UNDERSTANDING THE DEAL: Initially when Vodafone had tried to make its entry into India via its tie up with American based-Air touch, the low mobile penetration made it an unattractive offer. Two years later, when the subscriber base started shooting up, Vodafone returned. In October 2005, it picked up a 10 per cent stake in leading mobile operator Bharti Tele-Ventures for $1.5 billion (Rs 6,700 crore). In its third avatar, the $54.8-billion Vodafone has bagged Hutchison Essar, India’s fourth largest mobile operator, by paying $11.08 billion (Rs 49,860 crore) for a 67 per cent stake. In the process, it has edged out Hutch’s 33 per cent partner, the Essar Group, Anil Ambani-led Reliance Communications (RCom) and the London-based Hinduja group. Vodafone chief executive Arun Sarin has offered to pick up Essar’s 33 per cent stake at the same valuation. Now, Vodafone will have a presence in 16 of India’s 23 circles, plus licences for another six. Ironically, the only circle missing in Vodafone’s India bouquet is Madhya Pradesh, where it had made its India debut. INDIA’S Importance in VODAFONE’S scheme of things: The Indian acquisition fits into Vodafone’s focus on the EMAPA (Eastern Europe, Middle East, Africa, Asia Pacific and affiliates) markets. India is a critical cog in that plan. That’s because mobile revenues already account for 57 per cent of the $22.5-billion (Rs 1,01,250-crore) Indian telecom market. By 2010, it is expected to account for 76 per cent of an estimated $43.6-billion (Rs 1,96,200-crore) market. Of late, Sarin has been trying to reduce dependence on western European markets. Over the past 18 months, Vodafone sold assets worth $15.8 billion in Japan and Sweden, and got out of minority stakes in Switzerland and Belgium. And in end 2005, it acquired Turkey’s Telsim for $4.5 billion. IS THE PRICE TOO HIGH? The total valuation of $18.8 billion is below the $20-billion level that was considered a major issue with Vodafone investors. Vodafone will pay $11.08 billion for the 67 per cent stake. After one factors in the $1.62 billion it will receive over the next 18 months by selling its 5.6 per cent stake in Bharti, the net outgo is $9.46 billion. Add to that debt of $1.96 billion. If we were to understand the reason for the valuation being pegged so high, it is important for us to understand the potential of the Indian market. Vodafone seems to have pegged its valuation based on India’s mobile growth story. After all, there is no other country that is adding over 6 million subscribers every month. The increasing subscriber base has also meant that while average revenues per user (ARPU) are falling, revenues are on the rise. The Cellular Operators’ Association of India (COAI) data clearly shows that though ARPU fell by 10.66 per cent in the July-September 2006 quarter over the same period last year, revenues went up by 57.85 per cent. That’s a clear indication of the potential of the Indian market. Also, mobile penetration at 13 per cent is well below China’s 41 per cent and Brazil’s 54 per cent. It is expected to touch 40 per cent by 2011-12. By then Vodafone expects to control 20-25 per cent of the market
against 16 per cent now. That means having a shade over 100 million subscribers. Obviously, revenues will be higher. Indian mobile phone subscribers, Sarin predicted, would touch the 500-million mark in five years. In an indication of the high hopes Vodafone is pinning on India to help it recover and grow from a disappointing performance focused on the mature European market, its CFO Andy Halford declared "in five years time, over one-third of the group's revenue growth would come from emerging markets (like India) Also, mobile penetration at 13 per cent is well below China’s 41 per cent and Brazil’s 54 per cent. It is expected to touch 40 per cent by 2011-12. By then Vodafone expects to control 20-25 per cent of the market against 16 per cent now. That means having a shade over 100 million subscribers. Obviously, revenues will be higher. The enterprise value per subscriber that Vodafone paid at $770.2 is much lower than the $1,066 it valued each Bharti subscriber in 2005. Most importantly, the ARPU of Rs 374 for a Hutch is higher than Bharti’s Rs 349. For 24.41 million subscribers, that works out to annual revenues of $2.4 billion (Rs 10,955 crore). Betting large on Rural: The company is set to introduce low-cost handsets besides new services such as information, entertainment, mobile payments and money transfers — areas that it has worked upon and strengthened in Europe and other markets. India is a fabulous opportunity with the penetration of mobiles in the country only about 13 per cent (teledensity is around 17 per cent), but was growing at a very rapid pace. Vodafone recently reached the 200-million subscriber mark. With India’s 25 million, Sarin expressed optimism that the company would soon touch the 300-million number. “We’re excited about moving into rural areas. The company believes that emerging markets are approximately 60 per cent of the total expected growth in the next five years. The CAGR is 12.3 per cent as compared with 4.4 per cent in developed markets.
