Audire Volume III

AUDIREIIM ABC Consulting Review

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ge

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Audire is a joint initiative of the student consulting clubs at IIM Ahmedabad, Bangalore & Calcutta.

The IIMA Consult Club is a student-run organization with a mission to:

• Acquaint students about contemporary issues and foster discussions on them

• Update students with the latest thoughts and ideas in the industry

• Provide information about careers in consulting via Industry Workshops

The Club also takes up Recruitment focused initiatives for the students. It can be reached at [email protected]

ICON, the IIMB Consult Club was set up as a student's organization in 1999 and works with a threefold objective:

• Provide high quality consulting services to the industry

• Give students an insight into the challenging world of consulting

• Assist consulting companies in enhancing their visibility and brand image on campus

The club can be reached at [email protected]

In the business of Business

IIM Ahmedabad

onsultC

2010, Volume 3

Articles on Hydro-Electricity, Governance, Mobile Banking, Pharma etc.

The IIMC Consulting Club aims to provide opportunities for the students

to participate in live consulting projects. The club arranges various

networking events to enable students to interact with the industry.

Lastly, it organizes consulting games, quizzes and case competitions to

enhance the skills of the students indirectly preparing them for the

c o n s u l t i n g i n d u s t r y . T h e c l u b c a n b e r e a c h e d a t

[email protected]

1

4

8

15

18

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Table of Contents

i

39

43

49

54

58

Campus Thoughts

30,000 MW of Hydro in Arunachal Pradesh - Is Harry Potter helping?A criticism of the State Mega Hydro Electric Policy, 2008

Coding the Takeover MantraAnalysis of principles which govern the take over code

Gearing up The Indian Public Sector for Shared ServicesCost effective way of governance

Customer Analysis in Indian 'Mobile Banking' Sector Analysis of 'Mobile Banking' sector from customers' perspective

Impact of Internet on Print MediaIntegrating services with multiple delivery platforms to generate productive business models

Indian Pharmaceuticals IndustryEvolution and the road ahead

The Power to DisruptCompetitive leadership in systematic innovation is shifting 'from the west to emerging markets'

Climate change negotiations and its links with Wind EnergyIncentives like renewable energy certificate trading to promote growth

Leveraging the Power of NPS in B2B MarketsAction which can enhance power of marketing & sales operations

Marketing for Tomorrow : Social Media MarketingValidation of 'Social Media Marketing' from a social psychology perspective

Quo Vadis, Affiliate MarketingDetermination of facts which will help it overcome its pastignominy

1AUDIRE - IIM ABC CONSULTING REVIEWii

EDITORIAL TEAM

IIMB

Varun SainiG VenkateshNobal Preet SinghP Hariharan

Amber MaheshwariGurveen BediUtsav KheriaRao Chaithanya Prabhakar

IIMA

Sumit SinglaAbhishek ChopraPankaj ChatrathAlpesh Chadda

IIMC

30,000MW of Hydro in Arunachal Pradesh -Is Harry Potter helping?A Criticism of the State Mega Hydro Electric Policy, 2008

end of the 12th 5-Year Plan. If the plans of the power ministry do take off, we might actually be close to achieving “Power for All”. But, is this really possible? How can a state, which, in the last decade has not added more than 100MW of power, suddenly add as much capacity in 10 years that the entire country has not even added in the past 2 years? We need to dig deeper into the Hydro Policy for the state and analyze why after all, that might not be possible.

India is in a huge power deficit, and there is definitely a need to add capacity. The ministry outlines the need for India to add hydro capacity to its portfolio, based on the argument that environmental pollution needs to be controlled.

Abstract

India is a country in a massive power deficit. Recognizing this, the government has set out on an ambitious plan to provide “Power For All by 2012”. In sync with this plan, state governments such as that of Arunachal Pradesh have promised high capacity additions. In this article we explore why, some of these promises are far from reality taking the case of Arunachal Pradesh – a state that is aiming to add a whopping 30,000 MW of power within the next decade.

Looking at the plan of Department of Hydro Power, Arunachal Pradesh, one cannot help but be stunned by the mind-boggling installed hydro capacity that is expected from the state by the

Dear Readers,

As we present the third 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 previous issues were 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 issue. The diversity of articles in this issue is a testimony to our rich pool of contributors. Our writers have raised issues ranging from hydro-electricity to governance through their thought provoking articles.

Today, businesses are fast becoming global organizations spanning multiple geographies and disciplines. A manager today is confronted with new technologies and business models on a daily basis. Gone are the days when one could merely shrug our shoulders and say, “This isn't what I have been trained in.” In this dynamic world, it is necessary to have a broad outlook in order to appreciate and harness the potential of a business. We intend to stimulate this diversity of opinion and thought with this issue of Audire.

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.

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

EDITORIAL NOTE

1AUDIRE - IIM ABC CONSULTING REVIEWii

EDITORIAL TEAM

IIMB

Varun SainiG VenkateshNobal Preet SinghP Hariharan

Amber MaheshwariGurveen BediUtsav KheriaRao Chaithanya Prabhakar

IIMA

Sumit SinglaAbhishek ChopraPankaj ChatrathAlpesh Chadda

IIMC

30,000MW of Hydro in Arunachal Pradesh -Is Harry Potter helping?A Criticism of the State Mega Hydro Electric Policy, 2008

end of the 12th 5-Year Plan. If the plans of the power ministry do take off, we might actually be close to achieving “Power for All”. But, is this really possible? How can a state, which, in the last decade has not added more than 100MW of power, suddenly add as much capacity in 10 years that the entire country has not even added in the past 2 years? We need to dig deeper into the Hydro Policy for the state and analyze why after all, that might not be possible.

India is in a huge power deficit, and there is definitely a need to add capacity. The ministry outlines the need for India to add hydro capacity to its portfolio, based on the argument that environmental pollution needs to be controlled.

Abstract

India is a country in a massive power deficit. Recognizing this, the government has set out on an ambitious plan to provide “Power For All by 2012”. In sync with this plan, state governments such as that of Arunachal Pradesh have promised high capacity additions. In this article we explore why, some of these promises are far from reality taking the case of Arunachal Pradesh – a state that is aiming to add a whopping 30,000 MW of power within the next decade.

Looking at the plan of Department of Hydro Power, Arunachal Pradesh, one cannot help but be stunned by the mind-boggling installed hydro capacity that is expected from the state by the

Dear Readers,

As we present the third 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 previous issues were 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 issue. The diversity of articles in this issue is a testimony to our rich pool of contributors. Our writers have raised issues ranging from hydro-electricity to governance through their thought provoking articles.

Today, businesses are fast becoming global organizations spanning multiple geographies and disciplines. A manager today is confronted with new technologies and business models on a daily basis. Gone are the days when one could merely shrug our shoulders and say, “This isn't what I have been trained in.” In this dynamic world, it is necessary to have a broad outlook in order to appreciate and harness the potential of a business. We intend to stimulate this diversity of opinion and thought with this issue of Audire.

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.

We hope to hear back from you, your suggestions and feedback on this issue of Audire. Please feel free to write to us at [email protected].

Happy reading !

Team Audire

EDITORIAL NOTE

AUDIRE - IIM ABC CONSULTING REVIEW 32

The plan cites the total hydro potential of the state upwards of 57,000MW. While the plan does highlight some issues with the development of hydro power in the state, such as rehabilitation and resettlement (R'n'R) issues (Article 1.9), it glosses over most issues. Let us analyze the major deficiencies in the plan –

– The state is not yet connected to the national grid and transmission capacity in the state remains dismal, leading to poor evacuation of power. In fact the entire north-eastern region of India cannot evacuate more than 1,500MW of power to other regions. Arunachal Pradesh happens to be a very mountainous region with a thick forest cover. As a result, laying lines becomes a onerous task. The plan simply mentions the cooperation required between the government and the private players to achieve this task (Article 9.11), but fails to talk about how this capacity addition will be achieved.

– One would expect special clauses to attract investment in a zone which has had a history of insurgency from Nagaland rebels and other similar separatist organizations in the North-Eastern part of India. However, the plan contains no provision to compensate this. In fact, companies that have been allotted projects are finding it increasingly difficult to motivate employees to work due to employees' perception of the threat to their lives.

– Even though the McMahon line was recognized officially by the Tibetan government in the Simla Accord, China refuses to accept the document on the argument that China now has sovereign control over Tibet and it was not party to the agreement. Every now and then, there have been political and diplomatic flare-ups between the two nations on this issue. As expected, the government document ignores these issues, but, they are very real for private players' participation and should be addressed in the plan.

– Arunachal Pradesh falls in the

1. Terrain

2. Insurgency

3. The China angle

3. Seismology

Seismic Zone V which means it is highly prone to earthquakes. The plan outlines the need for private developers to take this into account and also educate the local population about the safety of dams (Article 1.10). Considering however, that it is very difficult to convince locals, the plan talks of no government support. The proposed projects would also result in storage of huge amounts of water. In the event of an earthquake, the havoc that a potential 200MW dam can unleash can be very much like a tsunami in that region. There seem to be no incentives to take into account this risk. Contrast this with the fact that North Eastern parts of India get Natural gas at a discount to encourage fuel use in those areas.

– The plan contains in its objectives the need to execute projects on time. In fact, the speech by the then Union Minister for Power, Mr Sushil Kumar Shinde in 2006, also outlines the need for timely completion. However, the 'flag-ship' plant of Subansiri Lower which was conceived in the 1980s and on which the construction was revived in the early part of the decade is scheduled for completion in 2013 after suffering numerous delays.

– The plan outlines that the government will provide all possible clearances required for the projects (Article 9.10). Arunachal Pradesh however, has an 82% forest cover. With the development of these projects, a large area of the forests will be submerged, leading to loss of flora and fauna. In the speech (referred above), the Power Minister talks about the great hydro potential of the state and of full support of the government in securing required licenses. In spite of all the help promised in getting clearances, a number of projects in the state are stalled due to land clearance issues, forest department objections etc. In fact, the plan contains a clause “The developer shall be responsible for upkeep of the ecology of the project area and its surroundings by preventing deforestation, water pollution and defacement

4. History of delays

5. Clearances

of natural landscape” (Article 12.2). This clearly indicates that the state government will provide limited support.

- The document outlines very few sweeteners. In fact, the only “incentive” so to speak has been to lower the bar for “mega-power plant” status that allows the generating company to import capital equipment, free from custom duties. In addition, the producer has been allowed to avail the income tax holiday of 10 years (typical to most hydro projects) any time during the first 15 years of commencement of operations (Article 6.1).

The upfront premium (which developers pay to win the rights to build the plant) is markedly less than some of the projects that have been allotted recently in other states (Article 9.13). However, the gradation of upfront premiums wherein a small hydro producer will be allowed to pay a lesser premium per MW seems a bit counter-intuitive. In fact, the smaller the project, lesser are the risks involved, lesser are the possible delays etc. Going by this logic, the government should probably be charging a higher premium for small hydro producers and subsidizing the large hydro producers due to the quantum of risk they are undertaking. However, considering the number of plants that are being awarded in the state, the state government is facing flak for what might possibly be a way of aggregating money from projects that might not even take off.

In conclusion, the hydro plan of Arunachal Pradesh appears to be just a “plan” that fails to address the basic problems faced by developers in the state. Even the incentives that seem to be mentioned in the document do not seem to be serious enough to attract participation from companies. Unless the state government demonstrates its commitment by expediting MoUs and contracts with environment agencies rather than mentioning it in its policies, the plan of 30,000MW will remain on paper for years to

The Sweeteners

come.

