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2009 Volume 1

IIM ABC Consulting Review 2009, Volume 2

Featuring Articles from A. T. Kearney, Booz & Co., PRTM

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Consult IIM Ahmedabad

I n t h e bu s i n e s s o f B u s i n e s s
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image on campus
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Other Articles: Telecom, Medical Tourism, Weather Derivatives, Port Economics

Table of Contents
Expert View








Campus Thoughts













Editorial Note

Dear Readers,
As we present the second issue of Audire the IIM ABC Consulting Review, on behalf of the
editorial team I wish to thank the industry and the academia for their overwhelming support to
our magazine. Our first issue was well received by the readers and we would like to thank them for
their valuable feedback. We hope to bring to you an eclectic mix of insightful articles with this
The diversity of articles in this issue is a testimony to our rich pool of contributors. Our writers
have raised issues ranging from medical tourism to weather derivatives through their thought
provoking articles. The writers from industry have tried to foster entrepreneurial spirits through
articles on entrepreneurship in times of turbulence.
The role of industry in shaping a country's workforce is unarguably most important. Today,
industry requirements move at a fairly fast pace. However, the pace of change in academics is
relatively slower. This is where the industry can contribute to bridge the gap by providing support
in the areas of curriculum changes, faculty development and skill development. The industry can
attract students to research and innovation by giving them an opportunity to work on live
projects. Human capital is the key to a long-lasting sustainable advantage for nations as well as
organisations and India might lose its competitive edge if it does not encourage participatory
With this thought, on behalf of Team Audire, I would like to extend my heartfelt thanks to our
industry partners, UAE Exchange and the students of IIM Ahmedabad, Bangalore and Calcutta
who have full heartedly supported our endeavour. Our special thanks to Saurine M Doshi, Senior
Partner, A.T. Kearney ; Debashish Mukherjee, Principal, A.T. Kearney ; Utsav Garg, Manager,
A.T. Kearney ; Vikram Ramakrishnan, Principal, Booz & Company ; Piyush Doshi, Principal,
Booz & Company ; Malcolm Frank, Senior Vice President, Marketing and Strategy, Cognizant
for their valuable contribution to our magazine.
We hope to hear back from you, your suggestions and feedback on this issue of Audire. Please
feel free to write to us at
Happy reading !
Team Audire

Nishant Aditya Kumar Chandrima Das
Shamiroh Tikoo Deepak Baid Vaishnaovi Rastogi
Madhulika Kaul Gurveen Kaur Bedi Tushar Bohra
Prateek Bhargava Shantanu Shekhar
Varun Saini


Is Your Marketing Spend Working Hard Enough?
5 Warning Signs for CMOs
Venkat, a marketing veteran, and now the CMO for a ways to burn fat and build muscle in marketing
large consumer durable company is a disappointed man spends. A starting point is to closely examine
post his board meeting review. Despite his passionate five key signals of inefficiency – should they see
attempt to convince the board members that the company three or more of these warning signs, it's time
needed to increase investments in its brands during the for some action. Our recent experience
downturn, he could not get the budget approvals. Instead, indicates that a zero-based review of the
the pressure is on him to cut back on marketing expenses marketing spend, in these times, will generate
given the business downturn. One of the board members benefits of at least 5-15% in terms of improved
even gave a competitor example on marketing spend return on each Rupee spent – enough to fund
optimization. The CEO has already been asking him other business initiatives or simply, make a
take a hard look at marketing spends which have been valuable contribution to bottom line.
rising at a fast clip for last few years. Venkat is now
beginning to wonder if there is a real issue with the way
spends are being managed, which he can identify and fix.
He needs to quickly understand if there are issues with
efficiency and effectiveness of marketing spends and if he
is really getting the maximum bang for his marketing
Marketing spends have grown at more than 20%
annually since 2005 and the overall media spend
figure crossed Rs. 22,000 Cr. in 2008. In the
recently concluded growth phase, Marketing
enjoyed significant war chests and creative
freedom – however in a rising tide, assessing the
effectiveness of these spends were not a priority.
Today, the economic slowdown is putting the
spotlight back on where marketing rupees are
spent, because as a whole, it can account for 6-
10% of sales in many consumer-focused
industries. Reductions in advertising spends are
expected across most, if not all, sectors. In fact,
within board rooms, there is a call for greater
accountability of marketing spends. "Starting point for marketers is to
closely examine five key signals of
The excesses of the last few years - proliferation
inefficiency – should they see three
of products, brands and communication
or more of these warning signs, it's
platforms - resulted in over-communication, low
brand-recall and consumer indifference. In this
scenario, it is imperative for CMOs to look for

Warning Sign 1: Little or no integration and in determining a holistic and robust
and optimization across a range of marketing plan.
marketing initiatives
With leading marketers already adopting an Warning Sign 2 : Lack of robust
integrated approach across marketing levers, a guidelines and standard procedures for
large number of players still do not display rigor media strategy, planning and buying
in understanding the true impact of each
customer-contact opportunity available to them. Adrenalin rush associated with overnight
Specifically, some key tradeoffs are not explored. responses to competitor initiatives is the stuff
For example, should an integrated brand retailer that marketing legends are made of. Nobody can
in a sales downturn situation, spend more on deny the critical need for strong tactical
catchment area promotion awareness or on responses to competitor initiatives, especially
broad based TV advertising? How can OOH when the battle lines are clearly defined.
spends be compared against those on traditional However, short term tactical responses become
media? Such questions are seldom asked or an issue when they start to dictate strategy itself.
answered in a rigorous fashion. One of the soundest tests to gauge this is the
level of compliance to the strategic plans of the
brand and to the gate-keeping processes laid
down by the organization even for tactical
moves. If the marketing spend process
compliance is not very high, then either the
processes themselves need to be restructured or
there is a need to reinforce the need for
compliance. In many cases we observe, that the
rigor of challenging media planning and buying
decisions is not for malized through
standardized guidelines or documentation.
While in some cases, a lot of data is accessible
and a lot of presentations are made, robust
Attaining excellence in Brand activation calls for decision making frameworks are still not
defining guidelines for an integrated marketing available to the marketing teams. Is there a
mix to bring alive the creative idea across all standard checklist which marketing teams can
consumer touch points. Often, spend analysis access to check if "Weeks on Air" (WOA) and
across different marketing platform is Frequency recommendations are logical for the
uncoordinated and unshared. To support an category? Is there dynamic buying framework
integrated marketing mix plan, an integrated which allows for channel wise spend plans to be
briefing process is critical. This means not only reviewed based on leading predictive variables?
Is there sufficient analysis to justify the impact
briefing across creative, BTL and PR agencies buys? Players who are able to develop and
but also including packaging, sales organization constantly stick to process guidelines and
and channel partners to truly magnify the impact strategic plans utilize their marketing rupees
of the initiative. This can be supplemented significantly better. Some relevant indicators
through periodic team meetings across various tracked regularly in form of CMO level spend
marketing agencies and the internal organization efficiency dashboards can help estimate the
team which are useful for perspective building


magnitude of the issue – number of unplanned significantly to media buying negotiations along
'additional' campaigns launched, number of with the agency. Ability to go beyond discounts
campaigns with budget overruns, number of on "inflated" rate cards will require marketing
campaigns with success rate in terms of reach teams to develop knowledge about media at par
and frequency etc. Best practice companies with their suppliers – best-practice Indian
adopt process frameworks even for tactical companies have already started the process of
initiatives which can have built in flexibility to investing in internal capability building.
ensure spend optimization without
compromising time to market. Warning Sign 4: Accountability for
results is not built into your partnership
Warning Sign 3: Limited focus on contracts
building internal media capabilities
The relationship between advertising and media
Marketing teams have traditionally focused on agencies with their clients is truly one of the long
activities that are generally considered to have a standing examples of partnership and
significant bearing on top-line such as consumer collaboration across business functions. While a
insights, market research, innovation channel / relationship of trusted partnership with the
distribution management and the like; media is advertising and media agencies is essential, it is
viewed often as a 'cost' item that needs to be also mutually important for the players to follow
optimized, but not necessarily as a lever that can a diligent and regular review process across all
actually improve returns based on micro- aspects of the relationship. Apart from
targeting of the consumer. Hence marketers adherence to processes and policies, a re-
today may not necessarily understand the assessment exercise re-calibrates and
intricacies of media industry and its business authenticates existing contracts, spends and
models. With an increasing focus on micro- execution pattern. Variable payments often are a
targeting the consumer in the media clutter, it is very small portion of the overall remuneration;
imperative for the marketing team, the owners KPI-linked payments are few and far in between
of the brand, to strengthen their internal and there are scope to improve transparency
capabilities. The added complication in the around financial transactions. This exercise
Indian market place as compared to developed should ideally leverage other internal
markets such as US is the lack of transparent and departments like Finance and Procurement as
third party data around cost benchmarks and well. If the relationship with the agencies is
actual performance in a medium like OOH. based on very high mutual trust then it is easy to
Hence there is a high reliance on the media make these assessments an intrinsic part of the
agency in India to provide the baseline for any checks and balances regime. Key performance
such analysis resulting in a high dependence on aspects like agency remuneration, performance-
them for media ideation, campaign planning and linked spend analysis; assessment of media
post-buy analysis. Marketing teams who campaign effectiveness and competitive
understand their target audience' media benchmarking should be a part of the scope.
consumption habits, competitive benchmarks Market leaders find that regular assessments
(spend, GRP/TRP deliveries etc) can contribute throw up insights and information that critically
to evaluation of media mix choices and brand determine how their marketing budgets can be
led media innovation. In fact our experience better utilized.
shows that the marketing team can contribute

Warning Sign 5: Innovation streak has
not yet reached your media strategy

Given the widespread challenges advertisers

face in terms of communication clutter and
inability of people-meters to go beyond the
demographic variables, innovation in media
strategy is essential to enable brands to reach
their target segments effectively. Best practice
leaders have demonstrated that breakthrough
innovation is possible across channels - be it the
use of advertiser-funded programming or
innovation in outdoors through 3D billboards.
Hand on heart, not many marketing teams can
stake claim to breakthrough ways of reaching
their target audience and that points to capability
and process issues. Another area that Indian
advertisers as a whole have been slow to adapt is
the use of non-traditional media. While in most
developed countries TV and print contribute 50-
75% of all media spends, the number is still as
high as ~85% in India. While some brands have
adopted brand-led web-portals and targeted
Author (s)
sms-based promotion routes, this area remains
unexplored and unexploited. There is an urgent
Saurine M Doshi
need for brand teams to decipher and fully
Senior Partner, A.T. Kearney
understand the multiple forms of web
advertising, email ads, search engines ads and
Debashish Mukherjee
now mobile advertising as consumers have taken
Principal, A.T. Kearney
to these media at a rate much faster rate than
advertisers. Again, the key prerequisite for
Utsav Garg
innovation is for brand teams to build
Manager, A.T. Kearney
capabilities which would have hitherto been
considered outside their domain.

In summary, while there is immense pressure on

CMO's like Venkat to optimize spends; it is also a
great opportunity for them to fundamentally
alter the processes and capabilities which define
how they are able to invest in their brands over
times to come. A rigorous assessment of their
marketing organization process and capability
could not only lead to cost efficiencies in the
region of 5-15% but also infuse innovation and
energy into the marketing setups.


Ideas to Action: Converting Bright
Ideas into Profitable Businesses
Ideas have the power to drive action leading to competitive differentiation. Competitive
results. In business, a viable idea that is executed differentiation depends on distinct quality, cost
efficiently, taking into account all critical factors per value, and timeliness attributes. Together,
and market forces, has high potential to translate these three characteristics comprise the unique
into a successful business model. selling proposition (USP) of the product or
service. Companies must leverage the USP to
The leap from a great idea to a successful the maximum.
business model requires three components:
vision, value proposition and competitive Having a winning idea is only 10% of the battle.
differentiation. The vision needs to clearly The real challenge starts when one sets about the
outline what the company stands for. As a task of converting an idea into a value delivery
Japanese proverb says, action without vision is a mechanism for customers while generating
nightmare. It is imperative for any corporation economic returns for the entrepreneur. The
to lay down a vision statement that articulates journey of converting an idea into a viable
what it intends to become and achieve in the business can be viewed across three
future. Value proposition determines what value stages—planning, pilot, and ramp-up. The
a corporate adds to all its key stakeholders. It is challenges, hence the capabilities, required
the benefit the corporation promises to within each stage vary widely and a successful
customers for by virtue of the relationship. An business must navigate through each
imperative extension of this value proposition is successfully. (See Exhibit 1.)

Exhibit 1: Journey to a Successful Business

Planning Pilot Ramp-up

Strategy & Plan


Team & Organization

Sales and Marketing

Production / Back Office

Support Functions

Process and Technology

Very Important Less Important

Stage 1: Planning A systematic approach to building scenarios
takes into account carefully selected possibilities
No battle plan survives the first contact with the and develops contingency options to be
enemy, goes the old adage. However, this does triggered as certain of these possibilities are
not diminish the importance of planning. On realized. A four step approach for planning
the contrary, planning and preparing for multiple scenarios is presented in Exhibit 2.
scenarios is essential to minimizing surprises.

Exhibit 2: Scenario Based Approach to Planning



Robust &
Possible flexible Hedging 3
“Futures” long-term Options

“Things to
“Things to

The other important factor in the planning stage Intrinsically, some business models are harder to
is funding. Unrealistic cash flow projections (and fully test, especially in cases where product
lack of a back up plan when cash flow falls short) development entails long lead times. The pilot
is the single greatest reason early-stage may focus on a specific geography, market
businesses fail. And accurately predicting cash segment, product segment or customer
flow requirements is intrinsically linked to good segment. But it must accurately reflect the actual
scenario-based planning. It is also important to market conditions the company is likely to
be open and transparent and choose an option encounter during the wider rollout. For example,
where there is the right level of mutual comfort spending Rs 1 Cr. on marketing and promotion
with investors, rather than going for an option in a pilot city might produce misleading results if
that looks outwardly most attractive. the national budget for launch across 30 cities is
only Rs 5 Cr.
Stage 2: Proof of concept / Pilot
All the important assumptions, which will vary
You don't get a second chance to make a first by business, must be explicitly tested during the
impression. The pilot phase is the best pilot. These assumptions commonly include a
opportunity to get things right prior to going customer's willingness to pay for the product or
market. The exact scope of the pilot will depend service and cost estimates. Companies must be
on the nature of the business. prepared to go back to the drawing board if


consumers are not responding at a level that will too much time analyzing the business plan
sustain the business; a full scale launch premised (analysis paralysis) or they jump in with
on sheer optimism is a sure path to disaster. insufficient forethought. Successful companies
recognize explicitly the risks and test
Finally, apart from fine-tuning the product assumptions that make them uncomfortable
offering, marketing strategy, pricing, and cost during the pilot phase, well before launch.
estimates, the test stage cal be used to start
building the organization and the technology and § Select the right partners: For any
support infrastructure in preparation for the successful venture, partnerships are essential,
ramp up. and this is especially true for younger companies
where no single individual possesses all the
Stage 3 : Ramp-up necessar y exper tise. Most successful
The most important activities governing a entrepreneurial ventures—Google, Microsoft,
successful transition from pilot to ramp-up are and You Tube to name a few—have involved
creating the right team and managing the ramp- more than one person.
up pace. As the business goes from planning and § Develop a simple to implement strategy:
pilot to ramp-up, an entrepreneur must any strategy has to be implemented well to deliver
transform into a general manager. Several results. An 80% intellectually pure strategy,
entrepreneurs struggle as good managers when it which can be easily implemented, is better than a
comes to handling detail and managing repetitive 100% intellectually pure strategy that is difficult
activities. The successful ones recognize this to implement. For example, a large financial
shortcoming and develop a team that collectively service provider failed to fully deliver the
possesses the skills they lack. estimated benefits from a restructuring mainly
The second big challenge is to ramp up at an because the implementation effort required
optimal rate. Ramping up too slowly could waste more staff training than had been anticipated,
precious advantage over competition, while which caused the staff to reject the
ramping up too fast can stretch cash and stress transformation as impractical.
the organization. Converting ideas to action is at the core of
Most entrepreneurial ventures succeed not helping economies develop. Some of the
because they do all things well but because they challenges that need to be overcome to achieve
do the few things that really matter, really well. results can seem daunting. However, great ideas
Among the most important to get right: combined with realistic expectations,
determination, and the right support can
§ Understand the true source of your translate to world-class businesses that make us
competitive advantage: What is it that makes all proud.
your offer unique and valuable to a customer?
Use the answer to that question to guide Author (s)
investment decisions and hone marketing Vikram Ramakrishnan
messages.. For example, no one goes to a hospital Principal
because it has marble floors –patients care first Booz & Company
about quality of delivery and medical outcomes.
Piyush Doshi
§ Balance thought and action in risk Principal,
management: Many businesses never get Booz & Company
beyond the ideas stage either because they spend