IMMEDIATE STEPS: After bagging the Hutchison Essar deal Vodafone has started to get busy by strengthening ties with its former partner Bharti Telecom, Indias largest Private telecom company. The two companies have agreed to easy buy back terms for Vodafone’s stake in Bharati, an in-bounding roaming deal and an infrastructure sharing agreement .Vodafone has divested 5.6% stake in Bharti as a matter of corporate propriety to other shareholders. Bharti has agreed to acquire 5.6% at a discount of 25% over existing valuations. At $1.6 billion that is still a lot more expensive than what Vodafone had to pay. Vodafone would continue to hold a 4.4% stake in Bharti through its holding in Bharti Infotel Ltd.
The importance of this deal is that it would give access to Bharti’s long distance and leased line network and would enable per cent of Vodafone’s inbound roamers preferred status on the Bharti Airtel network. Vodafone Chief Financial Officer Andy Halford has pegged the impact of the infrastructure-sharing pact to result in “combined benefits of around $1 billion over the next five years. The company has also estimated Hutch-Essar would increase its market share to 20-25 per cent by 2012, from 16.4 per cent at present, by expanding network coverage, especially in rural areas. The deal values the HutchEssar enterprise at $18.8 billion. Vodafone will also assume a debt of $2 billion. The following are few of the key steps of Vodafone’s India strategy: As a first step, the company plans to make significant investments in upgrading Hutch-Essar’s network, while continuing to invest in accelerated distribution rollout, especially in new areas. It has also set a target of increasing its radio-infrastructure sharing with other operators, including Bharti Airtel. Vodafone will initially retain a dual brand-name, which will subsequently become Vodafone. The company said that it will also pay the price-warrior game by “introducing ultra-low cost handsets,” besides bringing its other global offerings like mobile payments to India. This will make Hutch the only operator in India to be “integrated” with an international mobile company. Vodafone will continue with the management led by Hutch-Essar Managing Director Asim Ghosh, who is expected to report to Paul Donovan, chief executive of the emerging markets and Asia Pacific region for Vodafone. Vodafone may appoint the same directors — Donovan and Gavin Darby — who sat on Bharti’s board to the Vodafone-Hutch board.
SWOT ANALYSIS: It is important for a company to ensure that it understands its current position thoroughly in framing strategies for growth and expansion. The SWOT Analysis can be explained as follows: Strengths: 1. Large player with adequate experience and clout having the stake of an estabilished Indian player which has not yet reached its full potential. 2. Deal with Bharti: There are real benefits to be had, not just from spectrum sharing, but also in areas such as intra-circle roaming. Weaknesses: 1. Loss of First Mover Advantage as against Bharti, Reliance Idea et al 2. Possibility of Essar-Ruia group removing its 33% stake which would mean that Vodafone would have to search for an able, minority partner. Opportunities: 1. Reverse synergies for Vodafone from India: The deal may transform Vodafone’s purchasing clout in the low end terminal marketplace. There is potential for outsourcing of Vodafone’s operations to the low cost opportunities in India. 2. 3G license in India is a definite potential to be exploited. 3. Greater active network sharing that should help drive the penetration and bring affordable communication to a much larger population. 4. Vast expansive Rural opportunity 5. Fixed term mobile opportunities through deals with Offices and corporates. Threats: 1. In the long term there may be competition by larger international players. In the short terms with limited spectrum and opportunities for global players there is limited scope for the entry of new players. 2. Threat of legal and policy initiatives going against Vodafone.
CONTROL SYSTEMS AND THEIR REQUIREMENTS Growth of Business Controlling of costs Improvement of speed and quality of decision making
Key Parameters determining success: (Vodafone specific) The company has to keep a close watch on certain key parameters such as : 1. 2. 3. 4. 5. 6. ARPU: Average Revenue Per User Coverage in new circles, and ensuing expansion into rural areas Debt Servicing capacity Annual Revenues and Profits Performance of new services such as Radio, wireless, handsets Legal factors such as 3G spectrum licenses, Public Private Partnerships in Rural
Designing a Control System It must be balanced with a mix of qualitative and quantitative aspects It should not focus on minute uncontrollable elements Only Critical elements need to be controlled Requires a warning system
The factual premise would never be equal to the value premise. Thus it is crucial to have a control system in place. In designing this control system is crucial for us to understand that just as the superiors target depends on the sum total of the employee’s target an organization’s broader strategic goals would be dependant on the achievement of the narrower, shorter period goals. In the above deal, it is crucial for the company to set up targets for the various parameters mentioned above. These would be for example: INDUSTRY CHARACTERISTICS 1. Determining target level of ARPU for different classes of customers towards maximizing the Customer Lifetime Value. 2. Ratio of Fixed Income basis (Rental based Income) to Talk time based Income 3. Percentage of business that would come from Rural Telephony 4. The proportion of mobile telephony business: Hardware (Mobile handsets business) 5. Target level of business from Indian Market as a proportion to worldwide revenues.
