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CONTENTS VOL. 3 NO. 1
Editor-in-Chief Amitabh Taneja President & Publisher R. Rajmohan Editorial Contributors Sridhar Raman Red Tree Convergent Media Sahana Ghosh Kavita Kukday Advisory S. P. Taneja/ R. S. Roy/ Anjali Sondhi Art Director Pawan Kumar Verma Design Mohammad Shakeel Rohit Juneja Photo Coordinator Deepak Jha BUSINESS OFFICE VP - Advertising Deepa Gopinath GM - Advertising Rajeev Marwaha (Delhi) Kirishnanand Nair (B’lore) GM - Circulation Anil Nagar Branch Managers Waseem Ahmad (Mumbai) Piyali Roy Oberoi (Kolkata) Sr. Manager - Circulation Shrish Mudgal Manager - Advertising Anirban Sarkar (Kolkata) Manager - Circulation R.P. Singh (Mumbai) Dy. Manager - Marketing Ravindra Kirti PRODUCTION DGM Manish Kadam Deputy Manager Manoj Soni SERVICES DGM - Logistics Rajeev Mehandru DGM - Customer Relations Hemant Wadhawan Manager - Subscriptions Aparna Johri
L&T’s path to number 1 in the Indian construction business
46 GLOBAL TRENDS
DOSSIER STRATEGY SECTOR WATCH OPERATIONS
Building India Construction Project management
04 10 12
Renault/Nissan man Murthy’s laws The automotive sector Neuromarketing
56 60 46 50
C-SUITE LEADERSHIP ENTREPRENEURSHIP ACADEMIC FORUM CUTTING EDGE
MARKETING CRM: The rise of salesforce.com FINANCE VALUATION: Different methods DEAL OF THE MONTH: European bailout MANAGEMENT PUBLIC RELATIONS: The company smile
30 20 28 38
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Entrepreneur: Real estate Google Trends: Portable fuel cells Academia: Boutique brakes
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MAKING THE MOST OF INDIA’S PLANS
1938: Two engineers; a cramped office; a basketful of plans… 2008: 30,000 employees; $5 billion turnover. How did Larsen&Toubro become India’s largest construction company?
hichever way you look at it, it’s a remarkable story. One that started in the unlikely location of Matheran, a pristine little hill station, which two Danish engineers Henning Holck-Larsen and Soren Kristian Toubro visited, way back in 1938. Amidst the bonhomie of their revived friendship, they envisioned the future and aligned their fortunes with a country that they recognised as a nation with a bright future and a rapid growth curve. Their dedication to the growth of India’s infrastructure and manufacturing capabilities
never wavered. Instead, it bred a team of men that would take ownership of their dreams and build a company of values. Presently, L&T is into six businesses. Of these, engineering and construction, electrical and electronics and machinery and industrial products are traditional businesses, while IT, finance, and financial services, are relatively new businesses for the company.
Hands-on, feet on the ground In the beginning, the main rationale behind strategic decisions was a hands-on and practical response to the prevailing market conditions.
The strategy was responsiveness. When World War II put a stop to their equipment imports business, the founders Larsen and Toubro set up a workshop to manufacture dairy equipment. They also moved fast to tap the unique opportunities that came with war, taking on large installation projects that had been abandoned by war-struck German engineers. And the fabrication and installation expertise acquired here was extended in new ways. Over time, the engineering and construction contracts (ECC) division that started in 1944, became the spearhead for L&T’s growth. Thinking on its feet was a necessity for L&T in the early years. In 1945, immediately after the war, companies were literally planning to tip war-surplus equipment into the sea, as it was too expensive to transport it back home to Europe and America. Now skilled in the art of turning misfortune into good fortune, L&T bought second-hand equipment from Caterpillar Tractor Company, USA and refurbished them for use in the Indian market. The move translated into a partnership in which L&T become a dealer for Caterpillar
earthmoving equipment for India, where such machinery was scarce and expensive at the time. Post-independence, a consolidation of businesses was taken on to respond to a huge demand for technology, infrastructure and manufacturing capabilities. In three years, L&T expanded rapidly, setting up offices across the country, acquiring 55 acres in Powai, outside Bombay, to set up its own facility in 1948, and going public limited in 1950.
Following Plans L&T’s strategy during the third quarter of the 20th century was to accompany India’s Five Year Plans. In founder Henning Holck-Larsen’s words, L&T based its “Policies on the aims and objects of India’s Five Year Plans.” If you will, L&T’s strategic planning was to translate the Plans into opportunities. During the 50s and 60s, infrastructure development was funded almost entirely by the public sector and it was public sector agencies and others that executed projects. With few private players in contracting, L&T was able to use its fabrication and installation capabilities and access to
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international technologies to become a sub-contractor in many prestigious and big projects. While focusing on the Plans, L&T maintained its ability to enter new fields, as circumstances allowed. For example, when during the 2nd Plan period between 1956 and 1961, the Indian government stressed on power and atomic energy, L&T was commissioned to build India’s first atomic reactor. There was also a huge emphasis on manufacturing in the first few Plans, an integral part of the Nehruvian vision for India. The country was investing heavily in setting up steel plants
and other manufacturing hubs during the 3rd Plan (1961-1966). In response, L&T also focused on manufacturing, but instead of making consumer goods that were obviously in demand, focused on manufacturing machinery that would be used in heavy industry. Using foreign technical inputs, the machinery and industrial products division set up ventures that supplied equipment to industries like cement, steel, fertilisers, petrochemicals, mining, and paper and pulp.
Transition Once again, during the 5th
Plan period (1974-79), there was a renewed emphasis on industrial development under the leadership of Rajiv Gandhi, who was then a young, energetic leader. L&T responded by roping in the Indian Institute of Management in 1976 to make its manufacturing businesses more market-responsive. L&T centralised planning, budget and controls and rationalised its product lines into 4 groups— agriculture and earthmoving, heavy equipment for industry, switchgear and electronics equipment, and other business lines. This also marked a change in strategy from before and set in motion a series of strategic planning exercises that aimed to anticipate market trends in advance, rather than react to immediate events every time. But then, in the 90s, L&T had to return to defensive manoeuvering as it countered a series of aggressive takeover attempts by the powerful Reliance Group, owned by the Ambanis. Reliance was expanding its chemicals and petrochemicals business at the time, and was eyeing L&T’s capabilities in turnkey construction, engineering and equipment supply. Though the hostile bid was defeated, L&T floundered in terms of direction, for perhaps the first time since its inception.
Leveraging the core In 2000, L&T took the advice of its consultants, the Boston Consulting Group, and decided to concentrate on the core businesses of construction, E&C projects, heavy engineering, electrical and electronics, while exploring new thrust areas like IT and telecom. BCG’s strategy was somewhat
counter-intuitive. At the time, the engineering and construction business was not doing well since it had “taken on some large orders that were taking longer than expected time to complete,” according to a report by Khandwala Research. Instead, the cement division was considered the major growth driver for the company, which then had, “plans to acquire existing cement units,” from other companies. The strategic focus on engineering and construction seemed misplaced. On the other hand, L&T was the largest construction company in India at the time, and there was adequate domestic demand for construction, through government investment in infrastructure, and private investment in real estate. L&T took a bold decision to focus on its core competencies of contracting, fabrication and installation, and restrain somewhat its diversification. Over the next few years, the company sold off its cement business and divested stake in L&T-John Deere Pvt Ltd and L&T Niro Ltd. It exited the dairy equipment and glass container businesses as well. In 2008, it sold off its Ready Mix Concrete (RMC) business to Lafarge, despite enjoying a leadership position, with a 25% market share. Says AM Naik, “The vision was to take the group to a Rs 250 billion turnover by 2005,” from the 2000 turnover of Rs 80 billion. As it happened, in 2005 the company reported gross revenue of Rs 150 billion, a shortfall, but still nearly 100% growth over the five-year period. The silver lining was the success of the construction and engineering segments, which contributed 85% of this revenue. The strategy of
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DOSSIER - CONSTRUCTION ORGANISATIONAL CHART
IT & Technology services V K Magapu
Industries projects and power transmission Building and factories
Electrical and Electronics R N Mukhija
Building projects Engineering design
Construction K V Rangaswami
A M Naik Chairman and Managing Director
Construction Developmental projects Transportation & Infrastructure
Machinery and Industrial Products J P Nayak
Hydel and nuclear power Heavy Engineering M V Kotwal Financial Services & HR Y M Deosthalee
Hydrocarbon sector Power sector
E&C Projects K Venkataramanan
becoming the clear front runner in construction had succeeded – L&T’s revenues in construction were over seven times that of its nearest competitor Gammon India Pvt Ltd. The differentiator, in the words of a senior executive, was, “The ability to integrate engineering, manufacturing, procurement, construction and fabrication and deliver results in turnkey projects.” In widening its construction leadership, L&T has successfully deployed three strategies: develop superior IT infrastructure, organise a large vendor base of high quality, and forge technological alliances.
Project and vendor management Growing a world-class engineering and construction operations was no child’s play for L&T, especially with simultaneous projects in hundreds of locations in India and abroad. In 2000, L&T ECC saw the need for a solution that would streamline its supply chain, which was a major pain area for the company. At one point, the company was managing 6000 suppliers over 350 locations! However, IT solutions for construction were not really available in India then. So ECC
decided to upgrade from a traditional Enterprise Resource Planning (ERP) solution to an Enterprise Information Portal (EIP). Essentially a webenabled project management system, the EIP offered two advantages over an ERP—it gave every user a secure access point through a simple interface and its decentralised content management structure made sure it was updated at all times. L&T’s EIP used Microsoft Project 2000 and Visual FoxPro-based CeMA software, to upload complete job details on the portal, where managers could see them at a glance, anytime
and anywhere. With speedy access to information, it became much easier to manage business processes. Says KV Rangaswami, President Construction, “The EIP has provided us with the right solution. It has brought together different phases of construction cycles—design, development, tendering/bidding, budgets, planning/scheduling, etc. as well as the different stakeholders— architects, designers, vendors, subcontractors, clients and L&T—on a single platform. EIP has emerged as a powerful ERP solution for our construction division.” Plus, they went ahead and developed a web-based Supply Chain Management (SCM) solution built on SQL Server 2000 and Windows 2000 Server to streamline the extensive vendor network and all the processes, from request to payment. “We were procuring construction material and equipment to the tune of $1 billion at the time. More than 70,000 purchase orders were being issued every year. It was a nightmare. The SCM system helped us use our purchasing power to get better prices and swifter deliveries from vendors. In turn, these resulted in more efficient processes on site. We were able to deliver an increasing number of our projects on-time,” says a project manager, at one of the company’s sites outside Delhi.
Powered by partnership Strategic alliances with world
Timeline 1938 Larsen and Toubro set up partnership firm
1944 ECC incorporated
1946 L&T turns private limited
1948 Acquires land in Powai for first facility
1950 Becomes public limited company, with a paid-up capital of Rs.2 million
1956 Moves to head office in Ballard Estate, Mumbai
1962 Toubro retires from active management
1966 Acquires its headquarter building
1973 Enters Top 25 Indian Companies bracket
1976 Holck-Larsen awarded the Magsaysay Award for International Understanding
1978 Larsen retires
1991 Thwarts hostile takeover bid from Reliance
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leaders have opened doors in many arenas for the company. Teaming up with GE Energy to source power plant control systems is aiding L&T to tap the Indian power market. Similarly, tying up with Dassault Systemes for Project Lifecycle Management (PLM) systems allows L&T to increase efficiency in its heavy engineering division. L&T’s strategy is to enter pre-bid tie-ups with global players who combine technology and competitiveness. For infrastructure projects specifically, L&T has bought into the Indian government’s thrust on public-private partnerships, giving PPP a new dimension. L&T takes on projects of the familiar Build-Own-OperateTransfer (BOOT), Build-OperateTransfer (BOT), Build-Own-
1994 Panvel Nadi Viaduct Jawaharlal Nehru Stadium at Chennai adjudged the most Outstanding Concrete Structures in India
1994 Larsen & Toubro (Oman) LLC (LTO) set up as a Joint Venture between L&T International FZE and The Muscat Trading Co. LLC
2000 Launches restructuring plan Lakshya 1
Lease-and-Transfer (BOLT), Build-Own-Operate-Shareand-Transfer (BOOST) models through its subsidiary company, L&T Infrastructure Development Resources (L&T-IDL). What’s more, this subsidiary, “evaluates projects and makes investments,” together with the government, explains CFO YM Deosthalee. “The only condition is the construction work will be done by L&T’s construction division,” he adds. It’s a strategy that allows L&T to leverage its reputation to get contracts and yet share its risks with its partner.
Same format, new geographies The same strategy is being used in the company’s international operations. L&T’s recent
2000 Implements Enterprise Information Portal for project and supply chain management
2001 ECC Division receives the Overseas Construction Council of India (OCCI) Award for Outstanding Performance in 4 categories
2003 Gets Businessworld’s Most Respected Company Award
successful ventures into foreign markets, like the Gulf region, have been primarily through partnerships with local partners in each region, though there are still some instances of acquisitions and direct contracting. Typically, the local partner has 51% stake. The company has incorporated LTIFZE, a wholly owned subsidiary in Sharjah, UAE, through which investments in all international projects are routed. For example, L&T Oman is a joint venture between LTIFZE and the Muscat Trading Corporation, LLC. Similar JVs exist with companies in Qatar, Saudi Arabia, UAE and Kuwait. From the late 70s onwards, L&T’s ECC division worked as a sub-contractor in several prestigious projects in the Gulf, including the Abu Dhabi International Airport. However, through the 80s, the company focused on the domestic market, only to re-enter the Gulf regions on its own terms in the mid 90s. Unlike before, the emphasis is mostly on infrastructure, power, and hydrocarbons. Moreover, L&T has gone in a much stronger player, eyeing large contracts in the range of $150 million-300 million. L&T intends to expand to parts of Africa like Tanzania, Sudan, Kenya and Nigeria, and to South East Asia. But the GCC countries are the focus. KV Rangaswami summarises: “In the international market, we have a focused
2004 Mr. A. M. Naik, CMD wins JRD Tata Corporate Leadership Award
2005 L&T officially acquires Business Superbrand status
strategy for the GCC construction market where we already have an impressive presence. We have plans to increase international revenue share to almost 25% in the next 2 years, by aggressive ramping up of the resources and also expanding, and consolidating our position in other GCC countries. We see tremendous potential in various sectors, like infrastructure, power transmission and distribution, real estate and oil & gas, in most of the GCC countries.”
The present The ECC division now contributes about 76% of the company’s revenues. In the past year, the division grew 44.5% in revenue and boasts of an order book of Rs 527 billion ($11 billion). It has a size advantage that it is able to leverage. “With a sales turnover of over $4 billion, L&T - ECC division undoubtedly stands as the market leader in the Indian construction industry. Other Indian construction companies, like HCC, Gammon, IVRCL, NCC, etc are in the bracket of $1billion sales turnover,” explains KV Rangaswami, President Construction. It has the wherewithal to handle largescale, complex projects and is purposefully moving up the value chain, by migrating from lowmargin simple projects to larger and more complex projects of Rs 1 billion investment and above. The 2008 order book shows a higher share of orders in airport
2005 2007 2007 2008 ECC Division Launches 2nd L&T awarded Sells RMC receives the restructuring plan the esteemed business to IMC Ramkrishna to create Business Lafarge Bajaj National 12 distinct Leadership Award AM Naik gets The Quality Award verticals; projects by NDTV Profit, Economic Times Rs 500 billion in the category ‘Business Leader turnover target of Building& of the Year’ for 2012 ConstructionAward Infrastructure
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THE DANISH CONNECTION England owes its name to the Angles, a Germanic tribe based near present-day Denmark that invaded the island in the 5th century. Two, more peaceful Danes, lie behind India’s largest construction firm n 1938, two Danes, a chemical engineer, Henning Holck-Larsen, and a civil engineer, Soren Kristian-Toubro, were in India representing FL Smidth and Co—a Danish engineering firm. They decided that they wanted to import machinery from Scandinavia to India instead. Though they had scouted other locations like Madagascar, they anticipated that India would soon be an independent country in need of engineering capabilities. So they set up a small office, hired a clerk and a messenger, and embraced the motto ‘In service lies success’. Eighty years later, we know this ‘small’ company by the last names of the founding members—Larsen & Toubro. From importing dairy equipment for a small retainer to being one of India’s largest engineering companies, L&T, as it is commonly known, has indeed come a long way. L&T’s Danish connection, though, does not end at that. Soren Kristian Toubro’s son, Ole K Toubro, still maintains the house and estate that his father built in Kodaikanal, a hill station in Tamil Nadu. In fact, it was in this house that Soren Toubro’s wife lived after his death, until her last days. The Toubro Construction Technology Centre was inaugurated by Ole, in 2006, in the Chennai headquarters of the company. This was the second building to be named after Soren, after the Toubro Training Centre. And at the same campus stands the Holck-Larsen Centre, which not only serves as a memorial to Henning Holck-Larsen, but also as an exhibit of the company’s history. Larsen has the distinction of serving the longest stint in India as an expat business leader. In February this year, recognising the efforts of the company’s current chairman and managing director in taking forward Indo-Danish ties, AM Naik was knighted by the Queen of Denmark, Her Majesty Queen Margarethe, in Mumbai, and was appointed Knight of the Order of the Dannebrog. Naik is also the honorary Consul General of Denmark in Mumbai. On the business side, L&T operates in Denmark through a whollyowned subsidiary L&T Infotech, based in Copenhagen. L&T Infotech Denmark has formed an alliance with Payment Business Services, Denmark wherein the companies work together in approaching first-time European clients. In 1992, L&T had formed L&T-Niro Ltd as a joint venture with Niro A/S, Denmark, but sold out its stake to the Danish company, in 2005, along with its dairy division. L&T Ramboll Consulting Engineers Ltd was set up in Chennai in 1998, as a joint venture between L&T, Ramboll, Hannemann & Hojlund, and Industrialisation Fund for Developing Countries (IFU), both based in Denmark. In 2000, L&T again collaborated with the Danish group Ramboll, and entered into a tie-up with Ramboll Informatik, in order to jointly market services in the Scandinavian region. ■
infrastructure, power, ports and offshore platform, all of which are large and technically complex. In the current scenario of a global economic slowdown, infrastructure expenditure in the current 11th Plan has been stepped up to $500 billion, as compared to $400 billion in the 10th Plan. The 12th Plan will most likely spend close to $1000 billion on infrastructure. And L&T is back in familiar territory – helping India realise its Plans. To achieve that, L&T is restructuring its Construction and E&C divisions into 4 units – building and factories, infrastructure, power transmission & distribution, and metallurgical materials handling & water – effective from July this year. Falling in line with the company’s overall strategy of mirroring India’s growth plans, these areas indeed represent India’s major concerns and focal areas today, in terms of spending. “According to me, infrastructure and urbanisation are the primary macro growth drivers for any developing country which is not affected by cyclical economic downturns. We have formulated various future growth strategies to fully harness opportunities
in these areas in a systematic and focused manner,” says KV Rangaswami. Adds J Ganguly, Executive VP for Construction, “Each of the four divisions now contributes Rs 3,000-4,000 crore to the company’s exchequer and we would go for separate registration once they grow to at least Rs 5,000 crore each.” The move is also a way for L&T to concentrate its competences as it counters growing competition in domestic as well as international markets. Reliance, an old threat, is in the game now with a planned construction and engineering division and is even aping L&Ts strategic model of JVs to capture international markets. IVRCL, HCC, Gammon India, Simplex Infrastructure, Punj Lloyd, Nagarjuna Infrastructure, and many other large contracting companies are trying to match L&T, in performance and efficiency.
People’s company People have been considered a strategic asset in L&T for long. Perhaps the only Indian company that has consistently drawn its leaders from its own ranks, L&T is truly a people’s company with
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25% part of its equity held by an Employees Trust. Creating and nurturing loyalty is how L&T has traditionally believed in retaining talent. Says AM Naik, Chairman and Managing Director, “Our main job is to convert employees to L&T-ites, so that the future of the company is secure.” His own feelings for the company verge on the emotional. “In my career of 40 years I’ve received many offers, but I always tell them that this life is reserved for L&T, may be if I am reborn and return as a human being, I could consider then,” he says. Training was a way of fostering loyalty and increasing competence. Timely promotions, mentoring and training of engineers and deputations to reputed technical and business schools for higher education, are routine in the organisation. However, L&T is facing a crunch of talent, compounded by a loss of trained middle management employees through the 80s, when a merit-oriented system was replaced by a senioritydriven one. The lack of leaders is sufficiently serious as the company is not letting directors retire. Naik is worried. “I am losing people fast and there are not many around, from whom I can select,” he says. Recently the company took on consultant McKinsey to create a leadership development programme. A prominent long-term feature is the campus ambassadors programme, which will help the company pick up talent from business schools. Having faced a severe crunch of skilled construction workers over many years, the
ECC division has successfully established the Construction Skills Training Institute (CSTI) for 7 trades. The CSTI has now expanded beyond Chennai and opened branches in Ahmedabad, Bangalore, Delhi and Kolkata. One of the main strategies to meet competition for the future is “ramping up of skilled manpower through a systematic training process,” says KV Rangsawami. This is in line with the overall vision for L&T’s future. “Our
as daunting as it sounds. To achieve this milestone, L&T is moving away from a semiintegrated structure and plans to create 12 verticals in 2009: nine (including engineering & construction, power and hydrocarbons, electricals, machinery business, industrial products, heavy engineering, technology and ship building) are mature businesses; the remaining three verticals will be part of the mid-term and long-term growth
internal processes training and development, encouragement and empowerment, must be such that ordinary people can do extraordinary things,” avers Naik.
strategy. “We have plans to create 12 operating companies within the L&T corporate structure and each operating company will be responsible for its strategic and operational decisions and performance. Each company would have independent support functions such as finance and accounts, HR and supply chain management. The new structure is expected to provide a platform for sustained value creation,” says AM Naik. Considered a logical
The future L&T has set itself a new quantitative milestone – a target turnover of Rs 500 billion ($10.7 billion) for 2012. Considering that the company has doubled its revenues in just three years to register a figure of Rs 300 billion in 2008, this may not be
progression in the growth curve of a large-cap company, the move is expected to achieve two objectives. One, activities that logically fit together will be clubbed to achieve greater efficiency. Two, each business will get the autonomy and resources it deserves. In a nutshell, businesses are expected to create more value for the company with this new structure. Analysts opine that the move serves another objective, that of diversification, which is inevitable for a company this large. “Despite its emphasis on its core competencies, an experienced management team like L&T’s is bound to realise the dangers of being an overly dominating player and dependent on any one market,” says Dr Amit Kapoor, Professor of Strategy and Industrial Economics at the Management Development Institute, Gurgaon. “Diversification is the most logical strategic move at this point,” he adds. Clearly, the four years to the 2012 target will be testing ones for L&T, as it confronts three issues. There is international expansion, and yet the demand is largely from the domestic market. There is growth, but few future leaders to steer it forward. There is diversification, yet the construction and engineering business contributes the lion’s share of revenues. Clearly, L&T will continue to succeed in its mission of building India. Success in achieving the Rs 500 billion milestone will be a little more difficult. ■
NEXT ISSUE: FOOD
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BUILDING C A BIG THING India is humming with construction cranes, cement trucks, jackhammers, and other heavy equipment, as the country builds up its infrastructure, offices, homes for the 21st century. A statistical look at this sector, which accounts for almost 10% of GDP
Doing more than its share of GDP work
onstruction contributes over 8.7% to India’s GDP and provides the highest employment after agriculture, providing livelihood to 16% of India’s population. Its backward and forward linkages to over 250 manufacturing industries make it particularly important. Growing at approximately 15% today, and with a
turnover of over Rs. 4 trillion ($ 84.3 billion), the size of India’s construction market is projected to be Rs 11.5 trillion ($243.6 billion) by 2012. Despite being considered one of the fastest growing and most profitable construction markets in the world, India’s per capita spending on construction, at $49, is abysmally low, as compared to the other Asian
Growing brick by brick
Traditionally an agrarian economy, the importance of the construction sector to India’s economy is often underestimated. However, owing to larger participation of the private sector in construction and growing foreign interest, the Indian government has in recent years focused on infrastructure and construction, through special schemes. For instance, the JNNURM is investing funds to the tune of US$2300 million in urban renewal projects across 63 cities in India.
Construction output has more than doubled over the past 7 years, to reach Rs 3 trillion in FY2008. The main drivers of the sustained construction boom are public infrastructure and private residential and commercial buildings. Source: Economic Survey 2008
Construction behemoths L&T is in the twelfth position in world construction company rankings, but still only an eighth the size of the world’s largest construction firm. Yet, L&T’s presence in this list speaks of the inroads that Indian construction companies have made into global markets. Beyond catering to India’s large domestic demand, companies like L&T, Gammon India, Nagarjuna Construction Company, Ansal API and IVRCL already have established foreign ventures. Company
Turnover in US$ million
Source: Central Statistical Organisation
Emerging cost per square metre Construction costs ($/sq.m for an office) in India are a fifth of those in developed economies. At about 500 $/sq.m. they are comparable to the norms in emerging economies.
Number of employees
Source: building.co.uk Source: No1construction.com
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economies, such as Malaysia ($502), Sri Lanka ($205) and China ($1348). Experts see a silver lining in this though, taking it as an indicator of pent-up demand. The housing shortage is estimated at 31 million housing units. There is an investment requirement of Rs 14.5 trillion ($320 billion) in infrastructure by 2012. With the government determined to prioritise infrastructure and housing, there
is considerable activity expected in India’s construction sector. Moreover, a growing population of upwardly mobile middle class is fuelling sustained demand for real estate. However, the industry is facing a serious challenge, in the way of funding projects. Foreign investors and diverse formats of public private partnerships are being explored, but funding will continue to be the nemesis of the industry. The other
major concern is that the severe shortage of skilled workers and talent in the areas of engineering and construction management is hindering the growth plans of many construction companies. Initiatives in training have been started by private and public sector companies alike–HCC, L&T ECC and NBCC for example–and the government is addressing construction through its new initiative, the National Skills Development Corporation.
Construction will continue to remain a golden industry for India for two reasons. One: it is in India’s long-term interest to develop world-class infrastructure; second: in the present scenario, construction is robust, as compared to other backbones of the economy, like manufacturing and IT. The next five years will present an opportunity for players in construction to prove their mettle. ■
Prices at the construction shop Prices of materials have risen by 25-30% in the last 3 years and have severaly impacted the cost of construction across India. However, recent inflationary pressures have forced the government to bring down steel and cement prices. The global recession has also contributed to a slight fall in prices for some materials. The overall cost of construction is alarming for a country where there is a housing shortage of 31 million units. Indicative price Rebar steel
Ready Mix Concrete
Glass- 6mm clear
Glass- 8mm clear
Ceramic floor tile - 30 x 30
Ceramic wall tile - 20 x 30
Rs. 5,200/1,000 piece
40 mm agg
The ports, the malls and the condos Residential construction, which was once the mainstay of the Indian construction sector, is now only a fifth of total construction. In fact, infrastructure projects have taken the lead and are now the largest component (54%). The shift towards infrastructure by major players like Ansal API, L&T, HCC, Shapoorji Pallonji and many others is a result of the increased spending of the government on physical infrastructure projects. The Golden Quadrilateral, airport expansions and new airports are some of the areas that have seen emphasis in recent years.
Source: Design Combine Architects, Cochin Source: Design Combine Architects, Cochin
A largely unskilled workforce Over 80% of the estimated 35 million workforce in construction is unskilled. This is a major barrier to the industry’s development. Due to shortage of skilled labour, even reputable contractors find it difficult to deliver world-class quality on-cost and on-time. The daily wages earned by an unskilled construction worker in India is as low as Rs 125-150 or $75 per month. Skilled workers do not earn substantially higher, reflecting that the industry is yet to truly appreciate quality workmanship.
Construction Olympics A survey of 55 countries by Global Insight yields India as the 11th largest spender on construction projects. The United States, Japan and China make up the podium. However, the growth in spending in India over the period 2003 to 2008 has been much steeper, as compared to most other developed countries. Even compared to emerging economies like Mexico and Russia, the growth figures as well as the total spending amount, are much more impressive.
Source: Global Insight Inc.