Source - Image: (c) PinkMoose, Creative Commons, Flickr
High Growth Entrepreneurs
“In a rational world, a startup would not exist.” the market is so crystallized that you simply
- Alan Kay know that it's going to take the world by storm.
During this early period, there's a sense of
Abstract holding on to a great secret, and that your
If money and ideas could flow in a friction-free manner unlimited success is just a matter of time.
inside large, established corporations, startups would Then, reality hits.
never succeed. Large corporations – with their deep client
relationships, enormous R&D budgets and trusted In rapid succession when you ask customers,
brands – would quickly recognize and successfully address investors and potential employees to commit to
new market opportunities. But they fail to do so, with your vision with their money or careers, you may
amazing regularity. have a series of “failures”. They won't share your
vision and enthusiasm, will outline all of the
Having spent the past two decades at four high-growth, reasons you will fail, and thus don't feel
entrepreneurial high-tech companies, I have gained six compelled to work with your new company.
key insights. The first three concentrate on the early days Suddenly, your recent enthusiasm seems naïve, at
of an entrepreneurial venture, and the final three address best. The team starts to ask: “What have we
later days as the organization sees true success and begins gotten ourselves into?”
to scale.
You've entered the valley of despair. It's a dark
Insight 1: Beware the Valley of Despair place, one which you, as a leader, need to manage
Nothing is quite as exciting as the first six through. That initial enthusiasm, which was
months after launching a company. You based on concepts, now needs to be replaced by
understand, in a very visceral way, that if you tangible evidence of success. It may feel like a
don't show up to the company that day, things crisis, but remember, it isn't one, for this
simply won't happen. It's all about you, your sensation was created by your own overblown
vision, your team and your precious few expectations.
resources. The Valley of Despair is often the first moment
At the same time, you're involved in this venture of truth for a young venture. It's where your
not because you want to be, but because you team either gets galvanized or starts to fall apart.
have to be. Most successful entrepreneurs I And it's where the real insights that form a truly
know have had their epiphanous moments just successful venture are formed.
before starting their firms. BANG – multiple Insight 2: No firm is an island
elements come together, an idea is formed, and a
venture is started. It's that moment of clarity Don't do it alone. There's a mythology about
when it's clear that the risk is not in starting a new entrepreneurs, particularly in the West, that they
venture…the risk is in NOT starting it. Jeff represent a rugged individualism, and build their
Bezos, upon launching Amazon, referred to this ventures unaccompanied. Don't fall for this
as his “Regret Minimization Framework”. myth. In my experience, most successful high-
tech ventures succeed with significant help from
In those initial weeks and months, your vision of

a big brother or two - established companies or If your offer doesn't pass the “Mother Test”,
organizations in the ecosystem that are more you're in trouble. Call your mother on the phone,
than happy to provide you with business, and and in one minute you need to communicate
even funding. your value proposition so she can fully
understand what your company does and why
Tailor your value proposition as much to them as you will win. If you can't pass this test, your offer
you do to your end customers. During the is too complex.
formative years of one of my previous
employers - Cambridge Technology Partners - The “Mother Test” can be intimidating. After all,
more than 80% of sales leads came from you and your team are going to say, “If it's this
established hardware vendors. Similarly, during simple, anybody can replicate it.” Maybe, but
Cognizant's formative years in the mid-1990s, markets - and certainly large companies -don't
much of Cognizant's business came through its have the maniacal focus and passion that your
big brother, Dun & Bradstreet, which was company does.
looking for high-quality global delivery of Insight 4: Dealing with success: Firms grow
computer services. Big brothers provide in S Curves, not straight lines
stability. They also remove the perceived risk on
the part of your target customers. Suddenly, Companies do not grow in straight lines. It's not
customers see you as part of a total solution a simple extrapolation with your organizational
from a larger vendor they already trust. model, culture, customer relationships and
market environment - from pre-revenue, to a
Also, big brothers force focus. You don't have to $10-million run rate, to a $100-million run rate,
worry about creating contextual aspects of your to a $1-billion run rate. Instead, it will feel as if
business too soon, such as building distribution the firm is growing in a series of 'S' curves.
channels, over-investing in your brand, etc. They
The value propositions for many key
allow you to conduct “OPM” (using Other constituents are different at each stage. One set
People's Money) development. Find partners, of recruits and clients is attracted to a $10
drive unique value for them, and they will assist million revenue startup, another to a $500
significantly in building your firm. million industry leader. Recognizing and
Insight 3: Avoid the “Boston Syndrome” and managing through the 'S' curves is the toughest
pass the “Mother Test” – Keep your value lesson, for some of the behaviors and structures
proposition simple that made you successful at one stage will
actually hurt you subsequently. The difficult part
Don't over-think your offer. For some reason, a is your management team needs to determine
lot of start-ups from Boston, Massachusetts, what to keep and what to change.
suffer from over-engineering their companies.
You need to separate issues into two camps: 1)
This intellect doesn't turn into a value
those that made you distinctive and great, and
proposition that captures wallet-share. will be immutable as they transcend all market
Don't attempt to dazzle with your brilliance. and scale dynamics, and 2) those that you must
Start with a simple and obsessive focus. Once dispose off as they no longer suit your situation.
your offer looks complex, customers think, “I It's an ongoing and arduous challenge that
need a complex organization to deliver this”. requires strong teamwork and objectivity to
They won't trust you and your (perceived) band overcome. It's a cruel irony - that your success
of gypsies. and growth may lead to your own failure - but it
occurs with great regularity.


Insight 5: Dealing with success: You're a product of me.”- Jack Nicholson as gangster
darling today, but may be feared and loathed Frank Costello in the Academy Award-winning
tomorrow film The Departed.
You'll know you've “made it” when you get enter This hubris ultimately led to Costello's demise.
the “mutual admiration society” - that wonderful And, in our fast-changing markets, hubris often
sweet-spot where employees, customers, the leads to the demise of many market leaders. The
media and investors, all love you. key to sustainable success is found in quick-
thinking and acting entrepreneurship, which
Enjoy the moment - it's not going to last. ensures that your firm can evolve as quickly as
Where you were once loved and admired, you the market does.
will soon be feared and criticized. Over the past Entrepreneurialism is not about start-ups. It is
20 years, many high-growth firms have not a function of size. Entrepreneurialism is
experienced this — Microsoft, Oracle, SAP, and, about seeing and capturing new opportunities,
more recently, and Google. regardless of the size or age of the organization.
This market “change of heart” is driven by As Lou Gerstner recalled of his years at IBM, the
several dynamics in parallel. First, the press is elephant can learn to dance. Gerstner's great gift
often motivated by writing about the next “new” to IBM was instilling a sense of
thing. Your firm's initial ascent, for example, is entrepreneurialism into the organization, and
newsworthy. Additionally, your firm's success with it the inherent urgency, responsibility and
may be an indication of a larger market trend, market focus.
driving more positive press. Eventually, no Summary
writer wants to write, and few readers want to
read, the nth positive puff piece on your firm. In every entrepreneurial environment, there is
Plus, the market trend your firm rode on is now one constant; and that's an appetite and
well understood. So, the story now becomes enthusiasm for all that entrepreneurialism
what's wrong with your firm. entails. If you see the opportunity, and are deeply
motivated by the thrill of speed, then you may be
A second dynamic is driven by your competitors. an entrepreneur at heart. If it's right for you,
By definition, your success will create then there's no professional journey more
competitors. And competitors don't always play exciting.
fair. So these firms will seek the weaknesses in
your model, your firm, your product and your Author (s)
client relationships. Upon finding chinks, they Malcolm Frank has two decades of experience
will share this information with your customers, in the Information Technology industry. As the
prospects, recruits, industry analysts, investors Senior Vice President of Marketing and Strategy,
and the press. Recognize that it's a nice problem Malcolm's focus centers around Cognizant's
to have, for it's a natural result of your market brand, driving business through the
prominence and success. vertical/horizontal structure and overseeing
Insight 6: Maintaining entrepreneurialism Cognizant's corporate strategy.
at scale
“I don't want to be a product of my
environment. I want my environment to be a

Source - Image: (c) Nick Hum, Creative Commons, Flickr
Taming Turbulence - CEOs in Economist
Intelligence Unit/PRTM Survey Reveal
How to Manage Risk in Disruptive Times
Abstract As the current economic turmoil demonstrates,
the global business landscape is increasingly
Significant global forces are disrupting the operational
models of multinational companies worldwide. vulnerable to disruptive forces with the potential
According to our research, companies that proactively to drastically affect companies' operations and
adapt their operations are more successful than the perfor mance. Market disruptors cause
competition at mitigating the risks such disruptors pose. companies to change where and what they sell;
By making operational changes that are more significant, resource disruptors require companies to
innovative, and pervasive, these companies create change inputs, outputs, and processes to manage
important new sources of competitive advantage. Not cost and resource availability; and policy
surprisingly, a proactive approach yields superior business disruptors require companies to change how
results: stronger revenue growth, greater profitability,
they manage and where they operate (Figure 1).
and higher return on invested capital.

Figure 1: The Top Global Disruptive Forces

Three major categories of disruptors that can affect operations and performance

Growth and decline of markets

Market disruptors Emergence of low-income and rural mass markets
Geopolitical instability and change

Global shifts in availability and access to labor and talent

Constraints in natural resource availability
Resource disruptors
Uncertain and Shifting global financial markets and sources
of capital

Increased complexity of operating in multiple social, political,

and regulatory environments
Growing requirements to manage resource consumption,
Policy disruptors emissions, and disposal
Increasing requirements for making operations transparent and

Source : All charts that appear in this article were derived from research conducted by the Economist
Intelligence Unit and PRTM and published in Global disruptors : Steering through the storms (October 2008).

Understandably, the current credit crisis- nature of that impact can change as well. What's
uncertain and shifting sources of capital-makes m o r e, s e ve r a l d i s r u p t o r s c a n o c c u r
other disruptors pale in comparison. But, as the simultaneously, affecting not only individual
energy crisis that preceded it shows, any companies, but whole industry sectors.
disruptor can have a significant impact, and the

Most companies understand the importance of §
Take an enterprise-wide approach to
developing operational strategies to mitigate the implementing and measuring change
risks such disruptions pose. Few companies,
however, have been able to execute those §
Are more satisfied with the results of those
strategies. According to a survey of global changes
executives conducted in 2008 by the Economist §
Drive operational change from the C-suite
Intelligence Unit and sponsored by PRTM,
these select firms act preemptively, making This proactive approach yields powerful results.
significant changes in their business operations A much greater percentage of early movers
to create new sources of competitive advantage. reported stronger performance than their
Compared with their competitors, these early competitors on three key metrics—higher
movers: revenue growth, profitability, and return on
invested capital (Figure 2).
View global disruptors as opportunities,
rather than threats
Make operational changes that are more
radical and innovative

Figure 2: Financial Performance

How companies have performed over the past two years, compared to their main competitors

Early movers 60% Early movers

70% Late movers Late movers
early / late movers
early / late movers

Percentage of

50% 40%
Percentage of

40% 30%

0% 0%
Higher revenue Higher Higher return on Have already made Have introduced
growth Profitability invested capital significant operational operational changes
changes and may new to industry or world
be making more


Proactive companies also have introduced more leading and lagging performance indicators.
substantial changes to specific operational areas. They also regularly monitor each major initiative
A far greater percentage of early movers and its impact on overall performance.
claimed to have made radical change to their
Driving change from the top. Nearly half of
customer operations. The same distinction
early movers said their CEO drives operational
holds true for other areas, including product
changes in response to global disruptors,
operations, supply chain operations, and
whereas only one-third of late movers made this
organizational structure and talent
claim. The executive suite, especially the CEO,
needs to lead employees across the company in
It makes sense, then, that early movers are also dealing with disruptors so that everyone is
far more likely to implement innovative change. committed to implementing change wherever
Twenty-five percent said they had implemented needed.
changes new to their industry or to the world, in
Getting results. It should come as no surprise
contrast to only 3% of late movers. That is a
that proactive firms stand in strong contrast with
significant difference, and surely a key reason
reactive firms when it comes to success and
why early movers experience superior financial
satisfaction rates. Twenty-one percent of early
results. One has only to think of companies like
movers said they were “highly successful” in
Apple, whose iTunes business model was an
adapting to global forces, while none of the late
industry first, or Toyota, whose Prius led the way
movers made this claim. At the same time, nearly
in the hybrid auto market.
two-thirds of early movers expressed
Taking an enterprise-wide approach. When it satisfaction with their performance, in
comes to the scope of the operational changes comparison with only one-third of late movers.
made, proactive firms again differ markedly The financial success of early movers is entirely
from their reactive peers. Approximately 70% consistent with these findings: Companies that
of early movers said they apply changes across experience strong er revenue g rowth,
most business units and operational areas, profitability, and return on invested capital
compared to 40% of late movers. Recognizing would be more apt to rate their performance
the limited impact of point solutions, proactive highly.
companies adopt change programs that reach
The survey findings regarding companies'
across functions, business units, and
dissatisfaction brought to light some reasons
why early movers generally fare better than their
Early movers are also more likely to measure the peers. Respondents, as a whole, agreed that the
results of operational changes across the two most important causes of dissatisfaction are
enterprise. Twenty-eight percent have an short-term focus and underestimation of the
integrated enterprise-wide performance degree of organizational change required. But
management framework, twice the percentage late movers attributed dissatisfaction to other
of late movers. Because of the complexity and reasons as well. Over half cited two in
potential risk associated with enterprise-wide particular—“lack of insight regarding
programs, early movers assiduously track both operational changes that need to be made” and

“insufficient understanding of the implications mission and brand. Take, for example, global
of global forces”—while a much smaller consumer products company SC Johnson,
percentage of early movers were dissatisfied for known for being a friend of the environment
those reasons. We can surmise that proactive long before many of its competitors. In 1975,
companies are more adept at determining not t h e c o m p a n y vo l u n t a r i l y e l i m i n a t e d
only which global forces can affect their chlorofluorocarbons (CFCs) from its aerosol
business, but also what changes need to be made products, three years before the U.S.
to respond to these forces. government made this action mandatory. In
View of opportunities and threats. Another 1992, SC Johnson became one of the first
notable—yet predictable—difference between consumer packaged goods companies to report
proactive and reactive companies has to do with publicly on its sustainability programs. And, in
outlook. Early movers are more optimistic than 2003, the company began powering its
late movers and are more likely to view a manufacturing plant with turbine engines that
disruptor as an opportunity rather than as an run on methane gas, leading to a great drop in
obstacle. carbon emissions as well as energy costs.
Initiatives such as these have made SC Johnson a
Notably, the difference in outlook is most sustainability leader while broadening its brand
pronounced regarding policy disruptors. For appeal to environmentally-conscious
example, 43% of early movers viewed consumers.
“increased complexity of operating in multiple
environments” as more of an opportunity than a Responding to Disruptors
threat, compared to only 16% of late movers. The findings regarding proactive companies are
Similarly, a much higher percentage of early all the more striking, given that survey
movers saw “increasing requirements to make respondents, as a whole, agreed on the strategies
operations transparent and accountable” as an they need to alter in order to deal effectively with
opportunity, and a much higher percentage of disruptive forces. As Figure 3 demonstrates,
late movers viewed this disruptor as a threat. companies highlighted three in particular:
Early movers may be more optimistic about product, service, and technology strategy (i.e.,
policy disruptors because they are involved in which products and services to offer); target
shaping these policies. For example, U.S. telecom market strategy (which customer segments to
startup Cyren Call Communications is working focus on); and operational strategy (how to set
with policy makers to create nationwide wireless up the best operational model for making those
broadband to be used exclusively by police and products and serving those customers).
other public safety officials. Not only will this
network solve a pressing need for better
emergency communications; it will create a
major market for Cyren Call and other wireless
providers to tap.
For some companies, the anticipation of major
shifts in policy can become integral to their


Figure 3: Strategic Elements in Need of Significant Change
Most respondents agree that certain elements need to be
changed significantly to adapt to global disruptors

Multiple answers possible

Product Service and Technology Strategy 57%

Operational Strategy 55%

Target Market Strategy 55%

Competitive Strategy 49%

Geographic Strategy 45%

Business Structure 42%

Economic Model 35%

Financial Structure 26%


There was also broad consensus on the specific operational areas—global talent management
operational areas most in need of change: and customer operations—because they are the
customer operations, product operations, source of the company's differentiation.
Quintiles knows that its pharmaceutical
supply chain operations, and organizational
customers outsource their clinical trials because
structure and talent management (Figure 5). Not
this aspect of R&D is not core, and that
coincidentally, these are also the areas
outsourcing allows them to turn these fixed
participants said contribute the most business
costs into a variable cost. So the more Quintiles
value. Companies, in general, realize it is
invests in talent management and customer
important to keep innovating the operational operations, the more cost-effective its services
areas core to competitive advantage. 2003, the become—and the more compelling these
company began powering its manufacturing services are for the company's target customers.
plant with turbine engines that run on methane
gas, leading to a great drop in carbon emissions Germany-based Bayer HealthCare is another
as well as energy costs. Initiatives such as these example. Twenty years ago, long before China
was on the radar, the firm began investing there
have made SC Johnson a sustainability leader
to gain access to lower-cost labor and materials
while broadening its brand appeal to
while tapping into an enormous source of new
environmentally-conscious consumers.
customers. Leveraging this opportunity to the
Consider Quintiles, a global company that hilt, Bayer made major changes in its product,
conducts clinical trials for large pharmaceutical supply chain, and customer operations.
companies. Quintiles invests heavily in two core

Figure 4: Operational Changes That Matter Most
The operational areas that require change are also the ones contributing the most business value
Multiple answers possible

Customer Operations

Product Operations

Supply chain
Organizational Structure
and talent management
Physical footprint
Networks of Partners in
the value chain
Information architecture
Operational areas
Others, please specify contributing the most business value
Operational area
None requiring significant change

Don't know

0 10 20 30 40 50 60
Companies (percentage)

To expand its product offerings in the region, unleashing a number of other disruptors-
Bayer acquired the over-the-counter cough and including the meltdown of the financial services
cold portfolio of Chinese Qidong Gaitianli industry, which, in turn, has prompted shifts in
Pharmaceutical Company. In addition, Bayer other key industries.
established four manufacturing facilities in the
Even when a disruptor is especially powerful, it
region, and recently expanded its plant in Beijing.
is not always easy to see it coming, as the
The company also began sourcing raw materials
financial crisis has demonstrated. So, above all
and services for global drug production from
else, companies must deploy operational
various suppliers across greater China. And to
strategies that will enable them to quickly change
develop a strong customer base early on, Bayer
course when necessary. Three practices prove
built a customer outreach center.
crucial for success:
Turning Threats Into Opportunities Build in flexibility. All companies, regardless of
In today's world, disruptors spread far more industry, need to recognize that we live in an
widely—and quickly—than in the past. Any one increasingly unstable world. So they must build
disruptor can intensify, pushing other disruptors flexibility into their operating models and
into the background and catalyzing still others. eliminate anything that prevents it. Each
The current credit crisis, for example, has company needs to determine what that means
lessened the turbulence over oil prices while for its own circumstances.


