Changing DNA - Sept11

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    Nikhil Vora / Swati Nangalia / Varun Kejriwal(M) +91 9821132471/9820774251 / 9004291117

    (Dir) +91-22-6622 2567 / 2576 / 2685

    [email protected] / [email protected] / [email protected]

    ChangingChanging DNADNA

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    2

    Over the lastfive decades, only 60

    companies have consistent ly appeared in the

    Fortune 500 list !!!

    Ever wondered why?Ever wondered why?

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    What led to the so many flip overs...What led to the so many flip overs...

    Yahoo, t he invent or of search engines and the largest player of late1990s W ith market cap on par w ith Google in 2004

    is today 1/10th the value of

    Google!

    Nokia, w orlds largest elect ronic equipment provider and w ith profit s

    14x that ofApple in 2004today generates 1/6th the profit ofApple & is at 1/16th its value!

    HUL, t he largest consumer compan y in India, has seen it s market valueerode in the last decade

    while peers have given 20xreturns!

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    and the greatest creations beingand the greatest creations being lostlost today?today?

    Xerox,

    among the largestbrands created w hich actually got

    t ranslated into a verb (phot ocopy = Xerox!)

    has lost 50% of its value in the

    last decade!

    Polaroid, t he innovat ion that makes the name synonymous t o instantphot ography, and a US$3bn company in 1990s

    filed for bankruptcy!

    Intel, t he heart of machines, w ith 80% of w orld comput ersrunning on it

    has seen 50% erosion in itsvalue since 2003!

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    When markets shift, you will fail if you don't

    realize that

    longevityrequires you to change the

    Success Formulaor your DNA!!!

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    The organizationThe organizations DNA needs to bes DNA needs to be ALIVEALIVE !!

    In its lifecycle, each organization needs to go through achange in its DNAin order to WIN or even survive!

    Changing with timeand trends

    Accept failures andrecoup success

    Ability to fuel newgrowth

    Ability to foresee thelong-term prospects

    Translating visioninto success

    Adapt Learn Innovate Vision Execute

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    Innovate

    ?

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    TheThe strugglestruggle of Unileverof Unilever

    Statement from Unilever CEOStatement from Unilever CEOPaulPaul PolmanPolman

    "W e have lost t he connection w ith the w orld top. If w e w ant t o

    grow consist ently t he next five years and again w ant t o become

    one of the bigger companies, w e have to change the culture."

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    magnifiedmagnified in its Indian counterpart!in its Indian counterpart!

    Focus on share of wallets rather

    than larger share of a wallet

    1990 - 2000 2000 - 2010Nosuccessfullaunches

    0

    550

    1,100

    1,650

    2,200

    HUL Pepsi Colgate

    (US)

    Coca-ColaL'Oreal P & G Nestle Sa-

    Reg

    Danone Unilever BAT Reckitt

    Benckiser

    Colgate (I) ITC Nestle (I) Dabur Marico GCPL

    (%)

    HUL the worst

    performing consumerstock globally in the last

    decade

    Focusonmassandnotclass!

    Distribution/Reach LackofINNOVATION

    Overplay strength

    Biggeststrength

    Failures

    Increaserural

    reach by3x in

    2yrs!

    HUL

    Innovationin vain!

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    Execute

    ?

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    PolaroidPolaroidno reason tono reason to smilesmile!!

    Vision

    BusinessmodelSomething akin to

    selling razor

    blades.

    Buy t he shavingk it (cam era) &

    replace raz ors (orfilm) as you go.

    Innovation

    In 1989, 40%+ of R&Dbudget spent on exploring

    digital imaging technologies

    Lacked execution

    Polaroid was well preparedtechnologically for the shift to digital

    imaging It even had a sensor of 1.9 megapixel

    in 1989

    But it was never prepared in terms ofmarketing and business models

    Do no t undertak e t he program unless the goal is manifest lyimportant and it s achievement nearly impossible. Do not

    do anyth ing that anyone else can do readily .

    - Edwin Land, annual report 1980

    2,157 2,168

    839

    265

    FY1995 FY1997 FY1999 FY2000

    Lost90%ofitsvalue!

    Mkt cap (US$ m)

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    XeroxXeroxfailed infailed in copyingcopying its brand!its brand!

    Vision I knew I had a very big t iger by the ta il." Chester Carlson, Founder of Xerox Created theXerox brand

    What would a company with a strong brand like Xerox and revenues of US$1bn (in 1961) do?

    Move into brand extensions and innovate?

    Innovation Moved into to computer technology and data processing

    Fax Machine

    Technology based office products

    Xerox is today remembered only asa photocopier!

    Brand extensions failed and Xeroxfailed to create scale

    Mkt cap (US$ bn)

    16.138.8 60% eros ion

    Xerox did exactly that

    1998 2010

    Lacked execution

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    Adapt

    ?