Source: 2005 CIDC Census, NICMAR, Project managers, Architects
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THE THREE Os
Efficient planning and organised project management are critical in helping a project stay on-time, on-cost, and on-specification
t was more than a year and things were not looking good at the Tarapur Atomic Power Project, Units 3 and 4, in Maharashtra. First, the project was delayed because the handing over of the site was late, followed by major changes in the draft design and then delays in design approvals and clearances. After which, heavy rains came down on the project, with the level going up to 48 mm on a single day, delaying it by another three months. And when the work did start, steel prices shot up by more than 30 per cent. It was a challenging time for both, the Nuclear Power Corporation of India Limited (NPCIL), the owners, as well as Larsen&Toubro (L&T), in charge of the actual construction. The Rs 1,252 crore project was in danger of being derailed. Or so it would have been, had L&T not had sound project management (PM) in place. They responded with corrective measures, like delay analysis, adding resources, improvement in the construction methodology and better utilisation of resources. Negotiations on raw material prices with manufacturers, and replacing road transport with rail were
Project Management Scope of work in a construction project
Tendering & Procurement
• Preparation of Project Brief • Project Budget • Appointment of Consultants • Project Procedures • Project Planning Strategy • Master Schedule
• Design Review • Design Process Mgmt • Document Control • Project Cost Plan • Pre-Construction Cost Mgmt • Contract Documentation • Constructability Review • Value Engineering • Schedule Management • Document Review • Procurement Strategy
• Pre-Qualification • Bid Documentation Process • Bid Process • Contract Award • Contract Documentation • Start-up Management • Construction Scheduling • Correspondence Documentation
• Site Organisation • Construction Management • Submittal Process • Site Logistics • Construction Cost Mgmt • Quality Assurance • Performance Measurement • Billing Administration • Change Order Management • Claims Management
Stage 4 Project Close Out • Punch-Listing • Commissioning Management • Closeout Training Programmes • Operations & Maintenance Manuals and ‘As Built’ Drawings’ Collations • Financial close-out • Admin close-out
Indian project managers need to deal with some typical problems. A poorly skilled labour force, few qualified project management specialists, underdeveloped communication methods between managers, sites and contractors and no accountability, are some of the issues they face. Even though institutes like NICMAR and the Chennai-based International Institute for Project Management offer specialised courses for construction managements, there is a dearth of PM talent. To some extent, to compensate for that, but more as a way to increase efficiency, customised IT solutions have been deployed as answers to some of these problems. However, in the end, it is the ability of the manager to interpret situations, analyse them and solve problems that makes for on-time, on-cost, and quality project delivery.
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A CLEARER PICTURE A site monitoring method, the Digitalising Construction Monitoring model, makes it easy for the project manager to remotely monitor the progress of construction onstruction project management, especially for on-site activities, usually entails part of the project management team camping out at the site, monitoring the progress and reporting back. Similarly, teams from the architect’s office, from the consultants and other stakeholders, have to all make trips to the site independently, from time to time. To cut through that clutter and still get a clear idea of the progress, several methods have been tried over time. One of the most recent methods to come out has been the Digitalised Construction Monitoring (DCM) model. The model was proposed by Zubair Ahmed Memon, Muhd Zaimi Abd Majid and Mushairry Mustaffar, all senior faculty in the civil engineering department at the Universiti Teknologi Malaysia’s Construction Technology and Management Centre (CTMC), in a research project. The team tested the method on a pilot project of the Larkin Mosque Car Parking Project at Johor, Malaysia. In simple terms, DCM takes photogrammetric inputs (2D images converted to 3D drawings, using software, like PhotoModeler), compares them with the original drawings in AutoCAD, runs it by a project management software like MS Projects, analyses the information and presents the actual progress of work in percentage terms (see figure). The images can be taken with regular point-and-shoot cameras, by anyone. Besides making it easier on the project management team, the DCM model also makes it easier for the rest of the stakeholders to monitor progress. Images, as well as data, can be shared easily with the design team as well as the others. It also makes it easier for the design team to do mid-course correction. ■
System Integration in the Digitalising Construction Monitoring Model Digital photo capture at the site
Original drawing of the superstructure of the building in AutoCAD
Processed by using PhotoModeler software
A relational database model system (RDBMS) containing the details of the superstructure members of the building, created in MS Access
Processed by using PhotoModeler software
Planned bar chart (using MS Projects)
Information integration and system development
Calculating the actual percentage of work completed using MS Projects
additional inputs. With several years in the business, L&T had an accumulated wealth of learning in the area of project management. Putting it to work, the project was finished in 2005.
Defining PM Project management, defined variously by several institutes and academicians, is essentially about ensuring that a specific objective gets fulfilled in a stipulated time frame, following specific guidelines, and meeting defined parameters (especially financial ones). The Project Management Institute, a leading association for project management professionals, defines project management as ‘the application of knowledge, skills, tools and techniques to a broad range of activities, in order to meet the requirements of a particular project.’ While in software a project could mean the development of a software product, in construction, a project could be the construction of a road, building a small home, delivering a gigantic plant, for instance. Says Prof Goutam Dutta, Chairperson, Research and Publications, Indian Institute of Management, Ahmedabad, “Traditionally, project management has been seen as an operations function, giving an organisation competitive advantage. While most people think project management helps save costs on the overall project, one often-overlooked aspect is the saving achieved by risk management, which happens because risks are apparent more easily and on time, when project management is in place.” Project management as a discipline was born out of
experiences in construction and defence. Now, however, it is used as a broad management tool, and is especially important to the software industry. Their definition of ‘project’ may differ, but many of the tools used are similar. Moreover, software tools have become an integral aspect of implementing project management techniques in construction. The petrochemicals sector also employs project management. “One area that desperately needs project management is the public sector in the country. It is critical to train public servants in project management, so that those projects are better managed,” says Prof Dutta.
The basic approach The traditional phased approach to project management identifies a 5-step sequence of steps—initiation, planning and design, execution or production, monitoring and controlling, and completion. To understand this, let us take the example of a software product that needs to be created. The initiation stage outlines the nature and scope of the project. In this case, it means preparing the product brief, putting down the procedures to be followed, putting down the project strategy and schedule. In a way, conceptual design also happens at this stage. Then the system is designed, often along with a prototype. During execution, the coordination of people and resource assumes importance, along with integrating and performing project activities according to the project management plan. Keeping release schedule in mind, the
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OPERATIONS execution process includes monitoring and controlling, to identify and solve problems. Variances from the plan are noted as learning for the future. The closing stage includes formal acceptance of the project, including finalising all activities of the process groups, as well as the contracted professionals and vendors involved in the project.
Tools Project management was formally developed into a management tool by Henry Gantt way back in the 1890s, and the Gantt chart was widely used till its modern
variants, the critical path method (CPM) and the Programme Evaluation and Review Technique (PERT) were designed in the 1950s. Essentially, Gantt charts, CPM and PERT use a graphic schedule of tasks, in order of completion, to plan and control work and record progress. A Gantt chart allows you to see, at a glance, what should be achieved at a point in time. It also permits the user to assess how long a project should take, lay out the order of tasks, manage dependencies, and assess the impact of remedial action on the project. (See chart)
STREAMLINING A BEHEMOTH Using Primavera’s project management solution, Essar Construction (India) Limited managed to save 20 per cent of its administrative costs, and 30 per cent of its scheduling time
or a construction company, monitoring the progress of its various projects across several locations is extremely critical, and very difficult. Translating the vision of the senior management for each project and ensuring the follow-through of that, makes it essential for the company to employ a project management system. A large contractor for engineering, procurement and construction projects, Essar Construction Limited is a subsidiary of the Essar Group. It has experience in civil and irrigation projects, laying of pipelines, construction of industrial plants and highways and expressways. The company has a workforce of more than a thousand engineering design centres in Hazira (Gujarat), Mumbai, Chennai and Kolkata and global sourcing offices in India, the Middle East, Europe and China. At any given time, the company handles 20-30 large projects (of more than Rs 100 crore in value). A solution was needed to give top management an overview of all the projects of various strategic business units (SBU) such as steel, oil and gas, power, infrastructure, pipelines and marine. “There was a need to bring uniformity and standardisation in the planning approach for diverse projects in various SBUs,” states Mohan Phatak, the company’s GM and Head of Planning, in an interview to Express Computers. The company contracted KLG Systel, a Gurgaon-based software solutions and services company, to deploy an enterprise-wide project management solution from Primavera. Using the solution, information on the progress of their projects underway all over India and abroad was to be collected to provide centralised project data to their controlling facilities at Mumbai (the head office), Hazira and Jamnagar (in Gujarat,
where senior management is based). Like most major companies, Essar construction uses a combination of ready solutions, like Primavera and customised software. Using SAP ECC 6.0 PS module, a budget monitoring and management information system (MIS) was also developed. Finished in about two months, the implementation “helped create standard methodologies for various business processes. The data is being made available to individual users hierarchy-wise. There has been constant web-based updating of projects and customisation of webbased views for executives and top management,” adds Phatak. Data such as resource codes, activity codes, work breakdown structure (WBS), calendars, numbering systems, and reports for the typical projects for each of the SBUs was standardised. Using the solution, a baseline schedule is prepared and periodic reports on quality and schedule compliance are sent to the central planning team. Daily, weekly and monthly analysis of data is done to keep an eye on critical activities. The planners are able to get resource loading, and in turn are able to get cash flow in advance, which was earlier very tedious. This is close to what the company is supposed to spend, and they know this information in advance. Previously this was being done manually, without a user-friendly interface. Also, centralised reporting is something that was not being done earlier. Essar purchased 15 licenses of Primavera, at Rs 180,000 per license. The total cost of ownership, which included the purchase of Oracle 9i as the database server and Windows 2003 server edition, came to about Rs 7.5 crore. Against this, Essar reported a return on investment of around 10-15 per cent. Using project management, Essar Construction has managed to better utilise resources, cut administrative costs by 20 per cent and, by sharing best practices across projects, 30 per cent on scheduling time. For its implementation, Essar Construction (India) Limited became the first Indian company to receive the Primavera Excellence Award 2006, for engineering and construction, in the contractor category. ■
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A simple, yet no-nonsense method for project management, SCRUM breaks the project down into smaller chunks, finished iteratively
CPM is a mathematically based algorithm, that allows the user to view the list of activities, the time taken to complete them and the interdependencies. Essentially, CPM calculates the longest path of activities to complete a project, and helps the project manager find the shortest time possible to complete the project. It follows the activities that are on the critical path, that is, those that are on the longest path in the chart. A delay on the critical path means an increase in the overall project completion time. A CPM helps the manager determine the amount of float in each activity, which is the amount of time that a specific activity can be delayed, without delaying the entire project. Activities on the critical path have zero float. PERT, a similar technique, was specifically developed by a contractual vendor, under the United States Department of Defence to simplify the planning and scheduling of large, complex projects and is able to incorporate uncertainties. Says Dr AV Patwardhan, Dean at the National Institute of
n the context of product development, time-to-market is a critical criterion for success. You may have the most competitive products in place, but your competition may have already beaten you to it. Also, long, drawn-out product cycles, usually don’t cater for rapidly changing market scenarios. In spite of all good intentions and hard work, if the product fails to hit the market on time and with all the features the customer expects, time and effort are wasted—affecting not just ROI, but also employee morale. Enter SCRUM, an iterative method of creating a product. An idea made popular by Ken Schwaber and Jeff Sutherland, SCRUM is not an acronym. It takes its name from rugby, where the team works together to achieve something. In the case of product development, that something is a shippable finished product. SCRUM is most actively used in the area of software product development. Some of the top names in software—Google, Microsoft, Infosys, Wipro and Yahoo!—all use SCRUM to improve their development process. Other big SCRUM implementers include Siemens, Motorola, Nokia, Philips and Accenture. SCRUM is now being used to develop any kind of product, or even as a general project management tool. SCRUM uses a cross-functional team of usually 5-9 and clears them of hierarchical limitations—everyone does everything. This team then goes about developing the product in an iterative process. SCRUM involves working in short, snappy sessions (see figure). The three main roles in SCRUM are the project owner, the SCRUM team and the SCRUM Master. While the project owner communicates the expectations from the SCRUM—a master list of features, with priorities sorted—the SCRUM Master is the person actually ensuring the SCRUM process, by protecting the team from outside disturbances, as well as helping out with problems. While SCRUM works on a simple framework, usually once a company or unit decides to implement HOW SCRUM WORKS SCRUM, they get in touch with a Something needs to be done Who does what Let’s Sprint SCRUM evangelist or expert, who The decision for A Product Owner is allocated, who is Each item in the Product takes them through the process creating the product is responsible for the Product Backlog Backlog is worked on in taken. A master list of and setting its priorities. To help individual iterations called the first few times. There are about requirements is created set priorities and to do the actual Sprints. A typical Sprint takes for the product, based on development, the SCRUM Team is 2-4 weeks. It starts with a 50 certified SCRUM trainers (CSTs) inputs from the marketing brought in. A cross-functional team of day of planning, 2-3 weeks trained by Ken Schwaber himself. and other teams. This list 5-9 people, the SCRUM Team is free of of development and a day of is called Product Backlog hierarchies, roles, or blame allocation. review. The amount of work In India, Pete Deemer, a CST, has A SCRUM Master is announced, whose the team decides to do in job it is to help the team by warding a Sprint is called the Sprint set up GoodAgile to provide SCRUM off external issues and help handle Backlog. This cannot change training and certification. the internal ones in the course of the Sprint According to a survey, done by Done! Burned out yet? The Daily SCRUM GoodAgile in Yahoo!, 68% of the At the end of the Sprint, a shippable Another way to keep track To ensure the team stays finished product should be ready. of the tasks at hand and on track, there are Daily teams thought productivity was Also, a Sprint Retrospective their status, the members SCRUMS—15-minute stand-up takes place, which reviews what follow a Burn Down Chart, meetings where the members higher using SCRUM, while 85% happened during the Sprint. There which displays how many share what has been done since thought they would continue to is no time lag between one Sprint hours are left before task the last Daily SCRUM, what will and another, so the learnings from completion be done till the next one, and the use SCRUM. ■
the Retrospective become critical
impediments they are facing
Construction Management and Research (NICMAR), “While Gantt is just a comprehensive, visual, at-a-glance method, PERT and CPM are more extensive in their scope. PERT is better applied to scientific and defence projects, where there is a possibility of new discoveries and unpredictability along the way, while for CPM, you need to have clarity on the project path.” Beyond the traditional methods, advanced variations, like critical chain project management, extreme project management, event chain methodology and Prince2, are being used, among others. These analytical tools help managers allocate resources, prioritise activities and cut down the time and cost on a project, by fast tracking activities, or adding resources.
Project management in construction In the context of construction, project management plays an extremely critical role. Construction projects in India have come a long way from the days of ad-hoc planning and poor management, when delays and cost overruns were rife. The government-run projects were particularly poor in project management, running up huge losses. However, in the last years, the government has cleaned up its act and tightened its hold on the projects, consequently bringing the cost overruns down from 62 per cent in 1991 to just 22 per cent in 2003. Today, medium- and large-sized projects have professional teams for engineering, construction and project management. Within
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OPERATIONS the industry, though, there are variations. Says Dr Patwardhan, “While the Indian infrastructure companies are at par with those in the rest of the world in terms of project management, the real estate sector still has to catch up. The bigger players in it are more organised, but in the small and medium, sized companies, there are very few who employ project management in a formal manner.” Where project management is in place, the whole construction process is detailed, the major stages and their tasks, with the project management team at the centre. (See chart for a breakdown of the five stages in a construction project).
Software for project management Though project management techniques were developed before computers became widespread, today the implementation of PM is entirely through a wide array of general and specialised software, available for the purpose. There are a number of open source, proprietary desktopbased as well as web-based project management software available today. Whereas QuickGantt can help manage small projects and essentially helps managers generate basic charts, complex projects need software like Primavera SureTrak and Microsoft Project. Microsoft Project 2003 (with Project Server). Primavera Project Planner, Enterprise PM and Micro Planner X-Pert are suitable for multi-project situations. In India, Primavera and Microsoft Project is used in most cases. Most companies use a combination of off-the-shelf
SHARING PROJECT INFORMATION Design team
Client & Users
Construction and/or Facility Manager
Contractor Jurisdiction for permits
and web based or customised products. Choosing one over the other is usually dependent on the price and the available support. In India, customers want the full solution, and are willing to pay for it. Costs usually depend on the size and scope of the implementation. Ultimately, as Dr Patwardhan says, “These programmes are just tools, and need the vision and planning to be clear, in order to be effective.”
Project management in software development Software development is a complex process that often needs to respect draconian release schedules. Accordingly, software development firms have been quite savvy in deploying project management. In fact, software development companies usually tend to use more complex project management methods like Capability Maturity Model Integration (CMMI) and Rational Unified Process (RUP). There
are, however, some inherent critical differences in how project management is practised in software development versus how it is practised in construction. “In software, you have the option of simultaneous development at several locations. In construction, the scope for that is very limited because of the cost and availability of raw material as well as transportation costs. Also, in software, it is simpler to have people on the benches, who you can quickly deploy when you need to and pull and when you don’t,” explains Prof Dutta. Traditionally, software development companies have followed the ‘waterfall’ method of development, in which the process is more sequential. The process starts with stating the requirements, design, implementation, verification and finally maintenance, in a linear path. The management of this process is also linear, with
a hierarchical and fixed team structure. In the mid-90s, a new way of thinking evolved, which emphasised iterative processes, teamwork, self- organisation and accountability. This grew to include a group of methodologies, known as agile software development models. Some of the popular methods in this include SCRUM (see box), Extreme Programming (XP) and Agile Modeling. A number of software development companies that traditionally followed waterfall methods have shifted to agile methods. Project management software Primavera, for instance, chose SCRUM.
Ahead of the game The quality of project management can make or break a project today, where the costs as well as risks are high. With new technology and approaches coming into the market rapidly, managers need to stay informed about the latest trends. At present, the biggest concern for project managers is controlling processes. The second task that managers are emphasising is the management of project information during the various phases. A migration from written reports to online and computerised documenting systems, is on the cards at most major project management setups in India. Risk management is another area that is hotly discussed at this time, largely because risks are often underestimated in construction. ■
NEXT ISSUE: FOOD
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GLOBAL TRENDS FedEx’s central committee FedEx works in a people-heavy sector. In China, it set up a centralised Human Resources Service Center (HRSC) to tackle most of the routine HR activities
edEx has been present in China for over twenty years and recently, in 2007, bought out its joint venture partner DTW. The company launched the project to create a Human Resources Service Center (HRSC) in late 2005. Human resources is a critical function in a company like FedEx, where pay and benefits constitute 50% of costs. One of the major objectives of the centre was to delegate routine activities to centre employees, allowing the line managers and human resources specialists to devote time to high-value activities. The first step in the HRSC process was site selection. For reasons of employee pool size and property cost, only secondtier cities were considered. Five cities were selected and two were quickly eliminated, on property cost considerations. For the remaining cities, a weighted equation was used. The city of Wuhan, which has a large number of university students, came out on top, largely on the basis of the quality of its labour pool. The centre was set up in Wuhan in June 2006. SITE SELECTION SCORING SYSTEM
One of the first tasks of the centre was to implement Standard Operating Plans (SOPs). There were 21 work flows to complete and test. These were broken down into four major categories: recruitment and selection, employee onboarding, employee life-cycle, and pay processing. The goal was that processes, such as job change application, job movement, termination, leave application and cancellation,
Back-up Contingency Support (10%) WEIGHTED AVERAGE
and performance measurement, would function efficiently as possible. The first ever automated leave application system in the FedEx’s Asia Pacific region was implemented at this time. Upon completion of the SOPs, the centre set up Management Operating Plans (MOPs). These plans covered mail processing (fax and email), document sharing and control, call handling and service level agreements. It was also during this period that the 180 different job descriptions were translated from English into Chinese. Having implemented its SOPs and MOPs, HRSC was ready for the integration of the 2600+ employees of the joint venture partner, DTW, that occurred in 2007. The HRSC team had to enter employee information and
prepare job-matching for those 2600 employees, working in 63 different cities. Nine HR teams working with Managing Directors needed to be equipped to extend job offers to those people. Labour contracts, totaling some 10,000 pages, had to be prepared. By the end of August 2007, every DTW employee had received their new job titles and job offers to join FedEx. The HRSC Call Center was ready to provide consistent service to employees. Many of the recruitment activities (e.g. background checks, medical check-up arrangements, candidate consultation, offer letters) have been transferred from line managers to HRSC, resulting in greater line manager productivity. This goes a long way to explaining why HRSC won the ‘The Best New Shared Services Organization 2007’ at the Asia Shared Services Summit, in Singapore, on 21st August 2007. ■ Reference: ECCH 408-029-1, Professor Jean S K Lee – Michelin Chair Professor in Leadership and Human Resources Management, China Europe International Business School (CEIBS)
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GLOBAL TRENDS Global English with an Aussie accent? Navitas, an Australian company, was founded to provide instruction in English. Its CEO, Rod Jones, is now adding new services and moving into other Commonwealth countries
ducation is accepted as the bedrock on which success rests. But education is one thing, and achievement of success is another. Rod Jones is an entrepreneur who is seeking to link the two closer together. About thirteen years ago Jones saw his opportunity. He saw clear to a way of harnessing the educational services market geared to international students seeking a surer footing in the lingua franca of business English. For this he founded Navitas, an education company providing English language training.
Born in Western Australia, today Navitas is Australia’s biggest private education services provider, with operations in Canada, the UK, Indonesia, Kenya, Sri Lanka and Zambia. It has branched out into university pathway education, career advancement programmes and migrant settlement services, to students,
professionals and migrants. Data concerning the company convey an impressive story. Navitas currently enrols over 27,000 students from over 90 countries. Its contract with the Australian government has it facilitating cultural adjustment and the teaching of English for about 25 per cent of all new immigrants to Australia. Its ten campuses around Australia annually provide around 16,000 students with English language training. All Navitas programmes, everywhere, are accredited by authoritative organisations, including the Australian Department of Education Science and Training, and the British Council. Navitas is regularly audited by government departments and industry associations to comply with legislation and guidelines of the respective countries of operation. Rod Jones has served as CEO since 2004, but has been at the forefront of international education in Australia far longer than that. With 30 years of experience in educational administration, he has held various senior administrative positions in both government and private education, as well as in both secondary and tertiary education. It was during this long
period at bat, so to speak, that he spotted the entrepreneurial opportunity in providing English tutoring and support, during cultural acclimatisation, for international students. In 2007, Jones was honoured with an honorary doctorate of education from the Edith Cowan University, Perth, Western Australia, in recognition of his contributions to increasing student participation in education. He was also the 2008 Ernst & Young Entrepreneur of the Year, winning the acclaimed title over two dozen regional winners around Australia. In 2009, Jones will represent Australia at the World Entrepreneur of the Year, in Monte Carlo. Jones’s far-sightedness in spotting a void in the education
sector almost a decade and a half ago now sees him at the helm of a successful company that was the first educational institution to be listed on the Australian Stock Exchange. Over the years, it has continued to show impressive growth. Recent figures show an increase in revenues, from A$ 282.7 million in June 2007, to A$ 345.4 million, in June 2008. In a world that is growing increasingly smaller, the knowledge of English as a business language for all, has thus showed its value in Navitas’s success. And though nationalist winds blow here and there in favour of the local tongue over the use of English, it may just be that an Australian accent, rather than the Queen’s British, or a Texan twang, may countervail that. ■
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Asia Crowdsourcing a beverage How the firm called Calpis finds an innovative way to ensure sales: let your consumers dictate what your next product should be like
hen Calpis Co. Ltd, Japan’s big health drink and beverage manufacturer, wanted to launch a new fruit flavour, it didn’t turn to its R&D department; it turned to its customers. To do so, it collaborated with Mixi, Japan’s largest social networking service. It asked Mixi members to design the new drink. The result is a ‘crowdsourced’ beverage called Calpis Mixed Fruit – a blend of apple, pear, mandarin orange, and banana flavours. The collaboration on the new drink started in May and included all steps of the decision process. Mixi established a Calpis project community on its web site. Not only did members come up with ideas for flavours for the drink, but even catch phrases for sales promotion. Even design of the bottle. Crowdsourcing is the portmanteau term that refers to the act of taking a job traditionally performed by a designated agent (usually an employee) and, instead, outsourcing to a generally large group of people, plain people, using the web. It is an IT-enabled business trend in which companies get unpaid, or low-paid amateurs, to design products, develop new technology, create content, tackle corporate R&D problems, and even help capture, systematise,
or analyse large amounts of data. The word was first coined by Jeff Howe, in a June 2006 Wired magazine article. Though the term is new, there are earlier examples of comparable projects. For example, in the 19th century, the Oxford English Dictionary was written from volunteer contributions mailed to the publisher on millions of slips of paper. To make sure everybody understands, the difference between crowdsourcing and ordinary outsourcing activity, GO reiterates that crowdsourcing involves outsourcing to the public, rather than to an in-house team, or to another organisation. The most evident benefit of it is that problems can be explored at comparatively low cost, and companies can reach a wider arc of advice than might be available within its own organisational structure, or via conventional commercial outsourcing. To ensure that the process of crowdsourcing works, it is important to be able to separate the real thing from the gaff. The most essential thumb-rule is to be focused and to provide a rigid framework and precise instructions to the public. Since crowdsourcing produces a wealth of ideas, companies need to use effective filters to select the right ones.
NEWS BRIEFS: ■ Vietnam inflation at
23 per cent Take IBM’s use of Web 2.0 tools. They put together a two-part brainstorming session designed to tap the collective minds of employees, family members, and customers, to target potential areas for innovation. IBM identified four large themes, providing interactive background information on each one, employing moderators to keep conversations focused, and setting a 72-hour time limit for the first session. By the end of it, IBM had collected 37,000 ideas. After filtering the ideas, the company organised a second session, where everyone voted on the ideas with the most potential. Then senior executives shortlisted the ideas to make recommendations about which should be funded. As top talent is expensive, looking to it for aid can incur high cost. But crowdsourcing avoids that as, instead of being milked, it does the milking –the milking, that is, of a public that simply has taken an interest in solving problems as a pastime. To corral their milkable herds, crowdsourcers encourage participants to build bonds of friendship. This kind of relationship building is of considerable consequence, as it ensures a high level of involvement in the crowdsourcing process, and in turn, participants form an emotional bond with the final product that they have helped produce... and provide the start-up clientele for it. A possible New Year’s resolution: try crowdsourcing! ■
In Vietnam the economy has been booming, but is now slowing. What is new is that inflation is rising. In 2008, consumer prices rose by 23 per cent, sharply up from 8 per cent in 2007. The economy, which relies heavily on its exports, has been affected by downturns in the US, Europe and other markets. The main exports are manufactured goods, such as footwear and apparel, as well as food products, such as seafood, rice and coffee.
■ Richest get the lion’s
share of nation’s wealth, report shows According to a government report, the richest 20 per cent of Australian families have 60 times more the wealth of the poorest 20 per cent. The top 20 per cent, who each have more than $750,000 socked away, own 61 per cent of Australia’s wealth, compared with the 20 per cent at the base of the economic pyramid, where the average is less than $70,000. While the bottom 25 per cent make $500 a week, the top make $1,600.
■ Toyota in the red Toyota, the world’s second-biggest car maker, has announced that it will be losing money this year, for the first time since the 1930s. The reason is diminishing sales in the US and Europe markets. It forecasts an operating loss of 150bn Yen this year, though its post-tax profit will still be 50bn Yen. Toyota has already announced plans to reduce production at plants in both North America and Japan. It remains Japan’s No. 1 in car sales abroad.
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WRESTLING WITH VALUE
The concept of valuation is at the foundation of every tiny angel investment, every PE or VC deal, and every mega-merger. But there are numerous ways of determining valuation he financial engineering involved in M&As, PE or VC deals can lead to fantastic complexity, but all deals start with one question: How much is a business worth? The task of corporate valuation is basic to most investment decisions. Any serious investor, even individuals, will value a business before buying into it, or lending money to it. An employee, who has been offered a compensation package, by the company involving stock options, will also need to value the business. Naturally, valuation is done in greater detail when billion-dollar corporations are taking over other billion-dollar corporations. In such mega-deals however, both sides employ armies of consultants, and there is lots of reliable data available. The need for accuracy and difficulty in generating valuation is more acute when a VC is dealing with a start-up, or PE investment contemplated in a small business. In such cases, reliable data may not be available and projections may pile assumption on assumption. The risks are higher and naturally the expected return is also higher.
