Looking for CEOs inspired by the Yuletide spirit!

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As the New Year approaches, I wish all my co-bloggers and readers a wonderful year ahead with lots of happiness on all fronts – personal, professional and social.
We all have our own yardsticks for measuring our happy moments. On the personal and social front our happiness depends on a lot upon the time spent with our friends, family, happy events, trips, etc.
On the professional front, happiness to a great extent depends on the type of boss we work with. The kind of corporate leaders in an organization account a lot for the general well-being and happiness of their employees.
Recently, I came across this grid posted by Mr Ashok Bhatia on his blog, which measures leaders on three yardsticks – output, concern for people and ethics. It has some interesting nomenclature for leaders depending upon the characteristics they exhibit.
They could be Road Rollers, who care only for the deadlines giving two hoots to the concerns for employees or ethics or they could be Crazy Conformists who, while sticking to production deadlines, do not mind compromising on values or on people (sounds familiar?).
Then, there are Missionary Zealots, who guard ethics with all zeal but do not give results, Armchair revolutionaries who are passionate about ethics and people but not concerned about the output, and Sponge comforters who show lot of sympathy and concern to their people but lead them to doom.
Sadly for us, there are only a few leaders like Ratan Tata, late Field Marshal Sam Manekshaw, or late President Kalam who excel on all three fronts – high on output, high on values and high on empathy, while most leaders are somewhere on the periphery or somewhere in between.
Have a look at the grid and figure where you/ your boss stands on the leadership grid, and where you would like them to be.

Diversification Dilemma

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Diversification has given way to focus in developed countries like the United States and the United Kingdom,  and has often been correlated with lower performance. In contrast, diversified business groups have been hugely successful in most emerging markets, particularly in Asia.

Since the mid 1980s, strategists in countries like the United States and the United Kingdom have mostly advocated the use of focused strategies for businesses and have advised companies to ‘stick to their knitting’. Many diversified conglomerates in these advanced economies have been dismantled since 1980s to focus on one or a few core businesses.

A look at the motives with which companies diversify reveals some of the reasons why diversification by conglomerates yields benefits in the developing markets as against the discount associated with diversified conglomerates in the developed economies.

Growth is a primary motive for diversification

However growth does not always translate into higher profitability. Since management status and power is correlated more closely with the size of assets under management, management (the ‘agent’) may have the incentive to diversify for pursuing growth in preference to profitability, which is not in the best interest of shareholders.

Reducing risk

Having different businesses in their portfolio can potentially balance differences in the industry cycles and thus it increases the stability of a company. But the value of diversification advantage to the company may be offset by the high transaction cost associated with acquisition. Moreover shareholders can themselves reduce the risk of their portfolio by holding diversified portfolios. This is another argument against diversification in the developed economies.

Diversify or not

Corporate parenting advantage

Effective corporate management is given as the reason for existence and success of diversified conglomerates in the developing markets. The differences in the institutional context—i.e. a country’s capital markets, labour markets, consumer awareness, regulatory and legal system  that influences business practices and ethics,  infrastructure etc favours the presence of diversified conglomerates in developing countries.

Profitability

Corporate advantage due to diversification exists if the portfolio performance is greater than sum of performances of individual businesses. In the developing economies, diversified conglomerates wield considerable economic and political clout. Being a part of a diversified group increases the overall stability of the company’s cash flow.

Thus, diversification is context specific. “Stick to your knitting” may not be the best recommendation for firms in high-growth markets or regions that have strong corporate advantages.

Core of a Business

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We know that firms need to adapt their strategies as per the changes in the business environment.

Strategies are highly context specific.

What was good five years back will not hold good now. The business model that works for a particular firm may not work in a similar manner for another firm. The strategy that pays off in one country may not produce similar results in another country. While responding to the changes in the environment, sometimes companies have even moved away from their core business.

