Shareholders Value Creation

How to create value for your organization? Why TSR (Total Shareholders Return) is the best metric for value creation? Why is it difficult to create sustainable value? How to build sustainable value creation strategy? Why CSR & brand value change not consider as a part of TSR? Why multiple compressions are so difficult to beat? Why investors & analyst discounts valuation multiple? How to transit majority investors without eroding TSR? How to create value in low growth economy? How to play your strategy with sustainable TSR matrix as per investors eye? Why investors communication is so important for value creation? Which strategy you should use for value creation? How to use value creation scenarios? Why cash strategy is so important in low growth economy?

If all these questions bother you before developing your company’s corporate strategy/value creation strategy then you must see New Year’s complimentary presentation

Shareholders Value Creation – “A handy e-book on how to create sustainable shareholders value”

Take Me To The Home Page

Granular Business Portfolio Matrix

GE developed 9-box matrix strategy to manage portfolio of business when business grows to more than 150 business units.

In today’s global environment where world is flat, global economy, workforce & businesses are integrated, boundaries are narrowed traditional 9-box matrix is not very useful for managing portfolio of business. It requires more granular approach towards business portfolio.

This presentation is an advanced version of “traditional matrix (9-box) business portfolio strategy”.

Manage business portfolio in new multi-power economy with (2-way 9-box) matrix strategy

Organization Vision & Corporate Strategy

Every organization has a vision & in order to achieve that vision organization develops corporate strategy.

How to develop an optimal corporate strategy that carries both Blue Ocean & Red Ocean products?

Organization Vision & Corporate Strategy

Take Me To The Home Page

Strategy Control Map (Market Capitalization Dynamics)

Strategic Control Map (Matrix) is based on market capitalization dynamics to help companies identify their biggest opportunities and threats and boost their odds of hunting for acquisition targets rather than being hunted themselves.

Please follow the below mentioned link to see 1 slide presentation on my slideshare account.

Strategy Control Map Matrix

Take Me To The Home Page

Shareholders Value Creation through Price Optimization (SVC-4)

Does your organization create appropriate value with Pricing Policy? Normally organization doesn’t give as importance to pricing as to Volume growth & Cost optimization however reality is that Price optimization creates more value than Volume growth & cost optimization.

 

 # Research by one of the top Consulting Firm

Irony is that price optimization is overlooked as key business driver though for many businesses price optimization plays major driver of growth than volume or cost optimization.

Now the question arises why haven’t more organizations use price optimization for value creation. Following are the challenges for not adopting price optimization-

• Belief that price is driven by external forces: Many businesses mistakenly believe that they must passively accept prices across all products, markets and channels 
• Sales force resistance: This is particularly the case when people are rewarded on the basis of sales volume 
• Information collection: Difficulty obtaining the necessary information from existing systems is a reason why companies may ignore potential value from price optimization
• Perceived complexity: It generally requires thoughtful manipulation, often at the level of individual transaction

Management’s challenge is to achieve optimum price in the existing market. Normally following approaches are dominated the pricing strategy-

Cost Plus: It has an advantage of simplicity in implementation & administration however there is a high risk of leaving value on the table if some customers are prepared to pay higher price

Customer Value: Pricing according to the customer value approach involves setting prices to capture the full value customers place on a product or service. The advantage of this approach versus cost plus pricing is higher profit margins can be achieved through the capture of the customer surplus. However the main drawbacks are complexities involved in implementation – how to determine customer utility for each product line and how to account for difference in the price a customer is ready to pay

Penetration Pricing: Pricing low to gain market share in anticipation of scale or experienced economies however with product lifecycles becoming shorter and shorter, the risk inherent in penetration pricing is that the product may not endure long enough to deliver the expected savings

Skimming:  A skimming strategy is essentially the opposite of penetration pricing — pricing high to maximize margin from customers ready to pay the most however success of skimming strategy depends on the ease of entry by competition, since high margins are an open invitation to new entrants

Company’s pricing strategy depends upon market position, stage of product life cycle & customer demand however pricing choice should be driven my marketing strategy & to maximize shareholders valueSupply & Demand

How will current and future supply, demand, and cost dynamics affect the overall industry price levels in the foreseeable future? Although managers are often well versed in monitoring demand drivers and attuned to responding to the threat of new entrants, market and customer strategies are typically less effectively managed. Therefore for many companies these last two hold the greatest potential for where additional value can be captured.

 Product & Marketing Strategy

The key issue in product and market strategy is determining the “list price,” the seller’s published price for a service, product line or SKU. The Stock Keeping Unit (SKU) is the level at which price optimization is most powerful, since customer price sensitivity can frequently be found to vary according to the colors, dimension or other variations in the characteristics of a product.

The psychology of list prices is an important factor, since the price acts as a reference point for customers and conveys a range of signals about the product. The list price must be set at a point that preserves a product’s price / benefit advantage in the eyes of customers while maximizing profitability.