There are many different methods of valuing a company. Each has its advantages and its blind spots. Professor Ian Giddy of the Stern School, NYU says, “How a business is valued depends on the purpose, so the most interesting part of implementing valuation methods is to see how they work in different contexts – such as valuing a private company, valuing an acquisition target, and valuing a company in distress. Different tools of valuation analysis can inform management choices.” Some commonly used valuation methods include ■ Assets valuation ■ Ratio valuation ■ Discounted Cash Flow ■ Business valuation + Assets valuation
Asset valuations This method concentrates on the net worth of a company – the value of assets minus the debt. That includes tangibles, like cash, current assets, working capital and shareholder's equity; and intangibles, like brand name, IP, etc. If the business wound up today, all its assets could theoretically be sold and then after paying off all creditors, it
would have the net worth left. Intangibles are difficult to assess. Brand value is obviously important, but how does one quantify it? Brands reflect credibility of management and have a big impact on share price. Intellectual property can also be subjective and difficult to estimate. The difference between tangible assets values and the market value is often represented as goodwill, on the balance sheet. Goodwill and brand value (which is not necessarily accounted for separately) can disappear quickly if management makes errors. Some asset valuation methods involve calculations where all liabilities and all intangibles are subtracted from
total assets to calculate net tangible assets. This net asset value method is very similar to book value calculation in practice, and it’s normally used by mutual funds. Assets valuations are especially useful where previous profits may not provide guidance about future prospects. For example, a real estate developer may make bumper profits developing a land bank bought at low prices. However, if it consumes its cheap land bank, future profits will be much lower. Hence, NAV calculations are useful in the real estate industry. In banking too, profits depend on borrowing money cheap and lending at higher rates. But if a bank has run out
Asset valuation Shareholder’s Equity (Rs bn) Per share (Rs) Book Value Net Assets (Rs bn) Current Price (Rs) Price-Book Value Ratio
217 114 226 720 6.3 Source: Balance Sheet
In terms of Asset Valuation, Airtel has a net worth of Rs 217 billion, calculated in terms of Shareholders’ Equity (from the balance sheet: Share Capital+ Share Premium+ Retained Profits). The Per Share Book Value (shareholders’ equity per share) is Rs 114, while the net assets (from the balance sheet: total assets including intangibles minus debt) are Rs 226 billion. The Price-Book Value (share price/per share book value) ratio is over 6, at the current price of Rs 720. The book value is what in theory would be realised by a shareholder if Airtel wound up as a business today. The premium of market value over book value is what the market is prepared to pay for Airtel as a running business. Since the Price-Book Value is quite high at 6, Airtel is obviously a richly valued business.
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of its stock of cheap cash, it may have to borrow at higher costs. Once again, NAV provides a good picture. Sometimes assets valuation can uncover hidden value, such as land that is under-utilised by a business that is running at a loss, or not generating very high profits.
Ratio valuation This method generates valuations based on the accounting ratios of comparable listed businesses. The stock price of any listed business is at some multiple of that business’ earnings per share and other financial ratios. The valuer can compute the profits
Ratio valuation Key ratios
Reliance Comm 17
Idea Cellular 13
CAGR Rev (%)
CAGR EPS (%)
Current share price (Rs)
Current market value (Rs bn)
Market value at P/E=15 (Rs bn)
1,024 Source: Balance Sheets, Cellular Operators of India Share Price on Dec 22, 2008. Market share 31 Oct 2008
In terms of ratio valuations, we can compare some of Airtel’s key accounting ratios to those of other leading Indian telecom service providers, such as Reliance Communications and Idea. First of all, the three TSPs have high valuations in terms of price-book value as well as in terms of price earnings ratios. The reason is that it’s a high-growth industry – all three companies have excellent revenue and operating income growth rates. Airtel has the highest price-earnings (P/E) ratio, as well as highest price-sales ratios. The relative premium must be due to assumptions about its superior business model or some other sustainable advantage. It has the best operating margins; the highest reliable 3-year CAGR in terms of both revenues and earnings (Idea’s apparently high growth is misleading, since it is calculated off a very small base in fiscal 2006), and highest market share in terms of subscribers. One measure of ratio valuation uses the price to earnings ratio (P/E). The current market value (number of shares times price per share) of Airtel is Rs 1,366 billion, equivalent to a P/E of 20. Were one to use a lower P/E of 15 (the average of its two competitors), the valuation would fall to Rs 1,024 billion.
of the target business and then assign a suitable multiple by comparison. Commonly, operating profits (EBITDA) will be examined rather than net profits, to ensure that profits are not being masked by a high depreciation rate, or large capital expenditures that are being amortised. Then a multiple will be assigned by comparison of the EBITDA to that of listed businesses. If there have been recent deals in the same space, valuations of such deals will also be compared. A serious ratio valuation will look at a range of ratios for pricesales, price-free cash flow, pricebook value ratio, price-earnings and price-EBITDA, over a period of several months, or even years to smoothen out fluctuations in stock market prices. The advantage of this approach is that the valuation can be justified by comparison. Hence, it is a good check even if other methods are given greater weight. According to investment bankers, ratio valuations are the method of choice wherever available. However, according to Professor Damodaran of the Stern School, NYU, the ratio method can run into problems when “a transaction has other considerations, which are specific to that particular transaction.Like brand value, other intangibles, like synergy and control premium (in M&As), and management quality (always!) come into the picture.” So it always provide a useful benchmark.
VC funding a start-up. An assets valuation is impossible with a start-up, and ratio valuations imply profits in a running business. DCF valuation models can be applied to start-ups and also to other loss-making businesses. A DCF starts by forecasting future cash flows (positive and negative). These flows are added together. Then the valuer discounts those flows back to the net present value, using a discount rate. In effect, DCF inverts the compound interest concept to derive the initial amount required to generate a future cash flow at a given cost of capital. The discount rate in DCF calculations is crucial since this is based on the cost of funds and cost of equity. For example, if the current interest rate is 15% and a PE investor wants 40% return on equity, a discount rate of 27.5% may be assumed. This would be the weighted cost of capital on a debt: equity ratio of 1:1. Since DCF involves many projections, the levels of error can be high. The projections are founded upon the most realistic assessment possible of business prospects. In theory, a business can last indefinitely, but it’s impossible to project cash flows to eternity, causing a practical problem. This problem is ‘solved’ by assuming that beyond the estimate-horizon, the last estimated cash flow will be maintained ‘forever’. This is in fact true if one is dealing with a debt instrument, such as an annuity.
Discounted Cash Flow This common and widely applicable valuation method is often the only road forward for a
Business and Asset valuation This method attempts to improve upon assets valuation. A pure
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assets valuation model estimates the residual value of a business that ceases to run. It neglects the possibility of future profits. A more realistic valuation is a Business Valuation + Assets Valuation model. This involves assets valuation combined with the value of a continuing business. In addition to an emphasis on book-value, it will also examine profitability ratios, such as Return on Equity, economic value added and EBITDA/ Revenue. In diversified companies, with many business streams, a valuer may use different methods to judge the value of each separate business division. This is sometimes known as sum of the parts analysis (SOTP). SOTP can be a pointer in cases where restructuring or spin-offs will help create value. For example, when the conglomerate Reliance Industries was broken up, the component parts all gained in value. This was because the telecom services arm, Reliance Communications, had no synergy with the refining business, which was spun off as Reliance Petrochemicals. The exploration and production business, and the yarn and polyfibre businesses stayed with Reliance Industries.
This approach is especially popular in the energy industry according to a VC, who is working with renewable energy start-ups. But it is generally not applied in PE and VC deals and seen more often when executives are evaluating key business decisions.
The choice of method In practice, investment bankers apply several models to arrive at a potential range of valuations for a business. Different models give different values; buyer and seller will negotiate over those values. According to Professor Damodaran of Stern School, NYU, DCF can be used easily and confidently only when the valuer is reasonably clear about the achievability of projections. In cases of distressed businesses, he suggests following up an initial DCF with an option valuation model to cross-check. “Options are better as risk-hedges and the option theory can guide business decisions.” According to a PE industry insider, who has previous experience consulting with a Big Four audit firm, “For assets valuations, you must consider the market value of debt to factor in the possible credit risks in a shaky business. DCF
Discounted cash flow (DCF) valuation EBITDA (%)
CAGR Revenue (%)
EBITDA (Rs bn)
EBITDA+1 (Rs bn)
EBITDA+2 (Rs bn)
Total DCF (Rs bn) for 12 years
Actual Market Value (Rs bn)
NPV (Rs bn) @10%
NPV (Rs bn) @20%
IndiaBulls DCF Value
2,003 Source: Balance Sheet, IndiaBulls Securities
Discounted cash flow (DCF) calculations using two different discount rates amply illustrate the drastic amount by which valuations can change if one key assumption about cost of capital is changed. For this exercise, we have assumed that the current CAGR for revenues and the current EBIDTA margins will be maintained for the next two years and after that, revenue and EBITDA will be constant over the next 10 years. After summing EBITDA for this 12-year period to get cumulative cash-flow, we used two different discount rates to calculate the Net Present Value. This is an inversion of the compound interest formula to see what principal or initial amount is required to generate an eventual amount, equal to the cumulative cash flow, at a given discount rate. If we use a discount rate of 10%, the DCF works out to about Rs 1,565 billion. With a higher discount rate of 20%, the DCF would only be Rs 805 billion. The actual current market value is Rs 1,366 billion, implying a discount rate of about 12% under similar assumptions. IndiaBulls Security suggested that DCF calculations (neither discount rate nor other assumptions were disclosed in the advisory) implied a fair value of Rs 2,003 billion for Airtel. This implies that with DCF calculations that don’t assume a prohibitively high cost of capital, Airtel is currently priced below its DCF value.
valuations are often done at the target’s request in cases where visibility of future earnings is not that good. On the buy-side you will always adjust the discount rate up, to cater to higher risk perceptions. DCF is based too much on individual opinion and often leads to protracted
negotiations, because every assumption is open to question.” Most players in corporate valuation are very secretive about their modus operandi. Some use tweaked proprietory models that are variations of basic corporate valuations methods. Others say that they get to the table with a
Real options method Here, the financial option theory is applied in order to price real investment decisions. In real option theory, a premium and strike price is attached to real business decisions such as ‘can afford to wait to invest’ options, growth options, flexibility options, learning options, exit options. This is done by using versions of option pricing models, such as Black-Scholes.
Valuation summary ASSET VALUATION
DISCOUNTED CASH FLOW
P/E at 20 (current market value)
P/E at 15
804 Note: All financials Rs billions
In Airtel’s case, and this tends to be the norm, different methods yielded vastly different values.Using Asset Valuation and shareholder’s equity gives a low value of Rs 217 billion. Using the Discounted Cash Flow valuation at 10% yields a high of Rs 1,565 billion. The current market value of Rs 1,366 billion (P/E ratio of 20) falls in between, but toward the high side. The high valuations arrived at using price/earning ratios and discounted cash flows compared to asset valuation indicate that the market places a large premium on telecom’s ability to generate future profits.
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Rationale for Methodology Used
Acquisition of business of a foreign listed company by an Indian company
Only part of the business was available for sale. It was purchase of a business and not the entire company
Only fixed assets were valued, all IP and goodwill were written off. Also, no receivables and payables were taken over, minimising the risk
Raising private equity funding for expansion and acquisitions
Diversified Eng/ Construction
Forward EBITDA multiple
Company was still low on operational profitability and the acquisition would have eaten into the profitability
Applied multiple to 2-year forward projected EBITDA
Raising private equity funding for expansion
Discounted Cash Flow
Strong on IP and visibility on the future cashflows, made using DCF possible. Also, since the company was still loss making, listed comparable multiples could not be used
Representing a PE fund for investment in a company
Diversified Eng/ Construction
Combination of different methods or Sum of Parts
The business had various segments that has different maturity, profitability and risk profiles. Thus, a different valuation method was applied to each part and the sum of the various parts was the total valuation of the business
For the mature part of the business with steady and predictable cashflows, the comps valuation methodology was applied, while the DCF method was applied to a new line of business
Representing a Company considering a 100% sale to a PE fund/Strategic
Sum of Business Valuation and Land Asset Valuation
The transaction was structured as a 100% sale of the business and the underlying land assets to the acquiring party
The land sale was structured as a long-term lease (50-year lease) to the acquiring party, for a one time payment
broad range of valuations derived from several models. Most are wary of discussing previous deals in case they reveal thought processes and thus erode their negotiating edge.
Examples of choices Here are some typical deals where different valuation methods were used and the rationales for favouring one particular valuation method in each specific case. These are real case studies provided by an investment banker (also see chart) In ‘Project Vector’, an Indian company was buying the speciality chemicals division of a listed foreign MNC. An assets valuation model was used, neglecting intangibles like IP and brand value. The exercise was easier since receivables and
payables were not being taken over, only the assets. In ‘Project Scalar’, a diversified engineering construction company was raising PE funding for expansion through acquisition. This time, a forward EBITDA multiple was most convenient. As a new business, the company was short on current earnings, but a forward EBITDA could be calculated for the next two years and a comparable multiple attached because similar businesses were listed. In ‘Project Minardi’, a startup was entering the financial services sector and seeking PE to fund its expansion. There was visibility on future cash flows due to a business model based on good IP. Valuation was generous. The easiest way forward was DCF.
In ‘Project Zodiac’, a PE fund was seeking a stake in a diversified engineering and construction business. A hybrid sum-of-the-parts method was used. Some business segments were operating and profitable. These mature segments were assigned multiples through ratio valuation. New lines of business were assessed via DCF. In ‘Project Tulip’, a retail business was attempting to organise a 100% sell-out. Here, a Business Valuation +Assets valuation method was used with the land assets being valued separately, while the future income from the retail business was also assessed.
The process Let’s say that a lot of estimates have been made and numbers crunched. An investment banker
working with a business that is targeting fund-raising via a stake sale has generated reasonable valuations. Well, that’s only a start point. Any potential buyer will also do an independent valuation for himself. Then the respective negotiating skills kick in on both sides. In order to actually make a deal happen, both parties need to agree upon the numbers and assumptions they make. Many behavioural factors come into play as well as intangibles. Typically, there will be several rounds of negotiation, interspersed by gradual exchange of information. Legally, these would be marked by non-binding agreements (NBAs lay down prices and conditions at which the parties are willing to buy/sell, but are not enforceable in court), followed by a memorandum of
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understanding (MoU), followed by the actual deal. Negotiation is absolutely central. Both parties will do their number-crunching; but finally it is about the relative hunger for cash on one side, and business on the other. It is also about relative negotiating strength. In every deal, specific factors, like management compatibility and negotiation chemistry coming into play. The final say according to investment bankers, is market conditions. One investment banker says: “Broadly, valuations follow the market. But since nobody has a clue how markets will work going forward, valuations typically reflect existing market conditions. Upon hindsight, this can lead to deals looking absurdly cheap or very expensive.”
The current situation One investment banker says: “Deal making is a case of demand-supply dynamics. Demand for good companies to invest, in has fallen off drastically at the moment, due to the liquidity crunch and recessionary economic conditions. Supply of good companies has also gone down a bit, since companies that don’t need cash right now will prefer to sit tight until they can get higher valuations. But demand reduction is far more than supply reduction, leading to lower valuations. Deals that seem wildly optimistic have occurred chiefly on account of scarcity premium. Recent examples include Ranbaxy and TTSL.” N ‘Subbu’ Subramaniam, partner at Barings Private Equity says, “It’s definitely a buyer’s market at the moment with even market leaders available
at single-digit PEs. Even if you see clear visibility of earnings and you like the business model and the management, you can negotiate hard for low valuations. This situation reflects the high cost of equity (and of debt) at present.” In one example cited by a merchant banker who was part of the advisory team, a snacks and beverages MNC bought out cheap, a small Indian rival. The local business was suffering a cash crunch, whereas the MNC could afford to lose what it saw as relatively small sums to establish market share. After six months’ negotiation, the Indian company accepted a price that was maybe less than half the valuations calculated in terms of theoretical models. Over the past couple of years, a lot of deals were generated because valuations were high. In today’s recessionary conditions where valuations are low and cost of capital high, deal flow is prompted mainly by companies seeking financial closure on projects where delays would be fatal. This includes a lot of infrastructure plays, some IT, pharma and hospitals businesses. The current liquidity
In any PE deal or in an M&A, financial due diligence should be carried out stringently ue diligence means delving into details that go a long way beyond public financials. The target company is asked to produce a lot of detailed financial information to give a clear, detailed picture of the business. The world over, industry best practices have been adopted from the Big Four Auditors at the cutting edge of due diligence. A new concept in India, which is quite popular in continental Europe, is Vendor Due Diligence. Here, the target gets the due diligence done, upon entering the market. This saves time when negotiations actually start. From the buyer’s standpoint, the due diligence process typically includes four stages. In pre-due diligence, before any extended contact with the target company, publicly available data is analysed. In the preacquisition phase, the valuation analysis is performed using materials furnished by the target company. Often the target company will set up a data room, physically secure and continuously monitored, in which the acquisition team consults all the data. The post-completion phase, between signing and closing, will typically feature a purchase audit. In the post-acquisition phase, the purchaser has access to all the information and can follow up on the options and guarantees in the contract. ■
crunch has led to greater conservatism across the whole matrix of corporate valuation. As Subramaniam says, “Methodology of valuation hasn’t changed, but assigned multiples have dropped a lot. Similarly, in DCF calculations, discount rates have risen sharply. A certain kind of leverage-based deal is no longer possible. You cannot boost returns by borrowing cash to fund a deal at anywhere near
the ratios earlier available. In 2006 and 2007, you could fund PE deals at around 2:1 debt to equity ratios – put down $100 million and borrow $200 million. Nowadays, you will be hard put to borrow more than 20-30% of the total required funding. This in turn means that if a PE is looking for 40% return on his own money and he cannot borrow, he will set a discount rate of 40% in DCF.” Everybody working in the investment banking space is clear that this situation could continue for at least another year. The greater influence of sovereign funding could also mean that there will be more resistance to cross-border deals. One effect of the bailouts of the financing industry is that governments now call the shots across the world. ■
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Into Inuit Bryan Hellwig’s is an almost-rags to almost-riches story. But there is nothing ‘almost’ about his drive in taking Inuit art to the corners of the world
t takes either dire necessity, or a strong sense of adventure to leave everything, y’ know, and proceed to the North Pole and start life, well, afresh. Bryan Hellwig was thus motivated when he packed his bags in Saskatoon to move to Frobisher Bay, Iqaluit, Nunavut—a place that didn’t even have a road leading to it. The 21-year-old Canadian had no idea back then that in another 21 years, he would be hailed as the Entrepreneur of the Year, by eBay Canada, for using the Internet innovatively to sell Inuit art worldwide. Growing up in the Niagara Falls area, Bryan remembers not having money to spare most times. An eleventh-grade dropout, he settled for dish washing at a chain restaurant, and grew in the job to become a management trainee. Even so, it was getting difficult to make ends meet and Bryan was on the verge of filing for welfare support. So when he saw an advertisement for a front-
desk clerk at a Frobisher Bay inn, way up in northermost Canada, he jumped at the cryogenic opportunity. Now a whaling settlement, Frobisher Bay was gussied up during World War II to serve as a base for US Air Force planes. There, Iqaluit, Nunavut has a population of 6,500 and is accessible only by air. Covered in snow most of the year, it shivers just outside the Arctic Circle. “My reason for landing in Iqaluit was obviously part adventure and part destitution,” says Bryan. When he reached Iqaluit, he had just C$20 in his pocket and desperation in his stomach’s pit—especially when the owner wouldn’t give him the desk clerk’s slot. Literally pleading for a job, he had to settle for waiting tables. Bryan soon realised, however, that at Iqaluit, multi-tasking and resourcefulness were the talents that mattered. It didn’t take long, and he was doubling as the bouncer at the inn. Two jobs then
Americas became more jobs, as he learned to juggle his time and interests. That is when he came across artifacts created by Inuits, from nearby Cape Dorset. He became fascinated with Inuit art and bought a few pieces for himself. However, collecting any sort of art, he came to realise, is expensive. Bryan then bethought himself and figured that if it was expensive to buy, it could also be profitable to sell. So he started sourcing Inuit pieces to sell and right away found in the inn’s guests a ready market for them. He would spread a table with the artifacts for the guests, who would browse and buy. From hotel guests, the targeting soon expanded to galleries in Toronto. He made his first sale in 1986, the same year he had come to Iqaluit, and from then on, the money started flowing like gold dust, well-iced. Along the way he finished school and picked up a management degree as well. And continuing the multi-tasking streak, he added a recycling and janitorial services business. “I just run everything under one umbrella; it’s easier,” he explains.
“Here in the north, because you don’t have a large customer base, it is normal for businesses to
branch out into several fields.” It’s only a couple of years ago that Bryan started using the Internet to sell Inuit art. Initially, he saw eBay as a means of purchasing art for himself. Gradually, he decided to use it as a platform for selling. He set up a virtual gallery of his collection on eBay and let the Internet take it from there. E-mail from auction houses all over North America started flowing, making him realise that the Internet gave him a reach he could have never hoped to attain otherwise. Via the Net he now collects, displays and sells art, all over the world. Recognising his enterprise, eBay Canada crowned Bryan Hellwig Entrepreneur of the Year in 2007. That brought with it recognition and further business. This year, he is hoping to do C$450,000 in sales, which, as he says, is “not too bad for a business run mostly by my wife and me.” To be sure, he employs three part-time employees as well. They manage to sell, on an average, ten-to-twelve pieces in a month. The high-end items go over C$5,000, of which they have sold a few, notably in the last few weeks. Notably, because Yuletide is when they make the most sales—an original piece of art being considered an elegant holiday gift. Profitability is good because overheads are low. Best of all, by his own account, the time spent on the business is just a few hours in a week. It used to be that those in the art business looked to the tropics for profitable lolling—think: Gauguin and leDouanier Henri Rousseau. Is this now shifting to the North Pole? Climate change, y’know. ■
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GLOBAL TRENDS The virtual language lab Languagelab uses virtual worlds to provide immersive language learning in English
n 2005, after an hour-long conversation with a cab driver in Italy, David Kaskal realised that he had learnt more of the Italian language than he could have, from a language learning course. It was confirmation that languages are best learned in immersive environments, where the learner has to use all the key language skills on a daily basis. Kaskal’s idea was to combine immersive language learning with virtual worlds – put language learners in a virtual world that speaks the foreign language. To build his language lab, Kaskal brought together a team of highly motivated educational innovators from the fields of education and IT. Voice technology and virtual environment experts from Beta Technologies created an online
language school, in the form of an entire virtual city. People from all over the world can enjoy daily experiences together in this virtual city, and improve the language skills that they would require in similar occurrences in real life. The city features a variety of settings, including shops, restaurants, offices, museums, galleries, a theatre, homes, a house of worship, an airport, a bus depot, a bank, a town hall, or a medical clinic. These settings are manned by native language actors. Classes taught by the instructors are also held in these settings. Students can visit these settings outside of class time and converse with the native language actors (Languagelab calls them city people), who man the settings.
Using a virtual body, called an ‘avatar’, students and teachers can move around, talk and listen to others — all real people sitting at their computers, wherever they are in the world. People talk to each other using Voice over IP technology and a USB headset. Languagelab is currently offering English language courses to students from over 40 countries. New courses in Spanish are also being tested simultaneously. All teachers and support staff have completed Languagelab's proprietary Life-Based Learning training courses to make the very most of its unique educational environment and resources. Teachers receive competitive rates and are free to experiment and innovate, but they also have access to quality learning tools and pre-developed lesson plans. The students subscription rates run fro $40 to $80 per month, depending on the number of classes they sign up for. Languagelab exists in a 3D virtual environment called Second Life, which is run by Linden Lab, a company founded by Philip Rosedale (the former
CTO of RealNetworks) in 1999. Second Life was opened to the public in 2003 and since then, has been ‘inhabited’ by millions of residents around the world. Residents jointly inhabit a 3-D landscape and create the world around them. Second Life houses many other simulations similar to those of Languagelab. Examples of foreign language districts in Second Life are Parioli for Italian life, and Barcelona for Spanish life. It is also possible to hear other languages, such as Russian, German, Japanese, Korean, and Portuguese, to name a few. Other simulations dedicated to particular cultural goals, such as ‘Virtual Morocco’ for promoting Arabian culture, also exist. The quintessential reason behind selecting Second Life as the virtual platform for Languagelab.com was Second Life's ability to facilitate rapid development, while providing high levels of customisation at a relatively low cost. There is no need to construct entire environments in Second Life to facilitate immersive learning, as there are many locations that enable speech, listening and reading to happen in a live and spontaneous way. By their inherent characteristics, virtual worlds encourage rich expression through tools, objects, video, and art. The existing user base of Second Life was also a significant factor in deciding on it as the chosen platform for Languagelab. One last question for our readers. If our virtual representation speaking our mother tongue has come to be known as an avatar, what Sanskrit word should we use to designate our virtual representation speaking a foreign tongue? ■
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Americas Be local to go global The secret behind Carrefour’s success: conquering international markets by fast local adaptation
arrefour was established in 1959 by the Fournier and Defforey families of France. The first Carrefour supermarket was established in 1960. In 1963, Carrefour opened the world’s first hypermarket, in a Paris suburb. The company went public in 1970 on the Paris Stock Exchange and also began its determined global expansion. Carrefour followed an aggressive growth strategy through acquisitions, and has become Wal-Mart’s main competitor worldwide. Though the company witnessed moderate success in developed markets like the US and UK, it has been very successful in the emerging markets of Eastern Europe, Asia, and Latin America. The secret behind the company’s presence in 30 countries was best described by Daniel Bernard, former CEO of Carrefour: “There is a race and a lot of people are qualified for the race. But to go global, you need to be early enough. Generally, in new countries you need to be the first in, for the first win.” Carrefour also followed a strategy of multiple store formats (hypermarket, supermarket (Champion label), hard discount (Dia label)) which segmented stores into categories according to the local demography and the spending
capabilities of local consumers. Carrefour’s decentralised structure empowered local managers to manage these store formats. After conquering the European markets, Carrefour’s move to Latin America started in 1975, with the opening of its first hypermarket in Brazil. In Brazil, a combination of low price policy, promotional campaigns and a specific multi-format structure, helped Carrefour achieve extraordinary sales figures. By 2003, Carrefour Brazil had 85 hypermarkets and 113 supermarkets. Carrefour entered the Argentinean market in 1982 by acquiring Norte, the country’s largest food retailer. When Argentina experienced a profound economical crisis in 2002, Carrefour continued to consolidate the Norte network, and completed its repositioning. The growth in Argentina continued and at the end of 2003, Carrefour Argentina had 24 hypermarkets, 141 supermarkets and 299 hard discount stores. One of Carrefour’s biggest success stories was scripted when in 1998 it entered Colombia, South America’s second most populous country, as Carrefour Chévere, through a joint venture with a 55% stake (by June 2003 it had bought out
the partner). Due to Colombia’s booming private label market, aggressive pricing policy was one of the key drivers of Carrefour’s success in Colombia. Carrefour’s private brand label in Colombia was Nº1, catering to the price sensitivity of the Colombian consumer. Quickly, just 200 SKUs of this brand accounted for 7% of sales. According to Prof. Ashok Som, ESSEC Business School (Paris), an important reason behind Carrefour’s success is the company’s ability to understand the Latin culture and “export the French model, but with a Latin American touch.” In Colombia, for example, 97% of the No.1 products were sourced locally. The store format catered to national pride – they all host a Colombian flag at the entrance and are painted in the yellow, blue and red, the Colombian colours. The company launched innovative promotional campaigns in response to national economic policies. When the Colombian government increased VAT in
2002, Carrefour offered to pay back an amount equivalent to the VAT charged through redeemable vouchers. Since many Colombians work in foreign countries, Carrefour worked with Western Union to establish transfer centres in their stores. Any customer using part of the transfer to acquire a Carrefour bonus, saw an additional 3% tacked on to the bonus. In 2007, Carrefour Chévere crossed the €1 billion threshold (sales had tripled in a fiveyear span), contributing 10% of Latin American sales. Those Latin American sales in turn contributed over 10% of Carrefour’s worldwide total of €92 billion, up from 7% in 2003. While Carrefour is the leading Western hypermarket in China, Asia at 7% contributes less than Latin America! This French company is turning out to be quite a Latin lover. ■ Reference: ECCH 304-275-1, Professor Ashok Som, ESSEC Business School
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Euroquake European banks were not hit quite as hard as American ones by the sub-prime meltdown. But the ripples were felt, and many a European institution found itself in need of a bailout o doubt you remember the story of the three little pigs and the big bad wolf who blew, and blew, and blew until the houses fell down? Then you will recall that the houses made of straw and sticks collapsed, but the one made of brick remained whole. An apt metaphor for the banking crisis that blew down some of the vulnerable ones (for example Lehman Brothers), yet spared sturdier ones. More European banks than American ones must have been using brick, since they have not been hit as hard as the US banks. European banks had less exposure to the sub-prime spill, despite the appeal of the high interest rates of the CDOs (collateralised debt obligations), in which the toxic sub-prime assets were diluted. But there are still serious problems. Smaller European countries felt the pain ﬁrst, since they were often more exposed to the US ﬁnancial instruments
than the larger countries. Switzerland, Iceland, Belgium, all developed bigger banks than their small domestic markets would seem to justify, and this growth has often been built on aggressive lending and investing. The United Kingdom also got to feel a disproportionate share of the pain, since its ﬁnancial markets are large and since the UK banks have tighter links to their North American brethren.
Soft rock The United Kingdom was one of the ﬁrst to be hit by the subprime tsunami when it swept ashore in Europe. Already in February 2008, Northern Rock, one of the large British building societies (i.e. ﬁnancial institutions that lent money for home mortgages) was taken over by the UK government, as its worried depositors lined up to withdraw their savings. In a GBP ₤27 billion deal, that took the form of a loan,
EUROPEAN CENTRAL BANK
the UK government took over Northern Rock’s assets, installed an acting chairman and proceeded to manage the bank via UK Financial Investments Ltd, a special-purpose company, established for the management of UK banks that are recapitalised.
