSHYGXMSR o 'SRWMWXIRG]MRUYEPMX] o 'SRWMWXIRG]MRJSSHTVSHYGXW o %TTVSZEPF]JSSHEYXLSVMXMIW Industry Sheets, Qualitatives and Conclusions 1. Rich Ponds NOTES • Unexpected Gains o (SSV(IPMZIV] o ,MKLWLIPJPMJI Pains • • • • Inconsistent products Adulterated with preservatives Lack of regularity Non-accessibility Products and Services 0MUYMH1MPO+LII4ERIIV'LIIWI&YXXIV Pain Relievers • FSSAI approved products • Distribution through mom and pop stores, retail supermarkets and milkmen Gain Creators • FSSAI • New product innovations • Quality maintenance due to regulatory monitoring 273 Industry Sheets, Qualitatives and Conclusions Rich Ponds 2. Rural customers – customer profile Gains • 6IUYMVIH+EMRW o 'PIERPMRIWWERHJVIWLRIWW o Nutrition • Desired Gains o *VIWLTVSHYGXW o ,SQITVSGIWWIHQMPOTVSHYGXW RSXJEGXSV]TVSGIWWIH o ,MKLJEXGSRXIRX • Unexpected Gains o (SSV(IPMZIV] Pains • Adulterated milk • Lack of regular supply • Low shelf life Pain Relievers • Higher shelf life of products Gain Creators • Availability in mom and pop stores %WEVIWYPXTVMZEXIGSQTERMIWQEMRP]JSGYWSRQSVIHIQERHMRKYVFERGSRWYQIVW[LS EVI[MPPMRKXSTE]ETVIQMYQ 274 • 6IUYMVIH+EMRW o 'SRWMWXIRG]MRUYEPMX] o 'SWXGSRWGMSYW • Desired Gains o &VERHIHTVSHYGXWJSVGSRWMWXIRG]EGVSWWMXWGLEMR o 6IKYPEVEZEMPEFMPMX] o :EPYIEHHIHTVSHYGXW • Unexpected Gains o ,MKLWLIPJPMJIMRMRZIRXSV] o 0SKMWXMGWGSRZIRMIRXTEGOEKMRK Pains Industry Sheets, Qualitatives and Conclusions Gains Rich Ponds 4. B2B (Hotels, Restaurants, QSRs, Food Packages, etc.) • 0EGOSJVIKYPEVWYTTP]MRVIUYMVIHUYERXMX] • Logistics issues Pain Relievers • SMPs procured for regular supply • Focus on shelf life Gain Creators • New product innovations • FSSAI approved • Consistent procurement from similar cattle for consistency B2C customers: They are divided into urban and rural customers and have customer TVSƼPIEWHMWGYWWIHEFSZI 275 Industry Sheets, Qualitatives and Conclusions Rich Ponds 5. Industry Value Chain Infrastructure Production Site Maintenance, Production Site Audit, Refer Truck Network Management HRM Product Development Scientists, Sales Representatives, Marketing Professionals, Compensation Structuring R&D New Product Development, Approvals to Produce (FSSAI), Focus on increasing Shelf Life Procurement Through farmers, Running Village Level Milk Collection Centres, Agents, Farmer Community Building, Farmer Relationship Management Inbound Logistics Bulk Milk Coolers, Large Milk Chilling Centres, Transportation Network to transport Raw Milk Operations Milk Filtering, Milk Segregation, Packaging Raw Milk, Conversion to Value-added Products, Conversion to SMP (surplus) Outbound Logistics Transportation Network Marketing and Sales Dealer Network Management, Retailer Network Management, Brand Building Activities, Advertisements, Sales Reps, Reach Expansion Service Customer feeback, Retail feedback 8LIWI EVI XLI OI] EGXMZMXMIW XLEX RIIH XS FI HSRI F] ER]SRI [LS [MWLIW XS WXEVX E FYWMRIWWMRXLIHEMV]MRHYWXV] 276 • Organised Retail Players 'EWL 'VIHMX • Distributors • 'VIHMXHE]W • Local Milkmen 'EWL • End buyers 'EWL 'VIHMX • Unorganised mom and pop stores 'EWL Indian Private Dairy Industry FSSAI Industry Sheets, Qualitatives and Conclusions • Farmer 'VIHMX HE]W • Agents 'VIHMX HE]W • Logistics Partners 'VIHMXHE]W • *EGXSV])UYMTQIRX Providers 'EWL • Ad Agencies 'EWL • Storage Sites 'EWL • Employees 'EWL Rich Ponds 6. Industry Map 60 55 50 45 40 5 Paneer 15 10 Cheese 25 20 Curd 30 Ghee 35 Liquid Milk Operational Margin 7. Profit Pool 0 Product Market Size 277 Industry Sheets, Qualitatives and Conclusions Rich Ponds 8. Demand - Supply Scenario Year Production (mn MT) 1950 17 1970 21 1990 51 2010 116 2017 168 2020E 188 2027E 244 (Source: Ministry of Animal Husbandry, Dairy and Fisheries) 9. Market Size Milk Consumption ($107 bn) Self - consumption ($58 bn) Marketable Surplus ($49 bn) Organised ($15 bn) Unorganised ($34 bn) Cooperatives Private Players ($7 bn) (Source: PPFAS presentation on YouTube – Understanding dairy industry in India) 278 ($8 bn) Many farmers but often unionised Availability of regular supply Moderate for established firms Uniqueness of services No substitute Ability to substitute No substitute Switching Costs High cost and effort to set up new procurement network Dependency of industry on them Moderate dependency Can the industry threaten to vertically integrate? No Importance of volume to supplier's profitability No Payment power with the supplier Cash or Credit upto 14 days Industry Sheets, Qualitatives and Conclusions Number of suppliers in the market Rich Ponds 10. Supplier Power 7YTTPMIV TS[IV MW TVIWIRX MJ XLI JEVQIVW EVI YRMSRMWIH -R VIEPMX] JEVQIVW EVI SRP] YRMSRMWIHEXXLIGSQQYRMX]PIZIPXLYWVIWYPXMRKMRQSHIVEXIWYTTPMIVTS[IV 11. Buyer Power