PRATIBIMB The Reflection of Management FINANCE | GENERAL MANAGEMENT | HUMAN RESOURCE | MARKETING | HEALTHCARE | OPERATIONS | SYSTEMS
A Students’ Initiative Volume II, Issue XXII
September 2013
T. A. Pai Management Institute Manipal, Karnataka
About TAPMI T. A. Pai Management Institute (TAPMI) is a premier management institute situated in Manipal and is well known for its academic rigor & faculty-student interaction. The Institute has been recently ranked amongst top 1 per cent of B-schools in India & 4th in the South Zone by The Week Magazine. Founded by the visionary, Late Shri. T. A. Pai, TAPMI’s mission is to provide much needed impetus to the task of building professional management capability in the country. In the process, it has also played a role in strengthening the existing educational and health infrastructure of Manipal.
Our Mission “To excel in post-graduate management education, research and practice”. Means:
By nurturing and developing global wealth creators and leaders.
By continually benchmarking ourselves against best in class institutions.
By fostering continuous learning and reflection, achievement orientation, creative interdependence and respect for diversity.
Value Bounds:
Holistic concern for ethics, environment and society.
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PRATIBIMB TAPMI’S MONTHLY e-MAGAZINE
VOLUME 2, ISSUE XXII
SEPTEMBER, 2013
TAPMI’s e-Magazine - is the conglomeration of the various specializations in MBA (Marketing, Finance, HR, Systems and Operations). It is primarily intended to provide insights into the plethora of knowledge that relate to the various departments of Management and to give an opportunity to the students of TAPMI and the best brains across country to exhibit their creative cells. The magazine also strives to bring expert inputs from industries, thereby bringing the academia and industry together. Pratibimb the e-Magazine of TAPMI had its first issue in December 2010. The issue comprised of an interview of well known writer Ms. Rashmi Bansal along with a series of articles by students and industry experts like MadhuSudan Rao (AVP-Delivery, Mahindra Satyam) & Ed Cohen who is a global leader and chief learning officer who led Booz Allen Hamilton & Satyam Computer Services to the first rank globally for learning & development . It also included a hugely successful and engrossing game for finance geeks called “Beat the Market” to bring out the application based knowledge of students by providing them the platform where they were expected to predict the stock prices of two selected stocks on a future date. The magazine is primarily intended for the development of all around management knowledge by providing unbiased critical insights into the modern developments. TAPMI believes that learning is a continuous process and is not limited to the four walls of the classroom. This viewpoint is further enhanced through Pratibimb wherein students manage and contribute to create a refreshing learning environment outside the classrooms which eventually leads to a holistic development process. The magazine provides a competitive platform and opportunity to the students where they can compete with the best brains in the B-Schools of the country. The magazine also provides a platform for prominent industry stalwarts to communicate their views and learning about and from the recent developments from their respective fields of business which in turn helps to create a collaborative learning base for its readers. Pratibimb is committed in continuing this initiative by bringing in continuous improvement in the magazine by including quality articles related to various management issues and eventually creating a more engaging relationship with its readers by providing them a platform to showcase their talent. We invite all the best brains across country to be part of this initiative and help us take this to the next level. Pratibimb | September 2013 | 3
Director’s Message
It gives me immense joy to witness yet another release of Pratibimb. American author, Anais Nin once said, “The possession of knowledge does not kill the sense of wonder and mystery. There is always more mystery.” In a lifetime one manages to scratch the surface of a few disciplines, each of which goes to great depths and realms. This pursuit, among many other means, is facilitated by the publications that one reads. Pratibimb, one such publication, presents a cross section of critical ideas, knowledge and insights in the field of management for students, research scholars and faculty alike. I wish the magazine the very best and look forward to it achieving even greater excellence in the times to come. R C Natarajan Director TAPMI
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Editor’s corner Editor in Chief
Dear Readers, We thank all the participants and readers for their contributions and feedback. In this issue of Pratibimb, Mr. Ujjwal Mishra of NMIMS discusses about the growth potential of E Commerce industry. Further, Mr. Tarun Jindal and Alok Vyas of IIFT talk about the importance of efficient operations management in business. In the article, “Financial Independence—An Indian Perspective” Mr. Harshit Lamba and Shaguna Harbola, from Symbiosis explain the challenges faced by Indian economy. They also talk about the various policies adopted by Indian government. An article by Mr. Lokeshwar Sinha of IFMR explains how valuation can be used in football. This is a very interesting article where the author tries to merge two unrelated areas like sports and finance. Also, in her article “Social Media and the Workplace”, Ms. Richa Gupta from FORE School talks about the impact of Social Media in today’s job market. As always, stay safe, celebrate life and keep reading Pratibimb. Stay updated and like our page to hear more from us at :http://www.facebook.com/pratibimb.reflecting.management
Arun Stephen Marketing & Advertising Abhineet Rastogi Bhavnita Nareshkumar Creative & Cover Design Devi Kailas Communications Kannan Venkat Shubha Prabhu Operations Aditya Bhat Publishing Lloyd George Faculty Advisors Prof. Chowdari Prasad Dean (PR) & Chairman-Admissions
We would like to thank all our faculty members who have provided their valuable feedback in order to help us maintain the standards we have strived to achieve.