  • Today, Nokia is a world leader in digital technologies, including mobile phones, telecommunications networks, wireless data solutions and multimedia terminals. You would be surprised to know that Nokia started with a wood pulp mill in Finland as a manufacturer of paper. The company later went on to manufacture rubber bands, industrial parts and raincoats. After World War II they expanded into Electronics and then into telecommunications.
  • HP’s first product was an audio oscillator – an electronic test instrument used by sound engineers. They shifted to computers, printers, servers & imaging products.
  • Reliance Industries Limited (RIL) started as a textile manufacturing business in 1966, and is one of the world’s most vertically integrated and horizontally diversified group with a wide range of businesses such as retail, telecom, textiles, petrochemicals, infrastructure development, etc. RIL sold off its textiles business and its ‘Only Vimal’ brand in 2012.

core

Alternately there are businesses that diversify into other areas while retaining their core business.

  • Indian Tobacco Company ITC has diversified from its main business of cigarette into various other businesses like FMCG, lifestyle retailing,  stationeries, hotels, paper businesses, and agriculture products.
  • IBM started as a computing, tabulating & recording company in 1880s, moved to PCs in 1980s , to integrated solutions and consulting servicers.
  • Pepsico has broken out of confines of cola drinks to become one of world’s most successful suppliers of drinks, snacks and breakfast cereals. Pepsico had diversified into restaurant business after acquiring Pizza Hut in 1977, Taco Bell a year later, and Kentucky Fried Chicken in 1986. But these acquisitions failed to live up to expectations of the shareholders, as Pepsi began losing ground to Coca Cola in the soft drinks. In 1997 PepsiCo decided to spin off its under-performing restaurants and Yum brands was created.  PepsiCo has since expanded to a broader range of food and beverage brands, the largest of which include an acquisition of Tropicana in 1998 and a merger with Quaker Oats in 2001, adding with it the Gatorade sports drink to its portfolio.

So we see that the core of a business need not necessarily be static. It can very well be a moving target. 

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How far will the Jaguar leap? Corporate Turnaround of JLR

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Tata Motor’s acquisition of Jaguar Land Rover is one of the most discussed cases of a successful outbound acquisition by an Indian company. 

Since the past few years, Jaguar Land Rover Plc (JLR), the UK based subsidiary of Tata Motors has consistently been the major driving force behind the revenue and profits for the company and has helped the company to plug losses in the domestic business. The trend continues, with Tata Motors’ profit having tripled in this quarter of 2014, on strong Jaguar, Land Rover sales.

Such splendid performance of the acquired company was almost unimaginable for many in 2008.

JLR Corporate Turnaround

Flashback to June 2008. Tata Motors had acquired two iconic British brands – Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. This was the biggest buy-out in the automobile space by an Indian company. Ford Motors Company (Ford) had acquired Jaguar from British Leyland Limited in 1989 for US$ 5 billion. After operating it for losses for few years, in June 2007, Ford had decided to divest the brands as a part of its restructuring strategy. Tata Motors was interested in acquiring JLR as it would reduce the company’s dependence on the Indian market and facilitate Tata Motor’s entry into the luxury segment. In addition to the US$ 2.3 billion it had spent on the acquisition, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR.

JLR being a British powerhouse brand, people questioned how Britain could allow Jaguar to be sold first to Ford, and then to Tata. The deal was not very well perceived due to the Indian ownership and the fears of outsourcing of jobs, technology and the brand to India. Analysts feared that Tata had made a mistake. Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors as it had increased the earnings volatility during the difficult economic conditions in the key markets of JLR including the US and Europe.

In 2012. JLR, a business that was battling for survival three years ago, reported record annual sales and a 35% increase in pre-tax profits to £1.5bn due to surging demand in China.

 

How did Tata Motors manage to achieve such a remarkable turnaround for JLR?