Arpit Agrawal is a 2nd year PGP student at IIM Bangalore. He holds a Bachelor's degree in Computer Science & Engineering from National Institute of Technology (NIT) Allahabad and can be reached at [email protected]

References

1. “State Hydro Power Policy 2008”, Government of Arunachal Pradesh http://www.arunachalhydro.org.in/CORETED/20HYDRO/20POWER/ 20POL C/202008.pdf, (Last accessed: 4th Jan '10)

2. Transmission Grid Map of India, Power Ministry of India http://powermin.nic.in/transmission/pdf/powergrid_map.pdf, (Last accessed 2nd Jan '10)

3. Transcript of the Speech by Mr. Sushil Kumar Shinde, http://www.powermin.nic.in/whats_new pdf/Arunachal_Speech_21.09.2006.pdf, (Last accessed: 6thJan'10)

4. NHPC Annual Review, http://www.nhpcindia.com/English/Scripts/Performance_Annualreview.aspx, (Last accessed: 6th Jan '10)

5. “India's forest cover rises to 21/”, Times of India, http://timesofindia.indiatimes.com/ india/Indias-forest-cover-rises-to-over-21/articleshow/5286317.cms, (Last accessed: 6th Jan '10)

About the Author


The plan cites the total hydro potential of the state upwards of 57,000MW. While the plan does highlight some issues with the development of hydro power in the state, such as rehabilitation and resettlement (R'n'R) issues (Article 1.9), it glosses over most issues. Let us analyze the major deficiencies in the plan –

– The state is not yet connected to the national grid and transmission capacity in the state remains dismal, leading to poor evacuation of power. In fact the entire north-eastern region of India cannot evacuate more than 1,500MW of power to other regions. Arunachal Pradesh happens to be a very mountainous region with a thick forest cover. As a result, laying lines becomes a onerous task. The plan simply mentions the cooperation required between the government and the private players to achieve this task (Article 9.11), but fails to talk about how this capacity addition will be achieved.

– One would expect special clauses to attract investment in a zone which has had a history of insurgency from Nagaland rebels and other similar separatist organizations in the North-Eastern part of India. However, the plan contains no provision to compensate this. In fact, companies that have been allotted projects are finding it increasingly difficult to motivate employees to work due to employees' perception of the threat to their lives.

– Even though the McMahon line was recognized officially by the Tibetan government in the Simla Accord, China refuses to accept the document on the argument that China now has sovereign control over Tibet and it was not party to the agreement. Every now and then, there have been political and diplomatic flare-ups between the two nations on this issue. As expected, the government document ignores these issues, but, they are very real for private players' participation and should be addressed in the plan.

– Arunachal Pradesh falls in the

1. Terrain

2. Insurgency

3. The China angle

3. Seismology

Seismic Zone V which means it is highly prone to earthquakes. The plan outlines the need for private developers to take this into account and also educate the local population about the safety of dams (Article 1.10). Considering however, that it is very difficult to convince locals, the plan talks of no government support. The proposed projects would also result in storage of huge amounts of water. In the event of an earthquake, the havoc that a potential 200MW dam can unleash can be very much like a tsunami in that region. There seem to be no incentives to take into account this risk. Contrast this with the fact that North Eastern parts of India get Natural gas at a discount to encourage fuel use in those areas.

– The plan contains in its objectives the need to execute projects on time. In fact, the speech by the then Union Minister for Power, Mr Sushil Kumar Shinde in 2006, also outlines the need for timely completion. However, the 'flag-ship' plant of Subansiri Lower which was conceived in the 1980s and on which the construction was revived in the early part of the decade is scheduled for completion in 2013 after suffering numerous delays.

– The plan outlines that the government will provide all possible clearances required for the projects (Article 9.10). Arunachal Pradesh however, has an 82% forest cover. With the development of these projects, a large area of the forests will be submerged, leading to loss of flora and fauna. In the speech (referred above), the Power Minister talks about the great hydro potential of the state and of full support of the government in securing required licenses. In spite of all the help promised in getting clearances, a number of projects in the state are stalled due to land clearance issues, forest department objections etc. In fact, the plan contains a clause “The developer shall be responsible for upkeep of the ecology of the project area and its surroundings by preventing deforestation, water pollution and defacement

4. History of delays

5. Clearances

of natural landscape” (Article 12.2). This clearly indicates that the state government will provide limited support.

- The document outlines very few sweeteners. In fact, the only “incentive” so to speak has been to lower the bar for “mega-power plant” status that allows the generating company to import capital equipment, free from custom duties. In addition, the producer has been allowed to avail the income tax holiday of 10 years (typical to most hydro projects) any time during the first 15 years of commencement of operations (Article 6.1).

The upfront premium (which developers pay to win the rights to build the plant) is markedly less than some of the projects that have been allotted recently in other states (Article 9.13). However, the gradation of upfront premiums wherein a small hydro producer will be allowed to pay a lesser premium per MW seems a bit counter-intuitive. In fact, the smaller the project, lesser are the risks involved, lesser are the possible delays etc. Going by this logic, the government should probably be charging a higher premium for small hydro producers and subsidizing the large hydro producers due to the quantum of risk they are undertaking. However, considering the number of plants that are being awarded in the state, the state government is facing flak for what might possibly be a way of aggregating money from projects that might not even take off.

In conclusion, the hydro plan of Arunachal Pradesh appears to be just a “plan” that fails to address the basic problems faced by developers in the state. Even the incentives that seem to be mentioned in the document do not seem to be serious enough to attract participation from companies. Unless the state government demonstrates its commitment by expediting MoUs and contracts with environment agencies rather than mentioning it in its policies, the plan of 30,000MW will remain on paper for years to

The Sweeteners

come.

Arpit Agrawal is a 2nd year PGP student at IIM Bangalore. He holds a Bachelor's degree in Computer Science & Engineering from National Institute of Technology (NIT) Allahabad and can be reached at [email protected]

References

1. “State Hydro Power Policy 2008”, Government of Arunachal Pradesh http://www.arunachalhydro.org.in/CORETED/20HYDRO/20POWER/ 20POL C/202008.pdf, (Last accessed: 4th Jan '10)

2. Transmission Grid Map of India, Power Ministry of India http://powermin.nic.in/transmission/pdf/powergrid_map.pdf, (Last accessed 2nd Jan '10)

3. Transcript of the Speech by Mr. Sushil Kumar Shinde, http://www.powermin.nic.in/whats_new pdf/Arunachal_Speech_21.09.2006.pdf, (Last accessed: 6thJan'10)

4. NHPC Annual Review, http://www.nhpcindia.com/English/Scripts/Performance_Annualreview.aspx, (Last accessed: 6th Jan '10)

5. “India's forest cover rises to 21/”, Times of India, http://timesofindia.indiatimes.com/ india/Indias-forest-cover-rises-to-over-21/articleshow/5286317.cms, (Last accessed: 6th Jan '10)

About the Author


Strategic Issues from a Regulatory Perspective

After a year of uncertainty and gloom India Inc. is on a roll again thanks mainly to the timely stimulus initiated by the government and the confidence in the Indian markets shown by the foreign investors in the recent months. Just as in the years before the economic slowdown, Indian companies are again keen on pursuing the strategy of inorganic growth and are willing to tap any synergistic opportunity that exists domestically or internationally. This clearly demonstrates the role played by Mergers and Acquisitions (M&A) in helping companies to attain size and scale required to catapult them to

Abstract

After a year of uncertainty and gloom India Inc. is on a roll again thanks mainly to the timely stimulus initiated by the government and the confidence in the Indian markets shown by the foreign investors in the recent

i months. Just as in the years before the economic slowdown, Indian companies are again keen on pursuing the strategy of inorganic growth and are willing to tap any synergistic opportunity that exists domestically or internationally. As far as acquisition of listed domestic companies is concerned, Takeover Code is a very important regulation which companies have to comply with. This write up will analyse some of the important principles which govern the Takeover Code along with a few high-profile transactions which happened in the last few months.

Coding the Takeover Mantra the next big league. In the last one year or so the domestic market has witnessed some high voltage transactions involving Indian companies

ii in the field of acquisitions. There can be various reasons underlying these transactions but the most cited reason is cost savings arising out of economies of scale.

Since many of the companies who got acquired happened to be listed in the stock exchanges, the Securities & Exchange Board of India (SEBI) also played a major role in ensuring that the interests of all categories of shareholders were protected to the extent possible. For doing so, SEBI is armed with a powerful regulation called Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 popularly known as the Takeover Code. iii

Interestingly the Takeover Code applies only to companies which are listed in the stock exchanges. The Takeover Code is going to witness some exciting changes in the days to come as the committee headed by Mr. C. Achuthan which was appointed to suggest modifications to the existing takeover regulations submitted its report to SEBI on 19th July 2010. It is expected that SEBI will now consider the report in detail and take its final decision in the next few months.

The Takeover Code endeavours to give equality of treatment to all shareholders, protection of shareholder's interest and fair & truthful disclosure of all material information by the acquirer in all public announcements and offer documents while an acquirer attempts to takeover a target company. The Takeover Code has been amended many times since its inception in 1997. The very fact that it was changed on numerous occasions shows the complexity and uniqueness of the issues which the regulator is confronting while dealing with each case. In 2009 itself the Takeover Code witnessed some major amendments primarily

ivnecessitated by the SATYAM scam. In 2010

April also some minor changes were made to the v

Takeover Code.

Under the Takeover Code, certain specified threshold limits activate various disclosure and open offer requirements. Thus the obligations under the take over code are two fold, a) Disclosures to be made when the acquirer crosses a certain percentage of shares/voting right b) Open offer to be made when the acquirer gains control or crosses a certain percentage of shares/voting rights. SEBI has tried to cover almost all possible scenarios wherein the acquirer will try to structure the deal in such a way so that it can exercise indirect control over the target company without triggering the obligations under the Takeover Code. For this purpose the Takeover Code also

defines a Person Acting in Concert (PAC), who acts for a common purpose of substantial acquisition of shares/voting rights or gaining control of a company with the co-operation of the acquirer. There are numerous decisions which make it clear that even an agreement to acquire shares/ voting rights or control will trigger the obligations under the Takeover

vi. Code

The disclosure obligations mainly are reflected in Regulations 7 and 8 of the Takeover Code. They simply state that if any acquirer is purchasing shares/voting rights more than 5 %, 10%, 14%, 54% or 74% shares or voting rights in a company, then he/she has to disclose at every stage his total shareholding to the company and to the stock exchanges where shares of the company are listed. Apart from the disclosure requirements the Takeover Code also mandates an Open- offer to be made when the acquirer gains control or crosses a certain percentage of shares/voting rights. Regulations 10, 11 and 12 of the Takeover Code reflect the concept of Open-offer. Thus any direct or indirect acquisition of shares or voting rights that entitles an acquirer to exercise 15% or more


Strategic Issues from a Regulatory Perspective

After a year of uncertainty and gloom India Inc. is on a roll again thanks mainly to the timely stimulus initiated by the government and the confidence in the Indian markets shown by the foreign investors in the recent months. Just as in the years before the economic slowdown, Indian companies are again keen on pursuing the strategy of inorganic growth and are willing to tap any synergistic opportunity that exists domestically or internationally. This clearly demonstrates the role played by Mergers and Acquisitions (M&A) in helping companies to attain size and scale required to catapult them to

Abstract

After a year of uncertainty and gloom India Inc. is on a roll again thanks mainly to the timely stimulus initiated by the government and the confidence in the Indian markets shown by the foreign investors in the recent

i months. Just as in the years before the economic slowdown, Indian companies are again keen on pursuing the strategy of inorganic growth and are willing to tap any synergistic opportunity that exists domestically or internationally. As far as acquisition of listed domestic companies is concerned, Takeover Code is a very important regulation which companies have to comply with. This write up will analyse some of the important principles which govern the Takeover Code along with a few high-profile transactions which happened in the last few months.