6. Re-payment of debt from 5 banks and increase in the Credit rating of company ENVIRONMENTAL FACTORS The economical and political climate consist of environmental factors which determine key variables. COMPETITIVE STRATEGY The strategy that a company adopts determines the variables which must be monitored and emphasized. In the case of Vodafone its reach and coverage strategy would be monitored through circle penetration measures. STAKEHOLDERS The demands of the stakeholders such as Customers, Executives, Suppliers, shareholders are key control variables. The key variables and their interactions:
Integration effects among variables
For each of Vodafone’s departments performance measures may be developed towards maximum performance. These departments could be grouped as Vodafone Telecom India (Network and Telecom services), Vodafone Handsets, Vodafone services. The common parameters could be grouped as below: A) B) C) D) E) F) G) H) Short term profitability Market Share Productivity Product Leadership Personnel Development Employee Attitude Public Responsibility Balance between short-range and long range goals.
Towards achievement of these targets it is crucial to remember 2 important steps for Execution. These include: 1. Manning the responsibility centers with persons of adequate authority and knowledge of local conditions. 2. Periodic milestones and performance evaluation dates. The control systems in an organization enable: 1. 2. 3. 4. 5. Planning the activities of an organization. Coordinating the activities of the organization Communicating the information to different levels of the hierarchical structure Evaluating information and deciding the action to be taken Influencing people to change their behavior.
The domain of Management Control systems includes the following: A) B) C) D) E) Strategic Planning Management Control Task Control Control of strategy Control of Operations.
Control systems may also be classified as Formal and Informal Control systems: The formal control systems focus upon the needs of customers and markets. They should be consistent with and supportive of the Informal systems of the organization.
Organization structure Strategy Operations
Patterns of Autonomy Measurement Methods Responsibility Centers
MANAGEMENT STYLE & CULTURE Prevailing style Principal Values Norms and Beliefs
FORMAL CONTROL PROCESS
Strategic Planning Capital Budgeting Operations Management
Budgeting Project Management Variance Analysis
Individual and group Short term and long term
COORDINATION AND INTEGRATION Standing Committees Strategy Operations Formal Conferences Involvement Techniques
BALANCED SCORECARD FOR AN FMCG COMPANY:
How do Customers see us?
How do we look at stakeholders
Internal Business Perspective
Innovation and Learning Perspective
How do we innovate for future?
Balances Scorecard as designed by Kaplan and Norton 1991
It is necessary to achieve a balance among different performance measures in order to grant formal rewards to employees. These 4 group of performance measures Financial, Customer, Internal and Innovation and learning. For an FMCG Company the measures/parameters which could be used to evaluate the 4 Performance measures are critical. These could be quantitative and qualitative in nature. While designing the performance metrics it must be understood that a control measure must a) Measure Critical Activities b) Be measurable c)Measure Qualitative and Quantitative measures.
The following is a list of Performance Metrics that could be used to evaluate an FMCG Company.