Prof. Aparna Bhat Cover Photo Jinto Cyriac
Enjoy Reading! Arun Stephen
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Contents E Commerce—The Way Forward
7
by Ujjwal Mishra, NMIMS
Driving Growth through Operations Management in Turbulent Times
11
by Tarun Jindal & Alok Vyas, IIFT
Financial Independence: An Indian Perspective
16
by Harshit Lamba & Shaguna Harbola, Symbiosis
Football Field: Now in Valuation
19
by Lokeshwar Sinha, IFMR
Social Media and the Work Place by Richa Gupta, FORE School of Management
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23
E-Commerce- The Way Forward Ujjwal Mishra, NMIMS
E-Commerce is a booming industry with heavy investments from national/foreign players. The industry, which was until a few years back dominated by online travel & leisure is witnessing a gradual shift towards other categories like fashion & lifestyle, personal care etc. One of the biggest challenges for the marketers working for various firms (be it consumer electronics, apparel, retail, FMCG and others) will be to develop this channel for their companies, both from a sales perspective as well as from a consumer education/ communication perspective. Currently companies are leaving no stones unturned to develop this channel, as most believe that this channel is going to thrive in the future just the way modern trade did in the last decade. It’s important to understand the penetration of internet to appreciate the capabilities of this channel.
Globally, India stands 3’rd in terms of new internet users added since the year 2000, both in terms of absolute number of new internet users added & relative % growth. McKinsey research states that by 2015, the Indian Internet user base would touch 450 million. India’s total population is roughly 1.2 Billion and as of December, 2012 roughly 137 Million Indians use the internet which accounts to a penetration of 11.4%. Indians go online primarily for social networking, e-mailing, entertainment & online shopping. The following table shows how the time spent by an average Indian on online shopping has been rising: Coming to E-commerce Industry, the globally the industry has been growing steadily at over 20% for the past many years & is expected to surpass $1.4 Trillion by 2015.The Indian E-Commerce industry size is currently worth $10 Billion and is expected to grow to over $200 Billion over the next decade. Its composition is as illustrated below. The industry is currently dominated by online travel. Online retail, popularly termed E-tail contributes a mere 6.48 %.
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However, the E-tail industry is growing fast and eating up 12 hours. The figure illustrated below demonstrates the imthe space being left out by the saturating online travel indus- mense reach of the online retail channel: try. Unique Visitors is a term which is often used by digital The catch marketers. It is used to track the web traffic to a site, here is that counting one user only once in a pre-decided time-frame say this includes 12 hours. The figure illustrated below demonstrates the imthe visits mense reach of the online retail channel: which might be for product categories which are not relevant to a company & also might not lead to actual purchase. The growth witnessed by various product categories within online retail is as follows:
However, the E-tail industry is growing fast and eating up the space being left out by the saturating online travel industry. Unique Visitors is a term which is often used by digital marketers. It is used to track the web traffic to a site, counting one user only once in a pre-decided time-frame say
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As is very clear from the figures, this high growth channel, so even the companies who are serving in the product categories where the market size is not significantly large today cannot afford to ignore this channel just because of the future scope it promises. Here are some of the prominent trends which have been seen in this industry:
One might wonder at this stage as to why consumers are so eager to shop online. The figure below illustrates some of the most important factors which drive a consumer go online. It’s impossible to devise a strategy for any channel without understanding the channel’s consumers. Online shoppers can broadly be classified into 4 types: 1>Seekers 2> Researchers 3>Bargain hunters & 4>Window shoppers. Seekers are those consumers who want a specific product and know what exactly they want. E.g. if I know that I want a Nokia xyz from my trusted E-tailer Flipkart, I go online, make a purchase and logout. This makes me a seeker. Researchers have a specific goal in their mind but not a specific product. E.g. I know that I want a smart phone but I’m not sure about the model I want to buy. After doing research online, I might be able to make a decision or even end up making a purchase.
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Bargain Hunters are primarily driven to online shopping be- To conclude, E-commerce as a channel brings exciting opcause of the discounts and offers which they might not have portunities for the companies. The channel has huge potential not only in terms of the off-takes it can generate for the otherwise availed at a physical store nearby. company, but also in terms of the opportunities it can create Window shoppers are basically enthusiast shoppers who like to reach out to the end consumers. Companies can learn to go through the product offerings just for the fun of it & from data captured in real time to track the behaviors of do not have a specific intention of buying. their consumers. This, in turn can help them immensely in building their brands. Modern trade, today, is not just in the There are several reasons for companies to shift their business of selling products but also selling space to the focus to this channel. Firstly, it takes the company’s prod- manufacturers, similarly, the day is not far when E-tailers ucts to places where its existing channels can’t reach. It will also be not just in the business of selling products & gives a platform to connect with the consumers and give services but also in the business of selling invaluable big data them a holistic idea about the company’s products, their to the manufacturers. Here’s a quote from HUL’s CEO Mr features, prices, etc. It helps them to track the preferences Nitin Paranjpe featuring on livemint a few days back. of online consumers & also to interact with them outside of “Almost 10 years ago, we called out modern trade as one of normal business hours. our categories of the future even before anyone could preThe diagram below shows the operational models which the dict that it will become so large. We trained our people, sent company can adopt for this channel: them overseas to work with Walmart and Tesco, and we built the depth and understanding of the channel to make it as strong as our traditional channel. Modern trade now contributes close to 15% of our overall revenue. We have now called out e-commerce and feel it will become large in the future. We are building capabilities and benefiting from Unilever’s experience in developed markets.”
