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Changing DNA

Nikhil Vora / Swati Nangalia / Varun Kejriwal
(M ) +91 –9821132471/9820774251 / 9004291117 (Dir) +91-22-6622 2567 / 2576 / 2685 nikhil.vora@idfc.com / swati.nangalia@idfc.com / varun.kejriwal@idfc.com

Over the last five

decades, only 60

companies have consistently appeared in the
Fortune 500 list !!!

Ever wondered why?
2

What led to the so many flip overs...
Yahoo, the inventor of search engines and the largest player of late 1990s… With market cap on par with Google in 2004…
…is today 1/10th the value of Google!

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

Nokia, world’s largest electronic equipment provider and with profits 14x that of Apple in 2004…

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

3

…and the greatest creations being ‘lost’ today?
Xerox,
among the largest ‘brands’ created which actually got translated into a verb (photocopy = Xerox!)…

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

Polaroid, the innovation that makes the name synonymous to instant
photography, and a US$3bn company in 1990s…
…filed for bankruptcy!

Intel, the heart of machines, with 80% of world computers
…has seen 50% erosion in its value since 2003!

running on it…

4

you will fail if you don't realize that longevity requires you to change the Success Formula…or your DNA!!! 5 .When markets shift.

The organization’s DNA needs to be “ALIVE”! In its lifecycle. each organization needs to go through a change in its DNA…in order to WIN or even survive! Adapt Learn Innovate Vision Execute Changing with time and trends Accept failures and recoup success Ability to fuel “new” growth Ability to foresee the long-term prospects Translating vision into success 6 .

? Innovate 7 .

" 8 .The ‘struggle’ of Unilever… Statement from Unilever CEO – Paul Polman "We have lost the connection with the world top. If we want to grow consistently the next five years and again want to become one of the bigger companies. we have to change the culture.

650 1.2010 h ra l rea c ea se ru r s! Incr 2y n by 3x i Distri b utio n /R each No successful launches Bigge st s tr e ngth HUL NOVA TION ≠ Failur Innovation in ‘vain’! es (%) 2.Danone Unilever Reg BAT Rec kitt Colgate (I) Benckiser ITC Nestle (I) Dabur Marico GCPL 9 .100 550 HUL – the worst performing consumer stock globally in the last decade 0 HUL Peps i ColgateCoc a-ColaL'Oreal (US) P & G Nes tle Sa.200 1.2000 2000 .…’magnified’ in its Indian counterpart! Fo cu s on ma no t c ss…and lass! “Ov er p l a y” stren gth L ack o f IN Focus on “share of wallets” rather than “larger share of a wallet” 1990 .

? Execute 10 .

168 Mkt cap (US$ m) Los t 90 % of it sv alu e! 839 265 FY1995 FY1997 FY1999 FY2000 11 .157 2. Buy the shaving kit (camera) & replace razors (or film) as you go. annual report 1980 In 1989. Innovation ‘Do not undertake the program unless the goal is manifestly important and its achievement nearly impossible.’ .Edwin Land.9 megapixel in 1989 But it was never prepared in terms of marketing and business models 2. 40%+ of R&D budget spent on exploring digital imaging techno logies! Lacked execution Polaroid was well prepared technologically for the shift to digital imaging It even had a sensor of 1. Do not do anything that anyone else can do readily.Polaroid – no reason to ‘smile’! Vision Business model Something akin to selling razor blades.

Xerox – failed in ‘copying’ its brand! Vision I knew I had a very big tiger by the tail." – Chester Carlson. Founder of Xerox Created the “Xerox” brand What would a company with a strong brand like Xerox and revenues of US$1bn (in 1961) do? Move into brand extensions and innovate? • Moved into to computer technology and data processing • Fax Machine • Technology based office products Xerox did exactly that… Innovation Lacked execution Mkt cap (US$ bn) Xerox is today remembered only as a photocopier! Brand extensions failed and Xerox failed to create scale 38.1 1998 12 2010 .8 60% erosion 16.

? Adapt 13 .

Charles Darwin 14 .“It is not the strongest of the species that survives. It is the one that is the most adaptable to change!” . nor the most intelligent that survives.