Prepare on all major fronts. Since it's impossible Author (s)
to predict which disruptors will strike next,
Mark Deck, PRTM Director
companies that want to succeed in the long term
need to simultaneously stay on top of all areas The research in this article is based on an online
key to competitive advantage. Successful survey taken in 2008 by 242 senior executives
companies understand this and constantly from around the world. Approximately 33% of
monitor their operational strategies so they can the executives' companies are headquartered in
quickly adapt them when the need arises. North America, 31% in Europe, and 26% in the
Middle East, Africa, and the emerging markets
Go on the offensive. Attack the disruptors
of the Asia-Pacific region.
before they attack you. Companies that go on
the offensive increase their likelihood of a The participant firms are almost equally divided
positive net result. Those that take a defensive between products-based and services-based
position end up backtracking to repair damage, businesses. Approximately 25% of the
and they lose the opportunity to develop respondents' organizations have annual
operational innovations essential for getting revenues of more than US$10 billion, while 35%
ahead. Proactive companies follow these have revenues of more than US$500 million.
practices religiously. Operating on the The survey was supplemented by in-depth
assumption that the world is constantly in flux, interviews with CEOs and COOs. These
they are always looking ahead to anticipate the executives came from Argentina, India, Turkey,
impact of global disruptors on their businesses. the UK and the United States, reflecting the
As a result, early movers develop operational global spread of the survey sample itself. “Early
strategies that will support whatever business movers,” defined as firms that “proactively track
strategies they choose to pursue. They not only disruptors and try to act before competitors do,”
make operational changes earlier—they make comprised 25% of respondents. Late movers,
changes that are more significant, innovative, companies that “act in response to forces
and pervasive than the competition. These causing a shortfall in business performance,”
proactive companies are, for the most part, more constituted 17%.
successful, reaping stronger revenue, profit, and
return on capital than their competitors As we
look ahead to the next wave of disruptors, one
thing, at least, is predictable: The early movers
will not only weather the storms that arise—they
will also make any storm, however threatening,
work to their advantage.

Source - Image: (c) Cliff, Creative Commons, Flickr
Campus Thoughts

Indian Domestic Airline Industry

Abstract Commenced Ceased
This article traces the evolution of the Indian domestic Operations Operations
airline industry and looks at the key inflection points in Alliance Air 1996 2007
its timeline. The Low Fare Carrier (LFC) entry, the ArchanaAirways 1991 1999
regulatory structure and the downturn in the industry Damania Airways n.a 1995
from 2007-09 is also analyzed in detail. The key players East-West Airlines 1992 1995
are examined with an eye towards possible future ModiLuft 1994 1996
strategies. NEPC Airlines n.a 1997
Evolution of the Indian Airline Industry n.a: not available
Table 1: List of defunct airline car riers
The airline industry in India started off with the (
establishment of Tata Airlines in 1932 by J.R.D ndia, last accessed on: Jun 01, 2009)
Tata as a division of Tata Sons Ltd. It became a
public company named Air India in 1946. Indian The only survivors from this attrition phase were
Airlines was founded in 1953 by the merger of Jet Airways and Air Sahara. These two players
along with the state run Air India + Indian
seven independent domestic airlines as part of
Airlines controlled the entire airline market till
the nationalization resolution.
2003 when the first of the Low Fare Carriers
The story till 1990 remained one of near (LFCs), Air Deccan entered the market.
monopoly of the state owned airlines till the
This proved to be the major inflection point in
onset of liberalization in 1990-91. In 1990, a sea
the history of the airline industry as passenger
change in the airline industry came about under
volumes grew at an explosive CAGR of 29.5%
the 'open skies policy' where private airlines were from 2003-04 to 2007-08 driven primarily by the
allowed to operate taxi services. The policy low cost airlines. The key driver behind this
quickly prompted the formation of Air Sahara explosive growth was the aggressive pricing
and Jet Airways in 1991-92. The period 1992- strategy followed by the LFCs which
1995 saw the introduction of Modiluft, benchmarked their prices against first class and
Damania, and East West among others with AC train fares in a strategy borrowed from Herb
great fanfare. Kelleher of Southwest Airlines. Combined with
After an initial bout of success, all the new the convenience of online ticketing, LFCs
airlines ran into trouble – in part a mix of poor fuelled a big rise in the number of first time
management, over ambitious operations, the travellers. Air Deccan was soon followed by
capital intensive nature of the industry and in the SpiceJet, GoAir and IndiGo with each of them
adopting variations of the low cost strategy; the
case of East-West, the shooting of its CEO in a
market shares of LFCs consequently increased
gangland style execution! Most of these airlines
dramatically to 29.5% in 2006-07.
closed down in 1995-96; Modiluft was however
revived in 2005 as SpiceJet. The aggressive pricing strategy followed by the
LFCs put tremendous pressure on margins and

caused an all out price war. The resultant Bleak 2007-09 – Severe Downturn in the
escalating losses forced a period of Indian airline industry
consolidation with Air Sahara being acquired by
Jet Airways and renamed as JetLite and Air A combination of factors resulted in the
Deccan being acquired by Kingfisher Airlines (a quagmire the airline industry finds itself in.
Ambitious fleet expansion put pressure on
poorly-equipped airports and decreased service
quality of airlines. Indian carriers became
50 Advent of LFCs CAGR. c.30% 50
overleveraged – the estimated combined debt of
Passenger Volumes (mm)

40 40

the top three airlines, Air India, Kingfisher and
20 Jet, totalled USD 8bn. Further, Indian carriers
20 (%)
10 made staggering losses of USD 640mn in 2008.
10 0

0 -10
1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08
The major reasons for this dismal performance
Domestic passengers Growth (RHS) were the global downturn and the increase in
ATF prices through 2008. Although ATF prices
Figure 1: Domestic passenger traffic growth - eased off during H2CY2008, the Mumbai
Sharp growth with entry of LFCs (DGCA, terrorist attacks and the decrease in travel within
CRISIL report on Airline Services, Nov-2008) the IT industry proved to be major dampeners.
Inefficiency in operations, lack of consolidation
Full Service Carrier started by Vijay Mallya in in ground crew, archaic security regulations
2005). The two state owned carriers Indian necessitating excess staff and low passenger load
Airlines and Air India also merged in 2007 to factors due to compulsory serving of non-
form a new company National Aviation profitable sectors (regulatory constraint) all
Company of India Limited (NACIL). resulted in falling profitability every year.

15% 12.9% 1,400

10.3% 10.7%
10% 7.2% 6.6% 1,200
5% 1,000
-3.6% 600
-10% -
-15% 6.1% 400
-15.0% -14.0% -15.3% 200
-20% -17.0% -18.5%
-25% -20.5% -20.7% 0
Jan-08 Feb -08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug -08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb -09
Traffic Growth (LHS) ATF Prices (US$/kl)

Figure 2: Passenger Traffic growth and ATF prices (Bloomberg, Ministry of Civil Aviation monthly statistics)


Campus Thoughts

PLFs dropped as low as 66% in 2008-09 as As a response to the downturn, carriers have
traffic contracted and fares zoomed due to begun fleet rationalization – Paramount and
corresponding hike in ATF prices (fuel IndiGo being the notable exceptions.
surcharge). Infact Indian load factors are
significantly below Asia Pacific and global Regulatory Trends
averages. Under current regulations, foreign airlines are
prohibited from holding equity in Indian carriers
400 50 – this regulation is expected to be relaxed in 2009
to allow shareholding of up to 25%, still not
sufficient for management control. However,
200 0 foreign investors other than airlines are allowed
100 to hold up to 49% of the equity in Indian
0 -50
carriers. Current regulations also require
domestic airlines to operate for at least 5 years
1997-981999-00 2001-022003-042005-06
and operate a minimum fleet size of 20 aircraft
Operating revenue (LHS)
before being permitted to operate on
Operating expenditure (LHS) international routes.
Figure 3: Financial performance of
Indian carriers (IATA, Dec-2008) The government, considering the strained
liquidity positions of the airlines, has provided
flexibility in clearing dues of oil companies.
Further, custom duties on ATF have been
reduced from 5% to 0%. There is substantial
64% competition in both domestic and international
62% segments. The airlines are allowed to operate any
60% domestic routes with no restrictions on pricing.
58% The Indian government has pushed for bilateral











2008-09 (E)

air service agreements with overseas markets,

engendering greater access to foreign carriers. A
bill to establish the Aviation Economic
Figure 4: Passenger Load Factors of Regulatory Authority (AERA) was passed in Oct
Indian Carriers (Analyst Reports) '08 with responsibility for regulation of
aeronautical changes and to safeguard the
FY2007 FY2008 FY2009E
Jet Airways 54 58 58
interest of stakeholders at Indian airports. The
Indian Airlines + Alliance Air 53 55 57 Government is expected to continue to restrict
Go Air 5 6 6 new airline entry in 2009, but may issue licenses
Indigo 9 18 23 for airlines planning to commence operations in
Air Sahara 24 24 23
Paramount 5 5 15
Spicejet 11 15 15
Kingfisher Red 41 41 37
Kingfisher 28 41 37
Jagson Airlines 6 6 6

Table 2: Order book for Indian Carriers (DGCA,

CRISIL report on Airline Services, Nov-2008)

Ministry of Civil Aviation
Overall regulator of airlines &
airports in India

Airports Authority of India DirectorateGeneral of Civil Bureau of Civil Aviation

Aviation (DGCA) Security (BCAS)
Control and management of
Regulation of airline carriers flying Regulation of civil aviation security
Indian airspace-primarily
to/from/within India in the country

Central Industrial Security

Air Traffic Control (ATC)
Regulator Force (CISF)
Controls landing and
Provides security functions at all
departure of flights
Airline carriers
Services Services

Figure 5: Regulatory Landscape in Indian Airline Industry (DGCA,

Analyst Reports, CRISIL Airline Services)

Growth Drivers start reporting consistent earnings.

Economic growth has been a key determinant
of passenger traffic. With India recording Strategic Direction for Major Players
impressive growth rates of 8-9% in the last five
Kingfisher and Jet (both Full Service Carriers)
years, the industry experienced a significant
are the dominant players in the industry while
increase in passenger traffic. This was affected
Indigo is the dominant pure LFC. There is a clear
by the global recession which depressed the
trade-off between market share and profitability.
country's GDP growth to 6.5%. However, after
The rush to gain market share resulted in
the re-election of Congress to power there is
plummeting margins and poor customer service
increased confidence among the airlines
regarding the economic recovery. Domestic
passenger traffic growth is likely to moderate to
9.1% CAGR from 2007-08 to 2012-13. All the
Jet Lite Air India
Indian players operate a young and relatively 13.50% 17.20%
modern fleet, considering the fact that a majority
of their growth has occurred in the last four to 12.10%
five years. This ensures a richer experience for Jet Airways
the passengers, greater safety and lower Spice Jet 7.40%
operational and maintenance costs for the
airline. Go Air 3% 26.80%
Need to Deleverage 2.20%

The Airline Industry has traditionally been Figure 6: Market Shares of Indian Carriers, 2009
highly leveraged. With a majority of the (Centre for Asia Pacific Aviation, 2009)
domestic players reporting marginal profits (and
losses in some cases), their debt levels have
become unsustainable. Improving debt- With an alliance between Jet Airways and
servicing capacity will require deleveraging at Kingfisher, the two largest private players, there
least until the industry recovers and the players would be greater cooperation in ground


Campus Thoughts

Kingfisher: It overtook Jet Airways to become

h a n d l i n g c r e w, p a r k i n g b ay s, r o u t e the dominant player in January 2009. In
rationalization all with a focus on reducing costs. February, it flew close to a million passengers.
Unlike global airlines, domestic Figure airlines While it has announced opening up of new
hedge a lesser proportion of their fuel international routes, the company continues to
requirement. This hurt their profitability be cash constrained and needs capital infusion.
severely when the crude oil prices surged. But In the near term, Kingfisher will be aggressive in
with the crude prices expected to ease out in the expanding its market share. It may increase its
future, ATF prices would soften, boosting the capacity in its low-fare brand, Kingfisher Red, to
bottomline of the domestic players. We have 75%.
positioned the Indian
Air India: Constant bureaucratic interference in
Jet Airways: Undertook several cost-cutting its functioning, huge workforce and other
measures including reduction in capacity and inefficiencies sent Air India's market share down

A world of difference
Unexplored opportunities


Short Stage length Long

Figure 7: Strategic Positioning of Indian Carriers

to 17.2%. Its poor passenger load factor of 57%

this resulted in handing over the lead to coupled with higher ATF prices and operational
Kingfisher. As of March 2009, Jet Airways
costs has resulted in the national carrier needing
occupied 17.8% of the domestic market while
a government bail-out. The government's
Kingfisher had 26.8% of the pie. In the near
proposed restructuring plan involves modifying
term, the focus of Jet Airways has to be on
productivity pay schemes, deferring aircraft
improving profitability even if it comes at the
deliveries and debt obligations. We expect Air
cost of losing market share. Further, it will be
India to focus on regaining profitability without
moving most of its capacity to its low-fare
worrying about its market share in the near
offering JetKonnect.