References: Either the company can go for their own store or alterna tively they can go through an E-tailer. A company can also choose to do both. E.g. a company might choose to have it’s own E-store primarily for informational, brand engagements, awareness and other purposes & drive the traffic to the E-tail partner for the purpose of sales. In fact, this is what P&G does. They have dedicated E-stores for different brands which eventually drive a customer to flipkart through the buy now option when he/she wishes to purchase the product. Sales is just one side of the coin, the biggest strength of this channel lies in it’s ability to take the company to it’s end consumers. The figure below shows the various A.T.L (Above The Line) & B.T.L (Below The Line) activities which the companies can adopt to reach their end consumers through this channel.
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Report:Comscore_ ASSOCHAM-report-state-of-ecommerce -in-India Report:E-Commerce in India-e-Tailing India Report:Internet and Mobile Association of India (IAMAI) report Report:eMarketer, September 2012 Report:BCG report on Online retail in India
Driving Growth through Operations Management in Turbulent Times Tarun Jindal & Alok Vyas, IIFT
Thomas Friedman says that “The World is flat” and how everybody is on the level playing field. In this era of globalisation, one faces gloomy market scenario, diminishing margins, fierce competition, disruptive innovations and the one thing that matters now is how well one can differentiate itself from the competitors. Of all the business functions, supply chain management including logistics is the core area where the organizations are looking forward to gain that competitive edge. Dilemma with the organizations is the understanding of the word ” competitive advantage” in strategic management. This is the “interchangeability problem of competitive advantage propositions.” Theories in strategic management have extensively identified the characteristics that provide firms with competitive advantage. For e.g competitive advantage may derive from market barriers, market positions, idiosyncratic firm-specific resources and capabilities or dynamic capabilities.While research has identified the sources of the determinants of competitive advantage, surprisingly it does not provide any clear definition of competitive advantage per se. This creates a series of serious problems in strategic management. For example, the inability to operationalize competitive advantage by creating a valid measure for it has led academics to define and measure competitive advantage only in terms of performance of firm. Indeed, it is quite common in the literature to define and operationalize competitive advantage strictly in terms of superior performance, although most of them acknowledge that these terms are conceptually distinct. However the interchangeable use of the concepts of competitive advantage and superior performance makes the conceptual framework with leading hypotheses and sequential propositions of sources of competitive advantage leading to competitive advantage leading to superior performance of little value because they are definitional identical. 5 dimensions of competitive edge:
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1) Price/cost: The first quantitative factor which all the organizations look into is , how can they reduce the cost and what can be the pricing strategy , so as to have the highest ratio of this factor. If the pricing is too high, demand might go, and if it is too low, then customers. This is something very important in case of luxurious product industry, apparel industry and can be better understood by case of ”Zara”. 2) Product Quality: Poviding customers with appropriate product qualities is a must. Now, the organizations are able to retain the customer not only with the quality of the physical product but also quality of the after sale services. Companies now a days spends a lot of money on making customer buying experience better. This is clearly visible in case of Walmart and Dell.
maintaining their supply chain, including the operations management, logistics, warehousing, thus maintaining lower costs as compared to their competitors. The nature of competition has been shifted from company-based to supply-chain-based competition, which encouraged sharing information along a supply chain. Having efficient information systems, companies have not to own all the pieces of a supply chain network, instead, they may consider working as a cooperative supply chain that functions as a single entity. Coordination and information exchange between partners within a supply chain is the key to stay competitive. According to Stapleton, Supply chain management is the integration of all network activities which manufacturers, suppliers, , retailers and distributers are involved to improve products, services, and information flow throughout the chain from suppliers to the end customers, without ignoring the need for cost reduction while maintaining target service level.
3) Delivery dependability: For repeated customers and better supply chain, one has to be dependable , not just All this can be summarized into the 4 major goals to achieve once , but always. Firm has to make sure that the trust that an effective supply chain. the customer has on them is restored by making timely delivery of the products. This is specifically visible in case of Amazon. 4) Product Innovation: Companies need to innovate its strategy regularly to maintain the market share in the industry as with the advent of technology , competition within the industry has reached a new high. Toyota changed the way production was done and left the giant ” Ford ” behind in the race. 5) Time to Market: How extensive is the supplier base, or how much capacity is there to meet the expected/ unexpected demand of the customer will tell how much time does the product takes to come to the market. Inventory level becomes very crucial then.
Let us look into the practical cases where the companies actually applied these logics and have managed to come and stay at the top of their domain or industry.
According to the official data, 14% of Indian GDP is spent on Logistics Cost. So, unarguably this is one area where a lot of cost reduction can be done. Efficient supply chain has to be the way of life and not just a value added proposition for the companies to thrive and come on top. Delivering the right goods to the right customers at the right price and time is not a guarantee for companies to stay competitive in the market, but it is an inevitable key to survive. As a result, competition between supply chains has become more important rather than competition between individual companies. Maruti, Toyota, Dell, Walmart, Amazon,FedEx, Asian Paint have one thing in common; all of them have created a niche for themselves by excelling in developing and
Maruti looked at the small car segment with a clear focus on 3F’s ( fast, flexible , and first mover). Around 70% of the total number of Maruti vendors contribute to around 80% of the supplies which are located within a 100km radius to Maruti factory. This helps them using 3PL(3rd party Logistics) in efficient way by using milk run system and FTL (Full Truck Load) .