Number of buyers/customers Mass-market product Size of buyers/customers Small and scattered orders How informed are the buyers? Moderately informed Price sensitivity Inelastic Demand-Supply Scenario Balance Can the buyers threaten vertical integration? No Payment power with buyers Cash sales; some credit to distributors 8LIVIMWRSFY]IVTS[IV8LIVIMWZIV]PS[FY]IVTS[IV[MXLMRXIVQIHMEVMIW8LMWGERRSX EJJIGXTVSƼXEFMPMX]XLSYKL 279 Industry Sheets, Qualitatives and Conclusions Rich Ponds 280 12. Threat to Substitution Availability of substitute to the goods No substitute (Horlicks is a very distant substitutes) Ability to substitute No Substitute Cost of Switching No Substitute Price performance of substitute v/s the industry No Substitute 13. Threat to Entry Time and Cost of Sizeable Entry TIme and Cost is high Economics of Scale High Economies of Scale (Marketing and Distribution) Distribution strength required High Cost advantages to existing players Yes; access to farmers for procurement Switching Costs for Customers Habit Asset specificity in the industry Geographic asset specificity Proprietary product difference Medium for value-added products; low for milk Network effect of the product No Protection against new entrants No Brand Identity High Reputation of existing firms Moderately important for sales Response by incumbents on new entry Moderatele Strategic response 2I[IRXV]XEOIWXMQIXSFYMPH,S[IZIVƼVQWGERIRXIVXLIMRHYWXV]YWMRKTVIIWXEFPMWLIH FVERHW A few (geography-wise micro markets matter) How concentrated is the industry? Moderately dilute Differences in product quality Minor difference in liquid milk Cost of switching products Habit Is the industry growing? Moderate growth Overcapacity in the industry Seasonal Fixed costs in the industry Medium Exit barriers in the industry Low Basis of competition in the industry Competition based on advertising and new products Rich Ponds Number of competitors in the industry Industry Sheets, Qualitatives and Conclusions 14. Competitive Rivalry 0S[GSQTIXMXMZIVMZEPV]I\MWXW'SQTIXMXMSRMWJEZSYVEFPIEWTVMGIGSQTIXMXMSRMWRSXXSS LMKL&EWMWSJGSQTIXMXMSREPPS[WXLIMRHYWXV]XSKVS[ 15. Return on equity and DuPont analysis Parag Milk Foods 2015 2016 2017 2018 2019 PAT Margin 2.21% 2.29% 0.31% 4.45% 5.04% Asset Turnover 3.06x 2.44x 2.81x 2.57x 2.86x Leverage 3.8 1.87 0.98 1.07 1.02 ROE 25.69% 10.45% 0.86% 12.24% 14.62% ROA 23.94% 22.37% 14.91% 25.92% 26.84% Dividend Payout 0% 0% 88% 7% 7% SGR 25.69% 10.45% 0.11% 11.42% 13.82% 281 Industry Sheets, Qualitatives and Conclusions Rich Ponds Heritage Foods 2015 2016 2017 2018 2019 PAT Margin 1.35% 2.31% 3.16% 2.65% 3.22% Asset Turnover 5.69x 6.09x 5.38x 4.66x 4.44x Leverage 1.89 1.63 0.59 0.65 0.71 ROE 14.52% 22.93% 10.04% 8.03% 10.15% ROA 23.07% 33.76% 38.76% -50.9% 10.07% Dividend Payout 25% 13% 3% 15% 11% SGR 10.89% 19.94% 9.7% 6.8% 8.9% Hatsun Agro 2015 2016 2017 2018 2019 PAT Margin 1.33% 1.74% 3.21% 2.12% 2.42% Asset Turnover 3.70x 3.98x 3.66x 3.07x 2.99x Leverage 3.57 3.74 3.29 3.83 1.97 ROE 17.56% 25.9% 38.65% 24.92% 13.82% ROA 24.96% 35.2% 33.01% 26.62% 28.17% Dividend Payout 0% 0% 88% 7% 7% SGR 25.69% 10.45% 0.11% 11.42% 13.82% 16. PAT and Revenue Growth 282 Parag Milk Foods 2015 2016 2017 2018 2019 Revenue Growth 32.6% 13.99% 5.22% 12.9% 22.5% PAT Growth 100% 46.8% -87% 1700% 39.1% Hatsun Foods 2015 2016 2017 2018 2019 Revenue Growth 17.6% 17.6% 21.8% 2.1% 11.04% PAT Growth -52% 53.8% 125% -27.2% 26.37% (Base year) 2016 2017 2018 2019 PAT Margin 20.38% 14.86% -21% 25.29% 5.9% Asset Turnover -37% 95% 24% 5% 28.57% Parag Milk Foods 2015 2016 2017 2018 2019 CFO 88 59 (17) 19 140 Fixed Investment (30) (27) (94) (63) (85) FCF 58 22 (111) (44) 55 Revenue 1443 1645 1731 1955 2396 Hatsun Foods 2015 2016 2017 2018 2019 CFO 62 219 433 277 375 Fixed Investment (128) (140) (573) (532) (351) FCF (66) 79 (140) (255) 24 Revenue 2933 3445 4198 4287 4760 Heritage Agro 2015 2016 2017 2018 2019 CFO 52 125 115 121 148 Fixed Investment (51) (68) (93) (144) (127) FCF 1 57 22 (23) 21 Revenue 2073 2381 1894 2373 2515 17. Investment Needs Industry Sheets, Qualitatives and Conclusions 2015 Rich Ponds Heritage Agro 283 Industry Sheets, Qualitatives and Conclusions Rich Ponds 18. Rise of Private Players (Benefits for Farmers) • 2SGSRGITXSJQMPOLSPMHE]W(YVMRKWYVTPYWTVSHYGXMSRGSSTIVEXMZIWYWIHXSVIJYWI QMPOJVSQJEVQIVW8LIWITIVMSHWSJSZIVTVSHYGXMSR[IVIQMPOLSPMHE]W4VMZEXITPE]IVW HMHRSXHSWS • ,MKLIV VIEPMWEXMSR ZW GSSTIVEXMZIW %W TVMZEXI TPE]IVW GSYPH EPWS GLEVKI LMKLIV GLEVKIWEKEMRWXXLIGSSTIVEXMZIWHYIXSXLIMVFVERH • 8VERWTEVIRG]ERHXMQIPMRIWWMRTE]QIRXW • 7YTTSVXWIVZMGIWXSJEVQIVW )KGVIHMXGEXXPIJIIH • 1SVIIƾGMIRXP]QEREKIH 19. Advantages of direct procurement from farmers • )PMQMREXMSRSJEKIRXGSQQMWWMSR • 0S[IV [SVOMRK GETMXEP