Coding the Takeover Mantra the next big league. In the last one year or so the domestic market has witnessed some high voltage transactions involving Indian companies

ii in the field of acquisitions. There can be various reasons underlying these transactions but the most cited reason is cost savings arising out of economies of scale.

Since many of the companies who got acquired happened to be listed in the stock exchanges, the Securities & Exchange Board of India (SEBI) also played a major role in ensuring that the interests of all categories of shareholders were protected to the extent possible. For doing so, SEBI is armed with a powerful regulation called Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 popularly known as the Takeover Code. iii

Interestingly the Takeover Code applies only to companies which are listed in the stock exchanges. The Takeover Code is going to witness some exciting changes in the days to come as the committee headed by Mr. C. Achuthan which was appointed to suggest modifications to the existing takeover regulations submitted its report to SEBI on 19th July 2010. It is expected that SEBI will now consider the report in detail and take its final decision in the next few months.

The Takeover Code endeavours to give equality of treatment to all shareholders, protection of shareholder's interest and fair & truthful disclosure of all material information by the acquirer in all public announcements and offer documents while an acquirer attempts to takeover a target company. The Takeover Code has been amended many times since its inception in 1997. The very fact that it was changed on numerous occasions shows the complexity and uniqueness of the issues which the regulator is confronting while dealing with each case. In 2009 itself the Takeover Code witnessed some major amendments primarily

ivnecessitated by the SATYAM scam. In 2010

April also some minor changes were made to the v

Takeover Code.

Under the Takeover Code, certain specified threshold limits activate various disclosure and open offer requirements. Thus the obligations under the take over code are two fold, a) Disclosures to be made when the acquirer crosses a certain percentage of shares/voting right b) Open offer to be made when the acquirer gains control or crosses a certain percentage of shares/voting rights. SEBI has tried to cover almost all possible scenarios wherein the acquirer will try to structure the deal in such a way so that it can exercise indirect control over the target company without triggering the obligations under the Takeover Code. For this purpose the Takeover Code also

defines a Person Acting in Concert (PAC), who acts for a common purpose of substantial acquisition of shares/voting rights or gaining control of a company with the co-operation of the acquirer. There are numerous decisions which make it clear that even an agreement to acquire shares/ voting rights or control will trigger the obligations under the Takeover

vi. Code

The disclosure obligations mainly are reflected in Regulations 7 and 8 of the Takeover Code. They simply state that if any acquirer is purchasing shares/voting rights more than 5 %, 10%, 14%, 54% or 74% shares or voting rights in a company, then he/she has to disclose at every stage his total shareholding to the company and to the stock exchanges where shares of the company are listed. Apart from the disclosure requirements the Takeover Code also mandates an Open- offer to be made when the acquirer gains control or crosses a certain percentage of shares/voting rights. Regulations 10, 11 and 12 of the Takeover Code reflect the concept of Open-offer. Thus any direct or indirect acquisition of shares or voting rights that entitles an acquirer to exercise 15% or more


of the voting rights in a company will trigger the open offer clause. The consequence is that thereafter the acquirer will have to make an offer by way of public announcement to buy atleast 20% shares of the said company from the general public. The Takeover Code also deals with circumstances when an acquirer gains control of the company even if there is no transfer of shares/ voting rights to the extent mentioned in the regulations. For example in the recent open offer under the Takeover Code made by Arcelor Mittal in Uttam Galva Steels although Arcelor Mittal had initially acquired less than 15% stake, the open offer was triggered because of the fact that an agreement was signed by Arcelor Mittal to become a co-promoter of

viiUttam Galva Steels.

As pointed out earlier, in the year 2009 the SEBI was forced to make certain important amendments to the Takeover Code. Some of the changes were necessitated by the SATYAM scam. In January 2009 SEBI made it mandatory to disclose details of shares pledged by

viiipromoters. Later on it also relaxed the conditions for open offer and procedures including the offer price for certain companies whose board of directors were removed by the central/state government or any other regulatory authority and had appointed other persons to hold office as directors for orderly conduct of the affairs of the company. This really helped the acquisition of Satyam Computers, by the Mahindra Group because the amendments relaxed some very stringent conditions with respect to the offer price to be paid to the shareholders and facilitated the acquisition and revival of company which was almost on verge of a significant collapse. Again in September 2009 SEBI took steps to amend the Takeover Code and inserted clauses which mandated that the holders of American/Global Depository Receipts should make an open offer if such receipts enabled the holders to exercise

voting rights in excess of the stipulated per ix

centage. The amendment was made effective in November 2009.

The year 2009 also witnessed one takeover battle between two business groups which kept analysts on tender hooks. The battle over the company, Great Offshore fought between Bharti Shipyard and ABG Shipyard had all the features of an India- Pakistan thriller on the cricket field. Both Bharti and ABG were fighting for a much bigger company than theirs and finally Bharti won the game with an open offer price of Rs. 590 per share in December 2009. Interestingly the match started in June 2009 when ABG made a counter offer of Rs. 373 for Great Offshore's shares which was higher than Bharti's offer price of Rs. 344. This led to revision of offer price by Bharti which was again countered by ABG which offered a price of Rs. 520. However realizing the fact that it will be unrealistic to outbid the Rs. 590 offer price made by Bharti, ABG in the first week of December 2009 sold almost its entire Great Offshore stake of 8.2% in the market and virtually signaled an end to the close race which went on for the past

xfive months. Another interesting twist to the tale came out in January 2010 when ABG informed the Bombay Stock Exchange that it acquired 15.2% in Great Offshore by virtue of the open offer it made at a price of Rs. 520.

Finally Bharati Shipyard was able to acquire more than 20% stake in Great Offshore through its open offer made at a price of Rs 590 and with this Bharti had effectively clinched the deal. Some news reports suggested that Bharati Shipyard might have contemplated another open offer to acquire management control of the company, since its acquisition of 20% stake was done under Regulations 10 and 11 of the Takeover Code which dealt with situations where there was no intention to take control of

xithe target company . However in April 2010 Great Offshore passed a special resolution which

would allow Bharati Shipyard to acquire control in it and that effectively eliminated the need for Bharati to make a second open offer.

The above transactions involving companies like Arcelor Mittal, Bharati etc clearly point to the buoyancy in the M&A space after the gloomy days of 2008. This is surely going to rise in 2010 with the availability of more funds at the disposal of corporates which will open new vistas for pursuing inorganic growth. SEBI as a regulator has to play a balanced role which will protect the interest of all stake-holders in the market. To SEBI's credit it has been doing this role in a commendable manner. The balanced approach of SEBI will be crucial in preserving investor confidence and any initiative by the regulator on this front will help a long way in bringing stability to the capital markets which is in a state of slow and steady revival.

Professor V. K. Unni is currently an Assistant Professor in the Public Policy and Management department at IIM Calcutta. He can be reached at [email protected]

1. See the report titled M&A Activity in India More Than Doubled to $3 bn in Jan 2010 available athttp://www.livemint.com/2010/02/08163322/MampA-activity-in-India-more.html

2. See Assocham Report on M&A at http://www.assocham.org/arb/afp/2009/

About the Author

References

Trend_of_MA_in_India_April June_2009_.pdf

3. Full text of the Takeover Code is available at http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=5&sub_sec_id=5

4. Reg. 25 (2B) and Reg. 29 A were added in February 2009This deals with exemptions given to merchant bankers/nominated advisors who are in the process of market making according to terms and conditions prescribed in the case of public issue made by Small and Medium Enterprises (SMEs)Definition of the acquirer given in Reg. 2(1)(b) makes this point clear.Full details at http://www.moneycontrol.com /news/business/uttam-galva-eyes-new-segments-post-arcelormittal-deal_414328.html

5. Reg. 8A was added in January 2009This was added by SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2009. Details at http://www.hindustantimes.com /ABG-exits-Great-Offshore-takeover-war/Article1-482328.aspxhttp://www.financialexpress.com/news/Great-Offshore-shares-up-6--after-open-offer-from-Bharati/558371/http://www.livemint.com/2010/04/30003708/Great-Offshore-gets-Bharati-on.htm


of the voting rights in a company will trigger the open offer clause. The consequence is that thereafter the acquirer will have to make an offer by way of public announcement to buy atleast 20% shares of the said company from the general public. The Takeover Code also deals with circumstances when an acquirer gains control of the company even if there is no transfer of shares/ voting rights to the extent mentioned in the regulations. For example in the recent open offer under the Takeover Code made by Arcelor Mittal in Uttam Galva Steels although Arcelor Mittal had initially acquired less than 15% stake, the open offer was triggered because of the fact that an agreement was signed by Arcelor Mittal to become a co-promoter of

viiUttam Galva Steels.

As pointed out earlier, in the year 2009 the SEBI was forced to make certain important amendments to the Takeover Code. Some of the changes were necessitated by the SATYAM scam. In January 2009 SEBI made it mandatory to disclose details of shares pledged by

viiipromoters. Later on it also relaxed the conditions for open offer and procedures including the offer price for certain companies whose board of directors were removed by the central/state government or any other regulatory authority and had appointed other persons to hold office as directors for orderly conduct of the affairs of the company. This really helped the acquisition of Satyam Computers, by the Mahindra Group because the amendments relaxed some very stringent conditions with respect to the offer price to be paid to the shareholders and facilitated the acquisition and revival of company which was almost on verge of a significant collapse. Again in September 2009 SEBI took steps to amend the Takeover Code and inserted clauses which mandated that the holders of American/Global Depository Receipts should make an open offer if such receipts enabled the holders to exercise

voting rights in excess of the stipulated per ix

centage. The amendment was made effective in November 2009.

The year 2009 also witnessed one takeover battle between two business groups which kept analysts on tender hooks. The battle over the company, Great Offshore fought between Bharti Shipyard and ABG Shipyard had all the features of an India- Pakistan thriller on the cricket field. Both Bharti and ABG were fighting for a much bigger company than theirs and finally Bharti won the game with an open offer price of Rs. 590 per share in December 2009. Interestingly the match started in June 2009 when ABG made a counter offer of Rs. 373 for Great Offshore's shares which was higher than Bharti's offer price of Rs. 344. This led to revision of offer price by Bharti which was again countered by ABG which offered a price of Rs. 520. However realizing the fact that it will be unrealistic to outbid the Rs. 590 offer price made by Bharti, ABG in the first week of December 2009 sold almost its entire Great Offshore stake of 8.2% in the market and virtually signaled an end to the close race which went on for the past

xfive months. Another interesting twist to the tale came out in January 2010 when ABG informed the Bombay Stock Exchange that it acquired 15.2% in Great Offshore by virtue of the open offer it made at a price of Rs. 520.

Finally Bharati Shipyard was able to acquire more than 20% stake in Great Offshore through its open offer made at a price of Rs 590 and with this Bharti had effectively clinched the deal. Some news reports suggested that Bharati Shipyard might have contemplated another open offer to acquire management control of the company, since its acquisition of 20% stake was done under Regulations 10 and 11 of the Takeover Code which dealt with situations where there was no intention to take control of

xithe target company . However in April 2010 Great Offshore passed a special resolution which

would allow Bharati Shipyard to acquire control in it and that effectively eliminated the need for Bharati to make a second open offer.

The above transactions involving companies like Arcelor Mittal, Bharati etc clearly point to the buoyancy in the M&A space after the gloomy days of 2008. This is surely going to rise in 2010 with the availability of more funds at the disposal of corporates which will open new vistas for pursuing inorganic growth. SEBI as a regulator has to play a balanced role which will protect the interest of all stake-holders in the market. To SEBI's credit it has been doing this role in a commendable manner. The balanced approach of SEBI will be crucial in preserving investor confidence and any initiative by the regulator on this front will help a long way in bringing stability to the capital markets which is in a state of slow and steady revival.