The list price is generally the base against which discounts and allowances are taken. Therefore, it needs to be high enough to offset the expected discounts, freight recoveries and so on. A higher list price allows managers a greater degree of freedom in terms of offering a range of customer discounts. However, a list price too high may push the product into an inappropriately elevated price bracket in the eyes of customers.

Optimizing list price is easily grasped in principle, but in practice it is often ignored or not successfully implemented. Managers can identify the potential opportunities for value creation when they develop an improved understanding of the forces influencing achievable list prices. This requires investigation of factors such as: 

• Margin bands

• Regional variations in margin

• Freight rates

• Pricing conventions in the industry (early payment discounts)

• Distribution channels

Analysis of price sensitivity often reveals that the optimal list price can vary among geographic markets, products bundles or product lines within a category. Each of these areas represents an opportunity to enhance margins.

 Figure: A

 Figure A reveals that client was able to identify margin bands based on customer purchase volumes of a fast moving consumer product and to implement a new list price structure with the potential to add significantly to the value of the company.

The principal outcomes and benefits companies obtain through product and market price optimization strategies are:

• A restructured list price program that reflects the varying competitive intensity that enables the seller to capture more of the customer surplus

• Identification of opportunities to increase value through price differentiation between segments.

 Figure: B

Figure B shows the magnitude of margin increases available on low volume items in one market for fabricated products. Higher list prices were possible in this case due to a combination of lower customer price sensitivity on slow moving items purchased only infrequently and less intense competition in the supply of many low volume products. Previously, this manufacturer had maintained a standard margin as its pricing policy across all SKUs for each type of product. Analysis of price sensitivity revealed that while intense competition on high volume SKUs (D & E) required company to “meet the market” on price margins could be dramatically improved on low volume lines. This was because competition on low volume SKUs was typically less intense and infrequent purchases by customers made them less sensitive to the price. Higher margins on low volume SKUs produced a significantly higher contribution and helped ensure that the company could remain competitive on high volume products.

This example illustrates how a better understanding of relative price sensitivity of customers enables a more sophisticated approach to list prices, and can result in significant potential for value creation.

Customer Strategy

The key to customer pricing is maintaining loyalty while achieving the highest prices possible that are appropriate to the volumes sold to the customer. It’s a delicate balance and is based largely on the psychology of discounting.

In many companies, senior management’s understanding of price variation at the customer level is poor with the actual price ultimately determined by the sales force. Management needs to carefully monitor and evaluate customer pricing. Without an appropriate pricing framework, specific discount schedules and aligned performance incentives, sales staff with too much autonomy can quickly erode company profits and even provoke competitive responses that destroy value through out the market.

The key issue is identifying and managing the factors that have the potential to erode list price. These include:

• Discount schedules

• Rebates

• Volume bonuses

• Promotional bonuses

• Cooperative advertising/marketing

• Allowances

• Payment terms

• Buybacks

Performing a transaction level analysis can be a powerful tool for value creation, enabling managers to tighten the relationship between volume and price. In particular, it helps companies increase the contribution from low volume customers that may have obtained discounts or favorable terms that are otherwise reserved for high volume purchaser. Transaction level analysis also allows managers to directly assess:

• The value of customer segments and accounts, therefore determining the appropriate allocation of sales effort

• The net effect on profit of discounts, bonuses and other incentives given to particular sales channels

One indirect benefit is the increased price discipline in the overall market that results form a rational and consistent approach by key players, thus reducing the risk of irrational competition destroying margins for all. Another application of a rational pricing strategy is to examine price differential between small and large companies. Often, small customer accounts can occupy a disproportional amount of sales force time and provide relatively small returns for effort.

Pricing Frameworks to Improve Shareholders Value

Managers are under increasing pressure to lift returns and to focus on improving shareholder value. Institutional investors are becoming increasingly vocal in demanding cost reductions and rationalization programs however they should devote extra attention to the revenue side and the potential for price optimization. A robust pricing framework has the potential to improve shareholders value through:

• Establishing and maintaining list prices that effectively balance profit maximization with product positioning

• Preventing erosion of prices at the customer level through a careful customer pricing and discount strategy.

Senior managers therefore need to regularly assess pricing policy and administration. Key questions to consider:

• Does the company pricing policy recognize differences in regional market dynamics? 

• Is pricing segmented to recognize the variations in perceived value among different customer groups? 

• Is there a transparent discount policy based on customer relationship value? 

• Who has discretion to modify prices? What criteria are required? 

If an organization can acknowledge the importance of price as a driver of shareholders value, part of the battle is won. Once managers and sales people incorporate this awareness price into their everyday monitoring of performance, the company will start to create long-term value for its shareholders.

Take Me To The Home Page

Shareholders Value Creation through Strategic Market Positioning (SVC-2)

What is market share? Does market share mean share of product, share of category, share of channel, share of customer, share of region or share of something else? How does your company define market share? Companies that cannot answer this very important question cannot effectively engage in Strategic Market Positioning (SMP) and in the long term, will find it difficult to invest successfully for growth.

What is Strategic Market Positioning (SMP)? For a business or product line that competes in only one strategic segment, SMP is simply the market share of the business in its strategic market segment. For a company competing in multiple strategic segments, its overall SMP is the average of its SMPs in each strategic segment, weighted by the business’s sales or investment in each strategic segment.

