How do M/A unlock value ?

International Management Accounting Practice Statement

1 (IMAPS1) issued by IFAC states; that management
accounting refers to that part of the management process
which is focused on organization resource use. Thus, it
refers to managerial processes and technologies that are
focused on adding value to organizations by attaining the
effective use of resources in dynamic and competitive
context.

By creating the management process of M/A we

unlock value
DIRECTION OF THE Management Accounting
WHAT IS A BUSINESS MODEL ?

• A business model is the method of doing

business by which a company can sustain
itself or generate revenue. The business
model spells out how a business unit can
make money by specifying where it is
positioned in the value chain.
• If the business is through e-commerce then
it is referred to as e-business.
 Business Models 1950-1970/80

Products yesterday Producers yesterday

• Simple offerings • Vertically integrated
• Lesser choices • Functional models of
• Local markets command and control.
• Goods inherited across • Economy of scale
generations • Corporate established
• Willingness to wait performance measures
• No market driven processes
• Permit Raj/Delhi links
Business environment of 21st century
VALUE CREATING STRATEGIES/PROCESSES
• Mass customization through a good design
• Instant production driven by pull of customer
demand and ability to build on customer ideas.
• Network of producers through strategic alliances.
• Supplier privy to strategy. BUSINESS
• Delayered management hierarchies MODELS
CREATE
• Trust , Reliability and core competencies VALUE
• Information technology as a major enabler
• Global markets and world class practices
EVOLUTIONS OF NEW MODELS

• BUSINESS MODELS ARE EMERGING

FOR EXPLOITING DOWNSTREAM
BUSINESS OPPORTUNITIES THROUGH
Redefining Value Chain
Building Customer allegiance
Rethinking Vertical Integration
 MISSION STATEMENT

COMPONENTS
OF A
BUSINESS MODEL VISION STATEMENT

VALUES STAEMENT

OBJECTIVES

IT
STRATEGIES ENABLED

PROCESS BASED ORGANISATION

 A Battle on Two Fronts

ROI
(1) Strategy
choose the right ones …..
Strategic … and align the cost structure
MA
on

(2) Efficiency & Utilization

ti
rea

Operational
take waste and unused capacity
ue c

MA
Val

out of the organization

Management Accounting
 STRATEGY DEFINITION
METHODOLOGIES
TIME
Business Model
Expenses
PROJECT
ACCOUNTING,
FOR A MA ACCN
General PROGRAM
ledger MANAGEMENT MINIMIZE

$$s hours UNUSED

(AVAILABLE)
CAPACITY
OPERATIONAL PERFORMANCE
SUPPLY / INVEST ­ PRODUCTIVITY & EFFICIENCY
CUSTOMERS, STRATEGY  STRATEGY
­ BENCHMARKING 
RESOURCES ­ UTILIZATION/YIELD
MARKETS REALIZATION ­ TOTAL QUALITY MANAGEMENT
                    (Cost of Quality) 

ACTIVITIES
SUPPLY CHAIN (ABC/M) PROCESS
MANAGEMENT MANAGEMENT
DEMAND
ACTIVITY
DRIVERS VOLUME & MIX
MAXIMIZE FORECAST
Asset
Alignment of cost
structure to strategy
PRODUCTS,  management

DEMAND STRATEGY CHANNELS & 
PROFITABILITY
 CUSTOMERS ANALYSIS
What­if Planning?
PRODUCT & REVENUES
SERVICES
SHAREHOLDER PERFORMANCE
WEALTH MEASUREMENT
[VBM]
 SCORECARDS

MAXIMIZE
KEY PERFORMANCE INDICATORS (KPIs) versus ACTUALS
 CASE OF TELECOM SECTOR MODEL AND THE
MANAGEMENT ACCOUNTING

• 1990-2000 WAS THE PEAK OF TELECOM BOOM IN US DUE TO

ADVENT OF INTERNET AND WIRELESS.
• RISING TIDE LIFTED ALL BOATS. SAME WAS IN HONGKONG.
• BY 2002 SHARE PRICES STARTED DECLINING .
• HEAVY DECLINE OF INVESTORS CONFIDENCE
• BUT BY 2004 SOME SERVICE PROVIDERS RECOVERED AND THE
REMAINING STRUGGLED.
• WHAT DIFFERENTIATED THE WINNESR FROM LOSERS IS THE
CASE OF NEW BUSINESS STARTEGIES AND MODELS. AN
EVOLVING INDUSTRY MOVING INTO ANOTHER STAGE OF LIFE
CYCLE.
CERTAIN
COMMENTS
PRIOR TO THE TELECOM BUST 2001

• Capacity utilisation driven industry.

• Possessing assets such as switching and transmission
equipments, real estate, licence and what is called
SPECTRUM availability was considered competitive
advantage.
• Expansion of customer base was to generate revenues
through asset utilisation and customers were not assets.
• Regulatory role to protect customers and new entrants
become very important.
• Cost per unit of usage computed through scale oriented
allocation principles became important.
THE NEW BUSINESS CONTEXT

• By 2002 market was not underserved.

