The Last Week - Economic Reforms, QE3

There was lot of activity in the North Block & PMO last week. Manmohan Singh Government finally decided to bite the bullet and unleash the economic reforms in order to revive the economy which was at its lowest point in the last 8 years - thanks to a slowdown in Eurozone, 2% GDP growth in US and the spate of corruption scandals which have hit the UPA Government in its second term.

The mood was extremely pessimistic in the last 2 quarters and was deteriorating by the day. Therefore, it was extremely important that the Government announce a flurry of big bang reforms to revive the economy. It did exactly the same. The following announcements were made starting Thursday i.e. Sept 13. On Thu, Government hiked diesel prices by Rs.5 a litre and limited the subsidy on domestic LPG to 6 cylinders (per family) in a year. Next, on Fri, Sept 14, Government announced opening up of retail sector by allowing 51% FDI limit in multi-brand retail, 49% FDI in Aviation sector & broadcast industry.

Effect of oil subsidy due to the increase in diesel prices & reduction of subsidy on LPG?.

The Government claims that oil subsidy will come down by approx. 20300 crores.

Announcement by US Fed

Another important global news of the week was announcement of Quantitative Easing 3 (QE3) by Ben Bernanke in US. He announced that US FED will buy $40 Billion of US Government bonds every month till the end of 2015. This is to keep the interest rates @ ZERO percent in order to boost the US economy. 

What will be the consequences of QE3 - I believe it will fuel inflation due to the rise in commodity prices. Gold prices have seen a new high, metal prices are rising & crude already rose 1.5% post the announcement of QE3 by US Fed.

What will be the impact of QE3 on India

This will fuel inflation and the claim by Government that the oil subsidy bill will come down by 20300 crores will not be possible. This will negate the effect of increase in diesel prices and will do no good to India. The action by US Fed is detrimental to the global & Indian economy and the commodity prices will rise by astronomical amounts. 

I believe that the best asset class for investment in this scenario is GOLD.

Will RBI initiate a rate cut on Mon, Sept 17 

It will be very interesting to see whether RBI Governor will announce a rate cut in its mid quarter monetary policy on Sept 17. It is expected that the RBI Governor will join the party but the increase in inflation by 68 bps will compel him not to initiate a rate cut. Also, the announcement of QE3 will prompt the RBI Governor not to cut the interest rate as he is already able to see the inflationary effects of QE3.

It will be a very interesting week to follow & I, like everybody else is keeping my fingers crossed. I expect the Government to continue with economic reforms and stay the course. 

Brand Revival - Bata India

Everybody in India who is in his late 30's & older remembers BATA as a brand which was synonymous with footwear. For almost 7 decades, it enjoyed uninterrupted success before things began to go awry in the late 1990s. In the preliberalization days, Bata was so pervasive in India that the brand was once a generic noun for shoes. But post liberalization, around late 90s, it suddenly lost the plot against the onslaught of international and new domestic brands which sprung up in the market. What were the reasons for reversal in Bata India's fortunes?

THE FALL

 I believe that few of the reasons for downfall of Bata India are as below:

• Crash in Consumer Confidence
• Disruption in production because of troubles with unions
• Poorly managed supply chains
• Not keeping pace with consumer expectations in design/ style
• Loss making small stores
• Poor visibility in the upcoming malls
• High costs due to excess manpower
• Quality issues relative to new players

THE TURNAROUND

Bata India realized that it needed to do something drastic to revive its fortunes in the very fast growing Indian Footwear market which is worth INR 16000 Crores pa (2nd largest in the world after China & approximately 13% of the global market).

ITS RESPONSE

Bata India took some aggressive steps to revive itself. I believe that the following steps helped them to revive its fortunes in the Indian Footwear market:

• It introduced VRS to remove flab & promoted young, talented executives
• Closed small, unviable, loss making stores - 400 stores were shut in 5 years (2006 - 2010)
• Low margin, canvas shoes made way for high margin, leather shoes
• Opened 250 "Big Format" stores upwards of 3000 Sft - these are well-lit, showcase modern furniture  & are designed to display better
• Opened exclusive stores to sell its premium brand "Hush Puppies"
• Refurbished its image by improving its collection & design of footwear - Focus on design to attract GenX 
• Launched bouquet of brands targeted at different customer segments 
• Expansion in Tier II & Tier III cities with a population upwards of 1 Lakh

WHAT IS STILL NEEDED TO BE DONE

Though Bata India has reinvented itself by turning profitable in 2007 after suffering losses for 5 years in a row, I believe that there are few things which it still has to do to complete the process.

• Focus on innovative technology & design patterns - Though a lot is done in this area, it still lags behind international players who are much better in terms of innovative technologies & distribution mechanism
• Aggressive Marketing - Bata is counting on its stores to do the job whereas hard sell & aggressive marketing is what is needed in this cut throat market
• Bring more focus on segments it wants to target - currently it is all over the place with an offering for all customer segments

The turnaround story of Bata India is a very good case study for Marketing & Branding students and gives great insights about the reasons for success or failure of a brand. Also, it once again reinforces the fact that companies/ brands have to constantly innovate itself if it wants to stay ahead of the curve.