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Maruti:
MUL provided incentives for vendors to come within that distance, like availability of subsidised land, guarantee for loan, reliable power supply generated by MUL itself etc. YIM(Yield Improvement Program) was established in relation with suppliers to reduce the waste. Vendors
located nearby are thus saved from packaging as they that they have warehouses with no more than 8-10 days supply directly to the assembly line. capacities, which are as maximum located 15 minutes away from Dell’s factories. . That all resulted in reducing the Maruti supports its vendors to integrate with the World inventory to only four days, while it is 20-30 days for the Wide Purchase (WWP) system, in which the vendor competitors. Dell was able to improve inventory turns to 24 becomes the sole supplier for a Suzuki product all over the hours, while the competitors had to wait for 35 days for world which are around 200 in number. Standardization of payments through primary dealers. parts has helped reducing the inventory levels. By doing this, Dell has managed to create a niche for itself in E-Nagare System was implemented in 2003 to tackle the the market and has helped the firm to implement pull problem of material accumulation due to multiple sourcing. based supply system unlike others which still use push E-Nagare is an electronic version of Kanban system, which based supply system only. has helped in reducing the average inventory through just in time philosophy. All these things have combined helped the Same Organization but different supply chain: company to remain competitive for nearly 30 years now. Before looking further into other cases, one has to see that Dell: the supply chain designed by a firm cannot afford to be rigid even if it is effective. Because the same philosophy would Dell reengineered its processes and relationships with vary with the product life cycle. suppliers and logistics providers so that the overall processes of building, customizing, and shipping PCs does Functional products are mature products with stable not take longer than eight hours. Dell reduced the number demand, low forecasting errors, like Maruti Swift. The of logistics providers from 130 to 60, and suppliers from supply chain required for this would be �Efficient Supply Chain�, Innovative products are early life cycle stage where 204 to 30 companies. the demand is unpredictable, like Zara, the supply chain Dell dedicated VMI (Vendor Managed Inventory), where required for this would be Responsive Supply Chain. components are never ordered. The actors are selected so
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Wal-Mart: It invested generously in integrating innovation and information technology systems in retailing. They constantly considered re-engineering in processes, waste elimination, and performance efficiency. All the strategies mentioned above have been implemented effectively and this is the reason that when it comes to naming the competitor of Walmart, there is no name at the top of our mind. Toyota Motor Corporation: It is at the epitome of success when it comes to operational innovation. World over, it is best known for the development of Toyota Production System. This system created a manufacturing process which reduced production costs, eliminated defects, and improved the overall quality of its vehicles. The company’s success is praiseworthy considering the fact that they entered the market very late in auto industry but still changed the outlook of the entire automobile sector.
Amazon: In any ecommerce organization, process is started when the signal goes to worker’s wireless receivers, informing what items are to be picked off the shelves. After this, the workers crunch everything, from which items get plucked first to whether the weight is right for sending. Amazon took the help of IT to redesign a bottleneck where workers transfer orders arriving in bins to conveyor belt, which automatically drops them into the appropriate bins. This has helped increase the capacity of the warehouse by whopping 40%. Today, its warehouses can handle 3 times the volume they could in 1999. The company currently does not require building up a new warehouse for another year. The warehouses are so efficient that Amazon turns over its inventory 20 times a year, whereas for every other competitor, it is 15. These are the reasons that the company is at the top of the e- commerce business with the revenue of $48 bn.
Conclusion & Recommendations: Continuous improvement, respect for people, long term philosophy, the right process will produce the right results, After analysing, few questions comes into mind: add value to the people by developing your people and 1. If some of the companies have successfully used the partners, continuously solving root problems drives operations management, then why are other comorganizational learning, are the various concepts which panies lagging behind? turned the company and made it a $18bn organization. 2. Is implementation of the process for once would These are all operation management concepts to have serve the purpose? competitive edge. 3. How much money does one has to spend on the entire process?
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Before coming to the answer of 1st question, we need to understand that all the company varies as per, their needs, geographical location, consumer market, and lastly, patience and trust of the top management. Different regions have different labor prices, so the location where the labour is cheaper does not make any sense to spend much on the automation keeping ROI in mind. And when we talk about patience, we need to understand that Amazon, ran into losses for the initial 5 years of its operations, but still stuck to the basic and is now a pioneer in e-business market. But still, apart from these facts, companies playing on the same level field lags behind because of failure in execution. The reason is that the concepts like Six Sigma or Vendor Managed Inventory gives us a broader outlook of the method but each company needs to customize the concept and then implement it. This is a pitfall, wherein companies do not want to change the existing process and keeps on ignoring the problems, till the time they become a bottleneck.
companies are developing and giving competition to the existing powerhouses. As we move towards globalization, businesses are becoming more and more exposed to the international world. They are getting a larger base of clients than ever before, and there is no limit to how much they can increase their business. So, the future of the operation management looks bright and it will hold its coveted position as the oldest form of management amongst all.