Professor V. K. Unni is currently an Assistant Professor in the Public Policy and Management department at IIM Calcutta. He can be reached at [email protected]

1. See the report titled M&A Activity in India More Than Doubled to $3 bn in Jan 2010 available athttp://www.livemint.com/2010/02/08163322/MampA-activity-in-India-more.html

2. See Assocham Report on M&A at http://www.assocham.org/arb/afp/2009/

About the Author

References

Trend_of_MA_in_India_April June_2009_.pdf

3. Full text of the Takeover Code is available at http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=5&sub_sec_id=5

4. Reg. 25 (2B) and Reg. 29 A were added in February 2009This deals with exemptions given to merchant bankers/nominated advisors who are in the process of market making according to terms and conditions prescribed in the case of public issue made by Small and Medium Enterprises (SMEs)Definition of the acquirer given in Reg. 2(1)(b) makes this point clear.Full details at http://www.moneycontrol.com /news/business/uttam-galva-eyes-new-segments-post-arcelormittal-deal_414328.html

5. Reg. 8A was added in January 2009This was added by SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2009. Details at http://www.hindustantimes.com /ABG-exits-Great-Offshore-takeover-war/Article1-482328.aspxhttp://www.financialexpress.com/news/Great-Offshore-shares-up-6--after-open-offer-from-Bharati/558371/http://www.livemint.com/2010/04/30003708/Great-Offshore-gets-Bharati-on.htm

8 9

GEARING UP THE INDIAN PUBLIC SECTOR FOR SHARED SERVICES

Cost Effective way of Governance

expertise and professional best practices.

Shared services model can be broadly divided into two categories characterized by the relationship between partnering organizations:

in which participants try to consolidate functions within existing institutions. For example, Co-sourcing, Internal Centralization & Informal collaboration.

in which one organisation (private or public sector) either partly or completely assumes responsibility for running services for others. For example, Insourcing, Outsourcing, Joint Ventures.

Based on the analysis of two models (as per Table 1) Joint Working as a form of shared service is recommended for the Indian public system. It is more likely to get the initial buy-in of the government employees since it does not threaten their employment and also keeps the basic operations with the government.

The success of this model would depend on the state of basic infrastructure. Bearing this in mind, the model is recommended to be adopted first at local level across states before going national. It is therefore recommended that India follow bottom-up approach, which essentially means implementation in the urban local bodies (ULB) (comprising of Municipal Corporation, Municipal Councils). India should adopt Internal Centralization as a joint working model which not only ensures internal centralization of all administrative and financial tasks locally before moving at higher levels but also helps in building capabilities essential for it.

Approach : Bottom up or Top Down ?

1. Joint Working :

1. Third Party:

Gearing up The Indian Public Sector for SharedServices: Cost Effective Way of Governance

Abstract

Introduction

The need for cost effectiveness cannot come at a more pronounced time than the present year. Global slowdown and consequent reduction in available funding has left the governments with no choice but to find smarter ways to invest in systems, resources and infrastructure to meet their goals. Perhaps the newest challenge is to improve the quality of services provided to public, whilst simultaneously improving efficiency and reducing costs.

This article considers the case for Shared Services in the Indian Public sector, the known opportunities and benefits, alongside the core challenges and perceived barriers to its adoption. The paper also proposes future growth trajectory of Shared Services towards a more centralized state in India.

There is no one single overwhelming factor but rather a combination of factors that command government's attention for an immediate imperative to improve not just the quality of service provision, but also efficiency.

There is urgent need to reduce duplication of front end as well as back-office processes to make governmental functioning more efficient by engineering, cooperation and collaboration between local authorities in order to achieve economies of scale in delivering services.

Shared services are fundamentally about optimising people and their skills, assets, time and other resources. Shared services in the public sector is a model whereby governmental bodies come together to deliver part of their business in a combined or collaborative operation by maximising the use of scarce resources and skills, and building centres of

8 9

GEARING UP THE INDIAN PUBLIC SECTOR FOR SHARED SERVICES

Cost Effective way of Governance

expertise and professional best practices.

Shared services model can be broadly divided into two categories characterized by the relationship between partnering organizations:

in which participants try to consolidate functions within existing institutions. For example, Co-sourcing, Internal Centralization & Informal collaboration.

in which one organisation (private or public sector) either partly or completely assumes responsibility for running services for others. For example, Insourcing, Outsourcing, Joint Ventures.

Based on the analysis of two models (as per Table 1) Joint Working as a form of shared service is recommended for the Indian public system. It is more likely to get the initial buy-in of the government employees since it does not threaten their employment and also keeps the basic operations with the government.

The success of this model would depend on the state of basic infrastructure. Bearing this in mind, the model is recommended to be adopted first at local level across states before going national. It is therefore recommended that India follow bottom-up approach, which essentially means implementation in the urban local bodies (ULB) (comprising of Municipal Corporation, Municipal Councils). India should adopt Internal Centralization as a joint working model which not only ensures internal centralization of all administrative and financial tasks locally before moving at higher levels but also helps in building capabilities essential for it.

Approach : Bottom up or Top Down ?

1. Joint Working :

1. Third Party:

Gearing up The Indian Public Sector for SharedServices: Cost Effective Way of Governance

Abstract

Introduction

The need for cost effectiveness cannot come at a more pronounced time than the present year. Global slowdown and consequent reduction in available funding has left the governments with no choice but to find smarter ways to invest in systems, resources and infrastructure to meet their goals. Perhaps the newest challenge is to improve the quality of services provided to public, whilst simultaneously improving efficiency and reducing costs.

This article considers the case for Shared Services in the Indian Public sector, the known opportunities and benefits, alongside the core challenges and perceived barriers to its adoption. The paper also proposes future growth trajectory of Shared Services towards a more centralized state in India.

There is no one single overwhelming factor but rather a combination of factors that command government's attention for an immediate imperative to improve not just the quality of service provision, but also efficiency.

There is urgent need to reduce duplication of front end as well as back-office processes to make governmental functioning more efficient by engineering, cooperation and collaboration between local authorities in order to achieve economies of scale in delivering services.

Shared services are fundamentally about optimising people and their skills, assets, time and other resources. Shared services in the public sector is a model whereby governmental bodies come together to deliver part of their business in a combined or collaborative operation by maximising the use of scarce resources and skills, and building centres of


OPTIONS DRAWBACKSBENEFITS

Table 1: Comparison between the sourcing strategies

Implementation of Shared Services at ULB

Stage 1: Front-end Automation: Front-end Automation aims at integrating and offering a wide range of government to citizen (G2C) services at a single location called citizen service centres (CSC). The main aim is to change the typical department-centric approach to a more customer-centric approach. The CSCs would be a one-stop shop for a gamut of customer services i.e: payment of public utility bills and taxes including electricity bills, water and sewerage bills, and property taxes, etc.

On basis of a number of factors which are of immediate concern for common citizen, a number of services have been identified to be offered in the first phase of front-end automation.

?Minimizing the average number of customer visits per month

?Reducing the lead time to avail the service

?Reducing the average customer waiting time

?Reducing the fees and charges associated with the service

?Reducing the time spent to follow-up and track the progress of the requested service

?Increasing the accessibility in terms of the number of centers and the average number of working hours per centre

?Increasing the number of services availed vis-à-vis the number of visits,

Front-End Automation

Business Process Reengineering

Expansion

Figure 1: Stages of proposed Shared Services at ULB

The second phase of Front-end Automation in addition to the above mentioned factors would be to reduce the number of touch points in the

SERVICES CATEGORIES

Table 2: Services to be offered during the first phase of front-end Automation defined by the criteria identified above

system and hence the services that qualify for the second phase would be ones with more than one touch points in the system.

Stage 2: Business Process Reengineering (BPR): BPR guarantees elimination of all the redundant processes in the day-to-day functioning of government. It entails system improvement and efficiency trying to remove as many stages from the process as possible. Sharing services on this model would create savings from economies of scale, and the ability of contact centre staff to carry out many different transactions. Integration of front office functions with back office computer systems to create a single interface for customers is a step in the right direction. BPR aims to reduce service costs through a process of 'stripping out' from all services, including professional services, those transactional processes that can be made rule-based, and follow a pattern, and sharing those within ULB where they can be processed by

specialist staff with knowledge management tools.

It is proposed to start shared services with low risk areas, develop experience, trust and expertise and move gradually on to more challenging areas. A number of areas were identified as relatively 'low risk'. They fall into three main areas

1. Transactional service: that do not involve customer interaction with any local authority such as bill processing of electricity, telephone, processing house tax, property tax, water tax.

2. Legal services: the ones that essentially don't change from area to area such as legal services. i.e: Issuance of certificates and permits.

3. Capital Management: services that can be provided by pooling the overheads of services with additional capacity, for example, out of hour's services or a shared non- emergency number.


OPTIONS DRAWBACKSBENEFITS

Table 1: Comparison between the sourcing strategies

Implementation of Shared Services at ULB

Stage 1: Front-end Automation: Front-end Automation aims at integrating and offering a wide range of government to citizen (G2C) services at a single location called citizen service centres (CSC). The main aim is to change the typical department-centric approach to a more customer-centric approach. The CSCs would be a one-stop shop for a gamut of customer services i.e: payment of public utility bills and taxes including electricity bills, water and sewerage bills, and property taxes, etc.

On basis of a number of factors which are of immediate concern for common citizen, a number of services have been identified to be offered in the first phase of front-end automation.

?Minimizing the average number of customer visits per month

?Reducing the lead time to avail the service

?Reducing the average customer waiting time

?Reducing the fees and charges associated with the service

?Reducing the time spent to follow-up and track the progress of the requested service

?Increasing the accessibility in terms of the number of centers and the average number of working hours per centre

?Increasing the number of services availed vis-à-vis the number of visits,

Front-End Automation

Business Process Reengineering

Expansion

Figure 1: Stages of proposed Shared Services at ULB

The second phase of Front-end Automation in addition to the above mentioned factors would be to reduce the number of touch points in the

SERVICES CATEGORIES

Table 2: Services to be offered during the first phase of front-end Automation defined by the criteria identified above

system and hence the services that qualify for the second phase would be ones with more than one touch points in the system.

Stage 2: Business Process Reengineering (BPR): BPR guarantees elimination of all the redundant processes in the day-to-day functioning of government. It entails system improvement and efficiency trying to remove as many stages from the process as possible. Sharing services on this model would create savings from economies of scale, and the ability of contact centre staff to carry out many different transactions. Integration of front office functions with back office computer systems to create a single interface for customers is a step in the right direction. BPR aims to reduce service costs through a process of 'stripping out' from all services, including professional services, those transactional processes that can be made rule-based, and follow a pattern, and sharing those within ULB where they can be processed by

specialist staff with knowledge management tools.

It is proposed to start shared services with low risk areas, develop experience, trust and expertise and move gradually on to more challenging areas. A number of areas were identified as relatively 'low risk'. They fall into three main areas

1. Transactional service: that do not involve customer interaction with any local authority such as bill processing of electricity, telephone, processing house tax, property tax, water tax.

2. Legal services: the ones that essentially don't change from area to area such as legal services. i.e: Issuance of certificates and permits.

3. Capital Management: services that can be provided by pooling the overheads of services with additional capacity, for example, out of hour's services or a shared non- emergency number.

AUDIRE - IIM ABC CONSULTING REVIEW12 13

CATEGORIES ACTIVITY ADVANTAGES

Transactional

Services

Billing and

Accounting

Economies of scale with

cost effective service

Revenue,

Benefits and

Taxation

Legal Services

Issuance of

certificates and

permits

Capacity

Management

Out of hours

emergency

services

Single

emergency

Number

Table 3: Classification of services for under Business Process Reengineering

Stage 3: Expansion: Expansion of the new efficient system to subsequent levels of government would help move towards a more centralized state in India. Expansion of shared service model horizontally amongst different ULBs would be the last phase in the implementation of shared service in India.