MRZIWXQIRXW *EVQIVW EVI TEMH SRGI E [IIO ZW EKIRXW TEMH IZIV]X[SHE]W • 1YGLLMKLIVWXEFMPMX]SJWYTTP]%KIRXWQE]W[MXGLXSWYTTP]XSVMZEPƼVQW • +VIEXIVTVS\MQMX]XSJEVQIVW*EVQIVWKIXFIXXIVWYTTSVXEW[IPP Challenges of Direct Procurement • &IWXTVSHYGMRKEVIEWRIEVQIXVSWEVIEPVIEH]SGGYTMIHF]I\MWXMRKGSQTERMIW • -XMWHMƾGYPXXSQEOIXLIJEVQIVW[MXGLXSERI[GSQTER]EWXLI]XVYWXXLISPHIVSRIW 20. Indian companies growing through mergers and acquisitions • • • • ,MRHYWXER9RMPIZIVEGUYMVIH%HMX]EEMR/EVREXEOEMR%YKYWX ,IVMXEKI*SSHWEGUYMVIH:EVQER1MPOMR4YRNEFMR2SZIQFIV 0EGXEPMWEGUYMVIH8MVYQEPEMR%RHLVE4VEHIWLMR.ERYEV] 4EVEK1MPO*SSHWEGUYMVIH(ERSRIƅWTPERXMR%TVMPJSVEGGIWWXSRSVXLIVR-RHME 21. History of Dairy Sector in India • -RHEMV]JEVQIVWMR%RERH+YNEVEXJSVQIHXLIMVS[RGSSTIVEXMZIXSƼKLXEKEMRWX YRJEMVXVEHITVEGXMGIWSJQMHHPIQIR • -R3TIVEXMSR*PSSH[EWMQTPIQIRXIH • -RXLIHEMV]WIGXSV[EWHIVIKYPEXIHERHTVMZEXMWIH • -RQMPOERHQMPOTVSHYGXWSVHIV[EWEQIRHIH4VMZEXIGSQTERMIWHMHRSXLEZIXS VIKMWXIV[MXLPSGEPEYXLSVMXMIW8LI][IVIKVERXIHGSQTPIXIEYXSRSQ] • -RHMEXYVRIHJVSQEQMPOHIƼGMXGSYRXV]XSEQMPOWYVTPYWGSYRXV]FIX[IIR 284 As on 30/10/2019 Factors Note Particulars 1. Value Proposition Customer Segments 1 • Viewers • Advertisers Customer Gains 2,3 Viewers • Entertainment • Sense of belonging Advertisers • Business Growth • Brand building • Customer awareness Customer Pains 2,3 Industry Sheets, Qualitatives and Conclusions For Indian Premier League Franchises Rich Ponds Industry Sheet Viewers • Expensive forms of entertainment otherwise • Peer Pressure Advertisers • Lack of events with high viewership • Expensive ad rates • Lack of consistency in ad platforms Products and Services • • • • • • Matches Fan Parks Events about the matches Merchandise Ad space for advertisers On-ground campaigns 285 Industry Sheets, Qualitatives and Conclusions Rich Ponds Factors Note Particulars 2. Activities and Participants Value Chain 4 Key Activities • • • • • Player Management Ground Management Analytics Sponsorship procurement Media advertisements and brand building • Logistics and administrative issues Industry Map 5 Key Players • • • • • • Demand-Supply Scenario Players Support Staff BCCI Broadcasters Sponsors Audience 6 462 million TV viewers for IPL 2019 (Up 12% y-o-y) ₹ 2100 crores for Sony (broadcasters) - TV ad collection in 2019 Market Size Study 7 • IPL 2018 - 22 rights value at ₹16,347 crores by Start India • Favourable demand supply • Next auction due in 2022 for 2023-27 Industry Stability 8 No new teams being launched; each team maintaining share; thus, a stable industry. 3. Industry Characteristics Pricing Power 286 Auction format for pricing of sponsorship fees thus no exercise of pricing power. Competitive Life Cycle Disruptions Threat Particulars • Mature Stage • Teams easily finding sponsors • Viewership steady 9 Regulations Distant threat of new market disruption by other sport leagues like Pro Kabaddi, ISL, HIL. • No specific government regulations • IPL governing body to be followed by teams • BCCI guidelines to be followed • Supreme Court appointed COA • IPL Rules and Guidelines Industry Sheets, Qualitatives and Conclusions Note Rich Ponds Factors 4. Profit Forces Supplier Power 10 Moderate Buyer Power 11 Low Threat of Substitution 12 Low Threat of Entry 13 Low Competitive Rivalry in the Industry 14 Low 5. Financial Health ROE and DuPont Analysis • CSK - ROE - 91% • PAT Margin - 26% • The companies have no leverage and negligible asset requirements. Growth Major Growth comes every five years when broadcast rights are re-auctioned. 287 Investment needs 288 Note Particulars The companies have negligible investment needs as no assets are needed. 6. Outlook Trends in Industry • Increase in mobile viewership • Increasing share of digital ads • Increasing acceptance of online fantasy leagues • Online social viewership increasing • Regional languages seeing great growth Industry-specific Risks • Retirement of star players • Fall in overall viewership of IPL • Advertisers moving to different platforms • Any government action stopping conduct of tournament • Match fixing, spot fixing issues etc. Growth Factors • Increase in advertising budget of companies • Regional language viewership • International viewership • Mobile viewership increasing watch hours Variables for Success in Industry • Consistent performance by teams • Star 'hooks' in the team - M.S. Dhoni, Virat Kohli, etc. • Online reputation management Rich Ponds Industry Sheets, Qualitatives and Conclusions Factors 'YWXSQIVWIKQIRXEXMSRFEWIHSR[LEXXLITVSHYGX[SYPHFIYWIHJSV • Viewers – Use it for entertainment • Advertisers – Use it for business growth 2. Customer profile – Viewers Gains • 6IUYMVIH+EMRW o )RXIVXEMRQIRX *YRGXMSREPKEMR o 'LIET2SXXSSI\TIRWMZIIRXIVXEMRQIRXJSVQ *YRGXMSREPKEMR