References:
Marshall L Fisher - http://hbr.org/1997/03/what-is-theright-supply-chain-for-your-product/ar/1
Wal-Mart’s supply Chain Management Practises- Using IT/ Internet to manage the supply chain
Christos Sigalas and Victoria Pekka - Revisiting the concept of competitive advantage (Journal)
The methodology which Toyota used is being applied till date and they keep on modifying the process to the changing needs of the business. So, the answer to the 2nd question is that we need to follow the PDCA(Plan, Do, Check, Act) cycle in a sacrosanct manner, wherein, Checking and Acting is of utmost importance once the Planning and design has been done. The answer to the 3rd and 4th question is very industry specific and the top management needs to have a vision in mind , if not numbers, to implement the new processes keeping future in mind. Moreover Techniques like Poka Yoke, Kaizen, 5S, does not need capital investment but just need the coordination and involvement of the people working in the system. As the Indian transportation and logistics market witnesses new height(as can be seen from the chart above), there has been increasing buzz around technology adoption, network optimization, multimodal transportation and improving warehousing. It has been evolving rapidly from traditional ‘godowns’ to modern facilities. gradually getting redefined from the conventional concept of ‘godown’ - a mere fourwall-and-shed – to modern set ups with high levels of automation, multi-rack and palletization infrastructure, etc., the need for the wider industry to re-visit their warehousing approach is pressing. We can say that world is changing at an exponential rate. Communication technology is taking giant leaps and more
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Yossi Sheffi- Driving growth and Employment through Logistics (MIT Sloan Management Review) KBuzz Sector Insights- KPMG report Wal-Mart Supply Chain Management Practices (Journal) David Simchi-Levi, Philip Kaminsky, Edith Simchi- Levi, Ravi Shankar- Designing and managing the supply chain Outlook on the Logistics & Supply Chain Industry 2012 – World Economic Forum Agility Emerging Markets Logistics Index 2013 Christopher, M. G. (1992). Logistics and Supply Chain Management, Pitman Publishing, London, UK. Stapleton D., Hanna J. B., and Ross, J. B. (2006). “Enhancing Supply Chain Solutions with the Application of Chaos Theory”, Supply Chain Management.
Financial Independence: An Indian Perspective Harshit Lamba & Shaguna Harbola, Symbiosis
The year was 2009 when India’s audacity to global economic meltdown was the theme of conversation from tea table to corporate meetings. The Ministries in North Block were raising toast to impeccable decision-making and policies. The bold black inked newspapers’ headlines enunciated in arrogance and overconfidence, the fable of Maharaja. Least was known that the black ink signified something else. There was something mysterious, something hidden that was soon to be revealed. Cut to 2012-13,and the statistics show that the road to achieve status of an irrepressible economy is dwindling. Stock markets are trembling in apprehension, rupee is gasping to catch up with the top currencies, current account deficit (CAD)and fiscal account deficit are at peak, growth has hit the rock-bottom and rating agencies are only hairsbreadth away to downgrade India to lower medium grade. The experts say that India has slipped two decades back to 1991. Is it just an overstatement? How did the outlook changed so drastically? The concept of financial independence and the extent to which India is financially dependent can offer an explanation for this change. So, what is financial independence exactly in the context of nation? The term itself is subjective. For some nations, It simply means being debt free, while for others it means ensuring a life free of financial stress for its citizens by empowering them. So, in order to evaluate the financial independence of a nation, we need to take into account both internal and external factors. Here, in the present Indian scenario, the three significant parameters that would determine the financial independence are investments in Indian markets by foreign institutional investors (FIIs), external debt equation of the country and introduction of National Food Security Bill (NFSB). First, we’ll consider the effect of FIIs on Indian stock indices. As per a Business Today Report (November, 2011), a trend analysis of stock indices since 2006 reveals that market peaks when FII inflows are high and fall when FII inflows dry out or they start pulling out their investments from Indian markets (see Table 1).This observation is reinforced by a study conducted on the influence of FII flows on Indian stock market (GYANPRATHA–ACCMAN Journal of Management, Volume 5 Issue 1, 2013) which suggests that there exists a positive correlation between the FII flows and movement of sensex (see Graph 1). FIIs’ holdings in Indian stocks were close to 19% of overall market value of shares by June 2013.Hence, theoretically, the FIIs hold the power to bring down Indian stock market to shambles in one big exodus, which will have a ripple effect on value of home currency, CAD, external borrowings by companies and costlier imports. So much for unabated Indian stock market.