Spicejet: Due to the economic crisis, several their strategy to northern India combined with
passengers shifted from full-fare airlines to low- short distance international routes (Sri Lanka,
cost ones benefitting low-fare players such as Middle East) would be the way forward for
Spicejet. Further, investments from private Paramount Airways.
equity firms such as Wilbur Ross and Ishtithmar
have boosted its equity base. Spicejet is looking
to expand its presence in the domestic market From the inception of the first carrier in 1932,
and looking for potential acquisitions. In the the Indian airline industry has gone through
near term, we expect it to strengthen its market three inflection points. The first was the
share through consolidations. implementation of the Open Skies policy in
1991 which resulted in the first wave of Indian
GoAir: With the surge in ATF prices GoAir has private carriers. The second was the entry of the
substantially reduced its fleet. It accounts for a Low Fare Carrier (LFC) Air Deccan in 2003 and
miniscule 3% of the domestic traffic as of the third inflection point was the traumatic
March 2009. The PLFs have hovered ~70%, a 2007-09 period of the global economic
low figure for a LFC. The promoters are looking downturn, the effects of which is still being felt
to offload their stake in a business that they now. We foresee the emergence of niche
deem unviable due to the existing competition segments like business-only and premium long
and regulatory regime. From our viewpoint, the haul in the near future apart from consolidation
ideal strategy for GoAir, if it continues to among the LFCs.
operate, is to focus on rationalizing costs,
concentrate on high volume sectors and move Author (s)
away from the low cost model. Kaushik Sriram is a 2nd year PGP student at
Indigo : Voted as the most punctual airline of IIM Bangalore. He holds a Bachelors degree in
the year in India, Indigo has rapidly grown its Electronics & Communication Engineering
market share from 2.6% in 2006-07 to 13.5% in from National Institute of Technology (NIT)
2009. Further, its strong cash position, low Tri chy a n d c a n b e r e a ch e d a t
gearing ratio and operation based on sale and
lease back of aircraft puts it in a prime position Ganesh Kumar L is a 2nd year PGP student at
to expand market share in the future. We foresee IIM Bangalore. He holds a Bachelors degree in
it becoming an attractive buyout target for PE Computer Science Engineering from PSG Tech,
firms and for international carriers (if FDI Coimbatore and can be reached at
restrictions are lifted). We also predict an active
foray into international routes – especially the
highly profitable short distance Middle East References
Paramount Airways: follows a unique business Webpages/JRD.aspx?MID=196
model of short distance business only service (Last accessed on: May 28, 2009)
concentrated in Tier-2 business centres and has
2. Tarun Shukla, Jun-2008, SpiceJet,
been immensely successful. Its success in the
Modi call truce; to sell 11.5 mn shares,
domestic market has propelled it to venture into
the overseas market. It has recently announced & others
plans to acquire aircrafts to kick-start its overseas
operations. We believe that a logical extension of


Campus Thoughts

India's Port Economics: Developing

Sea Ports as Strategic Assets
Abstract economy. Sadly for us though, the lacklustre
performance by our seaports when compared to
For centuries, seaports have served as vital economic
their global counterparts has been preventing
lifelines by bringing goods and services to people around
Indian economy from realising its true potential.
the world. Today, seaports remain a critical component of
In 2005-06, all Indian ports combined together
our nation's economy. Not only do seaports deliver goods
to consumers and export India-made products overseas, handled a total of about five million TEU
they create millions of jobs and generate billions of (twenty-foot equivalent units), whereas the
dollars in central, state and local tax revenue. However, Chinese ports recorded a whopping throughput
India's major seaports suffer from a few chronic of more than 74 million TEU. Many ports
deficiencies, which are stifling its economic growth, and internationally are preparing for the new
require urgent attention. generation, ultra large container ships, capable
of carrying 12,500 TEUs, and Post-Suez-Max
Introduction (up to 18,000 TEUs) and Post-Malacca-Max
With the advent of globalization, India has (over 18,000 TEUs) while JNPT in Mumbai,
emerged as a major player in international trades, despite being India's leading container port, is
with its foreign dealings of approximately USD still unable to handle 14-metre draught vessels
400 billion an year. More than 95% of these that can carry 6,000 TEUs. Larger mainline
trades are handled by ports. Fast-increasing vessels continue to bypass the Indian coast.
exports of India-made goods through India's None of the top-10 container carriers in the
seaports to overseas buyers are helping buoy the world – the 10th biggest has a capacity of 9,040-
Indian economy. Port infrastructure thus is TEU – can call on an Indian port now, or in the
expected to play a crucial role in boosting India's immediate future.
status as a major global Need for Port Development
Currently, Indian government follows a
demand-driven strategy when it comes to port
12.00% 1.800 development. All the 12 major ports in the

10.00% 1.417 9.60%

1.600 country have been running at a capacity
1371 1.400 utilization of more than 90%. Looking at the
8.00% 7.40%
strong correlation between GDP growth and
6.30% 1.000
growth in port traffic, this puts a self-imposed
3.90% 4.00%
cap on the trading capacity of the country and
4.00% 3.60% 0.600
restrains the GDP growth.
0.200 With regards to infrastructure development, the
0.00% 0.000 government needs to realize it always has to be
The 50's The 60's The 70's The 80's The 90's 2000-2007

CAGR Part Traffic % CAGR GOP % Ratio

supply-leading-demand, with the supply
automatically generating demand after a certain
Figure 1: Correlation between GDP growth time lag.
and Port traffic growth

The primary losers in the context of the 500 Capacity Utilization 92.58%
inefficient scenario prevailing in the port sector 400
105.43% 96.56%
83.72% 86.50%

are the Indian exporters and importers. The 350

global carriers are compelled to tranship more 300
250 60.00%
than half of India's export-import containers at 200
foreign ports, with Indian companies having to 150

put up with higher costs and lost time. Thus, 100

despite the low labour costs and production 0 0.00%
economies of Indian manufacturers, the 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

resulting higher landed costs render their Traffic (MT) Traffic Capacity (MT) Capacity Utilization

exports non-competitive vis-a-vis those Figure 3: Capacity Utilization of Indian ports

exported from other more efficient ports.
major world shipping routes on both east coast
Major Ports:
and west coast, India doesn't have any
West Coast
1. Kandla (Gujarat) transhipment hub, foregoing approximately Rs.
Mumbai (Maharashtra)
Jawaharial Nehru (Maharashtra)
1000 crores every year in central, state and local
4. Mamugao (Goa) tax revenue. The port core sector constituted
New Mangalore (Karnataka)
Cochin (Kerala)
around 4% of Hong Kong's GDP in 2002 and
about 110,000 jobs, or 3.4% of total
East Coast
1. Tuticorin (Tamil Nadu) employment is closely linked to the port.
2. Chennai (Tamil Nadu) Compared to this, contribution from Ports to
3. Ennor (Tamil Nadu)
4. Visakhapatnam (Andra Pradesh)
India's GDP and employment is miniscule. For a
5. Paradip (Orissa) country with global aspirations and ambitions to
6. Kolkata Haldia (West Bengal)
emerge as an economic giant, a burgeoning
external trade, a rich maritime history and a vast
Figure 2: Location of major ports in India coastline, this is a gloomy scenario.
The time delay in shipment prevents the Indian Overall, the chronic congestion and inefficiency
exporters from availing “fixed-day-of-the-week- in Indian ports could be the major stumbling
services” offered by the liner industry at a time blocks that stifle the nation's industrial and
when manufacturing and trading companies economic growth and require a paradigm shift in
abroad were increasingly selling and buying on a operational philosophy.
“just-in-time” basis. Indian exporters have to Problems with current Infrastructure
thus operating on the basis of substantial buffer The Indian ports are highly inefficient when
stocks, which made them even less competitive compared to international ports. The
in global markets. inefficiency is clearly reflected from the fact that
Seaports represent a stable source of long-term Indian ports' average turnaround time is 3.85
revenue and thus have the potential to attract days compared with 10 hours in Hong Kong.
large number of investors, but a sceptical The state-run ports take four times as long as
attitude towards port development by the rivals elsewhere in Asia to unload and reload
government is preventing significant foreign container ships. As a result global carriers are
investments to flow into the country. Despite compelled to transship more than half of India's
being strategically located in close proximity to export-import containers at foreign ports, with


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Indian shippers putting up with higher costs and

lost time. As a result of the uncertainty high with the waiting period going up to as much
associated with container movements in Indian as 40 days.
ports in general, the major container operators Strengths Wearlesses
resist sending their main-line (mother) vessels to
India. Thus, Indian exports and imports are
typically carried by feeder vessels through trans-
shipment centres in Colombo, Singapore, and
Dubai. These additional cargo operations
increase the freight rate and chances of loss and
damage besides lengthening the cycle time
considerably, putting Indian products at a
competitive disadvantage in the global market.
It costs 50 per cent more to call on a port in
India, compared to Dubai, Singapore or Figure 4: SWOT analysis of Indian ports
Colombo. Many a times, Indian port costs are Recommendations
more than double other international ports.
According to a McKinsey study, the transit time Developing transhipment hub
from Indian factories to retail outlets in the US According to the Tenth Plan document, India is
was 6-12 weeks in comparison with two or three losing about Rs. 1,000 crores per annum for not
weeks from China. Road and rail systems are having a transshipment port. Currently, US $ 150
deficient beyond the ports. Poor links raise is levied in Colombo for trans-shipment and US
transport costs to 8-9% of total shipping costs, $ 130 in Dubai and Singapore for the same. A
compared with 3-4% in developed countries. A single container trans-shipped from Colombo
multi-tiered bureaucracy with no real authority port to Cochin incurs an expense of US $ 1,200.
vested in one source, and complex clearance and If it directly landed at Cochin, it would have
taxation procedures compounds the problem. costed only US $ 400. Therefore by developing a
Development and improvements are being held well equipped trans-shipment hub, India can not
back by poor planning, red tape and bureaucracy. only garner a substantial portion of
Other problems cited with Indian ports include transshipment fee, but also save a lot of money
absence of equipment maintenance, lack of charged by feeder vessels.
coordination of port activities, shallow port Marine JMP Mundra Cochin Chennai Visakha Dubai Singapure Hong Colombo
Change Kong
draft that preclude the handling of modern Patnam
container vessels, and a virtual nonchalant Port 2.785 14,300 6,656 5,980 6,526 1,275 1,566 1,389 1,911
attitude towards the changing nature of Dues

international trade and technological advances. Pilotage 4,961 14,466 9,282 8,845 347 691 2,031 1,911
Tug 409 1,154 1,447 764
In most of the ports while the main road is in
Berthing 259 166 148
good shape, the feeder roads leading to Harbour
container freight stations are in a pathetic state. Dues

Because of all this, trucks have to wait for several Berth 770 1,300 2,059 601 447 1,535 967 109

hours, even days to clear cargo. A recent example Total 8,515 15,600 23,182 15,863 15,818 2,290 5,112 5,982 4,696
of this has been Nava Sheva Port where the pile- Charges

up of trucks with export cargo hit an all-time Table 1: Cost structure of Indian vs other ports

India is strategically positioned on the world
geographic map, with proximity to international The Kwai Chung container port in Hong Kong
shipping connecting Persian Gulf, Far East and is the classic example of near-perfect market
Australia route and East-West shipping axis also dynamics. The prices of services provided are
supports the need for developing a trans- determined by market forces, and not the
shipment hub. Its 7517 km long coastline has regulator. In India, Tariff Authority for Major Ports
many deepwater areas having deep drafts, (TAMP) is the central authority for fixing tariffs.
especially in Kerala, which allows the servicing Tariffs at major ports are set on cost plus basis
of large ships with capacities of more than 6000 guaranteeing ROCE of 15%, thus providing no
containers. If need be, Andaman and Nicobar incentives for reducing costs and creating
Islands also provides a viable option. competition.

A Greenfield transhipment port developed at a

Average Inventory days
suitable site would provide flexibility in design 32.5
and expansion so as to bring efficiencies in the
system and bring down the cost of shipment.

Promoting Competition
Absence of inter-port and intra-port
competition which has been responsible for
substantial productivity increases in other Brazil China India
countries is absent in India due to poor inland
connectivity and a policy regime that protects Figure 6: Average Inventory days at different ports
domestic ports against competitive pressures. TAMP needs to be specifically mandated to
The port user does not in practice have the improve efficiencies or lay down quality of
option to shift his goods from one port to
service standards in port operations. There is a
another or between service providers within the
need for TAMP to develop a pricing mechanism
same port. It is only at JNPT that there are two
which relates tariff to efficiencies, and move
competing agencies handling container traffic,
and perhaps this is the reason behind JNPT towards fixing uniform principles for fixation of
being the most efficient major port in India. tariffs rather than fixing the tariffs itself.
Service Port Model to Landlord Port Model
Turnaround Time 84.0
A 1997 review of the top 100 container ports of
at ports (hours) the world showed that 88 out of 100 ports
conform to the Landlord Port model. As per this
model, the port authority consists of a landlord,
which manages the basic port assets by letting
7.0 7.0 land and infrastructure to port operators in an
efficient manner. The Landlord Port would be
Singapore Hong Kong India involved in planning, lease negotiation, safety,
navigation and overall coordinating functions.
Figure 5: Turnaround time at different ports Other services like cargo, marine, ancillary,


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berths etc are privatised on captive/BOT basis coal and iron ore and five hours for ships that
to the primary port users. Port operators and haul cargo-laden containers.
other concerned entities which need to be
Reforming clearance mode
located in the Port, lease the land, infrastructure
and associated services and provide them to the Efforts should be made to simplify port
secondary users - cargo owners, ship owners and clearance procedures including customs, which
cargo ship owners. are considered as a major bottleneck in the
export and import transactions. Advance
With intense competition, the role of Indian declaration and goods released upon arrival;
ports has to change from a Service port model to implementation of an IT-system for Electronic
a Landlord port model. Data Interchange (EDI) paperless clearance;
and promotion of logistics companies dedicated
Round the Clock Operations
to assisting in port clearance could be some of
Indian ports don't work round the clock. the methods to make progress in the clearance
According to an estimate, if the non-working procedures.
time is reduced from three hours to half an
Simplifying tax regime
hour each day, the turnaround time of ships
will reduce by 10%. This would save 12 hours Currently, India levies a dozen of taxes from
for dry-and-break bulk carriers calling at these shipping companies, which makes them hesitant
ports to load and unload cargoes such as steel, to do business here. India should take a lesson

lndia China
Projected Growth 8-9% 25%
Current Traffic 5 millon TEU 74 million TEU
TAT 84 hours 7 hours
Servicing charges per vessel of 2500 TEU USS8000-23000 USS 5000-6000
Contribution to GDP
Transporation cost (as a % of total 8-9% 3-4%
Shipping cost)
Policy making Centralied Decentralized
Tariff Cast-plus Competition-driven
Investment in ports Demand-driven Supply-driven
lnvenlory Days 32.5 24
Transit time to US delivery 6-12weeks 2-3 weeks

Table 2: Qualitative and quantitative comparison of Indian vs Chinese ports

from Singapore where the presence of a single Author (s)
tonnage tax has been a major attraction to Ajay Jain is a 2nd year PGP student at IIM
shipping companies.
Bangalore. He holds a Bachelors degree in
Hinterland Connectivity Electrical Engineering from Indian Institute of
Technology (IIT) Roorkee and can be reached at
An efficient multi-modal system, which uses the
most efficient mode of transport from origin to
Atishay Jain is a 2nd year PGP student at IIM
destination, is a prerequisite for smooth
Bangalore. He holds a Bachelors degree in
functioning of any port. This necessitates
coordinating rail and road networks to ensure Civil Engineering from Indian Institute of
good connectivity between ports and the Technology (IIT) Delhi and can be reached at
hinterland. Besides, it is required that laying,
strengthening and widening of roads is done on
a regular basis for connecting the ports. These
projects provide a good opportunity for private References
sector to create infrastructure in India. 1. Iyer, Ramnath, 2008, “Port: Sector
Trends?, CRISIL Infrastructure Advisory
Define Common performance measures
These can be turn around time of ships in hours
from outer anchorage to berth and outbound 3.
voyage, of trucks in minutes, trains in hours, 4.
documentation processing speed, customs and cat_id=114&art_id=2255
clearance speed, to mention a few. There is a
need to check the performance of different
supply chain partners with the benchmark, and
any deviation gaps must be addressed.


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How Open Source is changing the world

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Does downsizing & price-cutting really work?

Abstract increases and fewer people are required to do the

same job (Fioretti, 2007). Therefore, it is believed
Desperate situations call for desperate measures. General
that as an organization grows, it 'accumulates
Motors (GM), which declared bankruptcy recently, has
fat', i.e. it will have more employees than actually
announced that it will downsize salaried employment by
20% (around 6000 positions) as part of its restructuring required. Further, people costs constitute 30-
operations (Green, 2009). Experts have opined that it has 80% of the general and administrative costs of
to reduce the prices of some of its models by at least 40% most companies. Hence, downsizing is believed
in order to meet sales targets (Reiter, 2009). GM is not the to achieve the dual objective of reducing costs
only company to adopt such measures. Downsizing and and increasing productivity. Organizations are
price-cutting are widely believed to be the ultimate expected to become 'lean and mean' by 'cutting
weapons to improve cash flow problems. What is the the fat' (Cascio F.W, 1993).
reason behind this perception? Do these always yield the Does downsizing work?
desired results? What are its inherent risks? Let's
explore. A 1991 study of 1,005 firms by Wyatt Company
revealed that only 46% of the companies were
able to achieve satisfactory cost reductions
In the current recessionary environment, through downsizing. Even the productivity
companies might at times face short-term cash improvement was negligible. Moreover, in 80%
flow problems. Managers often respond to such of the cases, managers eventually replaced the
situations by downsizing and/or slashing prices, people who had been dismissed (Cascio .F.W, 1993).
as they don't have sufficient time to analyze and In some cases, employees might be entitled to
choose other better alternatives. Also, these benefits equivalent to their salary if they are
steps are considered to give definite results. dismissed. When some steel producers in USA
However, contrary to popular belief, these laid off their senior employees, they discovered
measures do not yield the desired benefits in all that the union contracts committed them to pay
situations. Besides, these measures could cause a substantial portion of the salary to the
some irreparable damage, which might employees even after their dismissal (Nagle .T.T
eventually lead to the company's downfall. This and Hogan .J.E, 2009).
article explores the reasons why such measures
fail and highlights the risks in adopting them so Risks in downsizing
that managers are in a better position to decide
by weighing the potential costs and perceived Research has proven that downsizing has some
benefits. permanent psychological effects on the
employees in the organization (Kets de Vries M F R
Why downsizing? and Balazs K, 1997). Employee morale lowers,
Proponents of the organizational learning curve productivity dips and distrust of the
theory argue that as an organization progresses management develops (Cascio .F.W, 1993). This can
along the learning curve, its productivity in effect impede organizational growth.