o 7IRWISJFIPSRKMRK 7SGMEPKEMR o *ERUYSXMIRXJSVXLIMVXIEQW 4W]GLSPSKMGEPKEMR • Desired Gains Industry Sheets, Qualitatives and Conclusions 1. Rich Ponds NOTES o )ZIRXWEVSYRHQEXGLIW *YRGXMSREPKEMR o 7SGMEPZMI[IVWLMT 7SGMEPKEMR o )\GMXMRKERHGSQTIXIRXQEXGLIW 4W]GLSPSKMGEPKEMRW • Unexpected Gains o +MJXWJSV[EXGLMRKXLIQEXGL )K,SXWXEVGSRXIWXW *YRGXMSREPKEMR o %HJVIII\TIVMIRGIW *YRGXMSREPKEMR o %GGIWWXSFILMRHXLIWGIRIWSJXLIMVXIEQW 4W]GLSPSKMGEP+EMR Pains • Too many ads • Dull, one-sided matches 3. Customer profile – Advertisers Gains • 6IUYMVIH+EMRW o &VERHFYMPHMRK o 'YWXSQIVE[EVIRIWW o -RGVIEWIWEPIW • Desired Gains o 'YWXSQIVIRKEKIQIRX o ;SVHSJQSYXL o 'VIEXMSRSJƄFY^^ƅ o (IGIRXVIXYVRSRMRZIWXQIRX 289 Industry Sheets, Qualitatives and Conclusions Rich Ponds • Unexpected Gains o :MVEPIJJIGXSJEHW o )\GITXMSREP63- Pains to be relieved • A few platforms with very high reach • Expensive Ad rates • Unpredictable Ad results Risks • • • • Create wrong positioning for the company Impact company’s brand negatively Poor ROI from Ad investments Industry value chain 4. Industry Value Chain 290 Infrastructure Ground, Practice Session Management, Equipment, Ticket Distribution Partnerships HRM Player Management, Support Staff Management, Team Bonding and Building Sessions. R&D Analytics for Strategy, Strategy for Selection Procurement Sponsorship Procurement, Ad Agencies Relationship Management Inbound Logistics NA Operations Practice, Match Preparations, Ticket Management, Accommodation Arrangement, Food and Beverage Arrangement Marketing Sales Media Ads, Events, TV shows for Teams, Social Media Management Service CSR 5. Industry Map • Players 'EWL • Support Staff 'EWL • Logistics Partners 'EWL • Accommodation 'VIHMX • Marketing Agencies 'VIHMX • Tournament Organisers 'EWL • Stadium %HZERGI Indian Premier League Teams • BCCI • IPL Governing Body • Broadcasters %HZERGI • Ticket Sales Partner 'EWL • Ticket Sales 'EWL • Food and Beverages 'EWL • Sponsors 'EWL • Merchandising Sale 'EWL • Team's shows and events rights %HZERGI Industry Sheets, Qualitatives and Conclusions Player Logistics Rich Ponds Outbound Logistics 6. Demand (TV and Digital) • -40SZIV8:ERHHMKMXEPLEWFIIRSRERYT[EVHXVENIGXSV]XLVSYKLSYX • -40LEHQMPPMSRZMI[IVW[EXGLXLIWIEWSR8LMWMW ]S]KVS[XLSZIVXLI TVIZMSYWWIEWSR • %HZIVXMWIQIRXVIEPMWEXMSRJSVFVSEHGEWXIVWSZIV8:MWEWJSPPS[W o ƁƟGVSVIW o ƁETTVS\ƟGVSVIW o ƁƟGVSVIW o ƁƟGVSVIW o ƁƟGVSVIW o ƁƟGVSVIW • %WEVIWYPXFVSEHGEWXVMKLXWGSRXVEGXLEWEPWSFIIRSRERYT[EVHXVIRHSZIVXLI]IEVW 8LMWMWXLIFMKKIWXTEVXSJVIZIRYIJSVXIEQW 291 Industry Sheets, Qualitatives and Conclusions Rich Ponds 7. Market Size Study • -R7SR]EGUYMVIH]IEVWFVSEHGEWXVMKLXWJSVƟGVSVIW • -R7XEV-RHMEEGUYMVIH]IEVYRMZIVWEPVMKLXWMIJSVƁJSVƟGVSVIW MIFMPPMSR97([LMGLXVERWPEXIWXSQMPPMSR97(TIV]IEV • +PSFEPQIHMEVMKLXWGYVVIRXP] TIV]IEV o 2*0 %QIVMGER*SSXFEPP97% FMPPMSR97( o )40 )RKPMWLJSSXFEPP FMPPMSR97( o 2&% FEWOIXFEPP97% FMPPMSR97( o 10& FEWIFEPP97% FMPPMSR97( o -40 -RHMERGVMGOIX QMPPMSR97( • %HVIEPMWEXMSRWLEZIFIIRGSRWXERXP]MRGVIEWMRKJSVFVSEHGEWXIVWEWWIIRMRRSXI • :MI[IVWLMTMWMRGVIEWMRK[MXLFVSEHGEWXRS[MRVIKMSREPGLERRIPWEW[IPP • 2I\X EYGXMSR MW HYI JSV Ɓ 8LEX MW [LIR XLI JVERGLMWIIW [MPP WII XLI RI\X MRGVIEWIMRTVSƼXW 8. Industry Stability 8IEQWPMOI/SPOEXE/RMKLX6MHIVW1YQFEM-RHMERWERH'LIRREM7YTIV/MRKWXLEXLEZI HSRI [IPP XS EXXVEGX WPMKLXP] LMKLIV WTSRWSV VIZIRYIW XLER SXLIVW ,S[IZIV E QENSV GSRXVMFYXMSR GSQIW JVSQ XLI GIRXVEP TSSP SJ VIZIRYIW XLEX MW WTPMX IUYEPP] EQSRK EPP GSQTIXMXSVXIEQW 9. Disruptions Threat (MJJIVIRXWTSVXWEVISVKERMWMRKPIEKYIWWYGLEW4VS/EFEHHMJSV/EFEHHM,SGOI]-RHME 0IEKYIJSV,SGOI]ERH-RHMER7YTIV0IEKYISV*SSXFEPP8LIWIGSYPHXEOIE[E]WSQI ZMI[IVWLMTJVSQ-40,S[IZIVXLIZMI[IVWLMTHMJJIVIRXMEPMWZIV]LMKL=IXXLMWGERFIE TSXIRXMEPXLVIEX 10. Supplier Power 292 Number of Suppliers Many players Availability of regular supply Seasonal (only during IPL months) Uniqueness of services No substitute Ability to substitute No substitute Switching Costs Effort Dependency of industry on them High Dependency Can the Industry threaten to vertically integrate? No Payment power with the supplier Advance Cash 11. Buyer Power 1ENSVP]EHZIVXMWIVWEVIMRGPYHIHEWFY]IVW Number of buyers/customers Many Size of buyers/ orders A few medium-sized orders How informed are the buyers? Very informed Price sensitivity Elastic Demand-supply scenario More demand Can the buyers threaten vertical integration? No Payment power with buyers Negligible credit Industry Sheets, Qualitatives and Conclusions No Rich Ponds Importance of volume to supplier’s profitability 12. Threat of Substitution Availability of substitute to the goods Distant substitutes available (other sports leagues) Ability to substitute Moderate Cost of Switching Habit and Preferences Price performance of