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”

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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

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.

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Shareholders Value Creation through International Expansion (SVC-1)

Do you think International Expansion always creates shareholder value for an organization? Not all international expansion creates value, international expansion considered by identifying and evaluating geography/country with target market segment creates value for shareholders.

Why does organization go for international expansion? There are 3 reasons for organizations to go for international expansion-

• Improvement in cost-effectiveness of operations
• Expansion into new markets for new customers
• Following global customers

Companies looking for growth through new markets and customers, particularly those with limited international exposure, should begin with a prioritization of countries to determine where resources should be spent. Even if a country has already been identified as a high priority, understanding the relative attractiveness of other countries is valuable for decision making.

Planning for International Expansion

A growing or untapped market holds an understandable attraction. But every country must be scrutinized under the lens of a company’s value proposition before expansion is considered. For US/European companies, entering large rapidly emerging markets such as China/India may seem to be an easy decision but in fact there may be a market closer to home that provides stronger returns, has less strategic complexity, and requires fewer costly adjustments to business processes. The focus of the analysis should not be: “Should we expand into China, India?” but rather: “Should we expand into another country, and if so which one?”

Business Planning for International Expansion includes three phases:

1. Country Prioritization
2. International Market Due Diligence
3. Acquisition & Partnership Development

 Country Prioritization

Normally organization relies on typical indicators such as per capita income, total industry market size, or geographic proximity to identify a country but sometimes it can be misleading. Instead, a systematic screening process should be followed to bring the best options. The screening should cover three factors HARD CRITERIA, SOFT CRITERIA & CORPORATE FIT.International Market Due-Diligence

Phase one identifies one or more geographic markets that appear desirable but requires more detailed assessment. In Phase two i.e. Market Due-Diligence determines the expected value the proposed expansion might generate. This valuation is based on a forecast of revenues, an evaluation of costs and investments, and the application of a risk-appropriate discount rate. Typically, revenue forecasting is the most challenging component and is usually more complex in an unfamiliar market and those undergoing rapid changes in the competitive landscape and/or regulatory environment.

Revenue forecasts based on objective and detailed analysis are the tools for rational investment and expansion decision making. In forecasting product revenues, key steps include:

Determining the total customer base or market size – A range of factors including geography, price point, technological capability and end user group can define markets.

Segmenting the market to identify what portion should be targeted by the product or service – In a developing economy, the segmentation is typically identified by price point or income level of potential customers

Expected penetration of the product or service into the market segment

Expected price per unit

Acquisition & Partnership Development

International expansion is often combined with acquisition or a strategic partnership as a vehicle for entering in a country. Not all acquisition or partnership creates value. Partnership creates value if they provide-

• Access to valuable or scarce resources or raw materials
• Privileged market position
• Access to transportation or distribution systems
• Access to specific markets or customers
• Valuable brand recognition or identification

 What kind of Partner is appropriate?

Many companies still select their local partners reactively, based on deals being brought to them rather than through a systematic screening process, and they end up with a sub-optimal partner. It is necessary to first outline the specific criteria and benefits you are looking for and then identifying a range of companies that could provide those benefits.

 Conclusion

The principal cause of failures in international expansion has been commercial misjudgment. A number of high-profile brewing joint ventures failed when they overestimated China’s thirst for more expensive, international brand beer. When entering any new geography, the odds of success can be improved significantly if the company conducts more due diligence, identifies realistic market demand, and “tests the waters” prior to an aggressive expansion effort. Gathering locally generated information is time consuming, but it is much less costly than changing direction once an investment has been made.

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Trade-off between ROIC & Growth to create Shareholders Value

There are two ways to achieve identical P/E multiple.  First, Return on Invested Capital (ROIC) & other by achieving High Growth.

How to make trade-off between ROIC & GROWTH to create shareholders value? 

Please follow below mentioned link to see my presentation on slideshare.net…..

Trade-off between ROIC & GROWTH

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.

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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.

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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.

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Managing Portfolio of business for Consistent growth

Traditionally organization that doesn’t maintain portfolio of business appropriately faces natural life cycle of corporate life i.e. start-up, growing, mature & decline phase however if corporate would like to grow consistently throughout their life cycle then they have to chose & update portfolio of business strategy continuously & appropriately.

It is easy to make business strategy for a foreseeable future based on reasonable assumption about development in markets, technologies, regulation & predictable economic situation however after the latest financial crisis & recession, future is very unpredictable & uncertain, so classic business strategy approach doesn’t works in an uncertain environment.

In order to counter uncertain environment & to grow consistently, organization need to follow business strategy “Portfolio for Consistent growth” (PFCG) approach.

PFCG approach is based on risk & reward on time basis. How organization select portfolio of business depends upon its familiarity & knowledge about the business. If organization has thorough knowledge about the industry & its attractiveness, markets, technology, geography, pool of talent etc. then it means they are familiar with the risk and they can provide an initiative to deploy abundance of resources and reap the benefit of knowledgeable risk in the short term.

Organization should spend huge amount of resources in this category of business to get maximum return on short time normally 18-24 months. These businesses are core business and most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximize the value of business. These types of businesses are run by business maintainence managers within fully installed capability platform to earn maximum return on investment.