Location: Frankfurt (Germany) Founded: 1998 Head: Jean-Claude Trichet Reserves: Euros 526 billion Key mission points: • The ECB has only one main objective, which is to maintain price stability in the Eurozone (which includes the 15 countries in Europe that have adopted the Euro as their currency). • Price stability is defined by the ECB as an annual inflation rate, below 2% • Defines and implements the monetary policy for the Eurozone • Issues Euro banknotes • Monitors the banking sector to maintain a stable financial system
Iceland Six months later, in late September and October, 2008, Iceland was severely shaken due to the high leverage of its main banks. These banks had borrowed heavily in order to reap the attractive interest payments of the international sub-prime instruments, and were now paying the price, or needing help to able to do so. Iceland’s top banks were placed in receivership (temporary nationalisation is how one expert describes it) by the Financial Supervisory Authority, although the banks continued to operate normally, on a daily basis.
Belgian lace “The sense of ﬁnancial panic was strong for the Delia and Fortis banks,” recalls Didier Cossin, professor at the IMD business school in Switzerland. “It was on a Saturday morning, at 10 am in October, that Dexia ﬁrst called ﬁnancial authorities in Belgium, France and Luxembourg. One hour later, at 11am, it was the
MAJOR BAILOUT EVENTS IN THE EUROPE August France’s BNP Paribas stops valuing three funds European Central Bank injects $156 billion
September Run on UK’s Northern Rock
December Switzerland’s UBS posts $10 billion writedown
April Germany’s Deutsche Bank announces $3.9 billion loss
May HSBC writes off $3.2 billion
July Spain’s top real estate developer MartinsaFadesa goes bankrupt
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MORE HOLES THAN CHEESE The two top Swiss banks choose different routes for their capital needs hen UBS started feeling the pinch of its exposure to sub-prime loans, it turned to the Swiss Central Bank for help, as professor Didier Cossin of Swiss business school IMD explains: “The Swiss take pride in their financial know-how, and the Swiss National Bank certainly negotiated a good deal for the national taxpayers.” The funding amounted to $60 billion and took the form of convertible bonds, with a 12.5% coupon, in other words bearing that level of interest payment annually. The term of the convertible bonds is for eight to twelve years. The advantages of the convertible bond are two-fold: it gives precedence to the claim of the Swiss National Bank in case of default, and it gives direct ownership rights, without further negotiation. In case of payment default, the $60 billion loan would then provide the Swiss Central Bank with 9.3% of UBS. “The deal has a much better structure and is more favourable to the Swiss state and taxpayers than many of the bailouts in the USA,” explains professor Cossin. “Although the Swiss National Bank (SNB) is a smallish central bank when compared to the Fed or the European Central Bank, it did a good job, in terms of securing a favourable deal for itself (and by extension, for Swiss taxpayers). The SNB has the safety of bonds (first payment in case of default), and the convertibility which then has the upside capital gains potential. The SNB could become owner of 9% of UBS, and these shares can be held until the proper time, when they can be sold back at a profit. What’s more, the SNB has a call option, enabling it to purchase further shares at the same conditions if it wishes.” Rival Swiss bank Credit Suisse – also in need of shoring up its capital base – was also offered assistance by the SNB, but it declined to go the same route as UBS, preferring instead to approach sovereign funds, and raising 10 billion Swiss Francs of fresh capital, mostly from Qatar Holdings. ■
Germany’s Commerzbank takes over failing Dresdner Kleinwort
UK’s Halifax Bank of Scotland is merged into Lloyds TSB
turn of sister ﬁnancier Fortis, to call for help; this time dealing with central banks in Belgium and Holland.” The difﬁculty here was the exposure of the banks in relation to loan-to-capital (capital adequacy) ratio rules. As professor Alok Pandey of IMT-Ghaziabad explains: “As per the Basel II norms, banks are supposed to maintain a minimum capital adequacy ratio of 8%. This includes capital for covering market, credit and operational risks. The Belgian banks, such as Dexia and Fortis, were found to be in blatant violation of the Basel norms, by keeping the capital adequacy ratio as low as 2%”. The rescue buoy for Dexia consisted of a €6.4 billion share and bond package, that gave the Dexia shares a value of $9.90 each. The Belgian and French governments obtained new shares (for €3 billion injected from each), whilst the Luxemburg government received convertible bonds (for an injection of under €400 million). Fortis found itself in deep trouble as well, especially after takeover talks with the French bank BNP, and Dutch bank ING, fell through. Fortis’ rescue amounted to €11.2 billion, after a bisection of the bank’s operations and assets. The Dutch part of the company was nationalised, and
October Iceland’s top two banks are nationalised France’s BNP Paribas takes over the Belgian part of Fortis Holland nationalises the Dutch part of Fortis UK injects $63 billion into top three banks Switzerland’s UBS receives $59 billion bailout Germany’s Hypo Real Estate receives $69 billion bailout Holland’s ING receives $12 billion capital injection.
the Belgian part recapitalised, after a partial sale (of its insurance business).
Government efforts Virtually all the large European governments intervened in one way or another to support their creaking banks. Most of the interventions purposed to increase the liquidity in the markets, by making loans available from the Central Banks to the various national ﬁnancial institutions. As for the effect of these actions on taxpayers, the jury is still out. Some experts claim that any current nationalisation (partial or full) could be set off by capital gains, as the share is then sold down the road. Other ﬁnanciers complain that the state’s intervention has been over-generous, as it is tantamount to a government guarantee, and therefore unfairly enhances the value of the banks’ instruments on the market. Moreover, the value of the guarantee is not reﬂected in the interest rate, or share price, so that the government is not proﬁting from its muniﬁcence, and thus short-changing the tax payer. So, what will remain after all is said and done? Bankers may want to consider building brick enclosures around their piggy banks in the future. Sometimes, it pays to be conservative. ■
December Bernard Madoff’s pyramid scheme Germany’s Hypo Real Estate releases half of its work force
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THE ORDEALS OF A SALESMAN Back in the days of Death of a Salesman, sales force administration (SFA) was not yet a three–letter word. SFA software is now changing the way sales reps do their jobs and are monitored he life of a sales rep is not one of pleasant monotony. Here is what an average day can be made of: find sales contacts, develop leads (contacts that seem interested), followthrough with leads ( involving phone calls, emails, face-to-face meetings), send out proposals, revise in-process proposals, send contracts out, sign contracts. So that average day could consist of dozens of calls, a dozen proposals, a few meetings and a couple of contracts; not to mention status updates. And some of these days are spent on the road.
Managing a team of agents is no easier. The team leader has to monitor the stages in the life cycle process for all his agents – contacts, leads, proposals, contracts multiplied many times over. And the leader has to analyse success (so as to spread useful techniques) as well as failure (so as to compete better on deals, in the future). It is to help manage these processes that Sales Force Administration (SFA) software has been developed and gained traction in the last decade. As an example of a company trying to better manage its customer relations, take
One can configure the home screen to give a snapshot of current activities. So, say you are a sales rep, you can have your home screen display your current customer pipeline, target status, customer contact details and meeting planner, all on one page.
Ocimum Biosolutions, a global life sciences research and development-enabling company, headquartered in Hyderabad, with operations in United States and the Netherlands, and sales offices and distributors throughout the world. “I wanted a one-click mechanism to have true insights about my top customers,” says Anuradha Acharya, CEO Ocimum Biosolutions, “I needed to know – who ordered and when, when was the shipment made, when was it delivered, when was the invoice sent, when was payment received, how many open cases did the customer have, who was
fixing the problem, what was the customer’s feedback – in short a true a true sales force administration system. What I instead had was tonnes of data coming from disparate applications, which we then had to manually sift through, to make sense!” In addition to having to struggle with different locations, another big hurdle was that of employee mobility. “The field staff had to constantly update the senior management. They had to come back to the office to enter data or log calls or mail back and forth. This disjointed process prevented them from accessing
Campaigns: Salesforce integrates a complete campaign analysis tool into its SFA software, that gives you complex analytical charts, such as ROI per campaign in a single click. Additionally there is also an option to create drill down reports that give you an in-depth view of every campaigns status currently running in your company.
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and updating vital information in a timely fashion,” explains Vinay Kumar, Vice President, Ocimum. A SFA system solves many of these problems. Sales executives can access the system in the field and update their reports instantly using their mobile phones or laptops. Managers can closely track the latest status of leads, sales territories, target status of a particular representative and then assign work accordingly. It’s also very important to be able to hand out the best leads to the best reps. This often does not happen because managers don’t have the latest data at hand, and usually one ends up assigning
leads in a round-robin fashion. With SFA systems managers get up to the minute data and so they can assign and re-assign leads, depending on the reps’ core strength, thus increasing the success rate considerably. Another important use is streamlining the sales work flow for the sales agents. In a regular work environment these get recorded in different places and on different media. For example, a field agent might not know what a tele-agent has discussed with the client. Therefore he ends up wasting a lot of time locating information and not getting the updates regularly. A SFA system
Trying to capture cross selling to already existing customers, forms an important part of SFA strategy. However to be able to do this one needs to have a one-stop shop for all customer data, at various locations of the company. Salesforce gives you such a feature with the opportunities tab. Here you can see if your company has signed up a client at Singapore so you can tap the same company’s local office in India.
allows users to go to one place to find the most up-to-date information. After having tried their hand with many diverse solutions to handle different modules of SFA lifecycle, Ocimum finally settled on one of the main players in SFA software, Salesforce. com. Subash Lingareddy, Chief Financial Officer and President of Ocimum summarises the benefits as follows: “Real time, accurate information is available and can be accessed anytime. Therefore we get by-the-minute updates on lead pipelines which can be quickly applied to our sales forecasts without sifting through reams of data.”
SFA modules Salesforce.com comes with modules for marketing teams that provide quick visibility into which campaigns are performing and which ones are not, so that marketing dollars and resources can be better focused. Genesys Conferencing, a company that enables videoconferencing used Salesforce.com for their marketing modules. Challenged
with a fragmented view of its customers, Genesys deployed Salesforce to 570 professionals worldwide to create a single, comprehensive view, of more than 18,000 customers. “Our account teams now share sales opportunities worldwide,” says Marcus Johansson, MIS Project Leader, CRM. “If we identify a conferencing opportunity from a major financial services prospect in Hong Kong, for instance, our account teams in London can share this information and simultaneously examine local opportunities there. By facilitating global collaboration, we can work together to close more deals, more quickly.” The sales teams and managers can also analyse their sales pipelines, perform win-loss analyses, and keep abreast of competitive trends. Genesys now has instant drill-down access to detailed sales information at a global, regional, and country level. The United States-based global sales director, for instance, has a dashboard view of the performance of individual sales
Dashboard is an interesting concept where you get a bird’s eye view of the entire SFA system at one click. So whether you are looking for your company’s current lead status, customer assignments or the recent campaign ROI you can customise the system to give you the whole picture at a glance.
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MARKETING managers in specific countries and the leads they are generating. The integrated sales, marketing, and service system was quick and easy to deploy, says Genesys. “There’s no software to integrate, and we did the data mapping, data migration, and sales training in only 10 days,” says Johansson. One of the most important uses of Salesforce.com, however, is for the sales representatives who have a place to keep all of their information and status on sales, so information is never lost if an employee leaves. It allows managers and executives to quickly and easily see what their pipeline looks like, and understand the health of their business. Tracking campaigns and finding out which ones are the most successful, normally involves a lot of number crunching and data analysis. Since Salesforce allows you to integrate all kinds of campaign data, including type of campaigns (web, email, trade show, PR push or internet search), and the number of opportunities generated, into a chart or dashboard view, it
becomes easier to decide which campaigns need to be pulled out and which ones need to be funded more heavily. So, say for instance, you realise that you are spending about 40% of your marketing budget on trade shows which bring in only 10% of the leads, whereas you spend only 5% on internet searches, such as Google ad-words, which brings 15% of your leads, you can quickly decide to increase your spend on internet search campaigns. Salesforce also has modules for customer service, which are aimed at recording all customer communication and are used to ensure customers have a good experience with their vendors. Canon Marketing Japan Incorporated, started making extensive use of these modules of Salesforce from 2005. “With over 36 million customers using our multi-function machines, our company needs to keep enormous amount of data,” says Hiroaki Sasaki, business solutions administration director, and project manager for Canon MJ’s business solutions
THE FORCE BEHIND SALESFORCE Marc Benioff started Salesforce in a tiny apartment in San Francisco in 1999 and now heads a $750 million dollar company. Here is a brief history of how it all began alesforce.com was born back in 1999 in a small apartment in San Francisco (CA), when 37-year-old entrepreneur, Marc Benioff, left his Oracle career to chase a dream. He founded salesforce.com with a handful of software developers, some of the money he’d earned at Oracle, and a $2 million investment from his friend and former boss, Larry Ellison. The other initial investors included Halsey Minor, Magdalena Yesil and Igor Sill, Geneva Venture Partners. Benioff’s choice of focusing on customer relationship management roots back into his Oracle days. During his thirteen-year long stint at Oracle, Benioff played a variety of roles, most of which dealt with the sales wing of the company. This is where the idea for salesforce.com germinated. He wanted to create software that streamlined the chaos of sales processes by giving them a quick, one-click access, and portable environment. He also bet that the best way of selling the software would be as a service over the Internet. Almost 10 years later salesforce.com surely is close to the top, in the CRM space, especially in the Software-as-a-Service area with more than 1.1 million subscribers at 51,800 companies using their applications for SFA and CRM. Revenue wise too, the company seems to be climbing the ladder steadily, with revenues of $749 million in 2008, up 50% over 2007. Part of Benioff’s strategy has been to turn Salesforce into a platform, something like Microsoft’s Windows operating system – a product so popular and so essential that an entire ecosystem of software developers and users has formed around it. This led to the creation of the AppExchange marketplace in 2006. After its launch the marketplace has already gathered an army of hundreds of developers that are thriving on the Salesforce platform. It’s basically a symbiotic relationship, where developers customise software for Salesforce and benefit from, while the company gains innovative ways of adding applications. In short, the iPod is to the iTunes Music Store what AppExchange is to the Salesforce.com platform. Additionally, the company is also looking at capturing and forking relationships with all the major players in the space of cloud computing, where the term ‘cloud’ refers to the Internet and software runs as a service. They already have tied up with websites such as Google Apps, Twitter, Facebook and more, to move forward on this path. “In the software industry,” says Benioff “the only companies that really make it big, move from being a killer app to being a platform.” And so that is where Salesforce is aiming to head. Last but not least, Salesforce is also known to have established the ‘1/1/1 model,’ whereby the company contributes one per cent of profits, one per cent of equity, and one per cent of employee hours back to the communities it serves. “This is our way of giving back to the community” says the founder. California strikes again. ■
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MARKETING CUSTOMISATION Thanks to the flexibility of easily customisable modules, Salesforce customers have managed to fine-tune their employees’ tools. Here are two examples of such novel uses t’s a given that every industry has its own problems. And since the problems are so diverse it is impossible to have a common software module that will do justice to all problems. For instance the problems that a casino might face while dealing with its customers are definitely not the same as those faced by a real-estate company. Now while it might not make sense for the CRM system to add detailed modules as per business, if the individual companies were given easy tools to create specific modules, it would make a huge difference to the productivity of the business. This is exactly what happened with Harrah’s casino chain in Las Vegas (USA) where developers came up with modules to help the personal sales representatives working with high spending customers. What they have done is to create automatic templates that generate special websites for the frequent customers. This lets the customers directly communicate with specific reps, about planning details of their upcoming trips. So customers can simply warn when they will be arriving, where they would like to eat, and what shows they would like to see. This gives the casino’s sales reps great insight into the times and dates of the customers’ arrival and plan. So in addition to making the stay pleasurable for the customer themselves, they can also figure out perspective cross selling of services, shows and such. Another interesting example is that of Maytas Properties’ a Mumbai based real estate company. Maytas was facing a major problem with its overall sales force management. In the past, sales personnel of Maytas Properties used spreadsheets to manage customer activity. And different spreadsheets were being used by different sales representatives to upload customer activity. This data later went into a centralised spreadsheet, but since all data came in manually, there was no standardisation of format. This was why they switched over to salesforce. com. But there was still room for improvement. If you are in the business of selling property, it is essential that you be aware or the frequently-changing mortgage rates for different banks. Even a .01% rate difference can help you swing the deal with your clients. But there was no module that let Maytas salespeople pull the latest data from the bank site and integrate it into the loan module. This was when Maytas decided to add their own real-estate based modules to their Salesforce CRM. Now they have a particular module that pulls in mortgage data and integrates with the complex loan logic, which is available on the mobile module of the sales reps. Customising has helped to close more deals. ■
company. “However, that data was used for billing and maintenance, and did not satisfy the demands of a shared group CRM/SFA system. Salesforce helped with modules which help ensure service level agreements are met, call centres are efficient, and customers get the best service possible.” So now, when a customer contacts Canon—to buy a new product or report problems with an existing service, as examples—the first available, qualified representative attends to the case. They use the customer’s account, contact, and case information—along with integrated knowledge management—to resolve the inquiry quickly and to a satisfying standard. Complex cases that are unresolved within predefined time periods are automatically escalated. Even the global infrastructure support team uses Salesforce’s customer service capabilities in a help desk environment to track and resolve staff technology inquiries. Similarly marketing uses Salesforce to segment targeted groups of customers based on geography, product interest, and more. The tele-sales teams then contact prospects with relevant, compelling sales messages. Qualified leads are routed seamlessly to the right sales teams, for follow-up.
Create your own applications In addition to these standard features, Salesforce offers self-service with the Web 2.0powered Salesforce Customer Portal. This is basically the customisation platform called
Force.com, that lets companies integrate various applications developed in-house, directly into their CRM applications. So this gives customers the power to create and use their own applications on Salesforce’s computers, mixing its systems with those from other developers. The point is to help companies develop internal systems, websites for the public, and even applications to run on common applications, like GoogleApps, Facebook or Twitter. Genesys recently needed to add a custom object for salespeople to register a change of account ownership. Whereas customisation of the old system was approached with caution, Genesys actively encourages changes to Salesforce. “Force. com customisations take just a few mouse clicks,” assures Marcus Johansson. “We simply created the object and linked it to an account. Now it automatically updates both Salesforce and our homegrown, back-office system. I’m not a technical expert but even I could do it with ease,” says Johansson. Schumacher Group, an emergency medicine practice management company in the US, can serve as a further example. “We are building a portal to distribute information to the 2,700 physicians we work with. Included in that portal is a document management solution where users can upload documents. We’ve already started writing some hooks into the Google API for documents, and architected a little system, so that physicians can create a Google document directly from within the portal, without having to launch a word processing
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application. Once a physician has created a document, someone at Schumacher Group can then pull up that physician’s account and see what other types of documents that person has created, such as best practices, or presentations. This allows us to leverage the strengths of group knowledge and give all our sales execs the most updated information,” says Douglas Menefee, CIO at Schumacher Group. The ability to give independent companies and customers an option to create and integrate application, builds customer satisfaction. But no serious company can rely only on applications developed by independent developers; therefore Salesforce.com has its own predictable and focused R&D plan, with a major theme release each year. This again makes large conservative buyers feel comfortable, since they know exactly what to expect. And of course these new additions come bundled with each contract renewal for the year. Thus the companies don’t have to shell out special price for the new releases.
Software as a service Salesforce.com has become a leading solutions provider in the space of CRM (customer relationship management) in a short span of close to 10 years, with more than 50,000 customers and a million subscribers. It has become that big not solely on the basis of superior software. Indeed, its offerings are comparable to the likes of Oracle, SAP and Microsoft, who have been in the space for a long time. But a major differentiator is that Salesforce’s customers don’t pay hefty up-front license fees, as their rivals’ customers do. Instead, they pay by the month to access the software over the web. In short, with Salesforce you can rent your CRM on a monthly basis – this model has come to be called Software as a Service (SaaS). This model has also become a part of the latest buzzword in the industry– cloud computing. Cloud is a metaphor for the Internet cloud computing enables users to access computing services from the Internet. Salesforce. com users satisfy their sales
management needs using the Internet. And in today’s times of tough economy – where capital expenditure budgets are under severe pressure – a pay-per-use solution has started becoming very alluring. “There really is no average price, but we have found that salesforce.com’s model proves less expensive than traditional CRM. Basic CRM functionality from Salesforce starts at only $10 per user per month,” says Aaron Katz, Area Vice President (Corporate Sales, Asia Pacific). This model permits companies to avoid the expense and headache of installing complex software packages that can require huge outlays of cash for hardware and software upgrades. It also presents an easy exit option, in the form of subscription cancellation. “It’s all about letting our customers pay attention to innovation and not infrastructure,” says Katz. “Software as a service is about freeing them from having to hook up another computer in another data centre to another database, to another application server, to another security server.”
Rising competition in SaaS: The success of the SaaS model has also given rise to a good amount of competition. On the one hand there is competition from smaller companies like NetSuite and Zoho, which use the same leasing model to offer a full suite of applications, including billing, accounting and other critical business tools. These form the biggest part of lower-cost competitors. And now that SaaS is being increasingly accepted – thanks, in part, to Salesforce’s evangelical
marketing – smaller competitors spending a tiny fraction of what Salesforce spends on marketing, can undercut them. And on the other hand, the subscription model’s success has inspired larger software firms, including Microsoft, Oracle and SAP, the German business software giant, to offer subscription-based versions of their own products for CRM. Microsoft, for instance, has recently started selling Dynamics CRM Live, an on-demand version of Dynamics CRM, the shrinkwrapped software package the company has been selling for four years. At around the same time, SAP unveiled Business ByDesign, an online version of the company’s array of business software, aimed at medium-size businesses. That means Salesforce faces increased competition in its core market at a time when it is focusing on selling itself as a platform. But their strategy seems to be working as they continue forging new relationships using their platform. A few large companies, such as Google, Facebook, and Amazon, recently jumped on the bandwagon as partners. Salesforce’s message seems clear to its customers, “We are at the centre of an eco-system with big partners.” This should give them an added edge, especially with bigger customers. CRM and SaaS are clearly two of the last decade’s most striking innovations. And salesforce.com is one of the most striking success stories. ■
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A Google for homes That’s what Artemi Krymski, founder of BytePlay, a vertical-specific search engine developing company, has already created. A 20-something, like the founder of Facebook, this entrepreneur dreams big Most people in their early 20s would love to be in the shoes of Artemi Krymski. At an age when his contemporaries are still struggling to find their feet, he is co-founder of an award-winning technology that helps people find the house of their dreams. Krymski is of Russian origin, having first emigrated to the Netherlands, and then to the UK. He is an alumnus of the Imperial College, London, where he studied computing. This was also where he met Douglas de Jager, with whom he founded BytePlay, in 2006. Its first subsidiary was DotHomes (initially known as Extate), a real estate search engine serving the UK, US and
South Africa, and intending to extend to other countries. The data-mining technology lying behind the DotHomes search engine has been one developed by Krymski himself, one that took him three years. The engine extracts information from various websites using a proprietary machine learning framework. It is able to trawl thousands of differently formatted real estate and property agents’ websites, and search relevant information for users. DotHomes has earned the epithet ‘Google of real estate’ given its efficiency, though, according to Krymski, it extracts much more information from web pages than Google does. While DotHomes currently searches over 2.5 million property listings in the UK, US and South Africa, there are plans afoot to extend to other
GEOGRAPHIC MOBILITY Geographic mobility is twice as high in the US as it is in the UK. Within the UK, short-distance relocation is motivated by housing considerations. It is primarily education and job opportunities that drive longer-distance relocation.
Source: Nick Donovan et al., ‘Geographic Mobility’, Analytical Paper, 2002.
countries. In fact, Krymski never intended to stop at the real estate business. He aims to extend the vertical search technology used in DotHomes into other fields, including job listings and automobile shopping. Rather than pitching his idea to established online players, Krymski preferred to go solo, forming his own company and pursuing established financiers for capital. When he and de Jager formed BytePlay in 2006 in London, it was with a round of angel funding; today it is backed by three of Europe’s top venture capitalists – the Accelerator Group (TAG), Arts Alliance and Samos Investments. DotHomes’ advertising business model does not charge property brokers to list their wares in the site index, but rather provides ancillary real estate services and the option to place advertisements along with search results.
Krymski was honoured by Business Week as one of Europe’s Young Entrepreneurs in 2007. Later that year The Guardian newspaper hailed DotHomes as one of the top 10 dotcoms to watch out for. It also featured on Esquire magazine’s shortlist of Best New Idea, at its annual Man at the Top Awards. So far, in 2008 DotHomes has picked up a trio of felicitations as well. It was selected to be part of the Web Mission, an initiative to facilitate the top 20 UK-based technology companies meet similar leaders in the US. The Telegraph listed it as one of the leaders in the new generation of UK Web ventures. And finally, DotHomes picked up a Stevie Award in the Fifth Annual International Business Awards. Russia has already given the world one data-searching genius, in the person of Sergey Brin, Google’s co-founder. Could Krymski be the next one? ■
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Thin fuel cells... ... are now available that are tiny enough to power even a cell phone
fter investing over 15 years of his life in research and development of fuel cells, Dr Anders Lundblad founded the company myFC AB in 2005, and at present, holds the position of Chief Technology Officer. Headquartered in Stockholm, the company is currently run by Bjorn Westerholm, who serves as the Chief Executive Officer and is responsible for the company’s growth and strategic direction. myFC is a privatelyowned Swedish company which develops fuel cell platforms for portable electronic applications, based on the company’s patented FuelCellStickerTM technology. With this pathbreaking innovation, myFC has been able to manufacture a revolutionary portable charger which will provide power anytime, anywhere. The Fuel Cell Sticker is an element about the size and shape of a stick of chewing gum. A miniaturised electrochemical device, it produces power with the aid of an oxidant (air or oxygen) that transforms the chemical energy of a fuel (hydrogen, methanol, natural
gas, gasoline etc.) into electrical energy. For those that need to know more, the fuel and the oxidant react at two electrodes: the anode and the cathode. The electrodes are separated by an electrolyte that transmits ions (e.g. H+, OHetc.) from one electrode to the other. Though fuel cells resemble batteries in many ways, the fundamental difference is that, in a fuel cell, the electrodes are not consumed in the process of transforming chemical energy into electrical energy. Hence, a fuel cell can run as long as fuel and oxidant (air) are provided to the electrodes. Industry produces many types of fuel cells. The variety is usually provided by the choice of the electrolyte, which in turn affects the design, type of fuel, as well as material and equipment involved. The structure of a fuel cell system can take the form of either a stack or a plane. A fuel cell ‘stack’ is formed when cells are layered and connected in a series. A planar fuel cell is formed when the cells are not stacked, but positioned on a flat surface, next to each other, in succession, with opposing electrodes connected. Fuel Cell Stickers are planar, ultra-thin fuel cells, that are squeezable and foldable. The
NEWS BRIEFS: cell uses hydrogen as fuel and oxygen as the oxidant. This choice of fuel also ensures that the only waste product generated is water, thus making myFC’s FuelCellStickerTM environmentfriendly. A proton-conducting polymer membrane is used as the electrolyte, interspersed between the cathode and the anode. The compactness and flexibility of the design makes it ideal for installation within severely cramped and irregularly-shaped mobile phone enclosures. myFC’s 1636 Chip is the first actual product to incorporate the Fuel Cell Sticker technology. The chip measures only 3mm in thickness, weighs only 0.2 ounces, and has a maximum output of 0.75 watts. Though this is much less than a RIM Blackberry battery, multiple stickers can be stacked inside a phone enclosure, to generate more power. The main advantage of the FuelCellStickerTM is that it has been designed to optimise power density and achieve high levels of efficiency. This ensures that the cell is capable of meeting the increasing power and volume needs for portable electronics. The cell’s planar structure eliminates the need for additional components, such as a compressor fan and a cooling pump; hence, lowering manufacturing cost. myFC’s FuelCellStickerTM is simple to manufacture, cost-effective, and thus suitable for mass production. myFC’s vision of the world is a cord-free one. Accordingly, (pun intended), the electrical outlets in your home might need to start worrying whether they might not be unemployed in the not so distant future. ■
■ UK becoming 2-mobile
The market research firm Mintel, in a recent survey of 1,000 persons in the UK who use cell phones, reports that ownership is inching close to two-mobiles per head. Mobile phone owners now average of 1.8 handsets each, and the figure is expected to rise to two mobiles soon. Ownership is thought to be split between one mobile for personal calls and another, like the Blackberry, for work.
■ Online advertising
eMarketer, a research company, has forecast that advertising on the internet will take a hit, with the recession in the UK. Earlier this year, it estimated that spending on UK online advertising would reach £3.36 billion in 2008—a rise of 27.1 per cent. However, this figure has now been re-valuated and it is now predicting a rise of 21.5 per cent instead (to £3.34billion).