To begin with, cash management and cost management were identified as the key priorities. A three-tier model was developed with the help of Roland Berger Strategy Consultants. First, a short-term goal to manage liquidity with the assistance of KPMG was put in place. A cash management system was built to manage cash on an hour to hour basis. Then came a mid-term target to contain costs at various levels and the formation of 10-11 cross-functional teams. A number of management changes, including new heads at JLR, were made and the workforce was reduced. Finally, a long-term goal that runs until 2014 was drawn up, focusing on new models and refreshing the existing ones.

Tata had also acquired the IP and skills from JLR that enabled them to locate a substantial part of production and supply chain in South Asia. This helped in bringing down the cost of production. Tata Motors divested stakes in group companies to raise cash. The proceeds were channelled for innovation and product development. A separate IT ecosystem was set up for JLR. JLR was always considered to be top end high end luxury brand but Tata added new products like Evoque which made the brand image a bit soft and targeted towards urban people, while still keeping the luxury branding intact. This brand image change by Tata worked in favour of JLR, helping it not only to survive but also to become an international powerhouse once again.

Tata’s footprints in South East Asia helped JLR to diversify its geographic dependence from US and Western Europe. After the downturn of 2008-09, JLR made its first operating profit in the quarter ending September, 2009. The profits continued in 2010, with an increase in Ebitda of 50% q-o-q. In 2011, JLR posted record annual profits of more than £1bn.

Given Tata Motor’s annual investment plans of £1.5 billion for JLR to impart the brand with a sustainable competitive advantage, analysts and investors are enthused to see how far Tata Motors will make the Jaguar leap.

Marriage Made in Heaven – Post Merger Integration

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With the announcement of merger between Mahindra Satyam and Tech Mahindra yesterday, analysts are upbeat about the future prospects of the company. The combined entity will become the fifth-largest IT company in terms of market capitalization. It will cater to more industry verticals in comparison to the standalone basis. So it stands a good chance of getting bigger business and more clients and breaking into the top tier of Indian infotech companies.

The benefits of the merged company will be made possible by a successful integration between the two companies. The company management foresees a period of six months for completion of the ‘complex’ post merger integration (PMI) process.

The integration process may touch upon several areas. It will entail the integration of the MIS platforms of the two companies. It appears that Satyam had close to 190 MISs earlier, many of which were not integrated, resulting in manual intervention for transposing data from one system to another. According Mr Vineet Nayyar, Chairman of Mahindra Satyam, this left scope for discrepancies in many cases. The MIS systems at Mahindra Satyam will now be integrated with the Oracle- PeopleSoft platform being used at Tech Mahindra. The post merger integration of the two organizations may also result in removal of significant duplication of corporate functions besides synergising sales and operations. Thus synergies will be realized through integration, by achieving cost reductions or bringing about revenue enhancements.

It will be an equally long drawn process to measure the success of integration. It is to be remembered that while organizational integration is necessary to reap synergies, but it also results in disruption due to uncertainty associated with organizational change, loss of motivation, turnover, changes in power dynamics and independence of decision making. Net gains from integration will accrue only when the benefits from collaboration exceed the costs of disruption.

Since integration is always costly, it will be crucial to have competent implementation and decide carefully on appropriate integration level such that for any given level of integration, gains are realized with lower costs of integration.

The other issue that impacts integration is the cultural alignment between the two organizations, which at times is very hard to bridge. Having worked with both the organizations, I can say thankfully that in this case though, the cultural alignment should not be very difficult to achieve owing to similar culture between the two organizations. However it still pays to be aware of any subtle cultural differences that might exist.  Overall a well communicated implementation strategy should be good.
As said by the management, “the Mahindra Satyam-Tech Mahindra merger appears to be a marriage made in heaven, and if they can execute their future business properly, one can expect the ‘honeymoon’ period to last longer.”