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Year 2008
FII Inflows/(Outflows) (in USD) (13 billion)
Percentage Increase/(Decrease)in Sensex (50%)
2009
19 billion (net)
85%
2010
30 billion
25%
2011 (till September)
281 million
(11%)
Table 1: Effect of FII flows on Sensex
Graph 1: Trend of FIIs and Sensex from 2001 to 2010
Second, the rising level of short-term external debt with respect to forex reserves from 5.1% in 2002-03 to 31.1% in December 2012 is ringing alarm bells. The problem is further exacerbated by long-term debt, which is also coming up for maturity. Moreover, the slowing down exports, deceleration of industrial production and growing appetite for imports, including non-essential commodities, Is adding fuel to the fire. The debt that needs to be repaid this fiscal is to the tune of USD 172.35 billion, i.e. about 61% of India’s forex reserves. This will have serious implications on balance of payments, which in turn will have undesirable effect on sovereign ratings. The underlying reasons for this problem are:
Lower rates at which credit can be obtained from international markets Surge of capital inflows during 2003-04 into emerging economies like India High interest rates in India, which led to ‘carry trade’
During heydays, the rapid GDP growth and strengthening rupee rendered these factors unnoticeable due to low external debt to GDP ratio. But now, as the rupee has depreciated by almost 25% of its value, debt servicing burden has greatly increased. In addition to this, there is nonavailability of cheap domestic credit to substitute nowexpensive external debts as domestic rates are riding high. Hence, the definition of financially independent as “being debt- free” does not hold quite well. Third, we’ll focus on NFSB. The initial perception of NFSB seems to fit well with one of the proposed explanations of financial independence. But the numbers tell a different story. The fiscal deficit for 2013 is projected at 5.12% of the GDP by FICCI against the target comfortable value of
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4.6%.Clearly, the economy is in bad shape and passing of this legislation will increase the fiscal pressure by Rs. 10,000 crore in the first year itself, which will only worsen (about Rs. 1.25 lakh crore each year) when this measure would be fully rolled out. To service the fiscal deficit, the government will either have to raise funds from external sources or increase taxes or issue long-term government bonds. Neither of these alternatives seem favourable and will pull the nation farther from being financially independent. The big question still remains. How to achieve, or rather pursue financial independence? The solution lies in proposing and implementing holistic approach as these problems are inter related. The first step should be cutting down of unnecessary and politically motivated government expenses such as undue waive offs and subsidies. Instead, these capital resources should be diverted to more important activities such as building world-class infrastructure, and developing and enhancing food storage facilities that will produce productive future results. According to FOX news report, about USD 6.8 billion of food is wasted every year in India. In 2011-12, there was a storage gap of 32 million tons. Therefore, management of resources coupled with rational positive intentions pose a major obstacle, overcoming which would solve two financial problems. First, the surplus could be exported to earn foreign exchange, thereby improving balance of trade (B.O.T.), and second, government debt burden would reduce. This would have a ripple effect on currency value, food inflation, financial markets and economic growth. Encouraging foreign direct investment (FDI) rather than FII needs to be the focus of policy makers due to its long term nature. Though FDI limits have been raised for many sectors, the basic implementation framework is still missing
which is making companies reluctant to invest. A good quality physical infrastructure along with ease of doing business are the two factors that would definitely inspire foreign investors. In addition to capital inflows, the FDI would bring along employment opportunities, which in turn would empower people to rely less on subsidies. The inflows would aid the battered state of home currency, set B.O.T. equations right and reduce external debt burden, especially for corporates. Jim Citrin, an expert on leadership, governance and professional success, once said, “Uncertainty can lead to paralysis. And you if you become indecisive, you’re dead”. Indian economy has been sailing in troubled domestic waters under a gloomy international economic environment for quite a sometime. It is now when stern and thoughtful decisions should be taken and more importantly, implemented efficiently, so as to mitigate the effect of worldwide downturn, create opportunities by developing optimistic investment atmosphere and pursue financial independence.
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References
Shrivastav, A. (2013). A Study Of Influence Of FII Flows On Indian Stock Market. GYANPRATHA–ACCMAN Journal of Management, Volume 5, Issue 1.
ET Bureau. (August 23, 2013). The Economic Times. In Food Security Bill will eat into finances, growing subsidies to hurt investments: RBI. Retrieved 24 August, 2013, from http:// articles.economictimes.indiatimes.com/2013-08-23/ news/41440859_1_iron-ore-central-bank-food-subsidies
Vikaraman, S. (August 24, 2013). The Economic Times. In Food security plan to increase govt's fiscal stress: BimalJalan. Retrieved 24 August, 2013, from http:// articles.economictimes.indiatimes.com/2013-08-24/ news/41443941_1_food-security-plan-fiscal-deficitbimal-jalan
Merwin, R. (June 22, 2013). The Hindu Business Line. In As the rupee sinks the LOSERS are.... Retrieved 21 August, 2013, from http://www.thehindubusinessline.com/ features/investment-world/as-the-rupee-sinks-thelosers-are/article4841002.ece
Vikaraman, S and Nayak, G. (June 26 2013). The Economic Times. In External debt growing to unmanageable proportions, putting pressure on rupee. Retrieved 23 August, 2013, from http:// articles.economictimes.indiatimes.com/2013-06-26/ news/40207079_1_external-debt-debt-service-ratiodebt-management/2
Padmanabhan, A. (January 27, 2013). Live Mint. In The perfect recipe for an external debt crisis. Retrieved 23 August, 2013, from http://www.livemint.com/Opinion/ h7cxYMVFLk9lF0Nsa07AtO/The-perfect-recipe-for-anexternal-debt-crisis.html
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Focus must be on FDI and not on FII inflows, says RaghuramRajan. (September 25, 2012). Retrieved 21 August, 2013, from http://www.thehindu.com/business/ Economy/focus-must-be-on-fdi-and-not-on-fii-inflowssays-raghuram-rajan/article3935783.ece
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Football Field: Now in Valuation Lokeshwar Sinha, IFMR
Introduction A company can be valued according to different methodologies like Discounted Cash Flow (DCF) model, Enterprise value Multiples (e.g. EV/EBITDA), 52 weeks high/ low stock price levels of the company etc. None of the methods can be called perfectly right or wrong, as they provide an indicative figure for valuation. Once various valuation analyses have been performed, it is important to evaluate the valuation ranges derived from various methods and use that information to triangulate a valuation range for the company. Investment bankers often summarize the result by creating a page called “football field” to graphically depict the valuation ranges derived using different methods of valuation. A “football field”, so named for its resemblance to a U.S football playing field, is a summary which enables bankers to establish a valuation range for a company that is the subject of merger and acquisition (M&A) transaction. For public companies, the football field also includes the target’s 52-week trading range in line with the precedent transactions in the specified sector (e.g. 30-40%). A football field may also reference the valuation implied by a range of target prices from equity research reports. Getting into Football Field In general, a football field will show that the valuation range from comparable company analysis is lower than that of comparable transaction analysis because a control premium is included in the comparable transaction analysis. However, this is not always the case especially when there has not been any M&A activity in the industry for a long time. A DCF analysis normally creates a valuation range that is similar to the range for a comparable company analysis, although there are cases when it’s not so. Typically, a company’s current acquisition value falls above the overlapping ranges given by the comparable company analysis and the DCF analysis, although again there are cases when it’s not so. This is because an acquirer should pay a control premium, which is not included in either of the above methods of valuation. Leveraged Buyout (LBO) analysis generally provides a floor value for a company, as it represents a price that a financial buyer would be willing to pay, based on their required internal rate of return (IRR). Generally, strategic buyers are able to pay more than the financial buyers, since they can take the advantage of synergies with their own company. But, if the market allows high leverage (as was the case from 2006 to mid-2007), which results into higher IRRs, or if there are specific operating strategies that a financial buyer brings to the transaction, then it is possible for financial buyers to surpass strategic buyers, despite the lack of synergy benefits. If there are multiple lines of businesses within a company, then a break-up analysis can be included in the football field. Depending on the industry and the company, other valuation methodologies can also be included in the summary.