■ Cinema’s resurgence While advertising budgets in general are being slashed, the one exception is cinema advertising, which has grown by 19 per cent in revenue this year. The report, by Optimedia, goes on to note that while cinema advertising holds only a 2 per cent share of advertising as a whole, it is the only segment of the business that has succeeded in breasting recession. The Optimedia report adduces this to cinema advertising’s low capital cost. Besides, it is an accepted fact in the business that advertising on a wide cinema screen lends a message special impact. Under the line, this means getting a bigger chug for your plug.
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Europe A brake company that doesn’t put the brakes on Béringer is a small French firm that has thrived by providing top-of-the range brakes, for racing motorcycles, racing cars and now light aircraft
he city of Saint-Etienne in central France is not unlike Manchester, in England. It played a major role during France’s Industrial Revolution. And like Manchester it has suffered economically, as France, like the UK, has changed to a service-based economy. Gilbert Béringer’s company is grounded in Saint-Etienne’s industrial past, and manages to thrive by being forward-looking. As a young man, Béringer raced sidecar motorcycles. After graduating from a Saint-Etienne engineering school, he began designing wheels and front suspensions for motorcycle sidecar combinations, in 1985. Always driven by the urge to improve what he viewed as improvable engineering designs, he started building sidecars for top-level motorcycle manufacturers, such as Italy’s Ducati, Germany’s BMW, and Japan’s Honda. Professors Paul Wheal and Corinne Berneman from ESC SaintEtienne (ESCs, Ecoles supérieures de commerce, are France’s less elitist versions of India’s IIMs) have studied the firm. They point out a key element of Béringer’s strategy that has been present from the outset: “Beringer’s strategy has always been to serve a limited market with high-tech, high quality products. They position themselves at the very top of the performance chain”.
As a sidecar racer, Gilbert Béringer gained knowledge by working with racing teams. In 1990 it was his company that outfitted the 1990 French sidecar champions; the following year, Béringer and his wife rode their equipment to the championship. But Professors Wheal and Berneman note that beside the passion for racing, there was also business acumen: “Béringer is always keeping an eye open. The company is on the lookout for new segments on which they can bring their technical imagination and quality to bear. In the 90s they realised that sidecars were not a growing market and having noticed that, there were few high-performance brake manufacturers, they decided to move into this segment.” By 1993 Béringer was clean out of the sidecar business and, instead, totally in brakes. The firm achieved technical superiority by perfecting cast iron disks that had 40% more braking power and required less pad pressure than the standard stainless steel ones. By the late 90s, ever on the lookout for new markets, the firm began getting into racing cars, including providing brake callipers for Formula 1 machines. But it kept one big racing boot in motorcycles, and even equipped the World Supermoto vice-champions, in 2002 and
2004, the European Supermoto champions in 2003 and 2004. The operation is a lean one – 9 employees, a turnover of €1.5 million and a healthy 9% profit margin. “Design is performed in-house. Production is outsourced, mostly to local manufacturers. The products are then assembled and inspected in-house,” Wheal and Berneman report. The company’s research efforts amount to nearly 10% of turnover and have resulted in ten patents, over the last 15 years. Nearly all the production of this French firm is exported: 85% to be precise, with Japan (22%) and Italy (18%) representing the two leading markets. Béringer is smaller than its competitors (e.g. Brembo Racing) but in its case, small has been beautiful. Smallness has meant greater reactivity. “Béringer is able to put into practice customer requests faster than the competition. Reactivity has been key to their success: reactivity to customer preferences and reactivity to technological evolution, particularly in the field of materials” note Wheal and Berneman. Top-of-the range performance goes hand in hand
with top-of–the-range response to need. What does the future hold for this small, high-tech firm? Béringer started out in sidecars, moved into motorcycle brakes and is now beginning to apply its technical savvy to the light aircraft industry. In the early 2000s, Gilbert Béringer found that he and friends at his flying club were dissatisfied with the brakes on their light aircraft. Rather than simply improve the brake systems on existing wheels, Gilbert Béringer thought outside the brake, so to speak. And so he came up with a lighter and better wheeland-brake combination. It was certified by the European Aviation Safety Agency in 2006. Béringer has started working with European light aircraft manufacturers and now hopes to implement his topof-the-range strategy in the small plane segment. In the end then, Béringer is a paradoxical brake manufacturer. It doesn’t brake, but accelerates through market curves! ■ Reference: ECCH 508-10501, Professors Paul Wheal and Corinne Berneman, ESC SaintEtienne
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THE COMPANY SMILE Public relations informs the outside world of the company’s inside activities. Whether insourced or outsourced, PR plays a key role in building the corporate persona
ll companies attempt to build a positive image, an attractive public persona. Part of that responsibility falls squarely on its public relations arm. The main objectives in public relations (PR) are to inform and potentially influence all the targets of the company – customers, employees, investors, shareholders, government and community. PR influences perception of the company, its brand and, of course, its products and services, by generating media coverage and building an image that, in the long run, should drive revenue growth. While advertising is the above-the-line communication that directly influences the image of the company’s goods and services, the brand and its social responsibility, PR is the belowthe-line indirect communication for the same purpose. Marketing expenses include space ads on TV, print, the internet and outdoor, and direct mailing through newsletters and e-mails. PR expenses include those for press and blog coverage, TV appearances, brand awareness, sponsorships, analyst coverage,
in-house communication, government liaison and so on. Another difference is the more targeted nature of PR. Advertising communicates a broad message to a large number of people; PR offers a more focused message to a smaller audience. As Prema Sagar, principal and founder of Genesis PR, puts it: “While advertising
is essentially a mass media tool with a standardised message, PR targets stakeholders of the company and so the message can be customised accordingly.” As media costs have burgeoned, below-the-line communication through PR is seen as more cost-effective. Most recently, the global recession that has resulted in massive cuts in
ad spend, is considered a boon to PR. Companies that cannot afford to stay out of the limelight for long, will have to shift to the less expensive PR. While product advertising expenses are handled by the marketing department, corporate advertising and branding is usually the responsibility of the corporate communications
Organisation Structure of a PR Department CHIEF EXECUTIVE Overall Image Building and Crisis Management Corporate Communications Head – Company Headquarters PRO - Government Relations
PRO – Media Relations
PRO – Investor Relations
Briefings and reporting to shareholders, stock exchanges, Reserve Bank & other regulatory authorities Press Conferences – product launch, events, crisis management
Press tours – operation facilities, conferences at special locations in India and abroad
PRO - Employee Relations
Annual Report, calendar, diary
Analyst/ fund manager/ consultant interviews (television, internet) & write-ups (print, blogs, newsletters, etc) Press releases, briefings
Consultant/ Economist print & Internet write-ups/ television interviews
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MEASURING THE EFFECT Gauging the effectiveness of PR is no straightforward exercise ost PR measurement tools are designed around media coverage, and are similar to the tools used by advertising and brand managers. These are at three levels: First Level: Reach, covering number of media and audiences (in terms of circulation of print media, TRP for TV, and listenership for radio), key message delivery, placement and the tone. The target audience reach would depend on the type of media (niche vs general). The delivery of message points would depend on creating the right message, in the right media, to the right audience. Second Level: Benchmarking, equivalent of the traditional advertising ‘share of voice’ approach, tracking the corporate media coverage vis-à-vis its competitors. Third Level: Share of Discussion, the amount of coverage for the company, or the product, in the public (principally media driven) discussion. At the next stage, it is important to understand whether the target audience groups have retained the messages delivered to them. The outgrowth, as it is called, is studied in various ways: Dip stick study: This studies the recall of the particular brand, corporate, or spokesperson, vis-à-vis the competition. Focus Groups: A form of qualitative research in which a group of people are asked about their attitude towards a product, service, concept or advertisement, immediately after they have been exposed to the messages of the particular element. Contest Entries: If the company is promoting a particular contest on TV, like for example Indian Idol or Nach Baliye, the number of contest entries or SMS received, as votes for the winning contestant would measure the effectiveness Call ins: If there is a particular interview that is being broadcast on the radio, or TV, and the floor is open for call-in interviews with the celebrity, the number of callers would measure as a success rate. ■
(CorpComm) department. Typically, Indian companies have allocated 1-5% of the communication spend to PR, while the rest has been
earmarked for marketing expenses. Increasingly, CorpComm departments are expanding in size and into different types of
activities. For example, before the Reliance group split, the entire PR department consisted of two officers as the company was engaged mainly in industrial products, like petrochemicals and oil refining. The PR activity was limited to press, investor and government relations. After the Ambani brothers went their own ways, each employed major PR strategies. As both the Reliance groups entered into consumer industries like telecom, retail and power distribution, they needed strong branding exercises. As a result, the corporate communications department of Reliance ADAG alone has grown to a 40-person team, spread across offices in different cities.
A PR success story Till 2000, the Tata Group did not have a consolidated PR strategy. The 120-year-old, $10bn group with 90 odd companies in its fold, was considered one of the most reputed and trusted brands in India. Yet, it was an ageing brand that had a stronger association with the 30-40-year age group, than with the younger set. Pathfinders, a brand-tracking agency, was assigned to study the Tata brand vis-à-vis other prominent ones, among 5,000 respondents in 13 Indian cities. It was found that the Tata brand was not perceived as youthful and it was not into technology in a big way. Besides, scandals like those involving Tata Steel-Rusi Modi, India Hotels–Ajit Kerkar and Tata Finance-Dilip Pendse, had hurt the brand image adversely. Ratan Tata set forth to develop a cohesive identity for the group, by creating a common logo, consolidating media buying
and PR, and putting in place a fee-based system for group companies that used the Tata name and logo. Media Edge became the group’s agent for media buying and Vaishnavi Communications was assigned the PR job for the 12 largest Tata companies, including the holding company, Tata Sons. However, the group’s corporate affairs department continued to handle promotion of the Tata brand, website, intranet and in-house magazines. The group chose sport as the main vehicle for branding, for the youth market. In 2002, it signed a 3-year title sponsorship contract for India’s only ATP tournament, and took on Narayan Kartikeyan, India’s F-1 aspirant as the brand ambassador. The ‘Tata One World’ concept was adopted as an integrated branding exercise. It also targeted business schools by sponsoring inter-collegiate events, at the IIMs. In 2003, Pathfinders found that the Tata brand had improved considerably. The brand image was shifting significantly, from commodity businesses to knowledge-based industries like IT, telecom, and biotechnology. While the 15-30 age group was targeted, the older demographics was not ignored. Over the years, the Tata Motors, with its path-breaking Nano plans, and the overseas acquisitions, like Corus and Jaguar-Land Rover, catapulted the brand to new highs. In 2006, Pathfinders valued the Tata brand at $5bn. Vaishnavi Communications has been the main PR agency for the Tata group, even while other agencies have been employed for specific jobs, or for some
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group companies. For example, Vaishnavi worked in association with Adfactors, an investor relations specialist, during the TCS IPO, in 2004.
The normal relations in public relations Media relations are considered so important in India that the profession of PR is often equated with ‘press relations’. The print media has traditionally been the crucial PR tool in India, thus making press relations almost equivalent to PR, as a whole. But over the last decade, the advent of private television channels, particularly business channels, has made broadcast a growing media tool for PR. With the boom in the stock markets, investor relations became a competing element of media relations. Earlier, investor relations included only printing of annual reports and holding annual general meetings. But, now, the routine PR activities include placing annual, halfyearly and quarterly reports, investor/ analyst meets and briefings to the stock exchanges, Securities and Exchange Board of India (SEBI) and other
regulatory authorities. With foreign institutional investors being the major players in the market, corporate presentations for existing and prospective investors are crucial. Banks and financial institutions, in addition, produce regular newsletter and equity research reports. PR activity, whether by the CorpComm or the PR agency, also includes getting the company featured in analyst/ fund management reviews. Government relations, though
less important than during the license raj, are still a major PR activity of Indian companies. Building relations with state and central governments are necessary for getting licenses (in some industries like, say, power plants), land, environmental clearances and other facilities, like electricity and water, at special tariffs. Companies need government relations also to influence the tax/duty regime. Although the duty structure is less elaborate than in the 1960s and 1970s, when Dhirubhai Ambani’s legendary PR skills modified the import duty structure for polyester and petrochemicals entirely to his advantage, lobbying with the government is still an important activity. This function, however, often requires involvement on part of the chief executive, or the industry associations, and chambers of commerce The website is evolving into the first stop for customer relations and so has become one of the crucial communication
media for most companies. Designing of the website as well as the content, is usually the domain of the CorpComm in association with specialised agencies. Social media, associated with Web 2.0, are becoming a potent tool, and are fostering what is known as PR 2.0 (see box).
Crisis management Crisis management is, of course, a vital PR activity. In fact, lack of communication from the company is most often the reason for PR crisis. For example, when the NGO, Centre for Science and Environment, broke the story of Coke and Pepsi drinks containing more than permissible limits of pesticides in 2006, both companies - advised by their global PR advisors - decided to limit their media exposure on the issue. Instead, they conducted their own experiments in their specified labs believing that the results will be proof of their innocence. However, this reticence turned consumers more
Organisation Structure of a PR Agency CHIEF EXECUTIVE
Musical soirees & cultural events
Publications – annual reports, corporate brochures, house magazines, newsletters, equity research reports
Audio Visual – corporate films, radio jingles, film sponsorships & promos, celebrity endorsements
Conferences & seminars
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MANAGEMENT THE NEXT WAVE The web has spawned new forms of retail and introduced novel management tools. It is now set to affect public relations, as the rise of PR 2.0 attests R 2.0 refers to the use of Web 2.0 tools for communicating information, or building corporate image. These tools include blogs, social networks (such as Orkut), video sites (YouTube), or user groups. The term has been popularised by two American PR consultants, Deirdre Breakenridge and Brian Solis. They have been arguing that the new Web 2.0 tools allow companies to provide information in new ways and to engage in more of a dialogue with their various stakeholders. This year, Deirdre Breakenridge published PR 2.0: New Media, New Tools, New Audiences. Next year, she and Solis will be releasing their Putting the Public Back in Public Relations: How Social Media is Reinventing the Aging Business of PR. Indian companies have begur availing themselves of social media. For example, Hindustan Lever has developed the customer forum, Sunsilk Gang of Girls. Infosys, Tata and the Indian subsidiaries of JWT, Frito-Lay and Motorola have corporate blogs and forums that talk about career options and employee experiences. As for the Indian players beginning to offer social media marketing services, they can broadly be divided into three categories: ■ PR agencies/practitioners, like Corporate Voice, Rediffusion PR, Adfactors PR and Genesis PR offering social media services with a focus on online reputation monitoring and social media outreach. ■ Prominent bloggers like Rajesh Lalwani, who founded Blogworks, or Palin Ningthoujam, who founded India PR Blog, offering corporate blogging consulting services and workshops. ■ Digital advertising agencies, like Quasar, offering social media marketing services with a focus on virals, social network applications, social media campaigns etc. ■
suspicious and revenues of both companies plummeted. As Suhel Seth, prominent PR expert and advisor to Coke, said, “In the US and the West there is a certain dignity to silence. But here, people interpret silence as guilt. You have to roll up your sleeves and get into a street fight. Coke and Pepsi didn’t understand that.”
The daily grind of a CorpComm executive A typical day of the CorpComm executive begins with tracking the media for positive or negative
news on the company. She is the mediator between the various stakeholders – the management, the shareholders, the employees, the customers and the media. Therefore, maintaining relationship with all of these constituencies is of utmost importance. The CorpComm department of a company, of course, functions differently if it retains an external agency and if it does not (see chart for the organisation structure of a CorpComm department that employs an
external PR agency, but also retains many of its activities). Media and investor relations are usually coordinated between the in-house team and the agency, while government and employee relations are typically domains of the in-house team. Hence, writing of press releases, reports to regulatory agencies, website and intranet management, are usually done by CorpComm executives. Press conferences and press tours to different company locations, or stakeholders, are also organised by CorpComm. Companies, however, employ agencies for certain event management roles. For companies that have external agencies, the first point of contact with the company, for the media, is usually the agency. Navin Suchanti of Pressman PR notes, “We are usually the initial spokesperson to the media for the client and we filter the media contact that the company needs to make.” If the company does not retain an external PR agency, the main responsibility of the CorpComm executive is to maintain a daily contact with journalists, both of print and TV. In-house communication is usually managed by the in-house team as “the CorpComm team is the best judge of the mind of the employees and know their demands the best,” says Ashok Mukhopadhyay, Vice President, Corporate Communications, Reliance ADAG. Rita Bhimani, who has served as a public relations officer with many companies for 30 years, and has written a book on PR, Face Up, says, “The PR person today is not required only at the fire-fighting stage. We now
form part of a whole process. Actually, it is not only a mere tool of the trade, but a more strategic management tool, making the role of PR very pro-active.” The CorpComm departments, as well as PR agencies, are increasingly kept in the loop with the other departments of companies.
External PR External PR agencies came into existence in India only in the 1990s and have really taken off in this millennium. Being in a nascent stage, however, the Indian PR industry is highly fragmented, with small momand-pop organisations jostling for space, with multinational agencies (often divisions of global advertising agencies), offshoots of national or regional advertising agencies and large independent Indian PR agencies. There are about 1,500 PR agencies in India, employing over 20,000 professionals. As Navin Suchanti of Pressman PR says, “The wife of a public sector official, or the nephew of the owner of a large business house, may use his/her government contacts and call himself/herself a PR agency.” At the same time, global PR outfits, like Text 100, Hammers & Partners, Weber Shandwick Worldwide, Hill and Knowlton and Burson-Marsteller, are present in India, either as 100% subsidiaries, or through tie-ups with Indian partners. The Association of Chambers of Commerce and Industry of India (ASSOCHAM) boldly estimates the Indian PR industry at $3 billion, expects it to reach $6 billion by 2010, growing at the rate of 30-40% per annum. Palin Ningthoujam, the founder of India PR blog, questions these
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MANAGEMENT numbers and puts the industry in the $50-150 million range. In any case, it is estimated that the top 4 PR agencies – Vaishnavi, Genesis PR, Perfect Relations and Sampark – control 40% of the market, while there is increasing competition at the lower end. While the size of the sector is debatable, the relative profitability of the big firms is less so. Ashwin Singla, principal of Genesis PR, summarises: “PR is a profitable business, with net margins of 20%, compared to the 3-5% spread of advertising firms.” Most agencies are retained for a monthly billing ranging between $200 to $1,000 a month, says Navin Suchanti. Hence, PR agencies have to survive either on volumes, by getting 80-85 clients on their portfolio, or bundling PR with other activities, like advertising, event management, etc. As much as 30% of Vaishnavi’s revenues now come from non-traditional lines, like media training, specialised targeted newsletters, business intelligence, support to brand positioning and marketing communications. Despite the increasing competition, the face of the Indian PR industry remains personality-driven rather than technology-driven as in the west. Although many agencies are now putting in place detailed PR efficiency tools to monitor performance, the image of personalities who head the agencies are the real USPs. Hence, PR professionals like Dilip Cherian, Suhel Seth, Rita Bhimani, Prema Sagar, Nira Radia and many others, have become brands on their own, while the agencies they run are less well known.
In India, PR agencies have grown either on the strength of their main clients (Vaishnavi was nurtured by the Tata Group and Sampark by the Essar Group), or through acquisitions. Most global PR agencies try to find their foothold in India through tie-ups with local agencies. But, like in any other industry, tie-ups in PR have brought with them issues regarding conflicting interests and opinions. As a
Perfect Relations, are generalists. The specialist PR concept is still at an evolution stage in India and most agencies follow the integrated model, providing onestop PR services. The PR industry also has a high attrition rate, at 40%. With high demand for professionals, the ASSOCHAM survey found that 90% of PR employees wanted to hop jobs, to gain exposure in different
result, there has been a spate of mergers and demergers in the industry, leading to consolidation and realignment, particularly in the context of MNC-Indian tie-ups. Some PR agencies have positioned themselves as specialists. Text 100, following the agency’s global strategy, calls itself a technology specialist. Hence, the India operations have four offices in the technology hubs – Mumbai, Bangalore, Hyderabad and Chennai. Agencies like Adfactors and Concept PR concentrate on financial relations, Blogworks on social media, while other agencies like Genesis PR and
industries. The industry, still being in an infant stage, lacks professional expertise and skills, although B-Schools like Symbiosis and Indian Institute of Mass Communications offer specialised courses. Most companies that use the services of PR agencies also have their in-house CorpComm departments. PR agencies offer the company a wider network of professionals than an inhouse CorpComm department, which is usually located in the corporate headquarters. Under pressure for market penetration, most companies prefer to retain PR agencies that can garner resources across locations.
Madhukar Kumar, of Grey Cell PR, notes, “Independent PR agencies bring with them a width and depth of expertise. They have dedicated teams and resources with valuable domain expertise. Besides, PR agencies can also offer the network of bureaus, or associates, across the country.” Most PR agencies build their resource base by becoming members of national associations, like the Public Relations Society of India, Public Relations Professionals Association of India, or international networks, like Eurocomm. The key, however, is for the in-house department and the outsourced agency to work in close coordination. Dilip Cherian says, “The benefits of an in-house team is in ‘early opportunity spotting’ – that is, having a person who can detect the ‘communications perspective’ at the planning stage, offer advance warning for upcoming opportunities and be the ideal coordinator between the agency and senior management of a company. The agency on the other hand, should have the intelligence and confidence to give the CEO impartial advice, even at the risk of contradicting the company boss.” For bigger companies at least, PR is beginning to resemble manufacturing. The internal PR group is delegating tasks to outside suppliers, and so PR too, has its supply chain to be managed. The corporate persona is beginning to foster its own form of logistics. ■
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Estimating market size GUMC (Kuwait) was considering entering the bitumen-based construction materials market. Professor CP Rao shows how price scenarios can assist in the decision process
or over a decade now, the Kuwaiti government has been attempting to diversify the country’s economy. In particular, this meant encouraging businesses in the petrochemical and non-oil sectors. Gulf Upstream Manufacturing Company (GUMC) was established in 2006 to take advantage of the by-products provided by Kuwait’s oil industry. One potentially attractive market was bitumen-based building construction materials, for both domestic and international markets. GUMC appointed a consultant to conduct a feasibility study and make recommendations. The feasibility study covered four issues: potential demand, competition, prospective consumer behaviour and foreign plant builders. Professor CP Rao of Kuwait University wrote a case around the study, and uses it in his business teaching. One of the key
points he covers is price scenarios and market size determination. In 2006 there was one Kuwaiti company in this market, selling at an average price of KD 7.5 per standard bitumen roll. Accordingly, the price scenarios include a high-price scenario of KD 8 per standard bitumen roll and a low-price scenario of KD 7 per standard bitumen roll. The high price scenario of KD 8 reflects a 7% increase on the local competitor’s current average price. If the new business venture offers better product, better service and more effective marketing, such a higher price is justified. A slightly higher price might also help to project a better quality image of the product. It could well motivate the distributors and retailers given that they would be earning higher margins. On the negative side, a higher price means lower sales targets – Professor Rao uses
Customer Expectation – Satisfaction “gap” Analysis Business Aspect
Expectation (Very Imp. + Imp.)
Satisfaction (Very Satis .+ Satis.)
Understanding our special needs
Sales Promotion Help
a figure of 20% of the private sector business. A lower price (KD 7) may enable the new business venture to capture a higher market share. Hence, a market share goal of 30% could be suggested for the private sector business. The down side to this lower pricing strategy is that it may immediately draw the attention of competitors, and to protect their market shares they may retaliate by lowering their prices. A further argument against the low-price scenario is provided by the customer expectation table below. Customers are reasonably satisfied with prices. The gap on all other differentiators is over 50% however. It makes sense then, to offer a higher price and better service, on the other differentiators. Given, the sentiments expressed by users and distributors/retailers to patronise a local company if their products are competitive and backed by effective services, the 20 per cent market share goal of the private sector business should be an attainable sales goal. Given that the local competitor is not very present in the private sector, the bulk of the 20 per cent market
share in the private sector needs to be attracted from the segment of the market which is currently supplied by other Gulf country suppliers. If this sales target is achieved, it amounts to 20 per cent of the private sector market of KD 5.4 million, or KD 1.1 million. Another key element in the strategy would be for GUMC to capture the remainder of the public sector business that is not supplied by the local company, but by imported sources. It could target the difference between the total public sector business and the local competitor’s sales (KD 2.1 million - KD 1.2 million = KD 0.9 million). Effective marketing could also draw sales away from its local competitor. Combining the private sector and public sector targeted sales, the company should attempt to achieve an annual sales volume of KD 2.0 million. In this way, does Professor Rao impart the value of price scenarios for market size calculations to cohorts of business administration students. ■ Reference: ECCH 808-031-1, Professor C P Rao, College of Business Administration, Kuwait University
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GLOBAL TRENDS A jem of a woman Working since she was eight, Augustine Hammond is now a model female business woman in Ghana
n the face of it, working as a seamstress and earning a living from it, sounds, well, basic. What makes Augustine Hammond and her company, Jem Afrik, stand out is the ability to parlay this basic into a 100-strong company that is marketing Afro-ethnic clothing in Ghana, Namibia, Angola, Mozambique, Botswana, Tanzania and Zambia, and has registered representatives in the United States and the Caribbean. Raised by her baker grandmother in a neighbourhood of self-employed seamstresses and tailors, it was natural for young Augustine to gravitate towards sewing and related activities. Juggling regular school education with running errands, like making textile and equipment purchases for neighbourhood tailors and seamstresses, Augustine, or Tina as she is better known, got an early insight into the garment business. Recounts she, by way of offering a quick biography,
“I learned to sew, hem, finish (a dress), sweep the workshop, serve refreshment to customers, or any other duties that needed to be done. I performed all these services whilst attending school: from primary through O and A Levels, until 1982.” And never mind what else happened. Tina put her skills to test while studying Rural Art and Industry at the University of Science and Technology, majoring in textiles, wood and metal work, where she made clothes for herself as well as for friends and colleagues. She also organised the university’s fashion show. By the time she graduated, she was armed not just with a degree, but a handful of loyal customers, too. She set up Jem Afrik straight out of college, with nothing but a rented sewing machine and later, one employee. Her fine work and professional discipline brought in more and more customers.
At that time, her decision to go it alone was seen as odd. “Just sewing was generally perceived as a lower-grade job, fit only for school drop-outs and ‘ne'er-do-well’ students.” she explains. “You see, for a university graduate to pursue sewing as a business was almost incomprehensible.” In 1988, the United Nations Conference on Trade and Development (UNCTAD) established EMPRETEC, a programme for skill development of SMEs and entrepreneurs. Tina was given the opportunity to attend its entrepreneurial training programme in Ghana in 1990, and this convinced her to adjust course. Above all, the programme convinced Tina of the importance of exports. “Moving my business beyond Ghana became an agenda,” she says. “I began participating in trade fairs in my country. My stands attracted tourists from all over the world, who bought my clothing. These tourists returned home with the clothes and called back with requests to send more. That for me was confirmation
that Jem Afrik was ready for the international market.” Jem Afrik was soon expanding. An EDIF loan, managed by EMPRETEC, enabled the company to retool its workshop and to build capacity by raising teams of supervisors and shop floor workers to meet all production and other day-to-day requirements. Today, the company offers ready-made as well as tailored Afro-ethnic clothing for men, women and children, in almost all the major African markets and in Afro-America. With her business now in steady and healthy growth, Tina’s focus is shifting on training. Jem Afrik offers in-house technical and management training to empower, equip, and sharpen the skills of her employees, on a regular basis. She feels this is needed to attain better quality and quantity. She currently ambitions to set up a fashion design school at Accra to improve vocational training's targeting of industry. “I believe that this sort of training helps graduates to raise the company hiring them,” says Tina. Appearances in several television programmes and reputation must serve as proof of commercial success. Where she works and at the level of business at which she operates, entrepreneurs are typically chary of numerating their success. One is left to guess whether it's in consideration of the evil eye, or of internal revenue. Let it suffice, then, that she was invited by the Women and Children Affairs Ministry to establish a sewing school for girls, in Malawi. In this way, tomorrow’s Tina Hammonds are being sown, or to put it her way, sewed… ■
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MEA A bow for the baobab Baobab fruit pulp gained novel foods status in June 2008, and could become a billion-dollar industry in Africa
efore we get to the pulp, an overture about the tree all Africans love, the baobab. First, because it lends shade, but also because no other continent has a tree that can grow a trunk up to thirty feet in diameter. Such trunks are sometimes excavated to provide housing. All Africans also know that the tree has fruit in the shape of a gourd that contains, ahem, mucilaginous pulp that's pleasantly cool to savour. Now on to the action. The African baobab fruit gained entry into the European market when it was awarded the Novel Food Certification by the European Commission’s Novel Foods Committee, in June 2008. PhytoTrade Africa, a Southern African Natural Products Trade Association, along with Afriplex, a specialist South African plant extract manufacturer, jointly filed the application for the novel food status in June 2006. The application also had the support of the Advisory Committee on Novel Foods & Processes (ACNFP), an independent committee of scientists appointed by the UK’s Food Standard Agency (FSA). In keeping with the increasing interest in exotic fruits and flavors and the trend of development in traditional African foods and their trading overseas, PhytoTrade Africa also plans to file an application for the GRAS (Generally Recognised As Safe) certification, to gain entry into the US market.