Building Blocks – Reliance Capital

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Reliance Capital, one of India’s leading Non Banking Financial Companies, is in news for chalking out a profitable growth path and de-leveraging its balance sheet. Reliance Capital is a portfolio company with different lines of businesses such as asset management, life insurance, general insurance, broking and commercial finance. All these lines of businesses are individually headed by their respective CEOs, who in turn report to the Corporate CEO.

In a recent news statement in the Business Standard, Sam Ghosh, CEO – Reliance Capital has said that his objective is to make each line of business profitable by using different strategies for different business. This statement leads to a very basic question. If each of the individual LOB is to become a profitable entity, what then would be the requirement for having a corporate portfolio company over these LOBs? Initially the corporate office served the purpose of capital infusion to the individual LOBs. However when these LOBs become profitable and self sustainable, capital infusion from corporate office may no longer be needed. One could wonder what purpose the corporate office will then serve. Will the corporate office simply be an overhead, with no revenues, removed from the individual businesses? Is this corporate structure created only to play the role of a ‘Big Brother’ for imposing corporate reporting restrictions and/ or bringing about cost savings by the way of shared services? Or does it add some value to the LOBs other than compliance and the shared services?

The answer lies in the notion of corporate parenting. Among the different types of corporate parenting activities, some are geared towards core compliance purposes while some activities are classified as shared services – i.e. providing services to multiple units in order to gain savings by obviating the need to replicate the service within each unit. Other activities fall under purview of ‘Value Added Parenting’.

Corporate advantage is created if the combined portfolio structure results in improvements in profits greater than the sum of the profits of the businesses operating individually. This draws on the idea of “synergies” that is closely linked to the idea of related diversification. In diversified business, corporate advantage is created if synergies can ensue by applying resources or combining capabilities across businesses to either reduce costs or enhance revenues.

 
 

As in the case of Reliance Capital, we see that beyond compliance and the shared services, synergies within an organization may be derived by applying common management capabilities at the corporate level to different businesses units, thus helping the businesses to pick on appropriate strategies, unlock value and promote self-sustainable and profitable growth.

First in the Race – Apple and Samsung

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Apple and Samsung are embroiled in several legal fights; both are contending for global leadership of smartphone and tablet market, with Samsung poised to surpass Apple in the race in 2012. Smartphones are an interesting example of a product category where the second or third movers have considerably learned from the experience of the product innovators. Long before Apple launched the iPhone in 2007, IBM had released the first smart phone called Simon in 1993.

Often the pioneers spend a lot of resources to come up with new and innovative products, demonstrate it to the users and test the market. In the meanwhile, newer companies that are more agile and are quick to see the opportunity, understand the product – market fit, learn from the mistakes of their predecessors, make a big bang entry and harvest the potential in the market already created by the earlier explorers. They survive and even make it big.

Samsung, for example, has perfected the game of being the second mover. They study the market leader meticulously, copy every aspect of the market leader’s strategy in minute details, and further improvise on the execution of the strategy.  They end up not only in catching up, but even surpassing the market leaders. It was the success of the iPad that made Samsung roll out the Galaxy Tab. Even the Galaxy Note was preceded by the Dell Streak.

On the other hand, there are companies such as GE or Siemens that have been successful in retaining the first mover advantage and in creating next generation products in a continuum while phasing out the older ones. One of the parameters of strategic health for GE is the proportion of revenue earned by products which have been brought out in the previous 2 years. It means that such companies need to have a whole range of next generation products in the pipeline. This is relatively easier for companies that cater to the B2B market, where customer expectations can be understood within a reasonable time frame, due to existing contractual relationships with the customers. It is more difficult for the companies to gauge the customer expectations in the B2C scenario, though the B2C market offers the advantage of high volumes.

This brings us to an interesting question that why the pioneers with all their obvious advantages such as a brand image, a customer base and a dealer network in place to push the new product, are still not able to retain the market leadership. Going back to the Kodak story, what could they have done differently so that having been the pioneers in digital technology, they would have continued to be so.