The ‘King Canute’ philosophy! ‘Adaptability’ has been THE MOST important DNA change required within an organization… Key issues with successful companies Obsession with core My core business is my identity and will always remain my focus! Arrogance “I am the largest and no competitor can get close!” Complacency “My products will always sell!” Inability to identify the “Changing trends”! 15 .

!” .Charlie Bell 16 .and that is us as a company becoming complacent. dumb and happy and take their eye off the ball and forget about serving customers.Dr. There are a lot of companies that get fat. Spencer Johnson “The biggest threat to McDonald's lies within .“Get out of your comfort can become extinct!” zone… if you do not change you .

Nokia – the biggest innovators of its time… Nokia Vision & Innovation Nokia 1011 1992 First satellite call 1994 First WAP handset 1994 3G phone 2002 N series Multimedia 2005 Execution World’s largest mobile and camera company! Nokia sells 452m mobile handsets a year and Apple ‘just’ 40m… Revenues (US$ bn) Nokia Apple 65 56 Mkt Cap (US$ bn) Then why the disconnect? 268 28 76 6 5 38 FY02 FY10 FY02 FY10 17 .

Steve Jobs."You can't just ask customers what they want and then try to give that to them. founder of Apple 18 . they'll want something new!” . By the time you get it built.

tablet maker. smartphone provider & Adapting! Struggling to remain a relevant computer vendor Launch of iPhone the most valuable tech co in the world Nokia 1011 Failed to adapt to the changing consumer needs! N series Multimedia Nokia’s first touch screen phone July 2008 Nokia Apple 59% 400% 1992 to 2005 in last 5yrs 19 . Faster operations 1990 2001 Jan 2007 2010 2011 Largest music vendor.…is losing the “connection”? Changing consumer: Design consciousness.

. is the originator and the largest search engine of 1990s… …then why do we all only remember Google today? Dominant search engine of 1990s A R R O G A N C E Search only an ‘accessory’! The advertiser is the customer…not search engine users! 20 ..Yahoo!.the inventor of search… Yahoo.

Orkut. & Google + …and the results are apparent! Market cap (US$ bn) Yahoo Google x 53 22 1x 52 FY04 21 10 FY11 191 . Youtube. Android.…is now being googled out! Customer comes first and “simplicity” is key Yahoo ‘succumbs’ to Google! Responsive to change Launch of products like Gmail. Google maps.

? Learn 22 .

IBM – a classic case of ‘revival’ DNA! Revenues Profits 6 65 P AT Mkt cap IBM 40% IBM 70% 1990 5x size of rival but growing at 6%! “Everyone is too comfortable at a time when the business is in crisis” – CEO in 1990 • Cut 125.75bn in 2004 Today 15 180 Figures in US$bn 23 .000 jobs and US$28bn in charges • 27% of revenues from services -8 1993 32 “Dangerous mix of arrogance and complacency” More than 400 strategic planners within IBM !!! • 60% of revenues from services 2001 8 83 “Adapted” to change Sold PC business to Lenovo for US$1.

E.V.But does it suffice for the ‘organizational’ DNA to be A.??? May be not!!! 24 .L.I.

8bn Subhash Chandra US$4.etc Largest media conglomerate Created commodity markets and new age exchange businesses Pioneered wind energy in the country to become World No.7bn Exchanges Renewable Energy Jignesh Shah US$3bn Tulsi Tanti US$12.3bn *peak market cap 25 .‘Mavericks’ create businesses… Innovation in businesses… Shantanu Prakash Revolutionized the ‘private’ educatio n sector …& creating VALUE! US$2bn Education Retail Kishore Biyani Spearheaded ‘organized Retail’ in the country Biggest innovator in the Media space – broadcasting/DTH.5bn Media Raghav Bahl US$2.3 US$2.