The baobab fruit is green, shaped like a gourd, and 6-8 inches long. Its creamy white powder has a long history of traditional use in Africa, in drinks, eaten as a sweet, or used in baking, when dried. The fruit pulp of the baobab is said to have an anti-oxidant activity about four times that of kiwi, or apple pulp. A study from Italian researchers in 2006 reported that the baobab pulp had an Integral
Anti-oxidant Capacity (IAC) 10 times that of orange pulp. The main nutrients include Vitamin C, riboflavin, niacin, pectin and citric, malic and succinic acids, while the oil also contains the vitamins A, D and E. The fruit pulp is also rich in calcium and has been traditionally consumed by pregnant women and children. PhytoTrade Africa, the southern Africa natural products trade association, represents the baobab producers of Botswana, Malawi, Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe and also the companies who wish to export this fruit. The association’s aim is to develop the natural products
industry in southern Africa for the mutual benefit of its people and its biodiversity. To this end, PhytoTrade Africa realised that export of the baobab fruit, and an entry into the European and US markets, was instrumental in achieving its objective. According to PhytoTrade Africa the fruit pulp will be used in a range of food products, but especially in the beverage and healthy snack segment. De-pectinised fruit pulp could also be used as an ingredient in other products, like biscuits and confectionery. According to Dr Lucy Welford from PhytoTrade Africa, the organisation also intends to carry out research into the baobab pulp's health–giving properties, as well as developing new uses and applications. PhytoTrade Africa is also hoping that the GRAS notification will be awarded soon so that the baobab products can be introduced in the US market by 2009 and, with the soccer World Cup scheduled for South Africa in 2010, there should be a boom in the snacks and beverage industry. The entry of this traditional African fruit into the European and US markets is believed to be a huge step in the right direction for this industry in Africa. According to a report by UK's Natural Resources Institute (NRI) for the Regional Trade Facilitation Programme (RTFP), the baobab fruit is projected to become a billion-dollar industry in Africa. If all goes well, on your trip to South Africa for the World Cup in 2010, you will be able to test these new baobab products for yourself! In the meantime, GO hopes that the local team, the Bafana Bafana, are wolfing down the baobab fruit! ■
■ RAK: The next attraction Ras Al Khaimah reports a 40 per cent increase in tourism over the last year. It mostly attracts Europeans, with its ruggedly picturesque Hajar range of mountains, its beaches, and its red-tinted desert. In 2007, it had a tourist inflow of some 500,000 and the Tourism Department has now set a target of 2.5 million visitors, by 2012. The Emirate plans to increase its hotel-room capacity five-fold, from the current 1,400 to 7,500 by 2012. This will entail construction of twenty new hotels, the department estimates. The question is, whether the recession in Europe will undermine the justification of the project.
■ Iran driving broadband
business in Middle East
The Middle East is witnessing a surge in wireless broadband business, with a 100 per cent increase in revenues in the past one year. The annual value of business has now reached $1.5 billion (Dh5.5 billion), according to industry experts. Most noteworthy is Iran’s record, that had penetration moving up from 17 to 60 per cent, over the last two years. The global financial crisis does not seem to be slowing the trend.
■ IDC: IT spends in Gulf
region to be slashed in 2009
International Data Corp (IDC) has slashed its growth forecast for the Gulf’s technology spending in 2009, from $15.93 billion to $14.95 billion, representing a cut of over 6 percentage points, due to the current financial crisis. Yet it still expects a growth of around 11 per cent, thereby demonstrating that the oil-rich Gulf remains a place where global finance retains a special meaning.
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SWITCH OFF THE AUTO-PILOT
The current crisis in the auto industry was caused by market factors, but also by some serious management mistakes. What changes do automakers need to make? O’s Academic Forum examines the current crisis in the auto industry: its causes, its consequences to management, its prospects. The panellists this month are Professor Ashok Som from ESSEC (Paris), Professor Bruce Belzowski from the University of Michigan (the state that also contains Detroit), and Professor Thomas Callarman from CEIBS, Shanghai. (See box for more biographical information). GO begins by asking the panel about the causes of the crisis and finds that its panellists have little difference of opinion on this topic, except in terms of emphasis. Professor Ashok Som, who teaches at ESSEC and also at IIM-Ahmedabad, emphasises the American perspective. “America is influenced by the lack of public transport in a vast country,” he explains. “Americans have always built vehicles suitable for longdistance travel. Like other peoples they also have their own way of demonstrating status, and the large SUV (sport utility vehicle) derives from that. Then came the petrol price increase. That left them without the right models of cars to sell, and a vast inventory of models that no longer sell. To make matters worse, the public is now not buying because the
economic recession has shaken them enough so as not to want to spend.” Professor Bruce Belzowski, at the University of Michigan’s Transport Research Institute, while agreeing with all that, shifts the emphasis to the “big issue of the ‘legacy costs’. That’s the term we use, in the main, for the cost of paying pensions to retired employees. These ‘legacies’ constitute a very heavy cost for US automakers. In fact, labour is considered a fixed cost by US automakers, since contracts with the unions severely restrict management’s freedom to change the way things are run. But the legacies also include the onerous overheads that the competition has managed to avoid. Detroit’s main competitors are both the foreign-owned manufacturing
facilities that have established themselves in less unionised American states, and the new breed of emerging market car makers, namely from China and India.” Professor Thomas Callarman, at the China Europe International Business School (CEIBS) in Shanghai, prioritises mismanagement. Says he, “At the crux, the USA’s problem is a poor product portfolio. Management there focussed too heavily on SUVs and big cars, as well as light trucks. They neglected development or research on smaller, more fuel-efficient vehicles. That’s how they lost it.” As an afterthought he adds, “In the US there’s also a problem with the management of suppliers. Suppliers are not considered close partners, as
is the case in Japan. Detroit has a tendency to beat up on suppliers when times get rough. By healthier contrast, Toyota is more cooperative.”
Management changes To GO’s query concerning the consequences of all this on management, Ashok Som foresees this: “Organisational structures need to be changed; processes need to be changed; mindsets need to be modified. Pan back to the effect that Carlos Ghosn had on Renault, when he joined their ranks in France in 1996, before it formed its alliance with Nissan in 1999. He re-designed age-old French processes (eliminated ‘socialisttype’ hurdles that had existed, namely in labour relations). Along with effective capacity
The contenders - Top ten automakers in the world Company
Toyota General Motors Volkswagen (VW) Ford Honda Peugeot (PSA) Nissan Fiat Renault Hyundai
Japan USA Germany USA Japan France Japan Italy France South Korea
Founded 1937 1908 1938 1903 1948 1882 1932 1899 1899 1967
Vehicle Production ('000s) 9,498 9,350 6,346 6,248 3,912 3,457 3,431 2,679 2,669 2,618
2007 Revenues $262 $181 $74 $173 $120 $56 $89 $59 $41 $74
2007 Operating profit $22.6 $-4.4 $1.9 $5.3 $9.5 $1.0 $7.9 $2.1 $1.4 n.a.
Notes: Financials in $ billions; Sources: OICA, GO analysis
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Bruce Belzowski is the associate director of the Automotive Analysis Division, Transportation Research Institute, University of Michigan, which he joined in 1994. He previously worked for UM’s Institute for Social Research and for RL Polk, where he was responsible for developing models of new car purchases and aftermarket spending. He has been a major contributor to most industry structure group projects. He has authored research reports focusing on a variety of automotive topics, including product development, manufacturer-supplier-dealer relations, globalisation, information technology, knowledge management, and human resources. His current research topics include Product Lifecycle Management (PLM), powertrain strategies, and globalisation of the automotive industry. He holds a BA from UC Berkeley and a MA from the University of Michigan. Thomas Callarman is professor of operations management at the China Europe International Business School (CEIBS) in Shanghai. He entered the automotive field doing research at Arizona State University and then, in Australia. In the nineties he worked there in association with Ford and carried out research with Holden University. An authority on inventory and production control processes, he has been at CEIBS in Shanghai since 2005. He holds a PhD in Management from Purdue University, and an MBA from Arizona State University. He has over twentyfive years experience in research and has been published in journals, such as the Journal of Managerial Issues. He has consulted with several Fortune 500 companies in various areas of operations management. Ashok Som is professor of international strategy and management at the ESSEC business school, near Paris, France. He holds degrees from IIT-Kharagpur and a PhD from IIM-Ahmedabad. His areas of expertise include strategy and human resources. He is interested in the interplay of strategy process and the shaping of human resource practices, especially in turbulent environments and with a particular focus on cross-cultural and post-merger integration. He is the author of “Organisation Re-design and Innovative HRM” (Oxford University Press). He is also the head of a special programme on the luxury sector, taught jointly at ESSEC and IIMAhmedabad.
utilisation, downsizing, plant closings, and product reengineering, he promoted the top HR manager to a place on the executive committee. And he created smooth relations with Nissan by installing crossfunctional teams and crossnational teams.” Professor Som goes on to predict more consolidations and alliances, in order to reduce the cost base. “Manufacturers with an R&D advantage will have an easier time, especially in handling automotive use of fuel cells and alternative energy sources,” he explains. “The aim will be to attain greater leverage, so as to be able to adapt and move more quickly. Managers will also be busy attempting to increase their penetration of emerging markets. This is where growth will still occur. Survival will depend on these growth markets. Car makers will quite necessarily, focus on them. The small-car segment must be made to grow, and they will have to attend to that. From India, watch for the Tata Nano, and from China for the Chery. The base of the pyramid will continue to expand. US companies are like dinosaurs, too large to adapt easily. But nowadays one needs to adapt on the double, because one needs to restructure production every two years.” Professor Callarman’s future vision also includes management changes in the rapport between blue collar and white collar workers: “One big change will be in the way management deals with the auto unions. They must wring concessions from them by hook or by crook in order for the companies to survive. Why pay 95% of a laid-off workers wages? To finally get their product palette right, they will
have to develop a far deeper understanding of the oil business. Fuel price has become a major factor in determining the model mix. Anyway, there will be fewer models, and more emphasis on fuel-efficient and alternativefuel models. At the same time they’ll need to attain sufficient production volume to reach the economies of scale required for low cost. Auto makers should concentrate on fewer ‘brands’ (GM has already cut down from 5 to 4, by eliminating Oldsmobile, leaving only Chevrolet, Buick, Pontiac and Cadillac).”
Future prospects When queried on prospects in general, our panel is both positive and pessimistic. For Professor Belzowski, the current market hiccup will not have globalisation skid into the guardrail. “Globalisation will continue. In the auto industry it will remain particularly significant in the area of research and development. Geographically remote facilities will cooperate more and more effectively by means such as computer-assisted engineering (CAE). By such means you avoid the cost of re-creating the wheel in America, then in Asia, then Europe, then South America, and so forth. Data transmission speeds and increased computing power have been important accelerating factors here, and will remain so. Mind you, although globalisation is gathering speed, there is still the need for some customisation. That will not disappear. There will continue to exist customers who think they need a Smart, and others who think they need a Rolls.” By this time the panel had settled in and, instead of individuals holding forth, the
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ACADEMIC FORUM degree of automation. And with this degree of automation and capital investment, there is fewer opportunity for car makers to reap a competitive advantage, by lowering labour costs. Professor Belzowski underlines the need to reduce overheads in developed markets in order to remain competitive. Should GM move its headquarters to Belize, Volkswagen to Belarus, and Toyota to Pyongyang? The panel proceeds, understandably, from there to the question of how, or whether, the industry can find a strategy to overcome its crisis. Given its high sunk costs, it is difficult to change strategy on the turn of an exigency. Professor Som invited the panel to consider as a model for reform how Tata managed to change its strategy quickly, and drastically, in 2001-2002. It was then that it changed from producing old clunky trucks to new fancy Volvo conveyances. But that didn’t template a way
BI-POLE POSITION China invests in battery-powered cars, in an effort to gain a lead on the pack utomakers have been spending heavily in electric and alternative fuel vehicles, especially as gas prices soared, making other solutions more attractive economically. In China, the government’s strategic plan includes the development of electric fuel cells for cars, and one of the companies that is spearheading that development is Shenzhen-based BYD, which stands for Build Your Dreams. BYD achieved note as the maker of an SUV that car reviewers have described as a copycat version of a BMW product. Another BYD vehicle, the BYD E6 electric car, which somewhat resembles a Toyota Yaris, will begin its commercial life this year, probably in Israel. Propelled for up to 300 kilometres by electricity from lithium-ion iron phosphate batteries (located under the rear seats), the E6 will pack quite a punch, with the ability to reach a speed of 100 km/h in a mere ten seconds, and a 160 km/h top speed. The car is expected to start selling in Europe in 2010. The firm started out in 1995 as a battery manufacturer for electrical appliances, such as cell phones. It is listed on the Hong Kong Stock Exchange, and was recently the target of Warren Buffett’s shrewd investor
to solve its current problem, namely that of merging the two ends of the auto spectrum, with Jaguar at the one end and Indica at the other. Yes, there’s always something, another panellist shrugged in response. That led one of the panellists to declare that the most
important strategy, it seemed to him, was for a company to attain a production rate of 4 million vehicles/year. This would provide the economy of scale required to assure survival. And what was to happen to the others? Some of the others will die, we are told, or be absorbed.
procedure increasingly took on the form of repartee. Points made, and answered, included these: For Professor Callarman, labour costs in the USA need to be lowered lest the ‘turmoil’ they generate ripple off to the industry elsewhere. In China, you reckon with about $2.00/ hour as a fully-loaded blue-collar wage. In the USA, it’s $75.00/ hour. So, even though the USA uses a bit less labour to produce a vehicle, the cost differential remains enormous. “And believe me,” pleads Professor Callarman, “the plants in China are very advanced for the most part, so there is no big labour input differential with industry elsewhere. The biggest difference between the USA and China is in the overheads (supervision, general and administrative expenses).” The panel discussed production automation in Japan and Germany, and were informed that Chinese plants also possess a noteworthy
eyes, when his company picked up a 9.9% stake. Not bad for a company that only started in the automotive field in 2003, with the acquisition of Tsinchuan Automobile Company! BYD will use four industrial centres in Xi’an, Beijing, Shenzhen and Shanghai, for its research & development and for vehicle production. BYD’s present claim to fame, as well as claim to substantial funding from the Chinese government, concerns its development of an electric power train for its car. The Chinese government is pushing Build Your Dreams because it, in general, believes that by doing things in a big way it can leapfrog work in the developed markets and come up with the most successful commercial solution. Having that, it plausibly argues, profits not only China, but the world. Thomas Callarman, professor at Shanghai business school CEIBS, and long on China experience, comments: “That’s the way China often operates. When the government decides on a strategy to pursue, it as much as mandates it for the industry. If the Chinese see an opportunity they focus on it and use the resources of the state to develop what hopefully will be a leadership position. And they’re having to look into something that even developed research has not yet solved, namely the problem of battery disposal. It is not so easy to dispose of old, used batteries, even in China.” GO agrees in failing to imagine how one disposes of the old dreams one once built. ■
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ACADEMIC FORUM Mono-model-mania? The panel then addressed another issue: should auto manufacturers keep the full product range? It allows them to spread the risk, both geographically and in terms of product palette, one panellist noted. To this the response was, if there’s a segment missing in a car maker’s product portfolio, and if servicing this segment promises profit, then it’s cheaper and quicker to re-tool an existing plant to a new purpose than build a new factory. Professor Belzowski mentions that Honda has introduced a stretchable car platform for its Accord range, that allows a factory to re-tool for different chassis sizes, with low downtimes. Professor Belzowski then broaches the topic of innovation within car making processes, and the specific topic of Toyota’s difficulties in its globalisation effort. The company suffers from the lack of sufficient Japanese engineers and managers to send abroad to inculcate the Toyota Way to its foreign subsidiaries and plants. This is particularly important for the constant stream of innovations so dear to the company and that has in the past enabled it to streamline its production and management processes on a continual basis. This keeps a factory or a company from going stale. Toyota’s philosophy is that there is always room for improvement. Part of the current difficulty within Toyota is that it is looking for improvements in areas that are 99% fine, whereas other areas are only 80% fine and are not getting enough attention. The panel now turned to discussing the situation in which
large manufacturers assemble different brands from similar platforms, parts suppliers or designs that seem strangely lookalike. The same things are sold to everyone. Although economies of scale are reaped, there is also cannibalisation and brand dilution. Professor Som warns that this is not in the car makers’ best interest.
Team up to beat up R&D Collaboration has not yet become the rule in R&D. Companies have been chary of sharing it with their competitors. But R&D is costly, and as budgets get tighter, the past individualism may morph into a future multitude, or at least so thinks Professor Callarman. In this regard a panellist reminded us of one fairly recent example of research co-operation, his reference being to the BMWMercedes-GM-Chrysler hitch up on hybrid power trains. So, it’ll be up management to figure out how, and how much, to spend on R&D. As to the trend in palette management the panel finds it difficult to predict. Some manufacturers will continue to offer a range, from minicar to small truck (e.g. GM, VW, Toyota), whereas other makers will seek a niche. Think German car makers at the top end, and some emerging car makers at the small-vehicle end, one panellist suggested. The failure of the Daimler-Chrysler merger seems to show that having the full palette is not necessarily effective. On the other hand, Fiat that largely sells small cars, has been doing well enough – as has Cadillac, which concentrates on luxury ones. In response to that, a panellist opined that opportunities
remained for niche players, especially in the new power train developments (see box on Build Your Dream in China). Professor Belzowski reminds us that for management improvements, the devil is in the details. He reported that at his university they were investigating future development of production minutiae, “...like metal stampings and the quality control of these. The way the edges are machined can have an impact on vehicle quality and cost.”
Watch those lawmakers Another panellist reminded us that looking into the future should include keeping an ear cocked and eye peeled on legislative changes. New regulations on pollution, emissions, safety standards, and fuel economy, can massively affect production – and costs. Automakers in emerging markets, one panellist remarked, are especially exposed to government interference in a variety of forms, notably including legislation and other kinds of pressure. All three professors counselled incessant ear and eye monitoring of the competition from China and, yes, India. China automakers
are already exporting their low-end inexpensive vehicles to Africa, Southeast Asia and other markets. China is following in the footsteps of Japan automakers in the 1970s and South Korean ones, a decade later. Manufacturing skills are on par with the best worldwide practices. Design is now playing catch-up in China. “But developed market car makers need not panic quite yet,” reassures Professor Callarman. “Chinese car sales are dropping, due to the crisis; in 2008 China will probably end up producing fewer cars than in 2007 (an expected 7.8 million vehicles vs. 8.5 million in 2007).” True, he was rejoined, and look at Toyota in the USA: sales down by 34 per cent! Anyway, it’s like how Obama put it, and thereby won a presidency; what is needed is change. More specifically, the panel agreed, there’s a need to shake off, or at least critically review, once and for all the strategies and models of the past, the ones that have led us to inefficiency and attendant mega-crisis. Auto managers must have a willingness to tweak the models, to break the old forms, and find new strategies, not just settle for make-do stratagems. ■
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INSIDE THE BUYER’S BRAIN As a brand guru, Martin Lindstrom seeks to understand why purchasers buy what they buy. Rather than rely on traditional methods, he attempts to ﬁnd an answer, by getting inside their brains uyology, Martin Lindstrom’s most recent book, is based on the premise that when one asks buyers why they choose certain brands, one cannot trust what they say. This isn’t because purchasers turn into liars when confronted by a marketer’s questions. It’s because, to a large extent, purchasers don’t really know why they are settling on the product that they are buying. They don’t know – and knowing is a function of consciousness – because it’s a web of subconscious forces that is mandating a decision for them. So Lindstrom sets out to study “the subconscious thoughts, feelings and desires that drive the purchasing decisions we make each and every day of our lives.” The explanation of subconscious buying he calls ‘buyology’. At the core of buyology is something that has been developed over the last fifteen years, namely neuroimaging. With it, neuroscientists have made it possible for Lindstrom to get inside purchasers’ brains. Traditional marketing research, quantitative or qualitative, used to have to rely on what people said. The newest form of research,
neuromarketing, aims to see what they are really feeling. It works with neuroimages, rather than market surveys, or focus groups. Martin Lindstrom is at the fore of, well, applied scientists striving to mate marketing with neuroscience. His research project is designed to “explore what the concept ‘brand’ really means to our brains…[and] help each one of us understand what is really going on inside our brains when we make decisions about what we buy.” To provide the neuroscientific analysis of responses to marketing experiments, he linked up with two neuroscientists: Dr Gemma Calvert (Chair of Applied Neuroimaging, University of Warwick) and
Dr Richard Silberstein (Chair of Cognitive Neuroscience, Swinburne University, Melbourne). Neuroimaging (see chart) is not cheap and so it took Lindstrom several years to gather some $7 million of funding from 8 multinationals, in order to conduct his experiments. These involved 2,081 volunteers, resulting in 1,979 steady state topography (SST) studies (overseen by Silberstein) and 102 functional magnetic resonance imaging (MRI) scans (overseen by Calvert).
Product placement and TV advertising Are product placement and TV advertising as effective as their ubiquity would lead us to believe? Lindstrom decided to apply
neuroscientific tools to the case of American Idol, an American TV show based on the UK’s Pop Idol. Three companies, Coca-Cola, Ford and Cingular pay over $20 million yearly to advertise on the show. But they do it in different ways and Lindstrom wanted to see how those methods compared in effectiveness – that is, in terms of brand recall. First, the different methods. Coke runs thirty-second ads but also has the judges sipping their drink, has the contestants sitting on couches shaped like Coke bottles and has the walls painted a Coke red. Cingular runs ads and is present on the show, though less than Coke. For example, viewers are reminded that they can vote via text-messages from a Cingular phone. Ford, by
FORMS OF MARKET RESEARCH Quantitative market research
Qualitative market research
Experiments and neuroimages
Based on what customers say
Based on what customers experience
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TITLE: buy∙OLOGY: How Everything We Believe About Why We Buy Is Wrong AUTHOR: Martin Lindstrom PUBLISHER: Random House Business Books DATE: 2008
contrast, is present only via a thirty-second ad spot. To probe this set-up Lindstrom and the neuroscientists devised an SST test to examine brand recall, the phenomenon generally regarded as the most reliable measure of an ad’s effectiveness. The result was that Coke was far more memorable than Cingular which, in turn, was more memorable than Ford. Why? Lindstrom hypothesises that
example, Reese’s Pieces were not a fleeting incidental, but were a part of the story line. To take a hypothetical case, placing a brand of women’s boots may not work in a Bruce Willis movie, but placing gym equipment in it could very well succeed.
Coke was fully integrated into the narrative of the show if Cingular somewhat; and Ford scarcely. Coke created greatest recall by being part of the show, while Ford lagged due to its mere fringe participation. Lindstrom draws a product placement lesson from this. Product placement can be effective only if it is a fundamental part of the story line. In Spielberg’s film E.T. for
Mirror neurons: seeing is doing Dr Giacomo Rizzolatti, a neuroscientist working out of Parma in Italy, is credited with the discovery of what are now known as mirror neurons.
NEUROIMAGING FOR NEUROMARKETING
■ ■ ■
Functional magnetic resonance imaging Measures magnetic variations in different regions of the brain Neural activity leads to ﬂows of oxygenated blood which induces changes in magnetic properties The subject is placed lying down in a large machine The machine must be housed in a room far from any magnetic materials Very high spatial resolution (informative images)
SST ■ ■ ■ ■
■ ■ ■
Expensive (a machine costs at least $1million) ■ Non portable: the subjects must come to the experiment ■ The subject must remain very still during the experiment ■ Relatively low temporal resolution (an image every 1-4 seconds) Scans in Lindstrom’s study 102 ■
Steady state topography Measures electrical variations in different regions of the brain Neural activity leads to different levels of electrical signals in the brain The subject wears a helmet equipped with electrical sensors
High temporal resolution (several images per second) Relatively inexpensive Portable: the experiment goes to the subjects Lower spatial resolution (less informative images)
Working with macaque monkeys, he discovered that the premotor area in the brain (the F5 area) which registers activity when monkeys make certain gestures, would also register activity when the monkey saw those gestures being made. As far as the brain is concerned, seeing can be as good as doing. Rizzolatti created the term ‘mirror neurons’ to designate neurons that fire when an action is being performed, and when that same action is being observed. fMRI scans of the human brain lead neuroscientists to believe that mirror neurons exist in certain regions of the brain. Per this consensus, when we see somebody doing something, our neurons act as they would, if we were actually doing it. Lindstrom links these scientific results to marketing. His hypothesis is that mirror neurons can explain buying behaviour. When buyers see another person using a product or a brand, they share the experience of the person they are watching, much as Rizzolati’s monkeys’ neurons ‘mirror’ the gesture that they observe. The hypothesis then proceeds to state that mirror-neuron-based sharing can inspire a purchase (of what has been seen). A woman sees an attractive model in attractive clothes, experiences the satisfaction of that beauty
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CUTTING EDGE (via the mirror neuron effect) and purchases the clothes. One of the strangest manifestations of the ‘to see is to do’ phenomenon is the emergence of sites where people can watch other people opening gifts. On sites, such as www.unbox.it.com and www. unboxing.com, people share in the gift-opening thrill. Lindstrom hypothesises that mirror neurons explain the success of these sites. The urge to buy can also be chemically spurred. Dopamine is one of the brain’s pleasure chemicals, a chemical naturally dosed into the blood stream in anticipation of reward, and resulting in a built-up of euphoria. Buying often creates a feeling of joy and this, in turn, may be attributed to a flux of dopamine. Dopamine can also be released in anticipation of a purchase. The effect is shortterm, so the feeling of happiness will be correspondingly shortlived. But the propensity to shop is driven, at least in part, by the seductive effect of dopamine.
Subliminal advertising Subliminal advertising designates the practice of inserting extremely short visual or auditory messages, within longer visual or auditory messages. Those short messages lie beneath our level of consciousness. The practice can be overt or covert. An overt example is provided by a Kentucky Fried Chicken ad, which played at full speed, plugs its Buffalo Snacker sandwich, but played at slow speed, reveals a code usable to get a free Snacker. But subliminality is usually used covertly. For example, a George W. Bush ad against Al Gore’s health plan ended with the tag
line ‘Bureaucrats decide’. As a voice utters ‘Bureaucrats decide’ a split second image of the word ‘rats’ appears. Lindstrom wanted to further investigate the role of information that lies beneath our level of consciousness in forming our behaviour. He set up an experiment with smokers to see whether cigarette craving could be triggered by images tied to a brand of cigarettes but not explicitly linked to smoking a cigarette. He had the volunteers look, but only look, at cigarette packs (Marlboros and Camels), at logos (i.e. explicit messages), but also at images associated with the brands (cowboys, camels in deserts, etc.). The explicit messages revealed pronounced activity in the brain region, known as the nucleus acumbens, the area involved with craving and addiction. The brand-related images also created activity in that region, but created more activity in the visual cortex, the area responsible for visual processing. The logo-free images were more effective (in triggering craving) than the logo-ful messages. For cigarette advertising the hierarchy of effectiveness was, running from most to least: image without logo, logo with warning, logo without warning. It would then seem, though Lindstrom does not make this point, that governments wishing to discourage smoking should 1) encourage cigarette advertising but 2) limit it to fullybranded, with no warning.
Religiosity and brands Another practice that is not consciously rational is of the ritual. Rituals are employed in the rationally unfounded belief
that they have the power to affect the future. They stem from the longing for a sense of control in a changing, overwhelming world. Which brings us to brand loyalty that may be seen as a kind of ritual. Light up, and everything will come up roses. Some companies have managed to build brand loyalty around certain rituals. For example, the Mexican beer Corona, has become associated with the ritual of inserting slices of lime, tipping the bottle and taking a sip. Guinness managed to transform a long-pouring process into part of the Guinness drinking experience: an artful pour to achieve the perfect pint. The American cookie Oreo, has thought up multiple rituals, such as prying open the cookie, licking the frosting and then eating the wafers, or keeping the cookie intact, but dunking it in milk. Subconsciously, people then find
themselves ritually buying Oreos and ritually quaffing Guiness. Among all human institutions, religion relies particularly heavily on rituals. Lindstrom wanted to examine the link between religion and marketing. Accordingly, he set up an experiment to delve into this problem. In it he used leading brands (exciting ones, such as Harley-Davidson and less exciting ones, such as BP), sports figures and religious images. When test participants were exposed to images of powerful brands, their brain activity occurred in the same region as when exposed to religious images. Weaker brands triggered activity in different parts of the brain. Strong brands have the same neurological effects as great religions. So if you want to pitch something alluring at the consumer public, it may pay to show ‘em the Pope riding a Harley—it says here.