This steers the discussion towards a very important trait of executive leadership – the ability to foresee the horizon of changing technology and customer expectations. An organization has to be futuristic, open to accept that the world can change overnight and the confidence to believe they can be the leader in the changed world too. It requires the tenacity to persevere, understand the market’s perception of their products, support R&D to improve on the products and make required changes to their products or their marketing approach in order to sustain the market leadership.

The path to achieving this trait could be through corporate entrepreneurship, if promoted in a true sense within an organization. This group would need to be supported and backed by the topmost authority in the organisation and would have to be reasonably separated from the current culture of the organisation, to encourage them to think differently and foster a culture of innovation. This may also, at times, require convincing the shareholders and the board to take a dip in immediate returns for long term gains.

This leads to an interesting question next. Which of the items of mass consumption today is most likely to into oblivion replaced by a newer generation product in the next three to five years? Who knows? Plastic money could be one! Already some companies are developing mobile payments solutions that focus on the convergence of online (e-commerce) and proximity (face-to-face) payments.

 

Kodak – Image Blurred

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On 19th Jan, 2012, investors woke up to the news of Kodak’s filing for Chapter 11 bankruptcy protection in US Bankruptcy Court in Lower Manhattan. This gives the company an automatic stay for 6 months during which it has protection from creditors and the time to reorganise itself.

Founded in 1880, by George Eastman, Kodak became one of America’s most notable companies that established the market for camera film and then dominated the field. Neil Armstrong used a Kodak camera to take pictures on the Moon in 1969. Eighty films that have won Best Picture Oscars were shot on Kodak film and the phrase “Kodak moment” captured people’s imagination.

Analysts feel that the firm’s late entry into the digital market is a key factor in its recent troubles. Although Kodak was one of the original inventors of digital photography in the mid 70s, it did not commercially begin to manufacture digital cameras for the next two decades due to the fear of the cannibalisation of film. As a result Kodak failed to keep pace with developments in the market and competitors steadily eroded its share of the market.

Since the late 1990s, the sales of photographic film declined and the revenue from the sale of film started fading. Since 2003, the company took the decision to halt investing in its film product, closed 13 manufacturing plants and reduced its workforce by 47,000.

Kodak adopted a product innovation strategy for digital technology, and came out with model offering consumers top-quality cameras at reasonable prices and other innovative products such as a printer dock. Consumers could insert their cameras into this compact device, press a button, and watch their photos roll out. By 2005, Kodak ranked No. 1 in the U.S. in digital camera sales.

Although Kodak’s digital camera business became a roaring sales success, business it could not replicate the rich profits of the film business, as mass-market cameras yield slim profit margins. As other competitors raced into the market, the digital cameras soon became commodities that further eroded the profit margins.

To boost profit margins, Antonio Perez, who became Kodak CEO in 2005, tried a number of turnaround strategies and cost-cutting efforts. He steered Kodak away from its traditional market in cameras to focus on home and commercial printers with the hope it would create a competitive advantage. Kodak turned to patent lawsuits to generate revenue, winning settlements from LG of South Korea. Kodak also attempted to sell its digital imaging patents, but failed to garner enough interest among potential buyers, driven in part by fears of Kodak’s deteriorating financial health.

Since 2004, Kodak has reported only one full year of profit, so the attempts to reinvent the company’s core business model have yet to bear fruit. Kodak has secured $950 million in financing from Citigroup to stay afloat during Chapter 11 proceedings. It remains to be seen if the company can emerge from bankruptcy, reorganize its business structure to increase productivity, reduce cost and keep pace with the evolution. Kodak could even be looked at as a takeover target.

A stubborn culture, refusal to push forward with digital technology after creating one of the first digital cameras, and inability to reinvent the core business model led to Kodak’s failure to remain competitive in a changing world. This also shows that companies, when they are successful with a certain way of working, imbibe a strong culture, which is the company’s strength, but the same culture may also impede the company from adapting to changing needs.

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