Expansionary phase envision setting-up of similar shared services across India with the aim

of establishing a centralized system in the country. The landmarks to be achieved in this phase are enlisted below:

1. ULBs

2. Districts

3. Divisions

4. State Government

5. Central Government

Expansion across ULBs

Expansion across different ULBs within a state would essentially consist of horizontally transferring the shared service model to them so as to increase the scope for pooled budgets and integrated working across ULBs. These include greater integration between different ULBs. A more comprehensive typology for expansion would be:

?Shared commissioning between two or more ULBs

?Shared commissioning between a ULB and other local public agencies within the ULB e.g. health, police.

?Shared delivery between two or more ULBs

?Simple outsourcing, with several local authorities purchasing the same or similar service from a single provider

?A delivery partnership between a ULB and a private partner, offering services to other local authorities/public services.

However, the impetus for moving towards shared services must come from the local authorities themselves.

The article proposes internal centralization as the initial phase for establishment of shared services for India; however, its only time before such services would be outsourced to a third party. Such a system is already in place in developed countries and India is also gearing towards the same nevertheless until such a change occurs, it is suggested that internal centralization be followed as the first phase of shared services for helping the governmental bodies build such capabilities.

Business Case: Kalyan Dombivali Municipal Corporation (KDMC)

KDMC project undertaken by the Government of Maharashtra is a case in point which has

implemented custom-made e- Governance application software coupled with necessary administrative reforms. The project entails automation of customer facing front-end and internal workflow and processes of the ULBs with the possibility of seamless integration of various departments like Property Tax, Water Tax, Food License, Market License, Birth and Death Registration, Town Planning, Accounts etc. for providing services to the citizens.

Presently the project is in expansion state wherein horizontal transfer of e-governance solution at KDMC (MAINet) across all ULB in Maharashtra has been envisaged by Government of Maharashtra (GoM).

?Increase in property tax /water bill revenue

?Additional revenue earned through replication

?Enhanced productivity and thus better utilization of existing manpower

?Elimination of monotonous and repetitive work

?Accurate forecasting and effective planning due to MIS

There are numerous risks and challenges in implementation of the proposed system in India.

The implementation of shared services in ULBs would result in removing routine transactions from back office and front line staff freeing them up, which might be a cause of concern among employees. The freed staff cannot be fired and alternate options would have to be scouted for them. Schemes like VRS can be put

Benefits accrued to KDMC

Risks and Challenges

Decrease in headcount


CATEGORIES ACTIVITY ADVANTAGES

Transactional

Services

Billing and

Accounting

Economies of scale with

cost effective service

Revenue,

Benefits and

Taxation

Legal Services

Issuance of

certificates and

permits

Capacity

Management

Out of hours

emergency

services

Single

emergency

Number

Table 3: Classification of services for under Business Process Reengineering

Stage 3: Expansion: Expansion of the new efficient system to subsequent levels of government would help move towards a more centralized state in India. Expansion of shared service model horizontally amongst different ULBs would be the last phase in the implementation of shared service in India.

Expansionary phase envision setting-up of similar shared services across India with the aim

of establishing a centralized system in the country. The landmarks to be achieved in this phase are enlisted below:

1. ULBs

2. Districts

3. Divisions

4. State Government

5. Central Government

Expansion across ULBs

Expansion across different ULBs within a state would essentially consist of horizontally transferring the shared service model to them so as to increase the scope for pooled budgets and integrated working across ULBs. These include greater integration between different ULBs. A more comprehensive typology for expansion would be:

?Shared commissioning between two or more ULBs

?Shared commissioning between a ULB and other local public agencies within the ULB e.g. health, police.

?Shared delivery between two or more ULBs

?Simple outsourcing, with several local authorities purchasing the same or similar service from a single provider

?A delivery partnership between a ULB and a private partner, offering services to other local authorities/public services.

However, the impetus for moving towards shared services must come from the local authorities themselves.

The article proposes internal centralization as the initial phase for establishment of shared services for India; however, its only time before such services would be outsourced to a third party. Such a system is already in place in developed countries and India is also gearing towards the same nevertheless until such a change occurs, it is suggested that internal centralization be followed as the first phase of shared services for helping the governmental bodies build such capabilities.

Business Case: Kalyan Dombivali Municipal Corporation (KDMC)

KDMC project undertaken by the Government of Maharashtra is a case in point which has

implemented custom-made e- Governance application software coupled with necessary administrative reforms. The project entails automation of customer facing front-end and internal workflow and processes of the ULBs with the possibility of seamless integration of various departments like Property Tax, Water Tax, Food License, Market License, Birth and Death Registration, Town Planning, Accounts etc. for providing services to the citizens.

Presently the project is in expansion state wherein horizontal transfer of e-governance solution at KDMC (MAINet) across all ULB in Maharashtra has been envisaged by Government of Maharashtra (GoM).

?Increase in property tax /water bill revenue

?Additional revenue earned through replication

?Enhanced productivity and thus better utilization of existing manpower

?Elimination of monotonous and repetitive work

?Accurate forecasting and effective planning due to MIS

There are numerous risks and challenges in implementation of the proposed system in India.

The implementation of shared services in ULBs would result in removing routine transactions from back office and front line staff freeing them up, which might be a cause of concern among employees. The freed staff cannot be fired and alternate options would have to be scouted for them. Schemes like VRS can be put

Benefits accrued to KDMC

Risks and Challenges

Decrease in headcount

in place for such staff. Alternate functions in ULBs can be pursued such as revenue improvement, identification of revenue leakage, surveying of unauthorized dealings in water, property tax etc. The freed staff can also be used in the CSC for delivery of services.

ICT brings a number of challenges, new systems explicitly designed to perform specific tasks, and handle data in a uniform way, can be made far less vulnerable to failure with data back-up and disaster recovery policies having similarly developed in a reactive and ad hoc way.

Elected members' concerns regarding the erosion of their responsibilities must be addressed. It is critical to ensure that the right governance models are applied to assure elected members that the right accountabilities are in place and provide confidence their responsibility to make sure that those services are carried out effectively are protected.

Making shared services affordable can be a challenge for the public sector. Each area resulting in cost saving has to be carefully considered to derive maximum benefits like Staff rationalisation; Management overhead; ICT procured; basis and rationalisation of the support arrangements.

It is possible to create service improvement and greater efficiency savings through adoption of shared services in the Indian public system. However, for such a system to succeed active participation by local bodies is indispensible.

ICT

Governance and accountability

Affordability

Conclusions

Though there exists a lot of hurdles in its implementation, but considering successful examples it seems that they are by no means insurmountable.

Neha Bisht was a PGP-ABM student at IIM Ahmedabad and graduated in 2010. She holds a B.Tech degree in Agricultural Engineering from G.B.P.U. A&T, Pantnagar and can be r eached at [email protected]

1. Accenture. The Government Executive Series. Accenture.

2. Associate Professor John Spoehr, A. B. (2007). The shared experience. Adelaide: Public Service Association of SA.

3. Attenda Ltd. (2007). Selective Outsourcing for the Public sector. London: Attenda ltd.

4. Kevin O' Donovon . (May 2008). Shared services Centres and Off-shoring: trends and jey risks and considerations. KPMG.

5. (2006). London centre of excellence- Shared services . London.

6. Pricewaterhousecoopers. Detailed project on Horizontal Transfer of KDMC e-Governance solution . Mumbai.

7. PricewaterhouseCoopers. White paper on e-Governance @ KDMC. Mumbai.

8. Pricewaterhousecoopers. Shared services for even greater efficiency in local government. UK.

9. Richard Whiter. (June 2006). Shared services: The opportunitues and issues for public sector organisation. IPF.

About the Author

References


contrast, a mobile phone transaction would cost about Rs. 2 to 5. It is said to be the cheapest alternative source of banking, cheaper than an internet banking transaction that costs Rs10-15."[4]

A significant portion (49 per cent) of high interest rate borrowing in rural India is for consumption smoothing. If a person does not have a bank account, the capacity to borrow is significantly less. About 40% of the individuals that have bank accounts borrow from banks while just 6% of people who do not have accounts borrow from banks. On the other hand, 18% of people having accounts borrow from other sources as compared to 40% of non account holding individuals [1]. The reasons for this are quick disbursal and lack of collateral requirements while borrowing from other sources.

Based on this information, we can segment the various types of customers on the basis of population density and financial backwardness as in Table 1.

For instance, a grocer in a city will fall into region IV, since he will not have a credit card or internet banking, but transacts with his customers using cash and will be willing to switch to mobile banking for the convenience that it offers. A rural migrant laborer, who keeps travelling, would be in region IX. He lives in rural areas and has no access to any banking facility and would like to save his money in an account, preferably in a portable option like m-banking.

Based on this, we can say that people in the regions VII to IX will benefit the most from m-banking, since it will provide them much needed

Segmentation

Abstract

This paper analyzes the Indian mobile banking sector from the perspective of a customer's needs. The paper also suggests a method for segmenting customers on the basis of population density and available financial facilities. It then understands from their behavioral tendencies what their needs are, and proposes a method to ensure maximum adoption. Finally, the requirements to ensure maximum penetration into the rural area, and to serve each segment in the best possible way, are suggested.

obile phones have touched the life of Mmore than 500 million Indians [3]. The reach of the mobile phone is wide, and the service it provides is cheap. Broadly, we can divide mobile phone users based on the population density of the locality into urban and rural. The urban users can be further divided into tiers based on the population size of the cities. Within each of these population categories, we can divide the users on the basis of demographics or customer needs. However for our analysis, it is best if we can find out what percent of the mobile users in each segment do not have access to banking facilities. While customers in such areas do not have banking facilities in their neighborhood, they do have mobile connections. The fact that mobiles can be brought from Rs. 1000 onwards and that m-banking services cost only Rs. 2 per transaction makes it a very cheap and attractive option to these customers.

M-banking is an attractive option for banks also. According to an article in Live Mint by Gargi Banerjee, "A banking transaction in a branch costs anything between Rs. 35 and Rs. 40, and at an automated teller machine (ATM), between Rs15 and Rs30, depending on the location. In

Customer Analysis in Indian Mobile Banking Sector

in place for such staff. Alternate functions in ULBs can be pursued such as revenue improvement, identification of revenue leakage, surveying of unauthorized dealings in water, property tax etc. The freed staff can also be used in the CSC for delivery of services.

ICT brings a number of challenges, new systems explicitly designed to perform specific tasks, and handle data in a uniform way, can be made far less vulnerable to failure with data back-up and disaster recovery policies having similarly developed in a reactive and ad hoc way.

Elected members' concerns regarding the erosion of their responsibilities must be addressed. It is critical to ensure that the right governance models are applied to assure elected members that the right accountabilities are in place and provide confidence their responsibility to make sure that those services are carried out effectively are protected.

Making shared services affordable can be a challenge for the public sector. Each area resulting in cost saving has to be carefully considered to derive maximum benefits like Staff rationalisation; Management overhead; ICT procured; basis and rationalisation of the support arrangements.

It is possible to create service improvement and greater efficiency savings through adoption of shared services in the Indian public system. However, for such a system to succeed active participation by local bodies is indispensible.

ICT

Governance and accountability

Affordability

Conclusions

Though there exists a lot of hurdles in its implementation, but considering successful examples it seems that they are by no means insurmountable.

