Changing DNA

Nikhil Vora / Swati Nangalia / Varun Kejriwal

(M ) +91 9821132471/9820774251 / 9004291117 (Dir) +91-22-6622 2567 / 2576 / 2685 nikhil.vora@idfc.com / swati.nangalia@idfc.com / varun.kejriwal@idfc.com

Over the last five

decades, only 60

companies have consistently appeared in the

Fortune 500 list !!!

Ever wondered why?

2

What led to the so many flip overs...

Yahoo, the inventor of search engines and the largest player of late 1990s With market cap on par with Google in 2004
is today 1/10th the value of Google!

today generates 1/6th the profit of Apple & is at 1/16th its value!

Nokia, worlds largest electronic equipment provider and with profits 14x that of Apple in 2004

HUL, the largest consumer company in India, has seen its market value
erode in the last decade
while peers have given 20x returns!

and the greatest creations being lost today?

Xerox,
among the largest brands created which actually got translated into a verb (photocopy = Xerox!)

has lost 50% of its value in the last decade!

Polaroid, the innovation that makes the name synonymous to instant

photography, and a US$3bn company in 1990s
filed for bankruptcy!

Intel, the heart of machines, with 80% of world computers

has seen 50% erosion in its value since 2003!

running on it

When markets shift, you will fail if you don't realize that longevity requires you to change the

Success Formulaor your DNA!!!

The organizations DNA needs to be ALIVE!

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

Adapt

Learn

Innovate

Vision

Execute

Changing with time and trends

Accept failures and recoup success

Ability to fuel new growth

Ability to foresee the long-term prospects

Translating vision into success

Innovate

The struggle of Unilever

Statement from Unilever CEO Paul Polman

"We have lost

the connection with the world top. If we want to grow consistently the next five years and again want to become one of the bigger companies, we have to change the culture."

magnified in its Indian counterpart!

Fo cu s on ma no t c ssand lass! Ov er p l a y stren gth L ack o f IN
Focus on share of wallets rather than larger share of a wallet
1990 - 2000 2000 - 2010

h ra l rea c ea se ru r s! Incr 2y

n by 3x i

Distri b

utio n /R

each

No successful launches

Bigge

st s tr e ngth

HUL

NOVA

TION

Failur

Innovation in vain!

es

(%) 2,200

1,650

1,100 550

HUL the worst performing consumer stock globally in the last decade

0 HUL Peps i ColgateCoc a-ColaL'Oreal (US) P & G Nes tle Sa- Danone Unilever Reg BAT Rec kitt Colgate (I) Benckiser ITC Nestle (I) Dabur Marico GCPL

Execute

10

Polaroid no reason to smile!

Vision
Business model
Something akin to selling razor blades. Buy the shaving kit (camera) & replace razors (or film) as you go.

Innovation
Do not undertake the program unless the goal is manifestly important and its achievement nearly impossible. Do not do anything that anyone else can do readily.
- Edwin Land, annual report 1980

In 1989, 40%+ of R&D budget spent on exploring digital imaging techno logies!

Lacked execution
Polaroid was well prepared technologically for the shift to digital imaging It even had a sensor of 1.9 megapixel in 1989 But it was never prepared in terms of marketing and business models
2,157 2,168

Mkt cap (US$ m)

Los t 90 %

of it

sv

alu e!

839 265 FY1995 FY1997 FY1999 FY2000

11

Xerox failed in copying its brand!

Vision
I knew I had a very big tiger by the tail."
Chester Carlson, Founder of Xerox

Created the Xerox brand

What would a company with a strong brand like Xerox and revenues of US$1bn (in 1961) do? Move into brand extensions and innovate?
Moved into to computer technology and data processing Fax Machine Technology based office products

Xerox did exactly that

Innovation

Lacked execution
Mkt cap (US$ bn)

Xerox is today remembered only as a photocopier! Brand extensions failed and Xerox failed to create scale

38.8

60% erosion

16.1

1998
12

2010

Adapt

13

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to

change!
- Charles Darwin

14

The King Canute philosophy!