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CUTTING EDGE SEX AND THE SALES Sex and advertising seem to go together. But Lindstrom argues that sex often detracts from brand recall ccording to a 2005 book, Sex in Advertising, roughly one-ﬁfth of all advertising uses overt sexual content. But does sexual content make advertising more memorable? A couple of experiments cited by Martin Lindstrom would indicate otherwise. A 2007 University College, London, experiment devised by Ellie Parker and Adrian Furham tried to answer this question. They showed two groups a Sex and the City episode, with the ﬁrst group viewing sexually overt ads during the commercial break while the second viewed ads without any sexual content. Another set of two groups watched the unerotic sitcom Malcolm in the Middle. What did the study show? First that the volunteers had no better recall of the sexually overt ads than of the sexless ones. Sex did not foster brand memorability. Secondly, the group that had watched Sex and the City had worse recall of the sexy ads than did the Malcolm group. Rather than highlighting the sexy brands, the sexy show had eclipsed them. The researchers concluded that sex does not really sell anything other than itself. Another study by a New England company, MediaAnalyzer Software&Research, showed four hundred subjects print ads ranging from racy (cigarettes) to bland (credit cards). They asked their subjects to use their computer mouse to mimic their reading of the page. The men spent much more time on the female anatomy than on the logo or text. Less than 10% of the men were able to recall the brands using overtly sexual ads, while 20% were able to recall bland brands. The sexual context was erasing the brand text. The ﬁrm branded this the Vampire Effect: the titillating content was sucking attention away from the brand and product information. So it appears that sex does not foster brand memorability. Calvin Klein though, has used sex in a different and more successful way. Their strategy has been to use controversy as an attention-getter and to use sex as the means to controversy. Since their Brooke Shields campaign in 1980, they have developed a habit of launching an over-the-top campaign, thereby generating huge controversy, and subsequently, discontinuing the campaign. All the ruckus creates brand memorability. What do the studies and Calvin Klein’s visibility demonstrate? It’s not the sex; it’s the controversy that creates brand recall. ■
Somatic markers Lindstrom cites a study by a German firm, Gruppe Nymphenberg, to the effect that 50% of all purchasing decisions by shoppers are made spontaneously. He postulates that somatic markers play an important role in these spontaneous decisions. Somatic marker is
a concept created by Antonio Damasio, a prominent American neuroscientist and student of emotion, to designate bookmarks or short cuts in the brain. Somatic markers associate an external perception (say, an aggressor) and an internal state (say, fear). When you perceive a rhinoceros charging at you, it will generate fear in
you, and do so in a flash. These cerebral short cuts also make us, quite unconsciously, narrow down possibilities available in a situation and impose a decision. It is logical then to see advertisers try to create similar types of short cuts. In Denmark, GaJol has managed to link itself to the late great Italian tenor, Pavarotti. Pavarotti was on his first visit to Denmark to give an open-air recital, when a sore throat forced him to cancel and sent the nation into an operatic weeping fit. GaJol jumped on the occasion and took out ad space in the press, with the tag line: “If only Pavarotti had known about GaJol.” It is thus that a lozenge manufacturer created a short cut in the brain, a somatic marker. Lindstrom also uses the example of tyres and a Michelin purchaser. He argues that the choice has a lot to do with the somatic markers that the brand has created. There was the Michelin man with his protective plumpness; there was the baby they used in their advertising to create a safety bookmark and there are the travel guides that create a tag for European class. All these short cuts can bias the cognitive processing involved in a purchasing decision.
Sensory branding Most advertising is visual – think of billboards, press ads and even television ads where the picture track tends to trump the sound track. Advertisers seem to believe that sight is the most potent of our senses and that to seduce a consumer, you should address the eyes. What Lindstrom set out to test was whether smell and sound were not also potent senses, whether visual images
aren’t more effective when they are coupled with another sense – sound or smell. Test participants were asked to rate the pleasantness of four well-known brands (a shampoo, a soap, a beverage and a fast-food product) and their fragrances, by first showing them images, then presenting the fragrances and finally, doing both simultaneously. The study showed that the image and fragrance presented together provided more pleasure than the images alone. The mixture more greatly affected the amygdala, a region of the brain involved in encoding emotional activity. Not all that surprising, as smell is considered the most primal, the most deeply rooted of our senses. Marketers have not waited for the confirmation provided by Lindstrom’s studies to act. Stores are already using scents to induce consumers to shell out cents. Samsung’s flagship New York store uses a honeydew melon scent to enchant customers. British Airways uses Meadow Grass to make its lounges suggestive of the outdoors. Some Northern European grocery stores pipe in the scent of freshly baked bread to get the (purchasing) appetite going. Such sensory branding has made it to paper too. Diet Pepsi recently ran ads in People magazine that contained a packaged taste sample. Working with the BRAND sense agency (a Lindstrom company), the Royal Mail is developing a programme to enhance marketing mailings with aromas and flavours. Under this scheme, a soap mailing would release a fresh soap smell. Lindstrom also studied sounds. The MRI results were very similar. Sight augmented by
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CUTTING EDGE CAVEAT EMPTOR LECTORQUE Neuromarketing has created wariness on the part of consumer groups. And Lindstrom’s readers also need to practise wariness. he Latin caveat emptor warns buyers to be wary of sellers. The rise of neuromarketing has prompted citizen groups to warn against the potential misuse of neuroscientiﬁc tools by corporations or governments. These people fear that neuroscience could foster forms of mind control through brain-reading. Business or political institutions could use these tools to impose their products or goals on these brain-read consumers and citizens. Commercial Alert is one such organization warning against the consequences of the development of neuromarketing. A 21st century variation on Caveat emptor! Martin Lindstrom is, as you might have guessed, more sanguine about neuromarketing. His argument runs like this. Neuromarketing is a tool, like, say, a hammer. A hammer can be used to bludgeon people, though that is not its primary purpose. Neuromarketing too, could be put to bad
sound produces greater emotional engagement; in addition it shows evidence of enhancing long-term memory encoding. There was one notable negative reaction: Nokia’s trademark, a telephone ringing. While Nokia’s image tested positively, it’s ring created strong negative activity. Lindstrom hypothesises that this most renowned of rings became polluted by consumers’ distaste of nuisance phone calls. That sound affects purchasing decisions has been shown by other experiments. Researchers at the University of Leicester ran one in the wine section of a large supermarket, alternating between French accordion and German brass band. On French music days three quarters of the buyers bought French wine while on German music days over half the customers chose German wine. Examples of sound-branding include Ford, which created a new latch system for their car doors that makes a distinctive vault-closing sound, and the Pringles potato crisp can,
which is engineered to make a distinctive vault-opening sound that connotates freshness.
Can neuroscience predict success? 52% of all new brands and 75% of individual products fail within the first year of their launch, according to a study by the IXP marketing Group. Some of these products were viewed as too-good-to-fail. For example, the Segway PT, a revolutionary personal transporter, has not met glorious expectations. New Coke was a controversy-generating flop in the 80s. RJ Reynolds recently invested over $300 million to create a smokeless tobacco, Premier, which never took off. So Lindstrom tried exploring whether testing could foretell what consumers will like. As a stab at this he organised an experiment around a popular British quiz show, Quizmania. Two hundred American volunteers were then shown a Quizimania pilot – one half viewing it along with a proven
uses. But it could have good ones. Lindstrom sees neuromarketing as a way of better understanding our wants and drives. Buyers will become aware of some of the subconscious forces driving their shopping habits. Companies will become better at developing products that satisfy people’s desires – product launch will become less of a hit-or-miss process. Lindstrom’s book requires some wariness, in a different regard. For whatever reason (limiting the number of pages, or avoiding technical discussions) the book is short on the neuroscientiﬁc details behind the conclusions. There is no presentation of the type of data that the neuroscientists are analysing and how they go about interpreting these data. GO’s reader would have welcomed at least an appendix with an example of ﬁrst, the pictures and/or numbers that the scientists are looking at, and second, the processing of these data to arrive at a conclusion. The reader is not really able to test Lindstrom’s inferences. In the absence of detail surrounding the nature and the interpretation of the data, some wariness concerning Lindstrom’s conclusions is in order. Lindstrom may be saying less than the data warrant, but also more than they warrant. Caveat lector! ■
success (How Clean is Your House?), the other half got to watch the pilot and a proven failure (The Swan). As they attended the showings they were asked to complete a questionnaire. The experiment showed a discrepancy between the questionnaire and the brain scans. On the questionnaires, the volunteers claimed that they were more or less as likely to watch How Clean is Your House as The Swan. But their brain scans showed more engagement with How Clean is your House. As for Quizmania, the volunteers claimed it was the show they would be least likely to watch. But the SST scans told a different story. Quizmania created a greater degree of engagement than The Swan, although less than How Clean. The subject’s brains told a different story than their avowals. It is a shame that Lindstrom could not have performed the same experiment with Pop Idol. The story goes that Rupert
Murdoch did not believe that an American version of the show would work, but his daughter convinced him to try. Thus was American Idol born. Lindstrom would no doubt say that Murdoch could have done SST tests on American volunteers that would have revealed its suitability for an American audience. It is said that a drawing is better than a thousand words. Martin Lindstrom would probably revise that saying: a brain scan is more illuminating than a thousand marketing questionnaires. Indeed, he predicts that more and more companies will be trading pencils for SST caps. Traditional market research will face increasing pressure from neuromarketing tools. Of course, there is still the affordability hurdle. After all, Lindstrom’s project required $7 million, or about $3,500 per scan. Ever the positive thinker, he predicts that as the tools become more popular, demand will make the tools cheaper, easier and more available. An SST helmet might be in your future. ■
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LEADING THE BEST AUTO ALLIANCE Carlos Ghosn is a multi-cultural, multi-lingual industrialist-- at Michelin tyres in France and the USA; at Renault in France; at Nissan in Japan; and now at Renault again. But is he exceptional enough to be able to cope with today’s inauspicious times? ow does a manager define career achievement? Well, many are the ways. The one might prioritise revenue growth; another the capture of new customers, or new markets. Yet others may focus on profitability; for example, restoring a loss-making division to profit via a well-managed turnaround. Carlos Ghosn (rhymes with cone) is firmly established in the last of these slots, his prime achievement having been his remarkable turnaround of Nissan, the Japanese car maker. The story of the turnaround strikes one like a before and after makeover – you know, like the frog turning into a prince. When Ghosn arrived in Japan to help Nissan, the company was a shambles: 1999 net losses of Yen 684 billion, a lean ten years without profits, a workforce with
low morale, and net automotive debt of Yen 1,349 billion. In 2005, when Ghosn returned to Renault in France, Nissan’s bad old record was covered by a new good one, like a palimpsest covered by a Titian. Revenues had virtually doubled to Yen 10,824 billion; operating profits were Yen 791 billion, plus a fresh vehicle palette that earned topquality marks from J D Powers, the company that internationally judges such matters. This piece of industrial alchemy was compounded by a man (see box for biographical details) of equally compounded background. Ghosn has Lebanese roots, but was brought up multiculturally and multi-lingually, studying and working on three continents. It is therefore not surprising that he developed an unusual leadership style. What can one learn from this chameleon of globalisation?
Case studies, business magazine articles, even a biography in Japanese-comics Manga form, along with video interviews, seem to indicate that the answer must be, a great deal. “There were even requests for Ghosn to become CEO of General Motors, or Prime Minister of Japan, in the early 2000s,” reports an authority, “at a time when Japanese political capital was scarce.” The authority is professor Guy Fournier, of a leading German business school, Pforzheim University of Applied Sciences, near Stuttgart, the home to Mercedes and Porsche. Fournier has been studying Ghosn for the past five years. The first lesson from Ghosn’s management book is to get along well with your boss. During his early years at Michelin, the French tyre manufacturer, he developed a strong tie with Francois Edouard Michelin, the grandson of the founder. He
fared so well that he had to leave the company, knowing that the very top slots were reserved for family members. The company he then joined, was Renault, France’s largest auto maker. At Renault, Ghosn quickly developed a strong rapport with Louis Schweitzer, the CEO. The men grew to respect one another. After cutting Ghosn’s teeth on some ‘simple’ problems at Renault and seeing them solved satisfactorily, Schweitzer was persuaded that the Nissan opportunity fit Ghosn’s capabilities like a glove. This was also the period of Ghosn’s first turnaround, when he successfully – albeit painfully – trimmed unprofitable Renault activities, namely at the Belgian Vilvoorde plant. These efforts boosted Renault’s cash flows, which in turn allowed the company to acquire the Nissan shares, down the road.
Ghosn delivers the goods Ten year summary financials at Nissan and Renault
Revenues (Euros million)
Revenues (Yen billion) Operating profit
Notes: Financials are in Yen (billions) and Euros (millions). Indicative current exchange rates: 1 Rs = Yen 1.87 and 1 Euro = Rs 68.10
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GHOSN FOR BEGINNERS Corporate adventurer on three continents, Carlos Ghosn represents a new breed of global managers ittle in Carlos Ghosn’s (rhymes with cone) background serves to explain his hard-nosed approach to conducting business. He was born in 1954, of Lebanese immigrant parents in Brasil. There was some money in the family and when aged six his mother returned with him to Lebanon, so he could be educated at a Jesuit school there. For higher education he moved to France, eventually graduating from the country’s premier institute of technology, the Ecole Polytechnique. He followed that up with a post-graduate degree from the prestigious Ecole des Mines, a top engineering university in France. His professional career started in 1978 at the Michelin tyre company, and included – over a span of eighteen years – stints in France, in South America, and finally in the US, where he is first COO and then CEO (1990). Bumping into the glass ceiling of family-owned firms and their predilection for family members at the helm, Ghosn then jumped ship to Renault, in 1996, as vice-president in charge of purchasing, research & development, engineering and production. In 1999 he is called upon to run Nissan, in which Renault just acquired a 35% stake (with an option to increase to 44% later, which Renault chose to exercise). In 2005, Ghosn returned to Renault in France, to assume first the position of COO and then of CEO (2006). Ghosn currently wears twin hats: at both Nissan and Renault he is President and CEO. How does he manage to sit on two chairs at the same time? When he was still running the day-to-day businesses of Renault and Nissan, 44% of the latter belonging to the former, he apportioned out of every month a fortnight of his time to Nissan, and a fortnight to Renault. Ghosn has four children, all born in Brazil. He’s entirely at home in Portuguese, French, English and Arabic, and speaks three other languages, any one of them gladly, and at the mere drop of a sentence. ■
Key data Nissan Country Revenues 2007 ($ billion) Operating profit 2007 ($ billion) Production (vehicles) Employees
128,893 Source: Company reports
What particularly strikes Professor Fournier, at least according to a paper he wrote with another professor, David Evans of the Reims Management School in France, is that Ghosn “... is a strong believer in crosscompany diversity, with teams from Nissan and Renault working together on projects in both Japan and France.” The two professors then go on to report that, “... Ghosn also introduced cross-functional diversity, for example with marketing staff acting on projects jointly with manufacturing engineers, or dealerships.” For Professor Evans, who teaches international management at Reims, the diversity goes beyond that which is nowadays called crossculturalism: “Ghosn is convinced that mixing up the pot will help create value that otherwise would not have been seen, or found.” By way of developing the thought he adds, “In a way what is happening is that these diversity-stretching teams are helping to establish new benchmarks. Putting radically different managers together helps them to recognise that sometimes other people can do better than you can, and that creates value for the company.” Professor Fournier calls this procedure cross-pollination: “For Ghosn, diversity must extend beyond the social, or the national, as well as beyond race, or gender, and also address functional areas. He believes that by creating diverse teams, better power trains as well as better dealership relations can be created. Mind you, these teams are no mere social experiment. They are given specific goals to be attained, and have their performance evaluated
on this basis. Ghosn feels that this is the way to operate, and expand, globally.”
Vision “I attribute a great part of Renault’s success with Nissan to the fact that it has given it the form of a strategic alliance, and not just another merger – a merger, say, of the doomed Daimler-Chrysler variety,” explains Professor Evans. “Renault, and Ghosn in particular, had the vision to let Nissan maintain its culture without imposing heavy-handed French management. Instead, both companies worked in tandem, coming to a problem from their own experiences, but then amalgamating, to come up with a solution.” This approach harvested cost-efficient synergy. Renault and Nissan are planning to reduce the total of platforms for the cars to ten, by 2010, from three times that number when the plan was first launched. The Nissan Micra and Renault Modus models use the same platform, as do Renault’s Scenic and Nissan’s Almera. Not only that, while the Renault Scenic is built at a Nissan factory in Cuernevaca, Mexico, a Nissan pickup is manufactured at a Renault plant in Brasil. The Renault Trafic truck and Nissan Primastar, also a truck, are built in a commonly owned plant in Barcelona. Renault and Nissan still operate their highly effective joint purchasing operation: RNPO, for Renault Nissan Purchasing Organisation. According to experts, RNPO continues to yield substantial annual savings in supplier costs. Which begins to spell out what ‘amalgamation’
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largely means, namely a noholds-barred, but all-culturesembraced search, for savings on all fronts and levels – and that on a day-to-day basis, and never mind the time zone. Let’s turn to Guy Fournier for the details: “I remember how Renault managers approached Nissan’s headlight supplier,” he reports, “a company that had developed a sophisticated yet expensive new technology. The ‘amalgamates’ were impressed, but said they needed to have the same excellent quality, but at 15% lower cost. As you can imagine, the supplier demurred, Such a drop is impossible, the headlight people said. Nonsense, retorted the French, while suggesting ‘Let us do the maths together.’ The maths consisted of cutting corners, without affecting what
was superior about the new headlights. In the end, Ghosn got the headlights at 15% off, because his culturally-attuned team had managed to creatively circumvent any feelings of damaged pride, in order win out with a solution that was win-win for both parties.”
Transparency As we have just seen, the Ghosn way is not without stratagems. Yet Fournier insists that, “with Carlos Ghosn, what you see is what you get. Take his performance at the Tokyo Auto Show in 2000, right after he had taken over at Nissan. In a press conference there he outlined his plan, and his concrete targets for the turnaround. This is what I will do, he said, and if we do not achieve these results, my executive committee and myself will resign. That is what one
calls putting one’s money where one’s mouth is.” In the event, he achieved his aspired results, which could be seen as a good thing not only in itself, but also because he had failed to notify the rest of the members of the executive committee of the drastic pledge he had made, at the auto show. “One of the striking characteristics of Carlos Ghosn, often remarked on by his colleagues, is his ability to synthesise the elements of a complex problem and propose seemingly simple solutions,” explains David Evans of the Reims School. “These analytical abilities are so strong that Ghosn’s colleagues often leave a meeting thinking: ‘Why didn’t I think of that myself?.” One answer to that is that Ghosn is expert in several fields. Having
the ability to synthesise and analyse is not given to everybody. Many companies hire high-priced strategic consultants to do that for them, while Ghosn is willing and able to solve problems without such help. Part of solving a problem is to understand it, and in many cases this requires the readiness to pay close attention to opinion and counsel. “I estimate that a good manager should spend 90% of his time listening, and only 10% speaking,” says Ghosn. Within Nissan, one of the key success factors was the cross-functional and cross-border teams, and their interaction with local managers. For this effort to be effective, there were countless large meetings involving many managers, and for these to be productive, it required the
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LEADERSHIP leadership of a sharp analytical mind to keep discussions on track, and objectives targeted. To bolster his analytical insight, Ghosn relies on his strong work ethic. Known as 7-11 for his long work hours, Ghosn devotes five days each week to pistons and clutches. The remaining two days are given to his family, spending time with his wife and four children. “My kids are very important to my balance,” he explained in an interview, “since they keep me informed of what is happening out there, in the world beyond my office walls. Reading books is another important source of mental nourishment.”
workers alike. Contrast that with the old school French car makers where CEOs would only discuss things with their direct reports.”
Ghosn styling In all these ways Ghosn has proposed a style, meaning for it to percolate down as an inspiring message to staff and workers. There’s the 7-11 work schedule. The down-to-earth engineer’s approach. The chummy lunches at the Nissan cafeteria and choice
tenures. “Renault in France is not in the same dire straits as Nissan was in 1999,” observes Professor Edwards, “but there are powerful and touchy trade unions to cope with, so he needs to tread more delicately here.” Ghosn has a plan for running Renault – ‘Contrat 2009’, it is called. It is nowhere as aspirational as the plan he prescribed for Nissan, back in 2000. Indeed, much of Contrat 2009 strikes one as banal,
Charisma To elicit the devotion from his managers, Ghosn can rely on a goodly supply of charisma. He does preserve the French formality of addressing colleagues as ‘vous’ – as opposed to a more familiar ‘tu’ that is the standard on the assembly line – yet his work style retains the American openness that came from his years in the United States for Michelin tyres, when it acquired Bridgestone. That openness is accompanied by the strict fairness that he displayed in Japan, when he only brought with him a small team of French managers. He sensed – correctly, it seems—that it would be counter-productive to appear on the Japanese scene with the intention of dominating. “Ghosn is also very open; you could even say democratic,” says Fournier. “He will go out on to the factory floor, or into the computer-laden purlieus of the engineering and design departments, and talk shop with blue collar and white collar
of a Nissan as his private car. There’s also one of his sayings that’s been quoted often enough to now qualify as a motto: “The key to success in any career is understanding and choosing what you love to do. The rest flows from there.”
The current frying pan To be sure, Ghosn lately has not proved immune to criticism in France, where he moved back in 2005, to assume the leadership position at Renault. Here he now has his work cut out, coping with our recessive times and a generally less friendly industrial climate. But he has approached his challenge with the same cool-headed self-assurance that characterised his previous
especially its emphasis on dealing with quality problems and its insistence, and insistence, and insistence, on achievement of bottom-line profitability. But the plan also contains strong signs of a regard for the future. This notably includes his declared intention to press work on a power train linked to a fuel cell, and a low-cost platform for production in a number of emerging markets. Nissan will be playing a large role in these two buzz areas. Ghosn has mandated it in a plan, the GT2012, which aims for leadership in vehicles with zero emissions. At talks that he gives at business schools and universities, he ever stresses the need for car makers to put
down solid ecological roots, or risk losing credibility and market share. With the current automotive crisis, some of GT2012’s aims seem illusive, such as the target to increase topline revenues by 5% annually. Yet Renault has been particularly adept at entering foreign boom markets, including, at appropriate times, Central Europe, Iran, Russia, Brazil and others (see map with plant locations) which may signal the way in which Ghosn intends to achieve profits, in spite of the inauspiciousness of the times. Another aspect of the long-term vision is the Better Place project (see box), an endeavour to spread the use of electric vehicles. Here Ghosn has chivvied his interest into the planning sphere, working with local authorities and environmental organisations in Denmark, Israel, and several US states, so as to create a network of electric charging stations, that would countervail the limited range of electric vehicles. For Ghosn, the next leadership frontier seems to lie in areas beyond the microeconomic interests of his two car companies. Indeed, at times he seems to be morphing into a green politician. But that’s only at times. ■ Reference: Carlos Ghosn – A Study of Diversity Management in the Framework of Strategic Alliances Prof. Guy Fournier, Pforzheim University of Applied Sciences Prof. David Evans, Reims Management School ECCH Case 307-234-1 Carlos Ghosn – Leader without Borders Prof. Manfred Kets de Vries, INSEAD ECCH Case 405-056-1
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INDIAN IT SERVICES MULTIPRENEUR Phaneesh Murthy has been at the summit of the IT services business as top executive, entrepreneur and now de facto intrapreneur
he remarkable turnaround of iGate Corp, since 2003, when Phaneesh Murthy took over its reins, is a testimony to his skills gained over two decades as manager, entrepreneur and now intrapreneur. The 17 years since 1992, when he joined Infosys, have seen Murthy go from being the highest-paid executive at India’s most-admired company, to a start-up artist (Primentor and Quintant), to the head honcho of a tech biggie. Murthy is currently President and Chief Executive Officer of iGate Corp. Murthy’s career has been shaped by two traits: a capacity to sell, and a drive to think differently. He plays for broke, on his instincts and convictions, and usually wins. For example, Murthy, a math Olympiad topper and Indian Institute of Technology pass-out,
buried his dreams of pursuing medicine, despite winning a Harvard scholarship. Instead, he followed his instincts, and his father’s advice, that the future belonged to business management—again a surprising thought, given corporate India in the 80s was still pretty much in the asphyxiating grip of the license-permit Raj. In 1987, on leaving the country’s premier B-School, the Indian Institute of Management, Ahmedabad (IIM-A), he chose the unbeaten path. Instead of following his classmates to a corner office in an FMCG bluechip, as did most IIM jocks back then, Murthy opted to join a little known software export company, Sonata, with the ‘dream of taking Indian software products to the world.’ It was a particularly strange decision given that in the 1980s if you said software, the most likely response would have been, ‘what where?’
In 1992, his knack for selling, found a match when he saw an advertisement in India Today for a sales and marketing manager to build Infosys’ business in the US. He knew instinctively that this was it: not so much a job as an enterprise that would give him the opportunity to sell Indian software on the global stage—the reason he had shunned cushy FMCG offers, for a job in littleknown Sonata.
Murthy and Infosys: The enterprise of selling What followed were rounds of intense discussion with the country’s software Gandhi, Narayana Murthy and his fellow founders, notably Nandan Nilekani, resulting in a deal, so “exciting that I could not wait to get started,” says Murthy. His first year’s target was $1 million in sales, from ground up. Exciting? It would be, if you thought like Murthy—differently.
Phaneesh landed in Boston in December 1992, an unlikely time for someone looking for business. But not for Murthy, for whom it was a done deal. The December snow was to flake him into the best selling machine Infosys could have imagined, a machine that hummed on and on over a decade, starting with a multi-million dollar order from Nordstrom in 1994, Infy’s first in the US, to a $37 million mega deal with mortgage giant Greenpoint, for the company’s business process outsourcing firm, Progeon, in 2002. Here is another example of how the entrepreneur in Murthy has won by playing for broke, backing his instincts over conventional wisdom, this one from 1996. Trained to pitch low and jostle for price advantages, an Infy project team produced a $4 million bid for a project at Cambridge Technology Partners, a Massachusetts-based leading
Phaneesh Murthy’s Milestones
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OUTCOME-BASED PRICING IT services have traditionally been billed by the hour. Murthy and iGate want to open the new path of outcome-based billing he global economic meltdown has shifted the spotlight to pricing models, prompting IT service companies to move towards a transaction-based pricing strategy instead of merely slashing per-hour-per seat costs. This is contrary to the conventional model which follows an input-cost mechanism, where IT services are not directly linked to a particular business outcome, be it, say, number of mortgages sold, or number of cell phone subscribers added. In the traditional model the vendor billing needn’t actually come down even if a vendor reduces rates, as more people putting in more number of hours would still keep the billing at the original levels. The savings for the buying organisation would, therefore, only be notional. With ‘outcome-based pricing’ model, IT services can be considered as direct cost of sales. A set of outcomes and a suitable compensation on their achievement are pre-defined, regardless of the number of hours and seats working on the project. For instance, in a typical mortgage scenario, an IT services would be priced, based on the volume of mortgage applications, taken from initial stage of solicitation to completing the deal. This is the direction Murthy wants iGate to take. “Billing on dollars per hour is all rubbish. We should start moving towards billing business outcome,” says Murthy. As the downturn hit the Indian services companies, the natural reaction was to put in more hours and increase billing. This is a result of the prevailing practice of the billing-per-hour model followed by the industry. Not many in the service space are listening to him, which is fine by Murthy. “They [iGate’s competitors] have 150,000 people trained to be inefficient. All derive their premium in the capital market because they can predict the number of ‘bums on seats’ and revenue. In my model it is much more difficult to predict revenue; so, therefore this is not something that an incumbent will move to easily. It is something that a challenger has to do.” There is an inherent risk in this strategy: it is harder to sell a new model, for a smaller player. The sourcing personnel at the customer end do not know how to compare this model with the traditional model of revenue-per-head-per-hour. But Murthy understands the importance of trailblazing tactics when you are smaller. He believes that iGate has to ‘change the rules of the game’ if it is going to take on the big boys. ■
edge provider of strategic management consulting and systems integration services, to Internet-based e-business solutions and processes. However, Murthy thought the amount was too small for a highprofile order and feared it might project the company as being overly optimistic – or downright unrealistic. Instinctively he doubled it to $8 million. Infy won the project. Then, almost catastrophically, Phaneesh, who had raced up from Marketing Manager for United States in 1992 to Senior Vice President and Head Worldwide Sales in 1996, and was widely seen as the natural heir to Narayana, found himself embroiled in a sexual harassment lawsuit, his career in shambles. On July 23, 2002, after an outof-court settlement, Murthy, Infy’s highest paid executive and poster-boy, left the company and walked into what many felt would be a dead-end. But as always, Murthy was thinking differently; his mind whirring with ideas, some audacious by conventional standards. Phaneesh Murthy, the entrepreneur was about to be born.