Neha Bisht was a PGP-ABM student at IIM Ahmedabad and graduated in 2010. She holds a B.Tech degree in Agricultural Engineering from G.B.P.U. A&T, Pantnagar and can be r eached at [email protected]

1. Accenture. The Government Executive Series. Accenture.

2. Associate Professor John Spoehr, A. B. (2007). The shared experience. Adelaide: Public Service Association of SA.

3. Attenda Ltd. (2007). Selective Outsourcing for the Public sector. London: Attenda ltd.

4. Kevin O' Donovon . (May 2008). Shared services Centres and Off-shoring: trends and jey risks and considerations. KPMG.

5. (2006). London centre of excellence- Shared services . London.

6. Pricewaterhousecoopers. Detailed project on Horizontal Transfer of KDMC e-Governance solution . Mumbai.

7. PricewaterhouseCoopers. White paper on e-Governance @ KDMC. Mumbai.

8. Pricewaterhousecoopers. Shared services for even greater efficiency in local government. UK.

9. Richard Whiter. (June 2006). Shared services: The opportunitues and issues for public sector organisation. IPF.

About the Author

References


contrast, a mobile phone transaction would cost about Rs. 2 to 5. It is said to be the cheapest alternative source of banking, cheaper than an internet banking transaction that costs Rs10-15."[4]

A significant portion (49 per cent) of high interest rate borrowing in rural India is for consumption smoothing. If a person does not have a bank account, the capacity to borrow is significantly less. About 40% of the individuals that have bank accounts borrow from banks while just 6% of people who do not have accounts borrow from banks. On the other hand, 18% of people having accounts borrow from other sources as compared to 40% of non account holding individuals [1]. The reasons for this are quick disbursal and lack of collateral requirements while borrowing from other sources.

Based on this information, we can segment the various types of customers on the basis of population density and financial backwardness as in Table 1.

For instance, a grocer in a city will fall into region IV, since he will not have a credit card or internet banking, but transacts with his customers using cash and will be willing to switch to mobile banking for the convenience that it offers. A rural migrant laborer, who keeps travelling, would be in region IX. He lives in rural areas and has no access to any banking facility and would like to save his money in an account, preferably in a portable option like m-banking.

Based on this, we can say that people in the regions VII to IX will benefit the most from m-banking, since it will provide them much needed

Segmentation

Abstract

This paper analyzes the Indian mobile banking sector from the perspective of a customer's needs. The paper also suggests a method for segmenting customers on the basis of population density and available financial facilities. It then understands from their behavioral tendencies what their needs are, and proposes a method to ensure maximum adoption. Finally, the requirements to ensure maximum penetration into the rural area, and to serve each segment in the best possible way, are suggested.

obile phones have touched the life of Mmore than 500 million Indians [3]. The reach of the mobile phone is wide, and the service it provides is cheap. Broadly, we can divide mobile phone users based on the population density of the locality into urban and rural. The urban users can be further divided into tiers based on the population size of the cities. Within each of these population categories, we can divide the users on the basis of demographics or customer needs. However for our analysis, it is best if we can find out what percent of the mobile users in each segment do not have access to banking facilities. While customers in such areas do not have banking facilities in their neighborhood, they do have mobile connections. The fact that mobiles can be brought from Rs. 1000 onwards and that m-banking services cost only Rs. 2 per transaction makes it a very cheap and attractive option to these customers.

M-banking is an attractive option for banks also. According to an article in Live Mint by Gargi Banerjee, "A banking transaction in a branch costs anything between Rs. 35 and Rs. 40, and at an automated teller machine (ATM), between Rs15 and Rs30, depending on the location. In

Customer Analysis in Indian Mobile Banking Sector

1716

Financial Facilities towns Areas

All facilities I II IIIavailable

Limited financial IV V VIfacilities

Financially VII VII IXExcluded

Cities Tier II Rural

Figure 1: Suggested framework for segmentation of various mobile banking users

access to banking services. People in IV to VI would also want to use m-banking to reduce transaction costs and for the added convenience. Those in I to III may not want to use m-banking since they have other cheaper alternatives. However they might switch to m-banking once it is accepted all over and it offers low cost portable services.

To reach segments I, IV and VII is easy since mobile infrastructure is in place and the only requirement now is to buy a mobile phone and activate m-banking. People in II, V and VII also would find it easy to shift, but the people in III, VI and IX may find it difficult to use these facilities unless mobile networks grow to cover most rural areas. Lack of infrastructure for distribution of mobile handsets is another barrier.

This section examines the factors needed for customers to adapt to any new technology, based on a paper on customer adaptability to mobile banking by Amin, Baba and Mohammed.[2]:

1. Perceived Usefulness [2]: M-Banking has a very high perceived usefulness when it comes to the financially excluded population. But those who have access to internet banking and credit cards see m-banking as an expensive alternate to current methods.

2. Perceived Ease of use [2]: Given the low literacy levels in India and the lack of

Factors needed for adoption of m-banking

understanding of transactions, the perception is that m-banking is difficult to use. But the growth of m-banking in African nations which are in a comparable situation to rural India shows that m-banking is easy to adapt and use by the entire spectrum of population.

3. Perceived Credibility [2]: The m-banking solutions have high levels of encryption and privacy. But the perception of people that mobiles can be easily stolen and someone could misuse their accounts creates a fear in the minds of the people. Also sending an SMS is not considered secure by a major section of the people.

4. Perceived Self-Efficacy [2]: Due to the lack of education, the rural sections of the society have a fear that they will not be able to learn how to use the product.

Normative pressure [2]: One of the main reasons for the success of m-banking has been the normative pressure. When a few individuals use the service, everyone is under pressure to adapt to it.

By analyzing the customers thought process, we can find out the needs of the customers on a pr ior i ty bas i s. The most impor tant understanding is that the services should be very simple to use and easy to learn. Otherwise most people would not use it. This knowledge has to be factored in while designing the user interface,

Usefulness

Ease ofuse

NormativePressure

Self efficacy

Credibility

the options provided in m-banking services and the customer helpline.

The next issue is a need for high perceived security and privacy. This can be established by providing information about security issues and ability to quickly block service in case a mobile is lost. Multiple PIN's (Personal Identification Number) may also be used but it might decrease the ease of usage. Options currently considered include use of low cost biometric scanners.

The next factor needed for wide spread adoption is the normative pressure. By encouraging a few citizens in the society to use m-banking, acceptance can be guaranteed.

Another huge factor that will increase the use of mobile banking in India is the easing of regulations to enable use of mobile to make real time payment. Tying up m-banking with the unique ID scheme is also on the cards [5]. Ideally, a rural laborer should be able to buy his daily provisions using a simple m-banking transfer to the shop keeper. While this will require a high degree of adoption, this will ensure the empowerment of the lowest strata of society as has been observed in several African countries.

Based on the understanding of the customer, we can suggest that some of the values that should be included in the final offering are ease of use, ubiquity, security, and global acceptance. Another important factor which shall drive the growth of m-banking is the penetration into the rural parts, where it can serve a latent need for banking services. Targeting the right customer segments and working closely with service providers and mobile phone manufacturers shall dictate the future of m-banking services in India.

Ayshwarya R. Vikram is a second year PGP student at the Indian Institute of Management, Ahmedabad. She holds a Bachelor of Engineering degree in Electrical and Electronics from Birla Institute of

Conclusion

About the Authors

Technology and Science (BITS) Pilani and can be reached at [email protected]

Murali Krishnan Nair is a second year PGP student at the Indian Institute of Management, Ahmedabad. He holds a Bachelor of Engineering degree in Electrical and Electronics from Birla Institute of Technology and Science (BITS) Pilani and can be reached at [email protected]

Articles in Journals:

1. Shubhashis Gangopadhayay, 2009, 'How Can Technology Facilitate Financial Inclusion in India?' Review of Market Integration 2009; 1; 223

2. Hanudin Amin, Ricardo Baba, Mohd Zulkifli Muhammad, 2007, “An Analysis of Mobile Banking Acceptance by Malaysian Customers”, Sunway Academic Journal, Vol. 4, Jan 2007.

Websites:

3. N. Sundaresha Subramanian and Anirudh Laskar, 2010, “Banks, telcos set to push m-banking, share revenue”, Corporate News, Jan 12 2010, http://www.livemint.com/2010/01/ 11235610/Banks-telcos-set-to-push-mba.html (Last accessed on: Jan 17, 2010)

4. Gargi Banerjee, 2008, "Banking on mobile phones for cost as well as 24x7 convenience", Mar 31 2008, Money Matters, Live Mint, http://www.livemint.com/2008/03/31235541/Banking-on-mobile-phones-for-c.html (Last accessed on Jan 17, 2010)

5. UID project will help banking needs of poor, Andhra Pradesh, Oct 22 2009,http://www.thehindu.com/2009/10/22/stories/2009102254070400. htm (Last accessed on: Jan 17, 2010)

References

Figure2 : Factors needed for adoption of M-Banking

1716

Financial Facilities towns Areas

All facilities I II IIIavailable

Limited financial IV V VIfacilities

Financially VII VII IXExcluded

Cities Tier II Rural

Figure 1: Suggested framework for segmentation of various mobile banking users

access to banking services. People in IV to VI would also want to use m-banking to reduce transaction costs and for the added convenience. Those in I to III may not want to use m-banking since they have other cheaper alternatives. However they might switch to m-banking once it is accepted all over and it offers low cost portable services.

To reach segments I, IV and VII is easy since mobile infrastructure is in place and the only requirement now is to buy a mobile phone and activate m-banking. People in II, V and VII also would find it easy to shift, but the people in III, VI and IX may find it difficult to use these facilities unless mobile networks grow to cover most rural areas. Lack of infrastructure for distribution of mobile handsets is another barrier.

This section examines the factors needed for customers to adapt to any new technology, based on a paper on customer adaptability to mobile banking by Amin, Baba and Mohammed.[2]:

1. Perceived Usefulness [2]: M-Banking has a very high perceived usefulness when it comes to the financially excluded population. But those who have access to internet banking and credit cards see m-banking as an expensive alternate to current methods.

2. Perceived Ease of use [2]: Given the low literacy levels in India and the lack of

Factors needed for adoption of m-banking

understanding of transactions, the perception is that m-banking is difficult to use. But the growth of m-banking in African nations which are in a comparable situation to rural India shows that m-banking is easy to adapt and use by the entire spectrum of population.

3. Perceived Credibility [2]: The m-banking solutions have high levels of encryption and privacy. But the perception of people that mobiles can be easily stolen and someone could misuse their accounts creates a fear in the minds of the people. Also sending an SMS is not considered secure by a major section of the people.

4. Perceived Self-Efficacy [2]: Due to the lack of education, the rural sections of the society have a fear that they will not be able to learn how to use the product.

Normative pressure [2]: One of the main reasons for the success of m-banking has been the normative pressure. When a few individuals use the service, everyone is under pressure to adapt to it.

By analyzing the customers thought process, we can find out the needs of the customers on a pr ior i ty bas i s. The most impor tant understanding is that the services should be very simple to use and easy to learn. Otherwise most people would not use it. This knowledge has to be factored in while designing the user interface,

Usefulness

Ease ofuse

NormativePressure

Self efficacy

Credibility

the options provided in m-banking services and the customer helpline.

The next issue is a need for high perceived security and privacy. This can be established by providing information about security issues and ability to quickly block service in case a mobile is lost. Multiple PIN's (Personal Identification Number) may also be used but it might decrease the ease of usage. Options currently considered include use of low cost biometric scanners.

The next factor needed for wide spread adoption is the normative pressure. By encouraging a few citizens in the society to use m-banking, acceptance can be guaranteed.

Another huge factor that will increase the use of mobile banking in India is the easing of regulations to enable use of mobile to make real time payment. Tying up m-banking with the unique ID scheme is also on the cards [5]. Ideally, a rural laborer should be able to buy his daily provisions using a simple m-banking transfer to the shop keeper. While this will require a high degree of adoption, this will ensure the empowerment of the lowest strata of society as has been observed in several African countries.

