SIBM Forthright, a Research Factory Intiative

Waiting just that little longer…

2006-12-15T23:32:00.000-08:00

By Susheel Aswani, Marketing I, SIBM

In this day and age, the customer is demanding more variety and the manufacturer is realizing that in order to gain a crucial edge he needs to deliver goods at lower costs. The need of the hour is a supply chain which can respond quickly to changing customer needs. This article aims to study the concept of postponement in the supply chain, and explores its applicability in the business context…

The term postponement refers to the process of delaying a decision about a product. Today with the need to provide the customer with as many varieties as possible suited to his/her personal need it is imperative that adequate inventory be maintained. If there could be a mechanism whereby a mismatch between the demand/orders and the inventory on hand could be avoided it could result in great benefits to the manufacturer. Postponement aims to do precisely this. By delaying crucial decisions which could commit to product characteristics postponement enables best possible utilization of resources and creates vital economies.

This concept encompasses building of platforms or modules which are common across product categories, and modifying these to meet the demands effectively. By reducing the period for which predictions are made, demand can be forecasted more accurately. Another strategy is keeping your inventory as “Raw as possible” ie in an unprocessed form. By not processing the material we can reduce the quantity of finished goods inventory and the fact that we haven’t committed to processing the raw material for a specified purpose enables us to customize its usage as per the needs of the customers. The concept of postponement can occur at various stages of the manufacturing cycle. The point of postponement can vary from the design phase and can occur even as late as the packaging, assembly stages.

One of the most common applications of postponement in operations is postponement related to manufacturing and assembly. This takes shape in the form of creation of a platform or a vanilla product which is common across a family of products, on which customization can be implemented to satisfy customer needs. The platform strategy has now become closely associated with the automobile and apparel industry.

Lessons from DELL

Many manufacturers around the world concentrate on their best selling models. As a result the stock piles of these keep increasing. This practice of “channel stuffing” is dangerous. As and when the customer demands for variations or when there are changes in technology resulting in product obsolescence the company finds it difficult to cater to the needs of the customer. Dell through its ‘Built to Order’ model does not have finished goods inventory devaluing on a daily basis. They align their suppliers to deliver components as required and hence minimize raw material inventory. Dell maintains an inventory of 6 days as compared to a competitor who needs to maintain 25 days of inventory on hand coupled with another 30 days of inventory locked up in their distribution channels. This difference of a good 49 days results in cost saving of 6 % of the material cost. To add to this the fact that Dell allows its customer to customize their models and yet offer prices below the competition explains the reason for the success of the company. Let us understand this better with the help of an example. Dell offers over 100 million different combinations of its popular desktop model Dimension 4600C.

Dell is able to forecast the demand for popular combinations based on perfection of its built to order model. By offering discount on popular component combinations for which the components are easily available it can actually shape demand to its advantage. Their systems are configured in such a manner so as to allow for a greater variety of low-cost parts and a limited variety of expensive parts. In this manner they are able to manage components and Inventory velocity to ensure unparalleled success.

The concept of platform manufacturing started off with the automobile sector. Volkswagen builds over 30 automobiles from its 4 platforms. Through its strategy it is able to churn out a flashy Audi TT and a Volkswagen Beetle built on the same chassis. The Indigo, Indica V2 and the Indigo Marina are built by Tata Motors on the same indigenously developed platform. The platform strategy was used ingeniously by Honda to design its cars for their varied markets. The company was initially facing problems with the design of its Accord model. Initially the US customers complained that the car was too small and the Japanese customers complained that the car lacked stylistic features. The company launched the new Accord which was longer and designed for the preferences of the US market. The sales of the company grew rapidly in the US and Honda enjoyed a dominant position but the design failed in the Japanese Market. The company had to produce differently designed cars for its 2 major markets. Honda engineer Yozi Kami realized that the crux of the situation lay in the design of the chassis. He was instrumental in designing the first flexible platform where in the length width and height of the car can be tailored to suit market preferences. The fuel tank was moved to the rear end of the car and the wheels were connected to brackets that could be moved closer or farther apart from each other.

In the apparel market postponement is quite popular especially with regard to team jerseys. The sales of a particular team or a player depend on the performance of the player/team during the course of the season. Thus companies like Reebok keep a ready stock of the basic black/white jerseys. These are then screen printed with the name of the player’s based on the demand for jersey’s which is linked with the player’s appeal.

As mentioned earlier the Raw as possible strategy of keeping the raw material unprocessed for as long as possible is another embodiment of postponement. This is adopted by companies like Subway and Burger King in the fast food business. Unlike McDonald’s which has readily packaged burgers which are meant for immediate consumption a company like Subway offers its customers with the opportunity to customize their sandwiches by choosing the combination of items such as cheese, meat, pickles etc. The platform for each of these products would be the bun and lettuce and these would be readied on the basis of the forecast for each sandwich. This strategy helps the company to reduces wastage of inventory, as it is possible to use the platform across a category of products and meet the changes in demand.

Logistical Postponement takes into account postponement at other levels of the supply chain namely labeling packaging and distribution. If we take the case of a bottler, instead of buying the bottles with the labeling done he could consider the possibility of doing it in-house. This would permit the usage of the same sized bottles for a number of different products. This would enable meeting the difference in demand for cola and lemon flavored drinks based on seasonal demand. Postponement in packaging has been used by companies like Gillette which has made a decision to outsource its packaging so as to concentrate on manufacturing. Bulk quantities of razors are sent to the packaging company and as and when the orders are received different packaging configurations are assembled and sent across to the manufacturer. In the long run the benefits resulting from this decision are a 15 % reduction in the inventory and packaging costs and an improvement in the ability to meet orders on time.

Postponement in distribution has been effective in reduction of lead times. Whirlpool realized that it is expensive to stock heavy refrigerators at local stores as they occupy a lot of space. Thus they ship across the refrigerators and washing machines to a centralized warehouse from where they are shipped across to the customer’s home directly. A little closer to home companies like Aravind Mills and Madura garments maintain central warehouses to cater to their stores across the country. As againt this ITC’s Lifestyle retail business division has suppliers across the country. It has thus set up regional distribution warehouses. These stocking points can cater to the demand of stores across the country within 24 hours. Also flexibility in manufacturing ensures production can be ramped up in accordance with the demand. The company is able to cater to the needs of customers and ensure that the shelves are never empty

Using the above mentioned concepts pf postponement at various stages of the supply chain HP effectively solved the problem pertaining to its deskjet printers. To cater to its different markets ie North America, Europe, and Asia Pacific HP had to manufacture printers with different power supply models, power chords and manuals for operations. HP designed a common platform for the various models of printers. Earlier the printers had to be shipped across to the 3 international markets as per their demand with variations in their power chords and manuals. HP set up local distribution centers (DC’s) to assemble the country wise requirements and perform the final packaging. This resulted in tremendous cost saving for the company.

The Benefits:

Postponement can provide the following benefits to a firm:

More variety: As seen from the example of Dell the manufacturer is able to provide an entire bouquet of products to choose from using postponement.
Inventory Reduction: the quantum of inventory can be reduced by ensuring holding more work in process and postponement of customization. This counters the original notion that variety increases of quantum of inventory to be maintained.
Better quality of forecasts: delaying the customization until more information is available helps to improve the quality of forecasts. With time the forecasts improve and become more stable and hence the standard deviation in the demand for a product reduces. This reduction in variation helps to give a specific time frame to the manufacturer to customize the product.
Reduced logistical cost: shipping products in bulk and then packaging them, reduces bulky transportation problem and ensures reduced distribution cosst.

The above benefits ensure in providing the goods of the choice of the customer, and enhance service levels. But postponement has 2 major costs attached with it. The cost of increased product development and increased manufacturing cost. Creation of a modular design, or a platform strategy would require tremendous investment and may restrict the flexibility for further product development. Also the company needs to tailor its supply chain to fit in customization and these costs need to be weighed in relation to the benefits.

A case in question

Let us examine a case of a manufacturer of liquid hand wash. Let us assume that the product comes in 7 variants. Let us for the moment assume that the demand for the variants in a particular year is as follows:

By running a statistical test such as the Chi square test it can be demonstrated that the sales are not independent of the variant, which simply means that the variant impacts the sale of the product and the sale of all the products is not uniform. Keeping this in mind the company can have 3 options:

a) Stock different quantities of the soaps giving preference to the lemon and peach variant.
b) Advertise the variants which are selling well, and offer the slow moving variants as special combination packs
c) Go in for a postponement strategy such that the color and essence may be added in the final stage of assembly so as to play by ear with market trends.

The company while evaluating the options available may adopt either of the above mentioned strategies. If it goes in for the first strategy then it would have to be wary of market fluctuations. It would moreover to ensure that sufficient base stock levels of the different categories have to be maintained at all times. In considering the second strategy it would push its best selling models and thus try and direct demand towards these variants. It could perhaps manufacturer limited quantities of the other variants and make them available in combination packs realizing that they by themselves do not sell sufficiently. In this case again a few of the customers would be left disappointed as they would find a variant of their choice unavailable in an SKU of their choice. lastly the postponement strategy may be given the preference if the company sees sufficient potential sales of all variants in such a manner that the additional investment in changing the mode of the manufacture would be recovered in a reasonable period.

Conclusion

Postponement is slowly but surely spreading across industries. Companies like McGraw Hill have got into custom publishing where the reader is able to choose the text book extracts and cases he would want in a text of his choice. Even in the airline industry Embraer postpones high value feature additions to its aircrafts till the time the confirmation of sale has been made. Almost any industry where a certain degree of customization would be required ranging from residential real estate, to music retail presents an opportunity for the implementation of postponement strategy and save those precious millions for the company.

References:

Fast Track Supply Chain guide by Safexperss
Research Paper: “Platform strategies in International New product development” by Moreno Muffatto, University of Padua
Research Paper: Regional Strategies for Global Leadership by Pankaj Ghemmawat
http://www.wikipedia.org/
Direct From Dell by Michael Dell
Complete Business Statistics by Amir Aczel, Jayavel Sounderpandian
Frost and Sullivan Research services
http://www.tata.com/
Research Paper: Case studies of postponement in supply chain: Massachusetts Institute of TechnologyHP Transshipment case study

Radio Industry in India

2006-12-07T22:33:00.001-08:00

By: Amit Puri, MBA Mktg I, SIBM.

Radio: Is it a pie big enough for everyone to party on?

Radio in India is segmented into MW (Medium wave), SW (Short Wave) and FM (Frequency Module) based upon the frequency of the radio station. It covers 99% of the country’s population and is also the most cost effective mass medium of one way communication. The strength of radio lies in its coverage and cost effectiveness.

The penetration of FM radio is estimated to grow from the current 30% to 60% by 2010. The importance of radio has not been neglected even by the policy makers. The tenth five year plan targets to get FM to 60% of the Indian populace.

FM has gained popularity in India only in the recent past and but much earlier around the globe before that, because:

1. It is a means for low coverage broadcasting, thus best suited for delivering localized
content
2. It can be used to broadcast stereoquality music which is not possible using AM or MW thus
making it a preferred low cost medium to broadcast good quality music and content.

Research suggests that in the “ad-avoidance world” that we live in, radio can be a friend. The radio audience is consistent and loyal, and thus radio works better to build brands. It offers efficient targeting by reaching the right audience at the right time and in the right place! Radio creates strong emotions which when linked with local people provides strong communities. Thus while people avoid watching ads on television (by changing channels, or doing something else) they don’t mind listening to advertisements on radio in one form or the other. Even on the internet, people tend to close advertisement windows as soon as they pop up which is less likely in case of a radio.

With mature mass mediums such as television and print available, why is a rush to get a share of the radio pie observed? Especially when knowing that returns are not as lucrative (the portion of the advertisement spends on radio is a meager 2% of the entire advertisement spend amount across media).

The answer seems to be simple. To reach to the masses and also generate value for the advertiser, radio is an ideal medium. Let us give it a closer look - the potential of the opportunity, the players vying for it, expansion options and what keeps the hopes high after the first phase of radio reforms have left a majority of the players in the red.

At present FM radio is present in 12 cities, and would go up to 87 cities, with 245 new stations being added to the existing 21 stations, and with ad spends to go up to 5% by 2010 in comparison to the current 2%. This in effect creates a Rs.13 Billion opportunity in a short span of 4-5 years.

The opportunity is definitely good enough for several players to try their hands in this field!

Phase I: A learning curve or a lesson in through failure?

Phase-I of radio reforms left most of the players entering in the FM market in the red and several players even had to close down shop. The reason was an extremely high entry limit. In phase-II the entry limit is effectively the OTEF (One Time Entry Fee) which is linked to the revenues that the company would generate. This would ensure that any company entering the market has to pay a lower amount to get in; but just in case it does make it big, it would have to share the revenue.

Annual License Fee = 4% of the revenue generated or 10% of reserve OTEF whichever is
higher

Existing players have been given an option to migrate to the new regime by paying OTEF as the average of the successful bids in that city for the radio frequency/license. Clearly then, it is a step in the direction to increase participation in accordance with the primary goal of increasing the presence of radio as a mass medium.

Although the entry barrier has been reduced to lure a larger number of players, is the strategy sound enough to sustain numbers? The number of players entering the arena in this phase is 43. Considering the size of the opportunity (Rs13bn), each player is left with an average of just above Rs 0.3bn.

The experience in foreign countries shows that radio developed as a medium for the masses before the others including TV and internet, while in India’s case TV and internet are mature mediums already; this could hinder growth of radio as an industry to a certain degree.

The risks:

􀂙 No consolidation possible within the current structure. As one company cannot run multiple station in a single city, smaller players who find it difficult to sustain operations, would have no option at a later stage but to close shop, as there would be few takers for such operations.

􀂙 With generalized targeting and minimal content differentiation, the strength of radio might be lost. Globally, radio’s potential lies in being able to deliver niche content for specific audiences. With one channel percity and high entry barriers, generalized content is the only option that most companies would be left with to generate “hearer-ship”.

􀂙 Rs 5Million per station is paid towards music royalties which would make it an unviable business proposition for the smaller players that too in smaller cities where revenue generation opportunities are limited.

􀂙 News and current affairs content is not permitted on private channels thus further restricting the options available for differentiated content.

At Rs 2116 Cr and 32 stations (13 in A & A+ Cities) ENIL - Radio Mirchi and 1599Cr and 45 stations (8 in A & A+ cities) Big Radio (Reliance ADAG) are the biggest players.

Breakeven analysis:

To check whether it is a viable business proposition for new players to set shop, let’s analyze the costs and revenue generated for one player on a very simplistic basis.

Assumptions and considerations:

1. Each station is treated as a different entity. Thus the performance of one station for a company would not affect the performance of the company’s other stations.

2. The revenue earned per radio channel is taken as Rs. 12244897 which would not be the case for all channels and would differ from one city to the other. But this would be offset by the entry barrier difference between different tier cities.

3. A radio broadcasting setup would require:
i. On Air Studio
ii. Voice Over Booth(Discussion Studio)
Production Studio
iii. Transmission Equipment

Depending on the combination of setup option that a company goes in for the cost would vary between 9 to 29 lack, for the current breakeven analysis the setup cost has been taken as 30 lack. The setups have been recommended by BECIL(Broadcast Engineering Consultants India Limited).

With an estimated earning before tax and depreciation over 1.5 lakhs per station, each station should ideally break-even in the first year of operation itself, but following are the problems with the present policy that could hinder the growth:

1. The earning per station would vary and the stations which earn less than the average revenue as estimated are not left with other revenue generating options.

2. One option for stations is to reduce their expenditure by saving on the music royalty by catering to specific audiences thus reducing the range of music for which they would have to pay royalty. This option would reduce the target audience and thus the revenue as well, inducing a vicious cycle.

Thus, phase-II of the radio policy is a step in the right direction to enable a lot of players to take it up as an opportunity. There are a lot of loopholes that are yet to be plugged for the sustained growth of the industry, including:

􀂃 Option to operate multiple channels
􀂃 Lower entry limit for niche content channels
􀂃 Differentiation of radio station on basis of content rather than just geography
􀂃 Option for companies to collaborate

The size of the radio pie as of now is too small for 43 players to co-exist and grow. The policy needs new thrust either to increase the size of the opportunity (by allowing to operate in the restricted areas) or to collaborate (so that a few can grow to an optimum size by consolidating)

Recommendations:

To plug these possible problems that the radio industry could face, the following recommendations can be considered:

a. Let a company operate multiple radio stations in the same region
b. Distinguish channels based on the content that they propose to broadcast.

If the companies are allowed to operate multiple channels they would be able to cater to different audiences by niche channels, the overall operating cost for the company to operate multiple channels would go down as royalty towards music used by the channel would come down and the company can use the same common infrastructure, e.g. the production studio.

Infrastructure and technology for operating radio is not a constraint as it is a full blown industry in other parts of the world. The regulating policy is the only major roadblock in the growth of the radio industry in India. Limiting the growth potential or even slowing down the growth curve doesn’t make sense. The sooner radio claims its due share of the market the better. After all, marketers and customers alike wouldn’t want to see radio as a lost opportunity!

Loyalty Programs

2006-11-07T11:09:00.000-08:00

By: Susheel Aswani, MBA I

When the customer comes first the customer lasts….

Customer Loyalty is what every marketer seeks to achieve. Here’s a look at Loyalty Programs, their feasibility and the requirements to create a successful program…

From delivering to your doorstep those pair of altered trousers, to wishing you on your birthday, from offering you customized meals in the comfort of a private lounge to providing you and your families with the dream holiday of a lifetime, companies are getting the message across loud and clear, You are a loyal customer, and we value you…

Loyalty programs have now become extremely common in the Indian scenario. The need for these programs is based on the simple principle: A customer is the hardest thing to get and the easiest thing to lose. In today’s day and age with intense competition today any firm has only 2 ways to maximize its share of the pie a) Increase its customer base and attract new customers b) Maximize the value from its existing customers.

More than 90 % of the organizations lose more than 30 % of their customers in a given year. The only reason that market share figures remain more or less stable is because the customers are traded between competitors. There thus emerges the need for Loyalty Programs, which when supported by Excellent service, and delivery of value can be a potent force in emerging as true leaders.

The power of existing customers is immense. One good experience can create enough publicity which cannot even be generated through the widest means of communication.

The power of customers is illustrated through the diagram shown here.

The power of existing customers

The numbers say it all when they highlight the importance of retaining a customer:

Reducing customer defections can boost profits by 2-85 percent.(Harvard Business School)
The price of acquiring new customers can be 5 times than the cost of keeping current ones (US Office of Consumer Affairs)
The return on investment to marketing for existing customers can be up to seven times more than to prospective customers. (Ogilvy and Mather Direct)

Unfortunately loyalty programs are not the panacea for all the problems a company faces. They can be tremendous value additions and key component in building up relationships with your clientele. But they can exist only when the core offering ie your products and services offered is delivering value to the customers. No loyalty program can succeed when the core benefits do not satisfy the customer. The pre requisite thus always remains that a company must go beyond the expectations of its customers and strives to achieve Customer Delight.

Disappointment Satisfaction Delight

The current scenario

In the present scenario there are numerous loyalty programs existing, and in many ways the Indian customer is exposed to the “points barrage”. Today the customer is rewarded with points for virtually any scenario be it the frequent flyer miles earned, the points accumulated in the lifestyle and apparel stores, or even at your neighborhood grocery store. No longer is it a novelty and with so many of them around, they no longer influence the purchase decision. Moreover they are an expensive affair and require a heavy investment from the view point of companies. A company needs to break through the clutter and firstly evaluate whether loyalty programs are economically feasible, and if so which customers can it be “special” to.

Getting Started

Today of the numerous loyalty programs existing in the country, only a few of them are actually boosting the sales, and satisfying the customers simultaneously. The process of starting a loyalty program is far from simple. It requires proper planning, analysis of data generated, designing of an offering, tracking the data and transactions, updates and feedback. The most crucial point to be noted is that Investment in Loyalty programs is not a guarantee of success and all loyalty programs which are successful, pay dividends in the long term.

One of the key starting points for designing loyalty programs is deciding the membership criteria. This could be either by making purchases above a standard threshold level set, or by charging an annual membership fees. In either case, the success of the program largely depends on which customers the company decides to target. Setting lower threshold limits is a fairly common practice for ‘frequent use’ products like grocery stores.

Loyalty Programs in the Retail Sector

The concept of loyalty programs in our country was introduced by Shoppers Stop through their First Citizens Program. Today the program has a membership of more than 300000 members. The first citizen members account for 20% of the footfalls but 57% of the sales. Moreover the average cash memo size of First citizen members is twice that of non- members. One of the major requirements for the success of the program is a strong IT Infrastructure. The program was restructured in 2000, along international lines when a 3 tier structure was started based on the annual purchase bill of the customer. Some of the special services offered to first citizen members include: exclusive billing counters for the Golden Glow card members, free delivery of alterations, additional reward points on purchase of private label brands, carry forward and web tracking of reward points. The rewards are further sweetened through exclusive shopping festivals held for the first citizens, and updates on sales promotions and offers through the magazine First Update.

Although the First Citizens club program has been immensely well received it has not gone unscathed without its share of problems. The billing time increases as virtually every customer needs a point update, moreover the customers have realized that the redemption of points comes at a heavy cost. Co-creation of value one of the basics of Marketing is seriously doubted from the customer’s point of view. The heavy investment in terms of IT and back-end infrastructure, and the frequent updations, have recently led to the slashing of points on offer leaving a large number of disgruntled customers.

Loyalty Programs are increasingly being used in other sectors of retail. To counter the advantages of the nearby kirana store, Loyalty programs have now been implemented in the grocery stores, and super markets. A typical example is the “TruSmart” card offered by the Tru Mart chain of stores. A one time purchase of Rs 500 could gain you membership of the club. Thereafter the customer enjoys a discount of 4% on all purchases. Moreover the company is in a position to collect data about the customers’ purchases, and also offer value added services like home delivery.

Making them Work

A company must understand that it cannot be everything to everybody. Although it is necessary to provide a delightful experience to customers it is crucial, that loyalty programs must be optimally designed to be economically beneficial. A company may categorize its customers on the basis of current revenue generated and potential for attrition. Those customers who are currently responsible for a major proportion of the revenue and who have a high potential for attrition are to be categorized as prime targets of the loyalty program. Another way to find out who your target customers for the loyalty programs would be by asking “ How likely are my customers going to recommend my product or service offered to others?”. The ones who would most likely do so are your “Idea Merchants” and they deserve special treatment.

Personalization has become the key: “ To know your customer is to love your customer” and a customer appreciates personalized, customized treatment. For those customers with whom the company has had a large gap between visits, they could possibly consider selling personalized mailers informing the customers of the latest in- store activities, and offers.

Two crucial points are to be kept in mind in the designing of the programs. Firstly if in case the loyalty programs have a tiered structure, then there must be a differential which encourages a customer to upgrade. Aspirations of the customers are to be targeted. Secondly, no one is going to make a purchase decision on account of mere points being accumulated. The customer must perceive value in what he would get after accumulating all the points. It is no longer enough to provide the customers with the run of the mill cash discount, or a gift voucher. If the reward is something which strikes a chord with the customer, causes him to look upon the pot of gold at the end of the rainbow with excitement, which gives him a sense of tangibility, only then would he consider accumulating those hard earned points. Abroad some of the innovative rewards include, a round of golf with Tiger Woods, or a test ride in F1 car! These are the “WOW” experiences which woo customers to be loyal.