substitute v/s the industry Poor performance as preferred sport changes 293 Industry Sheets, Qualitatives and Conclusions Rich Ponds 13. Threat of Entry Time and Cost of Sizeable entry Very High Economics of Scale High Economies of Scale Distribution strength required High Cost Advantages to Existing Players No Switching Costs for Customers Habit Asset Specificity in the Industry None Proprietary Product Difference Low Network Effect of the Product No Protection against new entrants Can only be introduced by IPL governing body Brand Identity High Reputation of existing firms Reputation needed Response by incumbents on new entry No response 14. Competitive Rivalry 294 Number of competitors in the industry 8 Players How concentrated is the industry? Concentrated Differences in product quality Homogeneous Cost of switching products Habit and Preferences Is the industry growing? Yes; growing industry Overcapacity in the industry No overcapacity Exit barriers in the industry High Basis of competition in the industry Competition based on performance `15. Revenue break-up for each team in IPL • Broadcasting rights (central pool) o 7XEV -RHME FSYKLX VMKLXW JSV KPSFEP FVSEHGEWXMRK ERH HMKMXEP VMKLXW SJ -40 JSV ƟGVSVIWJSV]IEVWƁ o 8LMWXVERWPEXIWXSƟGVSVIWTIVWIEWSR o &''-VIXEMRW SJMXERHHMWXVMFYXIWXLIVIQEMRMRK IUYEPP]XSIEGLXIEQ )EGLXIEQKIXWETTVS\MQEXIP]ƟGVSVIWIEGL]IEVJVSQXLIGIRXVEPTSSP Industry Sheets, Qualitatives and Conclusions Medium Rich Ponds Fixed costs in the industry • Ticket sales, food and beverages o 8IEQWIEVRIHƟGVSVIWƟGVSVIWMRJSVXMGOIXWEPIWJSSHERHFIZIVEKIW HYVMRKXLILSQIQEXGLIWEGVSWWXLIWIEWSR • Team Sponsorships o 8IEQWIEVRIHƟGVSVIWƟGVSVIWMRJVSQXIEQWTSRWSVWLMTW8LIWI WTSRWSVWEVIHMJJIVIRXJVSQXSYVREQIRXWTSRWSVW • Tournament Prizes o -40[MRRIVKIXWETVMÎSJƟGVSVIW8LIVIEVITVMÎWXSFI[SRF]IEGLXIEQ XLEXƼRMWLIWMRXLIXST • Team events broadcasting rights o 8IEQIZIRXWWYGLEW-RWMHI'7/ERH%QM//6EPWSWIPPXLIMVFVSEHGEWXMRKVMKLXW WITEVEXIP],S[IZIVRSXEPPXIEQWHSXLMW 16. Expense break-up for each team in IPL • Player fee o 8SXEPTPE]IVJIIJSVIEGLWIEWSRMWGETTIHERHMRGVIEWIHWPMKLXP]JSVIEGL]IEV-R -40IEGLXIEQWTIRXƟGVSVIWJSVTPE]IVJIIW • Support staff, logistics, team management, marketing and admin costs o )EGL XIEQ TE]W XS XLIMV WYTTSVX WXEJJ PSKMWXMGW QEVOIXMRK ERH EHQMR GSWXW 8LIWIGSWXEVSYRHƟƁGVSVIW • Franchise fees o )EGLXIEQRIIHWXSTE]JVERGLMWIJIIWXS&''-IEGL]IEV8LMWMWRS[Ƽ\IHEX SJXLIXSXEPVIZIRYIWIEVRIHF]XLIXIEQHYVMRKXLI]IEV 295 For Indian Express Logistics Industry As on 31/10/2019 Factors Note Particulars 1. Value Proposition Customer Segments Customer Gains 1 2,3,4 Rich Ponds Industry Sheets, Qualitatives and Conclusions Industry Sheet B2B, B2C, C2C • • • • • • • • • • Speed Reliable Single point of contact Tracking facility available Active customer support Software integration with the company Wide branch network Low rates Assurance that no parcels lost Social impression of courier used Customer Pains 2,3,4 • • • • • • • Speed Expensive Not all pin codes covered Unreliable No cash-on-delivery facility Lost shipments No door-to-door service Products and Services 2,3,4 • • • • Bulk transport (B2B) Last mile delivery (B2C) Parcel delivery(C2C) Insured delivery 2. Activities and Participants Value Chain 5 Key activities: • • • • • • 296 Fleet management Warehouse management Software management Unloading and sorting Distribution Marketing and customer support • Branch network management 6 Particulars Key players: • Fleet owners • Warehouse and distribution centre owners • Labour • B2B customers • B2C customers E.g. e-commerce sites Demand-Supply Scenario • Transportation demand is increasing y-o-y. Supply is flexible. • Warehousing space is currently in overdemand and undersupply state. Industry Sheets, Qualitatives and Conclusions Industry Map Note Rich Ponds Factors 3. Industry Characteristics Market Size Study 7 Indian Express Logistics Market Size: • FY12 – ₹ 10,870 crores • FY17 – ₹ 22000 crores • FY22E – ₹ 48000 crores Industry Stability The industry mainly competes on price and reliability. Thus, there is not a very high pricing power. The volume drives profitability. Pricing Power It is a price-sensitive industry, with negligible pricing power. Those with established brands have a little pricing power. Competitive Life Cycle Growth Stage • Industry growing fast • More players are adapting to express Disruptions Threat None; Sustaining Innovation in Technology involved 297 Industry Sheets, Qualitatives and Conclusions Rich Ponds Factors Note Regulations Particulars • GST implementation • E-way bill • Multi-modal transport of goods act 4. Profit Forces Supplier Power 8 Low Buyer Power 9 Moderate Threat of Substitution 10 Low Threat of Entry 11 High Competitive Rivalry in the Industry 