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    It is not the strongest of the species that survives, nor the most

    intelligent that survives. It is the one that is the most adaptable to

    change!- Charles Darwin

    ThTh Ki CKi C t hil h !hil h !

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    TheThe King CanuteKing Canute philosophy!philosophy!

    Adaptability has been THE MOST important DNA change requiredwithin an organization

    Inability to identify the Changing trends !

    Obsession withcore

    My core business ismy identity and will

    always remain myfocus!

    Key issues with successful companies

    Arrogance

    I am the largestand no competitor

    can get close!

    Complacency

    My products will

    always sell!

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    Getoutof yourcomfort z one if you do not change you

    can become extinct!

    - Dr. Spencer Johnson

    The biggest t hreatt o McDonald's lies w ithin - and that is us as a

    company becom ing complacent. There are a lot of companies t hat

    get fat , dumb and happy and take their eye off the ball and

    forgetaboutserv ing cust omers.!- Charlie Bell

    N kiN ki th bi t i t f it tith bigg t i t f it tim

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    NokiaNokiathe biggest innovators of its timethe biggest innovators of its time

    Vision &Innovation

    Nokia10111992 1994 1994 2002 2005

    FirstsatellitecallFirst WAPhandset 3Gphone N seriesMultimedia

    Execution Worlds largest mobile and camera company!

    NokiaNokia

    Nokia sells 452m mobile handsets a year and Apple just 40m

    Then why theThen why thedisconnect?disconnect?

    Revenues (US$ bn) Mkt Cap (US$ bn)

    Nokia

    Apple

    76

    538

    268

    FY02 FY10

    65

    28

    6

    56

    FY02 FY10

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    "You can't just ask customers w hat t hey w ant and t hen t ry

    to give t hat to t hem. By t he t ime you get it built, they'll

    w ant somet hing new !- Steve Jobs, founder of Apple

    is losing theis losing the connectionconnection??

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    is losing theis losing the connectionconnection ??

    Changing consumer: Design consciousness, Fasteroperations

    Launch of iPhone

    1990 2001 Jan 2007 2010 2011

    Adapting!

    Failed to adapt to thechanging consumer

    needs!

    Nokias first touchscreen phoneNokia1011 N seriesMultimedia

    Struggling to remain

    a relevant computervendor

    Largest music vendor,tablet maker,

    smartphone provider &the most valuabletech co in the world

    1992 to 2005 July 2008

    Nokia 59%

    Apple 400%

    in last 5yrs

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    is now beingis now being googledgoogled out!out!

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    is now beingis now being googledgoogled out!out!

    Responsive to changeLaunch of products likeGmail, Google maps,

    Android, Orkut, Youtube, &Google +

    Customer comes first and simplicity is key Yahoo succumbs to Google!

    and the resul ts are apparent!and the resul ts are apparent!

    52 53

    22

    191

    FY04 FY11

    Yahoo

    Google

    Market cap (US$ bn)

    1x 10x

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    Learn

    ?

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    But does it suffice for theBut does it suffice for the organizationalorganizational DNADNA to beto be

    A.L.I.V.E.A.L.I.V.E.??????

    May be not!!!May be not!!!

    MavericksMavericks create businessescreate businesses

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    MavericksMavericks create businessescreate businesses

    *peak market cap

    Education

    Retail

    Media

    Exchanges

    Innovation in businesses& creating

    VALUE!

    Renewable

    Energy

    Biggest innovator in theMedia space

    broadcasting/DTH,etc

    ShantanuPrakash

    Kishore Biyani

    Subhash

    Chandra

    Revolutionized the private

    education sector

    Spearheaded organizedRetail in the country

    Jignesh ShahCreated commodity

    markets and new ageexchange businesses

    US$2bn

    US$2.8bn

    US$4.5bn

    US$3bn

    Largest mediaconglomerate

    Raghav Bahl US$2.7bn

    Tulsi TantiPioneered wind energy in

    the country to become

    World No.3

    US$12.3bn

    and at timesand at times killkill it too!it too!

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    and at timesand at times killkill it too!it too!

    Learnt the rules of the game ofprivate educationand how to play!

    Growth hungry promotersbut also capital starvedCash flows never a focus.

    Undermined the need forcorporate governance in theregulated private edu space

    Undermined the need tobuild a strong back -end

    Took on the regulator SEBI!...for MCX-SX

    Underinvested in corebusiness; unwil ling to look at

    the changing face of

    competition

    Success led to contextual arrogance? Result

    (Mkt Cap Rs

    88,873

    18,842

    30-Sep-09

    Today 79%

    125,131

    64,052

    31-Dec-07

    Today49%

    204,048

    112,976

    31-Dec-99

    Today

    45%

    119,377

    39,608

    30-Sep-09

    Today 67%

    132,862

    35,665

    30-Jun-07

    Today 73%

    Too much toosoonReckless expansion,

    in retrospect.