The benefits of the programs should be clearly stated. These could be hard benefits in the form of discounts, or soft benefits like provision of toll free help lines, or magazines and free updates. Sometimes complaints arise that the free gifts comprise of the ‘dogs’ of the company’s product line. This is done at the company’s own peril as you can take the customer for a ride once, but not again. Moreover you have lost one precious ambassador, a potential evangelist for your brand. There are also complaints from customers that the data which the company collects, infringes on their privacy and many a time the sacrosanct database is sold to fellow marketers targeting similar customer segments.

Shining Examples

Just to drive home the point we consider 2 success stories. Raymond has long been the market leader in men’s apparel The company has recently launched its Premium Circle loyalty club in the metros. It realized that 9% of the customers account for 30 % of the sales and the average cash memo size of one its club card members is Rs 8000 as against Rs 2951 for a non- card member. The company has a tiered structure with Blue, Silver, Gold classes based on the size of the invoice purchased. The company has made an honest effort in delighting its members by offering fashion tips, personalized services and even free passes to events like concerts at the Belgian embassy, which have proved to be a hit with the customers and have ensured that the cash registers keep ticking away.

Loyalty programs in the real estate sector have been so far un heard of. But the Bangalore based Purvankara Group has innovated and succeeded. Owners and residents of the properties are offered a bouquet of tangible and intangible services right from home improvements to free tickets to movies. Apart from this the company allows its present member base of size 5000 families to earn through referrals. For example a Rs 25 lakh product sold would fetch a reward of Rs 25000. The company has managed to sell about 50 flats with a mere investment of Rs 50 lakhs on its Loyalty program.

The future ahead

Loyalty Programs have been introduced in numerous sectors. They have done rather well in the Airline Industry, particularly because they offer tangible and visible benefits like free trips, or personalized facilities. Also in the cooperative sector, certain cards have been introduced which require a monthly or yearly payment/fee and offer specialized services with respect to rations, and provisions.

With competition and international benchmarks set, a few loyalty programs are shaping up for the future ahead. Dual cards have become the order of the day. Earlier a few organizations had their exclusive club cards which could be used only at their outlets. For the customer it meant adding another piece of plastic to his already burgeoning wallet. Now the card doubles up as a credit/debit card, which can be used in other outlets. Considerable progress has been made through such collaborations like the Bharat Petroleum Petro Card, which offers convenience to customers by the usage of smart card, and lets them accumulate points which can be redeemed for points.

Another product launched recently was the first coalition program of the country, I-mint. This card brings together 6 large organizations, Airtel, HPCL, ICICI, Indian Airlines, Lifestyle and Make my trip and provides the customer with an integrated solution for his needs. Points are added to the kitty whenever the customer interfaces with the above mentioned companies, and can be redeemed.

Conclusion

Increasingly it is realized that Loyalty Programs need to be Royalty Programs, and they do not work unless a customer feels special to be a part of them. Loyalty Programs have fast caught up in our country and are going through stages of transformation.

With improved emphasis on Data Analytics and CRM, these are being tailored to meet customized needs of various segments of business. But a word of caution, Loyalty does not come easy. It requires a solid structure, heavy investment and most of all an offering which satisfies and delights the customer. It takes a lot to build that magical bond with the customer and Loyalty programs if structured well enough to create a sense of belonging and value in the minds of the customer could be one of those threads which attach a company to the heart of the customer, the undisputed king!

Do you wish to send your articles and contributions to us? Please feel free to mail your feedback and suggestions to forthright@sibm.net.

Microfinance in India

2006-11-07T11:00:00.000-08:00

By: Suruchi Chaudhury, MBA I

Microfinance, Micro credit, Self Help Groups, SHG-Bank Linkage Program, Partnership Model, On Tap Securitization Model, Farmer Service Centers, Social Initiatives Group etc. - these terms have come into sharp focus in the present day India and more so after Dr. Muhammad Yunus won the Nobel this October for his pioneering work in the field of Microfinance which began in 1970’s and the subsequent setting up of the Grameen Bank in 1976 in Bangladesh.

“A lot of directed lending is indeed wasteful and hugely inefficient. But microfinance is a form of directed lending that greatly improves efficiency. This is hard-nosed economics, not the bleeding heart variety.” - Swaminathan S Anklesaria Aiyar, Consulting Editor, Economic Times in 2004

According to Dr. Yunus, “Microfinance leads to poverty reduction through a virtuous cycle comprising: ‘low income, credit, investment, more income, more credit, more investment and thus growing income”. He further adds that the impoverished have skills that are underutilized and that they are creditworthy borrowers and hence their financing needs should be adequately taken care of.

The above mentioned benefits as well as inputs from various research studies show that in many cases microfinance has reduced poverty through increasing income levels. It is also believed to result in improved healthcare and nutrition, child education and women empowerment. And so in the recent past it has become a promising way to use already scarce development oriented funds to achieve the objective of “Poverty Alleviation”.

In the context of this increased activity in the arena, it becomes interesting to know more about the state of Microfinance in India, the industry setup, the challenges and roadblocks ahead and the way to handle them best.

Current Scenario

India has 400 million people spread across more than six million villages who are in need of micro-financing. The organized financial sector caters to the need of only 20 million people. Because of the lack of statistical validity of data sets, there are few reliable indications on the reach and demand of microfinance. The UN, in collaboration with the World Bank and the IMF is working on constructing a headline indicator for access to microfinance. However as per industry experts, the demand for microfinance in India is estimated to be around Rs.300 billion. All this suggests that there is a huge unmet gap between demand and supply. This happened because in the past big commercial banks considered small loans as a statutory obligation rather than a business opportunity. These loans were considered as the ones that were difficult to recover, unprofitable and involving high transaction costs.

Industry Setup

With so many Microfinance Institutions (MFI) around, the Indian Microfinance Industry is no longer “micro” in scale. As the Economy is growing this sector is also becoming more organized in comparison to the scattered system of individual moneylenders and loan sharks in the villages.

A case in point is that of an MFI named Spandana. Today it operates with 2,000 employees and serves 800,000 loan recipients at interest rates of 10 to 15 percent a year.

It lends to small Self Help Groups (SHG’s) of 5 to 10 people rather than to individuals and also insists on regular payments to be made weekly so that the borrowing family manages the debt and financial responsibility properly. When a SHG comes together, they save small sums on a regular basis. This serves to aggregate small funds into a sizeable and more importantly- “serviceable” amount. They also learn to handle resources of a size beyond their individual capacities, and get motivated to save more.

In India, there exists a variety of micro finance organisations in the government as well as in non-government sectors. Leading national financial institutions like SIDBI and NABARD have played a significant role in making micro credit a real movement.

India has also witnessed phenomenal development of SHGs in the past two to three years. These are better known as SHG Bank Linkages, as they are credit-linked to banks. The SHGs have remarkable rates of recovery of 98%-99% showing that their credit rating and ability to absorb credit and repay has increased.

New Entries

In the middle of all this, what is interesting about India is that its biggest commercial lenders such as ICICI, HDFC, SBI, UTI etc. to name a few have diverted their funds and attention to this sector in a big way. MNCs like ABN Amro, Standard Chartered, HSBC and the Citigroup are also moving into this sector.

Clearly what drives these institutions is not social responsibility alone. There is a bigger gain involved. What attracts them is a huge market opportunity here with 30% of India’s 1 Billion+ population still living below the Poverty Line and these banks realize that lending to credit worthy rural borrowers is a lucrative business proposition.

As per Ranjan Ghosh, who heads Financial Institutions for India and South Asia at Standard Chartered Bank, "With fewer defaulters in this sector, clearly the risk return rate is acceptable to the banks. We look at it as an investment."

And may be that is why Nachiket Mor of ICICI spends so much of time in India's economically depressed rural hinterland looking for prospective borrowers.
So all in all it’s a good business for Indian banks, given the diminishing market for lending to companies and consumers in cities.

ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity.

ICICI Bank's micro credit initiatives involve provision of basic banking services like savings and withdrawal along with micro-investment products like mutual funds and insurance. This provides poor people with safer avenues for saving with little volatility or risk.

Its structures also include buying the microfinance portfolios of MFIs either on a selective basis or buying the complete loans of a branch or a particular area along with partnership arrangements with MFIs. This helps leveraging the operational strength of NGO/MFI with the financial strength of ICICI Bank. In the world's largest securitization deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from Share Microfin Limited in 2004.

In the Public Sector SBI is doing a commendable job in this area with its innovative products like Project Uptech, SBI Life ‘Shakti’, Sahayog Niwas, Agri SBU, Contract Farming and Kisan Credit Cards.

As has been mentioned earlier Indian Microfinance Industry is increasingly attracting the global attention. Unitus is a case in point. Started in early 2000 by a group of friends with a common mission of poverty alleviation, it is based in Redmond, Washington, with an office in Bangalore. Unitus works in Latin America and Southern Africa, but with one third of the world's population in India, its focus has naturally turned to India.

The structure that Unitus is using is based on what it calls its "accelerator" model, which basically implies acceleration of outreach. To address gaps, Unitus uses three different capital instruments, namely Grant, Debt and finally Equity. Working typically with MFIs, which are NGOs or have originally been NGOs, Unitus first uses grant funds to build the infrastructure in the MFI.

Unitus Equity Fund, along with SIDBI, Vinod Khosla and other social venture capitalists made a Rs 11 crore (Rs 110 million) investment in SKS Microfinance in India. The money would be used to access commercial debt and scale outreach from SKS's current 200,000 clients to 700,000 clients by 2006-07.

In short what the bigger institutions do is partner with microfinance specialists across India who have knowledge of the local villages and can identify worthy borrowers.

Another very interesting phenomenon that is associated with this industry is the creation of a secondary market over time. Under this the Micro loans would be bundled together into larger Bond issues which will be tradable among the Indian and the Global Investors taking Micro lending to a higher level.
The Challenges

All this sounds like a nice combination of corporate interests, fulfillment of social needs and a panacea for India’s balanced development. But this system is not free of complications and challenges.

There have been allegations time and again that microlenders structure their loans with hidden costs to exploit borrowers. The suicides of about a dozen women caught in this kind of a debt trap in Andhra Pradesh illustrates this point. The Government Inspectors had also pointed out four Organizations namely Spandana, Asmita, Umdama Pottu Pedatha and Share Microfin of charging interest rates as high as 40% to 50 %.

On the one hand, the industry is trying to grapple with problems of sudden growth, while, on the other, global social venture funds think that impact needs to be maximized and that institutions with the right professional leadership, governance, and systems need to be supported.

The biggest challenge is to develop a systematic growth mode which can cater to the accelerating demand. In this scenario the two main hindrances to the growth of MFIs are ‘lack of capital’ and ‘lack of capacity’.

Most MFIs are unregulated non-profit organisations, which prevents them from building an equity base. Through a combination of grants, equity and debt, it is possible to transform them into regulated financial institutions with an equity base that then allows MFIs to bolster their balance sheet and access local capital markets. Lack of capacity can be attributed to a variety of factors such as weak corporate governance, lack of management depth, absence of management and strategic planning systems and insufficient business infrastructure.

Another very inherent issue is that the focus of bigger funding organizations is always on mature MFIs, forcing young and mid-tier MFIs to look for capital from local sources, primarily grants. This focus on mature MFIs may be stalling industry growth as only a small percentage (1-2%) of MFIs is sustainable. So provisions have to be made to absorb some initial risk while the MFI develops a track record, relationships and credibility. Along with this what is required is upfront, longer-term involvement. And finally, there is a need for MFIs to work with policymakers on current regulations that limit options for MFIs and investors. Like in India, most MFIs are still NGOs and so they can accept local debt but not equity, and at the same time foreign investors have limited opportunities for investment in the sector.

The Path Ahead

Successful microfinance can be defined by three main characteristics: sustainability, outreach, and impact. Sustainability refers to the ability of a program to continue over time, preferably without ongoing subsidies. Outreach refers to the number of clients reached and targeting of the poor. Impact refers to the ability of a program to assist poor households and individuals to move out and remain out of poverty, and that is the ultimate objective of microfinance provision.

Enterprise growth is much more than just providing credit, it is also about financing a viable business idea. The importance of partnerships between the public and the private sector, as well as between social entrepreneurship groups and microfinance institutions thus becomes critical.

Care has to be taken that borrowed funds feed into a new business. No matter how the loan is described on paper, many families use the money to finance the purchase of a new motorbike or to pay the family doctor.

At the same time MFIs can help to facilitate capacity building consultancy projects to improve MIS/Accounting, technology and human resources. This emphasis on Management Information Systems (MIS) as well as the innovative use of technology (virtual branches, ATMs, credit and debit cards) is extremely crucial.

All this will lead to reduction in costs to clients and the institutions, building new distribution channels, helping clients build assets (not just debt), as well asmobilizing banks and capital markets for microfinance.

Distribution challenges: How will the Insurance Industry

2006-11-05T14:21:00.000-08:00

By Banit Singh Sawhney, MBA II Mktg

The Distribution Challenge

India is arguably one of the most challenging and promising emerging insurance markets. Its rapidly growing economy, plus a young and huge population spell ample opportunities for the development of insurance. There is however much to be done to realize this potential. A few challenges to be tackled here would be to improve insurer solvency, raise a standard among insurance practitioners, asset management capabilities, distribution challenges, operation risk mitigation etc.

Reach: The ultimate challenge
More than 50% of India’s population lives in tier II-III cities and in rural India. While tied agents continue to play an important role in distribution, alternative channels like corporate agents, brokers, and bancassurance are starting to play a greater role in distribution.

The Power of Brick and Mortar: The Indian Banks
The penetration of commercial banks in India is unmatched, and no form of agent led sales-force can compete with it. There are around 68,500 branches of scheduled commercial banks. Each branch serves an average of around 16,000 people. The only other national institution with a bigger reach than this is the Indian Postal Service. Banks have expanded not only in urban areas; they have also grown in semi-urban and rural areas. Of the total number of branches of commercial banks, 32,600 branches are in rural areas and 14,400 are semi-urban branches.

Banks therefore provide great potential to be tapped. The HNI and Corporates in India are saturated in terms of product offerings. The growth would come from the 200 million strong Indian middle class. This would principally be from personal and rural banking.

The fastest and the most cost effective way to target this segment would be by selling insurance policies through their local banks. These local banks provide credibility, assurance and unprecedented reach for a life Insurance company.
World View World over where “Bancassurance” brings majority of the business, the full-integration model is in operation. France is undoubtedly one of the countries where the breakthrough in bancassurance has been spectacular. In the space of just two years, Predica, Crédit Agricole’s life insurance subsidiary first set up in 1986, became France’s 3rd biggest life insurance company in terms of premium-income. It should be noted that one of the effects of the rapid growth in bancassurance activities in France has been the creation of new market opportunities rather than weakening of the traditional insurance business.

Today, French bancassurance operators are doing better than insurance companies on individual risk. In 2003, the French Bancassurance Group (chaired by Michel Villatte, CEO of Predica), accounted for 60% of sales in life assurance, with premium income of €55 billion. At the end of 2003, 5 bancassurance operators were amongst the top 10 life insurance companies (base: premium income). CNP is obviously in the top three, but its status sets it apart from the others. Its distribution strategy, based not only on partnerships with establishments such as La Poste, the Caisses d’Epargne but also the mutual insurance companies, financial institutions and even local authorities, makes it difficult to compare with other bancassurance operators active in the French market.

The field of French bancassurance has recently changed following mergers between certain banks:
• The merger of the BNP and Paribas networks produced BNP Paribas Assurance, which encompasses the activities of Cardif and Natio;
• The merger of Crédit Agricole and Crédit Lyonnais, which resulted in a “new version” Predica, combining the activities of Assurances Fédérales Vie and Médicale de France;
• Even more recently, the takeover of Crédit Maritime by Banques Populaires.

In France, bancassurance seems to be at the dawn of a fourth stage-that of concentration.

Hence it can be seen that bancassurance and other distribution channels like the Postal service etc. are actually driving growth in the Insurance sector.

Bancassurance - The way forward: Why?
• Low cost to acquire and process customer applications. Bancassurance provides one of the lowest Cost-per-Transaction.
• The psyche of the Indian customer is to believe in a reputable name. The major banks have a strong relationship with their existing customer base. Hence it would be easier to convince people to invest.
• Average insurance premium in India would be comparatively lower than developed countries. Hence generally agents would not target the segments catered through these banks due to very low margin.
• Easy availability of customer care executives would lend better credibility and
will improve service quality and experience.

The Present Indian Scenario
It is not hard to figure out that the leading insurance players in India are already using the Bancassurance model .A brief overview would show that many leading companies have Ranking As per Market Share Name Distribution

1 8,00,000 agents.
479027 individual agents, 159 corporate agents and four lakh plus agents under
2 Agents 1,00,000 Bancassurance partner ICICI Bank 3 agency channel Bancassurance partnersinclude Standard Chartered Bank. (reason , it had a good customer base of HNIs & corporate customers), Syndicate Bank , Centurion Bank ("B" class city presence).
4 Individual agency, corporate agency including brokers and credit life. Bancassurance partners SBI ( 14000 branches )
5 Personal Finance Assistance(25,000), corporate agents, brokers Bancassurance partners including HSBC, United Bank of India and The Orissa State Co-operative Bank, rural and direct marketing. The company has 140 branch in 60 major cities.
6 It has got 44 branches all over India.

Insurance advisors( 25000)
Bancassurance partners include CitiBank,DCB,Karur Vysya
Bank,BNP Paribas,Syrian Catholic and a few co-operatives
Tata AIG Life Insurance
Company Ltd
BIRLA SUN LIFE
INSURANCE COMPANY LIMITED
Life Insurance Corporation of India
ICICI Prudential
Bajaj Allianz Life Insurance
SBI LIFE INSURANCE

already tied up to foster growth and penetration.
Some Alternate Channels In order to increase penetration into the Indian market, companies could look at :

Medical Tie ups
Tie-up and increase distribution through leading hospital chains e.g. the Apollo Group etc. It could start with a campaign that promotes health care, good living and a secure future. It could be a good move looking at the way the Medical Service Industry is slated to grow.

Automobile Tie ups
Distributing life insurance through automobile companies like Maruti, Hyundai, Honda, Toyota etc. depending upon the target customer segment, could be another option. The auto industry is booming currently thanks to the rapid consumer spending of the middle class. As it is the Per-Capita-GDP to Insurance Ratio and the Population to Lives Insured Ratio is abysmally low compared to other emerging markets, such an agreement would take the company to a place where target customers frequently visit in sizeable numbers.
Innovative advertising should help the cause as people could be made to realize that if they are taking a car insurance, their lives are more important than the car and hence the requirement for a life insurance too is advisable.

Rural Partnerships
The company can look for possibilities of a tie-up with various micro-finance organizations, Self Help Groups, and NGO’s. A partner like ITC’s e-choupal could help make inroads into the rural markets.

Indian Postal Services
As soon as the regulation is passed by the government to allow partnership with postal services of India (which practically reaches every household in India), the companies would move in to exploit this channel.

Conclusion
The insurance market today is seeing cut-throat competition, with new entrants like Reliance turning on the heat on existing players, not just in the customer market but even in the job market. The industry will definitely see a round of consolidation in the near future with minor players either merging into each other or forming a bigger company.

The company that survives in the long run will not be the company that offers the highest returns, advertises the most or earns huge margins, but a company that sticks to its strategy, adjusting it when the situation demands and constantly innovating its offering and reach to suit the customers’ changing requirements and segment demographics.

We will be delighted to receive feedback, ideas and contributions on forthright@sibm.net . Please feel free to contact any RF member regarding your
suggestions and thoughts. Once again, have a very Happy Diwali!!

Is advertising becoming more manipulative?

2006-11-05T13:44:00.000-08:00

By Mrunmay Mehta & Rohit Hanjura, MBA II Mktg

“Most advertising tends to be”, Edward Kosner once said, "a trailing indicator of popular culture".
This might have been true 30 years ago, but the scene today is different. Advertising is actually CREATING culture(s) and is more and more targeted at changing the basic psyche of the target customers.

Let’s define advertising right away. According to Philip Kotler, “Advertising is any paid form of non personal presentation and promotion of ideas, goods, or services by an identified sponsor.”

Ads thus serve some standard purposes like:
• Advertising differentiates products
• Advertising communicates information about the product, its price and location of scale
• Advertising induces customers to try new things and induces reuse
• Ads stimulate distribution of the product
• Ads increase product use
• Ads build brands preference, value and loyalty
• Ads decrease overall cost of sale etc.
For understanding how ads influence consumer choice, it is imperative to understand the phenomenon of needs, wants and demands.
To understand the importance and structure of needs, Maslow’s framework can be used, as shown. However, Maslows’ theory has a major drawback; as today most physiological needs are already satisfied. A better idea of consumer mindset can be obtained by McClelland’s Trio Need Theory, also shown above.

Once, this is established, let’s understand the reasons why ads have adopted the
“emotional manipulation path” for ensuring brand success.

Changes in nature of Needs
“Advertising is found in societies which have passed the point of satisfying basic animalneeds.” - Marion Harper Jr.
Today, most basic physiological needs are satisfied amongst the most common target audiences for advertising. Thus, the “need” behind consumption is most often NOT basic.

Also, the higher order needs are increasingly becoming more “basic” in nature amongst common TGs (Target Groups). Even the basic needs are used as a vehicle to address higher needs. E.g Food can range from a simple off-the-road burger, to an expensive Subway sandwich. What it does is, use “food” not only to satisfy hunger, but also certain other “higher” needs related to social class consciousness or ego. The functional utility remains the same.

These higher needs are more emotional or behavioral in nature, as the basic needs are mostly similar at the core. Thus, the manner in which these new needs can be addressed have changed for marketers.

Effect of too many choices available to consumers:
With the shift from basic needs, it is also observed that the choice available to consumers has grown exponentially. Where few choices suffice, the consumer is faced with a frightening array of options. This makes an essentially simple decision process unnecessarily complex, as the consumer now has to think subconsciously before makingevery decision. Emotional ads provide the right vehicle to deliver the brand-payload right where it strikes the most – in the consumers psyche, in their self image, in their confidence etc. This is exactly what has compelled marketers to resort to manipulative advertising.

Effect of changing nature of offerings from marketers and a hypercluttered
market-space:
Today, most offerings are not unique. Their USP is not sufficiently different from the next me-too product. Competing products are increasingly more similar in their functional attributes. Thus, the positioning has moved from the functional plane to the emotional/intangible plane. This increasing product commoditization has seen marketers running for cover under advertising and non-functional positioning. In fact, not only are products getting common, even product categories are becoming “commoditized”. Companies no longer have a sustainable competitive advantage in the functional difference of their offering. The next company follows suit in an astoundingly short time frame, thus destroying the first mover advantage.

However, if the first company succeeds to place its offerings by changing the attitude of the consumer towards its offering itself, it gains an upper hand. Advertising is increasingly being used as the sole differentiator in a plethora of me-too offerings, as functional differentiation is no longer a position of advantage.

Also, newer categories are being created to shift from a cluttered market (Blue Ocean Strategy et al). However, how does one create new categories? There must be a need from the customers to create such a position. THIS is done through subtle/blatant advertising, by changing consumers’ wants into needs (Teenagers-“But Dad! I NEED that mobile handset.) or by creating entirely new needs (Indian women had been doing quite well even before they were educated by HLL-quite blatantly- that dark skin was a detrimental factor in their careers for success, and that Fair & Lovely is a dusky woman’sbest friend.)

All this has led to an increasing number of ads taking the “manipulation” route to reaching into the consumers’ normative buying behavior.

Effect of changing communication environment:
The communication scenario in today’s world has also radically changed. This has resulted in a fundamental shift in consumer behavior. In the words of Schwartz (1973) “Most important, this characteristic of the new environment eliminates the time between receiving information and responding to it. People do not think out decisions.” This acts a cue for advertisers, and thus the one who manages to be a part of the consumers selfimage itself, wins hands down.