048 Today 112.…and at times “kill” it too! Success led to ‘contextual’ arrogance? Learnt the ‘rules of the game’ of private education…and how to ‘play’! Undermined the need for corporate governance in the ‘regulated’ private edu space 30-Sep-09 Today 18..873 79% Largest retail industry ‘brand’ & hope of FDI to result into eventual sale to a global strategic investor Undermined the need to build a strong back-end 31-Dec-07 Today 64. distribution.225 579.for MCX-SX 30-Jun-07 Today 35.665 132..852 85% .377 67% Took on the regulator – SEBI!.976 45% Created marquee properties across genres and assume d they will always have takers (easy access to capital) Established the la rgest Exchange network.131 49% Biggest “innovator” in media – across broadcasting. etc Underinvested in core business. 26 31-Dec-07 Today 85.862 73% Became World No.842 Result (Mkt Cap Rs m) 88.1bn in 3 yrs of ops) 30-Sep-09 Today 39.608 119. unwilling to look at the changing face of competition Growth hungry promoters… but also capital starved… Cash flows never a focus. with MCX being the biggest success (valued at US$1. 31-Dec-99 204.3 in wind energy Too much too soon…Reckless expansion. in retrospect.052 125.

000 ‘Result’ Jain Irrigation Jain Irrigation Classical Case of everything Classical Case of everything wrong ––Diversification.But. Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11 (Rs m) 500000 375000 250000 125000 Bajaj Auto Became the game changer in the space….000 360. Overwrong Diversification.000 180. declining market (scooters).000 25. Overleverage and non-performance leverage and non-performance (1992.000 0 Jun-93 Dec-08 Jun-09 Dec -09 Nestle Jun-10 Dec -10 Jun-11 Belief in the fact that it was under delivering on own capabilities. Struggling (mgt) internals and an Struggling (mgt) internals and an aggressive external environment aggressive external environment Nestle Th eeunderlying core of the Th underlying core of the organisation was ––to beat Indian organisation was to beat Indian GDP growth! (until 2003) GDP growth! (until 2003) C H A N G E 50.2002) (1992.Innovated and let go of an hitherto successful DNA! 0 Jun-08 (Rs m) 450.000 270.000 90.000 Bajaj Auto Catered to the consumer of Catered to the consumer of yesterday…a mass player in aa yesterday…a mass player in declining market (scooters). Re-aligned internal targets .000 0 Jun-93 The biggest success story of the past 10 years…Stayed committed to the core. Growth now at 3x GDP Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11 27 .2002) 75. potential for “change” in DNA remains! The loss (Rs m) 100.

`Mavericks’ can recreate SUCCESS… ss ce uc S r Ar og e nc a Need to emulate… to Recreate g in ng ha NA C D l fu n n ai itio P s n ra t .

but key players are not premium.a threat to brick-nmortar distributors! Intermediary businesses No brownie points for intermediaries…yields to squeeze! Energy Renewable energy is the inevitable savior! 29 . but key players are not Media – access to content Media – access to content Newer avenues of viewership to Newer avenues of viewership to take over traditional TV viewing take over traditional TV viewing Print media Print media India to map the structural change India to map the structural change underway globally underway globally Spaces that demand a DNA change Distribution Online wave .Consumerization Consumerization Industry is moving towards Industry is moving towards premium.

World No. is most profitable Indian liquor company ““India to rank among our top 3 markets (in value terms) along with the US and China as rising incomes spur demand for our brands” – CEO. Pernod Ricard 30 .2 liquor player.6m) Premium players Automobiles All global majors at record sale and setting shop in the country 3x g th ro w BUT 10% mkt share 50% of industry profits Liquor Regular IMFL Premium IMFL Pernod Ricard.1 The Indian consumer is changing… Premiumization – The trend is evident! Premium growth 25% of the cars sold are sedans (above Rs0.

…but are companies ‘adapting’ to that? Distribution channel Best sales & services network Larg est reach in a govt regulated distribution Focus on mass 78% sales at hatchbacks 70% of volumes in the economy segment Strength Dominant market share Positioning 48% 55% Perception ‘fuel-efficient’ & value-for-money buy Affordable drinking! Lack the DNA to adapt Unable to change ‘mass perception’ Attempts such as Baleno and Kizashi failed Premium products launched at “low price” Competition can pla y spoil sport Audi/Honda launching in the mid segment Pernod could potentially eat into USL’s volumes Maruti / USL .a structurally de-rating business model over the longer run? 31 .