Achieving effective SMP involves analyzing an industry to determine strategic market segments and then making investments in those segments that will lead to increased returns.

Does SMP = Market Segmentation? Normally market positioning is considered as market segmentation. This is totally a marketing technique that involves breaking down market into smaller segments in order to better understand consumer behavior & identify opportunities to increase overall market share.

However on the other hand SMP is different because it creates shareholders return. It brings together the disciplines of strategy and finance to help shape a company’s approach to value creation. Organizations that fail to differentiate between market segmentation and Strategic Market Position may be at risk because the definition of market share often does not correlate with company profitability, returns and strategic potential.

Do you think larger market share provides superior return? As per research by one of the top consulting, larger market share even provides low return in comparison to companies having smaller market share with Strategic Market Positioning. There are several reasons supporting to this finding. The smaller, more profitable company may avoid going head-to-head with larger, more powerful competitors. It may deploy its investments into segments where (among other things) the dominant players simply do not compete. In essence, it positions itself in its industry strategically and allocates more assets in fewer, carefully selected ways. As a result, it has a much higher market share in its chosen segments.

How to create Value through Strategic Market Positioning (SMP)

Following 3 approaches should be followed to create value through SMP-

Be Creative & think Broad: To maximize the chances of identifying successful strategies, think beyond the current business offerings. Apply the Blue Ocean Strategy principle “Reconstruct Market Boundaries” & “Reaching Beyond Existing Demand”. Evaluate other businesses that share the same customers or leverage the same technologies. Consider services as well as product offerings. Identify the range of organic or acquisition initiatives that could be used to pursue potential growth strategies.

Conduct SMP Test: Identify the growth strategies that have the greatest potential to increase the company’s weighted average relative market share, as measured across all strategic segments impacted by the strategy. This will identify strategies that have the potential to improve the company’s overall position on the most important drivers of profitability. Conduct SMP test quantitatively to specific initiatives to see whether market share, appropriately defined, increases or decreases.

Conduct Value Creation Test: “Strategic value” is defined as the net present value of cash flows from higher revenues, lower costs and lower capital requirements that will accrue from the growth opportunity and the existing business being run together versus separately.

We will see an example of Southwest Airline & America West Airline to know how SMP creates higher value.

Southwest Airline & America West Airline started in roughly the same position, but ended in very different places. Both formed as low-cost, low-fare regional carriers, both airlines grew their operations and profits on roughly parallel tracks through the early 1990s.

America West followed a traditional hub-and-spoke design for its flights and became well known for its expansionist strategy. Southwest, on the other hand, grew at a slower pace, taking the time to build up strong positions in specific markets before penetrating additional markets. Southwest’s emerging strategy was creative in that it focused on short haul, high frequency flights in city pairs where the airline could secure a strong market share position, often flying to a secondary, lower-cost airport. In addition, its costs were controlled as a result of the corporate decision to use (and therefore maintain) only one type of aircraft: the Boeing 737.

By contrast, America West’s expansionist strategy called for international routes, which in turn called for a heterogeneous and expensive-to maintain fleet. America West did not base its strategy on the core tenet of SMP: build the type of market share that maximizes high-impact growth and leverages economies to the greatest extent possible.

  Summarize two Airlines positions & Strategies

Summary Stats ( 1990)	South West	American West
Revenue	$1186 M	$ 1315 M
Number of Aircraft	106	104
Types of Aircraft	1	4
Flight Design	Point-to-Point Short Haul	Hub & Spoke

Figure 1: Compares the two airlines in terms of traditional market share and Strategic Market Position to reveal the true impact of their different strategies

 Source: Bloomberg 

Although America West and Southwest had similar US total market shares in 1990, this measure obscures their relative competitive strengths.

In the airline business, pricing power and operating costs are driven more by share of flights between states or, more precisely, by share of flights between specific city pairs. Travelers prefer to fly an airline that has several daily flights between two points because it gives them more flexibility in the event of a missed or delayed flight. This is better for airlines because they are likely to have larger scale and more efficient operations at each end.

Southwest Airlines recognized this as a critical factor and was careful to enter a new market only when it felt it could achieve substantial strategic share in that market. By contrast, America West assumed that, by entering larger and increasingly international markets, it was strengthening its overall position in the airline market. In fact, it was neglecting its core franchise and spending limited resources to enter new market segments where it had little to offer against strong competitors.

Figure: 2 illustrates the value creation outcome of these two Airlines while adopting different strategies

As America West’s emergence from Chapter 11 in 1994, its stock has declined at a CAGR of -4.9 percent, while Southwest’s stock has grown at a CAGR of 9.9 percent.

Conclusion

Strategic Market Positioning (SMP) is a proven and highly effective tool for creating value. It is founded on the assumption that not all growth is good – in fact, that some growth actually destroys value. SMP helps companies identify the difference and respond accordingly. By being creative and thinking broad to maximize the chances of identifying successful strategies, and by conducting the SMP and value-creation tests, an organization’s leadership can gain valuable insight into organic growth ,acquisitions and other growth investments and be better able to formulate strategies that have the potential to improve the company’s overall performance.