Evolution of Retail Banking & Future Challenges

I am observing the evolution of retail banking in India over the years, right from the 1980s to 2010s. I must say that banking has come a long way in these years. There is a lot of difference in terms of customer experience which I have experienced over the years.

Though there is a lot of improvement in service levels delivered by the banks over the years, creating a consistently high quality customer experience continue to elude the banks. Though banks are trying to provide astute and nimble responses to the customer's needs, they are still slow to adopt the strategies that could allow them to capitalize on the tremendous additional potential for growth and profitability that a customer-centric retail orientation brings. What opportunities should they pursue to realize a dramatically different customer experience?

Many banks have made strong progress in improving their customer experiences in the following areas:

• Customer Data and Segmentation
• Leveraging Data to Deliver a Better Product Mix
• Creating a Distinct Brand Image
• Improving Service Operations

The challenge now for Banks is to improve and integrate their multiple distribution channels to consistently deliver an enhanced customer experience and foster better customer relationships. In this, distribution channels play an important role in customer relationship process. 

For most banks, branch presently dominates their distribution approach, while other methods of interaction such as direct channels are less important and not well integrated. But this situation is fast changing. There are three market dynamics, the convergence of which has created the inflection point banks face in the evolution of retail distribution channels.

1. Branch generated revenue growth is becoming more challenging: While growth at existing branches continue to be strong, this is not the case at many new branches. Growth in branches outside the bank's existing footprint is uneven and weak. At the same time, it is becoming more expensive to acquire existing branches. The cost of real estate has gone up over the years and therefore new branches in semi-urban and rural areas have become nonviable. 
2. Transactions processing and customer service are becoming increasingly independent of the branch channel: Why visit a bank branch. For many years/ decades, most people visited the branch for loan approval, know about products/ services, conduct transactions etc. However, most credit approvals moved out of branch many years ago and most of the core transactions that were once conducted in bank branches have now shifted to electronic form. The momentum for this kind of change has accelerated a lot in the last few years.
3. New Technologies are gaining widespread adoption: Initially, the shift was from branch banking to ATM banking and in the last few years, it has moved over to internet banking, which gained wide acceptance. It seems now the latest change gaining traction is mobile banking as mobile phones are becoming more sophisticated and capable of handling advanced applications and services. Banking via mobile phones appeals to consumers on various fronts. Mobile phones also serve as efficient medium for making person-to-person transfers. Other technology developments are also poised to affect the distribution of retail banking services. For example growing broadband penetration and cheaper web cams will help banks to connect with customers via webcams.Technological progress is also helping banks to reduce the cost of operation and improve its efficiency.

What Next?

I personally believe that the following will change in the coming years in the retail banking distribution channels:

• Over the next few years, the branch will remain the primary channel but other channels will become increasingly important for both sales and service. This will mean that the branches will evolve over the years into "next generation" branches offering different value propositions. The focus will be on improved layout helping the customer to navigate better, improving customer service by engaging customer in new ways, and technology improvements leading to improved efficiency & customer experience.
• The branches will be smaller in size and will be used more for cross selling and less for routine transactions. This means that productivity (revenue per square feet) will move northwards.
• Banks will invest more in mobile sales force i.e. sales team members visiting customers at their premises and helping customers in product selection.
• Customize products to meet customer's requirement rather than designing a product and trying to sell  the same product to all the customers.
• Provide customers with online research capabilities & inviting them to evaluate the products and publish results to help others make buying decisions.
• In the future, customer needs and preferences will increasingly drive the integration of all the channels. Thus banks should seek to accelerate the steady progress towards greater integration to meet customers' cross-channel needs.

Core Strategy & Core Competence

This article is based on the viewpoints expressed by the author in the 2 earlier posts - What Ails Indian Aviation Industry & What is Core Competence...

In my earlier post I mentioned that businesses should follow a consistent strategy and take a position according to the strategy. To throw further light on this statement, I like to cite few examples where companies tried taking multiple positions and failed to deliver.

• Maruti Udyog is the market leader and a very strong brand in entry level segment and cars in price range of 3 to 7 Lacs. Maruti tried taking a strong position in Cars/ SUVs in 16 to 20 Lacs price segment by launching Maruti Grand Vitara & Maruti Kizashi but both the products never really took off and bombed badly. 
• Hyundai is a strong brand in 4 to 7 Lacs price band with offerings like i10, i20, Santro etc. It also tried to compete in SUVs in price range of 20 to 25 Lacs by launching Hyundai Santa Fe but again failed badly.

The above are examples where businesses tried to do something not consistent with their Core Strategy and also Core Competence and fell flat. 