.and is now valued US$90bn! “On an average. 100m Indians spend about 16 hours a week online” . a change in DNA required! 32 .Google E-commerce industr y stats ( US$bn) 40 10 4 2009 7 2010 2011E 2015E Survey: 40% prefer to shop online co nsider ing convenience to shop anytime & one can collect detailed product info Over US$75m of funding to e-commerce sites in last six months A signal to brick-and-mortar retail stores….2 Shopping – the rules of the game are changing! Amazon went public in 1997 at a value of US$450m – when there were just 50m internet users worldwide!!!..

500 Proportion of individuals reading/downloading online newspapers/news magazines over the Internet f or private purposes However.3 Print – is it still ‘fine’? (Rs bn) 360 270 Indi an print indus try size 310 Globally. print circulation on a decline… 120 USA UK India …but.000 37. with migration of consumers to epapers… …Value erosion Eventual! 25. near term growth for Indian print intact! 193 180 90 0 2007 2010 2015E 160 80 40 Declining revenues for globa l players 200 3 200 5 200 7 200 9 0 Current mkt cap of top 5 print companies globally is same as that in 1990!!! (USD m) 50.000 12.500 0 FY90 FY94 FY96 FY98 FY04 FY100 FY92 FY02 FY06 FY08 Are Indian print companies prepared to change their DNA for this wave of transition? 33 FY10 .

4 Media – in a new age! With the online wave fast catching…can ‘traditional’ TV watching habits undergo a change? How much TV do you currently watch on the internet? Have you considered cancelling your cable service? Growing popularity of internet based TV viewing + Sourc e: Retrevo Increasing the likelihood of watching content on the internet Sourc e: Ericson 34 .

. Research 1. while online growing due to popularity of online TV” – Yankee Group (US)..080 960 840 720 600 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Are broadcasters ‘adapting’ their DNA to this changing trend??? 35 . …reflective of structural change underway? “TV advertising revenue is dropping.200 International subscription revenues for ZEEL have capped out!.“50% of tablet users are watching TV and film on the devices” – In-Stat Research (Rs m) 1.

5 Intermediaries – the ‘sweet spot’ is lost! Insurance product sales growth 40% of travel tickets sold in the country are online! Dec-10 Nov-10 Mar-11 Feb-11 May-11 Jan-11 Jun-11 (39) Oct-10 Apr-11 (3) (16) (16) (5) (12) (21) (18) (9) Result of drop in insurance commissions (slashed from 18-20% to 8-10%) Risk of becoming ‘irrelevant’! Farmer Village trader Wholesaler Retailer Agent End user Only cost addition…limited value addition Changeover ric e p Bid Electronic spot exchange As k p ri ce Seller (Farmer) Buyer/End user 36 .

the business proposition will compel banks to get into the segment of finance.A similar change inevitable across other businesses? Extremely fragmented industry Advent of technology such as DMA are eroding yields Efficiencies to reduce cost of trade Brokerages NBFCs Financial intermediaries MFIs As these businesses become large. as value addition stands to be limited Gold lending institutes Do these businesses have it in their DNA to ‘survive’??? 37 .

000 0 3/31/1993 Suncor Energy (Mkt cap) 7x in the last decade Renewable energy – Powering tomorrow’s growth? 3/31/2011 3/31/1999 3/31/2005 A ‘Crude’ decline of oil companies eventual if the DNA is not “renewable” 38 .6 Renewable energy – to ‘outshine’ need for oil? Oil .A significant energy contributor Top 15 oil companies are #1 or #2 in market Top 15 oil companies are #1 or #2 in market cap in out of 11 countries cap in 99out of 11 countries BUT Depleting reserves and environmental concerns Depleting reserves and environmental concerns puts $2 trillion at risk? puts $2 trillion at risk? (US$ m) 80.000 20.000 60.000 40.

Kettering 39 .“You can't have a better tomorrow if you are thinking about yesterday all the time!” .Charles F.

com 40 .com / varun.vora@idfc.nangalia@idfc.kejriwal@idfc.com / swati.Thank You Nikhil Vora/ Swati Nangalia / Varun Kejriwal (Dir) +91-22-6622 2567 / 2576 / 2685 nikhil.

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