Take Me To The Home Page

MNCs Dilemma on China’s “Good-Enough” market Segment

Chinese economy is growing very fast. It is estimated that it will grow nearly 10% for the next 2 years and by 2030, 36% of world’s Incremental GDP will come from China. China is taking huge advantage of its cost efficiency & leverage manufacturing to serve other regions also. Chinese growth depends upon emergence & fast growing segment of middle group or we can say “good-enough” market segment.

Majority of MNCs provide goods & services in high margin premium segment facing huge dilemma and competition from “good-enough” market segment.

Dilemma in the sense that company is not sure whether to jump into “good-enough” segment or continue with the premium segment. If they jump into good-enough then it can cannibalize their premium segment sales or in other case if they can’t enter “good-enough” segment then other local competitors will take some of the market share locally- Chinese people gives more importance to good-enough market segment where they buy almost same quality of products at lesser price.

Good-enough segments are growing and changing very fast and it becomes more than ½ of the total Chinese market segment.

What should be MNC Company’s strategy regarding good-enough segment? How to determine whether they need to jump into this segment or not? What should be their approach in catering to this segment?

DECISION TO ENTER INTO GOOD-ENOUGH SEGMENT

It can be very tough decision for any MNCs providing services in premium segment to get attracted & involve in catering to 62% market share of good-enough segment.

They have to do their homework properly before jumping into this segment. They need to find out few question i.e. Are the premium segment is still attractive? Is it growing? Are companies still achieving high returns or returns are eroding? What is your position in a current market? Are you a market leader or niche player?

If the company finds that growth of the premium segment is slowing down & returns are eroding and there is future threat from local competitors to capture some premium segment market. In this circumstances company has to take a call to enter into good-enough segment market however they should clearly strategize their approach, how they are going to enter, whether they expand organically or acquire an existing player. How to capitalize on strong geographic distinction so that new offering couldn’t cannibalize premium offering?

However one more important reason that justifies MNCs to get into this segment is that if they don’t enter into this segment then they will face tough competition from local Chinese company not only in the local Chinese market but also in their own backyard.

HOW TO ENTER INTO GOOD-ENOUGH SEGMENT

The goal for the organization is to lower their manufacturing costs, introduce simplified product & services & broaden their network while maintaining reasonable quantity. There are 2 ways through which companies can enter into good-enough segment-

Attacking From Above

MNCs providing goods & services in premium segment should employ and offensive-defensive approach to enter middle market/good-enough  segment. They should enter good-enough segment to defend against the rise of local competitors and erosion of premium segment.

GE Healthcare strategy to enter into good-enough segment and simultaneously protect its premium segment is a very good example of attack from above.

GE Healthcare employed to expand sales of its MRI equipment in China. The company created a line of simplified machines targeted at hospitals in China’s remote and financially constrained second and third-tier cities where other MNCs rarely ventured. That good enough territory has all the right conditions. It was a fast-growing market whose customers purchasing criteria weren’t likely to change soon. GE’s cost structure allowed it to compete with other middle market players in the industry. And there was little risk that the company would cannibalize its premium line of diagnostic machines; large city hospitals were not keen on downgrading their MRI equipment.

GE Healthcare was able to defend its position against local upstarts. The company is trying to develop the optimal product portfolio and is addressing such issues as how best to service the equipment. GE captured 52% of $238 million market in 2004 generating roughly $120 million in sales. GE is replicating the same strategy in other developing countries including India.

Buying way In 

MNCs that can’t alter their cost or process quickly enough to compete with local players should use break-through approach to enter good-enough segment market by way of merger & acquisition.  

Gillette is a very good example of entering into good-enough segment by way of merger & acquisition.

Gillette’s Duracell division throughout the 1990s was losing market share to lower- price competitors like Nanfu who controlled more then 50% of the market. By 2002 Gillette’s Duracell share of the Chinese domestic battery market was mere 6.5%.

Gillette management team recognized that its Duracell unit was at a cost disadvantage compared with its rivals and concluded that it will be difficult to broaden the brand’s market penetration. Facing with such an odd Gillette decided to buy into good-enough segment market by acquiring a majority stake in Nanfu but Gillette was extremely careful to protect Duracell’s & Nanfu’s brand in their respective segment. Gillette continues to sell premium batteries in China under the Duracell brand and has maintained Nanfu as the leading national brand for the mass market. The dual branding, cost synergies, sales growth, broadened product portfolio, economies of scale, and distribution to more than 3 million outlets in China have paid off for Gillette, Which has seen significant increase in its operating margin in China.   

Finally entering into good-enough segment in China can be double bonanza for MNCs. Just like Chinese good-enough segment market Indian good-enough segment market is also very big & growing very fast. MNCs can use experience of Chinese good-enough market and replicate the same in Indian market. In order to achieve cost efficiency or economies of scale MNCs can make a hub in South-East Asia region to cater both India & China’s good-enough market segment.