FINANCIAL PERSPECTIVE Return on Capital Employed Cash Flow Return on Channels used Credit Management Debt Servicing Ratio Stock Turns Inventory Coverage Ratio INNOVATION AND LEARNING PERSPECTIVE % of Revenue from new sources Quantum of Money towards R&D Market share of new products Benchmarking against the competition Development time: Time to market New Line Development INTERNAL BUSINESS PERSPECTIVE Product Launch success rate Production Yield and Capacity usage Advertisement Efficiency Threats to Channels Dependency on SCM Members Supply chain Rationalization Competition Activity Surveys
CUSTOMER PERSPECTIVE Customer Satisfaction Customer Lifetime Value Classification of Customers: RFM Loyalty of customers Share of Key account purchases Customer base expansion: New Lines
Below are metrics listed towards measurement of the above Performance Metrics:
Return on Capital Employed: This is one of the most widely used measures. It measures the return that one would generate on the money Invested. This in turn would be compared with the Market Rate of available options towards deciding on whether an adequate return has been generated. The adequate Industry Averages must be updated at all times. Cash Flow: The company must have sufficient liquidity and this is crucial for its day to day functioning. Returns on Channels Used: An FMC G Company would have several distribution channels. For example large companies such as HLL would employ channels in both the Traditional Trade and Modern Trade. Under the Traditional trade It employs: Key Retailers, Mass Retailers, Super Value stores, Kiosks, and Wholesalers. Under the Modern Trade it employs Large Key Accounts and the Self service stores. It must measure an adequate Return on the channels used by looking at: 1. Growth of the channel employed 2. Profitability of the channel 3. Demand and Coverage of the channel
For example for HLL the following models have been built towards measuring the above parameters:
Credit Management: For an FMCG company it is crucial to exercise a tight control over the credit extended to channel members. It must measure through figures such as Bad Debts that its performance does not deteriorate overtly through the extension of Credit.
Stock Turns and Inventory Management: An FMCG Company must also measure and improve on the stock turns. Each time the Inventory cycle is completed money is generated and a tight control must be maintained over the Inventory. For this particular purpose the company must try hard to reduce the Inventory held at each level by making the supply chain more responsive and improve performance. Return on Promotion: Through the advertising and sales promotional offers both to the trade and to the end user the company tries to improve its sales/offtake. We need to measure the money spent on these promotional tools and ensure that they yield a sufficient return. Generally performance metrics such as Viewership, No of Trials for a new product, Return on Advertising are used to compute the effectiveness of the Promotion effort.
Internal Business Perspective:
Product Launch success rate: The company must measure the effectiveness of new launches each year. It may employ experimentation method for the above purpose. Through historical data we can avail of increase in sales and market share pattern during the launch phase of similar products. If the product does exceptionally better as against these figures we may conclude that it has performed well. Production Yield and Capacity Utilzation: The company must strive for betterment by improving the utilization of capacity, reduction of inventory by low inventory manufacturing. Rationalizing the supply chain: The company must look at adopting the best fit for the different place of purchase. For eg: a Soap of the premium category might sell more at a Modern Trade outlet vis-à-vis a Neighborhood store. The company must look at maintaining zero wastage at the same time ensuring that the products of choice are made available. This can be done by tracking sales of SKU’s and fixation of stock norms for the same. Threats to Channel Members: At all times the company must look at the different channels used and analyze whether they are facing any threat of channel conflict. This is a qualitative measure and must be done so as to ensure that there is as little fraction between channel members. Information: Using the latest information the company must track the activities of competitors. Warning signs could be set with regard to competitor Spending, Market share, so as to initiate measures immediately.
Innovation and Learning Perspective
Percentage of Business from New products: The company to grow must definitely peg a figure from new products. ITC for example says that it must have 10 % PAT from new products. This is in sync with the vision to expand its operations and reduce its dependence on the under threat Cigarette Business.
Portion of money contributed to R&D: The Company must set aside a certain portion of the profits towards Research and Development. This is necessary for being on the growth path and stay ahead of competition. Market share of new products: The Company must set a target for the growth of each of its new products. New Line Development: The Company must always try and go for new lines of products so as to reduce competitive threat. Benchmarking best practices: The Company must try and benchmark with the best and strive for quality improvements. Reduction of time to market: The company can efforts towards reduction in the time to market by emerging as the leader in innovation.
Customer Satisfaction Index: The Company must monitor the satisfaction of the end users. This could be on Product based, Price based, Promotion based, Packaging attributes. Via Focus groups and questionnaires it must redress the problems of the consumers and actively involve them in the product development process. RFM Model for Customers: The customers (suppliers) can be categorized on the basis of their Recency, Frequency and Monetary value and different promotions may be targeted towards them. Different schemes and incentives may be provided to these users. Customer Lifetime Value: The company must try and increase the lifetime value of the customer by ensuring that it sustains the customer and tries to increase both the no of times of usage as also the value per transaction. Share of Key account purchases would give us an idea of the loyalty and customer preferences. This metric can be used to figure out which are the points of strength of the company and help it build on them.
Further understanding: The Balanced scorecard for an FMCG company has certain key priorities. Each of the 4 parameters could be sub-divided into several further narrowed down objectives which if accomplished can result in the accomplishment of the larger goals. There are measures as indicated above, targets dictated by industry standards and company specific policies.