Based on the understanding of the customer, we can suggest that some of the values that should be included in the final offering are ease of use, ubiquity, security, and global acceptance. Another important factor which shall drive the growth of m-banking is the penetration into the rural parts, where it can serve a latent need for banking services. Targeting the right customer segments and working closely with service providers and mobile phone manufacturers shall dictate the future of m-banking services in India.

Ayshwarya R. Vikram is a second year PGP student at the Indian Institute of Management, Ahmedabad. She holds a Bachelor of Engineering degree in Electrical and Electronics from Birla Institute of

Conclusion

About the Authors

Technology and Science (BITS) Pilani and can be reached at [email protected]

Murali Krishnan Nair is a second year PGP student at the Indian Institute of Management, Ahmedabad. He holds a Bachelor of Engineering degree in Electrical and Electronics from Birla Institute of Technology and Science (BITS) Pilani and can be reached at [email protected]

Articles in Journals:

1. Shubhashis Gangopadhayay, 2009, 'How Can Technology Facilitate Financial Inclusion in India?' Review of Market Integration 2009; 1; 223

2. Hanudin Amin, Ricardo Baba, Mohd Zulkifli Muhammad, 2007, “An Analysis of Mobile Banking Acceptance by Malaysian Customers”, Sunway Academic Journal, Vol. 4, Jan 2007.

Websites:

3. N. Sundaresha Subramanian and Anirudh Laskar, 2010, “Banks, telcos set to push m-banking, share revenue”, Corporate News, Jan 12 2010, http://www.livemint.com/2010/01/ 11235610/Banks-telcos-set-to-push-mba.html (Last accessed on: Jan 17, 2010)

4. Gargi Banerjee, 2008, "Banking on mobile phones for cost as well as 24x7 convenience", Mar 31 2008, Money Matters, Live Mint, http://www.livemint.com/2008/03/31235541/Banking-on-mobile-phones-for-c.html (Last accessed on Jan 17, 2010)

5. UID project will help banking needs of poor, Andhra Pradesh, Oct 22 2009,http://www.thehindu.com/2009/10/22/stories/2009102254070400. htm (Last accessed on: Jan 17, 2010)

References

Figure2 : Factors needed for adoption of M-Banking


advertising revenue also falls. Thus, any decrease in circulation volume can have a magnified impact on a newspaper company's total revenues (refer Exhibit 1).

Exhibits 2 and 3 show how the industry growth is distributed between these drivers. One important thing to note here is that there is a steadily widening gap between the revenues from circulation and advertising. The market is also highly fragmented in nature, as can be seen in Exhibit 4; there are a number of dailies with a circulation over one lakh.

Faster growth in non-metros: The rise in disposable income has led to increased circulation in smaller cities, while growth rate in metros has slowly become stagnant. Refer Exhibit 5 for detailed statistics.

Impact of global economic downturn: As can be seen in Exhibits 2 and 3, industry growth was affected by the global economic slowdown. The upward rising growth in sales suddenly took a downward turn in 2007-08, especially since most of the companies began to cut down on their advertising expenses.

The reduction in ad revenues has led to offices and editions of certain newspapers being shut down. PwC (2009, p.52) cites the examples of Business Standard shutting down its Gujarati edition and Jagran putting off expansion plans. Most publications have done away with free supplements and also reduced the number of pages. Rising newsprint costs have added to the existing pressures.

Industry Trends

Impact of Internet on Print Media

Abstract

Introduction

Print Media Industry

Since 1780, the Indian print industry has worked at the dissemination of information. The Indian print industry has learnt from the detrimental impact that the Internet had on the foreign print industries. This has seen the rise of many specialty magazines and regional language newsletters in Rural India which have helped maintain the industry's market share. However, over a long term the print industry should look at integrating its services with multiple delivery platforms to generate productive and sustainable business models in the future.

In its own imitable way, the Internet has redefined the boundaries of every professional sector in the world and reshaped the way each of these industries work. The concern that this report aims to address is the anticipated outcome of the massive footprint which the internet has made on print media.

We can define print media (Business Dictionary, n.d., Definition, para. 1) as the “industry associated with the printing and distribution of news through newspapers and magazines”.

Indian print media finds its roots in the Bengal Gazette, which was started in the year 1780. Fast forward 230 years, and print media has become one of the largest industries in India, currently standing at Rs.161.8 billion, having grown at 13.3% in the last four years (PwC, 2009, p.51).

The revenue generated from advertising depends heavily on circulation volume, which is the second most important source of revenue, and is based on the number of copies sold and subscription rate charged. As circulation drops,

Internet as the Trigger

Despite significant start-up and fixed costs involved in the newspaper industry, once a newspaper establishes its brand, it can recover these costs aided by large circulation volumes. However, over the last decade several large newspaper companies across US and Europe have melted down, primarily because they ignored the threat from growing Internet penetration. Several newspapers have shut down operations or are already looking for a buyer (refer Exhibit 6).

Although there is a debate raging in the Western world regarding the value proposition of the outdated newspaper model, the Indian newspaper industry has been doing relatively well. Even then, the disparity in growth of revenues through advertising and circulation is a worrying trend for the industry beginning from the years 2003-04, when the Internet gained prominence in India (refer Exhibit 7).

Ease of archiving and searching makes Internet a more attractive medium for retrieving information. Furthermore, online news sites also have the advantage of being able to show videos, giving the consumer a favoured television-like experience. Also, adoption of the Internet has led to the creation of a new market for mobile devices (like Kindle) which can be used for instant access to breaking news and information, at your fingertips.

Internet has also transformed a one-to-many industry into a many-to-many industry as most of online media is interactive, and the consumer can also become a provider of information. For instance, writing comments and reviews on online news sites, or blogging for news channels like CNN-IBN.

Marginal, though increasing, internet penetration is one of the important reasons why the Indian newspaper industry has not yet come across stiff competition from this medium. As

of November 2008, there were 81 million internet users with a penetration rate of 7.1% (http://www.internetworldstats.com) and 5.28 million broadband connections as of June 2009. Akamai (2009) reported that India “has an average internet connection speed of just 895 Kbps compared with the global average of 1.5 Mbps” (as cited by CIOL, 2009). These numbers are relatively small when compared to the western world, but in a country where the economy, income levels and middle class are growing fast, widespread broadband adoption seems inevitable.

As cited by The Viewspaper (2009), the Indian Readership Survey (IRS 2009) inferred that almost all of the English dailies are losing readership at a rate much faster than the rate of their growth. Many of them, including the biggies such as Times of India and HT, have reported a slump in readership as compared to the findings of IRS 2008, mainly attributed to free news available on the Internet.

On the other hand, a large number of regional newspapers have been expanding their circulation and geographical presence (Exhibits 8 and 9 reveal that regional publications are the leading newspapers and magazines of India). The main reason for this ambivalence could possibly be explained by the fact that the language of the Internet in India is primarily English and hence the impact of internet on local language newspapers has been minimal.

There is an immediate urge to think that internet is a threat to the print media industry as it eats into readership, thereby making print media attract fewer advertisements and hence reduce profitability of the print media players and industry. The other perspective can be to look at the synergy that internet brings to the print

The Ambivalent Picture

Print media and Internet: A source of strategic advantage


advertising revenue also falls. Thus, any decrease in circulation volume can have a magnified impact on a newspaper company's total revenues (refer Exhibit 1).

Exhibits 2 and 3 show how the industry growth is distributed between these drivers. One important thing to note here is that there is a steadily widening gap between the revenues from circulation and advertising. The market is also highly fragmented in nature, as can be seen in Exhibit 4; there are a number of dailies with a circulation over one lakh.

Faster growth in non-metros: The rise in disposable income has led to increased circulation in smaller cities, while growth rate in metros has slowly become stagnant. Refer Exhibit 5 for detailed statistics.

Impact of global economic downturn: As can be seen in Exhibits 2 and 3, industry growth was affected by the global economic slowdown. The upward rising growth in sales suddenly took a downward turn in 2007-08, especially since most of the companies began to cut down on their advertising expenses.

The reduction in ad revenues has led to offices and editions of certain newspapers being shut down. PwC (2009, p.52) cites the examples of Business Standard shutting down its Gujarati edition and Jagran putting off expansion plans. Most publications have done away with free supplements and also reduced the number of pages. Rising newsprint costs have added to the existing pressures.

Industry Trends

Impact of Internet on Print Media

Abstract

Introduction

Print Media Industry

Since 1780, the Indian print industry has worked at the dissemination of information. The Indian print industry has learnt from the detrimental impact that the Internet had on the foreign print industries. This has seen the rise of many specialty magazines and regional language newsletters in Rural India which have helped maintain the industry's market share. However, over a long term the print industry should look at integrating its services with multiple delivery platforms to generate productive and sustainable business models in the future.

In its own imitable way, the Internet has redefined the boundaries of every professional sector in the world and reshaped the way each of these industries work. The concern that this report aims to address is the anticipated outcome of the massive footprint which the internet has made on print media.

We can define print media (Business Dictionary, n.d., Definition, para. 1) as the “industry associated with the printing and distribution of news through newspapers and magazines”.

Indian print media finds its roots in the Bengal Gazette, which was started in the year 1780. Fast forward 230 years, and print media has become one of the largest industries in India, currently standing at Rs.161.8 billion, having grown at 13.3% in the last four years (PwC, 2009, p.51).

The revenue generated from advertising depends heavily on circulation volume, which is the second most important source of revenue, and is based on the number of copies sold and subscription rate charged. As circulation drops,

Internet as the Trigger

Despite significant start-up and fixed costs involved in the newspaper industry, once a newspaper establishes its brand, it can recover these costs aided by large circulation volumes. However, over the last decade several large newspaper companies across US and Europe have melted down, primarily because they ignored the threat from growing Internet penetration. Several newspapers have shut down operations or are already looking for a buyer (refer Exhibit 6).

Although there is a debate raging in the Western world regarding the value proposition of the outdated newspaper model, the Indian newspaper industry has been doing relatively well. Even then, the disparity in growth of revenues through advertising and circulation is a worrying trend for the industry beginning from the years 2003-04, when the Internet gained prominence in India (refer Exhibit 7).

Ease of archiving and searching makes Internet a more attractive medium for retrieving information. Furthermore, online news sites also have the advantage of being able to show videos, giving the consumer a favoured television-like experience. Also, adoption of the Internet has led to the creation of a new market for mobile devices (like Kindle) which can be used for instant access to breaking news and information, at your fingertips.

Internet has also transformed a one-to-many industry into a many-to-many industry as most of online media is interactive, and the consumer can also become a provider of information. For instance, writing comments and reviews on online news sites, or blogging for news channels like CNN-IBN.

Marginal, though increasing, internet penetration is one of the important reasons why the Indian newspaper industry has not yet come across stiff competition from this medium. As

of November 2008, there were 81 million internet users with a penetration rate of 7.1% (http://www.internetworldstats.com) and 5.28 million broadband connections as of June 2009. Akamai (2009) reported that India “has an average internet connection speed of just 895 Kbps compared with the global average of 1.5 Mbps” (as cited by CIOL, 2009). These numbers are relatively small when compared to the western world, but in a country where the economy, income levels and middle class are growing fast, widespread broadband adoption seems inevitable.

As cited by The Viewspaper (2009), the Indian Readership Survey (IRS 2009) inferred that almost all of the English dailies are losing readership at a rate much faster than the rate of their growth. Many of them, including the biggies such as Times of India and HT, have reported a slump in readership as compared to the findings of IRS 2008, mainly attributed to free news available on the Internet.