Adaptability has been THE MOST important DNA change required within an organization
Key issues with successful companies

Obsession with core

My core business is my identity and will always remain my focus!

Arrogance
I am the largest and no competitor can get close!

Complacency
My products will always sell!

Inability to identify the Changing

trends!

15

Get out of your comfort can become extinct!

zone if you do not change you

- Dr. Spencer Johnson

The biggest

threat to McDonald's lies within - and that is us as a company becoming complacent. There are a lot of companies that get fat, dumb and happy and take their eye off the ball and forget about serving customers.!
- Charlie Bell

16

Nokia the biggest innovators of its time

Nokia Vision & Innovation
Nokia 1011
1992

First satellite call

1994

First WAP handset

1994

3G phone
2002

N series Multimedia
2005

Execution

Worlds largest mobile and camera company!

Nokia sells 452m mobile handsets a year and Apple just 40m
Revenues (US$ bn) Nokia Apple
65 56

Mkt Cap (US$ bn)

Then why the disconnect?

268

28 76 6 5 38

FY02

FY10

FY02

FY10

17

"You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new!
- Steve Jobs, founder of Apple

18

is losing the connection?

Changing consumer: Design consciousness, Faster operations

1990

2001

Jan 2007

2010

2011
Largest music vendor, tablet maker, smartphone provider &

Adapting!

Struggling to remain a relevant computer vendor

Launch of iPhone

the most valuable tech co in the world

Nokia 1011 Failed to adapt to the changing consumer needs!

N series Multimedia

Nokias first touch screen phone

July 2008

Nokia Apple

59% 400%

1992 to 2005

in last 5yrs

19

Yahoo!...the inventor of search

Yahoo, is the originator and the largest search engine of 1990s then why do we all only remember Google today?

Dominant search engine of 1990s

A R R O G A N C E

Search only an accessory!

The advertiser is the customernot search engine users!

20

is now being googled out!

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

Responsive to change
Launch of products like Gmail, Google maps, Android, Orkut, Youtube, & Google +

and the results are apparent!

Market cap (US$ bn)
Yahoo Google

x
53 22

1x
52

FY04

21

10
FY11

191

Learn

22

IBM a classic case of revival DNA!

Revenues Profits
6 65 P AT Mkt cap

IBM 40%

IBM 70%

1990

5x size of rival but growing at 6%!

Everyone is too comfortable at a time when the business is in crisis CEO in 1990
Cut 125,000 jobs and US$28bn in charges 27% of revenues from services
-8

1993

32

Dangerous mix of arrogance and complacency

More than 400 strategic planners within IBM !!!

60% of revenues from services 2001
8 83

Adapted to change

Sold PC business to Lenovo for US$1.75bn in 2004

Today
15 180

Figures in US$bn
23

But does it suffice for the organizational DNA to be

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

May be not!!!
24

Mavericks create businesses

Innovation in businesses
Shantanu Prakash
Revolutionized the private educatio n sector

& creating VALUE!

US$2bn

Education

Retail

Kishore Biyani

Spearheaded organized Retail in the country Biggest innovator in the Media space broadcasting/DTH,etc Largest media conglomerate Created commodity markets and new age exchange businesses Pioneered wind energy in the country to become World No.3

US$2.8bn

Subhash Chandra

US$4.5bn

Media
Raghav Bahl US$2.7bn

Exchanges Renewable Energy

Jignesh Shah

US$3bn

Tulsi Tanti

US$12.3bn
*peak market cap

25

and at times kill it too!

Success led to contextual arrogance?
Learnt the rules of the game of private educationand how to play!
Undermined the need for corporate governance in the regulated private edu space
30-Sep-09 Today 18,842

Result
(Mkt Cap Rs m) 88,873

79%

Largest retail industry brand & hope of FDI to result into eventual sale to a global strategic investor

Undermined the need to build a strong back-end

31-Dec-07 Today 64,052

125,131

49%

Biggest innovator in media across broadcasting, distribution, etc

Underinvested in core business; unwilling to look at the changing face of competition Growth hungry promoters but also capital starved Cash flows never a focus.