Why price-cutting? Alternatives to improve cash flow
While downsizing is expected to improve cash In order to improve short term cash flows
flows by reducing labour overhead, price-cutting without downsizing, an equivalent reduction in
is expected to do the same by increasing sales wages can achieve the objective without the
revenue. The belief that price-cutting will undesirable side-effects. Wage reduction is often
increase sales can be traced to the fundamentals not preferred because it might reduce the
of economics. Most managers, having studied company's competitiveness in the labour
economics, believe that demand is inversely market. However, recessionary times are an
related to price. People working in marketing will employer's market and an organization that
vouch that this assumption doesn't always hold doesn't downsize is likely to be in a position of
(Trout .J, 2000). strength in the labour market. Such measures
have already been successfully adopted in South
Does price-cutting work? Korea which shows that this is a feasible solution
Study of customer buying patterns has shown (Ramstad .E, 2009). This is just one of the
that price is never the sole parameter on which possible alternatives that could be explored.
the buying decision is made (Nagle .T.T and When it comes to increasing sales, only the
Hogan .J.E, 2009). Therefore, understanding company that can understand the consumer's
customer needs and working towards satisfying varying psychology and can tailor its offering
them better is a more definite route to increasing accordingly will emerge triumphant. Take the
sales. In fact, price cuts can prove case of Hyundai for example. It is understood
counterproductive. Price cutting can lead to that the decreasing auto sales in USA were
lowering of perceived product quality in the because consumers feared losing their jobs.
consumer's mind, which will lead to decrease in Even those who had relatively secure jobs were
sales (Shawyer .D, Norman .F and McGann .A, reluctant to buy cars. So it introduced a scheme
1972). Moreover, price-cuts can result in price where customers could return their cars if they
wars where competitors keep reducing prices lost their jobs (Vlades .P.D, 2009). While other
until the business itself becomes unsustainable. auto majors like GM were experiencing a drop in
Risks in cutting prices sales, Hyundai was among the rare few who
registered a rise in sales. The risk of customers
For any product, the reference price is a returning cars was also low as only those who
psychological reference point in the consumer's were relatively secure about their jobs availed
mind. A consumer mentally compares the this scheme.
product's price with its reference price and buys
it only if he feels that it is fairly priced Conclusion
(Gurumurthy .K and Winer .R.S, 1995). Downsizing and price-cutting can have a long
Companies, by maintaining perceptions, try to lasting impact on the performance of the
keep the reference price high so as to earn organization. Any action that has such an
maximum margins. Price cuts result in a enduring impact should be in alignment with the
permanent lowering of reference prices. This organization's vision and goals. The belief that
results in a regular loss of margins. In addition to downsizing and price-cutting are powerful tools
this, the lower reference price reduces perceived for solving cash flow problems rests on some
product quality, which further reduces sales. impractical assumptions. Hence, considering the


Campus Thoughts

long-term and undesirable side-effects, a 6. Nagle .T.T and Hogan .J.E, 2009, The
manager has to first exhaust all other options Strategy and Tactics of Pricing, New Delhi:
and only then, after carefully weighing the costs Dorling Kindersley, pp. 17-28, 177
and benefits, adopt such measures if necessary.
Else, as the old saying goes, haste makes waste. 7. Ramstad .E, 2009, “Koreans Take Pay
Cuts to Stop Layoffs”, Wall Street Journal,
Author (s) Mar 2009,
M Arun is a 2nd year PGP student at IIM
44366614685.html (Last accessed on: Jul
Ahmedabad. He completed his Bachelor's 10, 2009)
degree in Mechanical Engineering from
National Institute of Technology (NIT) Calicut 8. Reiter .C, 2009, “Opel May Slash Prices
and can be reached at 40% to Boost Sales, Save Jobs ”, Bloomberg,
Jun 2009,
1. Cascio .F.W, 1993, “Downsizing: What do pid=20601087&sid=aBK5dmsP375w
we know? What have we learned?”, (Last accessed on: Jul 10, 2009)
Academy of Management Executive, Vol. 7
9. Shawyer .D, Norman .F and McGann .A,
No. I, 1993, pp. 96-104.
1972, “The effect of price cues on
2. Fioretti .G, 2007, “The organizational perceived product quality in a grocery
learning curve”, European Journal of shopping simulation”, European Journal of
Operational Research, Vol. 177, 2007, pp. Marketing, Vol. 6 Issue. 4, 1972, pp. 217-
1375-1384. 222
3. Green .J, 2009, “New GM Will Build on 10. Trout .J, 2000, “Why Price Cutting Is a
'Battlefield Triage' Intensity ”, Bloomberg, Poor Marketing Tool”, Differentiate or Die:
Jul 2009, Survival in Our Era of Killer Competition, 2000,
(Last accessed on: Jul 10, 2009) 0006/bk000605.htm (Last accessed on: Jul
10, 2009)
4. Gurumurthy .K and Winer .R.S, 1995,
“Empirical generalisations from reference 11. Vlades .P.D, 2009, “Laid off ? Hyundai will
price research”, Marketing Science, Vol. 14 take your car back”, CNN, Jan 2009,
No. 3, 1995, pp. 161-169
s/hyundai_assurance/index.htm (Last
5. Kets de Vries M F R and Balazs K, 1997, accessed on: Jul 10, 2009)
“The downside of downsizing”, Human
Relations (USA), Vol. 50 Issue 1, Jan 1997,
pp. 11-50.

Source - Image: (c) Rennet Stowe, Creative Commons, Flickr
Campus Thoughts

Divestment in Public Sector Undertakings

Abstract get rid of these loss making PSUs so that the

g over nment can concentrate on the
This article discusses the much debated divestment plans development activities of the nation. In the wake
of the government from the various Central Public Sector of fiscal deficit ballooning to 6% of the GDP
Undertakings popularly called PSU. How divestment and worse even more, it also made more sense if
will impact these PSUs? Is it necessary at all for the it was financed from the divestment of these
government to divest in the first place? We can analyze the PSUs hence the voice grew louder and stronger.
arguments both in favor as well as against the divestment
in PSUs in this article. Glimpse of PSUs
Before we frame our point of view let us have a
Introduction glimpse facts about the performance of the
Post independence period the Indian PSUs. Considering the PSUs which have
entrepreneurs were yet to sprout and the capital turnover of over Rs 2 bn which are about 123
was scarce to invest. So, in the second five year out of the total 242 contributed together an
plan, in the fifties, it was decided that aggregate annual total income of Rs 13,037.62
government will step in as an entrepreneur in bn and net profit of Rs 1,128.15 bn in FY07. In
some key sectors like the heavy industrial sector fact, the aggregate total income of the profiled
that would make the country self reliant. The companies is equivalent to 31% of the country's
number of PSUs then over the period grew to a gross domestic product at current prices for the
total of 242 which are classified into four fiscal 2007. The profit margins of the top PSUs
schedules, 52 in schedule 'A', 83 in schedule 'B', are listed in the figure 2. The profit margin of
64 in schedule 'C', 11 in schedule 'D', and 32 as almost all the sectors with the exception of
uncategorized. (Ref: pesb/ Insurance and trading sectors are healthy and
pesb-psu-completelist.htm). These are also comparable to the private sectors. The Return
categ orized as Navaratna, Miniratna on capital employed on the top 10 PSUs are also
(Category I and II). as is evident from the figure 3 is healthy.

Failure of PSUs In 2008, the public sector companies paid over

These PSUs which were created to give impetus 33.5% of their net profits as dividends, whereas
to the economy and help the private sector to their private sector counterparts paid 20.6% of
grow later became burden for the government in their profits as dividends. Now, to finance the
the form of loss making bodies. Various factors fiscal deficit if the government is planning to
attributed to the failures of the PSUs are disinvest from these firms it will be a one time
bureaucracy, inefficiency in operation, lack of return and will have to forego the dividends
technological innovation and otherwise. Also from these firms (at least the part that was
one of the major reasons of the failure was that divested). The government might also not want
in the post independence period these PSUs to divest more than 49% and thereby retain the
were majorly export pessimistic and worked on management control of these organizations. In
the principle of 'import substitution' hence were that case removing inefficiency by any major
technologically lagging. Thus there were calls to decision that will have a political impact will be

Sector-wise Net Profit Margin (%)
40 36.44
25 22.42

18.81 18.71
15 12.01 11.32 10.39
10 5.82
5 0.68

id e



in g
Tr icait Tele



ov ic




Pr erv














Figure 1: Port services and Coal emerged as the most profitable sectors,
with Net Profit Margins of 36.4% and 28.9% respectively

ROCE-wise (%) Top 10 PSUs

Hindustan Aerocautics Ltd 84.3
STCL Ltd 72.5
National Mineral Development Corporation Ltd 60.6
National Buildings Construction Corpn Ltd 58.0
Orissa Minerals Development Co Ltd 56.5
Mazagon Dock Limited 51.6
PEC Ltd 48.9
Indian Railway Cateriang & Tourism Corpn Ltd 47.7
National Aluminium Company Ltd 47.6
Mahandi Coalfields Ltd 47.5
0 10 20 30 40 50 60 70 80 90 100

Return on Capital Employed (%)

ruled out which in turn will mean that it will still fiscal deficit if the government is planning to
be under the clutches of bureaucracy. Thus the disinvest from these firms it will be a one time
following points for divestment in the PSUs return and will have to forego the dividends
becomes invalid from these firms (at least the part that was
divested). The government might also not want
In 2008, the public sector companies paid over to divest more than 49% and thereby retain the
33.5% of their net profits as dividends, whereas management control of these organizations. In
their private sector counterparts paid 20.6% of that case removing inefficiency by any major
their profits as dividends. Now, to finance the decision that will have a political impact will be


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ruled out which in turn will mean that it will still

be under the clutches of bureaucracy. Conclusion
Thus the following points for divestment in the The figure below shows the number of state
PSUs becomes invalid owned in various OECD countries. It only
shows that the presence of SOE is not
The PSUs are loss making bodies or give uncommon even in the developed countries.
low profits PSUs are not necessarily inefficient or against
They give low return on investment and the market (private firms). So, government
pays less dividends should not divest in the PSUs for the sake of it or
The inefficiencies can be removed if to just satisfy the investors and show the pro
divested capitalist nature of the government. The
The divestment will provide a better way to government also should take care that the firms
make money for the government. that are in need of fresh capital are adequately
Or is it? served by divesting in these firms and bringing in
fresh capital and fresh management to sort out
Reasons for Divestment the inefficiencies in those firms while it can
If the PSUs are so profitable then why should continue to benefit from the dividends from the
the government go for divestment? There are profit making PSUs. These PSUs are created
various factors involved. Many of the PSU firms with a purpose to create large benefits to the
is in their sectors enjoy a near monopoly or these society. So, a balanced approach towards
firms are heavily subsidized and hence enjoy the maintaining profitability and competitiveness of
benefits that no other private firm can have. the firm as well as the social good to the society
Also, not all PSUs are profit making. There are derived from these PSUs.
many PSUs that are incurring losses. To improve
the efficiency of these firms would require Author (s)
major restructuring (read right sizing) of the
firm which cannot be done under the Praveen Karthick S is a 1 year student
government due to political reasons. But these at IIM Calcutta and can be reached at
can be done under the banner of a public listed
Further, the funds obtained from the divestment References
of these firms can of course be used to finance 1
the current fiscal deficit as any money made out overview.asp
of these loss making PSUs do benefit the 2
government. Also if these PSUs are turned industryinsights.asp
profitable, government can also enjoy the 3
dividend which would then become a win-win articleshow/msid-3967558,prtpage-1.cms
situation. The assumption here is that the 4
revamp of the firm will be carried out smoothly completelist.htm
without the state intervention in the operational
(including labor) matters.

Source - Image: (c) Ron Almog, Creative Commons, Flickr
Campus Thoughts

Weather Derivatives (An Indian Perspective)

Abstract futures and options on futures - the first
products of their kind1.
In today's world, weather is not merely an environmental Just as an option on a commodity has as its
factor, but a major economic factor as well1. Many underlying asset the price of the commodity, a
industries are significantly impacted by the weather weather derivative has as its underlying 'asset', a
directly, and this might have an indirect chain impact on weather measure2. In US, where the market for
other upstream or downstream industries. Hence, a weather derivatives, both the OTC and the
hedging against the risk posed by weather by various standardized CME version, has reached some
businesses whose revenues and profits are impacted by maturity, the underlying measure is usually
variations in weather is a very viable activity. temperature3. Energy companies are primarily
the hedgers in the OTC segment of the market.
Introduction In the exchange traded version, the individual
It is estimated that nearly 20% of the US contracts are calendar-month futures (swap)
economy is directly impacted by the weather, contracts on heating degree days (HDD) and
and that the profitability and revenues of cooling degree days (CDD) .
virtually every other industry – agriculture,
energy, entertainment, construction, travel and A degree-day (DD) has emerged as a common
others – depend on the vagaries of temperature1. measure of temperature, and measures the
Weather insurance did exist earlier, to provide deviation of a day's average temperature from
cover against certain eventualities related to the reference. An HDD occurs when the average
weather. However, this usually covered events temperature is below the reference and a CDD
occurring with low probability, and posing high when the average temperature is above. The
risk, usually resulting in heavy losses (like a futures contracts pay $100 per each point
hurricane). The insurance policies were highly movement in the index. Earth Satellite
tailored, and usually expensive. Moreover, it Corporation, an independent entity, calculates
required a 'demonstration' of the loss, which the indexes ensuring transparency and
might be an uphill task given the strict legal independence in the benchmark1.
covenants, however real the loss might be.
Weather derivatives emerged as an instrument to Indian Context
hedge against the risk posed by low-risk, high- In the Indian context, our economy would be
probability events in weather, which might not dependent on the Rainfall, and not temperature,
lead to a heavy loss in earnings or losses of as in the case of US. Fifty per cent of agriculture
assets, but slight variations in earnings. In 1997 is based on rain-fed irrigation, and monsoons
the first OTC weather derivative trade took determine rural demand patterns4. Thus the
place, and the field of weather risk management industries providing inputs to agriculture, such
was born1. In 1999, the Chicago Mercantile as fertilizers, genetically treated, or normally
Exchange (CME) took weather derivatives a step generated seeds, agricultural tools like tractors,
further and introduced exchange-traded weather combine harvesters, pesticides etc, as well as

industries selling consumer goods to rural over the given period can be evaluated against
markets, the top and bottom line of all would be the average rainfall benchmark, and the contract
impacted by weather patterns. Moreover, there can be settled accordingly.
are urban industries like Airlines, Travel and
Tourism, entities like Shopping Malls, Options: Another alternative can be Introducing
Amusement Parks, Restaurants, or even Large concepts of Wet days or Dry days, similar to the
sporting events like the World Cup or IPL, which HDD and CDD in US markets. These would be
are significantly impacted by rainfall (negatively, calculated as:
in most cases). Hence there is indeed a huge
scope for introducing Rainfall derivatives in Wet Day = max (0, Real Rainfall –
India. Average benchmark Rainfall)

Devising new instruments for India Dry Day = max

As of today, there are no standardized Rainfall (0, Average Benchmark Rainfall – Real Rainfall)
based derivatives traded anywhere in the world.
Hence a major challenge lies in devising and The number of Wet or Dry days would
standardizing such derivatives. accumulate over a period of time. Option
contracts can thus be sold with the WD or DD
The average rainfall in India is about 117cm a indexes as the underlying. Notional Rupee
year, with about 75% of that coming in the amounts will have to be allotted to them, in order
monsoon months of June to September5. From to determine the payoffs.
this data, we can calculate an average rainfall per
day, in the monsoon months (comes to 1 cm or For example consider a WD call option with 100
10 mm per day). Of course, this will come out to Wet Days as the 'Strike', paying Rs 100 per Wet
be different for different parts of the country, day.
and those differences would also have to be
taken into account, but for the sake of simplicity, Payoff = Rs 100 * Max [0 , CDD(actual) –
let us consider this to be the average expected 100(strike)]
rainfall per day.
Combinations of Options or Special types of
Futures: A Rupee value can be assigned to each Options: Collars, Caps etc can be implemented
millimetre of rainfall, and Futures contracts can on Options to make them more appealing to
be traded on an exchange (like CME does), with investors. Combinations of options such as
certain parties which benefit from rain, like Butterfly spread with puts (going long on put at a
agriculture or related industries assuming low price, long on put at a higher price, and short
counter-positions against parties to whom rain is on 2 put options with an intermediate price),
detrimental, like certain urban sectors and Candor spread with calls (Long call at low price,
entities talked about earlier. The futures Short call at higher price, Short another call at an
accounts will be marked to market (in this case, even higher price, and Long a call at the highest
the payoffs made based on the rainfall data of price) etc, might also provide specific returns to
the previous day to the involved parties). investors with specialized needs. I have detailed
one such combination (Straddle) below, which I
Forwards: OTC forward contracts can also feel is ideal for the Indian farmer.
come into play, in which the sum total of rainfall


Campus Thoughts

Straddle, The ideal instrument for the which will receive payoffs when the rains are
Indian farmer: This is the ideal security from between two extremes. These firms can gain
the perspective of an Indian Farmer. A long from selling these straddles to farmers across the
straddle is an option combination strategy where country, as there is almost never a case when the
the investor simultaneously goes long on several entire country has either too heavy, or too low a
a put and a call option with the same strike rainfall in all its parts. Furthermore, to hedge
amount and the same expiration date. This against such an eventuality, the firm can
means a payoff curve like the one in Figure 1. purchase insurance. This is easier than individual
farmers purchasing insurance.
or Loss Another way can be to bundle the short
positions on straddles and sell these positions to
large institutional investors who are themselves
looking for new asset classes not correlated with
existing markets, or who can sell these off to
30 40 50
retail investors seeking to diversify their
Stock Price
at Expiration portfolios with a new security. Once end-users
-S400 determine that weather too is a risk they would
like to actively manage and hedge, there is
unlikely to be a shortage of counterparts4.