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Figure 1.1 : An example of a Valuation Football Field
Understanding with an Example An example of football field can be found below –
different business line values after allocating debt and considering tax issues. Based on this football field, investment bankers might determine that the appropriate triangulated
In the above figure, the current stock price of $40 is value for the target company is $50 (which might be exwithin the comparable company analysis range of $36 to pressed as a range of $48 to $52), that represents a 25% $44. The comparable company analysis range is less than premium to the current share price of $40. However, $50 the comparable transaction analysis range of $42 to $51. could be adjusted up or down based on the acquisition conThis is generally expected since comparable transaction sideration (shares or cash), probability of completion, and multiples include a control premium whereas trading com- other factors. parable (from comparable company analysis) do not. A DCF analysis might show a valuation range of $38 to $45, unless synergies are added, where the range might increase to $43
Analysis &Interpretations The comparable company analysis range is general-
to $50, assuming cost synergies of $5. In this football field, it ly in line with the DCF analysis range, which means that, is inferred that financial buyers might be interested in the currently, investors are properly valuing the company in the target company based on the its strong cash flow, low lever- public markets relative to its intrinsic value. The breakup age, and small capital expenditure requirements, and so an analysis range in Figure 1.1 is wider than some of the other LBO valuation was completed, which shows a valuation methods. This is not uncommon because there is less cerrange of $39 to $45, based on an assumed 20% IRR require- tainty in the values of several component pieces compared ment. A break-up analysis was completed, because there to a single company because there is execution risk involved are several different business lines run by the company, and with each of the individuals sale transactions and also bethe valuation range based on this analysis is $41 to $51, cause there may be uncertainty as to the range of values for which is the widest range due to uncertainty regarding some of the component pieces.
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If the company in Figure 1.1 were for sale and a If, in this example, the DCF analysis range were $46 buyer were to offer $50 per share, the offer is likely to be to $53, as shown in Figure 1.2, as opposed to $38 to $45 as considered “fair” from a financial point of view due to the shown in Figure 1.1, the target company might not want to fact that – accept an offer of $50 per share. If the company believes in the integrity of its strategic plan and its projections, it might $50 represents a $10 per share or 25% premium to not want to try and realize its strategic plan and then allow the current share price of $40. time for the market to reward it with a higher stock price. $50 is on the high end of the comparable transaction Assuming, the market ultimately does recognize the intrinsic analysis range of $42 to $51. value of the company (assumed here to be the DCF analysis $50 is greater by $5 per share than the high end of range of $46 to $53); it is possible that this company could the DCF analysis or “intrinsic” value range of $38 to be worth more in the public markets than the $50 per share $45. offered by the buyer. This means that, assuming markets were to properly value this company based on a DCF valuation, the highest value a public investor should be willing to pay for a noncontrolling interest is $45 per share. If the financial buyer were to offer $50 per share, the offer price would exceed the standalone intrinsic value of the company. The only reason a potential buyer should be willing to pay $50 per share for a company that is, at most worth $45 on a standalone basis is because the potential buyer can create more than $5 per share of synergy value (such that a price of $50 per share is still a value enhancing transaction for buyer even after paying away $5 in synergy value in order to gain control of the target company).
Applications
It helps to graphically depict the valuation ranges derived using different methods of valuation.
This approach also helps in using one method to “sanitize‟ the other!
A football field summarizes the various metrics and assumptions used to determine the valuation of a company or business segment.Companies are generally valued using a combination of multiples and future cash flows, and each of which can be taken in a best, worst and median case scenario.
Figure 1.2 : A contrary example tithe above Valuation Football Field
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For example with a discounted cash flow, it can be assumed that the company will have a terminal growth rate of x%, x+1% or x-1% which would give three different final values. Thus, the discounted cash flow (DCF) method will give a range of values for the company being valued. This applies to all valuation methods. The football field graph shows the different mean valuations and multiples for the different methodologies and allows the person conducting the valuation to decide which method to use primarily to achieve the best possible valuation. Straight away an investment banker can see the share price given by the average of all of the valuation methods and argue its range of valuation. The valuation range is finally tested and analysed within the context of merger consequence analysis in order to determine the ultimate bid price.