• Driving cost per minute down by driving up NETWORK
usage was no longer working.
• Subscribers could choose the service providers after
evaluation.
• Growth came only by enticing customers from the other
service providers.
• COMPETITIVE ADVANTAGE CAME FROM
KNOWING THE CUSTOMERS WHO ARE REALLY
PROFITABLE AND MAKING THE RIGHT OFFER AT
THE RIGHT TIME .
• The performance measurement systems were not having
metrics relating to the new competitive advantage.
AN INDUSTRY LEVEL COST METRIC PRACTICED IN US

SERVICE PROVIDER COST/NEW CUSTOMER

NEXTEL $ 567
VERIZON WIRELESS $ 383
SPRINT $ 280
US CELLULAR $ 410
T-MOBILE $ 356
CINGULAR $ 315
AT&T WIRELESS $ 350
AN INDUSTRY LEVEL REVENUE METRIC PRACTICED

SERVICE PROVIDER RPU/NEW CUSTOMER

NEXTEL $ 72
VERIZON WIRELESS $ 51
SPRINT $ 62
US CELLULAR $ 48
T-MOBILE $ 54
CINGULAR $ 51
AT&T WIRELESS $ 59
CRITICAL INDICATIONS COULD BE

• Nextel spends high on customer acquisition and

must be justified by a better RPU. In fact it is so.
• But the damage is from US Cellular.
• Low revenue customer base with a lower RPU
coupled with high cost of acquisition is not a
sustainable strategy.
• Customer churn rate also need to be taken into
consideration.
CUSTOMER CHURN AND LIFETIME CONCEPT

SERVICE CHURN AVERAGE

PROVIDER LIFE in Mth
Nextel 1.6% 62
Verizon 1.5% 69
Sprint 2.3% 44
US Cell 1.6% 62
T-Mobile 3.0% 33
Cingular 2.7% 37
AT & T 3.4% 30
COULD BE CONCLUSIONS
• Higher marketing spend at Nextel is justified by higher
revenues and longer customer lifetime.
• Sprint’s lower marketing spend does not look appealing
with dissatisfied customers.
• US Cellular should reexamine their customer retention
policies to ensure that retention offers are cost effective.
• At & T has the third highest RPU but the lowest customer
satisfaction trend.
• As the industry structure starts changing we need new
ways of measuring performances by relating to new
strategies.
• This is an universal truth and not applicable only to the
West.
 CHANGING TELECOM INDUSTRY SRUCTURE –
UNIVERSAL PHENOMENON

• CUSTOMER ACQUISITION TO CUSTOMER RETENTION. US

REGULATORS REMOVING BARRIERS BY REMOVING NUMBER
PORTABILITY.
• CUSTOMER RELATIONSHIP AND NOT PRODUCT
DIFFERENTIATION IS THE SOURCE OF COMPETITIVE
ADVANTAGE.
• ONE TO ONE MARKETING BY IDENTIFYING CUSTOMER
SEGMENTS AND TAILORING MARKETING OFFERS AND
SERVICE PROPOSITIONS TO INDIVIDUAL CUSTOMERS.
• EXPANDED PROUDCT DIVERSITY AND CUSTOMISATION NEEDS
CAPTURING OF COSTS OF PROCESSES WHICH RELATE TO
THAT.
• DEREGULATION IS SHIFTING POWER TO CUSTOMERS.
IMPLICATIONS OF THE FIVE FORCES

• PROFIT GROWTH FOR SERVICE PROVIDERS WILL

COME FROM BUILDING INTIMATE RELATIONSHIPS
WITH CUSTOMERS AND BY PROVIDING MORE
PRODUCTS AND SERVICES TO THE EXISTING
CUSTOMER BASE.
• HOW MUCH TO SPEND ON WHICH CUSTOMER TO
RETAIN AND THEM AND STILL MAKE PROFIT IS AN
IMPORTANT MEASUREMENT ISSUE.
• ACTIVITY BASED COSTING SYSTEMS MEASURING
CUSTOMER PROFITABILITY AND RELATING TO
LIFE TIME VALUE FROM THEM BECOMES
IMPORTANT.
HOW CAN EXCESS CAPACITY IN NETWORK AND
UNPROFITABLE CUSTOMER CAN COEXIST.

• FUNDAMENTALLY A CUSTOMER WHO DOES

NOT PAY THE BILL.
• DOMINATING THE CALL CENTRES WITH A
HIGHER LEVEL OF TECHNICAL SUPPORT.
• CHURN REDUCTION PROGRAMS TARGETED AT
CUSTOMERS UNIVERSALLY WITHOUT
LOOKING AT LOW PROFIT ZONES.
• EXPENSIVE SEVICE CENTRES OR TELESHOPS
AT UPMARKET PLACES MORE USED UP IN
SETTLING COMPLAINTS AND COMMERCIAL
DISPUTES.
 WHY THESE COMPANIES WANTED TO
MEASURE CUSTOMER COSTS ?
• Manage each customer’s costs to a lower level.
• Establish a surcharge for or re-price expensive cost to serve activities.
• Reduce services
• Introduce new products and service lines.
• Raise prices.
• Abandon products or service lines.
• Improve the business process.
• Offer the customer profit positive service level options with varying
prices.
• Increase investments in activities that customer shows a preference for
• Up-sell or cross-sell the customer’s purchase mix toward richer ,higher-
margin products and service lines.
• Discount prices to gain more business with low cost to serve customers.
Users

Users

Users
Is this going to be relevant in India
or we say these are only for west
• Call rates coming down consistently.
• RPUs are falling down for many companies.
• Customer acquisition becoming a mad race.
• Markets getting saturated in metros and expansion
going the rural way.
• Business magazines articles on telecom calling for
customer profit measurement.
• The sector is adopting global practices.
• Hence we need the new business models and
practices.