Take Me To The Home Page

Global Business Model of “Emerging Market Multinationals” & “Developed Market Multinationals” in a new Multi-Power Economy

When we talk about Emerging Market naturally our focus sights on “BRIC” countries Brazil, Russia, India & China but in reality there are other emerging market economy also that will grow very fast in the coming decade or so. Those countries are Czech Republic, Hungary, Indonesia, Lebanon, Mexico, Poland, Russia, Singapore, South Africa, South Korea, Venezuela, Vietnam, Malaysia, Saudi Arabia, Thailand, Turkey & Egypt.

At present we have two global power house Europe & America however after the emergence of emerging market economy we are going to have 3 global power house Europe, America & Emerging Market that will compete against each other, trade with each other and create partnership with each other to grow and serve the global economy.

Till the last decade there were only 20 emerging market multinational in Fortune 500 list but now more than 70 emerging market multinationals are in Fortune 500 list. This shows that emerging market multinationals are spreading their legs very fast and the emergence of IT has provided more impetus to it as world becomes flat and boundaries are narrowed.

Now the question arises how emerging market multinationals will compete with developed worlds multinationals. what are the challenges they have to face? What kind of operating model they have to develop in order to compete in global environment? Similarly after the acute financial crises & expected low GDP growth trajectory for long period of time what will be the business strategy of developed market multinationals to compete globally?

There is a great divergence between Emerging Market & Development Market. How they will compete in each others market? In the normal circumstances there is huge difference between operating models of both the economy. This makes us to think further, how they will achieve economies of scale? Does they require global operating model? Answer is yes…………

Yes both the economy requires global operating model. Then again question arises, Does development market & emerging market completely changes its operating model as per local models of a particular country/region?

In order to understand these issues we have to check existing operating model of both the economy & their advantages & disadvantages.

At present circumstances when developed market multinationals expand themselves to nearby region then normally they adopt their existing operating model as market condition, consumer behavior, regulatory concern, formal structure, Low risk & culture are almost similar to their home country so they have to make only minor changes in their model and the same is true for emerging market multinationals also.

We can call this “Minor Diversity” but the problem arises when developed country encroaches into emerging market economy where conditions are vastly different to their home country like market condition which caters more to lower pyramid, consumer tastes & preferences vary across regions because of developing nature, volatility of risk, Political uncertainty, lack of proper regulation, informal structure & diversity in culture etc.. These differences require major changes in their model and we can call this “Major Diversity”.

Now we are going to see existing operating model of both developed & emerging market multinationals.

 Operating model of Developed Market & Emerging Market multinationals

Above mentioned picture shows that Developed market multinationals gives more emphasis to Process & Technology and Organizational Architecture. Their operating model is process & technology driven and results were judged on the basis of performance metrics. They give very less importance to Leadership skills & Inter-personal relationship between people however opposite is true for Emerging Market multinationals where more emphasis is given to Leadership & Inter-personal relationship between people and less importance is given to process &  technology, organizational Architecture & metrics. 

For Example: In the oil and gas industry, for instance, emerging-market NOCs do not seem to rely as systematically on the strict net-present-value metric that IOCs use in their decision-making process—which is consistent with a more-risk conscious leadership style. Rather than adopting this metric, NOCs change the game by creating deals that involve aid and infrastructure packages. This signals a market development mind-set as opposed to a market-exploitation mind-set.

Leadership in developed market multinational tends to be more institutionalized: the CEO’s personality surely counts, but decision influences employees’ collective thinking however there are always some exceptions like Apple’s Steve Jobs. In most developed-market multinationals, leaders’ personalities are not as important as rules, processes and organizational structure. Leadership in these companies revolve around planning and structured and formal decision making more than around direct interactions and personal contacts with employees. Leadership is not concentrated just at the very top but distributed throughout the hierarchy and the top-management team. In developed countries, stock market pressure leads leader/CEO to give more emphasis on the short term and more conservative attitude toward risk.

On the other hand Emerging Market multinationals strongly rely on the leadership component. Leadership at these companies is personalized and centralized; it is also more entrepreneurial and top executives make fast, bold decisions and are oriented toward long-term risk. Because many emerging-market multinationals are privately owned, they often have greater unity of ownership and control than developed-market multinationals. The CEO, who is often the owner, usually has more power than the CEO of developed-market multinationals. This results in individual-based leadership structures more than in team-based leadership structures where power is more distributed. The CEO is also highly visible throughout the company and top executives are often family members or members of the same political party (ownership-related) or clan (political clan); by contrast, in developed-market multinationals, the leadership is almost exclusively composed of professionals.

Emerging-market multinationals are state-owned or privately-held and don’t need to meet the short-term demands of shareholders, their top leaders are more comfortable with risks and look more to the long-term. The amount of red-tape and bureaucracy that emerging-market leaders have had to deal with in their home countries is also a sign of their leaders’ strong entrepreneurial spirit. It equipped them with a superior ability to create networking skills within their ecosystem and to deal with political stakeholders. They are much less politically naïve than their developed-market counterparts, and this can help them in their efforts to internationalization.