Ads also have thus departed from promoting solutions to the “basic” needs to the “emotional” needs in an attempt to keep pace with the changing consumer psychology. According to Dr. Sandage (1951), "We live in an economy which is dependent upon the psychological needs and wants of the consumer".

Changing role of advertising:
Our hypothesis is that indeed ads have been increasingly using methods to manipulate customer’s behavior. The evolution of the role of advertising (from the initial organized ads in the 1840s) in the consumer buying decision process is captured in the scale shown below.

To illustrate the changing role of advertisements, we have some examples in each broad category, which are present today in the Ad-space.

• Informative: Ads of computer brands like Lenovo focusing on the physical
attributes of the product.
• Impressive: Ads of Sonata focusing on impressing the consumer and peers
• Influencing: Ads featuring celebrities endorsing a product. E.g. the Parker ad
showing Mr. Bacchan and driving the fact that if Mr. Bachhan uses Parker so should you.
• Persuasive: Ads on the theme of Pester Power, i.e. targeting the kids in the
family who are a major source of influence in buying decisions. For example,
Maruti Esteem ad with the tag line “My Dad’s Big Car”
• Manipulative: Ads in this category can be divided into two sub categoriespositive or negative. An example of positive manipulation is ad of Pepsodent trying to inculcate the habit of brushing teeth in the night. An example of negative manipulation could be an ad of Rexona deodorant wherein a college boy is shown as a smelly goat since he does not use the Rexona deodorant.
• Brainwash: This is more on the lines of Pavlov’s conditioning experiment,
where unconditioned stimuli cause a conditioned response through psychological manipulation. They differ from manipulative ads in degree of intensity and frequency of administration on TG. Is this the dark future of manipulative ads?

So how would one describe “Manipulative ads”?
“Some elements of such ads are designed to influence consumers without consumers having any possibility of rejecting that information.”

“Advertising is a negative influence when it dictates what an individual should do, rather than just inform or persuade a consumer about a product.” – Dr. Sandage.

At present, manipulative advertising seems to simply represent poor ethical standards and lack of consideration for members of the public. In future, with the development of new technologies, it may become more effective, more manipulative and more difficult to detect.

This question of manipulation by ads can be viewed from different angles. The question is-WHO or WHAT is being manipulated. On a very mundane level, consumer behavior is being manipulated through some advertisements. This too can be classified into positive and negative manipulation.

Positive Manipulation: In layman terms, these are ads that carry the message “If you do this/buy this, then you will achieve XYZ benefits.” This may actually lead to betterment in the lifestyle/personality/psychology of the target. The absence or non-use of the offering does not hamper the target in any way, and this is not suggested in the communication. Thus, ads of products like Dettol actually benefit the target with the inculcation of cleanliness as a regular habit. This ensures that the target’s manipulation can only result in betterment, and not in feelings of inferiority.

Negative Manipulation: These would go to suggest that if some product is not purchased, then the target chances the risk of non acceptance, or unsuccessfulness, or some kind of negative repercussion. These brink on the edge of using fear psychosis to induce people to purchase the offering. Worse, these actually may alter the ego/personality or confidence levels of the target. E.g. The Fair and Lovely Ads clearly mention how a female will NOT succeed (in a field not even related to beauty) if she does not apply the product, while if she does, she achieves instant success (and can buy a coffee for her father). There is no proven correlation between the skin color (not comparing ethnic races, but within a homogenous market like India) and the chances of success of a female individual. These ads use more of Neuro-Linguistic Programming (Ref: Pavlov’s Experiment).

Studies have proven that such ads have an enormous influence on susceptible targets pecially youth and children. Thus, manipulative ads not only affect comparative buying behavior of the currently adult TG, but also form the normative behavior pattern of future consumers, by targeting kids today.

Role of advertising and sustenance of the global economy & society: A debate is emerging amongst the neo-economists about how advertising encourages high-level consumption and squandering of resources on the macro economic level. This assumes all the more importance when the sole differentiator amongst similar and superfluous offerings is only advertising. Thus, it is not about manipulating individuals, but also manipulating the entire economy. A special congregation of experts from the UNenvironmental program have mentioned in their report how sole reliance and success through advertising as the only differentiating element, can negatively affect e conomies, when the same resources can be spent for more constructive purposes. Thus, advertising is not only a marketing effort, but it also has a social responsibility to play, by encouraging “Sustainable Consumption” (First UNEP meeting, Paris 1999).

Also, the same manipulative ads that are used to advertise tobacco products and alcoholic beverages can be used for social causes using similar creativity and insights into consumer psychology and behavior. This puts a great responsibility on the shoulders of the modern advertising personnel.

Conclusion:
In today’s world, while purchasing a product, a consumer takes it for granted that the basic need-solution derived from that product will be satisfied (it’s a hygiene factor). So what is going to drive a consumer towards a product? What will it take to equate a brand with a common name? It’s whether his/her emotional and ego needs are going to be satisfied from the offering or not. So in order to influence his behavior for that offering, an ad has to necessarily appeal to (or manipulate) his/her emotional/irrational behavior.

Manipulative ads are here to stay for now. As markets get more and more cluttered in increasing number of categories, such ads are going to spill into many domains. With the burgeoning information overload, manipulative ads offer a good path for the marketer to ensure loyalty. However, this trend also shall die its death as NOT every product can participate in the consumer’s normative thinking process. Manipulative ads are NOT the ultimate panacea for all marketing needs, only a time-adapted solution in accordance with the current market-customer variable mix.

When every ad tries to manipulate customers’ behavior, a time will come when customers shall refuse to let every other marketer to mess around with his/her mind, and marketers will have to find a new method to ensure sustenance of the growth curve.

References:
1. Marketing Management, Phillip Kotler
2. Olson, Erik L. "How Magazine Articles Portrayed Advertising from 1900 to 1940" Journal of Advertising, 1995
3. www.ciadvertising.org
4. Changing face, by Ajita Shashidhar , The Hindu Business Line, 2004
5. “Can ads impact popular culture?”, Guest Column, O&M, www.rediff.com
6. “Advertising and Sustainable Consumption”, First Expert Meeting Report, UN environment programme, Paris 1999
7. “The Fall of Advertising and Rise of PR”, by Al Ries
8. www.wikipedia.org

PRICING A BOON OR BANE- AIR DECCAN ?

2006-09-30T22:34:00.000-07:00

The article discusses the use of Price in the marketing Mix in the Airlines Industry. We discuss Deccan Aviations single point obsession with price and the present turmoil in the Airline Industry. Is the First Mover advantage sustainable for the Airline in the Low cost no frill airline space . Who would trump in the end ‘a Customer focus approach by full service airlines’ or ‘Price penetration by low frill airlines’. The article explores the competitive forces in the Airline Industry and steps taken by Deccan Airlines to remain on top.

The Current Scenario….

Deccan Airways has blazed away to become India’s second largest airlines with a 21.2% market share in June. Over the past one year, the number of passengers flown by the airline has swelled 230% from 2 million in September, 2005, to the current 6.6 million. With better services, new colours and an attitudinal shift, the pioneer plans to unseat Jet.

The picture on the ground in the aviation sector looks very different from that in the books. After Jet reported a disappointing performance, and warned of yet another tough year ahead, Deccan Aviation’s results seem to indicate that India’s aviation sector will take some time before it turns profitable.

Deccan’s turnover is a respectable Rs 1,352 crore during the 15 months ended June ’06, but comes with a sizeable loss of Rs 340 crore. During the June quarter, its income was Rs 430 crore and loss Rs 110 crore, indicating that more than a third of the loss was incurred in the last quarter. At an EBITDA level, Deccan’s loss was Rs 95 crore.

Deccan’s load factor for the past fiscal has been 75% with lowest operational cost. That is a good occupancy level for an airline, and compares well with the market leader Jet. But if Deccan cannot make money at these occupancy levels, then the key to profitability does not really seem to lie in filling more seats. Given the current capacity of airline companies and planned additions in the Indian market, it seems unlikely that domestic airlines will have pricing power in the near future.

Air Travel has grown by 230% since 2002 .It is unlikely that the demand growth rate is going to be better than the one shown in the previous years. That is, unless demand grows exponentially or some of the weaker players fold up the airlines would not turn profitable.

Pricing ‘The troublesome Marketing Mix”

In every Industry Prices are usually Sacrosanct and should not be dropped unless in Dire circumstances. The Marketers shall try all weapons in there arsenal such as Advertising, Trade and consumer promotions. However in the obscenely growth sectors the price takes a beating in view of the Top line growth .This is true for the Indian Telecom sector but the problem does not seem to be so acute with major players showing signs of profitability.

In case of the Airlines sector the future does not seem to be so promising. The sector is expected to grow at around 15-20 % in the next year. With competitors matching prices and bracing dog fight it is unlikely that there would be a substantial increase in topline or margins as compared to others. Air Deccan does expect its market share to move up by 25-28% in the next few years.

The Components of Pricing Includes

Basic fare
Fuel Surcharge (Rs 750/- per passenger)
PSF (Passenger Service Fee) Rs.225/- per passenger
Transaction fee of Rs 50/- if booked online through the website
Transaction fee (5% of basic fare) if booked through any other point of sale apart from the website

First Mover Advantage..Is it sustainable?

A first mover advantage can be simply defined as a firm’s ability to be better off than its competitors as a result of being first to market a new product category. We often find it difficult to distinguish durable first mover advantage and those that are short lived.

In the Airlines scenario where the market is leading (ie the pace of demand growth outstrip the total capacity of existing players) it is very important to dominate a category and hold onto your customer base.

To build a sustainable competitive advantage it is necessary to address all the market segments as they emerge. This would not be done by Air Deccan single point focus on price. New emerging segments such as ‘small businessmen’ travel would value on time flights and less flight cancellations. Here I believe that Kingfisher a late entrant (2004) which has 9% of the Indian market has taken a large chunk of this segment .

Low Cost Issue….A strategic Advantage

Air Deccan has built up a sustainable competitive advantage in the Airlines Industry. The case in point is that there is no way to squeeze more margins from existing operations to generate the savings that would justify the price charged.

Air Deccan utilizes an aircraft for close to 13 hours per day with an average load factor in excess of 70%.This is 10% higher than market leader Jet. This as also considered high when compared with International low cost Airlines such as Ryan Airways. The growth in this is limited.

Cost of fuel which is a constant for all airlines accounted for 33.7% of Jet’s expenses against 42% for Deccan’s. The obvious conclusion is that other expenses for Jet are higher.

Another area where Air Deccan scores is selling and distribution. For Jet, this cost worked out to 11.85% expenditure against 5.2% for Deccan. The latter sells most of its tickets online or via its call centre — which cuts out the commission paid to travel agents. The commission paid by the airline to travel agents is also lower.

Traffic on off beat routes has been growing at 50%, albeit on a smaller base. Air Deccan flies to 55 airports out of which 35 are small airports. At present, besides Jagson Airlines Ltd it is the only other carrier tapping this market. Coimbatore-based Paramount Airways operates all-business class flights to small-town destinations with its 50-seater Embraer regional jet ERJ 145. Kingfisher Airlines, which will soon be taking deliveries of ATRs, is also eyeing this sector. SpiceJet wants to keep out of this market because of the hassles involved in maintaining two types of aircraft. So, for the moment literally has the entire market to itself as Jagson is an insignificant player.

Air Deccan is partnering with government to increase air travel. States like Andhra Pradesh and Karnataka have announced a reduction in sales tax for no frills regional airlines to improve air connectivity in those states. While Andhra has completely abolished sales tax, Karnataka has reduced it from 25 per cent to just 4 per cent.

With all avenues cost already low, an easy way to improve profitability would be to hike prices, but that would affect what Air Deccan epitomizes

Customer Focus…The new paradigm

The Airline has planned for a rapid expansion. It plans to overtake Jet with the kind of operation expansion his airline has planned over the next few years. For this it needs to set its flight path to it is higher service standards and a complete makeover of image.

It goes way beyond just switching the colour of tee-shirts worn by employees from blue to yellow. The airline is now looking at improving its on-time performance and passenger service; reduce number of cancellations and customer complaints even as it maintains the lowest fares in the market. Being the best, however, may take tremendous effort on the part of Deccan; not just in terms of financial investment but also in terms of attitudinal shift.

Nonetheless, the airline has already kicked off the exercise.

Over the last nine months, the airline has brought down its flight cancellations to less than half from 597 in January to 234 in August. It has also improved on-time performance during the same period from 58.61% within 15 minutes and 87.11% in an hour to 76.40% and 98.33% respectively.

Last three months have seen its on-time within 15 minutes range between 76% and 79% and within an hour, it is hovering at around 98%. The no-frills airline has also pruned the percentage of complaints per 1000 passenger from 13.6% (on 3.19 lakh passengers) in January to 6.82% (on 4.21 lakh passengers) in August.

Such performances are giving it the confidence to commit to passengers on service standards. It is kicking off a month-long WOW campaign beginning September 19 under which, if an Air Deccan flight is delayed over three hours flyers would unconditionally be getting a free ticket (except in cases of delay due to fog), and in case of cancellation, he would be put on another flight, subject to availability.

And as it embarks on the campaign, the airline has entered into Rs 460 crore ($10 million) agreement with Lufthansa for component and maintenance repair and overhaul (MRO) support and another Rs 230 crore ($5 million) agreement with aerospace companies — Airbus ($3 million) and ATRs ($2million) — for engineering support. It has also bought a hanger at Chennai airport.

Customer Lock-in are being used effectively .The airline has introduced two new schemes, Super Flier and Super Flier Plus, which offer 30 and 36 tickets, respectively, at reduced rates to passengers. Under the Super Flier scheme, a passenger gets 30 tickets for Rs 50,000, which can be used in any of the short haul sectors that the company operates with the ATR aircraft. The Super Flier Plus scheme comes with 36 tickets for Rs 1,00,000 which can be used in any of the sectors that the airline operates. The tickets are valid for 12 months from the date of purchase of the package. The packages can be used for business or personal use and includes family members as well.

Continuing with its strategy of strengthening its distribution through
new channels, India's low-cost carrier is gearing up to launch an option
of booking, payment and re-scheduling of flights through SMS. The airline had tied up with Reliance WebWorld to offer an option of booking air tickets through a nationwide retail chain of 241 real broadband centres across 104 cities in India. The initiative
is being termed as the "first ever and a major e-ticketing initiative of
its kind in the country, leveraging the retail presence and broadband
capabilities of Reliance WebWorlds."

Outlook

Deccan Airways continues on rampant capacity addition by adding five aircrafts. This would affect load factors and also the yield and the expenses will be up for these five aircraft operations. If one looks at the past twelve months, Air Deccan introduced seven airbuses and around eight ATRs, last year based on growth rate of 280% in the last year. This year industry expects to grow around 15-25% , the repeat looks unlikely by Air Deccan.

The load factor would improve as the flights start achieving maturity. Hence load factor always depends on how the mix is skewed, whether it is skewed towards the newly introduced routes or the mature routes, which determines the average load factor and the average yield. With Air Deccan initiative to start new sectors the load factor might not improve.

It needs to be seen whether it is able to maintain its competitive edge and break even keeping the prices at current level. Although the airline is moving towards a more customer centric approach rather than a single point price strategy, It needs to be seen uptill how long the investors and debtors are willing to wait for the return on their investment or would allow Air Deccan to keep losing money.

The shift in Indian Television Industry

2006-09-30T22:25:00.000-07:00

India consists of 179 million households out of which 70 millions have a TV. The figures seem to be great in terms of penetration and also have an ample amount of scope for growth. The advent of private players, foreign investment, and growth in technology has brought this industry to a tipping point of an entirely new era.

The Key Growth Driver

Subscription revenues are projected to be the key growth driver for the Indian television industry over the next five years. Subscription revenues will increase both from the number of pay TV homes as well as increased subscription rates. The buoyancy of the Indian economy will drive the homes, both in rural and urban (second TV set homes) areas to buy televisions and subscribe for the pay services. New distribution platforms like DTH and IPTV will only increase the subscriber base and push up the subscription revenues.Industry estimates feel that industry will grow at a rate of 24% in the coming 5 years.

Evolution

The Indian TV industry seems to be evolving from three different stages and would reach a point where conversion of TV into a PC and into a telephone will not be distinct anymore. As the market matures the television wars will first compete on price in which mode of connectivity is going to play an important role and then on content and quality of picture and sound. Each of these stages has been studied in detail, keeping in view the initial investment and the feasibility in the Indian context

Stage One- It is more than obvious that sooner or later CAS will be rolled out considering its advantages over the present form in more customized offering, more transparency and better market pricing (Demand and supply of individual channels can be easily measured). CAS will involve an initial investment which can be broken down into monthly installments.

Stage two- Direct to Home; holds distinct advantage in terms of low involvement by the consumer with the cable operator (E.g. problems of power failure and poor picture quality). Direct to home model operations which uses direct satellite communication and major players like Tata, Zee & Reliance have invested in this. This model supports two way connectivity as well as a reach to any corner of India, thus increasing the connectivity in the non urban areas(successful launch of igo tv, with DD direct package). DTH also is a beneficiary of content makers as it would reduce piracy. The hindrance to acceptance of this model by the consumers is the initial investment to be incurred by him, high switching cost and less amount of flexibility(in terms of the preferred content). However we feel that there would be a gradual shift towards acceptance of DTH once CAS is rolled out.

Stage Three- Convergence, with a rapid change in technology and everything from camera, phone and radio becoming one, possibility of convergence of telephone, internet and TV into one in Indian context is no longer a dream. IPTV has been at the fore front of this convergence and has done very well in the developing markets of Malaysia and Taiwan. After about 20 years the Indian consumer will no longer be satisfied only with streaming content (which is being directly broadcast), but would demand interactive-ness and options like customizing his TV viewing on his choices to individual programs at his convenient time. For ex. A consumer would be able to buy a stock news from CNBC, and headlines from Aaj Tak, sop operas from Star while songs from MTV. With massive investment already being made in bandwidth & infrastructure setup; a set of new players in TV market would emerge mainly the Telecoms & ISPs. So Hutch TV might just not be an advertisement, but can also turn into reality.

Note: The current state of FDI in the Industry

Cable networks- FDI limit is up to 49% inclusive of both FDI and portfolio investment. Companies with a minimum 51% paid up share capital held by Indian citizens are eligible for providing cable TV services under the Cable Television Network Rules, 1994.

Direct-to-home- Maximum 49% foreign equity allowed including FDI/NRI/FII Within the foreign equity, FDI component should not exceed 20%

Welcome to ForthrighT

2006-09-21T07:41:00.000-07:00

Insights, Analysis, Reasoning, Synthesis and much more...
Enjoy reading

-Team ForthrighT

Swaroop takes a closer look at India as a small car hub

Smaller is Better : Business Newspapers in India are nowadays seen full of car giants announcing their foray and expansion plans into the small car segment. The excise duty cut in the recent Union Budget has fuelled growth of the small car segment in particular. Though this might be the immediate cause of the flurry, the underlying causes might be far deeper and broader. The article aims to communicate the expansion plans of most domestic and global giants, and takes a look at why a sudden upsurge is being seen in the small car segment.
http://sibmforthright.blogspot.com/2006/09/smaller-is-better-small-car-story.html

Prathibha gives insights about Private Equity in India

Private Equity: The Indian Scenario : Last March, when the international private equity firm Warburg Pincus sold a $560 million stake in Bharti Tele-Ventures, it made private equity investors the world over sit up and take note of the potential the sector holds in India. In this article we take a look at the current scenario of private equity investment along with understanding the major factors, both economic and sociological, that have played a key role in the development of the sector.
http://sibmforthright.blogspot.com/2006/09/private-equity-indian-scenario.html

Commets and contribution welcome forthright@sibm.net

Private Equity: The Indian Scenario

2006-09-21T05:45:00.001-07:00

By :Pratibha Singh, MBA- II, Finance, SIBM

Last March, when the international private equity firm Warburg Pincus sold a $560 million stake in Bharti Tele-Ventures, India's largest publicly traded mobile telephony company, it created ripples both within the country as well as among private-equity investors across the globe. Not only was the transaction, on the Bombay Stock Exchange, the largest block trade ever on the Indian market, but was also carried out smoothly in less than half an hour, pointing to the depth and maturity of the Indian equity markets.

Over several months Warburg reduced its 18.5% stake in Bharti to about 6%. It invested nearly $300 million in Bharti in the period 1999-2001 and by selling nearly two-thirds of its share, earned a whopping profit of $800 million. When Warburg had entered the market Bharti had around 100000 subscribers, the figure stands at over 14 million today. Bharti’s market capitalization back then was a mere $100 million as against $15 billion towards the end of the period in view. Warburg is the largest private equity investor in India having ploughed $811million into the country as of last year. What is interesting is that the figure is more than double the amount the firm has invested in China- $362 million. Moreover, the Bharti deal is just the tip of the ice berg of private equity investing in India- with the sector holding great promises especially in view of long term investment.

What really set the ball rolling? It is to be noted that a decade ago, while money from US investors did go to Asia, it was to countries like Thailand and Indonesia. The Indian market was still considered to be in its infancy stage and did not figure in any major way. The 1991 crisis that brought the country to the brink of bankruptcy spearheaded an era of reforms, both political and economic that has continued ever since. Although the process of reforms may have slowed down in some cases, it nevertheless has moved on in the right direction. These, as well as sociological changes, both within India and abroad have culminated in developments that are exciting private equity investors the world over.

Factors favoring private equity investment

India’s democratic government and a free press that is rooting out corruption provide it a favourable investment climate especially in the long term. GDP has grown at rates between 6.5-8% over the last few years, a rate not seen in any developing country. Furthermore, the volatility of the Indian rupee has been curbed and inflation has declined implying lower interest rates. Thus equity markets seem to be a preferred investment. Since October 2004 the Sensex has been on the rise. Although it did witness a fall towards the middle of this year, the Sensex has recovered and in fact crossed the 12,000 mark a few days ago.

Globalization has played a key role with most production work shifting to countries like India and China. As a result there is a shift in consumption globally from the developed to developing and underdeveloped world. It is in these nations that one is witnessing a growing middle class that will take up a major share of the world’s total consumption in the years to come.
Removal of restrictions on Foreign Direct Investment (FDI) has added further impetus, the most noteworthy being the change in the retail sector where outside firms selling a single brand such as Nike are allowed to own a majority stake in Indian stores. The limit on FDI for development of airports, mining of diamonds and precious stones and power trading has also been lifted. Foreign Institutional Investment (FII) has boomed over the last couple of years.

One of the biggest changes has been in the confidence level of the Indian people. The contribution of the Indian IT companies to averting a worldwide Y2K meltdown was a major factor in this regard. It saw Indian IT companies going global and the government- unfamiliar with IT- having nothing to do with it. The result being all companies wanting to break away from government regulations.
Moreover, India has an advantage in healthcare including biotech, pharmaceuticals and telemedicine over its Asian counterparts. These are important sectors for a developing economy.

The Current Scenario

A look at Warburg’s other notable holdings in India throws light on the market scenario today. These include- Rediff Communication, Gujarat Ambuja Cement, Sintex Industries, Kotak Mahindra, Nicholas Piramal and WNS Global Services. As can be seen the firm has stuck to big, trusted stock market listed companies. This throws light on an interesting finding that unlike the US where this is rarely a strategy for a private equity investor, India with its demands of a billion people yet to be fulfilled, leaves enough room for even the largest conglomerates to grow. Moreover bigger Indian companies are increasingly seeking capital abroad to expand and thus will never play foul, making them less risky and hence the preferred choice for private equity investors.