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References
Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions By Joshua Pearl, Joshua Rosenbaum
http://www.investment-and-finance.net/investmentbanking/v/valuation-football-field.html
The Bidder Competition for Techem By Ekaterina Bozoukova
The Investment Banker's Handbook: Accounting, Valuation and Modelling By Corporate Training Group (CTG)
Social Media and the Workplace Richa Gupta, FORE School of Management
Organizations constantly look for new ways of communication to align their employees’ goals with that of their business objectives. One of the emerging platforms in this context is social media which has significantly changed the way people interact with each other and even the nature of employment relationships. Some of the well-known examples of social media platforms are LinkedIn, Facebook, Google+, Pinterest, Wikipedia, YouTube, Twitter, Second Life and Wordpress. It has not only changed the ways of communication, but has also presented great opportunities for businesses in areas of public relations, recruiting, organizational learning and other human resource functions. This article discusses benefits of social media in various HR applications and how organizations are making use of it. RECRUITMENT With the ever expanding social media a new approach to recruitment is emerging slowly leaving behind the traditional recruitment channels. Social networks are viewed by corporations as a means to recruit both passive and active candidates in a personal yet professional way. It is helping recruiters to look beyond candidate’s business acumen to personal characteristics, providing them with a huge engagement rate and cost effectiveness. It is also serving as a tool to understand candidates in terms of their career graph, areas of interest and professional network. Recruiters are using this social platform for sourcing candidates by posting jobs through their own accounts, creating corporate career pages and advertising. Some of the companies that are already leveraging these benefits are Marriot Hotel, L’Oreal and P&G by designing online games on Facebook mainly to attract mid-level talent. Players are given a competitive scenario where they are evaluated on skills and the top scorers are recruited by the company. REWARDS & RECOGNITION Rewarding and recognizing employees has been made more effective through the use of social media and social media tools. Companies have realized that public recognition of employees through social media can lead to great work motivation as well as feeling of pride in working with the organization. For an individual it’s a great feeling to earn something tangible that can be shared with friends and families. It also encourages peer-topeer acknowledgement, helps executives reach their employees and hence serves as an effective tool to reward staff and boost morale. Some of the best practices of employee
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recognition through social media are:
LEARNING AND DEVELOPMENT
Highlighting employee achievements on Facebook by tagging employee pictures receiving an award or by promoting their stories of accomplishments. AviSpl Is one such company that uses their Facebook page to recognize employees?
Another application of social media lies in development of employees. Mostly social media is seen as an extension to already existing training programs. It can be used to blend the initial online and classroom experience with the posttraining support to the employees at all times. Not only can Second is by creating hash tag for all employee companies develop innovative teaching tools inexpensively, recognition tweets so that Twitter groups them to- but can also have more flexibility in how and when to train. gether for easy search. Deloitte makes use of social Some of the most innovative ways to foster collaboration media by letting employees share their badges on across an enterprise includes blogging, Microblogging Twitter, LinkedIn earned through completing various (Twitter), Expert Diaries, communities of practice, video training modules. instruction and training through vitual world.
Reduces recruiter’s personal bias
Saves recruitment cost
IBM is one such company which conducts employee orientation and mentoring in a simulated computer world by making use of virtual environments such as Second Life .The idea is to improve mentoring relationships as well as expedite orientation enabling new IBM employees to mingle, interact and share ideas in the virtual world before their first day on the job. Nestlé objective is to crowdsource innovation ideas from employees across the world so as to enable internal knowledge sharing. Another example is Marsh Inc., a global risk management firm which uses blogs internally for training.
Give candidates a look into the company.
CHALLENGES:
Why Companies Use Social Media
Access to huge talent pool irrespective of geographical location
To look at the candidate’s personality and to know them better.
Helps develop relationship with candidates over a time period
EFFECTIVE COMMUNICATION Social media has given employers a way to spread the word as well as a way to channel employee comments by shifting patterns of communication, from being one-way to being multi-way. Some organizations use a corporate Facebook page to communicate new programs or policies to their employees. Other employers use a corporate blog or video sharing to keep employees around the world engaged in regular meetings. It is seen by them as an excellent tool for quickly disseminating information on the state of the organization and lets everyone feel involved and connected. Some such companies using social media for internal communication are Dell, Nokia & Nestle. Dell objective is to make employees more productive and to interact more easily and frequently – particularly vital when they are working remotely and around the globe. It enables them to follow their leaders’ updates and interact with them on an open platform thereby increasing engagement.
Social media has its own set of challenges. Certain precautions need to be taken while using it.
Widening Web of Social Media: Social media's workplace implications are growing, HR Magazine, June 2012.
The idea of the Nokia Social Media Communications is to encourage the use of social media internally to bring out the company’s unique authentic voice and to engage in
Social Media: Gets Strategic, HR Magazine, October 2012
Economic Times Article, Jul 23, 2013
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The potential threat of using social media is the risk involved in dealing with data security and privacy issues. However, this can be controlled by proper set of policies and safeguards in place.
Bringing congruency in four generations existing in one workplace is again a challenge. Before implementing the use of social media consider the unique perspectives and needs of your entire workforce.
Another challenge is to develop skilled talent to manage and cultivate organization’s own participation on social networks. This can be done by suitable training and development of employees.
References
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