12 Moderate 13 Moderate margin and turnover business; low leverage needed for asset-light models 5. Financial Health ROE and DuPont Analysis • ROE – attractive • ROA – attractive 298 Growth 14 Growth in teens in industry; slightly higher PAT growth due to operating leverage Investment needs 15 Asset-heavy companies have a very high fixed capital and working capital investment needs. Asset-light model needs low investments. Particulars 6. Outlook Trends in Industry 16 • • • • • • Automation Asset-light model Modern warehouses Multi-modal integration 3PL business model Data analytics Industry-specific Risks • Too many pin codes without volume • Regulatory changes • Reputational risks • Network breakages • Lack of distribution network Growth Factors • Economy growth • Growth of online businesses • GST allows lot of logistical improvements • Increase in 3PL and logistics outsourcing • Increase in value-added services Variables for Success in Industry • Volume • Network capabilities • Distribution strength Industry Sheets, Qualitatives and Conclusions Note Rich Ponds Factors 299 1. 3RXLIFEWMWSJƄ[LSƅXLIGYWXSQIVMWƁ&&&'ERH'' 2. Customer profile – B2B customers Gains • 6IUYMVIH+EMRW o 8VYWX[SVXL][MXLXLITEVGIP o 6IPMEFPIHIPMZIV]JVSQWSYVGIXSHIWXMREXMSR • Desired Gains Rich Ponds Industry Sheets, Qualitatives and Conclusions NOTES o *EWXHIPMZIV] o 8VEGOMRKJEGMPMX]EZEMPEFPI o %PPTMRGSHIWGSZIVIH o 7SJX[EVIMRXIKVEXMSR o (SSVXSHSSVWIVZMGI o 7MRKPITSMRXSJGSRXEGX • Unexpected Gains o -RWYVIHHIPMZIV] o 7SGMEPMQTVIWWMSRSJXLIGEVVMIVYWIH o %GXMZIGYWXSQIVWYTTSVX Pains to be relieved • • • • • Slow delivery Time boundaries breached Damaged products during transit Expensive service No tracking facility available 3. Customer profile – B2C customers Gains • 6IUYMVIH+EMRW o *EWX o 7SJX[EVIMRXIKVEXMSR[MXLXLIGSQTER] o 'EWLSRHIPMZIV]JEGMPMX] 300 • Unexpected Gains o &IJSVIXMQIHIPMZIV] o 7SGMEPMQTVIWWMSRSJXLIGEVVMIVYWIH o %GXMZIGYWXSQIVWYTTSVX Pains to be relieved • • • • No tracking available Slow delivery Too expensive Not all pin codes covered Industry Sheets, Qualitatives and Conclusions o -RWYVIH o +SSHWRSXHEQEKIH o %PPTMRGSHIWGSZIVIH o 0MZIXVEGOMRKEZEMPEFPI o 7MRKPITSMRXSJGSRXEGX Rich Ponds • Desired Gains 4. Customer profile – C2C customers Gains • 6IUYMVIH+EMRW o *EWX o 6IPMEFPI o 'LIET • Desired Gains o 8VEGOMRKJEGMPMX]EZEMPEFPI o %GXMZIGYWXSQIVWYTTSVX • Unexpected Gains o -RWYVIH(IPMZIV] Pains to be relieved • • • • No tracking available Lost packages Too expensive Industry value chain 301 Industry Sheets, Qualitatives and Conclusions Rich Ponds 302 5. Industry Value Chain Infrastructure Logistics Network Maintenance, Fleet Maintenance, Warehouse Management, Warehouse Equipment Management HRM Drivers, Warehouse Workers, admin Teams, Tech Teams R&D Software Management, Data Management, Automation Procurement Branch Network, Brokers for Warehouse, Brokers for Fleet Spot Hire Inbound Logistics Unloading, Sorting, Labelling Operations Sorting, Palleting for those to be sorted, Packaging, Value-added services like knitting Outbound Logistics Sorting, Fleet Allocation, Branch Distribution Marketing Sales TV Ads, Sales Representatives, Branch Network Service Feedback, 24x7 Helpline, Live Tracking, Customer Service Representatives Indian Express Logistics Industry • Government • Industry Regulations • B2B 'VIHMX (E]W • Agents/Brokers 'VIHMX(E]W • Tie-ups with other express companies 'VIHMX(E]W • E-Commerce Companies 'EWL • Branch Bookings 'EWL • C2C Customers %HZERGI'EWL Industry Sheets, Qualitatives and Conclusions • Software 'EWL • Building Maintenance 'EWL • Employees 'EWL • 3rd Party Freight Operators 'VIHMX HE]W • Air Freight Operators 'VIHMX HE]W • Labour Boards 'EWL • Warehouse - Real Estate 'EWL • Fuel 'EWL • Brokers 'EWL • Warehouse )UYMTQIRX 'EWL • Truck Owners 'EWL Rich Ponds 6. Industry Map 7. Market Size Study Indian Express Logistics industry size: o *=ƁƟGVSVIW o *=ƁƟGVSVIW o *=)ƁƟGVSVIW 7YTTP]MRXLIMRHYWXV]MWƽI\MFPI-XHSIWRSXXEOIXMQIJSVRI[GETEGMX]XSIRXIVERHI\MX XLIMRHYWXV],S[IZIVWYTTP]MIƽIIXS[RIVWLMTMWZIV]JVEKQIRXIH 8. Supplier Power Number of Suppliers Many Suppliers Availability of regular supply Easy Uniqueness of services No substitute Ability to substitute No substitute Switching Costs No substitute 303 Industry Sheets, Qualitatives and Conclusions Rich Ponds Dependency of industry on them High Dependency Can the Industry threaten to vertically integrate? No Importance of volume to supplier’s profitability Low Payment power with the supplier Cash 9. Buyer Power 1ENSVP]EHZIVXMWIVWEVIMRGPYHIHEWFY]IVW Number of buyers/customers Many Size of buyers/ orders A few medium-sized orders How informed are the buyers? Very informed Price sensitivity Inelastic Demand-supply