Challenges related to Rainfall Derivatives in

Figure 1: Payoff of a Long Straddle6 India
Challenges in Implementation at Grassroots
A straddle limits the loss, but gives the potential level: Penetrating the Indian rural market is a
for unlimited profit in both directions. From the enormous challenge, and requires an well
perspective of a farmer, even too much rain is thought out strategy. The lack of awareness and
detrimental to the crop. Hence, the strike should illiteracy of farmers might be a roadblock, as is
be chosen as to the optimal amount of rain for having such a huge distribution network so as to
the crop. In case of the optimal amount of rain, connect with every individual farmer. A way to
the farmer will have to pay out the maximum do this might be to seek governmental help and
amount, which would be the combined use governmental distribution channels, as this is
premium for both his positions. However, in the a socially beneficial venture for it seeks the
event of a bumper crop, this should not be a betterment of farmers. Another option can be
problem. In the event of slightly heavy or to take the help of NGO's operating in certain
slightly low rainfall, which might not lead to a areas for the implementation of this in those
bumper crop but neither lead to a famine, the areas. The third way would be to interact with a
farmer would have to pay but a lesser amount. In certain educated person, or leader of the village,
case of very heavy or very low rainfall, in which e.g. the Sarpanch, in each village, educate him as
case the crop is significantly affected, the farmer to the pros of these securities which he in turn
would receive payments to the extent of the explains to the villagers and sell securities and
magnitude of the heavy or low rainfall. collect or distribute payments in his particular
village through him.
The short party to these straddles can be a firm,

Challenges in Pricing of Rainfall Options: would have to be devised, and among these, the
A premium for these options would be the Straddle looks the most promising.
payoff for the short party on the options. Black
Scholes model is the most popular model used to Author (s)
price options based on financial variables. Nitin Pahwa is a 1 st year student at
However, it has certain underlying assumptions IIM Calcutta and he can be reached at
that do not hold true for weather derivatives.
The main assumption of Black Scholes model is
that the underlying follows a random walk, with References:
no mean-reversion. This means that the 1.
variability of the underlying increases with time, 2. Weather derivatives: Instruments and
and after a significant amount of time, the Pricing issues. Robert Erickson et al,
underlying can take any value whatsoever. This is Environmental Finance (March 2000)
not true for weather variables like temperature 3. Introduction to Weather derivatives, by
or rainfall, because these almost always assume Geoffrey Considine, Weather Derivatives
values within a certain predictable range and the group, Aquila Energy
variability is not observed to increase with time. 4. Weather derivatives can easily be adapted in
India , by Vivek Mohindra (Article published
However, ways have been devised to price in Financial Express, dated September 27,
temperature based options, and the same can be 1999)
applied to weather derivatives. One such method 5. India's fluctuating rainfall pattern, Article
is Simple option pricing using Expected value, published in Livemint, dated August 18,
which can be calculated by integrating the 2008
probability of occurrence of a certain WD (or 6.
DD) multiplied by the payoff of that WD (or
DD). The problem with this, and other such
models is that they are not standardized as yet.
The Standardized usage of Black Scholes model
across markets was what propelled the growth
of the options markets in the 80's, and till such a
standardized model is available for weather
derivatives, we might not see a rapid growth in
this segment.

Despite the challenges in implementation and
pricing, Rainfall derivatives have a huge potential
for implementation and growth in the Indian
markets, and can be both a socially beneficial as
well as an economically viable venture. New
instruments pertaining to the needs of Indian
investors (mainly from the perspective of the
agricultural sector and its impacted sectors)


Campus Thoughts

Winning in a Low ARPU market:

Lessons from Indian Telecom
Abstract Reason 1: Operating Model Innovation

Despite having significantly lower ARPUs than 1. a Network and IT outsourcing

European and US operators, Indian mobile players Network outsourcing was pioneered in India by
exhibit similar or higher EBITDA margins as compared Bharti Airtel when it outsourced capacity
to their western peers. Indian operators have been able to management of network for 8 circles to Nokia
boost mobile penetration and usage without sacrificing Siemens in 2004. Apart from enabling operators
margins by employing a number of cost-optimization to reduce OPEX and CAPEX out sourcing of
levers such as network and IT outsourcing, infrastructure Network operations provides other benefits like;
sharing, encouraging customers to use self-service and ability to focus on core/important functions like
maintaining low subscriber acquisition and retention customer acquisition and retention, it reduces
costs. Operators in emerging markets can attempt to
operational and organizational complexity for
replicate the Indian model to drive profitable growth,
telecom operators. Post Airtel all Indian
while operators in developed markets can adopt some of
Telecom operators have followed suit and
the initiatives of Indian mobile operators to reduce
outsourced their network operations. Following
CAPEX and OPEX, and improve margins.
outsourcing map displays the scope and extent
Introduction of network operations by 7 lead operators in
The Indian Telecom industry is the 2nd largest
mobile market by the number of subscribers and Estimated reduction in Network Operations
has been growing at a CAGR of 65% since 2001, OPEX due to Network Outsourcing is
with an average of more than 8.5 million approximately 15-20% resulting in Total OPEX
subscribers added per month since June 2006 reduction of 6% as Network Operations forms
and an astonishing 11.90 million mobile approximately 30% of Total OPEX.
subscribers added in April 2009. Moreover, only
IT outsourcing : Indian Telecom Operators
around 400 million of India's population of over
have again partially or completely outsourced
1.1 billion were mobile subscribers in May 2009.
their IT requirements. e.g.: Bharti Airtel
As a result of efforts made by Indian mobile outsourced its complete IT requirements to IBM
operators to drive adoption and usage of mobile in 2004. IT outsourcing provides similar
services, India has very low per minute call advantages as network outsourcing, moreover
charges and ARPUs. Despite such low values for presence of global IT majors and Indian based
revenue drivers, major Indian mobile operators IT majors provides low cost out sourcing
exhibit high EBITDA margins of around 40%. options to Indian telecom players.
This article tries to investigate the drivers which
enable the high profitability of the Indian Since network and IT operations have been
players in this low ARPU environment. commoditized for the telecom operators and
network not being a differentiation factor for

Extent of Network Outsourcing by Indian Opertors
All circles

Reliance Vodafone BSNL Airtel

Partial No of circles

Aircel Tata Indicom

Network Services Outsourced Network Capacity Management Outsourced

Telecom Operators enables them to outsource body of the country. TRAI allows passive
these operations to achieve significant OPEX infrastructure sharing which has enabled Indian
reduction. It provides added advantage of ability operators to work at tower tenancy ratio of 1.4
to focus on sales and marketing which plays a (2008)5, which is expected to go up to 1.7 in the
major role in customer acquisition and retention. next couple of years. At present Infrastructure
1.b Infrastructure Sharing sharing provides a total OPEX reduction close
to 2% for operators.
Infrastructure sharing (passive) helps bring
down network costs per subscriber as it brings Reason 2: Scale effects for operating in India
down the rental costs for Network operators. Wide Network
Moreover, other synergy elements which Sizes of operations provide cost economies and
contribute to savings due to infrastructure better utilization of resources in all categories of
sharing are power & fuel, passive maintenance & operations: Network and IT costs, Sales and
logistics costs. Infrastructure sharing is majorly Marketing costs, Customer Care costs and
affected by regulation position of regulatory Admin costs. Scale of operations in India can be
estimated simply by looking at the number of
BTS a Telecom Operator in India operates
compared to European or Middle East
1 Operators. Bharti Airtel operates close to 65,000
0.5 BTS (2008), Reliance operates close to 45,000
BTS(2008) whereas Telecom operators in
Europe operate close to 10,000 to 17,000 BTS
India Europe
per country where as Telecom operators in
Tower Tenancy Ratio India Vs Europe 5 Middle East operate close to 7,000 to 10,000
BTS per country.


Campus Thoughts

Reason 3: Keeping Low Subscriber paid subscribers to use self-service routines,

Acquisition Cost directly accessible via the customer's mobile
Subscriber Acquisition Cost includes cost handset, for micro recharging transactions,
incurred in connection with acquiring new balance and validity enquiries. Other operators
customers in one period. This is made up of also offer similar self-service facilities, which not
subsidies for handsets, dealer commission, only increase customer convenience but also
subsidies for third party channels, sales aids and help in reducing calls made to customer contact
advertising cost subsidies. centres as well as the sales commission and
The following is a representative set of SACs of distribution costs associated with selling pre-
operators across India, US and Europe. paid recharge vouchers.
The handset subsidies are an unnecessary cost Availability of recharge coupons and recharge
that operators incur only because the operator is through a retailer using easy e-recharge is
another point of contact that operators have
Customer Acquisition Cost leveraged efficiently. Operators have pervaded
retails and the retailer is well versed to educate
Idea T-mobile
Netherlands the customers about tariff plans and standard
SACs T-mobile USA enquiries which substantially reduce the
(USD) Orange Spain enquiries directed to customer service free of
Orange UK charge for the operator.
France Reason 5: Distribution and Sales

doing it, and the SAC becomes unusually high as Indian operators have come with a matchbox
a result. Handset subsidies are a negative element model, where they have started distributing
for developing the market and operators who do telecom services like an FMCG product with a
it find themselves in a prisoner's dilemma: they do it focus on maintaining a lean operating model to
because the competitor is doing it, but actually it keep their costs low. They have built large
is in no one's interest to do it. Hence unless one distribution chains spanning the length and
imposes high termination costs, subsidies to breadth of India by leveraging a large number of
handsets are a major cost component in SAC. third-party distribution outlets to sell SIM-cards
Prepaid cards have advantages for both and recharges which has brought down the
operators and users. For the operator it reduces overall cost of customer servicing.
acquisition costs, avoids billing cost, reduces bad Reason 6: Regulations
debts and permits tapping into new customer
segments. On the other hand, since the average The first order of business for the government
airtime charges are much lower, it will not take in developing a successful national telecom
away intense users. For the user it means policy is to stay out of regulator y
avoiding a rental and better control over implementation and instead set up an
expenses. independent body to carry out regulatory policy.
Reason 4: Savings on Customer Service The government must allow it independence
from political influence by giving it a distinct
Indian mobile operators encourage their pre- legal mandate and appointing regulators for

fixed periods. regulatory efforts, research programs, and
Universal Service Funds for promoting telecom
How India achieved it?
service in rural and less-developed parts of the
The Telecom Regulatory Authority of India country. This would boost innovation by
(TRAI) is functional since January 1997, with a encouraging industry players to reinvest at
mandate to provide an effective regulatory higher rates and bring new players to the market.
framework and adequate safeguards to ensure How India achieved it?
fair competition and protection to consumer
interests. Currently the main role of TRAI is that Unified Access Licensing Regime (UALR)
of an adjudicator and arbitrator, whereas the The establishment of the UALR (2003)
Department of Telecommunications (DOT) eliminated the need for separate licenses for
looks after policy making, licensing and different services. Players are allowed to offer
coordination. both mobile and fixed-line services under a
Second, the government must set policies that single license after paying an additional entry fee.
reduce its degree of ownership in the sector's The UALR signaled the beginning of TRAI's
incumbent players. Curtailing the level of efforts to move towards a 'service and
government ownership leads to an increase in technology neutral' convergence license.
foreign investment and encourages new Reducing Access Deficit Charge (ADC)
entrants. The government must however carry
on working with regulators and industry players ADC makes it essential for the service provider
to create a strong, competitive market. at the caller's end to share a certain percentage of
the revenue earned with the service provider at
How India achieved it? the receiver's end in long distance telephony.
The New Telecom Policy, 1999 (NTP-99) was This actually subsidizes the infrastructure costs
approved on 26th March, 1999 and was effective of a service provider enabling access at receiver's
from 1st April, 1999. NTP-99 laid down a clear end, especially because rental for fixed-line
roadmap for future reforms that contemplated services is low. ADC was reduced, bringing
the opening up of all the segments of the downward pressure on tariffs and was gradually
telecom sector for private sector participation. phased out and completely eliminated by 2008.
The regulatory regime was changed through Calling Party Pays (CPP) Regime, making
significant amendments to the TRAI Act, which mobile service cheaper, fixing low termination
clearly defined the role of the regulator and also charges for mobile coupled with the freedom to
facilitated the setting up of TDSAT (Telecom fix outgoing call charges by the operators thus
Dispute Settlement and Appellate Tribunal) to enhancing competition in the sector.
allow all disputes arising in the telecom sector to Conclusion: It is true that telecom markets have
be settled by this special Tribunal. their unique features and replication is not
Third, the government needs to institute straightforward. The i-mode success of NTT
guidelines for the financial obligations of Docomo has not caught on in Europe. However,
telecom operators, removing payments as it is believed that there are a few key lessons that
royalties some governments still demand from can be looked at by operators.
telecom operators, but maintaining corporate Firstly, the way the Indian telecom market
taxes at levels that will sustain the government's evolved - the handset manufacturer and the


Campus Thoughts

Effect of Regulations on Tariff and Penetration




CPP implemented
ILD services UALR established
open to
80 competition ADC
Reduction of
NTP 99 Licence fees


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Cellular Tariff (INR) 16 16 8 5 4 4 3 2 1 1
Total Subscribers (millions) 0 0 3 5 10 15 35 55 90 145

service providers were decoupled. This has

proved to be of great benefit as most operators Sourav Dutta is a second year PGDM student
do not bundle their offers with subsidized from IIM Bangalore. He holds a Bachelor's
mobile phones. In fact, the few that do so haven't degree in Electronics and Communications
done that great. This results in huge savings in Engineering from Nirma, Ahmedabad and can
the SAC for operators. be reached at
Secondly, increasing infrastructure sharing and Tuhin Chatterjee is a second year PGDM
tower tenancy ratio can help reduce network student from IIM Bangalore. He holds a Dual
costs. Operators in Europe should aim to degree in Chemical Engineering from IIT
achieve higher infrastr ucture sharing. Kharag pur and can be reached at
Additionally, IT outsourcing which is happening
at certain levels in outer geographies can be
taken to next step. References

Back Home, it is also important to mention that 1. Source: Livemint: India's mobile
the dynamics of the Indian playground is bound subscriber base crosses 400 million:
to change with the entry of 4 new operators and Posted: Tue, Jun 2 2009
introduction of 3G. While new operators and 2. As compared to the European Market
MNP regulation signal further pressure on tariff
3. Company press releases and Annual
and costs; new technologies like 3G and
WIMAX indicate boost to data revenues and
stem decline in ARPU. 4. Reliance Equity research report, IBEF &
Merrill Lynch Telecom Global Report
Author (s)
5. Swisscom Definition
Roshan Agarwal is a second year PGDM
student from IIM Bangalore. He holds a 6. Quarter Results and Annual Reports
Bachelor's degree in Mechanical Engineering 7. Economics of Mobile Telecommunication
from IIT Kharagpur and can be reached at

Source - Image: (c) Nagoya, Creative Commons, Flickr
Campus Thoughts

Can MVNOs Survive in India?