People

Emerging-market multinationals typically rely heavily on people skills. These companies excel at fostering and leveraging wide inter-personal and inter-organizational networks. It aligned with a leadership style based on highly personalized interactions; networking is deeply engrained in emerging-market multinationals corporate and national cultures. In emerging-market multinationals networks are based on reciprocal obligations, long-term commitments, kinship and trust.

On the other hand Developed-market multinationals emphasis on people means extensive, formal international human-resource management processes. In developed market multinationals, networks tend to be rational and calculated which limits trust due to the higher risk of free riding and opportunism.

Organizational Architecture

Emerging-market multinationals where CEOs and top managers seem to concentrate more on authority, organizational structures are more centralized and hierarchical than in developed-market multinationals. High power-distance acceptance and benevolent paternalism are common traits of emerging countries. It suggests that some emerging-market multinationals may lack the lateral structures necessary to formally coordinate international operations.

By contrast on the other hand developed-market multinationals tend to rely heavily on their organizational architecture to coordinate their international operations.

Process & Technology

Processes and technologies were given less importance in Emerging Market multinationals. This component is also less important than their leadership and people components. Emerging-market multinationals tend to subordinate processes to people.

By contrast, processes and technology in developed-market multinationals are an essential component of their operating model even when these multinationals operate in regions of similar economic development.

Metrics

Emerging-market multinationals use fewer metrics than developed-market multinationals since the former may have fewer tracking processes in place to generate the metrics. In emerging market multinationals, metrics used to measure individual performance and productivity do not seem to be as important as they are in developed market multinationals. Emerging-market multinationals appear to place more emphasis on loyalty, kinship and political connections for talent management.

Developed-market multinationals typically use metrics to assess the quality of human resources, innovation, supply chain effectiveness, knowledge management and leadership.

In order to internationalize business or encroaching in other countries/region, what shall be global operating model of Emerging & Developed Market? How to develop model so that they can retain advantages of existing model & improve on activity required as per other region/countries requirement?

Global Operating Model

Emerging Market Multinationals:

Leadership

Emerging-market CEOs centralize decision making—a possible flipside of their personalized leadership style—could be a handicap to their success in developed markets. The autonomy of subsidiaries might be stifled when they need it the most.

For example, Hyundai has suffered important setbacks in the United States (market share loss, high executive turnover) due to the feudal leadership style of its CEO. Evolving partially toward the more Western distributed-leadership model might then make sense.

Because family, cultural or political clan relationships matter for leadership selection and appointment, and because the clan is likely to be home country-based, leadership in emerging-market multinationals also needs to become more geographically diverse to manage a broad multi-power economy. More global emerging-market multinationals are beginning to understand this. Companies like Tata manage the career of future leaders with multiple foreign assignments, which creates more sensitivity to international markets.

Thus, emerging-market multinationals with a footprint in broad multi-power economy should embrace some of structural leadership attributes of their developed-market counterparts. They need to reconcile more structure and their current agility and speed of decision making. This will give them an added advantage as compare to developed market multinationals.

People

Emerging market multinational should converge towards more systematic international HR processes. In spite of progressive adoption of western human resource practices, the emerging market networking capability seems enduring. It influences both organizational and individual performance against expectations. More global emerging-market multinationals like Tata are using international networking extensively to leverage knowledge across borders. They not only keep the senior management of acquired foreign companies but also connect them with all employees in and outside India who hold valuable knowledge. These strong interpersonal networks have the added benefit of creating strong identifications with the company and of fostering the emerging-market entrepreneurial culture that helps employees become more comfortable with change. In the multi-power world multinationals are trying to emulate these networking capabilities.

Organizational Architecture

Tight hierarchy among emerging market multinationals with wide multi-power footprints is hindering integration and responsiveness. On the other hand, as the strong interpersonal networks of these companies may provide an advantage in helping them to manage the differentiated networks needed to manage successfully in broad multi-power economy.

Emerging market multinational should try to progressively converge towards developed market organizational architecture however they should continue using their soft skills advantages.

Process & Technology

Emerging-market multinationals may need to strengthen the role of processes and technologies in their configuration, they should also be wary of the rigidities that processes can create. In fact emerging- market multinationals should continue to subordinate processes to people. Although formal processes and technologies are important in a differentiated network, excessive reliance on them can inhibit the creation of interpersonal ties and thus, hinder the creation of customer intimacy, delay in decision making, opportunity loss, and the adaptation to local markets.

Metrics

Metrics help to determine whether the global operating model is performing well and whether each of the components is internally and externally aligned. Alignment of global operating model components will be increasingly important to emerging market multinationals performance. Emerging market whose footprint is more global may also need to employ more metrics.

Developed Market Multinationals:

Leadership

Developed-market multinationals have problems because of excessively structured leadership. They needs to move from an emphasis on management, in which good managers produce predictable results, to an emphasis on leadership, where leaders are charismatic, risk-taking, fast moving and far sighted.