scenario More supply; but lack of quality supply Can the buyers threaten vertical integration? Yes Payment power with buyers Credit Given: 15-30 Days 10. Threat of Substitution 304 Availability of substitute to the goods No substitute Ability to substitute No substitute Cost of Switching No substitute Price performance of substitute v/s the industry No substitute Moderate Economics of Scale High Economies of Scale Distribution strength required High Cost Advantages to Existing Players No Switching Costs for Customers Hassle, Technology, Dependency Asset Specificity in the Industry High asset specificity of owners Proprietary Product Difference Low Network Effect of the Product Yes Protection against new entrants No Protection Brand Identity High Reputation of existing firms Reputation needed Response by incumbents on new entry Moderate Strategic Response Industry Sheets, Qualitatives and Conclusions Time and Cost of Sizeable entry Rich Ponds 11. Threat of Entry 12. Competitive Rivalry Number of competitors in the industry A few competitors How concentrated is the industry? Moderately diluted Differences in product quality Minor differences in the product Cost of switching products Hassle Dependency Is the industry growing? Yes; growing industry Overcapacity in the industry Seasonal overcapacity Fixed costs in the industry High Fixed Costs 305 Industry Sheets, Qualitatives and Conclusions Rich Ponds Exit barriers in the industry High Basis of competition in the industry Competition based on customer service and price 13. Return on equity and DuPont analysis TCI Express 2017 2018 2019 PAT Margin 4.93% 6.55% 7.13% Asset Turnover 4.41x 3.56x 3.89x Leverage 1.05 1.19 1.02 ROE 22.83% 27.75% 28.29% ROA 36.4% 36.7% 45.2% Dividend Payout 16% 16% 16% SGR 19.17% 23.31% 23.76% Blue Dart 2015 2016 2017 2018 2019 PAT Margin 5.67% 7.68% 5.21% 5.18% 2.84% Asset Turnover 6.21x 5.14x 4.81x 4.89x 4.46x Leverage 1.18 1.30 1.30 1.07 1.23 ROE 41.54% 51.31% 32.57% 27.1% 15.57% ROA 35.24% 39.5% 25.04% 25.34% 12.60% Dividend Payout 294% 36% 25% 21% 33% SGR - 32.84% 24.42% 21.4% 10.27% 8LIGSQTER]YRHIVXSSOEQEWWMZIRIX[SVOI\TERWMSRTPERMRXLIPEWXJI[]IEVWXSGSZIV EPPTMRGSHIWEGVSWW-RHME8LEXEJJIGXWTVSƼXEFMPMX]MRXLIQIHMYQXIVQEWZSPYQIXEOIW XMQIXSFYMPHSZIVXLIWIVSYXIW 306 2017 2018 2019 Revenue Growth - 18% 15.7% PAT Growth - 56% 25.8% Blue Dart 2015 2016 2017 2018 2019 Revenue Growth 17.29% 12.8% 4.9% 4.05% 13.4% PAT Growth 4.8% 52.7% -29% 3.5% -38.1% 15. Investment Needs TCI Express 2017 2018 2019 CFO 52 74 78 Fixed Investment 38 62 19 FCF 14 8 59 Revenue 750 885 1024 Blue Dart 2015 2016 2017 2018 2019 CFO 153 361 225 317 243 Fixed Investment 44 119 123 199 287 FCF 109 242 102 118 (44) Revenue 2272 2563 2690 2799 3174 Industry Sheets, Qualitatives and Conclusions TCI Express Rich Ponds 14. PAT and Revenue Growth 307 Industry Sheets, Qualitatives and Conclusions Rich Ponds 308 16. Major practices in Indian Express Logistics Industry • • • • • • • 6IRXMRKXLI[EVILSYWIWMRWXIEHSJS[RIVWLMT 3[RMRKXLI[EVILSYWIIUYMTQIRXHIWMKRIHMRLSYWI 3[RMRKWQEPPTEVXSJXLIƽIIXSYXWSYVGMRKXLIVIWX %WWIXPMKLXQSHIPXSWGEPI %WWIXLIEZ]QSHIPXSGSRWSPMHEXI *SGYWSRQYPXMQSHEPRIX[SVOGVIEXMSR 'SPPEFSVEXMSRW[MXLWQEPPTPE]IVW ;I [MWL ]SY FIWX SJ PYGO 5YEPMX] SJ ]SYV HIGMWMSRW [MPP HIXIVQMRI XLI TEXL ELIEH +S SR ERH GVIEXIWMQMPEV-RHYWXV]7LIIXWJSVXLIRIWXFYWMRIWW]SYEVIPSSOMRKXSSWXEVXSVRI\XFYWMRIWW ]SYEVIPSSOMRKXSMRZIWXMR Rich Ponds Industry Sheets, Qualitatives and Conclusions Notes 309 Industry Sheets, Qualitatives and Conclusions Rich Ponds 310 Further Reading *SVXLSWIMRGPMRIHXS[EVHWVIEHMRKQSVILIVIMWEPMWXSJFSSOWXLEXWLEPPWIVZIKVIEXXS FIRIƼXXLIVIEHIVW8LIWIFSSOW[SYPHEHHKVIEXZEPYIXSXLIVIEHIVW[LS[MWLXSQEOI EGEVIIVSVEPVIEH]LEZISRIMRMRZIWXMRK%PPXLIWIFSSOWLEZIFIIR[VMXXIRF]TVSPMƼG VIWIEVGLIVWSVMRZIWXSVW[LSEVIZIV][IPPIWXEFPMWLIHMRXLIMVEVX • 8LI'SQTIXMXMZI7XVEXIK]8IGLRMUYIWJSV%REP]WMRK-RHYWXVMIWERH'SQTIXMXSVWF]1MGLEIP) 4SVXIV • 'SQTIXMXMZI%HZERXEKI'VIEXMRKERH7YWXEMRMRK7YTIVMSV4IVJSVQERGIF]1MGLEIP)4SVXIV Further Reading • &YWMRIWW 1SHIP +IRIVEXMSR % ,ERHFSSO JSV :MWMSREVMIW +EQI 'LERKIVW ERH 'LEPPIRKIVW 7XVEXIK]ÎV F]%PI\ERHIV3WXIV[EPHERH=ZIW4MKRIYV Rich Ponds • :EPYI4VSTSWMXMSR(IWMKR,S[XS'VIEXI4VSHYGXWERH7IVZMGIW'YWXSQIVW;ERX 7XVEXIK]ÎV F]%PI\ERHIV3WXIV[EPH=ZIW4MKRIYV+VIKSV]&IVREVHEERH%PER7QMXL • 8LI0MXXPI&SSO8LEX&YMPHW;IEPXL8LI/RSGOSYX*SVQYPEJSV*MRHMRK+VIEX-RZIWXQIRXW 0MXXPI &SSOW&MK4VSƼXW • 6IWIEVGLTETIVƈ1IEWYVMRKXLI1SEXƉTYFPMWLIHF]'VIHMX7YMWWIMR[VMXXIRF]1MGLEIP 1EYFSYWWMR • >IVSXS3RI2SXISR7XEVXYTWSV,S[XS&YMPHXLI*YXYVIF]4IXIV8LMIP • :EPYI 1MKVEXMSR ,S[ XS 8LMRO 7IZIVEP 1SZIW %LIEH SJ XLI 'SQTIXMXMSR 1EREKIQIRX SJ -RRSZEXMSRERH'LERKI F]%HVMER.7P][SXÔ] • ,&6ƅW1YWX6IEHW3R7XVEXIK] ,EVZEVH&YWMRIWW6IZMI[1YWX6IEHW F],&6 • 8LI *MZI 6YPIW JSV 7YGGIWWJYP 