(MNOs) and provide services under their own
Abstract brand name (Exhibit 1). Around the world,
India is one of the fastest growing telecom markets in the companies running MVNO operations vary
world with a subscriber base of approximately 350 from mobile operators and retail chains to TV
million in 2008. The market is highly competitive and channels. These companies buy airtime in bulk
this sector is often considered to be the closest to a 'perfect from existing operators and sell it to targeted
competition'. Even though the high competition has customer segments capitalising on factors such
benefited the consumers in terms of declining call tariffs, it as their brand image, loyal customer base or an
has squeezed out the margins of operators; making it very extensive distribution network.
difficult for a new operator to enter the market. In this Indian Mobile Market A Context
scenario, one viable option for an operator is to enter as a
mobile virtual network operator (MVNO). This paper India is one of the fastest growing mobile
examines what are the conditions under which MVNOs markets in the world. For the last 3 years, India
can operate and whether they can compete with the existing has been adding nearly 6 million new subscribers
players in the Indian market. every month and is projected to network i.e. the
mobile spectrum, from traditional mobile
network operators (MNOs) and provide
Business services under their own brand name (Exhibit
Wholesale of
Mobile traffic
Resale traffic
MVNO branded
1). Around the world, companies running
MVNO operations vary from mobile operators
- Network Roll-out - Focus on marketing, sales
activities - Network administration
(infrastructure. spectrum,
and distribution
- Value proposition for the
and retail chains to TV channels. These
numbering etc)
- Other services (Marketing,
final client
companies buy airtime in bulk from existing
CRM, Sales)
operators and sell it to targeted customer
Economics - High CAPEX (-10-15% Sales)
- High fixed costs
- Investments : -2.5% Sales
- Mainly variable costs
segments capitalising on factors such as their
- High EBITDA Margin - Low EBITDA Margin : -10-
(-20-40% Sales) 15% Sales brand image, loyal customer base or an extensive
distribution network.
Rs. Rs.
Cash flow
Indian Mobile Market A Context
t t
India is one of the fastest growing mobile
markets in the world. For the last 3 years, India
Exhibit : Comparison between MNOs and MVNOs has been adding nearly 6 million new subscribers
Source: Research Analysis every month and is projected to grow at a CAGR
23% till FY 2012. In spite of the rapid growth,
What is a MVNO? the penetration of telecom services in India is
close to 37%, indicating that there is still
A MVNO is a type of mobile operator which
potential for expansion.
offers voice and data services without owning
any part of the network infrastructure. MVNOs At present, there are 5 mobile operators which
typically “rent” both the access network and the have a Pan-India coverage (Airtel, Vodafone,
transport network i.e. the mobile spectrum, BSNL, Idea and Reliance) while many others are
from traditional mobile network operators seeking to build a national presence. High

competition between the incumbents over the efficiencies they have the option of either
last few years has resulted in declining mobile growing their subscriber base organically or by
tariffs, and today the call rates in India are selling their airtime on a wholesale basis to a
amongst the lowest in the world. However, the reseller, or a combination of both.
fall in the ARPU has been more than
From the demand-side, launch of MVNOs is
compensated by rapidly growing subscriber base
facilitated in markets where low competition
and the MoUs (minutes of usage), because of
between mobile operators has led to a situation
which the existing companies have been
where the needs of a few customer segments are
exhibiting double digit growth rates. (Exhibit 2)
not fulfilled. This could be due to poorly
Over the last one year, the Department of designed products and services for the
Telecom (DoT) has granted telecom licenses to customers, or a mismatch between the
7 new players which include companies such as individual's lifestyles and the operator's brand
Telenor-Unitech, Swan-Etisalat etc. The Indian image. The underlying reason for this
market is already very competitive and entry of phenomenon is that mobile operators often
new service providers at this point of time raises suffer from the limitations of a 'one size fits all'
questions on their survival. Under this scenario, strategy. Such an approach may lead to higher
the MVNO model presents itself as a probable economies scale and lower costs but it will
option for new operators given that it requires ultimately lead to dissatisfied customers and a
lower capex and allows a faster service roll-out. higher churn rate.
Emergence of MVNOs in a Market MVNO Business Models and Value
The emergence of MVNOs in a market can be
driven by both supply-side and demand-side Exhibit 3 gives the value chain of the various
factors. From the supply-side, the entry of operations carried out by a mobile operator.
MVNOs in a market can be because of existing Depending on what part of the value chain the
operators wanting to partner with MVNOs for MVNOs decide to operate in, they can enter a
market using a variety of models.

504 507 509 512 514 517 At one end, a MVNO could act as a “Pure

482 489
Reseller” where it purchases the airtime in bulk,
RPM 468
rebrands it under its own name and sells the
service through its distribution channel. At the
MoU 422 other end, the player can also operate as a “Pure
MVNO” where it carries out all activities of a
0.50 0.50
mobile value chain except the laying of physical
0.49 0.49 0.49 0.49 0.49 0.49
2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

The decision to adopt a given business model is

Exhibit 2: Mobile Phone Usage Trends in India governed by several factors including the scale
Source: TRAI Quarterly Benchmarking Report
of the business, telecom expertise, investments
required, and the level of risk the MVNO is
commercial reasons. Operators with surplus willing to take. The entry of MVNOs in a market
capacity on their networks have a low capacity also leads to the emergence of third-party
utilisation; in order to increase their operational players which provide services and platforms to
support the MVNOs. Such service providers are


Campus Thoughts

referred to as Mobile Virtual Network Enablers the growth of MVNOs, mainly because retail
or MVNEs. They facilitate the growth of players are well positioned on key dimensions
MVNOs by reducing the complexity of which are necessary for success established
operations and the investment required. brand recognition, a captive customer base
which can be leveraged to reach a critical mass
Depending on the customer segment which they and a wide distribution network which
target, MVNOs can position themselves as maximizes the cross-selling potential of mobile
premium, focused or discount players (Exhibit services). Examples of retail chains running
4). MVNOs around the World Europe, North MVNOs include Tesco, Sainsbury, Carrefour
America and Latin America are the largest and Breizh among others.
markets for MVNO services with a cumulative
subscriber base of 89 million in 2008. The first Case: Development of MVNOs in Europe
commercially successful MVNO was introduced
in the UK in 1999 by Virgin Mobile UK. Europe is the largest market of MVNO services
Targeted at the youth, the service rapidly grew in in the world, with the first MVNO being
popularity and today enjoys a subscriber base of launched as early as 1999. However, within
4 million subscribers. Currently, there are Europe itself different countries are in different
approximately 360 planned and operational. development phases with regard to the
commercial and regulatory aspects governing
MVNOs around the world. MVNOs.
MVNO penetration is lagging behind in Asia- Key Success Factors for MVNOs
Pacific and the Middle East however, they will
offer the highest growth potential over the Experiences from different mobile markets
coming few years. Telecom regulators in many around the world have shown that the success of
of these countries are also in favour of MVNOs MVNOs depends on a number of economic,
for reasons that it improves competition and regulatory, demographic and company-specific
enhances customer experience. factors such as:
?Extent of Competition : Markets with
Retail is one of the most active sectors driving
high competition offer high barriers to

Interconnection Back office

Mobile Data Mobile Pricing & Offer Marketing &
Network service & Customer
Platforms Handsets Development Distribution
& operations Care


MNO Pure

MNO MVNE (Mobile Vittual Network Enabler) MVNO

Exhibit 3: Different MVNO Models
Source: Diamond Consulting – India MVNO Report, Research Analysis

?Distribution Network : As MVNOs
entry because not only are most of the usually compete in niche markets, targeting
segments already covered, but the price- the right customer segment is critical.
cutting also ensures that charging a Therefore it is necessary to have the right
premium from a particular user-group will distribution channels.
be difficult.
Regulatory Constraints for MVNOs in India
?Regulatory Framework : Most countries
across the world do not allow active The rapidly growing Indian telecom market has
infrastructure sharing between MNOs and meant that the regulations in India are evolving
the entry of MVNOs is often disputed to rapidly. However; the DoT still has not clearly
be a case of active sharing. Consequently, laid down the guidelines for the regulation of
clearly laid-down guidelines are necessary MVNOs. The issues which can potentially
for MVNOs to operate. impact MVNOs can be grouped into two
?Brand Strength : The MVNO's existing

Premium Players
Full Optional This is the typical
- Focus on product positioning of the
development and traditional MNOs
- High quality and service
- High investments into
brand (mass advertising) Typically targeted at
youth or regional /
Service differentiation

ethnic community
Focused Players
- Focus on customizing
offer to a specific target
- Innovative tariff portfolio
- Competitive prices for
specific usages
- Targeted Marketing
Typically used by
- Specific content / services supermarkets.
telecom operators
Discount Players
- Focus on price
- Standard services only
These are the (Voice, SMS)
positioning options - Few (one) easy-to-
for the MVNOs understand tariffs
No frills

Premium Price Price differentiation Discount

Exhibit 4: Positioning of MVNOs in a Market

Source: Research Analysis

brand awareness is a key factor w hich can Industry Structure

determine success, especially for well
established brands with international ?FDI Regulations for MVNOs: Indian has
presence. different FDI regulations for each industry.


Campus Thoughts

Given that MVNOs will most likely be 40% is seen as the threshold beyond which the
launched by non-telecom players, existing MNOs are likely to partner with
regulations governing foreign investments MVNOs. Secondly, the markets with low
will require a greater clarity. competition or high degree of consolidation
have also favoured their launch.
?Restrictions on MNOs investing in
MVNOs: If the regulator requires the Exhibit 5 gives the HHI, market penetration and
network operators (i.e. MNOs) to be size for different countries. When benchmarking
separate from the service providers (i.e. the Indian telecom market against other
MVNOs) then it will have to stipulate the countries on these parameters, it can be
maximum equity that the MNOs can hold observed that even though the Indian market
in their partner MVNO. has low penetration and is one of the fastest
growing markets in the world, it may not be
?Tax structure of MVNOs: The current conducive for the entry of MVNOs. This is
tax structure imposes a tax of 17-26% on because of the high degree of competition in
telecom players, which is one of the highest India, which is indicated by the HHI Index of
in the world. Since MVNOs would 1656, and can be categorised as being “highly
essentially be working on thin margins, high competitive” under the guidelines of the
tax rates could prove to a big hurdle towards Competition Commission.
a viable business model.
The biggest testaments to the extent of the
Spectrum and Licensing competition are the continuously falling ARPUs
?Use of USO Fund: The regulator needs to and a tariff structure which is the lowest in the
clarify whether the MVNOs will have world. Another consequence of the high degree
access to the USO Fund to provide service of competition is that with 10 operators
in rural areas. competing to provide services to the same pool
of people, nearly all customer-segments are
?Sharing of Spectrum: MVNOs would already being served. Given the squeezed
benefit if spectrum sharing and trading are margins prevailing in the industry, MVNOs will
allowed as it will give them greater find it very difficult to target a specific customer
flexibility. segment and earn their required rate of return,
Can MVNOs Succeed in India? even though they require lower investments to
roll out their network.
In general, the success of MVNOs in India will
depend upon a combination of factors which Apart from the doubtful financial viability, there
include mobile penetration, extent of are a number of regulatory issues as well, which
competition, evolution of regulations, and the need to be addressed by all the stakeholders
changing needs of the consumer segments. involved before MVNOs can be successful.
Even if the market offers some opportunities
Studies conducted across various mobile for MVNOs, the absence of clearly defined
markets have indicated that the success of regulations will be a significant hurdle for their
MVNOs is largely dependent on market entry. Virgin Mobile, India's first MVNO was
penetration and the extent of competition in the launched last year and this is too short a time to
market. In telecom markets, a penetration of gauge whether the Indian market is ripe for the
entry of other MVNOs. Only time will tell if
MVNOs will be able to compete in India's 'dog-

eat-dog' mobile market, although casualties can
be expected. india-awaits-mvnos-but-market-will-be-judge
(Last accessed on 12 July 2009)


HHI Index

France Russia

3000 Pakistan Italy

India US
Brazil UK


0% 50% 100% 150% 200%
Mobile Penetration
Exhibit : HHI Index and Mobile Penetration for Selected Countries (2008)
Source: EIU

4 Prasad, Swati, “Foreign Telcos to enter India

Author (s) through MVNO route”, March 2009,
Kabeer Chawla is a 2nd year PGP student at IIM s/0,39044192,62053749,00.htm (Last accessed on
Ahmedabad. He holds a Bachelors degree in 12 July 2009)
Polymer Science and Chemical Technology 5 NA, “ Recommendations on Mobile Virtual
from Delhi College of Engineering and can be Network Operator” , April 2009,
reached at
n.3636.html (last accessed on 12 July 2009)
References 6 Prasad, Swati, “Can MVNOs bailout India's small
1 Rao, Malovika, “MVNO A profitable strategy”, players”, May 2009,
March 2007, s/0,39044192,62041295,00.htm (Last accessed on
ldbook07/107031228.asp, (Last accessed on July 12 July 2009)
12 2009) 7 Mysore, Mathew, Nair, “Is the Indian market
2 NA, “MVNO Services in India”, August 2007, ready to go virtual for mobile”, 2006, (Last
accessed on 12 July 2009) Os_Diamond.pdf (Last accessed on 12 July 2009)

3 Garland, Chris, “India awaits MVNOs”, March



Campus Thoughts

Medical Tourism – Healing Abroad

Abstract Internet. It has provided the health care
institutions in India and the rest of the
The economic recession has provided Indian Medical developing world with a credible platform to
Tourism industry with a golden opportunity. Job cuts and demonstrate the efficiency, quality and cost
reduction of employee healthcare benefits have forced saving of this option.
Westerners to explore affordable alternatives for good
quality healthcare. More than 2.9 million patients visited India,
Singapore, Thailand, Malaysia and the
India is well-placed to take advantage of this as it already Philippines for medical tourism in 2007 and the
has several good private hospitals and skilled manpower. Asian medical tourism industry is expected to
It is highly competitive on costs and is marketing itself grow at a CAGR of 17.6% between 2007 and
aggressively as a healthcare destination. However, it needs 2012 (Asian Medical Tourism Analysis (2008-
to develop its public infrastructure and tourism industry, 2012) 2008)
as well as shed the tag of being a third-world nation in
order to capture a significant portion of the global medical With its pristine natural beauty and incredible
tourism market. bio-diversity India has always been one of the
most favorable tourist locations in the world.
Medical Tourism Now with world-class facilities like AIIMS,
“Sunshine, sea, sand, surgery a brilliant Apollo Group, Escorts Hospitals in New Delhi
combination which enticed me to come to and Jaslok Hospitals in Mumbai to name a few,
Chennai for my knee replacement surgery” medical tourism is booming in India.

- Jacqueline J., British Citizen The recent move by the Tourism Ministry to
extend Market Development Assistance to Joint
This is a trend that is growing with each passing Commission International (JCI) certified
day in the developed world and has resulted in hospitals shows that the government is putting
the flourishing of a new industry Medical its weight behind the industry (Thukral 2009).
Tourism. Medical tourism refers to the act of Various state tourism boards and even the
traveling to another country to seek specialized private sector consisting of travel agents, tour
or economical health care, well being and operators, hotel companies etc. are eying
recuperation, of acceptable quality with the help medical tourism as a segment with tremendous
of a support system (Deloitte 2008). potential for future growth.
Most of the traffic is directed from the Effect of recession on the sector
developed world to the developing countries.
High costs and long wait times in health care Owing to recession, companies are looking to
institutions, the ease and affordability of reduce employee healthcare benefits or
international travel and improvements in eliminate them altogether (Maltby 2008).
standard of health care in many developing Struggling insurance majors such as the AIG
countries are the key factors driving this Group have been forced to increase deductibles
industry. Another factor which has helped on health insurance plans (Andrews 2008).
expedite growth is the penetration of the Already, cosmetic and dental surgeries are not

covered in health benefits. These factors make hip replacement surgery and Cyberknife robotic
surgery and subsequent recuperation abroad an Radio surgery (Apollo Hospitals 2009).
attractive option for people.
Accreditation: To allay the medical tourists'
In the US, as the share of government spending concern for quality, Indian hospitals are
on healthcare decreases and the fiscal gap investing huge sums of money (approximately
widens, people are becoming increasingly $40,000 per hospital per year) to get themselves
apprehensive about the ability of the American accredited by international bodies like JCI.
healthcare system to provide adequate care. This These accreditations have put these hospitals on
has created a gap for some firms to exploit. world map as centres of excellence in healthcare.
Insurance companies are increasingly coming up Also, accreditation is important because only
with plans which encourage medical tourism. patients treated in accredited hospitals are
From January 2009, Well Point, the second- eligible to claim refunds under some insurance
largest American health insurer, will offer schemes.
employees of Serigraph Inc. the option of
traveling to India for non-emergency While Apollo has got JCI accreditation for 6 of
procedures (Meehan 2009). Other companies its hospitals (Apollo Hospitals 2009), Wockhardt
such as North Carolina-based IndUShealth act has got itself registered as an associate hospital
as facilitators for US medical tourists. of Harvard Medical International (Wockhardt
India is well poised to take advantage of this
situation and to act as a destination of choice. Inter national Collaborations: Indian
With the gradual opening up of the Indian Healthcare providers have entered into strategic
economy, private hospital chains such as Fortis alliances with overseas insurance companies and
Healthcare (14 hospitals), Max Hospital (8 referral agencies. An example of one such deal is
hospitals), Wockhardt Healthcare (12 hospitals) the Wockhardt-IndUShealth deal. IndUShealth
and Apollo Hospitals (43 hospitals) have jumped acts as a link between companies trying to save
into the fray and are aggressively wooing medical up on medical costs and Wockhardt chain of
tourists. hospitals in India (Wockhardt 2009). Similarly,
Apollo Hospitals have tied up with Well-Point, a
Steps taken by Indian Hospitals US based insurance company. This deal helps
keep costs low for Well-Point and assures a
Expansion: Indian hospitals are expanding constant revenue stream for Apollo Hospitals.
rapidly to meet the increasing demand. Apollo Apollo has similar alliances with AIG, GMC
Hospitals has finalised plans to increase its services, Emergency Services (Japan) etc. Fortis
capacity by 2000 beds by investing Rs 1500 has also, recently, entered into similar
crores (Business Standard 2009). Fortis agreements with Aenta, BUPA, and CIGNA.
Healthcare has ventured into a “medi-city” in
Gurgaon, expected to be operational by 2010 Indian chains are also tying-up with American
(Business Standard 2009). hospitals, which often turn away uninsured
patients (currently the primary focus of Indian
Hospitals are also investing in capability marketing efforts), and refer them to their
expansion - hiring and training better talent and Indian counterparts. (Narayanan, 2008).
acquiring new facilities. Over the past one year,
Apollo Hospitals has developed capabilities to End-to-end services: In order to attract
conduct complex procedures like Birmingham medical tourists, Indian hospitals now provide a