As news of the Indian markets has spread, competition has increased and significant names in the private equity world can now be seen operating in India. These include Intel Capital, Oak Hill Capital Management, the Carlyle Group, Citigroup, General Atlantic Partners, CSFB Private Equity and CALPers among others. However most have invested only in double digits so far. A large number of Indian financial institutions like Kotak have created venture funds to tap the sector’s potential. So much so that fund managers expect returns of 20-30% a year.

India’s requirement for capital will continue for quite some time. Infrastructure improvement alone in the form of better roadways, more power generation, etc will require approximately $20-25 million in the form of investments every year. The biggest challenge is to lift nearly 200 million people out of abject poverty. Infrastructure, more than any other medium, has the potential to generate the jobs needed to attain this social goal.

The Stumbling Blocks

A major drawback is that concerning property rights. While the Indian legal system does offer protection of property rights, it does not do so with great speed.
Banking and finance is a critical concern for private equity investors in India , although the future of banking does appear optimistic. With a large number of foreign players, there would inadvertently be pressure on local players to be proactive.
Exit options are another stumbling block. Indian companies are more strongly linked to US firms than their Asian counterparts. Investors in these firms can exit through a US sale or initial public offering. While it’s easy to invest in India, it can be difficult to exit. The public markets lack liquidity and many companies are thinly traded in markets controlled by powerful local brokerages. The Warburg- Bharti case proved to be an exception though.

It is clear that private equity presents a huge potential for investment, more so in an emerging market like India. With reforms in place and the economy zooming ahead, the timing is appropriate. However what needs to be realized is that the key to successful private equity investment depends less on what happens in the financial capitals of the world than in developing villages. It depends on how quickly the internal market will develop. With a rapidly emerging middle class, hundreds of millions of people who will seek to have the same standard of living as everyone else in the world shall enter the picture. The sooner this is understood, the more beneficial will it be- for both the investor as well as the nation.

Smaller is Better: The Small Car Story

2006-09-21T05:39:00.000-07:00

By: Swaroop Joshi, MBA I, SIBM

It’s not just the monsoons rampant in the country. The country suddenly seems to be flooded with auto giants flurrying in with huge funds. Small cars, all of a sudden have become the pets of the auto Goliaths. Small cars; which are currently defined as the cars less than 1200 cc engine capacity for petrol vehicles and less than 1500 cc engine capacity for diesel vehicles, along with a 4 meter length constraint; make up about 65% of total passenger cars market in India.

Maruti Udyog Ltd, the current market leader in passenger cars and gaining more than 80% of its revenues from its small and compact cars segment, will launch a new compact car by 2008-9 and invest an additional Rs 3,000 Crore till 2010. Code named A, the car would be priced at around Rs 4 lakh with an engine capacity of 1,000-1,200 cc. It has already committed to investing Rs 6,000 Crore by the end of the decade in its existing facilities at Gurgaon and the new unit at Manesar.

Tata Motors, which has eaten up a sizable share of Maruti in the last 5 years, has announced plans to invest Rs 10,000-12,000 Crore over the next three to four years to expand its production capacity for passenger cars and commercial vehicles. In addition to expanding its existing unit, Tata Motors has decided to set up a JV with Fiat of Italy to build a range of small cars and sedans for the Indian market. Technological inputs from FIAT would help the Tatas in developing the highly awaited 1 lac car.
After riding high on its Santro, Hyundai Motor India, which is the third largest player, enjoying about 20% market share in passenger cars, is also looking at another small car, positioned between the Santro and the Getz.

The global giants are not awaiting any invitations to join the party either. GM shifted its gears to the small cars segment, and has announced 3000 Crore plan to roll out the all new model “Spark” in addition to its Aveo plans at its proposed facility in Talegaon near Pune.The Toyota Kirloskar JV, which had initially denied of any plans of foraying into the small cars market until August end the latest, too seem to have swirled their plans. In 18 months' time, Toyota is now planning to roll out a small car. It is putting up a plant that will make 1.5 lakh small cars a year. It aims to corner 10% of the market in the next 4 years. Japan's Honda Motors along with its Indian partner SIEL is planning to set up a second plant in India, which could involve an investment of about 8000 Crores over a period of five years. The proposed plant will primarily be used for building small cars in India. Even majors like Ford, Nissan and Volkswagen have publicly unleashed their aspirations to foray into the Indian small car segment in past 1 month, all combined together totaling more than a whooping 25000 Crores investment plans.

Reasons underlying the gold rush

The biggest trigger for the sudden flurry can be seen in the excise duty cut from 24% to 16% for smaller cars in the recent Union Budget. In a recent move, the heavy industries ministry is expected to recommend that any car up to 4 meters in length should be considered “small” and charged lower excise, regardless of its engine capacity or the fuel used to run it. Till now, petrol cars with engine capacity of up to 1,200 cc and diesel vehicles with engine capacity of 1,500 cc were eligible for the lower excise bracket as long as they were up to 4 meters in length. This definition excluded several popular small cars, besides almost all the entry-level sedans, from the lower excise bracket. The latest move, if accepted, is expected to bring some cheer since popular car models such as Maruti Swift, Hyundai Getz, Tata Indica petrol and Fiat Palio (petrol) would become eligible for entry into the small car club. A few sedans could also qualify, provided their respective manufacturers tinker with the length. At present, the small car club comprises five models from the Maruti stable — M800, Omni, Zen, Alto and WagonR - besides the Hyundai Santro.

The present proposal comes close on the heels of industry bigwigs, including Ratan Tata, asking the government to relax the “small car” definition to include all cars with up to 1,500 cc engine capacity. If one takes a look at other small car markets around the world, it becomes apparent that India has come up with a novel way to define a small petrol car. In Brazil, a small car must have less than 1,000 cc engine capacity, whereas in Japan, the 660 cc cars fall under this ambit. Nowhere in the world is a small car defined as having engine capacity of up to 1,200 cc.

Although the excise duty cut might have been the immediate cause for the gold rush, the underlying reasons are far broader. The Indian Auto Industry has come a long way from the days of Ambassadors and Premiers, to the Maruti 800 revolution, now becoming the fourth largest and fastest growing passenger car producing hub on the globe. No doubt that a robust domestic market with stable consumption trends has been the key to the industry growth; due to the improved productivity, quality and reliability along with the traditional low labor cost factor, global auto giants are looking at India as a sourcing hub for their global operations. Thus, the situation in the global arena might have a larger part to play for the recent flurry. The excise cut might not give a competitive edge to any one of the auto players in the domestic market, but certainly does impact the global markets to a large extent. For example, Maruti Alto is the no. 1 brand in its segment on the Netherlands. With the duty cut, they can become more cost effective in the Netherlands market, and can increase their market share from the current 18.7% in that country.

Another important global reason for auto companies is the Free Trade Agreement India signed with Thailand two years ago. As per the agreement, the so-called 82 early harvest items, which include a range of auto components, will be subject to zero duty when imported from Thailand into India from September 1. Japanese majors like Toyota and Honda have major operations in Thailand and the FTA will help them integrate their Thai operations into their India plans. The option of importing critical components from their own operations/suppliers in Thailand confers a twin advantage for the Japanese majors. First, the time to market can be crashed as they do not have to wait for Indian component suppliers to invest in production capacities and, second, it confers a big price advantage as they can import duty-free components unlike other competitors.

Apart from these strategic reasons, the global crude oil price pressures on developing and developed markets seem enormous. With the fear of crude touching the 100 $ mark within one year, more and more manufacturers are turning to fuel efficient cars worldwide. Shifting to fuel efficient cars offers a temporary solution to the manufacturers till some other non crude technology ramps up to take over the market. The shifting of Indian autos towards manufacturing more and more diesel variants also seems to be a direct ramification of the crude prices.

Mind Games?

As mentioned earlier, robust domestic demand is the key to the recent small cars bout. The Neo spender youth, double income family and possessing of a car still being a status symbol more than a commuting medium is driving the auto growth. Along with it, the congenital frugal mentality, which still prefers fuel efficiency over looks and style, is stimulating small cars demand in particular. Though the two wheeler market is expanding, the taste of the urban youth is shifting to own a car after their first salary rather than owning a two wheeler.

It might just not be the mind games, but something more for the small cars to be rolled out in masses in the Indian markets. Ease in financing should be credited with a lion’s share. More than 80% of Indian car sales are on credit. Schemes like 5000 per month were a huge success because it brought the affordability factor into picture which was totally absent earlier.

Words of Caution

Though most auto majors are investing heavily in the small cars segment to gain a competitive advantage globally, the big flurry might lead to over capacities across all companies, including ancillary and auto comp industries in India, apart from the fierce competitive pressures. It would take at least 2-3 years till the time all capacities are built up, and in case of economic slowdown fuelled by sky rocketing crude prices, huge losses might be incurred. Also a jump shift from two wheelers to executive cars surpassing the small car segment in view of higher and higher disposable incomes of Indian families, along with easier financing schemes, too is not a remote possibility.

Imperialism of the new generation?

Long gone is the period when powerful Imperials used to be at war in far away lands for local and global supremacy. History is repeating itself; with some changes though. The difference this time is that amidst the clashes of the Emperors and Kings, the customer would be emerging as the trump Ace; the real victor.

Innovation in Internet Advertising

2006-08-31T11:52:00.001-07:00

By: Research Factory

Abstract

The article presents the paradigm shift happening in internet advertisements from banner advertisements to more specific form of advertisements which are much more accountable for advertisers and focused towards customer. It discusses on how Google despite being the biggest disguised form of advertising agency has been constantly changing to be more cost effective for the advertisers at the same time delivering the message to the target segment. We have tried to explain the advertising costing model prevalent in the industry plus the new innovation in internet pricing, tools and advertising methods coming up. Innovations like cost per click and pay per call have lead to serious competition in the online advertising front between MSN’s Adcetre and already established Google’s Adword. The article also discusses Google’s unique Adsense concept which has given business opportunity to thousand of bloggers and non serious website owners.

Introduction

John Wanamaker the man who invented department stores and price tag in 1870 famously said “Half the money I spend on advertising is wasted, the trouble is, I don't know which half.” More than a century later the proverb still holds true and more so for the internet based advertisements. According to a Mckinsey research internet advertisements going to the wrong audience accounts for $332 billion of wasted resources of which $112 billion is spent in America alone. For any marketer this waste of resources is a night mare. In the following article we will try to look at the various tolls and technique which companies and agencies are using world wide to track their advertisement so that it reach the correct audience.

Traditional media like television commercials have come in for serious criticism in the past often relating it to as if dropping an atom bomb. The message hence sent reaches the entire population rather than small fraction of our target. Also television rating point system (TRP) used for measuring viewer ship of program does not take into account viewer’s involvement with the program. For example a person may have switched on the TV and gone in for shower or to his kitchen. Also, the viewer might have switched channel at the time of commercial break or the advertisement featuring men after shave is being watched by a women. Internet advertisements on the contrary are more specific and more narrowed down to the desired target segments. With more than 10 million program recording software like TiVO already being used, agencies are more than skeptical about the future of television commercial. More so consumers also tend to be more alert on the internet. Whereas people might watch a television show in a semi-comatose state of mind and at obtuse angles on their couches, consumers typically surf the web leaning forward while paying attention to the screen.

Internet advertisements which mainly comprises of banner ads, sponsored searches, videos and text files. Innovation is the key for internet advertisements, with advent of video ads their distinct advantage in the inability of user to avoid them plus with additions of sounds and graphics make them more appealing as compared to banner ads. However of late internet advertisements have developed a problem of their own. Often we encounter interruption by mysterious banner ad only to be taken to a site that offers us no value. Internet is more a medium of knowledge than entertainment hence any disconnect between the kind of work we are doing online and the advertisements generates negative feeling towards that advertisement and site. This is unlike in the case of TV where entertainment is the main reason for viewer ship. Advertisers therefore are looking at options which put advertisements relevant to the content of the site and add value to the site. According to Mckinsey report although the inventory of banner ads—$4 billion to $8 billion—appears more than sufficient to accommodate the likely demand of $2.5 billion, advertisers probably won't be interested in much of what's available. The complex task of spreading media spending across thousands of small Web sites, many with different ad formats, means that advertisers tend to return to heavily trafficked sites, where supply is at a premium. Even on the big portals, marketers are leery of having their ads placed near consumer-generated content that might be objectionable. In fact, advertisers currently direct 96 percent of their spending for online display ads to pages that represent just 30 percent of overall Web traffic.

Innovation in internet advertising

The above reason have lead to series of innovative steps being taken by various online advertisement companies to make cost of advertisement more accountable and driven by actual customer interaction rather than theoretical exposure of users. Advertisers now pay only for real and measurable actions by consumers, such as clicking on a web link, sharing a video, placing a call, printing a coupon or buying something. This has lead to pricing on the basis of every click that a user makes on the advertisement, also called as “Cost per click (CPC)”. New interactive forms of advertisements have replaced the traditional banner ads and lots of new innovative steps are being worked upon.

Generally CPC model of payment was preceded by cost per impression (CPM) model which still being widely used as the mode of calculating advertising rates for the internet.The CPM model refers to advertising on the basis of impression. It is used for measuring the worth and cost of a specific e-marketing campaign. This technique is applied with web banners, text links, e-mail spam, and opt-in e-mail advertising. This type of advertising arrangement closely resembles Television and Print Advertising Methods for calculating the cost of an Advertisement. Often, industry agreed approximates are used. The total price paid in a CPM deal is calculated by multiplying the CPM rate by the number of CPM units. For example, one million impressions (theoretical audience) at $15 CPM equal a $15,000 total price.

1,000,000 / 1,000 = 1,000 units
1,000 units X $15 CPM = $15,000 total price

The amount paid per impression is calculated by dividing the CPM by 1000. For example, a $15 CPM equals $.015 per impression.

The Cost per Click model was formulated by Google under the banner of Adsense and Adwords. The innovative practices being followed by Google helped it to garner a turnover of $6.1 billion last year hence making it one of the biggest disguised form of online advertising agency. Adword an online advertising tool offered by Google helps advertisers to tag searches to definite keywords which are widely used. When such a keyword is searched on Google search engine generates a set of sponsored searches along side the search result. An advertiser is then charged when such a sponsored is clicked by the user. All this comes with an added twist that advertisers could bid for these keywords in an online auction. Google also has AdSense a system that goes beyond search-results pages and places “sponsored” (ie, advertising) links on the web pages of newspapers and other publishers that sign up with Google. Like AdWords, even AdSense advertisements are “contextual”—relevant to the web page's content—and the advertiser pays for them only when a web surfer clicks. Adsense is path breaking in the respect that bloggers and people who own non commercial sites enriched with good content can make money out of this tool. A typical Adsense customer when signs up give space on his website to Google for putting up ads on his website. This ad when clicked gives the owner of the site some royalty. Google in return insures that advertisements are relevant to the content of the site by using various sophisticated tools and techniques. Various filters are used to block competitor and pornographic ads coming on ones website. This also makes process more user friendly and regulated. Google puts relevant CPC (cost-per-click) and CPM (cost per thousand impressions) ads through the same auction, and lets them compete against one another. The auction takes place instantaneously, and, when it’s over, AdSense automatically displays the text or image ad(s) that will generate the maximum revenue for a page -- and the maximum revenue for you. Google goes beyond normal advertising auction but offers tools used for designing websites in order to become more advertisers friendly. Site owners can give the URL’s of their site which Google scans and finds out all the relevant keywords present in them in order to be picked up in a search. Also the Google search bar we find in many websites is another feature of Adsense. A sponsored search result when searched through search bar is clicked; some amount of money gets paid to the owner of that website. A full vertical diversification of Google can be seen from the following case:-

I own a site and want to earn revenue from it. This is how I will go about doing it with the help of Google.

a. Once my site is completed I will submit my URL to Google for it to be included in its free searches.

b. Once the site becomes popular and I start getting few hits I run this site in Google analytics, a statistical tool used for analyzing my site on the parameters of hits depending on location, time and age of visitors. I can even find out which all portions of my site are more frequently visited and which are not.

c. The portion of sites which are less visited can be boosted by using Adword in which I buy keywords in those portions of my site which are least visited. Hence, when a next time a query for such a word is raised my website features as one of the result.

d. The most frequently visited portions of my websites can be used through Adsense for putting up ads via online auction hence adding to my revenue.

e. I can even add Google search bar for increasing my revenue besides which there are number of tools available which help me in designing better websites in order to brand it in a better way for advertisers.

The massive indents created by Google have to be countered by none other than Microsoft recently launched Adcentre. Adcentre goes a step beyond Adsense and targets customer on the basis of gender, geographic location and day part and day of week. Critics of Adcentre say how such segmentation be achieved specially when user is not disclosing any of these information online. Analyst feels this is being achieved by targeting through demographics via MSN Passport profile. So, IF a user is logged into their passport account and IF their Passport data is valid, and IF the person that is logged into the Passport account is the person who "owns" the Passport, then demo targeting is achieved. This can also be done though huge information available to MSN through licensing information of various Microsoft products plus the personalized cookie which gets updated when one travels around the web. This surely is a brilliant concept but we have to wait and see for its effectiveness.

Future Ahead

Cost per click is fast being replaced by pay per call or pay per view. EBay is coming up with pay-per-call advertising on a larger scale through its recently bought Skype (Like Gtalk) software.

Another company Kontraband track exactly how many times a video is viewed and where, so that clients can see neat pie charts that summaries their success and hence are billed accordingly.

ZiXXo, saw that almost 90% of the discount coupons issued on the net were wasted hence now lets advertisers issue coupons online and places them on search results, but charges advertisers only when a consumer prints one out. Such initiatives are breakthrough in its kind and allow the manger to mange his advertising budget in more effective and efficient manner therefore generating widespread acceptance all over.

Marketing Filters

2006-08-31T11:47:00.000-07:00

By: Prateek Gupta, MBA II, Marketing

Abstract

The article studies the strategic shift in the modern world suggestive marketing and the use of marketing filters, a tool to market a product based on suggestions of other consumers or decision influencers, to promote the products. Suggestive marketing is occupying a key role in selling of modern products and services. The article deals with the design and implementation of filters for the assortments based products.

How many times it has happened to you that you sit in a restaurant, you find all the songs which are being played you love them. Often it happens you come across a person who has read all the books that u have. Few days ago my younger brother bought her friends’ laptop and I was using it and I was amazed to see that she shared my taste to the spirit. All her play lists were such that I took out some blank CD’s and ended up burning them. It’s quite unique that sometimes when we have to choose from a large amount of assortments we don’t know what to buy. The greater the variety more difficult is the choice. How many times have you bought a CD because you loved one song, but ended up hating the rest of the disc?

The scenario has changed to a large extent with the demands of consumers are ever changing and the consumer being more and more informed. The latest empowerment of the consumers is coming of age with the new concept called marketing filters. Basically marketing filters is a type of marketing tool where you sell individual units of a product and you select your choices of based on the choices of other people, editors, reviewers, curators, celebrities etc. These marketing filters give the consumers some permutation of relatively better choices available for the product. Especially in the case of new age marketing, the concept is what we call “Suggestive Marketing”. An unlimited number of user-defined marketing filters can be created where each of them would have a series of predetermined items that are assorted on the basis of prior inputs.

Why filters will really be successful is one of the questions which is of utmost importance to us. If we look in depth at certain aspects of the marketing filters and the consumer response to them we would find the following insights surface.

Belief in Insider Information-

Consumers instead of believing the marketers claims about the product and it’s excellence. Believe in the first hand experience of other people and they tend to trust the opinions of other people who have used the product themselves. For example if we consider Amazon.com which sells it books. It associates a huge number of consumer reviews with the books and the consumer tend to believe the reviews more than they do any other professional opinion on the books, even more than half of them are casual comments by the readers of the book. The filters employed by the amazon.com allow you to see all the books for which a customer has either written a review or has bought. So actually if you tend to agree upon with some unknown customer you can just traverse his preferred list of books.

Expert Opinion-

Marketing filters also provide customers’ an expert endorsement to directly choose from a huge range of products. Interesting implementations of these kinds of filters are visible in the organized book retail chain “Crosswords”. They have a separate section of books which are assorted from the books in their stock and kept as “Sriram Recommends”. Many customers buy books just because of the strong filter, that the books are recommended by the CEO of the bookstore himself and trust his opinion as a voracious reader. They prefer to buy books which are endorsed by an expert opinion.

As consumer options continue to increase, the filter will gain even more significance in the marketing domain. The ultimate insight would be creation of niche as narrow as an individual, then the filters would rule. For example, homogenized, stereotype models of computers are slowly being replaced by a multi-option, self customizable and convenient form. When the options grow wider, our focus naturally narrows to find the perfect fit, and marketing filters are steps ahead in the same direction. Lisa Johnson has talked about different ways these marketing filter actually be implemented in the organizations.

1. Create filters in both "practical" and "passion" categories

Progressive Insurance has made it easy to filter through the benefits of all the available insurance offers. It's a welcome solution for a boring, yet necessary purchase. On the other end of the pendulum swing, fans will spend hours and days consulting filters in their passion categories, including books, fashion, music, gaming, travel, sports, collectables and politics.

2. Build a forum for customer opinions

How can you gather and leverage customer opinion data? Think about how brands like eBay, Amazon and Epinions have made minor celebrities out of their top reviewers.

3. Develop an influential insider

Consider creating an internal brand personality who shares her favorite purchases. For example, a travel company could profile its CEO and ask her to share favorite vacation destinations, packing tips, luggage criteria and the best ways to re-book a canceled flight or avoid travel headaches.

4. Filter out the unnecessary

Sometimes, knowing what not to buy is more valuable than information on what to purchase. The trusted author of The Girlfriends' Guide to Pregnancy has released a shoppers' guide to steer new moms through the dizzying array of products available for their little ones. New moms appreciate the scoop on what's essential to buy new and what's OK to pick up used or to just forget altogether.

So now we can see that there is a way by which we can clutter through a series of assortments and offer consumer a good and interesting solution through these techniques of suggestive marketing. I have strong belief that in the era of customization and varied choices these would be the voice of the new age marketing.

Cement Industry

2006-08-18T06:25:00.000-07:00

By - Amit Puri and Samrin Shaad

Growth and India can easily be taken for synonyms in recent times. It’s not just for the potential of IT and ITES sectors that India is considered a goldmine, but also in a lot of other sectors, the prerequisites, of course, is that investments are made in key areas which would be the drivers for future growth. The top slot for the key areas would easily be taken up by the infrastructure sector. Not only does the sector have enormous scope for growth in itself, it is an important component of the entire growth eco-system.

The cement industry would play a crucial role in building up the infrastructure required for aviation, transportation, ports, and fuel terminals (for energy requirements) amongst others.

The Cement Industry in India has made major strides ever since inception of the first cement plant in 1914 with a humble capacity of 1000 tons/annum. At 145 metric tones a year the country is the second largest producer of cement producing around 5% of the global produce.

GLOBAL SCENARIO
DemandCement demand throughout 2006 will remain strong with growth expected in most countries. There are exceptions, notably the Philippines, Malaysia, the UK, Switzerland and Germany. As expected, the emerging markets are on course to register high annual growth rates. In the Middle East, India and Vietnam, rates of 8% are on the card, while in other countries rates of 3% to 6% have already been reported.

The shift of focus
In the recent Building Materials Report from Exane BNP Paribas, there was much mention of the shift in the centre of gravity of the cement industry to the East, and from the mature markets to the emerging markets. Asia represents 70% of global cement consumption, with China accounting for about 45% of the world total; by 2020 the emerging markets are expected to represent 90% of world consumption. For the period 2005 – 2010 it is anticipated that there will be a net increase in capacity of 648 million ton stream, of which 63% will be in Asia and 15% in the Middle East, two regions in which the European players have a relatively limited presence.