7XSGO -RZIWXMRK 1SVRMRKWXEVƅW +YMHI XS &YMPHMRK ;IEPXL ERH ;MRRMRKMRXLI1EVOIX • 'SQTIXMXMSR (IQ]WXMƼIH % 6EHMGEPP] 7MQTPMƼIH %TTVSEGL XS &YWMRIWW 7XVEXIK] F] &VYGI ' +VIIR[EPHERH.YHH/ELR • &IVOWLMVI,EXL[E]%RRYEP0IXXIVWF];EVVIR)&YJJIX +DSS\5HDGLQJ 311 312 Rich Ponds Before you end, Industry Sheets, Qualitatives and Conclusions Before you end, Rich Ponds 8LIMHIESJXLMWFSSOEWEPVIEH]QIRXMSRIHMWXSTVSZMHIERI\LEYWXMZIERHQSWXMQTSVXERXP]ER ƄMQTPIQIRXEFPIƅKYMHIJSVXLSWIMRXLIMRZIWXMRKMRHYWXV]SVEVIPSSOMRKXSKIXMRXSMX8LIJSGYW SJXLI[SVOEXIEGLWXITLEWFIIRXSQEOIXLI[SVOEWI\LEYWXMZIEWTSWWMFPIERHEWETTPMGEFPI EWTSWWMFPI8LMWLS[IZIV[EWRSXTSWWMFPIF]MKRSVMRKXLI[SRHIVJYP[SVOHSRIF]SXLIVWMR XLIƼIPHMRXLITEWX1ER]MHIEWHMWGYWWIHMRXLIFSSOXLEXQEOIWYVIXLITVSGIWWERHƄ-RHYWXV] 7LIIXƅMWI\LEYWXMZILEZIFIIRIMXLIVFSVVS[IHSVMRWTMVIHF]TEWX[SVOWMRXLIƼIPH;IHMHRSX JIIPƼXXSPIEZISYXWYGLEQE^MRK[SVOEWMX[SYPHLEZIHIƼIHXLIIRXMVITYVTSWIƁ)\LEYWXMZMX] ERH%TTPMGEFMPMX]JSVXLIVIEHIV;ILEZIXEOIRXLIWIMHIEWWMXXMRKMRVMGLPMFVEVMIWERHXVMIHQEOMRK XLIQQSVIETTPMGEFPIJSVXLIVIEHIV8LIMRGPYWMSRSJXLIWIMHIEWQEOIWYVIXLEXRS[XLIƄ-RHYWXV] 7LIIXWƅMWI\LEYWXMZIERHETTPMGEFPI,IVI[IMRGPYHIEPMWXSJWSYVGIW • Value Proposition ModelƁ,EWFIIRMRWTMVIHF]XLIFSSO:EPYI4VSTSWMXMSR(IWMKRF] %PI\3WXIV[EPHIVERHLMWXIEQ;IHSRSXGSQTPIXIP]EKVII[MXLXLIGYWXSQIVTVSƼPI WMHISJXLIMVQSHIPERHLEZIQEHIGLERKIWEGGSVHMRKP]MRSYVW • Value ChainƁ-X[EWƼVWXMRXVSHYGIHMRXLIFSSO'SQTIXMXMZI%HZERXEKIF]1MGLEIP )4SVXIV • Industry MapƁ-X[EWƼVWXHMWGYWWIHF]1MGLEIP1EYFSYWWMR • 4VSƼX4SSPƁ*MVWXMRXVSHYGIHF]X[SVIWIEVGLIVWEX&EMR 'S • Five Forces model Ɓ8LMWMGSRMGTMIGISJ[SVO[EWMRXVSHYGIHMRXLIFSSO'SQTIXMXMZI 7XVEXIK]F]1MGLEIP)4SVXIV -RRS[E]HS[IGPEMQXLIWIXSFIQ]TMIGIWSJ[SVO;ILEZIQIRXMSRIHEPPXLIWSYVGIWMRXLI XI\X[LIVIZIVMXMWETTPMGEFPI8LIWILEZIFIIREVIWYPXSJGSYRXPIWWLSYVWSJIJJSVXTYXMRF]XLI VIWIEVGLIVWERHXLIMVXIEQERHXLI]EVIXLISRIW[LSHIWIVZIGSQTPIXIGVIHMXJSVMX;I[SYPH EPWSMRWMWXXLEXXLIVIEHIVGLIGOWSYXXLIVIWIEVGLIVWƅGSQTPIXI[SVOEW[IPP 313 Industry Sheets, Qualitatives and Conclusions Rich Ponds References 1. https://www.entrepreneur.com/article/317725 2. https://www.psychologytoday.com/us/blog/the-athletesway/ 201403/the-neuroscience-social-pain 3. http://aronkiptarus.blogspot.com/2012/10/the-value-chain.html 4. https://www.lucidchart.com/blog/what-is-value-chain-analysis 5. https://mpra.ub.uni-muenchen.de/66799/8/MPRA_paper_66799.pdf 6. http://analystreports.som.yale.edu/internal/F2013/MJ/Measuring%20the%20Moat.pdf LXXTHSGYQIRXWQ\HSGYQIRXWTVSƼXTSSPWLXQP 8. https://www.daytrading.com/commodity-cycle 9. https://blog.arkieva.com/demand-forecasting/ 10. http://www.strategystreet.com/blog/causes_and_symptoms_of_overcapacity 11. https://en.wikipedia.org/wiki/Capacity_planning 12. https://www.slideshare.net/aju721/cadbury-6110613 13. https://www.investopedia.com/terms/p/pricingpower.asp 14. https://www.icsi.edu/media/website/Business%20Economics%20(FndProg).pdf LXXTWGSVTSVEXIƼRERGIMRWXMXYXIGSQVIWSYVGIWORS[PIHKIWXVEXIK]MRHYWXV]PMJIG]GPI LXXTW[[[WPMHIWLEVIRIXEWLMWL/4(TVSHYGXPMJIG]GPI LXXT[[[MEPGSVKƼPIHSGYQIRXW[SVOWLSTWVSYIR-RHYWXV]CPMJIG]GPICWIQMREVC LERHSYXTHJ LXXTW[[[IRG]GPSTIHMEGSQIRXVITVIRIYVWIRG]GPSTIHMEWEPQEREGWXVERWGVMTXWERH QETWMRHYWXV]PMJIG]GPI 314 References Rich Ponds LXXTWGSVTSVEXIƼ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ƼZIJSVGIWXIQTPEXI LXXTW[[[RLQEGYOHMWGSZIV[LEXMWREXYVEPWIPIGXMSRLXQP LXXTW[[[LMWXSVMERWSVKEFSYXELEERHQIQFIVWLMTELELMWXSV]ERHEVGLMZIW LMWXSVMGEPEVGLMZIW[L]WXYH]LMWXSV] LXXT[[[NJOPERGIVGSQ)HYGEXMSRLXQP LXXTWNYHMXLGYVV]GSQYRGIVXEMRX]PSWXMRXVERWPEXMSR 315 Disclaimer 316 Rich Ponds Industry Sheets, Qualitatives and Conclusions Industry Sheets, Qualitatives and Conclusions Rich Ponds This book has been published with all efforts taken to make the material error-free. However, ZebraLearn Pvt. Ltd., do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause. While every effort has been made to avoid any mistake or omission this publication is being sold on the condition and understanding that ZebraLearn Pvt. Ltd., would not be liable in any manner to any person by reason of any mistake or omission in this publication or for any action taken or omitted to be taken or advice rendered or accepted on the basis of this work. For any defect in printing or binding the publishers will be liable only to replace the defective copy by another copy of this work then available. 317 Industry Sheets, Qualitatives and Conclusions Rich Ponds Credits Edited by Fairy Panchal Creative Direction Priyal Mehta Fairy Panchal Creative Visualization Ashwini Ramesh Kumar Additional Illustrations from Freepik Storyset 318 Industry Sheets, Qualitatives and Conclusions Rich Ponds www. zebralearn.com @zebra_learn Download our app Google PlayStore App Store 319

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