However there are certain businesses where organization doesn’t have adequate knowledge, they need to acquire knowledge to develop business. These kinds of businesses come in unfamiliar category where risk is very high at the present situation because organization doesn’t have adequate knowledge about the business, and capabilities were developed or acquired during a period of time. These businesses were developed over a medium-long term time horizon of 5-6 years. These businesses require initial capital which generates future cash-flow over a period of time and they are handled by entrepreneur talent. These businesses are valued not on the basis of profitability but on the basis of NPV and growth. They are the future cash-cow for an organization.

Third category of business that come in PFCG strategy are businesses where future is uncertain & organization can’t predict it during a short period time. These kinds of business were developed considering long term perspective whose benefit can be achieved over a longer period of time. These types of businesses are like research work where organization is using its foreseeable talent to predict future requirement of industry. Here organizations are not very clear about future but there is a vision which drives them.

Normally companies should never invest in uncertain business for short-term benefit however there are exceptions where organization invest in uncertain business for example investing in an industry whose fate depends upon election results and future govt. Opposite is true for familiarity risk category where normally companies don’t invest considering long-term view because maximum benefits can be reaped during the short period of time however here also exception are there like for example a company finds a reservoir of oil but it is not investing because it is not sure how petroleum industry prices will shape up in the future.

The most important part of PFCG is that organization should know when they have to move business from category 2 ( unfamiliar) to Category 1 (familiar) and Category 3 (Uncertain) to category 2 ( Unfamiliar). This is a continuous process where companies must take three steps: undertake a disciplined search for a number of initiatives that provide high rewards for the risks taken; monitor the resulting portfolio rigorously, reinvesting in successes and terminating failures; and take a flexible, evolutionary approach that allows for midcourse corrections. The resulting strategy, like a conscious form of natural selection, identifies the strongest initiatives and sheds the rest. The increasing uncertainty of today’s business environment and the importance of balancing risks with rewards make the Portfolio-of-Consistent-Growth strategy more relevant than ever.

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Myth about Top Line & Bottom Line Growth

What’s your opinion about Top line & Bottom line growth of an organization?

Do you think organization that provides good top line growth always gives good total return to shareholder (TRS) or the organization which perform poorly in terms of both top line & bottom line growth doesn’t provides good return to shareholders or the organization which provides good bottom line growth however lacks in top line growth can deploy good TRS for a long period of time.

If you think yes then you are wrong. Top Line & Bottom Line growth are always a good indicator of high return to shareholder but this is not always true, there are certain number of companies that were not rewarded in terms of Total returns to shareholders (TRS) in spite of giving robust revenue & profit.

Survey conducted by a reputed company for US economic cycle of 1984-1993 shows that 20% companies in spite of being providing faster revenue growth than the median, could not generate good total returns to shareholders (TRS) however there are other 20% companies whose revenue growth were very slow but they have provided excellent total return to shareholders (TRS).

On the basis of TOP LINE & BOTTOM LINE growth we can divide companies into the following categories-

Growth Oriented

These types of organization always does breakthrough innovation & continuously invest in growing industry & segment and provides exceptional returns to shareholders for a very long period of time. These kinds of company’s top line growth outpaced GDP and TRS outperforms S & P 500. These companies grow continuously and provide GDP & market beat returns for more than one business cycle.

TRS (Total Return to Shareholders) Performer

These kinds of organization can’t grow their revenue however they provide very good return to shareholders. These companies compete in slow growth industry like consumer durable, engineering, construction & utilities etc. The keys to their ability to create value were of good execution, cost control and savvy portfolio management. Many of these companies sold or exited lower margin business or bought or enter high margin business. Majority of these kinds of company can’t survive for more than 1 business cycle and were acquired by other competitors however those weren’t acquired continue to struggle for Revenue & Growth unless they embarked on a successful acquisition program or shifting their business mix, they couldn’t survive or fetch enough gain from reducing cost or restructuring their existing business to compensate for the lack of top line growth.

Thus companies that don’t hit top line eventually hits TRS non-performer category and often becomes target of acquisition. Even largest company can’t delay it for very long period of time.

Unrewarded

Unrewarded companies are those that have increased their revenue faster but not rewarded in terms of Total return to shareholders (TRS) however in majority of cases these kinds of companies ultimately rewarded in another business cycle.

The Challenged

Challenged companies are those who underperformed in both increasing faster revenue & Total return to shareholders. These kinds of companies become major takeover target & could not survive for more than one business cycle.

However when same survey company conducted survey for another business cycles of 1994-2003 that shows 65% & 58% of “Growth Oriented” & “Unrewarded” category companies were survived from 1984-93 survey. On the other hand only 35% & 10% of “The Challenged” & “TRS” category companies were survived.

Conclusion:

TRS category result shows that companies need to give as much attention to top line growth as to increasing the bottom line. While cost improvement can drive earning & shareholder value in a near term however they have worst long term odd of survival.

Where to compete is more important than how to compete. The choices a large company makes today about its portfolio mix, and where to place its bets will shape its future growth trajectory for next 5-10 years. Unless the company enjoys the advantage of fast-growing pool of revenues and profit or has ample opportunity to consolidate, growth just with the pace of GDP will difficult to sustain, even though execution is great. Large organization should follow tailwind if they want to grow & provide market beat returns to shareholders. They need to identify industry & segment which out plays GDP growth rate.

When large companies faces headwind i.e. slow growing market and have few options to consolidation in their existing business, opportunity to change growth trajectory are limited then the best approach is to reposition the portfolio business, customers, products & geographies to create a mix with higher potential of growth.

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