Middle East
With regard to the Middle East countries, there are two important factors that could be influencing the decision makers: oil prices and the geopolitical situation in the Middle East. Construction output in these countries has always been correlated to oil process. If demand slows and does not match expectations of increased cement capacity there could be intense domestic price competition and surplus capacity would have to be exported, out of a region that is currently importing about 15% of global sea-borne cement.

The international cement groups as well as the domestic producers in the Middle East will be carefully watching oil prices, as a fall from the high levels and revenues that have been fuelling the construction industry in many parts of the region could severely affect cement demand.

Expansion optionsThere is also another interesting aspect of the latest developments in the cement industry and that is an increase in vertical integration, in which companies are looking to control downstream activities. The acquisition of aggregates companies or ready mix concrete operations (such as that of AggregateIndustries by Holcim, or RMC by Cemex) can offer a deterrent to imports. An oversupply of cement in some of the rapidly expanding regions could set off a price war in the mature markets and the established players will want to protect their domestic interests, by becoming both producer and customer.

THE INDIAN SCENERIO
The Indian cement industry is fragmented across the length and the breadth of the country with a few clusters. Cement being a transportation intensive industry the fragmentation provides an opportunity. Road is the preferred mode for transportation upto 250 km but the industry is highly dependent on the roads as the railway infrastructure is not adequate, there is an acute shortage of wagons.

Consumption
Indian per capita consumption of cement is only about a third of the world average. Even though India stands fourth in the tally of cements consumers across the globe it easily has the capability of being the second largest consumer behind China, which, as per the estimates, would continue to be the largest consumer of cement. An additional 12 million tons per annum would need to be added to the current Indian capacity to keep up with the growing demand. There aren’t a lot of Greenfield projects in the pipeline to add to the capacity thus it would create a favorable demand-supply scenario.
However, cement consumption per capita in our country at about 115-kg/ capita is one of the lowest amongst other countries. A simple comparison with the rest of the world would prove the point, the figure for China, for instance is 450 kg/capita. Similarly in Japan it is 631 kg/capita while in France it is 447 kg/capita, while the world average is about 250 kg/capita.

Energy EfficiencyAs for energy and pollution norms, the best performers in the country perform almost at par with the best around theglobe (thermal energy Kcal/kg of clinker – India 665 against 690 of Japan and pollution norms SPM of 40 in India against 20 of Japan) but the average performers lag far behind the global average.

Demand Supply
Cement demand has posted a healthy growth rate of 11.16% in the current fiscal. This is in tandem with strong economic growth of the country. The GDP growth in the current fiscal is expected to be in excess of 8.1 per cent and during the half year Jan-June 2006, cement industry grew around 12.2 % as compared to 10.5 % for the corresponding previous year.

During 2005, the industry produced and supplied over 136 million tons of cement, including export of 9 million tons of cement and clinker. The industry capacity was 157 million tons. The industry achieved production of 141.81 million tons in fiscal 2005–06 compared to 127.57 million tons during corresponding previous year.

The strong growth in the cement sector has been fuelled by various sectors which are witnessing strong growth themselves. They are:

Ø Growth in housing sector (over 30%)-a key demand driver;
Ø Infrastructure projects like ports, airports, power projects, dam & irrigation projects
Ø National Highway Development Programme
Ø Bharat Nirman Yojana for rural infrastructure
Ø Rise in industrial projects
Ø Export potential is also a demand driver

Capacity UtilizationThe capacity utilization has improvedover the years, the current level of capacity utilization is pegged at 90% which in itself is a benchmark the world over. Not being able to add capacity rapidly has been a blessing in disguise for the industry as it has enabled it to attain such a high level of productivity.

THE CONSOLIDATION
In the past 3 years the Indian cement industry has undergone dramatic changes, the takeover of L&T cement division (UltraTech) by Grasim (Aditya Birla Group) was only the beginning of the consolidation that was to follow. The top five players control almost 50% of the capacity; the remaining 50% of the capacity remains pretty fragmented.

Global participation
The consolidation so far has not been limited to the home grown players; a lot of foreign players are keen to get into the Indian market. The newfound interest of the global bigwigs in the Indian cement arena has a pretty simple reasoning behind it; huge potential for growth in the medium and the long run, and a strategic base for a possible injection of cement at competitive prices to China and other Asian Countries.

It would only be unfair to expect that the global bigwigs would sit back and watch without being part of the action. Its no wonder that the top ones (Lafarge, Holcim and Heidelberg) have increased their investments in India.
The added advantage
The government initiatives to extend a variety of incentives to the industry to spur growth in the housing and other infrastructure sectors is only going to increase cement demand in the medium term. Having mentioned earlier that the per capita cement consumption in India is very low, the multinational majors see a huge potential for this pie to grow and thus are eager to have a slice through acquisitions.

The acquirer and the acquired
The following acquisitions have happened in the recent past
Grasim: UltraTech(L&T)
ACC: IDCOL
Lafarage : Tisco, RaymondsGujrat Ambuja :DLF, ACCCement FranCais : Zuari
Heidelberg : Mysore Cement
Holcim: Gujarat Ambuja

It’s interesting to note that ACC took over state-owned Industrial Development Corporation of Orissa Ltd (IDCOL) in Dec 2003, only to be merged with by Gujarat Ambuja which in turn has been taken over by Holcim recently. ACC and Gujarat Ambuja are now the two arms of Swiss cement giant Holcim with a 24 per cent share of the Indian market and nearly 35 million tons capacity.

OUR VERDICTThe Indian Cement Industry is evolving and evolving for the good. The action that we have seen is not the end, it is would continue for some time. Though the bigger players have created bigger entities there have isolated smaller entities who would eventually have to come together either to grow or be part of some bigger entity. The cement market is on a growth path(refer other article in this issue on Realty Boom) and as they say “make hay while the sun shines” we expect more global players to enter this growing market.

THE “REALTY” SHOW

2006-08-18T06:20:00.000-07:00

By - Swaroop Joshi and Siraj Mukherjee

· An Overview
The dream run started with the onset of the new millennium. India was fast making a mark in the global IT market creating a high demand for the educated intelligentsia. Followed by that was a wave of the BPO industry, requiring a whole new lot of educated urban professionals; and of course land in prime locations to set up their swanky offices . That was the time when better job opportunities, increased per capita income, dual income couples, easier housing finance, nuclear family concepts and higher standards of living fuelled the current real estate boom.
The corporates are never late to join a party. The neo-spender youth was not to be left unnoticed. Entertainment and commercial complexes, hotels, malls and multiplexes that mainly catered the new society burgeoned, further fuelling the real estate boom.

The government also had a part to play. After 100% FDI was allowed in real estate in February 2005, the residential property market got a major boost. The FDI in residential projects led to a spurt in huge 100-acre plus townships. The relaxation of the FDI ceiling saw big names like Dubai-based Emmar Properties — the largest listed real estate developer in the world — joining hands with the Delhi-based MGF Developments to announce India’s largest FDI in the realty sector, amounting to over $500 million in projects with a capital outlay of $4 billion. High economic growth has upheld the demand for real estate. The development of real estate on both the major areas: retail and residential; has been phenomenal. The real estate industry constitutes 5.8-5.9% of India’s GDP. It is said that of every Rupee spent on construction sector, an estimated 75- 80% was added to the country’s GDP. Real estate prices in key cities like Mumbai, Delhi, Gurgaon, Bangalore, Hyderabad and Pune witnessed a 35%hike in prices in 2005, and even 100% in select areas within two years.

The Mumbai Story – Mill Lands to Mall Lands
The Indian Supreme Court on; 7th March 2006; in a verdict sanctioned the sale of 602 acres of prime land in the heart of Mumbai city occupied by 58 mills textile mills to private developers. Prior to the Apex Court judgment, by a ruling, The Bombay High Court had set aside the sale of mill lands here by the National Textile Corporation (NTC), which had flared the prices by more than 20% within four months.

The high profile sale of the 5 National Textile Mills (NTC) in Mumbai to private builders, which was approved by the Supreme Court of India, was the latest spark in the real estate scenario in Mumbai. DLF Universal bought Mumbai Textile mill land for Rs 702 cr. for the construction of a hotel and a shopping mall. Two other NTC mill prime lands were recently auctioned for Rs 862.75 cr. While Shiv Sena leader Manohar Joshi- promoted Kohinoor CTN Ltd purchased Kohinoor Mill No. 3 with a winning bid of Rs 421 cr, financial services group, Indiabulls won the auction for another prime NTC property –Elphinstone Mills – with a bid of Rs 441.75 cr. The mill lands would soon shed the look of a haunted place with plaster peeling off the walls. It won’t be long before the land that once buzzed with industrial activity and produced quantities of yarn and cloth, is transformed into a glitzy glass and chrome building churning out IT products and services. Mumbai would now be set to garnish its inherent beauty by an all new oasis of elite business and leisure which would now swathe colossal residential villas, corporate offices, advertising agencies, art galleries, entertainment centers and aristocratic malls.The ripples of the Apex Court verdict were felt all over the country. Prices surged further in most of the metropolitans. The real estate stocks gained substantially following the Supreme Court verdict on the sale of NTC mill land in Mumbai. Stocks like IndiaBulls, Bombay Dyeing, Godrej Industries, Ruby Mills and Morarjee Realties were the major gainers. Stocks of companies like Hindustan Motors and Bata India, which have property in Kolkata and do not in any way benefit from the decision, also gained substantially.
Though the real estate prices usually keep abreast with the stock markets, the fundamental difference between the two markets surfaced out after the recent crash in the stock markets. Even after the markets shed more than 1/4th of the market cap, real estate prices had remained firm.
The real estate market, like the stock market, is all about supply and demand: when more people want to buy than sell, prices go up, and vice versa. Buyers often buy stocks based on future potential, not for its inherent value. People may invest in real estate for extra income hoping the price would rise further, but real estate still has inherent value because you or someone else can actually live in it or at least rent it out. If the property prices of area, in which a person lives, falls by 10%, is he going to move? Not really. The shifting cost and tiresome efforts involved in moving is not worth it for most of us.Supply and demand also work differently in the housing market. People realise that even if they sell their property for some extra income, they will have to pay the increased price to purchase a new house, which is rather vexing. This phenomenon is causing limited supply and even higher prices. In other words, the price increases are not necessarily about irrational demand, but rather limited supply.Time for a correction?
The Supreme Court ruling, though had produced a sharp price rise in a tussle to gain the prime mill lands, the verdict has also provided an opportunity for unlocking real estate potential in the heart of Mumbai. Rise in supply thus might pull the prices down in the near future.
The recent interest rate hikes would also have a say for the party to end. With fixed home loan rates rising from 7.5 to 10.75 per cent in most commercial banks, there will be a gradual decline in demand for home loans, which in turn would mean the softening of property prices. Coupling the interest hikes, the speculated tax reforms might shoo away those players buying property for the sake of tax benefits.
The other side of the interest hike might be that as the cost of credit goes up, the demand remaining the same, will lead to cost push inflation. The buyer may also feel that as interest rates are going up and property prices are moving up, it is better that he takes the plunge now, thereby spiraling cost push inflation. The projected retail boom might also be one of the reasons that would sustain the real estate boom. But as far as the residential estate prices are concerned, it might not create the necessary drive so as to sustain the prices.
The upward spiral this time has surpassed previous boom cycles. It is observed that the boom is more investor heavy with buyers going in for second and even third homes purely for investment. This means entry of short-term players or speculators into the real estate market has skewed the demand-supply equation in many cities. The speculation in the real estate market is seen to be feeding the asset prices. Speculators in fact might be shooed away from the markets; owing to the decline in demand for home loans and in turn lowering the prices; compelling them to book profits and exit the market. This in turn might unveil a bunch of unused land and residences, thus increasing the overall supply and making the land available to the real consumer.Thus, the overall trends along with supposition of slight retardation in the overall economic growth owing to the sluggish performance of the US economy in the last quarter, coupled with higher interest rates and thecrumbing infrastructures in most of the metros, the real estate boom might call it a day.

Effect of the possible property price fall on the consumer

A Study: The Property Price Fall Coupled with an Interest Rate Hike

The following table shows the monthly EMI a consumer might have to pay for projected price falls and increasing home loan rates. The comparison is vis-a-vis last year’s average rate of 7.25%. The calculations are for commonplace household costing 30 lacs and the loan period being 15 years.

Property Price : 3000000
Loan for years at fixed rate: 15 years
Current EMI (27,386) - @ 7.25%
The analysis shows that though the home loans are getting dearer, an expected price fall might leave the consumer untouched with the EMIs at current rate matching the figure one year ago. At a 10% fall in one year, which might not be a very bold conjecture, the consumer would still end up in paying lesser even at a loan rate of 11.25%.

The AIG/ General Re Scandal

2006-04-03T12:06:00.000-07:00

By Pratibha Singh, MBA-I, Finance

First came investment banking; then mutual funds; now the insurance industry is mired in scandal-Eliot Spitzer, New York's formidable Attorney-General on October 14th, 2004, filed charges against AIG (American International Group Inc.), the world's biggest insurer. The charges were part of an ongoing investigation into industry practices that suggested insurers and brokers had acted collectively to betray customers. In 2005, after an AIG scandal on insurance and mutual funds the year before, AIG was once again under investigation for accounting fraud. The company has already lost over $58 billion worth of market compensation because of the AIG scandal. Here’s a look at the story so far.

About AIG
AIG was founded in 1919 by Cornelius Vander Starr in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to the Chinese.
AIG owns ILFC, the world's largest aircraft leasing company, with hundreds of aircraft like Boeing 747-400. It also is the world's leading international insurance and financial services organization, with operations in more than 130 countries and jurisdictions.
AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer.
In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and AIG American General is a top-ranked life insurer. Maurice Hank Greenberg till recently led AIG.
The scandal
The AIG scandal involves the unusually arcane and obscure world of reinsurance. Insurers don't simply take premiums and hope you don't collect. They insure themselves with other insurers. By doing so, they move risk and liabilities off their balance sheets and onto others'. Because the transactions are complicated and ambiguous, both insurers and reinsurers may be tempted to engage in transactions that seem to be insurance but are really just deals to make earnings or balance sheets look better. AIG seems to have done that to keep its stock price healthy.
In February 2005, AIG received subpoenas from the Office of the Attorney General of the state of New York (NYAG) and the Securities and Exchange Commission (SEC) relating to "investigations of non traditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions." One of the deals involved a loss portfolio transfer from Gen Re, which is owned by Warren Buffet’s Berkshire Hathaway (the primary user) to AIG (the reinsurer). AIG booked as income $500 million in premium for the loss portfolio transfer and then added $500 million in reserves against future claims to its balance sheet. AIG counted the transaction as an insurance deal but later concluded that the Gen Re transaction documentation was improper and that it should not have been recorded as insurance. What makes this deal "scandalous" is the fact that there was no underwriting risk transferred in the deal. Instead the loss portfolio transfer was essentially a $500 million loan from Gen Re to AIG that AIG would repay through $500 million in claims payments to Gen Re. AIG did not face any chance of loss in this deal, its limit of liability was evidently capped at $500 million. Because of this, it is argued that the $500 million should have been accounted for as deposits on AIG’s books. But by recording the deal as "insurance", AIG was able to effectively boost its loss reserves by $500 million.
It has been reported that 10 other similar transactions have now come under the microscope.
The result 9
The AIG/Gen Re scandal has put financial reinsurance in the limelight and has caused the industry to revaluate such products. The financial devastation caused by the scandal is not trivial.
~Forthright~ Research Factory
On May 31st, 2005, AIG came out with its restated financial statements and issued a reduction in book value of USD $2.7 billion; a 3.3 percent reduction in net worth. AIG also adjusted its shareholders’ equity for the year 2004 downward by $2.26 billion or 2.7%. Between February 2005 and May 2005, its stock price fell by 25%.
Maurice "Hank" Greenberg was forced out as Chairman and CEO of AIG in March.
On the Gen Re side- Richard Napier (former Gen Re senior VP) and John Houldsworth pleaded guilty to conspiracy to file false financial records, falsify books, records and also mislead auditors in connection with the AIG deal.
The auditor’s role
The AIG fraud once again put pressure on the auditors, questioning their credibility. In this case, PwC, AIG’s major auditor has been engulfed in controversy over the series of accounting restatements.
Beginning with Enron, large accountancy firms have seen their reputations shattered by corporate scandals. Auditors are being blamed to varying extents for failing to spot fraud and accounting errors, and Andersen - one of the erstwhile big five firms - was destroyed by its role at Enron. Deloitte is facing billion-dollar lawsuits over the role of its Italian firm as joint auditor of Parmalat. The rigour of auditing has been further thrown into the spotlight after the Refco fiasco last year (Covered in an earlier issue of Forthright). PwC however believes that in the AIG case, its audit work was "appropriate". To the extent they were not aware of situations; they should not have been expected to be aware.
As per section 404 of the 2002 Sarbanes-Oxley law on accounting and corporate governance all companies are required to evaluate their internal controls. However this is a costly affair. As a result auditors have had to double their fees and thus accused of going over the top and doing too much testing.
Although PwC supports the Sarbanes-Oxley law, it argues that the US has to wean itself off its rules- based system of accounting and corporative governance. It calls for a mixed model involving principles as well as rules. The principles could set the tone inside companies by stressing the importance of "doing the right thing", although rules would still be necessary in financial reporting. One essential ingredient to achieving such a change would be the willingness of companies and auditors to exercise greater judgment in their accounting work-and not just following rules.
Despite all the turmoil surrounding the AIG/Gen Re scandal, however, it is important to realize that it is not financial reinsurance itself that is scandalous; rather it is the misuse of it that is wrong. The various scandals in the financial field in the last couple of years are enough to signal that it’s high time not just for the auditors and legislators to take their roles more seriously, but also for the companies to realize that ethical practices have to be followed if they wish to survive and compete.