    Largest retail industry b rand & hopeof FDI to result into eventual sale to aglobal strategic investor

    Biggest innovator in media across

    broadcasting, distribution, etc

    Created marquee properties acrossgenres and assumed they will always

    have takers (easy access to capital)

    Established the largest Exchangenetwork, with MCX being the biggestsuccess (valued at US$1.1bn in 3 yrsof ops)

    Became World No.3 in wind energy579,852

    85,225

    31-Dec-07

    Today 85%

    But, potential forBut, potential for changechange in DNA remains!in DNA remains!

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    But, potential forBut, potential for changechange in DNA remains!in DNA remains!

    Classical Case of everythingwrong Diversification, Over-leverage and non-performance(1992-2002)

    Classical Case of everythingwrong Diversification, Over-leverage and non-performance(1992-2002)

    The loss

    Jain Irrigation

    Bajaj Auto

    Nestle

    Result

    Catered to the consumer ofyesterdaya mass player in adeclining market (scooters);Struggling (mgt) internals and anaggressive external environment

    Catered to the consumer ofyesterdaya mass player in adeclining market (scooters);Struggling (mgt) internals and anaggressive external environment

    The underlying core of theorganisation was to beat IndianGDP growth! (until 2003)The underlying core of theorganisation was to beat IndianGDP growth! (until 2003)

    CCHH

    AANN

    GGEE

    Jain Irrigation

    0

    25,000

    50,000

    75,000

    100,000

    Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-1

    (Rs m)

    The biggest success story ofthe past 10 yearsStayed

    committed to the core.

    Bajaj Auto

    0

    125000

    250000

    375000

    500000

    Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-1

    (Rs m)

    Became the game changerin the space.Innovatedand let go of an hitherto

    successful DNA!

    Nestle

    0

    90,000

    180,000

    270,000

    360,000

    450,000

    Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-1

    (Rs m)

    Belief in the fact that it was under

    delivering on own capabilities.Re-aligned internal targets .

    Growth now at 3x GDP

    ` Mavericks` Mavericks can recreate SUCCESScan recreate SUCCESS

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    MavericksMavericks can recreate SUCCESScan recreate SUCCESS

    Need to emulateto Recreate

    Succ

    ess

    Arro

    ganc

    e

    Cha

    nging

    DN

    A Painful

    trans

    ition

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    Consumerization

    Industry is moving towardspremium, but key players are not

    Consumerization

    Industry is moving towardspremium, but key players are not

    DistributionOnline wave - a threat to brick-n-

    mortar distributors!

    Spaces that demand a DNA change

    Media access to content

    Newer avenues of viewership totake over traditional TV viewing

    Media access to content

    Newer avenues of viewership totake over traditional TV viewing

    Print media

    India to map the structural changeunderway globally

    Print media

    India to map the structural changeunderway globally

    Intermediary businessesNo brownie points for

    intermediariesyields to squeeze!

    EnergyRenewable energy is the inevitable

    savior!

    The Indian consumer is changingThe Indian consumer is changing1

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    g gg g

    Premium growth

    25% of the carssold are sedans

    (above Rs0.6m)

    Premium izat ion The t rend is ev ident!

    Regular IMFL Premium IMFL

    3xgro

    wth

    All global majors at record sale and setting shopin the country

    Pernod Ricard, World No.2 liquor player, is mostprofitable Indian liquor companyIndia to rank among our top 3 markets (in value terms) along w ith the US and China as

    rising incomes spur demand fo r our brands CEO, Pernod Ricard

    50% of industry

    profits

    10% mk t

    share

    BUT

    Automobiles

    Liquor

    Premium players

    but are companiesbut are companies adaptingadapting to that?to that?

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    pp p gp g

    Marut i / USL - a structurally de-rat ing business model over the longer run?

    Positioning

    Distribution

    channelBest sales &

    services network

    48%

    Largest reach in agovt regulated

    distribution

    55%

    78% sales athatchbacks

    fuel-efficient&value-for-money

    buy

    70% of volumesin the economy

    segment

    Affordabledrinking!

    Dominantmarket share

    Focus on

    mass

    Perception

    Strength

    Lack the DNA to adapt

    Unable to changemass perception

    Competition can play

    spoil sport

    Attempts such asBalenoand Kizashi failed

    Audi/Honda launchingin the mid segment

    Premium productslaunched at low price

    Pernod could potentially

    eat into USLs volumes

    ShoppingShoppingthe rules of the game are changing!the rules of the game are changing!2

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    pp gpp g g g gg g g

    Amazon went public in 1997 at a value of US$450m when there were just 50m internet usersworldwide!!!...and is now valued US$90bn!