31-Dec-99

204,048

Today

112,976

45%

Created marquee properties across genres and assume d they will always have takers (easy access to capital) Established the la rgest Exchange network, with MCX being the biggest success (valued at US$1.1bn in 3 yrs of ops)

30-Sep-09 Today 39,608

119,377

67%

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

30-Jun-07 Today 35,665

132,862

73%

Became World No.3 in wind energy

Too much too soonReckless expansion, in retrospect. 26

31-Dec-07 Today 85,225

579,852

85%

But, potential for change in DNA remains!

The loss
(Rs m) 100,000

Result
Jain Irrigation

Jain Irrigation

Classical Case of everything Classical Case of everything wrong Diversification, Overwrong Diversification, Overleverage and non-performance leverage and non-performance (1992- 2002) (1992- 2002)

75,000

Bajaj Auto

Catered to the consumer of Catered to the consumer of yesterdaya mass player in aa yesterdaya mass player in declining market (scooters); declining market (scooters); Struggling (mgt) internals and an Struggling (mgt) internals and an aggressive external environment aggressive external environment

Nestle

Th eeunderlying core of the Th underlying core of the organisation was to beat Indian organisation was to beat Indian GDP growth! (until 2003) GDP growth! (until 2003)

C H A N G E

50,000 25,000 0 Jun-93

The biggest success story of the past 10 yearsStayed committed to the core.

Jun-96

Jun-99

Jun-02

Jun-05

Jun-08

Jun-11

(Rs m) 500000 375000 250000 125000

Bajaj Auto

Became the game changer in the space.Innovated and let go of an hitherto successful DNA!

0 Jun-08 (Rs m) 450,000 360,000 270,000 180,000 90,000 0 Jun-93

Dec-08

Jun-09

Dec -09 Nestle

Jun-10

Dec -10

Jun-11

Belief in the fact that it was under delivering on own capabilities. Re-aligned internal targets . Growth now at 3x GDP

Jun-96

Jun-99

Jun-02

Jun-05

Jun-08

Jun-11

27

`Mavericks can recreate SUCCESS

ss ce uc S

r Ar

og

e nc a

Need to emulate to Recreate

g in ng ha NA C D
l fu n n ai itio P s n ra t

Consumerization Consumerization
Industry is moving towards Industry is moving towards premium, but key players are not premium, but key players are not

Media access to content Media access to content

Newer avenues of viewership to Newer avenues of viewership to take over traditional TV viewing take over traditional TV viewing

Print media Print media

India to map the structural change India to map the structural change underway globally underway globally

Spaces that demand a DNA change

Distribution
Online wave - a threat to brick-nmortar distributors!

Intermediary businesses
No brownie points for intermediariesyields to squeeze!

Energy
Renewable energy is the inevitable savior!

29

The Indian consumer is changing

Premiumization The trend is evident!
Premium growth
25% of the cars sold are sedans (above Rs0.6m)

Premium players

Automobiles
All global majors at record sale and setting shop in the country

3x

th ro w

BUT 10% mkt share 50% of industry profits

Liquor
Regular IMFL Premium IMFL

Pernod Ricard, World No.2 liquor player, is most profitable Indian liquor company

India to rank among our top 3 markets (in value terms) along with the US and China as rising incomes spur demand for our brands

CEO, Pernod Ricard

30

but are companies adapting to that?

Distribution channel

Best sales & services network

Larg est reach in a govt regulated distribution

Focus on mass

78% sales at
hatchbacks

70% of volumes
in the economy segment

Strength
Dominant market share

Positioning
48% 55%
Perception
fuel-efficient & value-for-money buy Affordable drinking!

Lack the DNA to adapt

Unable to change mass perception

Attempts such as Baleno and Kizashi failed

Premium products launched at low price

Competition can pla y spoil sport

Audi/Honda launching in the mid segment

Pernod could potentially eat into USLs volumes

Maruti / USL - a structurally de-rating business model over the longer run?
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Shopping the rules of the game are changing!