New strategies for FMCG companies

2006-04-03T11:59:00.000-07:00

By Ahmed Faiyaz

The industry has already extracted much of the benefit to be had from improving productivity and concentrating on core brands. Meanwhile, its dynamics are changing. What comes next?
At first glance, the leading consumer goods companies' strategy for handling the fierce competition of the past ten years looks robust enough to carry them through the next ten. Indeed, with the industry still caught between price-sensitive consumers, poor infrastructure and powerful retailers, some of the challenges facing it remain the same.
In the 1990s the industry's executives developed strikingly similar strategies to address these issues: focusing rigorously on the strongest brands and pursuing productivity gains. The results confounded those who forecast the demise of brands and the industry's rapid consolidation. Remember the day in 2004 when P&G and HLL slashed the price of their core detergent brands by almost 40 percent? A business weekly wrote, "Many brands will perish or never be so profitable again." But such pessimists were wrong. Anyone who invested every year since 2004 in the top 10 consumer goods companies (minus HLL which has under gone a massive restructuring) received a 12 percent annual return over two years results that outperformed those of most industry sectors. Eight of the top fifty companies of 2000 (ranked by sales) were still in the list of leaders in 2005, and roughly in the same order.
But the strategy that worked so well might have run its course. A string of recent profit warnings at big consumer goods companies hints that the industry's dynamics may be shifting in important ways. The surge of discount retailing, emergence of local & regional brands, entering of more global players and the spread of private-label products are putting ever greater pressure on the price of branded goods. Companies have extracted much of the financial benefit from restructuring their portfolios and concentrating on core brands. And though managers doggedly pursue further improvements in productivity, most of the obvious gains have already been achieved.
The glory days
In confronting the challenges of the past five years, big consumer goods companies all chose much the same strategy. They began by reshaping their product portfolios through mergers and acquisitions, with the aim of becoming national leaders in a few core categories. Marico, went on to buy its closest competitor Nihar from HLL to prevent Dabur from moving to a position of strength. Dabur itself bought the ailing Balsara brands to give meat to its ailing oral care products. Even globally companies made acquisitions to fill geographic gaps (L'Oreal in Asia) or to strengthen a specific category (Procter & Gamble's hair-care business).
Then, most companies focused on their core brands, where they concentrated marketing and other resources, and eliminated weaker ones. Strengthened brands made it more difficult for retailers to insist on price cuts. Even the cross-category heavyweights HLL, Nestle, Procter & Gamble, and Dabur concentrated on fewer brands. 2
Next, to reduce costs and finance growth, most companies in the industry went after
~Forthright~ Research Factory
productivity gains. Large savings came from global purchasing and from centralized supply chains facilitated by information technology. Outsourcing and setting up plants in Uttaranchal to avail tax benefits were the most visible sign of the push for higher productivity and efficiency. Nestle, Brittania and ITC have set up world class production facilities in Uttaranchal. ITC has been outsourcing the manufacturing for its categories and P&G has been sourcing the H&S and Pantene shampoo it sells in India from Thailand.
For many companies, this strategy created a virtuous circle. Productivity gains financed investments in marketing and product innovation. Brands gained market share and expanded internationally. Their growth unleashed further productivity gains as burgeoning companies generated new economies of scale. Contrary to conventional wisdom, it did not take a unique, creative strategy to win; companies of different sizes successfully applied the same approach. The key lay in how well, and how quickly, they executed it.
Their results were impressive. A composite index of the top 10 consumer goods companies, excluding tobacco, shows that over the past three years show gross margins improved by an average of five percentage points and earnings before interest, taxes, and amortization (EBITA) by four percentage points. The strategy has weaknesses, however.
First, it is proving difficult to propel the virtuous circle beyond portfolio restructuring and core brands. Acquisitions did make up for the lack of organic growth and helped increase margins as companies reaped the benefits of postmerger synergies. But they were costly: the industry-wide return on capital has been flat since 1998 as the amortization of Crores of Rs in intangibles and goodwill absorbed from these acquisitions weighed on corporate balance sheets.
Another worry is that the easiest savings from improvements in purchasing, logistics, and manufacturing have already been pocketed. The move to centralized purchasing, for example, saved plenty of money but can take place only once; furthermore, the savings were achieved in a decade of favorable raw-material costs. The industry's strategic position is also troubling. Retailers continue to consolidate, adding to the bargaining power of the bulked-up survivors, and discounters continue to grow, especially in the South, where chains like Nilgiri’s & Fab Mall offering inexpensive private-label and branded goods are gaining strength.
Where now?
Given this list of concerns, senior management could be excused for wondering how companies will grow. In our view, they must accelerate the pace at which they build capabilities in core functions, because day-to-day execution is and will remain an important factor for success. They must also serve emerging markets better, respond to the growing emphasis on value and reap the benefits of scale and scope. Finally, we believe, some companies will strike out in bold new directions: outsourcing, entering new service businesses, or developing product categories that others have shunned.
Improving execution 3
Discipline in execution is nothing new, but it remains a top priority, despite the likelihood of decreasing returns. The important point is that big differences in
~Forthright~ Research Factory
the performance of companies persist; in other words, superior capabilities can be built and exploited. In the coming years, success will require ever sharper capabilities in the four main areas that sustain consumer goods companies: brand marketing, sales, innovation, and the supply chain. Average performance and best practices have improved spectacularly in each area compared with a decade ago. Tomorrow's winners will be the companies that not only adopt and roll out best practices more quickly but also introduce new approaches, often borrowed from other industries.
Marketing effectiveness remains a big source of gain for consumer goods companies; most, for example, are still struggling to maximize the value of trade spending the money passed on to retailers to promote sales. Given how much money these companies invest in marketing, and the declining productivity of traditional advertising in many markets, managers will be under increasing pressure to allocate resources wisely across not only brands but also marketing tools and consumer segments. In sales, managing relations with retailers and the customer interface they control will be particularly important for the biggest multicategory companies like HLL and ITC, which will seek to take advantage of scale and scope.
Although every consumer goods company views innovation as vital, few are happy with what they have accomplished in this respect, especially compared with pharmaceutical and consumer electronics companies. The most successful consumer businesses will treat innovation as a strategic and organizational challenge, striving particularly to blur the distinction between home-grown and external ideas (obtained through acquisitions or partnerships) and tailoring their approaches to different types of innovation.
Some leading companies will also find ways to squeeze more efficiency from their supply chains by offshoring some of their operations, employing new technologies (such as radio frequency identification tags to track inventories), or redesigning processes to reduce waste and variability, as manufacturers in other sectors have done.
Winning in emerging markets
Although almost all consumer goods companies are active in markets across the country, few take advantage of their full potential. Many concentrate on the minority of the population that can afford expensive, Western-style goods, leaving local competitors to target the overwhelming majority of consumers with modest means. The locals have the edge in supplying neighborhood stores, which global companies find harder to reach, and have held off the big players by selling some products at very low prices while nonetheless generating profits. Venky’s known for its presence in packaged chicken and newly launch wine business has recently launched four variants of glucose biscuits in the large and profitable Maharashtrian market. 4
It is hardly news to senior executives that big consumer goods companies must tailor their products to meet local needs; indeed, companies such as Unilever & Nestle have had some success with that formula. But many others still find it hard to come to grips with the big changes required in branding, distribution, and manufacturing strategies. Global majors like Bungee, Heinz and Henkel Spic are still coming to terms with the way business is done in the
~Forthright~ Research Factory
Indian market. Competing for the mass market in developing countries means rethinking the way things are done not easy for huge, successful organizations. Those that do well there will become truly global corporations and will shake up the industry's balance of power.
The value conundrum
Serving value-conscious consumers in mature markets is also increasingly necessary. This notion might seem counterintuitive, since many companies have focused on introducing expensive innovations at the premium end of their markets. Nonetheless, though the premium segment is growing in many categories, the shift toward value is a more important trend for companies that mainly target the mass market. Retreating to a narrow premium segment might make sense in categories such as wine but would prove self-defeating in household cleaners. In addition, price competition stalks the premium segment: a growing number of retailers, such as the Pantaloon’s Big Bazaar, excel at offering consumers premium private-label alternatives.
The growth of discounters has accelerated the trend toward private-label goods and split companies into two camps. A few hard-liners continue to make and market only branded products and deploy marketing and sales skills to defend their share at the low end of the market. Many other manufacturers, in a spirit of "if you can't beat them, join them," supply retailers with private-label products, at least in some categories. A number of paper-product companies, for instance, have developed a sizable private-label business outside their home markets while retaining a strong branded domestic business.
To decide which approach to take, companies must weigh their strengths and weaknesses. Those whose brands are below second or third place in market share and don't occupy a clearly defined niche might find making private-label goods the most attractive option. The same goes for companies that can't sustain the advertising and research spending needed to keep brands on top.
But underestimating the risks would be dangerous: private-label supply is no longer an amateur sport. The skills required to stand out in that business are different from the core know-how of a supplier of branded products not just in manufacturing but also in product development, logistics, and sales. The decision to develop those new skills must be a conscious, strategic one, not an afterthought.
Exploiting scale and scope
The biggest companies are still trying to figure out how to wring a competitive advantage from global scale and broad scope. The aggregate financial and economic performance of industry heavyweights such as ITC, Nestle, Procter & Gamble, and Unilever, for example, hasn't been markedly different from that of the category champions, which compete in a more focused range of products like Brittania in Biscuits and Amul in Dairy. We can imagine two extreme scenarios. 5
One is that single-mindedness, responsiveness to consumer needs, and the ability to move quickly will continue to help category champions match or beat the giants' performance. Some of these champions will continue to consolidate fragmented categories-a trend that has already affected categories such as biscuits and some segments of personal care,
~Forthright~ Research Factory
among others. A handful, aiming to defend their independence, might join forces in mergers of equals, thereby avoiding the acquisition premiums that have hurt the industry's performance in the past. Others will seek to defend their independence by entering into alliances and joint ventures to find new avenues for growth (as PepsiCo and Unilever have done in tea-based drinks). Ultimately, new category champions will emerge as the heavyweights spin off some of their categories or break themselves up into several companies. This development would represent the final triumph of the focused category champion model.
In the alternative scenario, the heavyweights would find creative organizational solutions to the traditional trade-offs between the global management of a number of categories and brands, on the one hand, and local responsiveness, on the other. Companies like ITC and P&G would harness their considerable resources, for example, to pioneer breakthroughs in fundamental technologies. The payoff from using electronic identification tags to track inventories more efficiently would make it easier to swallow that technology's high cost. And they and some retailers would develop strategic partnerships leveraging scope advantages based on better insights into shoppers' preferences. Companies that succeed with these strategies will be in a good position to justify acquisitions prompting a new wave of industry consolidation and challenging the prevailing orthodoxy that favors category champions.
Try unorthodox strategies
Some companies now limited by the orthodox approach might consider quite different strategies to spur growth. They have several innovative options. Marico is entering the higher end of the hair care market with its Parachute advanced therapy hair oil and through its foray in Kaya skin clinic.
New business models
Traditionally, consumer goods companies have been vertically integrated: they design, make, market, and sell their products. Increasingly, however, they will depart from this model and outsource some or all of their production to third parties. A trend that has already started in apparel and consumer electronics. The final form these consumer goods companies take will differ markedly from one category to another, but a range of business models could replace the integrated monoliths that now dominate. Contract manufacturers that make but don't brand products, for example, will coexist with pure branding companies that do no manufacturing. Often the former will build capacity by acquiring and restructuring assets from the latter.
This approach is less radical than it sounds. Coca-Cola and many other beverage companies routinely outsource bottling operations. High-end perfumes often come from contract manufacturers. And in some segments, such as home and personal-care products, the outsourcing strategy is steadily gaining ground in developed countries. The contract manufacturer Budelpack, based in the Netherlands, recently announced its acquisition of manufacturing assets from Colgate-Palmolive, Henkel, Sara Lee Corporation, and Unilever. P&G which for long used to manufacture Vicks has outsourced it to a firm in Hyderabad. 6
Where brands continue to rule, the rationale for outsourcing is simple:
~Forthright~ Research Factory
management can concentrate entirely on dealing with customers and consumers - the main engines of growth. Indeed, many companies find that they can think more creatively about developing new products and stretching their brands into new categories when they no longer have to worry about keeping factories occupied. This approach would also promote a great leap in a company's return on capital employed.
The supply company too can create value. A management team focusing 100 percent on operations is better placed to build skills and generate improvements than the management of an integrated company. Operational excellence has a direct impact on profits; our evaluation of the best pure private-label suppliers shows that their profitability is on par with that of their average-performing branded counterparts. Moreover, the prospects for growth are better, since supply companies can produce goods for a variety of customers and tap into the growing market for value-oriented products.
Not every maker of branded goods should play this game. In some cases, proprietary manufacturing expertise is a source of competitive advantage that cannot be risked, even with watertight contracts to protect products and processes. In other categories, margins are too slim and the potential to cut costs is too slight for profits to be shared with a contract manufacturer. Concerns about product safety or the sourcing of ingredients are also easier to address with in-house operations. To decide whether outsourcing makes sense, companies need to assess each product and category in individual geographic regions and, of course, evaluate possible suppliers.
Venturing into services
Nescafe and Bru’s range of premixed ready to drink coffees is a service that extends a product. Another example: the drinking fountains and bottled water supplied by Bisleri Parle's home- and office-delivery division to 0.7 million residential and business customers in India. L’oreal and Wella are setting up and supporting as number of up market saloons and beauty parlours in cities like Delhi, Mumbai and Bangalore to provide consumers the experience of using their products along with professional guidance
These businesses and other successful forays into the world of services share several important characteristics. They have real consumer appeal and avoid head-on competition with mainstream retailers. They are managed separately from the core of the enterprise to avoid stifling them with big-company controls, costs, and attitudes. Most important of all, their senior executives understand that developing new businesses takes time and that nascent ones cannot be measured by the same yardsticks applied to established brands.
The move toward services is challenging. It requires new skills and runs the risk of damaging core brands by stretching them into territory that is hard to control. Moreover, during the initial growth phase, returns are paltry compared with those from a core business. Still, as consumers everywhere demand more service, some companies will find ways to provide it. In principle, any corporation, whether large or small, could enter this new arena, but the bar is high: you need not only creativity to invent attractive concepts but also determination to realize them.
7 ~Forthright~ Research Factory
The forgotten categories
A handful of companies might gain an advantage by focusing on product categories, such as traditional grocery products like packaged pulses and canned foods (fruit pulp, baked beans etc), that global operators have forgotten. While multinational companies were busy consolidating, a new breed of consumer goods player stealthily gained ground: private equity firms that acquired local businesses in categories that multinationals were divesting or ignoring.
So far, the evidence suggests that firms such as Nutrine, Parle and Parry’s have been highly successful in the industry. Their formula is well-known: acquire a stand-alone business, either from independent shareholders or from a multinational reshaping its portfolio, add financial leverage consistent with predictable cash flows, and give management the incentives and authority to improve the performance of the acquisition. After spending a few years building it up, such firms sell it to a trade buyer, another private equity firm, or the public through a stock offering.
This approach provides a template for some consumer goods companies searching for growth. They can optimize a portfolio of local businesses concentrating on categories that are too small or fragmented for the giants without much regard for the synergies among them. Usually, these categories (which include some canned foods, breads, fresh-and-ready meals, and seafood) are relatively small, sensitive to local tastes, or dependent on local supply chains.
The industry's largest companies might have difficulty playing such a game: after all, they have spent the past decade getting rid of small brands and would have a hard time explaining an about-face to investors. But some midsize consumer goods companies could make this a viable strategy. They have little hope of becoming global category champions, because they lack the brands, the marketing capabilities, and sometimes the financial wherewithal. Rather than mimicking the global giants, they could adopt a different mind-set and organizational model, taking the private equity firms as their inspiration.
Ever greater price competition means that the pace of change in consumer goods is likely to accelerate. The companies best placed to thrive will be those prepared to take their quest for growth into new arenas.
Source: Mc Kinsey Quarterly and analysis of articles read over the recent months

HLL – The new Face

2006-03-31T11:15:00.000-08:00

By Vikram Vasisht

In 2000 Unilever’s then Chairman Niall Fitzgerald laid down an ambitious 5 year restructuring plan popularly known as “Path to Growth”. The targets sets were high, first a 5% growth rate for its leading brands and secondly, to make them accountable for 95% of total Unilever’s revenues. To achieve this Unilever decided to chop down its rich stable of 1600 brands to 400 core or popularly called as power brands. The entire restructuring was going to take around five years with managers given clear directions to focus on core and growth oriented brands and shed the remaining (remember in India under Chairman Mr Vindi Bhanga strategy HLL’s 110 brands were down to 36 power brands). Steps taken as a part of “Path to growth” plan-
1. Cutting down on brands and manufacturing cost- Unilever saved about €4 billion ($4.9 billion) in costs over the past five years as it reduced its portfolio of brands from 1,600 to some 450 over a period of 5 years.
2. Restructuring Levers culture and reward system- After the buyout of Bestfoods its integration with current Levers business was important. Levers reenergized the enterprise culture, in terms of reviewing there own leadership group. About 40% of workforce was changed. The new work force was supposed to be more risk takers, more business-builders, people who have a passion for growth. Much more emphasis is laid on real delivery and performance. Levers moved to one of the most aggressive reward systems in terms of being skewed toward performance.
3. Exiting the American bakery market- As a part of radical restructuring, $2 billion were raised from the sale of Levers American bakery business and some European food brands. The sales were as a part of a condition imposed by European regulators after Unilever's acquisition of Bestfoods for $21.3 billion in 2000.
The plan impressed everyone initially even the numbers were positives for first few quarters but the final picture is a dismal one. Though Levers saved about €4 billion ($4.9 billion) in costs over the past five years and reduced its portfolio of brands substantially. Last year sales were down by 6% and operating profits slipped by 9%. In September 2004 came the group's first ever warning that it would not deliver a promised increase in profits and to add to there woes there leading brand grew by a mere 0.9% far short of targeted 5-6%. Analysts feel more than changing business environment it’s the missed opportunities in Unilevers strategy which is responsible for this situation.
4. Division of Levers into HPC and Food- April 2004 as a desperate effort Chairman Niall Fitzgerald went against his plans and reorganized Levers into two division Home and Personnel Care(HPC) and Food divisions in order to quicken the decision making process.
Chairman Niall FitzGerald, 58, who had a tough time restructuring Unilever, left the Unilever to head British news and information company Reuters. In keeping with tradition, Unilever PLC picked up an insider to fill the spot. Patrick Cescau, a 55-year-old director of the firm's global foods division, took over the helm in September 05 and marked the end of “Path to growth” at the same time started his own restructuring process so as to revive the growth for which Unilever is known for. Firstly let’s look at the factors which made the air hot for Unilever
Missed Opportunities
1. Advertising Misfit- Many think that the main problem is under-investment in advertising and marketing, an infatuation with brands and unattractive product. Unilever cut its ad and marketing expenditure at the worst moment. Commoditized products were vulnerable to the onslaught of retailers' own brands. In many instances, retailers' own brands now capture as much as one-fifth of the market. Unilever also over-extended some successful brands, for instance Bertolli's olive oils and pasta sauces. The firm spends 14.5% of its revenues on advertising, which is more than the 12% spent by Nestlé, the world's biggest food firm, but far less than the 20% that P&G splashes out on promoting its products. The problem also lies in the way that the company spends its advertising budget. It sacrificed longer-term advertising on television and other media for short-term promotions in an effort to stem its loss of market share which backfired.
2. Lack of Innovation- Unilevers Management obsession with sales number has taken yet another toll. Everyone in the company during “Path to Growth” was so busy with growth, sales etc that they overlooked innovation in there brands and which where there rivals knocked them. For e.g. P&G, it continues to gain share in lucrative spots: It has 70% of the tooth-whitening market, up from 57% a year ago, and 48% of disposable diapers, vs. 45% a year ago. The key behind P&G success is renewed creativity. Since the new agency took over in 2000, P&G has shown a savvy knack for innovation. From its Swiffer mop to battery-powered Crest SpinBrush toothbrushes and Whitestrip tooth whiteners, P&G has simply done a better job than rivals at coming up with new products that consumer crave -- and, not incidentally, on which it can earn higher margins than it can on its more mature lines. In the last three years P&G has updated all of its 200 brands and created whole new product categories -- such as Mr. Clean AutoDry Carwash -- that have added $2 billion in sales. The company is launched its Crest Vanilla Mint toothpaste during an episode of The Apprentice. The focus of the show was on the contestants' plans for marketing the toothpaste. During a 15-second spot, viewers were invited to visit Crest.com, where they wrote that how they would have handled the marketing job. An extremely new and innovative concept which did indeed did well.
Antony Burgmans, Chairman
M.S. (Vindi) Bhanga, president (foods)
CFO Rudy Markham
HR chief Sandy Ogg
Harish Manwani, President (Asia-Africa)
Patrick Cescau, CEO
Kees Van Der Graaf, president (Europe)
John Rice, president (Americas)
Ralph Kugler, president (HPC)3. Low Carb Diet craze untapped- Unilever needs to do a better job of managing its brands like Slim-Fast. In June 2003, it was believed in Unilevers that low-carb diets were a fad and were going to go away. Slim-Fast products traditionally included foods such as shakes and meal bars that serve as low-calorie -- but not necessarily low-carbohydrate -- alternatives to regular food. This calculation misfired and company was left behind with serious catching up to do. As a result Slim-Fast's global sales dropped by nearly 30%. At the end of last year, Unilever rolled out five low-carb Slim-Fast products. It was this move that brought some respite to Slim-Fast a move which can be vindicated by the fact that about 20% of slim fast’s revenue is from Low –Carb drinks. It has, however, been too slow to introduce new products.
4. Poor performance of Fragrance Division- Unilevers Prestige fragrance division which sells Calvin Klein Obsession, Eternity, cK, and other designer names were to slow to offer variety and get newer products in the market. On the contrary other companies were quicker to launch more products. It is believed that with fragrances, consumers are on to new things very quickly. These twin problems with Slim-Fast and fragrances have hit Unilever particularly hard in North America. Marketing the scents became tougher, as consumers became more selective in their discretionary spending.
5. Complex Organizational Structure- Levers follows a 75 year old practice of having two chairmen, one in London and one in Rotterdam. This meant complex management structure to with overlapping accountability and slow decision-making.

6. Less dispensing of dividend to shareholders arising negative sentiments
7. Volume driven growth giving way to margin driven growth as more focus was on profits and growth. This meant short term profits but hindered long term sustainable growth as it was seen world over in various Levers offices.
Business Environment
1. Competitive Heat- Yet most analysts agree that the P&G-Gillette merger is likely to make the climate even tougher for Unilever in the consumer-products business. Notably, the bulked up P&G will have more leverage to bargain with large retailers such as Wal-Mart, although in the short-term P&G may be distracted by its own consolidation it still is not a healthy sign for Levers.
2. Store Special Brand- Unilever often has to fight for market share with increasingly popular store-specific value brands, which fill the shelves of Europe's "hard discounters". With less spending on advertisement meant low brand value of a product, consumers often flocked to cheap store brand. As a result In Europe, which a FMCG business was fluctuating commodity prices which put pressure on the margins.
3. Unrealistic performance target- Many people believe it’s the unrealistic performance target which Levers has set for itself responsible for its bad shape. A moderate 3% growth would have been a practical target rather than 5-6%.
Soon after Patrick Cescau the new chairman took over in September 2004, he himself has revamped the Levers operation. Calling an end to “Path to Growth” he has restructured the organizational structure toward volume driven company from margin driven.
Change in leadership structure- The Anglo-Dutch giant had a unique dual-chairman structure that is; it had two Chairmen one in based in London and the other in Rotterdam. The Rotterdam office was lead by Antony Burgmans while the Unilevers London chairman was Patrick Cescau. In May 2005 it was changed to a more conventional form of a chairman and CEO model. Antony Burgmans became chairman and Patrick Cescau took charge as CEO. The objective of this exercise is simplicity of structure and clarity of leadership. The streamlined focus would bring better focus, accountability and will quicken the decision making time. Antony Burgmans would be the non executive chairman and it would be mainly Cescau job to steer Unilever into growth. One of the first steps taken by Cescau is towards companies’ unification popularly known as One Unilever. Cescau has been trying to transform it into a more global organization under the One Unilever programme. The idea is to ensure that Unilever is able to leverage its scale fully - something that it hasn’t done in the past. This will ensure that Unilever is in a better position to negotiate with it suppliers and big buyers (retailers) like Wal-Mart and others. Nobody in US knew that Unilever is a ten-billion dollar company because they had separate businesses (in UK, Holland and US). As a result of One Unilever they can establish this image of theirs especially when competitors like P&G have taken consolidated by acquiring Gillette.
The new restructured Unilever has 8 independent executive directors including CEO who will be responsible for there respective divisions. Out of eight directors two of them are Indians which just reinstates the respect which Indians command in Levers.
Renewed Advertising Strategy- As pointed earlier Levers failure to innovate and misdirected advertisements have hurt them badly. Taking a cue from this experience of theirs Unilever and their ad agencies are innovating and downgrading the importance of the 30-second TV spot. The target set for their many new products is between 18-25 years. Unilever believes that if it can create compelling entertainment on the Net and in game venues where guys spend time, it can foster brand loyalty. They are also going beyond the 30-second TV commercial to create a deeper bond with our guy. Their offering include streaming video, plus downloads to cell phones and Sony PlayStations this summer, a video game, blogs, and chartrooms and others.
Restructuring in HLL
Amidst the entire upheaval HLL Unilevers Indian subsidiary is undergoing its own revamping. The power brand strategy under then chairman VS Bhanga didn’t deliver as expected. Mr. Harish Marwani took over from Mr. VS Bhanga. HLL in early 2004 was divided into two divisions namely Home and Personnel Care and Food division both having there own managing director. Last month, HLL announced that Douglas Baillie, group vice-president and head, Unilever (Africa, Middle East and Turkey), will take over as its new CEO and managing director with effect from March 2006. Reversing a split that happened in 2004, HLL's dual-business structure (the home and personal care or HPC division, and the foods division) will now have Baillie as the man in charge. Arun Adhikari, managing director, HPC, was deputed chairman, Unilever Japan (with responsibility for Korea). S. Ravindranath, managing director of the foods division, will retire soon. As far as for Mr. Marwani is concerned he moves on to become president Unilevers Asia-Africa at the same time continuing as the non executive chairman here in India. Baillie's India appointment and Adhikari's move to Japan (the two countries together account for roughly 28 per cent of Unilever's Asia-Africa turnover) were both orchestrated by Manwani. Both will report directly to him, and increasingly, they will be key players in his regional gameplan. During the period of 2000-2010 it is expected that consumer spending is going to increase by $14.4 trillion, of which Asia-Africa is expected to bring in $8.6 trillion which vindicates the importance of this region for Unilever.
Carrying forward One Unilever will benefit as this would mean HLL would be one company and not two businesses or two divisions. They can also use their scale across the board, so that might of HLL can be leverage. Whether they sell Annapurna Salt or Dove soap, might of HLL in every one of these activities can be used. Also part of the interdependent Unilever and take advantage of all the global innovations. One of the distinct competitive advantage for Unilever is that they operate through out the pyramid whether it penetration driven (lower end), volume driven (middle class) or innovation driven (high end upper class user). It is clear that new management has brought in new style of strategy which now revolves around volumes and not profits. Management is willing to give managers time to build brands and wait for profits. Consolidation of ailing brands is of prime importance before deciding on their future unlike the time from 1999-2004 when they were disposed of without giving second thought. The performance of Marwani and his team would be closely monitored for his future in Unilevers as many feel he is an ideal person to replace Patrick Cescau.

The evolving face of digital entertainment

2006-03-31T11:12:00.000-08:00

By Mrunmay Mehta

Whether it’s a 3G mobile handset, the iPod, or the Xbox, digital entertainment has long evolved from the primordial form of the fixed TV-Radio routine. With the internet playing a large role in deciding the course of entertainment, spurious unpredicted factors like the runaway success of the Apple iPod and the cult forming there from, one thing is for certain-there exists a huge opportunity for digital media management/providing companies, and the key to this market would be innovation and ease of use. With mobility increasingly becoming a part of lifestyle, entertainment on the move also will assume much greater importance, and already mobile phones are available with processing power that exceeds some of the recently used computing systems.This article tries to discuss a few recent news making happenings in the digital entertainment industry.
Interactive Television:

Imagine being able to turn your television on, pick the program you want to see from your customized pre-recorded list, pull up an on-screen menu to check the latest weather and stock quotes, instant-message a friend, order pizza from your remote control, and book your next vacation, all without leaving your couch. Welcome to the world of interactive television. The idea of having consumers actively engage in the television experience isn't new. After all, shopping channels like QVC have turned viewer-to-buyer conversion into a science.
Cable and satellite systems have greatly increased the number of channels available to consumers, and pay-per-view (PPV), where viewers use the telephone to rent access to certain programs, is a fixture at most hotels. In an effort to drive traffic to the Internet, television-show hosts often exhort viewers to log on to web sites and take companion surveys, enter sweepstakes and download recipes. More recently, the spotlight has been on personal video recording (PVR) technology, which is offered by devices like TiVo and SONICBlue's ReplayTV. These products take the VCR one step further, offering hard-disk-based recording of favorite programs, pause-and-rewind capabilities for live television, and the ability to skip commercials during playback. In Europe and elsewhere, satellite system providers such as BSkyB and Canal Satellite are offering enhanced features, including t-commerce applications, to their customers. By connecting their set-top box to their phone line, viewers can access e-mail, shop, bank, place bets, and more. Many providers are also experimenting with video-on-demand (VOD), which allows consumers to request and view content whenever they want without having to record it first.