    On an av erage, 100m Indians spend about 16 hours a w eek online - Google

    A signa l to brick-and-mortar reta il stores. a change inDNA required!

    (US$bn)

    4 710

    40

    2009 2010 2011E 2015E

    E-commerce industry stats

    Survey: 40% prefer to shop onlineconsidering convenience to shop anytime& one can collect detailed product info

    Over US$75m of funding toe-commerce sites in last sixmonths

    PrintPrintis it stillis it still finefine??3

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    Are Indian print companies prepared t o change theirDNA for this w ave of t ransit ion?

    Globally, print circulation on adecline

    However, withmigration ofconsumers to e-papers

    USA UK India

    2009200720052003

    0

    40

    80

    120

    Declining revenuesfor global players

    Proportion of individuals reading/downloadingonline newspapers/news magazines over the

    Internet for private purposes

    but, near term growthfor Indian print intact!

    0

    12,500

    25,000

    37,500

    50,000

    FY90

    FY92

    FY94

    FY96

    FY98

    FY100

    FY02

    FY04

    FY06

    FY08

    F Y 1 0

    (USD m)

    Value erosionEventual!

    (Rs bn)

    0

    90

    180

    270

    360

    2007 2010 2015E

    160193

    310

    Indi an print industry size

    Current mkt cap of top 5print companies globally is

    same as that in 1990!!!

    MediaMediain a new age!in a new age!4

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    W ith the online w ave fast catchingcan t radit ional TV w atching

    habits undergo a change?

    Growingpopularity of

    internet basedTV viewing

    Increasing thelikelihood of

    watching contenton the internet

    How much TV do you currently watch on the internet? Have you considered cancelling your cable service?

    +

    Sourc e: Retrevo

    Source: Ericson

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    50% of tablet users are w at ching TV and film on t he dev ices

    In-Stat Research

    TV advertising revenue is

    dropping, while online

    growing due to popularity

    of online TV

    Yankee Group (US), Research

    Are broadcasters adapt ing theirDNA to this changing trend???

    (Rs m)

    600

    720

    840

    960

    1,080

    1,200

    Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

    International subscription revenues for ZEELhave capped out!...

    reflective of structural change underway?

    IntermediariesIntermediariesthethe sweet spotsweet spot is lost!is lost!5

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    Buyer/End usereller (Farmer)

    Electronic spot exchangeBid

    price Askprice

    Changeover

    Risk of becoming irrelevant!

    Insurance product sales growth

    Result of drop in insurancecommissions (slashed from

    18-20% to 8-10%)

    (21)

    (12)(18)

    (5)(9)

    (16)

    (3)

    (16)

    (39)

    Oc

    t-10

    No

    v-10

    Dec-10

    Jan-11

    Fe

    b-11

    Mar-11

    Ap

    r-11

    M

    ay-11

    Ju

    n-110% of travel tickets

    sold in the country areonline!

    Only cost additionlimited value addition

    Farmer Village trader Wholesaler Retailer Agent End user

    A similar change inevitable across other businesses?A similar change inevitable across other businesses?

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    Do t hese businesses have it in theirDNA to survive???

    Financialintermediaries

    Brokerages

    NBFCs

    Extremely fragmented industry

    Advent of technology such as DMA are erodingyields

    Efficiencies to reduce cost of trade

    MFIs

    Gold lending

    institutes

    As these businesses become large, the business

    proposition will compel banks to get into thesegment of finance, as value addition stands to belimited

    Renewable energyRenewable energytoto outshineoutshine need for oil?need for oil?6

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    A Crude decline o f oil companies event ual if theDNA is not renew able

    Renewable energy Powering tomorrows growth?

    Oil -A significantenergy cont ribut or

    Top 15 oil companies are # 1 or # 2 in marketcap in 9 out of 11 countries

    Top 15 oil companies are # 1 or # 2 in marketcap in 9 out of 11 countries

    Depleting reserves and environmental concerns

    puts $2 trillion at risk?Depleting reserves and environmental concerns

    puts $2 trillion at risk?

    BUT

    Suncor Energy (Mkt cap)

    0

    20,000

    40,000

    60,000

    80,000

    3/31/1993 3/31/1999 3/31/2005 3/31/2011

    (US$ m)

    7x in thelast decade

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    You can' t have a bet t er t om orrow if you are thinking about

    yesterday all the time!

    - Charles F. Kettering

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    Thank You

    Nikhil Vora/ Swati Nangalia / Varun Kejriwal

    (Dir) +91-22-6622 2567 / 2576 / 2685

    [email protected] / [email protected] / [email protected]

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