If a company wants to come with a successful offering which is not consistent with their Core Strategy, then they need to create a separate brand/ company and keep it completely independent. I will elaborate this with few examples:

• Toyota is a hugely popular brand in mid-segment sedans with offerings like Corolla and Camry. When it wanted to offer a product in luxury segment, it created a new brand - LEXUS. The entire leadership team, employees, dealerships, service stations etc for Lexus is separate and does not share anything with Toyota.
• Tatas, again hugely popular in entry level cars (3 to 7 Lacs), when decided to operate in premium luxury segment, decided to buy-out JLR.
• Volkswagen, again very popular in mid-segment sedans created a new brand AUDI in premium segment. It also has another successful brand - SKODA.

From the above examples it is obvious that businesses need to be consistent with their Core Strategy, else they will not be successful. Another important point to be noted here is that when a business focuses consistently on the same strategy, it further enhances its Core Competence thereby increasing the distance between itself and its nearest competitors.

Core Strategy & Core Competence are interlinked and one drives another thereby improving the brand, positioning and success of a business.

What is Core Competence

The idea of Core Competence is becoming more and more important in today's world as businesses try to outsource as many activities as they can and are focusing their efforts on things they do well. All the Management Gurus want the businesses to focus only on their core competence.

WHAT IS CORE COMPETENCE:

Core Competences means that businesses need to have something that customers uniquely value. "Me Too" businesses which have nothing unique to distinguish them from competition compete on price - they drop the prices and margins become thinner and thinner.Therefore its is necessary that businesses need to identify and build USPs (Unique Selling Proposition). If you can offer something uniquely good, customers will be willing to pay a premium for the same. The question now is "HOW TO GET THIS UNIQUENESS?".

There are 3 important criteria which an idea must pass before it can be called "CORE COMPETENCE". These 3 criteria are as below:

1. Relevance: The competence must give your customers something that strongly influence the customer to choose your product or service. If it does not, then it can't be called a core competence.
2. Difficulty of Imitation: The core competence should be difficult to imitate. This ensures that you are in a position to develop products which are better than those of your competitors. Moreover, since you are constantly focusing on your core competence, you are able to sustain its competitive position.
3. Breadth of Application: The core competence should be such that it opens up a good number of potential markets. If it opens up only few niche segments, then the success in these niches will not be sufficient to sustain significant growth.

The above 3 criteria are very critical for an idea/ skill to become core competence for a business. Once the above 3 criteria are met, then a company can develop on it and gain a foothold in the market.

What Ails Indian Aviation Industry

I am studying/ following the happenings in the Indian Aviation sector for a long time now and I am confused with the strategies adopted by most of the players. When I look at all the companies in the sector, it is very difficult to understand the strategy for most of the companies.

Broadly, a company needs to have one of the 3 core strategies - Cost Leadership, Product Differentiation, & Market Segmentation. Based on the core strategy adopted by a company, it can further fine tune its strategy for different markets but the core strategy has to remain consistent.

In India, except for few players, most of the players are not clear about the strategy. That's the reason its very difficult for them to position itself in the market. For eg. Jet Airways (Full Service Carrier) also has Jet Lite (No Frills Carrier), Kingfisher (Full Service Carrier) also has Kingfisher Red (No Frills Carrier). This kind of strategy will not work as customer gets confused with the positioning of the carrier. Moreover, aviation is a cash guzzling industry and it is very difficult for a company to invest in 2 types of services - full service & no frills at the same time.

Another problem which I anticipate by adopting a dual strategy is the focus of the top leadership. The kind of mindset which is required of the top leadership for the 2 strategies mentioned above i.e. full service (product differentiation) & no frills (cost leadership) is diametrically opposite. In one, you need top leadership to add value to the customer, pamper the customer, provide the ultimate in service whereas in other strategy, it is all about minimizing cost, do away with all the frills etc. I believe that it is very difficult for top leadership to focus on both the strategies simultaneously. For this very reason, I strongly believe that it was a wrong move on part of Kingfisher to acquire Air Deccan as the acquisition was inconsistent with Kingfisher's strategy of product differentiation. I believe that few companies which got their strategy right are Indigo & Spicejet. 


Thirdly, in a dual strategy, employees are expected to perform 2 diametrically opposite roles simultaneously - that is of focus on customer service (product differentiation) and focus on cost (cost leadership). It is very difficult for employees to switch roles to perform both the tasks together as the mindset and the orientation required for the two roles are totally opposite. In such a scenario, the employee is confused and unable to perform either of the tasks with complete precision.

If you take a look at international carriers also, you will find that all the successful ones are those who got their strategy right - be it South West Airlines, Jet Blue Airways, Singapore Airlines, Air Asia, Emirates Airlines etc. The top of the mind recall for a consumer for South West, Jet Blue & Air Asia is of Low Cost, No Frills whereas it is all about Customer Delight & Customer Thrill for Singapore Airlines & Emirates.

Looking at above, the ailing Indian Carriers have to get their act together and focus on getting their strategies right if they want to have a turnaround.