Indeed, several entertainment companies have filed suit against SONICBlue, claiming that the ad-skipping technology in the ReplayTV device violates content-providers' copyright. Five users, assisted by the Electronic Frontier Foundation, have countered by filing a suit against the entertainment companies, seeking to affirm their right to use their ReplayTV boxes to skip advertising and digitally record content. Show Me the Money Television can certainly influence consumers to buy products (Home Shopping Network and QVC are examples of success in that arena), but exactly how much commerce can be integrated into entertainment remains to be seen. Imagine a scenario where two consumer households are watching the same program. The young, single professional sees ads for a sports car, while the family with two children sees ads for a minivan. This is something advertisers have not been able to do before. The technical feasibility of this, is being proven in a trial currently being conducted by SpotOn, a joint effort by ACTV, Motorola and Wink, on an AT&T system. Historically, we have been used to the idea of program flow, and entire schedules of shows are created with the idea of people continuously watching the lineup. The idea of flow is now changing. The network may become more of a brand that the consumer turns to just to consider which programs are worth adding to his personal schedule. If people are cherry-picking programs that way, they might not go to their local stations at all. Interactive TV also poses questions on a societal level. We have society-making media (shared media which enable movement of people and ideas across groups) and segment-making media (media which crystallizes people's sense of belonging to a niche). In a world dominated by niche media, it is increasingly possible to drill down only into areas that you care about, and dwell on particularistic interest groups, often excluding your neighbors. It's a form of electronic gating. You can create or change programming based on whom you're targeting. What does it mean to have a society in which the shared experience becomes less and less common? How will the brave new world of interactive television change society? Tune in at a later date to find out.

The Digital Living Room
When Microsoft introduced its long-awaited Xbox 360 console on May 12 in an MTV special, its intentions went beyond just fun and games, The company called the long-awaited product a "future-generation game and entertainment system. "While Xbox 360 promises to offer video games compatible with HDTV, fast processing and a lot of memory, Microsoft also noted that the system can play DVDs and CDs, stream music from MP3 players, and network with the company's "Media Center" PCs to stream digital content around the house, among other tasks. Microsoft's market: The increasingly crowded living room. In fact, the parade of technology companies targeting home entertainment is a long one. Dell Computer sells TVs. Apple Computer's iMac Mini is viewed by analysts as a potential entertainment server. Media-ready PCs abound from the likes of Hewlett-Packard. These technology stalwarts are selling wares that were typically offered by consumer electronic giants such as Sony. But do they have what it takes to compete in your living room? Is the so-called digital living room -- in which audio and visual content is available on demand and combined with Internet and other applications in one seamless environment -- fact or fantasy? Who will the winners ultimately be?
The vision of the digital living room isn't new. Some form of it has been pitched for decades. Interactive TV was introduced in the 1980s. Microsoft created a digital home as a prototype in 1994 and has dabbled with everything from WebTV to game systems. The digital living room "vision" has evolved to a level where content of all forms is delivered according to highly personalized specifications along with Internet service on one box -- a kind of home entertainment server. Indeed, many components of the digital living room are in place today. Video-on-demand service is available through most cable providers. Music and video can be pumped through computer networks wirelessly. Televisions and computers are largely made from similar components. Gaming devices can play DVDs and connect to the Internet.

Problems? Well, these devices don’t play well together as of now. Just like companies that have a hard time connecting various hardware and software platforms, consumers who try to go digital with all of their entertainment will have integration issues. Meanwhile, many devices don't play nicely together. Apple's iPod songs don't play on the Windows Media player, and vice versa. In most cases, a Sony TV can't communicate automatically with home PCs. And then there's the conundrum around having separate boxes for every entertainment function-- music, digital video recording, DVD players and the like. Standards are just being formed, but there are turf wars as players such as Microsoft, Sony and Comcast jockey for position. The problem is compounded by another fact: Consumer electronics product cycles take along time. A television could last 15 years compared to a PC that maybe replaced in four years. That means the latest technology takes a long time to reach television sets.

Meanwhile, Fader says the whole concept of the digital living room needs other things to fall into place first. For instance, broadband penetration needs to be at100% for consumers to get audio, video and web access pumped into their home networks. Nevertheless, the living room gadgets keep coming. Whether these gadgets collect dust or become dominant will rest on one thing -- ease of use.

So what makes the idea of the digital living room so appealing to technology suppliers? According to experts, it's a matter of extending brands to grow sales and revenue. If a company like Microsoft can dominate the living room, its software could be everywhere in every facet of life. A company like Dell can take the same parts it uses for displays to manufacture and sell televisions. The other appeal of branching out to more consumer products is the so-called "halo effect" – the Holy Grail that Apple is pursuing with success. By selling iPods, Apple has managed to sell more of its other products such as its iMac. For the fiscal second quarter that ended on March 26, Apple reported net income of $290 million, compared to $46 million a year ago. Apple shipped 5,311,000 iPods during the quarter, up 558% from a year ago. The iPod's success also had an effect on the shipments of Apple's Macintosh computers. Apple shipped 1,070,000 computers in the quarter, up 43% from a year ago. "Apple is firing on all cylinders," said Steve Jobs, Apple's CEO, in a press release. Indeed, Apple offers a host of components that could eventually be used to create a digital living room. The company that can piece together a digital living room and offer customers all the entertainment they want in any format will be the big winner.
Podcasting: Can This New Medium Make Money? For whom?

Podcasting, a way to broadcast audio over the Internet, has become the latest web movement to get everyone's attention. Including Apple Computer CEO Steve Jobs, who recently called it "the next generation of radio". On June 28, Apple announced that it had integrated podcasts into the latest version of iTunes software so that users can manage and receive these new kinds of broadcasts. It's a logical move. After all, the podcast moniker stuck partially because of the popularity of the iPod, although most of these broadcasts are produced in a format that can be played on music players using the MPEG-1 Audio Layer-3, or MP3, audio compression format. Podcasting can also apply to video broadcasts, but audio dominates for now. The actual content on podcasts is a mix of amateur broadcasters -- waxing poetic about everything from global warming to venture capital to ice hockey – and media giants that are repurposing existing shows. The market for podcasts is growing quickly. A survey by the Pew Internet & American Life Project found that more than six million people out of the 22 million who own iPods or MP3 players have listened to a podcast. Such activity begs the question: Is pod casting here to stay? Experts at Wharton and analysts who follow the market answer with a resounding yes. As to whether a business model emerges for these broadcasts, observers suggest that advertising and subscription revenues may eventually come into play. Apple, for example, could begin serving as a guide to pod casts and sell a few more iPods in the process. "A lot of the attention has been overdone, but pod casting is not going away," says Wharton marketing professor Peter Fader. "It will continue to grow and resources will be thrown at it. Some will do podcasting well and be rewarded for it."

Regardless of how predictions pan out, the way media is consumed is rapidly changing. Podcasting for audio does what Tivo does for watching television: Entertainment is consumed on your schedule. Experts predict that "media consumption will be routinely time shifted." Indeed, time shifting is the most important aspect of podcasting, but the traditional broadcasters may be up to the challenge. Podcasting has gained momentum quickly because the average American can create a show easily and everyone wants to be a celebrity. But podcasting is becoming increasingly mainstream as big media players jump in too. With the low barriers to entry, some stations can make podcasting an intern task.For Apple, podcasts now provide more content to populate the company's iTunes and iPod products, says Fader. However, longer term it's possible that podcasting will require some kind of paid subscription. The catch is that Apple hasn't focused on subscriptions, choosing to sell songs through iTunes and generating hardware sales as consumers gobble up the iPod. “Apple could find itself in a tough spot," experts suggest, adding that pod casting could push along the subscription model for music and audio distribution, something that Apple hasn't trumpeted. To be sure, Apple mitigated future risks by tightly integrating podcasts into iTunes in late June 05, but it is noted that you don't necessarily need an iPod to get a podcast. Indeed, analysts expect Microsoft and Real Networks to offer guides to podcasting in the near future. Podcasting is a boon for Apple if it sells more iPods, but it's also a threat to Apple's control of the platform. If you use your portable music device mostly to hear non-commercial or retransmitted podcasts, what do you need Apple for? Hence, the inventor himself stands to lose out from his creation

A revolution called blogging

2006-03-23T05:41:00.000-08:00

By Ahmed Faiyaz

Blogs and BloggingChoose one of the following options: Technology has improved my life; it sets me free. Or, technology has harmed my quality of life; it enslaves me. Chances are you may want to reply, "All of the above." In recent years, the Internet itself has been evolving as weblogs or blogs become more and more of a trusted social medium. Blogging is a tool for users as they try to deal with a changing technology landscape where the problem is no longer how to get more information from one person to another but how to constrain that flood of information, how to deliver and receive more meaningful and contextual information for you and your business.
Typically, a blog (a contraction of Weblog) is created with easy-to-use software that streamlines the process of creating and updating a professional-looking Web page, giving users a low-cost platform from which to express their thoughts on a particular subject. Written material made available on a blog is called a post and can be linked easily to other information on the Web, such as other blogs, a company Web site, news articles, photo images, or video and audio files. This allows information on a blog to be indexed and swiftly accessed by popular search engines such as Google or Yahoo and disseminated far more quickly—and, in some instances, far more prominently—than other, more traditional forms of corporate communications.
Glenn Reid, CEO of FiveAcross, an innovator in communication software for networks, agreed. "As the blizzard of information has increased, we have all been trying to find a filter, editorial oversight as it were. That happens in blogs. If I like the blogger's point of view, I follow his or her recommendations. Connecting people to one another can be a solution."
Because traditional media platforms are closed to most of us, "these new channels offer tremendous opportunities for commercial programmers as well as for universities, companies and 'us'," said Jeremy Allaire, president of Brightcove, a new online service for distribution of TV over the Internet.
As with any opportunity, new channels also bring new challenges. "Media of any kind act as amplifiers for ideas of individuals; it's all about power," said Chandratillake. "With power comes danger. For example, two weeks ago we got a submission from the BNP, the largest anti-immigration party in the UK. Here we are now amplifying the message of an organization that would have thrown me out of England at age three."
In a world where everybody can broadcast, where everything is reported, there are problems, agreed Marc Canter of Ourmedia.org, a non-profit whose goal is to make it easy for the public to publish digital media. "But, that also means there will be more often be multiple views of events. For example, police behavior will be reported on by more than just those in the traditional media. No one source can control our view of an event. That's a tremendous positive."
More can indeed be better, especially if the content is better than the "58 hours a week of mind-numbing entertainment some people watch each week on TV," agreed Mike Homer, head of Open Media Network, a new, free public service for the mass viewing and publishing of content on the web, much of it educational. "We want to reinvent public broadcasting. We intend to accelerate content creation and audience growth, as well as harness the community to help organize, rate and rank offerings. It's an entirely new landscape for rich media delivery.

Growing Popularity
Recently, blogs have been credited with everything from CBS News anchorman Dan Rather's departure, to unauthorized previews of the latest Apple Computer products, to new transparency in presidential campaigns. The big question is whether blogs, short for weblogs, have the staying power to become more than just online diaries. Will bloggers upend the mainstream media? What legal protections should bloggers have? Is there a blogger business model?

However the growth rate of blogs is impressive. Technorati, a search engine that monitors blogs, tracked more than 8 million online diaries as of March 21, up from 100,000 just two years ago. A new blog is created every 7.4 seconds. That adds up to 12,000 new blogs a day, 275,000 posts a day and 10,800 updates an hour. At its most basic level, it's a technology that is lowering the cost of publishing and turning out to be the next extension of the web, blogging is still in its early days. It's analogous to where the web was in 1995 and 1996. It's not clear how it will turn out.

The opportunity

What is clear is that opportunities for blogging abound. Companies can use bloggers to put a more human face on interactions with employees and customers; marketers can create buzz through blogs; and bloggers can act as fact checkers for the mainstream media. There are dozens of applications for blogs, Werbach notes, and many that haven't even been conceived yet. To be sure, the concepts behind blogging aren't exactly new. Comment and feedback have been around as long as the Internet itself. What's new is the ease with which anyone can publish their thoughts on any number of topics, whether it's the latest Congressional hearings, the newest gadget or the hottest pair of shoes.
The amateur content movement was clearly enabled by the Internet, which made it relatively easy for anyone to start a web site. Some of those early sites peddled Pez dispensers and antiques (eBay) while others were just directories pointing to other sites (Yahoo). From there, the concept of amateur content has ballooned. In South Korea, for example, a newspaper dubbed ohmynews.com is written, not by trained journalists, but by regular citizens who send in their reports to editors, who then pick the best ones for publication. Companies and individuals have created their own Internet sites offering original information and content. Other sites, like the technology news-oriented Slashdot, are populated by visitors posting items they have seen elsewhere.
The Blogosphere's Rathergate

For now, blogging is much like the web sites of the mid-1990s -- lots of drivel, some useful items and plenty of opinions on every topic.
Today's blogs are mostly associated with politics -- not surprising given that former presidential candidate Howard Dean used blogs to rally supporters. Blogs detailing the documents that CBS used to question President Bush's National Guard service were picked apart by bloggers, who pointed out font differences in the documents and thus raised questions about their authenticity. The scandal, known in the "blogosphere" as Rathergate, ultimately resulted in the anchorman's departure. On the other side of the political spectrum, bloggers detailed Senator Trent Lott's glowing comments in 2002 about Strom Thurmond's presidential run in 1948 during which he supported segregation. A few apologies later, Lott gave up a bid to be the Senate majority leader.
The danger of overtly political blogs is one of selective hearing. If there's a blog for every taste, readers will just flock to sites they agree with. Fader adds that the marketplace of ideas and readers will weed out bloggers who are on the fringe and peddle bad information; they just won't develop an audience. In the future a technology may be created to rate credible bloggers. The system, which would operate like eBay's buyer and seller ratings, could create a blogger pecking order based on readers' opinions.
In the meantime, the courts are trying to figure out whether the First Amendment's freedom of the press protections apply to bloggers. Are bloggers journalists? It's a tricky question. For instance, some bloggers are de facto journalists -- because they do interviews, file news stories and provide opinions on current events -- and others are just regular people writing about their most recent family vacations. The courts will ultimately have to develop a legal test to extend press privileges, if necessary. According to Hunter, determining what will shake out in the courts is anyone's guess. It's hard to say where this will go legally however courts will ultimately give press credentials to a select group of bloggers.
For now, the disputes over press protections continue. Apple Computer recently sued a site called Think Secret for publishing information about upcoming products. Apple alleges that by publishing the data, Think Secret divulged trade secrets. Should Think Secret be treated as a journalism site? The issue spawned a host of blog entries and even a blogger boycott of Apple. The lesson: Apple can use the courts to try to stop product leaks, but the effort is likely to be futile. Indeed, a Technorati search turned up a blog revealing mockups of an iPad, a tablet PC-like device
The whole blogger-as-journalist issue also raises another key issue: Is the mainstream media about to be usurped by a bunch of amateurs? Yes and no. The mainstream media worries about blogging just as they initially did about Matt Drudge, who created a tabloid-style news site that features a few stories penned by Drudge but mostly links to other media outlets.
Blogging has already adopted a similar role of chasing tips, rumors and other potential stories. It's a threat to the mainstream media to the extent that it takes away central control of content and distribution, but "it's not a substitute for the resources and brands that media companies have developed." What's likely is that the mainstream media and blogosphere will share a happy coexistence, he adds. Indeed, bloggers often comment on, and provide links to, articles in The New York Times and other mainstream media.
Whether bloggers supplant the press will depend on their skillfulness, for commentary, bloggers' opinions are just as good as commentary printed in newspapers. However, investigative journalism will still be the hallmark of the media. First-hand reporting will be the distinction between blogging and journalism. It's a good idea to read both blogs and mainstream news. A blogger in Iraq can detail things on the ground that journalists often can't.... Bloggers are viewed more as fact checkers to keep the media honest. The challenge for mainstream media is to keep up with bloggers' speed.
Overall, media angst over blogs is misplaced. The idea that blogging will kill media is as overblown as when they said that e-commerce would kill the retailing business.
The Voice of Microsoft in Siberia
Media navel gazing is one blogger preoccupation, but another development has been the use of weblogs by companies and organizations. The "danger" is that corporations might not "understand the culture of blogging" and produce content that contains carefully vetted material instead of spontaneous writings that appeal to blog fans. Indeed, corporations are allowing employees to keep blogs, and in many cases encouraging online diaries. Microsoft, Sun Microsystems, General Motors and Boeing are just some of the companies that use blogs to communicate with employees and outsiders.
Robert Scoble, a Microsoft employee who operates Scobleizer, a blog about Microsoft products and developments, maintains one of the more interesting blogs around. Scoble, whose official title is "technical evangelist," sounds like many employees at large companies. He has his share of gripes, but will also defend his employer. The key is that he is balanced, says Brown. "This Microsoft employee has to maintain credibility by remaining transparent. By being negative once in a while, it's more credible when he's positive."
Scoble is so credible as a Microsoft blogger that he is viewed as the voice of the company across the globe. When Ted Demopoulos, principal of Demopoulos Associates, an information technology consulting company, was traveling in Russia recently, he stopped in Surgut, Siberia, where he was surprised to find Scoble fans. "I'm out in the middle of nowhere and they ask me about Scoble," says Demopoulos. "To them, Scoble is the voice of Microsoft."
Is There a Business Model?
While corporations can chalk up blogging as a marketing expense, the story is a little different for individuals. Can blogging pay the bills? If you are lucky, you can pay the hosting fees, but that's about it. Nevertheless, Experts predict that multiple business models will emerge. Individuals ages 18-25 are spending more of their time online, and marketers need to reach them. That means blogging could become a way to target the most coveted audience for media.
Bloggers currently can sell ads through a keyword system such as Google's Adsense. If an individual writes a blog about asbestos lawsuits, he or she is bound to get significant traffic from lawyers. And that could lead to subscription models. Some bloggers may become so successful that they can charge for their output. The rub with the subscription approach is that it's not clear if anyone will pay for content beyond financial news, data and pornography, says Fader. The other model is one that depends on being acquired, adds Demopoulos. Google bought Blogger.com, and media companies such as Gawker Media are buying and consolidating popular blogs.
What happens when bloggers try to make money off their sites? It's not a matter of when bloggers want to be paid, but when do readers want to pay for content. The mainstream media hasn't had the guts or savvy to start charging. It will be difficult for bloggers.
The business opportunity

Selling out to and joining mainstream media. This is what Andrew Sullivan did. Although "selling out" in this instance means handing over the technical headaches of operating his site to Time.com while retaining editorial control and accepting a regular paycheck. "Andrew Sullivan," the brand is subsumed into Time.com's, bolstering the latter. "I like to think of it as a moment when the blogosphere and the (mainstream media) made touchdown," Sullivan told the press.

Selling out while staying independent. Calacanis has managed to do this with Weblogs Inc. since selling his company to AOL last month for a reported $25 million. "The things that have changed are all on the backend," he wrote in the aftermath of Gawker's Yahoo (Research) deal. "With AOL's support we can hire more bloggers, promote the blogs, sell more advertising, and ultimately pay bloggers more money. That's the basic concept behind the deal: scaling the business." AOL gained a fresh portfolio of brands and a geyser of traffic against which to sell ads. The synergies are invisible.

Syndicate and partner while holding fast to the brands. Nick Denton at Gawker Media is building brands. To that end, he turned to syndication -- first with VNU overseas and now Yahoo -- to bolster traffic and penetrate the mainstream without selling out.