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

On an average, 100m Indians spend about 16 hours a week online - Google

E-commerce industr y stats

( US$bn)

40

10 4 2009 7 2010 2011E 2015E

Survey: 40% prefer to shop online co nsider ing convenience to shop anytime & one can collect detailed product info Over US$75m of funding to e-commerce sites in last six months

A signal to brick-and-mortar retail stores. a change in DNA required!

32

Print is it still fine?

(Rs bn) 360 270 Indi an print indus try size 310

Globally, print circulation on a decline

120 USA UK India

but, near term growth for Indian print intact!

193 180 90 0 2007 2010 2015E 160

80

40

Declining revenues for globa l players

200 3 200 5 200 7 200 9

Current mkt cap of top 5 print companies globally is same as that in 1990!!!
(USD m) 50,000 37,500

Proportion of individuals reading/downloading online newspapers/news magazines over the Internet f or private purposes

However, with migration of consumers to epapers

Value erosion Eventual!

25,000 12,500 0

FY90

FY94

FY96

FY98

FY04

FY100

FY92

FY02

FY06

FY08

Are Indian print companies prepared to change their DNA for this wave of transition?
33

FY10

Media in a new age!

With the online wave fast catchingcan traditional TV watching habits undergo a change?
How much TV do you currently watch on the internet? Have you considered cancelling your cable service?

Growing popularity of internet based TV viewing

+
Sourc e: Retrevo

Increasing the likelihood of watching content on the internet

Sourc e: Ericson

34

50% of tablet users are watching TV and film on the devices

In-Stat Research

(Rs m) 1,200

International subscription revenues for ZEEL have capped out!... reflective of structural change underway?

TV advertising revenue is dropping, while online growing due to popularity of online TV

Yankee Group (US), Research

1,080

960

840

720

600 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Are broadcasters adapting their DNA to this changing trend???

35

Intermediaries the sweet spot is lost!

Insurance product sales growth
40% of travel tickets sold in the country are online!
Dec-10 Nov-10 Mar-11 Feb-11 May-11 Jan-11 Jun-11 (39) Oct-10 Apr-11 (3) (16) (16)

(5) (12) (21) (18)

(9)

Result of drop in insurance commissions (slashed from 18-20% to 8-10%)

Risk of becoming irrelevant!

Farmer Village trader Wholesaler Retailer Agent End user

Only cost additionlimited value addition

Changeover
ric e

p Bid

Electronic spot exchange

As k

p ri

ce

Seller (Farmer)

Buyer/End user

36

A similar change inevitable across other businesses?

Extremely fragmented industry Advent of technology such as DMA are eroding yields Efficiencies to reduce cost of trade

Brokerages

NBFCs

Financial intermediaries
MFIs

As these businesses become large, the business proposition will compel banks to get into the segment of finance, as value addition stands to be limited

Gold lending institutes

Do these businesses have it in their DNA to survive???

37

Renewable energy to outshine need for oil?

Oil - A significant energy contributor
Top 15 oil companies are #1 or #2 in market Top 15 oil companies are #1 or #2 in market
cap in out of 11 countries cap in 99out of 11 countries

BUT

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

(US$ m)
80,000 60,000 40,000 20,000 0 3/31/1993

Suncor Energy (Mkt cap) 7x in the last decade

Renewable energy
Powering tomorrows growth?
3/31/2011

3/31/1999

3/31/2005

A Crude decline of oil companies eventual if the DNA is not renewable

38

You can't have a better tomorrow if you are thinking about yesterday all the time!
- Charles F. Kettering

39

Thank You
Nikhil Vora/ Swati Nangalia / Varun Kejriwal
(Dir) +91-22-6622 2567 / 2576 / 2685 nikhil.vora@idfc.com / swati.nangalia@idfc.com / varun.kejriwal@idfc.com

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