If your strategy is to deliver breakthrough performance, you need a different type of leader to make that happen but the problem lies within existing workplace structures and business processes that are constructed not for breakthroughs, but for predictable performance. Simply put, successful leaders of the 21^st century will not be cut from the cloth of managers of the old.

Developed market multinationals needs entrepreneurial leaders to get successful in multi-power economy.

People

Global developed-market shall try on developing networking skills.

Developed-market multinationals should realign their global operating model thoroughly by developing employee’s ability to network, by letting ties to be created by local people and not only by senior expatriates, by creating structure and performance metrics which allow foreign subsidiaries to lead more initiatives that go out from the corporate standard will provide impetus to develop inter-personal relation & networking skills.

Organizational Architecture

Developed market economy organizational architecture requires to reconfigure their global operating models so that more informal, soft components can play the necessary lubricating role. For example, it has been well documented that networks require intense inter-personal communication, a capability well found among emerging-market multinationals. This is where more global developed-market requires re-balance of their configuration and to include more of the soft components will gain.

Process & Technology

Developed-market multinationals with diverse footprints in multi-power economy should work to balance processes and people, in particular to succeed in emerging markets. The key for them might be to differentiate where standard processes work best (for efficiency maximization) and where they should rely more on people’s skills and networks. In other words, in some locations, human-based solutions might be the least expensive and most satisfying.

Metrics

Developed market multinationals are already metrics driven they should properly align metrics with increased importance of Leadership & People in their global operating model.

Global Operating model of Developed Market & Emerging Market Multinationals

Both Developed Market & Emerging Market multinationals make sure that all the components of global operating model should properly aligned with each other in order to provide Superior Business Performance.

Please Take Me To The Home Page

How to use “Business Portfolio Matrix” strategy to get maximum out of diversified business units?

When large organization diversify themselves into different business units then after sometime it becomes very difficult for an organization to take decision where to put more cash and where less. Lots of large organization find themselves in this kind of situation where they need to take decision of providing cash to different businesses in order to get maximum result. GE is one of the organizations which find itself in this kind of situation when their business grows to 150 separate business units.

It is very difficult for an organization to allocate cash just on the basis of projected future results. This can be very dicey as each individual makes projection differently as per his thinking. Apart from this, there are different kinds of businesses some are capital intensive, others give more impetus to advertisement or brand etc.

How to solve this kind situation? How to allocate cash so that a particular business gets required cash?

Business Portfolio Matrix is one of the ways to solve this kind of situation. GE used Matrix to make decision on their diversified business portfolio.

In order to use matrix we need to know Industry Attractiveness of business units and organization’s Business Position in a particular business unit. This provides real position of a company in an industry.

Industry Attractiveness

Industry size
Growth Rate (substitute industries growth rate, capability & expansion should be considered before identify growth of the industry)
Number of Competitors
Current Profitability
Entry Barrier
Industry’s future Expansion potential / Govt. Regulation
Industry approach towards social responsibility
Customer outlook towards industry

Industry attractiveness can be identified by getting information of all the above mentioned points. Industry size is very important, how much players can an industry accommodate? What’s the future expansion potential of a particular industry, for example if you are in Outsourcing (BPO/KPO) industry then there is huge opportunity because BPO/KPO industry is growing very fast and will grow for a very long period of time and it can expand itself in other areas also like initially when BPO was started it was used mainly for call center or transaction processing work but now today all the high-end services like business analysis etc. are served by outsourcing industry. On the other hand, industry like Textile which is growing but growth rate is not very fast and there future expansion depends upon govt. regulation and consumer behavior.

Industry’s attractiveness depends upon growth rate of industry. Organization should find out industry’s past, current & future growth rate. While identifying industry growth rate- substitute industries growth rate, capability & future expansion should also be considered.

Business Position

Company’s business position as compare to competitors (competitive sustainable advantage)
Core competencies
Financial position
Market share / Brand equity
Use of technology in business
Bargaining power over supplier
Customer loyalty towards business (Corporate Social Responsibility)
Is the company natural owner of business?

What is the company’s business position as compare to competitors? Does business unit has sustainable competitive advantage as compare to its competitors?

 “Business Portfolio Matrix” Strategy

In “Business Portfolio Matrix” strategy, the major hurdle for any organization is to know how to plot businesses in these 9 columns.

In the above mentioned Matrix X-axis shows Industry Attractiveness however Y-axis shows Organization’s Business Position. As we see all top right corners are marked in green and these are the business that will provide good returns and has huge growth potential. These businesses require more cash. Organization should try to fulfill cash requirement of this segment so that business units can obtain business advantages before their competitors. It should not happen that organization couldn’t grow business due to lack of resources. These are the highly attractive industry categories where organization’s business units position is also high-medium category.

After putting cash in high-growth business if there are any cash left then it should be used selectively in business units marked in yellow. These are the business units where Industry Attractiveness is high but company’s position is low or company’s position is high as compare to its competitors but industry attractiveness is low. In between them there is a category where industry attractiveness and business position both are in medium category. Organization should first put money in this category of businesses afterwards if there is any money left then it should be used in other two extreme categories on the basis of selective investment.