Campus Thoughts

one stop solution to their international visitors. donation, which may lead to public outrage and
Fortis for example, provides services like subsequent government regulation of the
airport pickup, visa assistance, cost estimation, industry. Often, the hapless victims, such as
hotel bookings, sight-seeing, foreign exchange those in the recent kidney scam (IANS 2008),
and insurance (Fortis Healthcare 2009). have little or no awareness of the risks involved
in organ donation, and are forced to undergo
Marketing initiatives: Indian hospitals are now complex surgery in highly unsanitary and
marketing themselves much more aggressively. dangerous conditions.
Aesthetically designed websites provide
information regarding facilities, doctors etc. The Ethical Dilemma
They also contain testimonials from other
patients regarding quality of healthcare and Medical tourism also raises the broader ethical
hospitality. Also, Indian hospitals regularly dilemma of whether Indian doctors, who are
advertise on blogs, websites and YouTube already hard-pressed to treat the country's sick,
(Apollo Hospitals 2009, Fortis Healthcare should spend their time treating higher-paying
foreign patients who often jump the queue.
However, there is another side to this argument,
In addition to the online campaigns companies and there are studies which say that the
are also investing in PR initiatives. For example, secondary effects of medical tourism are
Apollo Hospitals recently sponsored an event positive for domestic seekers of medical care.
for benefit managers in New York where they Enhanced prestige and international repute
outlined cost advantages of having an employee (which enable hospitals to tap more sources of
healthcare outsourced to India (Narayanan funding), as well as increased revenue from
2008). foreign patients means that hospitals can invest
in better infrastructure and offer better salaries
Challenges for India that attract more expatriate doctors back home.
However, not everything is as rosy as it seems, However, another deterrent to foreign medical
and India has some challenges it needs to tourists is the absence of adequate legal
address before it can become a global remedies and a culture of litigation in India, as
powerhouse in medical tourism. For instance, it opposed to the US. Therefore, lawsuits for
has to shed the age-old third-world nation tag. medical malpractice in India often take far
India's vast slums and open sewers raise doubts longer to get resolved, if they are resolved at all,
about the level of public sanitation and hygiene as compared to those in American courts. Even
in the country, which serve as a deterrent to successful litigants are often awarded only token
many foreigners (Marcelo 2003). Moreover, the damages by courts. Perhaps the most significant
challenge that India faces is increased
recent Mumbai terror attacks in which
competition from other countries such as
foreigners were singled out will perhaps achieve
Thailand, Singapore, Spain and Brazil (Waddock
exactly what it set out to do hurt India's
and Richardson 2007).While Singapore has a
economy by reducing tourist and medical tourist
significantly better infrastructure and public
inflow. Already, the US State Department and
health system, Thailand has the advantage of
the governments of several other countries have
being perceived as a more exotic tourist
expressed serious concerns about the safety of
destination than India. These factors offset
their citizens in India. The growing market for
slightly higher prices than those in India. Brazil is
medical tourism also translates into a potentially
well-placed because of its proximity to the US,
large illegal market for tissue and organ

while Spain, although significantly higher priced References
than India, has the advantages of being a
developed country and having a medical care 1. Andrews, M, September 25, 2008, "Surprise!
system of repute, while still providing healthcare premiums are up again", U.S. News,
at lower prices than in the US (Connell 2006).
Conclusion (accessed July 16, 2009).
In conclusion, we would like to say that the 2. Apollo Hospitals, 2009,
global recession offers a tremendous
opportunity to the Indian medical tourism (accessed July 16, 2009).
industry. It already has hospitals in place and is
competitive on cost with most other countries. It 3. Asian Medical Tourism Analysis (2008-
needs to counter its image as a third-world 2012), Bharat book Bureau, 2008.
nation with aggressive marketing through 4. Business Standard, "Apollo Hospitals
foreign media channels, perhaps even leveraging achieves Rs 1.5K cr financial closure for
the Indian Diaspora abroad. Also, since reports expansion", June 30, 2009,
indicate that most medical tourism in the future
will be undertaken only to obtain quality
healthcare abroad, India needs to invest even o=362500 (accessed July 16, 2009).
more heavily in developing its infrastructure.
Infrastructural development needs to take place 5. Business Standard, "First Phase of Fortis
not only in the medical sector but also in sectors Medicity to be operational by 2010”, July
such as tourism, which can enjoy the fringe 14, 2009,
benefits of medical tourism. What is especially
encouraging is that the Indian government has phasefortis-medicity-to-be-operational-by-
made positive policy moves to promote medical 2010/363874/ (accessed July 16, 2009).
tourism. We believe that the Indian medical
tourism industry has strong fundamentals in 6. Connell, James, "Medical Tourism: Sea,
place and an encouraging future. sun, sand and surgery”, Tourism
Management, 2006: 1093-1100.
Author (s)
7. Deloitte, "Medical Tourism- Consumers in
Deepti Gunjikar is a PGP2 student at IIM Search of value”, August 2008,
Ahmedabad. She holds a B.E. degree in
Electronics from Mumbai University and can be ntent/us_chs_MedicalTourismStudy(1).pd
reached at f (accessed July 16, 2009).
Gourav Bhattacharya is a PGP2 student at IIM & others
Ahmedabad. He holds a B.Tech in Metallurgial
Engineering from IIT Bombay and can be
reached at
Himanshu Sharma is a PGP2 student at IIM
Ahmedabad. He holds a B.Tech/M.Tech Dual
degree in Biotechnology and biochemical
engineering from IIT Kharagpur and can be
reachd at


Campus Thoughts

Mobile Technology Wars A New Look

Abstract works on time sharing basis on multiple narrow
channels, whereas CDMA works on a special
The US market is predominantly CDMA, whereas the type of randomized digital modulation which is
European markets follow the GSM technology. India, spread over a wide channel. An apt analogy in
the second largest mobile market in the world, follows a Wikipedia makes the concept behind the two
mix of CDMA and GSM. Right from its launch, technologies clear without using any technical
experts have commented that CDMA cannot survive in a jargons. Imagine a cocktail party, where couples
market such as India. However, it has now crossed 100 are talking to each other in a single room. The
million subscribers. But, CDMA operators are now room represents the available bandwidth. In
beginning to setup GSM networks. What is the future for GSM, a speaker takes turns talking to a listener.
the two technologies? The speaker talks for a short time and then stops
Introduction to let another pair talk. There is never more than
one speaker talking in the room, no one has to
CDMA was launched in India in December worry about two conversations mixing. In
2002. Few years after its launch, industry experts CDMA, any speaker can talk at any time;
were of the opinion that CDMA may not be the however each uses a different language. Each
right mobile technology for India. But today, listener can only understand the language of
CDMA's subscriber base has crossed a their partner. As more and more couples talk, the
phenomenal mark of 100 million users and background noise (representing the noise floor)
currently this number stands at nearly one-third gets louder, but because of the difference in
of the total subscriber base of India. Also, new languages, conversations do not mix. To
entrants into the mobile space, like MTS are understand more about these technologies, let's
relying on CDMA technology to reach their do a comparison on a few basic parameters as
customers. If CDMA is doomed to die, then depicted in a Table 1.
how is its subscriber base growing at such a
break-neck speed? Why are new operators still Indian Story: GSM vs CDMA
relying on CDMA technology? On the other India's mobile story is predominantly a GSM
hand, GSM is not lagging behind. India's largest story, with around two-thirds of the population
GSM operator, Airtel, crossed its 100 million owing a connection provided by a GSM
subscriber mark recently. So, which of these will operator. The country's leading mobile
be the technology of tomorrow? Will one win operators Bharti Airtel and Vodafone operate
over the other? Let us analyse further to answer pure GSM networks.
these questions and predict what is at stake for us
in the future. The leading CDMA operators are Reliance
Communication (RCom) and Tata Teleservices.
Understanding the technologies
CDMA operators have historically experienced
GSM (Global System for Mobile lower ARPU's (Average Revenue per User) than
communications) and CDMA (Code Division the GSM operators, as shown in figure 1. While
Multiple Access) are the two popular the ARPU's have been declining for the industry
technologies in mobile communication. GSM



Generation 2G 2G

Year of birth 1991 1995

Global market 72% 12%

share Presence
n in all countries Presence
n in US, Asia Pacific, Russia, Latin America

n international roaming International
n roaming is limited
- US, India and China are the major CDMA hubs

Spectrum Less efficient More efficient

n spectrum can support up to 80 simultaneous calls 1Mhz
n spectrum can support up to 288 simultaneous calls

Cell Size Suited for smaller cells as against larger ones Suited for larger cells as against smaller ones

n cells can operate on different base All cells
n operate at same frequency. Hence, adjacent
frequencies, hence cell size can be very small in the cells must have a minimum distance of 500 meters
order of few hundreds of meters
n at 800MHz (in India). Hence, attenuation is low
n in 900/1800Mhz ranges (in India). High due to relatively low base frequency, and also low
frequency leads to high attenuation and 35 km is the transmitter power encourages larger cell size
hard limit

Handset Flexible Rigid

n interoperability is easy since the SIM card in Handset
n interoperability is not possible since it is operator
unlocked locked

n life is better because of simple protocol Battery
n life is bad because of higher demands of CDMA
power control

Governing bodies ITU and few major operators CDG (CDMA Development Group) & Qualcomm

ARPU - CDMA discounts and the unbelievable number of free

350 180%
minutes offered by certain CDMA operators
Subscriber Growth - CDMA
300 Subscriber Growth - GSM
such as Reliance.
Telecom : Circle-wise analysis
Subscriber Growth
ARPU (Rs / month)


200 100% Metro circle consist of the metro cities – Delhi,

150 80% Mumbai, Chennai and Kolkata. These are some
60% of the most competitive markets in India, with
40% Delhi having in excess of 100% mobile
penetration. Mobile Circle A consists of
Maharashtra, Gujarat, Andhra Pradesh,
Jan-07 Jan-08 Jan-09
Karnataka and Tamil Nadu. Circle B consists of
Kerala, Punjab, Haryana, Uttar Pradesh (East
Figure 1 – Comparison of CDMA and and West), Rajasthan, Madhya Pradesh and West
GSM technologies – Subscribers and ARPU Bengal and Andaman and Nicobar Islands.
Circle C consists of Himachal Pradesh, Bihar,
over the past few years due to increasing focus Orissa, Assam, Jammu and Kashmir and the
on tapping the rural markets, those of the North East. The A and B circles are the fastest
CDMA players have been declining at a faster growing in terms of mobile subscribers,
clip. Industry experts attribute this to the huge growing at over 3% month-on-month.


Campus Thoughts

GSM Metro Circle pockets of the large Indian middle class, they
275 had to shift their focus to the urban centres,
GSM Circle A
where the GSM players already had a strong-
GSM Circle B
225 GSM Circle C hold. The advantage that GSM offered to the
ARPU (Rs. / month)

consumers was that the phone was not bundled

175 with the connection and hence, it provides the
consumer the dual convenience of switching
CDMA Metro Circle CDMA Circle C operators at their choice as well as purchasing
CDMA Circle A the mobile phone they want. Reliance has
CDMA Circle B
recently begun offering GSM services, primarily
30.00% 40.00% 50.00% 60.00% 70.00% aimed at attracting existing Airtel and Vodafone
users. While, this may be seen by some as a sign
Figure 2 – Comparison of CDMA and GSM that CDMA has poor chances of survival in the
statistics across different circles long run, it is also worthwhile to note that many
of the new entrants in the market such as MTS
have chosen to go for CDMA networks.
GSM Circle A and Circle B have the largest
subscriber base of around 100 million people New entrants
each. The remaining 150 million of India's
subscribers may be found in the other circles. For a new entrant, in this highly competitive
GSM Metro segment displays the lowest market, launching a GSM network is relatively
subscriber growth, due to the high current easy, due to the possibility of sharing existing
penetration. It, however, has the highest ARPU networks. Shared infrastructure operators such
with GPRS and value added services being as Indus Towers make this sharing of towers
commonly used. Circle B and Circle C are rapidly feasible for the new comers. However, the fact
growing in subscriber strength. This is because that MTS has chosen to go with CDMA has
of the rapid development of these states and the suggested that there is still some hope left. In
increasing per-capita incomes. For CDMA, order to draw subscribers away from the bigger
ARPU's are relatively consistent across circles players, MTS is offering innovative low-cost
because of the low fares offered to all by players schemes where customers are able to make Local
like Reliance. and STD calls at just 35 paisa to anywhere in
India on the MTS network.
The CDMA operators bundle the handset along
with the connection and are able to offer them at Suppliers
highly subsidized prices. It is for this reason that When it comes to handsets, CDMA operators
CDMA has taken off in a big way in rural areas,
rule the roost in terms of price differential. The
where price is the primary driver of purchase.
According to the CDMA Development Group, average cost of CDMA handset is less than Rs
the industry group that promotes CDMA 1,500 whereas the average cost of a GSM phone
technology, acquiring a CDMA subscriber has is Rs 4,355. Even the CDMA entry-level phone
become almost Rs 1,000 to Rs 1,400 cheaper costs $8-10 cheaper than a GSM phone.
than a GSM subscriber. Customer gross adds is
Recently, Chinese and Taiwanese CDMA phone
also supported by Reliance's aggressive selling
strategies and efficient distribution networks. manufacturers like ZTE, Huawei, CalComp,
However, though the market is extremely large, PanTech, Kyocera and Kinto have entered
the willingness to pay is low. To tap into the Indian market with their low price tags driving

the prices further down. For example, Reliance Conclusion
Communication starts its offering with a Telecom as an industry has been through a rapid
bundled offering at Rs 777. The CDMA growth phase in the past few years and there is
operators have taken advantage of the low-cost no doubt that it will continue to grow in the
manufacturers in reaching out to rural areas with future. When it comes to the future of the two
an ultra-thin price tag, a perfect serving that rural prevalent technologies, it becomes evident from
our analysis that both GSM and CDMA will
India always wanted in its plate.
have their share of the cake and neither of them
Distribution is going to lose out on the race. The difference is
going to come in the portion of the cake which
CDMA operators have established an advantage each one of them is going to devour. GSM will
when it comes to hassle-free delivery of service scrape through the top creamy layer of the urban
in acquiring and sustaining customers in rural markets and CDMA will have the bulky bread
areas. For example, RCom sells its mobile portion of rural markets for its part.
connections, handsets, fixed wireless phones Author (s)
and data cards in villages through any kind of nd
Arun Manohar is a 2 year PGP student at IIM
outlet like a tailor shop, a grocery or fertilizer or Bangalore. He holds a Bachelors degree in
seed seller. Although, GSM operators too have Electrical Engineering from Indian Institute of
tie-ups with small outlets in providing mobile Technology (IIT) Madras and can be reached at
connections, they don't offer the bundled
package. A villager will always look for an option Prasad Gopal is a 2 year PGP student at IIM
that will meet his need in a one-stop service Bangalore. He holds a Bachelors degree in
location which simplifies the process of buying a Electronics and Communication Engineering
f r o m P S G C o l l e g e o f Te c h n o l o g y,
handset and a phone connection at the same Coimbatore and can be reached at
point. Also, he/she doesn't have the technical
know-how to choose the handset by features,
and his choice is usually determined by lowest
price offering. So, in terms of distribution References
mechanism and price point CDMA is a perfect 1. Joshi, Priyanka, “CDMA handsets to
fit for delivering mobile service to rural dominate entry level market”, Rediff News,
community. On the other hand, GSM scores Jun 2007,
2007/jun/11cdma.htm (Last accessed on:
over CDMA when it comes to urban audience Jul 18, 2009)
who are looking for variety and features in
2. Anurag Prasad, 2007, “A call from the
selecting handsets of their choice. Urban
bottom”, Outlook Business, Nov 2007,
customers are not averse to buying handset and
phone connection at different outlets. In fact, px?articleid=596&subcatgid=470&edition
they prefer that way, because the phone is not id=21&catgid=29 (Last accessed on: July
18, 2009)
only a communicating medium it is also a status
symbol and an entertainment device. & others