Primentor and Quintant: making an enterprise Pushing 40, and still in his prime, Murthy saw the outsourcing story primed for a new turn, an ideal stage for him to launch his comeback and prove to himself and to everyone else that the Infy crisis had been only a minor aberration—a trigger at the worst, for much bigger achievements. Together with wife Jaya, his college mate at IIM-A, Murthy conceived Primentor as a leading-edge IT outsourcing
advisory firm. The company went on stream in 2002, based out of the US, and soon became Murthy's statement to the world of a daringly different way of providing off-shore services. For Jaya it was about putting into practice Murthy’s conventiondefying ideas, born out of his ability to look at every situation from an unusual angle, almost like a National Geographic photographer. For Primentor, his first enterprise after leaving Infy, Murthy liked the view of the outsourcing business from the customer’s corner and not, as was the practice then, from the standpoint of the vendors. Says Murthy: “If you analyse all the deals of TPI, a global outsourcing advisory firm which commanded the outsourcing space in the 90s, less than one or two per cent of them came to Indian companies. So I thought, if I sat on the other side of the fence, that is, the customer side, I could make large deals go to Indian companies. That was the raison d’être of Primentor.” Indeed. The unique business proposition of the start-up was to connect customers in the US with offshore providers in India, in a value chain that drove substantial comparative advantages to both. At his company, Murthy helped Nordstrom, his favoured client from good old Infosys times, parcel out an outsourcing deal of $25 million a year amongst multi-national service providers, including Indian companies. The Nordstrom experience of making a deal on the battlefront, made Phaneesh restless for more on-the-ground action, the hands-on manager in him getting the better of the arms-length-
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consultant. Says Murthy, “To do well in the advisory business you have to stay consciously away from the action and restrict yourself to giving the advice and walking away. I found this out quickly.” Clearly, Murthy, wanted more. About the same time, at a chance meeting with old friend TG Ramesh, Phaneesh heard that GMR, an infrastructure builder with interests in power, roads and airports, was interested in investing in an IT venture. Soon Phaneesh, Ramesh and GMR's Kiran Gandhi were meeting at a hotel in Paris, to hammer out a deal. The result: Murthy wound up Primentor and floated Quintant with an investment of
$ 15 million and a commitment of a like amount from GMR. The quantum of the start-up funding offers another insight into the mind of a man who thinks out-of-the-box almost by default. “My principle is when you are dealing with banks you have to show enough of runway for the company. When you have $30 million in the bank, it shows that you will last for some time. That’s the reason why we raised so much during the first round.” This view is clearly contrarian to conventional business wisdom: even seasoned businessmen are averse to raising more money than they require, in return for a higher dilution of their stake. But that's Murthy for you: classically un-classic. With Quintant, Murthy found a way to channel his beliefs about how Indian companies should be positioning themselves in the global market, something that was to prove crucial later, in his re-shaping of iGate. He was never convinced about the conventional revenue-to-headcount ratio, a theory that manpower had to be necessarily sized in direct proportion to revenues. With
his game-changing iTOPs (Integrated Technology & Operations), strategy at Quintant, Murthy demonstrated that just like product companies it was possible for software service players to crank up revenues, without necessarily resorting to a proportional increase in headcount. Talking about iTops, Murthy says: “The key element in this strategy was to understand the business process and automating common tasks and sharing resources amongst multiple clients.” To this model he added a new pricing policy which defined in cost terms the relevance of each task, or group of tasks, to the business outcome specified by a client. Call it result-oriented if you like, this was never seen as being viable by entrenched industry players. ITOPs became the basis on which Quintant bagged a big order from its first and only client as it was acquired by iGate soon after. It was an order fulfillment processing project from Greenpoint, the company with which Phaneesh had signed a large deal before leaving Infosys.
In a break with convention, the billing in the Greenpoint project was based on the volume of order fulfillment processing and not the number of number of hours, and seats deployed on the project (see: Outcome-based pricing).
Murthy & iGate: remaking an enterprise Two unrelated developments soon after Quintant’s formation led Murthy and his fledgling company into the arms of a grateful iGate. First, with India’s spectacular growth story unfolding, GMR was moving its focus and resources rapidly to the infrastructure space, its area of core competence. Simultaneously it was losing some of its steam for Quintant, where it had made substantial investments which, given the nature of the industry, were unlikely to start paying back in a hurry. Second, the NASDAQ-listed iGate appeared to have slipped into a state of serious decline, in urgent need of a rescue artist. In its effort to emulate the astounding success of Indian outsourcing companies like TCS, its founders Ashok Trivedi
iGate progresses under Murthy
Source: Company reports
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ENTREPRENEURSHIP iGate and its competitors iGate FY 2007
Infosys FY 2008
Satyam FY 2008
Wipro FY 2008
Qtrly Rev Growth (YoY, %)
Gross Margin (%)
Operating Margin (%)
Net Income ($ million)
Revenue ($ million) Employees
and Sunil Wadhwani, had tried everything: acquiring companies to quickly infusing the required expertise, restructuring the giant into nine separate divisions for greater specialisation and even going public, in 1996. But by 2003, it was clear that nothing could stop iGate’s slide, except may be, a leader who could pretty much re-invent the company; in short, Phaneesh Murthy. The timing was perfect. On the one hand, iGate needed a result-oriented, fresh-thinking manager to kick it back into life, and on the other Phaneesh Murthy was making waves in the outsourcing space, as a hardtalking leader with exceptional drive and entrepreneurial ability. The match was perfect. But there was one problem: Murthy was locked into Quintant, his pet creation. There was only one solution: iGate had to buy out Quintant. Trivedi made the offer which was accepted by Quintant’s promoters. Result: GMR got the fastest return on its investments ever and Murthy took charge as CEO of, iGate Corporation, a leviathan-like organisation, with nine un-coordinated arms, slipping rapidly down the hill. When Murthy took over at iGate in 2003, he discovered that it was not so
much of an organisation as a loose confederation of nine companies, each working on its own, and pulling in different directions. It was a far cry from Infy's clean structure. Together with veteran financial whiz Ramachandran Natesan, who joined up as CFO, Murthy set about cleaning iGate’s Augean stables, with the mission of cleaning up the business inside out. For years, Murthy pushed reforms in four distinct areas: consolidating all acquired units into ‘one iGate’, modifying the customer mix, rejigging human
iGate Facts Year founded : 1986 (as Mastech) Headquarters : Fremont, California Employees : 6400 Revenue 2007 ($ million) : 307.3 Net Income 2007 ($ million) : 15.6 resources, and changing the business model. Consolidating was not easy. iGate was a riot of private and public companies, share-holding patterns, work styles, structures, product mixes…the works. On the business front, its order books were swarming with lowend, loss-making sub-contract work. On top of all that, there was the attitude of ‘how long will
this guy last?’ to contend with. But clearly, Murthy hadn’t walked into the company with his eyes shut; he was here and he was going to play hard-ball. Says Murthy: “I started by cracking down on reviews. My philosophy has always been that you cannot build great companies by working 8 to 5; you have to do a lot more. I had to let go of many people who were incompetent. We spent a lot of time just sprucing things up. Today, we have an extremely clean capital structure. We are a US headquartered and US listed company with the bulk of our operations in India.” Compared to the ‘clean-up mission’, the task of changing the customer mix was easy, dependent as it was only on redrawing the business model. The company moved out of staffing to outsourcing and project consulting. For years, iGate (originally Mastech) throve on supplying software engineers to US companies, many of them 17 times cheaper than US nationals. It was just labour arbitrage. That's how early companies like TCS entered the US market. Later, however, as US companies realised that they could reduce their IT costs by as much as 60 per cent by sending work to places like India, companies like
TCS modified their strategies. But not iGate. Before Murthy, 65 per cent of iGate’s business came from Fortune 1000 companies and the remaining from sub-contracts. After he took over, iGate said ‘no’ to subcontracts. Today, 95 per cent of its business comes from Fortune 1000 companies. “Now we are 38.5% gross margin and 15% net, on a US GAAP basis, which is very close to the best in class on the gross margin side,” says Murthy. As the company re-engineered itself its employee mix underwent dramatic changes too. “We had at that time 2,200 employees with 1,800 individual employee contracts. Today, we have 6,500 employees and only one employee contract,” says Murthy. And now comes iGate’s turn to outcome-based pricing (see box). It may be contrarian thought in the Indian outsourcing context, but Murthy is convinced that offshore companies “must stop functioning as sweat shops and start charging clients per transaction for unique value, rather than by man-hours, for huge volumes of low-end grunt work.” He realises that this will be challenging to implement, but as an IT services underdog, he needs to boldly go where the bigger guys have not yet gone. Murthy’s blend of rebellious street-smartness should serve him well in this new enterprise. He loves being challenged and flourishes when he is pushed to the wall. “I like to put myself in a discomfort zone to discover myself a little more,” says Murthy. The new billing model is just the next step in his path of self-discovery through challenge. ■
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TECHNOLOGY PRODUCT COMPARISON: IPOD NANO, FOURTH GEN VS. MICROSOFT ZUNE NE
MP3 PRIZE FIGHT H Here it is: a no-holds-barred slugfest between the latest Nano iPod and the Microsoft Zune. Can it get any hotter? N iPod Nano Microsoft Zune Highs: Attractive design; large screen; best-in-class music compilation features. Lows: Requires upgrade to Apple’s iTunes 8 software with its laundry list of hardware requirements.
Highs: Cutting edge navigation, n, excellent display and support for or games games ga Lows: Average design; restrictive ve compatibility.
Back to its vertical form, the fourth generation iPod looks like a Zune duplicate. Fact, however, is that the Zune’s Wi-Fi downloads, FM radio, and Zune Pass subscription support are very different from the Nano’s Genius playlists, iTunes movie rentals, and shake-to-shuffle novelty. Feature for feature the Zune answers everything the new Nano can throw, so finally it comes down to small niceties. Since the contest is this close, we are departing slightly from the standard format and comparing them, side by side, on three critical counts: navigation, design and compatibility. On sound, quality and price the two are dead even.
Navigation Nano: Retains the acclaimed click wheel technology backed by intuitive menus. But given how small the fourth gen Nano is, scrolling can feel cramped. However, its navigation interface is quick, responsive and user-friendly, paired with adjustable fonts and spoken menus. Zune: The touch-pad is not dropdead cool, but is deadly effective. The pad offers accuracy and space as you explore its clean menu structure to select, control and manage functions. The fact that controls reorient when watching videos, is an advantage over the Nano. Winner: Zune
Appearance & design Nano gets rid of the chub, returns to cutting edge candy-bar design with smooth, sharp edges and looks much smarter for those changes. The fourth-gen is available in a burst of colours and scores big with its large screen. For sheer oomph this will be tough to match. Zune: With its earthy rather than bold colours, sleek body and slick handling, the Zune comes close – but not close enough. Reason: MS has compromised on the screen size and generally, there is nothing in the design that would get your blood rushing. Winner: Nano
Weight Dimensions (W x D x H) Formats
1.5 in x 0.2 in x 3.6 in
2.4 in x 0.5 in x 4.3 in
AAC, MP3, WAV, AIFF, Audible, Apple Lossless
AAC, MP3, WMA, WMAPro, Audible
16 GB Flash memory
120 GB hard-disc
Video Formats Battery Interface
H.264 , MPEG-4
Lithium; 24 hours
Lithium; 30 hours
High Speed USB
Wi-Fi , Hi-Speed USB
Compatability Nano: Biggest catalogue of music, compatible to Mac, PC and the widest variety of content providers – it is an unbeatable combination. Most companies stretch themselves to be iPod compatible. Result: monthly iTunes updates. Zune: Offers tad more format support but is still restrictive. Cannot work with Mac. Plus the Zune Software is still a laggard. You can purchase single tracks or the subscription service, but nothing close to iTunes. Winner: iPod
PRODUCT OF THE THE MONTH
Nokia strikes again Price: $690 Just as mobile enthusiasts had finished giving thanks to 08’s extraordinary harvest of smartphones, Nokia uncorked another cause for celebration. Unveiled on December 2, the Nokia N 97 will joust with the iPhone, the T-Mobile G-1, the Sony Ericson Xepria and the Blackberry Storm and Bold, for dominance of the top-end smart-phones market. One look at Nokia’s latest N series multimedia hottie will tell you why it has got hearts racing,
Data services Dimensions (WxDxH) Weight Devices Operating system Memory Voice mail GPRS Wireless Interface Digital audio standards Price
E-Mail, SMS, MMS 2.2 in x 0.6 in x 0.5 in 5.3 oz Camera, music player Symbian 60 32 GB (expnadable by 16 GB) Yes Yes Bluetooth AAC, MP3, WMA $700
in a year not particularly short of mobile excitement: slide-out full QWERTY keyboard, 3.5-inch tilting touch screen, a 5-megapixel camera with Carl Zeiss optics and a whopping 32GB of expandable onboard memory. Indeed, for Internet savvy users, the Symbianbased quad-band N97, might be the phone of choice, trumping even the Blackberries and the iPhone 3G. Why? The N97’s Web browser supports streaming Flash videos, gives easy access to social-networking sites and its GPS driven ‘social location’ utility, helps users automatically update their social networks. Plus, it lets users personalise the Home screen with widgets of their favorite Web and social-networking sites. Finally, the N97 is fully compatible with the Nokia Music Store, Nokia Maps, and the N-Gage gaming platform.
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Polish your reputation online! With freedom of speech on the web, people can easily malign your company and products. Make use of these services to keep them from harming your business It took Rachna Mehra, a Mumbai-based interior designer, almost two months to figure out the mystery behind her suddenly disappearing clientele. “When my clients started pulling out project suddenly without any reason, I was totally clueless about what exactly was going wrong,” says Mehra. It was only when a friend, who was a net addict, told her about the postings on the interior decorator blogs which criticised her work and her so-called irresponsible behaviour, that she figured out what was happening. “Unfortunately, on the internet anyone can write anything, no matter if it’s true or not, and this can be a huge disaster, especially if you are into business,” says Mehra. “That’s true,” says Vivek Bhargava, CEO of communicate 2, a Mumbai based search engine performance marketing company. “Earlier, there weren’t too many sources to gather information on a company or a brand. Today, consumers first go to the internet and check reviews and news about the company before making a decision.” And the trend seems to be growing; therefore even well known companies are taking cue and honing their online reputations. According to industry experts online reputation management is now becoming an integral part for many companies and they are spending anywhere between Rs 25 lakh and Rs 1.5 crore to invest in their online image. The list of companies that are already utilising the power of online reputation management, include the likes of ICICI bank, Bharti Airtel Ltd, Virgin Mobile India, HDFC Bank Ltd, Tata Motors Ltd, General Motors India Pvt. Ltd and Microsoft Corp. But it’s not necessary to have a heavy budget to start with online reputation building; in fact, there are ways to start building your internet image for free. Signing up for Google (alerts.google.com) and MSN (alerts.live.com) email alerts is probably a best way to begin. Since these are the most popular search engines, they make the best destination to stay aware of your ‘online footprint’ and possibly protect your reputation and/or identity. Another good way to build your reputation online would be to sign up with sites, such as Naymz.com and RepVine.com. These sites are much like a personal public relations services for your company. Here you can create a profile and link to various other resources that exist about you – say a blog, corporate website, or your social networking profile. Finally, there are other companies that allow you to generate an online profile that will appear whatever website you use. TrustPlus. com, for example, allows users to integrate information from sites such as eBay and Facebook, to create a public profile.
To create alerts on search engines go to Google (alerts.google.com), MSN (alerts. live.com) or Yahoo (alerts.yahoo.com). You could start the process by keying in terms that you would like to monitor. This is where you should put the name of your company or brands. Next, you pick the type of websites you want to keep tabs on, so you could pick news sites, blogs or the complete web, in general. You also get an option of setting the frequency of the alerts and finally, you would need to supply the email ID where you would like these alerts to be posted. Click on ‘OK’ and you should get a constant supply of what the web is saying about your company.
Next step would be to sign up with sites like Naymz.com and RepVine.com, which have been launched with the sole purpose of allowing people to build an online reputation. So after you sign up with these services, you can invite people who know your company to write reviews about you and your products. Here, you have an option of simply adding the emails of friends and colleagues, or directing them to your page using social networking sites, such as LinkedIn. This can be a great way to portray the right image to the world about you and your company.
Websites like TrustPlus go a step further, by letting you create a portable profile that goes with you wherever you go. So once you sign up with TrustPlus, your Facebook friends will be able to see what rating you have on say, eBay or Amazon. They also have a nifty piece of application called ‘Reputation viewer’ that offer customers a quick overview of the reputation of the seller. So, for instance, when you log on to Craigslist, you can view how trustworthy your seller is according to his/her profile reviews on other sites.
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DOING BUSINESS IN
Kuala Lumpur I
went to Malaysia four years ago after I got headhunted to run a digital advertising agency in Kuala Lumpur. At the time I was heading Ogilvy Interactive in India, a good job, but I wanted a change of scenery. Given that internet penetration in Malaysia is nearly 50%, compared to just 15% in India, and seeing that online business was my specialty, I decided that the job in Malaysia would afford me a rare opportunity to finetune my experience. So I decided to move. Malaysia’s economy is founded on natural wealth: petroleum, palm oil, rubber. The country is a big oil exporter, and is the world’s second largest exporter of palm oil. As a manufacturing hub, Malaysia has, to an extent, built a reputation in chips and electronics. It is currently trying to develop into a services location. It ambitions to become a BPO hub in the region (after India and China) and, to achieve this, banks on its multi-ethnic composition, as well as on its reputation as a global centre for Islamic finance. Before I went to Malaysia, I checked with a friend who lived there for a few years, and
therefore knew pretty much affirmative action via the what to expect. And after having National Economic Policy. Small stayed in Kuala Lumpur for four wonder that recently there has years, I can say that it is a very been some unrest within the comfortable place to live and Malaysian-Indian population, work in. Speaking to other expats, in protest against perceived too, the consensus emerges that economic and other biases. Malaysia is probably one of the But overall, Malaysians have a easiest countries in the world to professional respect for Indian settle into. nationals, and can usually tell us One important reason is that apart from the domestic variety, about 10% of the population from our accent. is of Indian origin. Speak to For immigrants, the someone and once they find out procedures for obtaining work you are Indian, they will start permits can sometimes be telling you about unclear, and the their father, or rules do change. grandfather, Having said that, who came from the process is Population: 25.3 million India. Yet, not complicated, GDP – official exchange rate: very few have and somewhat $186.5 billion visited there. similar to GDP– purchasing power parity: To an honestly applying for $361.2 billion Indian, like a visa, which GDP per capita – purchasing power parity: $14,500 (CIA The myself, it seems with an agent’s World Factbook 2007) to demonstrate help, can be Inflation rate – (consumer prices): easy. For those the pull of the place, or to put it 2% (2007 est.) considering a more grandly, its Unemployment rate: 3.2% (2007 est.) shift, it would Source: CIA World Factbook be helpful to centripetality. The local keep in mind Chinese constitute 30% of that the skillsets most valued in population, and answer for the K(uala)L(umpur) are consulting, largest share of the national GDP. banking and media. The Malays form 60%, and do Language wasn’t a big all right, unlike the Malaysian problem either – English can Indians, as beneficiaries of get you through most situations,
though as you leave the big three cities (KL, Penang, Johor Bahru) it gets less easy. Knowing Tamil or, Chinese would help to some extent. Apart from that, everyone speaks and understands Bahasa Malaysia, and it is an easy language to learn. Accommodation is largely comfortable. Condominiums are well-built, and generally have good facilities, like gyms, swimming pools and squash courts. Even in central KL one can find condos at a fraction of their Mumbai cost. A 1,500 sq foot apartment in the heart of town, a stone’s throw from Petronas Towers, costs less than
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BUSINESS ETIQUETTE ■ Refer to people by their title
(eg Dato) ■ Shake hands firmly ■ No bowing needed: the typical
RM 4,000 per month (approx Rs 55,000). Many expats tend to live on KL’s fringes, in areas like Mont Kiara, Bangsar, Petaling Jaya, where houses can be rented at anywhere from RM 3,00010,000+. But considering that rent accounts for the largest expense, below the line, KL figures as an inexpensive place to live in. For an international city, public transport could be better. While there are multiple urban rail systems in KL – monorail, LRT (subways) and intercity trains – they have limited junctions between one network and another. In addition, the
system does not cover the entire city. Taxi drivers seldom go by the meter, and can cheat foreigners. So it’s best to end up running a car. The relatively low price of fuel– currently approximately Rs 25 per litre– certainly recommends this. Work culture is very akin to that of India. Personal and professional relations intersect at the workplace, but friends there need not play the same role off-duty. Punctuality is valued, so be on time. To be sure, you’ll be kept waiting at some government offices, which will give time to reflect on what’s new about this.
Malay way is to shake hands and touch your heart with the same hand after shaking ■ You may shake hands with women . ■ Communication is informal: even SMS can serve to get responses. ■ Large meetings are held for public consumption and to create effect, small meetings for deal-cutting.
Work hours start at 8.30 or 9.00 and continue until 5.005.30, with an hour’s lunch break. During Ramadan, though, the lunch hour will extend from 12.30 to 2.30 since many will add on time for afternoon prayers. Malaysia has almost as many
■ Business style is slightly formal in
the beginning, at the getting-toknow-you phase. After that, quite informal.
holidays as India, and if a holiday falls on a weekend, you can get a day off during the week. Dress code is formal, though cuff links can substitute for a tie. For government business and banks, tie and jacket are de rigueur. Most women dress
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DOING BUSINESS IN
Kuala Lumpur in smart business suits. And while dress is formal, business language is generally informal, at least after the first couple of encounters. Meetings are expeditious and informal, but deals can take excruciatingly long to close–meeting upon meeting, upon meeting. KL is a foodie paradise for every budget. The choice of food is something of a rite and each meal is given its due time and importance. Breakfast is considered the most important meal of the day, though not its
most substantial one, and is generally had at home. It consists of either coconut rice, or noodles, or the overwhelming favourite, roti canai (similar to a paratha). Lunch will seldom be on the go, unlike London or NY. People will take it at a local deli where they sit down to eat. Lunch can take anywhere from 30 minutes to an hour. Perhaps due to KL’s interesting ethnic mix, the choices in cuisine are a multitude – Chinese, south Indian, Malay, along with cooking from around the world.
Dinner is a prolonged affair but would not include drinks, seeing as how Malaysia is a largely Muslim country. Otherwise, it very much resembles India. But those who do indulge still exhibit the kind of caution that would incline them to decline the offer of alcohol from you, at the very first meeting. When invited for dinner, the best gift to take would be some choice food item or chocolates; in the case of Chinese, wine. It is easy for Indians to eat Indian-style at home in KL, since most spices, and groceries, in general, are available there. Just go to Brickfields and you can find ghee, Amul Cheese and everything else, to make a home away from your own rasoi. Tamilians will find it easiest of all because 80% of Malaysian Indians speak Tamil. Punjabis and Malayalees will find some of their ilk too. After-hours socialising conforms with, shall we say, global practice. You might go out for a drink or dinner with colleagues at a variety of pubs and bars, especially at Asian Heritage Row, a street votive to them and where even the roadway is something of a meeting place. I feel a little contrite in being able to also recommend La Bodega, Vintry, Zeta Bar, Sky Bar, Luna Bar, Finnegans, TSB (Telawi Street Bistro), Backyard and Hard Rock Café (both with live rock music). For those who drink, Tiger Beer from neighbouring Singapore is a common choice. The popular clubs are Zouk (for the teeny boppers) and Waikiki (for the set closer to the pyre). Now hear this: clients won’t work on weekends, and may not expect to be bothered by
BOOKS Kuala Lumpur Insight Pocket Guide Culture Shock! At Your Door: Kuala Lumpur, Malaysia by Lynn Witham Lonely Planet Kuala Lumpur Melaka & Penang Globe Trotter: Best of Kuala Lumpur Kuala Lumpur Complete Residents’ Guide
PLACES OF INTEREST KLCC (Petronas Towers + shopping mall) KLPAC (a performing arts space) Batu Caves Petaling Street (shopping for cheap gifts and fake designer brands, but something to experience at least once) Sutra Dance Theatre (Exemplary Odissi performed by multi-ethnic troupe, run by Malaysian Ramli Ibrahim)
IMPORTANT WEBSITES http://www.kualalumpur.gov.my/ http://en.wikipedia.org/wiki/ Kuala_Lumpur http://thestar.com.my/ http://www.lonelyplanet.com/ malaysia/kuala-lumpur http://www.timeoutkl.com/
business—that is, unless you can play golf with them, and slyly contrive to lose. Yes, weekends are sacred and, piously devoted to the national pastimes, golf and futsal, a kind of indoor soccer. Soccer to Malaysians is like cricket to Indians. Themselves having a weak national soccer team, the Malaysians have adopted the English Premier League teams—a sort of hangover from the past-- and the British
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DOING BUSINESS IN
Kuala Lumpur national team, as their own God Save Rooney. But everyone has his favourite, and tends to be vociferous about it. So it helps to brush up on your soccer and learn to play golf, as well. They make great conversational lubricants and can help close business deals. Unlike in India, golf is not elitist and is very accessible. There are nearly 230 courses across the country and you can walk into most of them without a membership. It isn’t uncommon for people to drive a couple of hours from the city to one of the many golfing resorts to
spend the weekend. Indeed, many a deal is closed over a weekend game of golf. The weekend is also used to steam off to one of the nearby islands, like Pulau Redang, Perhentian, and Tioman on the east coast. Penang, an enchanting isle, with history, beaches and culture, is another place. For variety, there’s Taman Negara, an old rainforest. It is easy enough to drive out of the city: from the centre, 15 minutes can get you out of it in any direction. Kuala Lumpur, the city itself, offers much to keep you
occupied. Petronas Towers with its shopping mall, Batu Caves with its Hindu shrine, and Petaling Street with its shops, are the most recommended. I would say the best thing about living in KL is the ease of getting around, getting through the jams which don’t compare with those back in Mumbai, or Delhi, the multiplicity of foods and the space for physical exercise: gyms, futsal, golf etc. And India is not all that far away. Sandeep Joseph is the Managing Director of XM Malaysia, an advertising agency with internet specialisation
Did you know
world. The Petronas Towers Skybridge links the two on the 41st floor. ■ A visit to the National History Museum in the Colonial District is a must, to understand the history and soul of KL. ■ The Batu Caves, 13 km distant from Kuala Lumpur, are great for wildly differing reasons. The Dark Cave is a hotspot for spelunking, whilst Temple Cave contains a Hindu shrine that is visited by almost a million pilgrims in January and February each year.
■ Swiss Inn
■ Until 2004, the Petronas Towers were the tallest buildings in the
■ Alpha Genesis ■ Capitol Hotel ■ Ancasa Hotel
High-end ■ Ritz-Carlton ■ JW Marriott
■ Hotel Imperial ■ Mandarin Oriental
■ You can negotiate/bargain for many things: Traffic summons, credit
card renewal fees (can be waived), prices in shops ■ Have a cup of “stretched” tea with condensed milk (the tarik) with a
business partner at a Mamak stall to talk turkey and cut to the chase.
COST OF LIVING Exchange rate: $1 = 3.55 Malaysian Ringgits (MYR) Movie ticket: 8-10 MYR Bus/subway/Go fare: 1-2.5 MYR for a long circuit Cup regular coffee: 1-2 MYR Local beer: 10-15 MYR Moderate three-course dinner for one (without tip): 30-40 MYR Room for two in moderate (3-star) hotel: 100 MYR
USEFUL NUMBERS Police: 999 Ambulance: 999 Fire and Rescue: 994 Tourist Police: +603-2149-6590 (Hotline)/ +603-2149-6593 (Enquiries) HOSPITALS General Hospital Kuala Lumpur: 6(03)-7722-2692 HeartScan Malaysia: 6(03)-2287-0988 Island Hospital: 6(04)-2288-222 Johor Specialist Hospital: 6(07)-223-7811 Lam Wah Ee Hospital: 6(04)-6571-888 LohGuanLye Specialists Hospital: 6(04)-2288 AIRPORT INFORMATION Kuala Lumpur International Airport: 6(03)-8777-8888, 6(03)-8776-2000. Kuala Lumpur Sentral Sdn Bhd (Railway booking): 6(03)-27302000 or Fax at 603-2730 2022. TAXI SERVICES Airport Limo & Taxi Service: 6(03)-9223-8080, 6(03)-92238949 (Booking Centre) 6(03)-8787-3675 (KLIA Counter) City Line: 6(03)-9222-2828 Comfort Taxi: 6(03)-2692-2525 Eco Transit: 6(03)-5512-2266 Hotline Radio Taxi: 6(03)-255-3399
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