Investing in these two categories are very critical decision, this need to analyze properly before making any decision. Is it viable to continue business in this category even though company’s position is good? An organization should try to make selective investment in these kinds of businesses and once when they find some other attractive business opportunities that require cash in highly attractive industry then they should harvest/divest investment in existing business and put cash in attractive growth oriented industry.

Other selective category where company’s position is low but industry attractiveness is high. This is another critical decision, first it should be analyzed whether business unit is showing poor performance due to lack of resources or any other reason. Can business units will grow if additional resources will be allocated? If poor performance is due to some other reason then it should be analyzed properly before taking any cash allocation decision.

It is always better to put money in a high growth oriented industry rather than in low growth oriented industry even though company’s performance is better as compare to its competitor in low growth industry.

Other 3 lower category of matrix marked in orange should be harvest/divested immediately and generated cash shall be allocated in upper & middle category of business units as per their requirement.

Take Me To The Home Page

Financial Innovation with Inclusive growth

India is embarking towards robust growth to achieve the position within top 5 economies of the world. In order to achieve that feet India requires huge development in infrastructure, industrial & manufacturing front. These are the core factors for countries growth however in order to achieve it every country requires financial innovation.

Financial innovation is a key to development but India should learn from the mistakes made by western countries while doing financial innovation. We have seen the consequences of unregulated financial innovation like securitization, off balance sheet funding etc. In western countries these innovations were made without keeping proper check point on risk involvement like high exposure or excessive leverage etc. We have seen the consequences of it, as global economy is suffering from great recession since the great depression.

India should keep in mind all these factors before taking a road ahead towards top 5 economies. However the current recession has showed the robustness of Indian economy particularly in banking & finance sector. Global financial sector are turmoil with the current recession but Indian banking and finance sector is unscathed by it due to robust regulation in Indian financial system. Today, Indian banks are highly capitalized & profitable.

Yesterday itself, the banking regulator has asked banks to divulge a host of details in the notes to account in the balance sheet from the year ending March 2010 onwards, which will vastly increase the level of transparency. Among the information that banks are required to disclose include concentration of deposits, advances, exposures and non-performing assets (NPAs). In addition, banks will have to disclose
sector-wise NPA’s.

Disclosures relating to concentration of deposits include total deposits of 20 largest depositors and the percentage of deposits of these 20 largest depositors to total deposits of the bank. Similarly, banks are required to display total advances to 20 largest borrowers and the percentage of advances to 20 largest borrowers to total advances of the bank. In connection with NPAs, RBI has asked banks to reveal which are the top four borrowers who have defaulted. They also have to disclose the extent of non-performing assets that banks have in respect of each industry. Banks will also not be able to sweep bad loans under the carpet as they now have to declare gross non-performing assets at the beginning of the year and gross NPAs added during the year. If there is a reduction in bad loans, banks will need to provide a break-up of how much of these were due to upgradations, recoveries and write-offs. A new disclosure also requires banks to disclose all the SPVs that they have sponsored in India as well as abroad.

This kind of initiative enhances transparency in the system without eroding growth factor. Today the challenge in bank regulation, underlined by the financial crisis, is to strike a balance between stability and innovation. It is a balance that can and must change over time. Innovation should be made considering the benefits available to up-gradation of Indian society rather than producing bonuses for bankers.

Today India needs financial deepening and financial inclusion. It is possible to have financial deepening, a bigger banking system, without inclusion. That is not what India wants today. Indian wants deepening of financial innovation with inclusive growth.

India needs a fresh set of players who can design business models for financial inclusion. Now, India is a second fastest growing economy in the world and every investor wants to share a pie of its growth. There are lots of foreign banks eyeing to take a banking license in Indian Financial system. India should take an advantage of this opportunity, as global economy is not going to achieve high growth for quiet some time so investors can pump money in a growing wheel like India.

India should ask a question to foreign investors, banks & corporate seeking banking license in India, you want a banking license then why don’t you enter where you could make a difference? Why don’t you start from the bottom of the pyramid, the rural area? The onus should be given to foreign banks to innovate in the rural market. It will require them to combine local talent and IT in creative ways. It is a serious bottom-of-the pyramid challenge and it can translate into enormous payoffs worldwide and in India.

Foreign firms are doing the same thing in manufacturing sector like establishing industry in tier-3 cities so why not they can do it in banking front. Foreign banks are the one who introduced retail lending & cash management in Indian banking industry, afterwards all the private sector & public sector banks followed it.

In order to catch investors seeking banking license, India can propose some incentives like – in phase I entry into rural areas, in phase II allowed acquisitions of regional rural banks and in phase III access to the main market.

Considering the current global situation, growth of Indian economy and above mentioned incentives I think foreign banks can ready to upgrade bottom of the Indian pyramid, innovation of foreign banking in rural area. It will make huge benefit for India in terms of inclusive growth with deepening in financial system. Seeing foreign banks in rural area, private & public sector banks will also jump into this and makes the market more competitive and enhances further growth.

Take Me To The Home Page