The Blog Conglomerate (the Federated Model). This is John Battelle's approach. His soon-to-launch FM Publishing network will combine the brand-oriented aspect of Denton's approach with Calacanis' focus on back-end synergies. FM Publishing will become the hub for a loose conglomerate of A-list bloggers whose combined traffic will start to reach a critical mass. But there are no editorial synergies between the diffuse blogs in the portfolio
Fit to print? The last addition to this list is a blogger federation that harvests its best thoughts, jokes and criticisms for recombination in another medium. Rather than build a business on the back of a hub site, why not have a team of editors painlessly extract and repurpose the collective intelligence of a blogging network in exchange for final approval and a share of the profits? Imagine an editorial supply chain where content begins life in a blog and is then reprocessed as needed by new layers of editors, producers, etc. To an extent, Yahoo has done just that with Gawker's syndication (and about a billion other sources). But why stop at recombining them within another Web site? Why not a magazine? Or any other medium that advertisers are willing to pay for? As it happens, that's exactly what Tony Perkins has done with Always On, where the repurposed punditry of his techie members has spawned a 100,000-circulation quarterly magazine aimed at an audience that missed reading it the first time
Blogging & Corporate America
Over the last twelve months, business leaders have grudgingly, warily, come to realize that blogging is a force that must be used—or at least accounted for—in their communications strategies. Companies are increasingly using blogs to communicate to both internal and external audiences. But blogs have also become a thorn in the side of these very same companies—witness the many vitriolic blogs posted by former employees and disgruntled customers. Corporate America may fear critical comments in public blogs, but it isn't ignoring the medium's potential for improving internal communication.The numbers are downright puny. According to The Fortune 500 Business Blogging Wiki (a list of blogs provided by employees about their companies and products), only 22 of the 500 largest U.S. companies operate public blogs from their executive suites. That amounts to a measly 4.4%. Has the blogging sensation passed corporations by?
Not by a long shot. Instead of public blogs, think about blog technology. That's the focus for many leading companies around the world. From McDonald's (MCD) to Cannondale Bicycle, corporations are using the software to revamp internal communications, reach out to suppliers, and remake corporate Intranets. Often the site doesn't look much different from what it's replacing. Sometimes there's nothing particularly bloggy about the results.But these corporate initiatives are interactive and cheap to deploy -- making them an attractive form of communication. "Blogs are a way to bring our knowledge together," says Dave Weick, chief information officer at McDonald's.Conversation Pieces. Over the last month, Cannondale has opened its corporate Web site to 15 of its sales and marketing staffers. Each one now has the tools to file his or her own updates, press releases, photos, and news about the race teams Cannondale sponsors, says Janet Maurice, the company's Webmaster.It may not seem like they're blogging. They're simply using software to send information. Sometimes they do it from remote Internet cafés. In time, they'll be able to file from cell phones. But each mailing, technically, is a blog post. And the program will expand to a host of Cannondale staffers and affiliates. "We're transferring our corporate content management system to blogs," Maurice says.Why are blogs supplanting traditional corporate Intranets? They're a snap to set up, and cheap to run. That's why the blog universe -- as counted by Technorati, the leading blog search engine -- has tripled to 27 million in the last year. They dwarf the number of personal Web pages, which require more technical expertise. What's more, blogs are designed to change daily and -- importantly -- to receive comments from the public. This means that while traditional corporate Intranets are static, blogs generate conversation.Extra Value. The first corporate blogger at McDonald's was Chief Operating Officer Michael Roberts, who launched his internal blog last fall. He used it to spread information through the company's global operations and receive feedback. Now, according to Weick, McDonald's is distributing blog access to thousands of employees, who will use them to report on operations at restaurants worldwide.The question at McDonald's and Cannondale is whether they'll extend blogs outside the company, to their customers. Already, newspapers such as the Houston Chronicle are building communities of bloggers, which provide new sources of information -- and new advertising platforms.Robin Hopper, CEO of iUpload, the Toronto-based outfit that hosts the McDonald's and Cannondale blogs, predicts that growing numbers of companies will distribute blogs in an effort to build social networks around their brands and products. "It's a whole new way to market," he says. "People willingly provide all sorts of demographic information on blogs." Companies can then use that to target them with customized services and advertisements.Building Trust. Hopper says that media and entertainment outfits are already sprouting blogs by the thousands. For example, the TV show Canadian Idol, the cousin of Fox's American Idol, provides a blog to every potential contestant.They use them to post their bios and pictures -- which provide material for the show's producers. Fans can also post on www.idolblogs.ca, a blogging community that has reached 40,000, says Hopper.Could Cannondale follow suit? Not so fast, warns Maurice. "With every great technology comes the fear that it might go out of control," she says. So she's launching Cannondale's blogging program cautiously, starting with brand managers and their teams. Later it will extend from so-called trusted bloggers, whose posts go up on the site automatically, to "untrusted bloggers," whose submissions must be edited. Everyone's A Critic. Companies interested in opening up branded blogs to the broad public face plenty of risks. Opponents of the company could use them to spread criticisms or nasty rumors -- and the host outfit would face the wrath of bloggers if it were seen to shut down or censor customers' entries. Conversely, if criticism appears on the blogs, the company can learn quickly and respond. For such giants as Wal-Mart (WMT) and McDonald's -- both subjects of blistering documentaries recently -- such an early warning system might prove to be worth the gamble
Blogging for Market Research
The Blogosphere is a vast, unruly, and totally tantalizing mother lode of unvarnished consumer opinion on every product and service in the capitalist universe. But to know what the masses are saying about your product, you would have to dig through 350,000 fresh daily postings on a staggering 20 million blogs worldwide (90% of them are based in the U.S.). And that's just the beginning. Roughly 50,000 new blogs are launched every day.
Let's say you're still determined to find out how your new gizmo is being received. You could hire a couple of teenagers to Google the product name all day and compile a digest of all the blog citations. But they would probably end up with a vast amount of material, particularly for mass-market products such as a new line of blue jeans or brand of ice cream. And it would be difficult to draw meaningful conclusions from the quotes because bloggers don't always reveal basic information about themselves (such as their age and gender).
Enter Umbria, a market research firm in Boulder that designs software to find useful consumer intelligence on the Internet. "The blogosphere is overflowing with brutally honest opinion," says Howard Kaushansky, Umbria's 47-year-old CEO. "Our goal is to track those opinions down."
Every few hours Umbria (http://www.umbrialistens.com) sends an application called a spider out over the web to scour the blogosphere for postings about the firm's clients, most of which are big consumer companies, such as Electronic Arts, SAP, and Sprint. By analyzing keywords in blogs, Umbria can classify each citation thematically. In the case of Sprint, for example, Umbria's software can tell whether a blogger is talking about customer service, the company's advertisements, or a particular calling plan.
Another big challenge is to decipher what's on a blogger's mind. To figure out whether an opinion is strong or tepid, for example, it helps to know that "awesome" is a stronger endorsement than "pretty cool," and that "shoddy" is less damning than "abominable." Umbria has several employees with Ph.D.s in linguistics and artificial intelligence who are forever tweaking the software to make it better at categorizing opinions.
Kaushansky claims his software can even identify sarcasm, a useful skill in the prickly blogosphere. Consider this statement: "The Treo 650 is the greatest phone in the world ... NOT!" Umbria's language-parsing software is "trained" to classify that and other common sarcastic turns of phrase as negative sentiments about the client. "Sarcasm is difficult for people to pick up, let alone machines," says Kaushansky. "But it's very valuable from a market research standpoint because it tells you how a customer really feels."
The software can also estimate the author's age and gender. Elongated spellings ("soooooooo"), multiple exclamation marks (!!!), and acronyms such as POS ("parent over shoulder") suggest a teenage female member of Generation Y (born after 1979). The blogger is probably a teenage boy if a posting is rife with hip-hop terminology such as "aight" (translation: "all right") and "true dat" ("I agree!").
The twenty- and thirty-something members of Generation X are more likely to use complete sentences. Gen X men also tend to favor satiric jibes and vivid adjectives such as "sordid" and "hilarious." Gen X women favor elaborately emotive turns of phrase, such as "wishing I could just crawl out of my skin and go on without it" (a real example). Male baby-boomers, on the other hand, tend to favor stale hip-hop-isms such as "jiggy" and "bling." They also pepper their blogs with terms such as "prostate" and "IRA."
Umbria's service is warp-speed quick. It usually takes less than a minute for the spider to crawl through those 20 million blogs. That's followed by a few additional minutes spent running linguistic algorithms on any relevant blog entries. Then out spits an "Umbria Buzz Report" that tells clients how they are being portrayed in the blogosphere. The reports cover the overall brand experience, along with consumer reactions to specific products and even specific features of those products. Umbria also tallies the number of comments, classifies all of them by estimated age and gender, and gauges whether blog sentiment is skewing positive or negative. In its reports, available weekly or monthly, Umbria always makes a point of reproducing a few of the juiciest blog postings verbatim (see the box above).
Bloggers are often early adopters of products and services, according to Kaushansky, and they tend to be more fervent and expansive in their opinions than the general population. Clients say Umbria's service helps them discern attitudes that may not show up for months using traditional market-research tools such as surveys and focus groups. Working on behalf of U.S. Cellular (http://www.uscc.com), for example, Umbria trawled the blogosphere and provided an early read that teens were especially anxious about exceeding their calling-plan minutes. The reason: They worried that their parents might charge them for overages.
Buzz Reports are infinitely customizable. Umbria can gauge the response to a specific product launch or an advertising campaign. The service is also useful for gathering intelligence on competitors. Izze Beverage (http://www.izze.com), a 45-employee Boulder company that makes sparkling fruit juices, recently engaged Umbria to track what bloggers were saying about rival brands. The exercise was a revelation, according to CEO Todd Woloson. When a blogger had a bad fruit juice experience with one of his competitors, the result was often a profane online rant. "We want to make sure that never happens to us," says Woloson. The company recently hired a customer relations specialist that it hopes will soothe angry consumers before they take to their blogs.
Umbria is a relatively small player in the $20 million blog research market, with a 10% share. Principal rivals include Cincinnati-based Intelliseek (http://www.invisible.com), which controls about a third of the market, and BuzzMetrics in New York, which does not disclose revenues. The latter two companies also crawl the blogosphere on behalf of corporate clients. But Umbria's solution is entirely software-based. Kaushansky's competitors also meet with clients to interpret the data and suggest strategic responses. "Ultimately we rely on both technology and humans for analysis," says Max Kalehoff, marketing director for BuzzMetrics. "Umbria takes an extremely automated approach."
Automation is the source of Umbria's competitive edge: affordability. Companies pay roughly $60,000 a year for its service. By contrast, the fee to engage one of its rivals can easily run into the seven figures. Kaushansky intends to maintain Umbria's low-cost and no-consultants strategy. The company's next frontier: algorithms that will classify bloggers by ethnicity, location, income, social class, and level of education.
GM and blogging
When Bob Lutz, the vice chairman of product development at General Motors, wants to get quick feedback from consumers on the company's latest product launch, new strategy, or something as specific as the quality of the sheet-metal fits on the latest Chevrolet, he knows where to go: his corporate blog, http://fastlane.gmblogs.com/.
Lutz is among a small but growing number of corporate executives who have started to experiment with blogs—Web-based commentary sites usually written in a first-person, conversational manner—to connect with customers online and advance corporate communications and marketing goals.
There are sixty-plus blogs produced by large corporations—and many more if, for example, you count the approximately 2,000 individual blogs written by Sun Microsystems employees that are then aggregated into one group blog at http://www.blogs.sun.com/. Besides General Motors and Sun Microsystems, companies that encourage blogging activity include The Boeing Company, Google, Hewlett-Packard, IBM, Microsoft, Red Hat, Edelman, Stonyfield Farm, and Yahoo. These blogs are part of a constantly expanding blogosphere that, as of the end of 2004, had some 32 million readers, according to the Pew Internet & American Life Project.
What Lutz and other executives recognize is that a blog is an incredibly effective yet low-cost way to:
· Influence the public "conversation" about your company: Make it easy for journalists to find the latest, most accurate information about new products or ventures. In the case of a crisis, a blog allows you to shape the conversation about it.
· Enhance brand visibility and credibility: Appear higher in search engine rankings, establish expertise in industry or subject area, and personalize one's company by giving it a human voice.
· Achieve customer intimacy: Speak directly to consumers and have them come right back with suggestions or complaints—or kudos.
How bloggers connectBloggers are somewhat like constantly circulating guests at a very large cocktail party: They don't all talk directly with one another, but each of them talks to many others, thus forming a richly interlinked network. According to David Sifry, founder and CEO of blog-focused search engine Technorati, there are almost 18 million blogs, spanning over one and a half billion links.
Technically, conversations among bloggers can occur in two ways. Blogging software can be configured to allow blog visitors to post a comment that others visiting the blog can also view. The GM FastLane blog featuring Lutz's comments is a corporate site that invites visitors to post their thoughts as well.
Other corporate sites do not permit posts from outsiders but do communicate on a blog-to-blog basis using various tools (such as the search engines Technorati, PubSub, and Google Blog Search) that allow users to monitor what is being said about themselves or their blog in cyberspace. These corporate blogs, like the vast majority of other blogs out there, use RSS (for real simple syndication) feeds, a tool that allows people to subscribe to blogs and thus be notified when the blogger has posted something new.
"If you are going to do a blog, you should always have an RSS feed of your own, which then allows people to subscribe to your publication," says Tim Bray, director of Web technologies at Sun Microsystems.
Take a lead in the conversationThis ability to engage with others is what gives blogs their power. "Blogs are all about conversations," says Sifry. A corporate blog allows a company both to keep an ear to the ground to hear what's being said about it and, if necessary, speak up with a correction.
"If you're not blogging, you're missing out on the chance to contribute to the conversation taking place in the blogosphere," says consultant Debbie Weil, creator of the BlogWrite for CEOs blog (http://www.blogwriteforceos.com/) and author of The Corporate Blogging Book (forthcoming in 2006 from Penguin/Portfolio).
You're also missing out on the chance to reach the journalists who write about your company for more traditional media outlets: a Euro RSCG Magnet and Columbia University Survey of the Media in 2005 found that 51 percent of journalists view blogs regularly.
Boost credibility and get closer to customersNot surprisingly, many of the early adopters of blogs have been technology companies eager to leverage blogs' ability to position a company executive for recognition as an expert in a given industry or on a specific topic. With his blog, Jonathan Schwartz, the president and COO of Sun Microsystems, has established himself (blogs.sun.com/jonathan) as a thought leader on issues pertinent to computer operating systems.
"Blogs allow us to get our message out to the world in a direct, unmediated, and unfiltered way," Bray says. Bray, who has been blogging since February of 2003 on tech-related topics, says that blogging allows Sun to write things that "are read directly by people in the software development community without being filtered by journalists and analysts."
He adds that a more subtle benefit is the fact that the blogging by Schwartz and many other employees has made it apparent to the world that Sun is not a faceless corporate monolith but a community of people who are passionate about software and information technology, and eager to engage with customers. He mentions one instance when a blog reader was trying to figure out how to obtain a type of software licensing approval from Sun. Several employee bloggers volunteered to assist, says Bray, and "they put the problem on a quick path to resolution.
Blog Pulse
here are many sites such as daypop.com and blogdex.com that can tell you what subjects are hot in the blogging world. And that's invaluable information if you've just released a new product and want to see what the world—or at least the part of the world that is online—is saying about it.
What we particularly like about BlogPulse, which is produced by Intelliseek, is its ability to graphically pinpoint blog news to specific time periods. So let's say Apple wants to look at blog mentions of its recently released Tiger operating system. Steve Jobs would enter those terms into the BlogPulse search bar. When the results are displayed, he would click the “Trend this Search” icon at the top of the list. This produces a chart that shows blog activity by date. You can click on the peaks to see what the buzz was that day. In this case, the big news was around the April 29 launch date, but you can also see more blog mentions generated on June 6, when the Apple-Intel relationship was announced.
This information will not only give you links to specific content about your product generated around the Web, but also provide a view into what specifically generates interest in your product or company.
Conclusion
Blogging is not a fad, it's the rise of amateur content, which is replacing the centralized, controlled content done by professionals. While most agree that blogging will continue to be popular, its next steps are uncertain. Blogging overexposure is on the horizon. Right now, blogging is trendy, I see that lasting a few years, but it will slow down. Blogging is here to stay, as many sites start to incorporate blogging features, and some news sites become more blog-like. The blogosphere will also become known for topics other than technology and politics. Two things are certain: Blogging will remain disruptive to the traditional media, and new uses will surface. You are going to see blogging move to video and instant messaging. It's just the beginning.
Sources:
HBS Articles, Knowledge @ Wharton, Cover stories on blogging in Fortune, CNN and Business Week

The future of Bluecasting as a new medium of outdoor communication

2006-03-23T05:36:00.000-08:00

- By Ahmed Faiyaz

When one hears of a term like Bluecasting a number of questions would arise. What is Bluecasting? How does it work etc. Let us first get familiar with the essentials.

What is BlueCasting?

BlueCasting is a proximity marketing solution which allows brands to communicate to users via Bluetooth-enabled mobile phones. BlueCasting is a trademark of Filter UK Ltd, mobile partners to OneZeroOne and infrastructure providers to Maiden and BA Media

What is Bluetooth?

Bluetooth is a standard for radio hardware and operating software which are embedded into consumer electronics like mobile phones, digital cameras and printers. All Bluetooth devices can “talk” to each other using this standard and share information with each other.

Who invented it?

The Bluetooth SIG (Special Interest Group) was founded in 1998 to promote and develop a wireless technology which would allow devices of rival companies to exchange data. These include promoter member companies Agere, Ericsson, IBM, Intel, Microsoft, Motorola, Nokia and Toshiba, and thousands of Associate and Adopter member companies.

Why ‘Bluetooth’

Harald Bluetooth was a 10th Century Viking king who united Denmark and Norway. The runic logo is testament to this heritage.

So is it expensive?

No; it’s free.. The technology is device to device not through the network. So your phone speaks to your Bluetooth ear piece in your car for example and doesn’t charge you via a phone network every time it rings.

How do Bluetooth Devices Communicate?

Bluetooth is basically a tiny radio transmitter and receiver embedded into an electronic device. When a Bluetooth device [for example, a phone] wants to “talk” to another device [for example, a computer] it simply broadcasts a radio signal which is received by the other unit.

What Frequency does BlueCasting Operate At?

Bluetooth is a world standard which operates at a frequency of 2.45 Gigahertz – this band is referred to as ISM [Industrial, Scientific, Medical].

Does Bluetooth Interfere with Other Equipment?

Not at all. Bluetooth delivers a low-power “tagged” signal which is specifically designed to avoid interfering with other equipment, making Bluetooth an easy-to-adopt technology.

Is Bluetooth Dangerous?

The low power and high frequency of the ISM band means there are no negative effects of prolonged exposure. The International Telecommunication Union specifically chose this band because it is has no effect on humans [or anything else for that matter].

What Does a BlueCast server look like?

A BlueCast Server is basically a Windows PC running our BlueCast software and augmented by a Bluetooth aerial.

How Big is The Server?

The BlueCast server is the same size as a small portable computer. It measures approximately 31cm wide by 25cm high by 4cm deep. It weighs around 2.7Kg.

What does the Server need?

The standard BlueCast server runs off 240 volts AC power. Optionally the server can be plugged into an Ethernet connection, access a WiFi network or ADSL connection for remote monitoring and maintenance.

How Does BlueCasting Work?

A consumer comes within range of a BlueCast Server and switches their mobile phone to “discoverable”. The BlueCast server recognises the handset and then sends information to it over Bluetooth.

What is the range of BlueCasting?

Anything from a few meters up to 250 meters. We are able to increase or decrease the signal strength to accurately adjust the range.

What Type of Content is BlueCast?

We can BlueCast anything from a small piece of text or a still image up to an audio clip or even video.

Does it Track Users?

Yes, it does. This means that if a user has opted-in and received some content we know they have received it and therefore the next time they come into range we can either send them new content or simply ignore them. This means we do not keep sending the same content to the same people. It also means our content gets more and more relevant to each cosumer over time.

Is it Junk Mail?

No. BlueCasting only works if the user turns on their Bluetooth, makes it “discoverable” and elects to receive the content. If at any point the user says they do not want it then we stop trying to talk to them.

Does BlueCasting Comply with Privacy Law?

Yes, it does. It has been certified by the Legal Counsel to the IPA [Institute of Practitioners in Advertising] as complying with the EU Digital Privacy Directive.

How and where does it work……

• Digital Billboards
– Pushes content to users based on proximity
– Value-add for existing advertising locations
– Adds new dimension for retail and public spaces
• Broadband Delivery
– Pushes content to users upon user request
– By-passes mobile networks and associated charges
– Very high speed when compared to GPRS transfer
• BlueCast servers located at prime poster sites Shopping hubs, Malls, Airports, Multiplexes etc
• Delivers additional information based on current advertisments
• Can be synchronised with multi-ad displays
• BlueCast servers located in retail environments
• Deliver special offers, vouchers, etc & can tie in with specific brand[s]
• Delivery of “grazing” content like News, games, audio, video, magazine content
• Essentially its to cater to a captive audience
•
•
•

Content Delivery on Bluecasting
• BlueCast server is used to deliver paid-for content to user’s handset without need for mobile network.
• Fast delivery [around 25k per second]
• Delivery “there and then”
• No network charges for user, no network commission payable
• Enables new type of rich-media content/application sales

Advantages of Bluecasting

• Fast
– Delivers content at 25k to 35k per second (10 times faster than GPRS)
• Free
– Does not use mobile network and therefore no distribution costs
• Secure
– BlueCasting uses latest security technologies [opt-in, PIN code]
– Communication is server to phone, not phone to phone; no virus potential
• Smart
– Builds up profile of user and follows associated rules
– Creates a pull for the brand & effectiveness can be measured
• Fun
– Rich media, Java games, TrueTones - large files in seconds
• Proven
– Maiden and BA media recently installed in their infrastructure ; Coldplay’s launch of X & Y

Some Bluecasting successes:

The campaign, carried out to promote the launch of Coldplay's album "X&Y", is just one of several that are being pioneered in and on billboards, movie theaters, airports and train stations around the United States and Europe.
The upshot: Advertising is coming to a cell phone near you.
Filter UK, the mobile marketing agency behind the Coldplay campaign, embedded its Bluetooth ad servers in giant television screens in several central London train stations. The screens promoted the album and also urged users to switch their Bluetooth handsets to "discoverable" mode, so that they could receive more content. Commuters with discoverable Bluetooth handsets passing within 100 meters of the billboards were sent a message asking if they'd like to receive the Coldplay content, which included video interviews, music clips and still images.
The billboards detected 87,000 unique discoverable handsets, of which 13,000 opted to receive the material, a response rate of about 15 percent—very high by advertising industry standards. While the Coldplay campaign may be the biggest Bluetooth campaign yet, it isn't the first.
In the United States, the pioneer is WideRay, which has just finished a summer-long campaign at several Loews movie theatres around the country—in New York's Lincoln Square, Loews Universal Citywalk in Los Angeles and the Loews Metreon in San Francisco.
Instead of billboards, WideRay installed its "Jack Service Point" units in theater kiosks, and offered downloads via Bluetooth or infrared. The downloads featured content related to the Fox films "Mr. and Mrs. Smith", "Fantastic Four" and "Kingdom of Heaven," and included movie trailers, ring tones and wallpaper images.
Technology from Filter and competitor Hypertag Ltd. has been used in several previous campaigns in the United Kingdom. Filter Bluetooth ads tied into British Airways billboards around London convinced 10,000 users to download content earlier this year. Filter also powered successful ads for Range Rover and Volvo in London's Heathrow airport this spring, as well as advertising kiosks in Bristol sponsored by Carling, a British beer brand.
Maiden, a major handler of UK billboards, is outfitting its advertising spaces with Filter technology in 30 train stations around the United Kingdom. Hypertag has carried out two major Bluetooth promotions for album launches, one for a New Order album in March, and the other in August for the Goldfrapp album "Supernature."
The New Order promo was embedded in kiosks in HMV UK Ltd. music stores in London and Manchester, England, while the Goldfrapp launch uses a downloadable Java application called Hyperstore and is promoted through billboards and Goldfrapp performances. Bluetooth ads are made practical by the growing density of Bluetooth in Western countries. In all of Western Europe, 19 percent of cell phones will be Bluetooth-enabled by the end of this year, according to Strategy Analytics, nearly doubling to 64 million from 35 million last year.
Filter said it believes the density in the United Kingdom is higher, upward of 30 percent. In North America, the analysis firm puts the figure at 32 million handsets, about 14 percent of the total, by the end of this year. That's up from last year's 15 million. Bluetooth is also popular in China and Korea, but not as much in Japan, where technologies such as 3G and GPRS are more widely used.
The Future in India
As per a research conducted by Frost & Sullivan 10 % of mobile phones in Indian metros have Bluetooth. This number is growing every quarter with the cost being only Rs 6- 7,000. These numbers are likely to show an upward trend with the number of Bluetooth phones increasing by 30% per annum.

The Target Audience
Age 18 – 24

– Visit the malls / multiplexes at least once a week; many 2 – 3 times a week
– Reside in the vicinity of the mall or study/ work in the same area
– Visit 2 – 3 hours on each visit; 4-5 on weekend or if they are watching a movie
– Often unwind at cafés in the evenings
– Are brand conscious and are looking for value for money purchases ; willing to pay for high brand equity & image
– Visit at least 2 stores on each visit to the mall apart from the food court / cafe; Check out new collections/ products
– Global in taste & outlook and are tech savvy

Age 25 – 40

– Sec A, B+; High disposable incomes & work long hours
– Use laptops, mobile phones & PDA’s for official purpose
– Spend close to an hour each time waiting for a flight at airports and fly often
– Shop when required at malls and catch a movie when they can at a multiplex
– Are brand conscious and do not like unsolicited marketing messages/ calls ; willing to pay for high brand equity & image
– Are sophisticated in their taste, individualistic and brand loyal

Potential locations
BlueCast servers could be located in places where the the target audience hang out regularly such as:
Shopping Areas eg Brigade Road in Bangalore, MG Rd in Pune
Malls eg Forum & Garuda in Bangalore, Inorbit in Mumbai
Cafes eg Barista, Café Coffee Day
Multiplexes eg E-square, Inox, PVR
Airport Departure lounges

What kind of content would appeal to the target audience:

Wallpapers of Dockers, Levis or Benetton’s new season offerings
Music clips, images and ringertones of new movies & music albums
Images of sports icons who endorse Nike/Rbk/Adidas
New releases and bestsellers’ list from Crossword/ Landmark
Discounts and special offers from retail stores eg Nike, Fabmall, Levis
New product information, images and feature downloads of new mobile phones, laptops and watches eg Motorola, Timex, Lenovo
Discount offers, new routes, check - in information and flight schedules from Kingfisher & Jet
Images, features and clips of new cars launched eg Swift, Honda
Promotions and new launches in stores like Lifestyle & Shoppers Stop

I believe that is a new and exciting medium that one could reach out to their target audience through. It is also an innovative tool and provides a new touch point to reach out to the target base in a more cost efficient & measurable way and moving away from the expensive and highly cluttered traditional media like television and newspapers.

SourcesBluecasting.com
Protein Feed web articles
Original research done at Kinetic one –o – one & Ogilvy Activation