On the other hand, a large number of regional newspapers have been expanding their circulation and geographical presence (Exhibits 8 and 9 reveal that regional publications are the leading newspapers and magazines of India). The main reason for this ambivalence could possibly be explained by the fact that the language of the Internet in India is primarily English and hence the impact of internet on local language newspapers has been minimal.

There is an immediate urge to think that internet is a threat to the print media industry as it eats into readership, thereby making print media attract fewer advertisements and hence reduce profitability of the print media players and industry. The other perspective can be to look at the synergy that internet brings to the print

The Ambivalent Picture

Print media and Internet: A source of strategic advantage

2120

media. And it is this synergy that the pro-active players in the industry are looking to harness to gain a competitive advantage. The idea is to link your services with online medium by establishing strong websites. The synergy provides following advantages:

?These online versions of the newspaper and magazines can reach more readers, generate more talk, and lead to more hits.

?These websites can be used to generate revenues through adver tisements, subscription fees, archival access charge, and Internet-related services, thereby covering at least the Web publishing costs.

?The website can be used as a promotional tool to create a better image, thereby attracting greater readership in a long run.

?The offering (newspapers and magazines) gets protected from competitors who have not yet forayed into online services. The website also prevents the customers, who want to shift to online medium for news, from shifting to other online players.

If the operations can be aligned properly, this synergy can reap huge strategic advantage for the early movers. Hence, instead of competing with internet, print media industry might want to look at online services as an opportunity to expand and reach more people.

While the Internet triggered a drop in circulation and advertising revenues in the print media, the Indian print media has still managed to hold its own. The year 2007 saw an advertising revenue of around Rs. 9,300 crores, 18% growth compared to 2006 according to Indian Media Industry – Print and TV Grows, Internet sulks (2008, para. 5).The print media is the most open to attack by the Internet medium but it still continues to garner a large share of advertising spends.

Print Industry Response

This is largely due to lessons that the Indian print medium seems to have learnt by looking at the issues raised by the entry of the Internet medium in various overseas markets like UK and U.S.A. There has been a shift of the print media towards tabloids and regional newspapers. This model is further helped by natural factors such as the existence of multiple regional languages leading to a consumer's ease of obtaining local information in the language he is most comfortable in.

Another lesson that the Indian print media seems to have gained from looking at their counterparts in the foreign industry is the importance of the 'niche' magazines. Recent times have seen the launch of quite a few such magazines, specific to segments such as News, Fashion, Travel and Health, etc. Some of the popular foreign magazines that have been successfully launched recently are Forbes, Inc., Entrepreneur, Stuff (India's version of Stuff, UK), Lex WITNESS- first Magazine on Legal and Corporate affairs, Feature and current affairs weekly magazine- Open, Seed Today, Sports Illustrated India, Harper's Bazaar, Food and Nightlife. In fact 60 new magazines have been launched in the last 12 months in spite of the recent recession causing the revenues to drop by almost 30% in 1 year. Media Monday: 60 new Magazines launched in India in past 12 months (2009, para. 2).

The Indian media laws have aided this trend by making the specialty magazine segment attractive to foreign publishers. Currently, Indian media laws restrict foreign equity to only 26% in the news segment, but allow full 100% foreign equity in other specialty magazines of other segments. Indian Media Industry – Print and TV Grows, Internet sulks (2008, para. 7).

One lesson the Indian print industry has not yet learnt is that of pricing. The Indian print industry, like its foreign counterparts, has been consistently increasing the price of advertising.

While, this appears to be a faster way to improve advertising revenues, it has to be kept in mind that online advertising reaches a lot more people for longer periods of time at a lesser price. Therefore, constant hikes in advertising prices will only cause the print industry's major revenue sources to move away towards the online medium.

The print media industry is facing a structural challenge. In metros, the paid titles have seen a long-term decline in circulation volume. These trends are forecast to continue as the reach of internet expands. Comparing past trends in the industry with projected trends (Exhibits 10 and 11), it can be seen that a slower growth of the Indian print industry is anticipated for the coming years. The industry needs to successfully address these challenges and make use of the tremendous opportunities that India as a country (due to its size and growth) presents.

The future, in short term, may lead to entry of regional players to cater to the un-served rural population. In the long run, though, as the profitability reduces due to competition arising by substitutes (digitization), the industry may see consolidation and diversification by big players as a strategic response to the challenges. The revenues for India's newspaper market are generated from advertising and circulation and this business model would continue at least for the next decade. With more demanding customers, the focus of the industry will shift to provide better content, optimize distribution and cost reduction by shifting to newer technologies.

India is said to live in its villages with nearly 75% of the population being concentrated in rural areas. Literacy rates are growing at a rapid rate in the rural areas. Internet adoption in the rural and semi-urban areas would be gradual. Thus Rural

Industry Evolution: The Next Decade

The Way Ahead

India provides a huge potential for the print industry.

Another possible revenue model would be to increase the cover prices of the magazines and thereby increase the share of revenue from subscriptions. This would also ensure that the print industry's dependence on advertising revenues for survival will reduce.

With advancement of technology, much of the industry's activities can be mechanized. There are also better monitoring and tracking capabilities. Therefore, costs can be reduced substantially. Industry players who can come up with effective and innovative cost reduction measures will have a significant business advantage. Also, India is known for its “English” resource. The Indian print industry should look to leverage this natural advantage that it has by looking into outsourcing opportunities be it in business processing or in content writing.

This will ensure cost reduction for foreign publishers while serving as a revenue source for Indian publishers and also increase their resource utilization.

Finally, the print industry should look to embrace technology rather than compete against it. It should look into diversifying into multiple platforms to ensure that they have access to customers at both ends of the spectrum, i.e., technology savvy to the technologically challenged, Urban India to Rural India, Youth to Mature. As a long term strategy this will ensure that the print industry has integrated itself across different delivery platforms thus blurring the line between the print and online medium. Magazine brands that can provide access to customers across both mediums will attract more advertisers.

Aviral Jain is a PGP2 student at IIM Ahmedabad and can be reached at [email protected]

About the Authors

2120

media. And it is this synergy that the pro-active players in the industry are looking to harness to gain a competitive advantage. The idea is to link your services with online medium by establishing strong websites. The synergy provides following advantages:

?These online versions of the newspaper and magazines can reach more readers, generate more talk, and lead to more hits.

?These websites can be used to generate revenues through adver tisements, subscription fees, archival access charge, and Internet-related services, thereby covering at least the Web publishing costs.

?The website can be used as a promotional tool to create a better image, thereby attracting greater readership in a long run.

?The offering (newspapers and magazines) gets protected from competitors who have not yet forayed into online services. The website also prevents the customers, who want to shift to online medium for news, from shifting to other online players.

If the operations can be aligned properly, this synergy can reap huge strategic advantage for the early movers. Hence, instead of competing with internet, print media industry might want to look at online services as an opportunity to expand and reach more people.

While the Internet triggered a drop in circulation and advertising revenues in the print media, the Indian print media has still managed to hold its own. The year 2007 saw an advertising revenue of around Rs. 9,300 crores, 18% growth compared to 2006 according to Indian Media Industry – Print and TV Grows, Internet sulks (2008, para. 5).The print media is the most open to attack by the Internet medium but it still continues to garner a large share of advertising spends.

Print Industry Response

This is largely due to lessons that the Indian print medium seems to have learnt by looking at the issues raised by the entry of the Internet medium in various overseas markets like UK and U.S.A. There has been a shift of the print media towards tabloids and regional newspapers. This model is further helped by natural factors such as the existence of multiple regional languages leading to a consumer's ease of obtaining local information in the language he is most comfortable in.

Another lesson that the Indian print media seems to have gained from looking at their counterparts in the foreign industry is the importance of the 'niche' magazines. Recent times have seen the launch of quite a few such magazines, specific to segments such as News, Fashion, Travel and Health, etc. Some of the popular foreign magazines that have been successfully launched recently are Forbes, Inc., Entrepreneur, Stuff (India's version of Stuff, UK), Lex WITNESS- first Magazine on Legal and Corporate affairs, Feature and current affairs weekly magazine- Open, Seed Today, Sports Illustrated India, Harper's Bazaar, Food and Nightlife. In fact 60 new magazines have been launched in the last 12 months in spite of the recent recession causing the revenues to drop by almost 30% in 1 year. Media Monday: 60 new Magazines launched in India in past 12 months (2009, para. 2).

The Indian media laws have aided this trend by making the specialty magazine segment attractive to foreign publishers. Currently, Indian media laws restrict foreign equity to only 26% in the news segment, but allow full 100% foreign equity in other specialty magazines of other segments. Indian Media Industry – Print and TV Grows, Internet sulks (2008, para. 7).

One lesson the Indian print industry has not yet learnt is that of pricing. The Indian print industry, like its foreign counterparts, has been consistently increasing the price of advertising.

While, this appears to be a faster way to improve advertising revenues, it has to be kept in mind that online advertising reaches a lot more people for longer periods of time at a lesser price. Therefore, constant hikes in advertising prices will only cause the print industry's major revenue sources to move away towards the online medium.

The print media industry is facing a structural challenge. In metros, the paid titles have seen a long-term decline in circulation volume. These trends are forecast to continue as the reach of internet expands. Comparing past trends in the industry with projected trends (Exhibits 10 and 11), it can be seen that a slower growth of the Indian print industry is anticipated for the coming years. The industry needs to successfully address these challenges and make use of the tremendous opportunities that India as a country (due to its size and growth) presents.

The future, in short term, may lead to entry of regional players to cater to the un-served rural population. In the long run, though, as the profitability reduces due to competition arising by substitutes (digitization), the industry may see consolidation and diversification by big players as a strategic response to the challenges. The revenues for India's newspaper market are generated from advertising and circulation and this business model would continue at least for the next decade. With more demanding customers, the focus of the industry will shift to provide better content, optimize distribution and cost reduction by shifting to newer technologies.

India is said to live in its villages with nearly 75% of the population being concentrated in rural areas. Literacy rates are growing at a rapid rate in the rural areas. Internet adoption in the rural and semi-urban areas would be gradual. Thus Rural

Industry Evolution: The Next Decade

The Way Ahead

India provides a huge potential for the print industry.

Another possible revenue model would be to increase the cover prices of the magazines and thereby increase the share of revenue from subscriptions. This would also ensure that the print industry's dependence on advertising revenues for survival will reduce.

With advancement of technology, much of the industry's activities can be mechanized. There are also better monitoring and tracking capabilities. Therefore, costs can be reduced substantially. Industry players who can come up with effective and innovative cost reduction measures will have a significant business advantage. Also, India is known for its “English” resource. The Indian print industry should look to leverage this natural advantage that it has by looking into outsourcing opportunities be it in business processing or in content writing.

This will ensure cost reduction for foreign publishers while serving as a revenue source for Indian publishers and also increase their resource utilization.

Finally, the print industry should look to embrace technology rather than compete against it. It should look into diversifying into multiple platforms to ensure that they have access to customers at both ends of the spectrum, i.e., technology savvy to the technologically challenged, Urban India to Rural India, Youth to Mature. As a long term strategy this will ensure that the print industry has integrated itself across different delivery platforms thus blurring the line between the print and online medium. Magazine brands that can provide access to customers across both mediums will attract more advertisers.

Aviral Jain is a PGP2 student at IIM Ahmedabad and can be reached at [email protected]

About the Authors

List of Dailies Claiming more than One Lakh Circulation in India (2005-2006)

Ananda Bazar Patrika Bengali Kolkata 1234122

The Hindu* (P F12 DPP) English Chennai 1168042

Hindustan Times English Delhi 113664

The Times of India English Delhi 1102521

The Times of India English Mumbai 626568

Gujarat Samachar Gujarati Ahmedabad 561402

Divya Bhaskar Gujarati Ahmedabad 553164

Punjab Kesri Daily Hindi Jalandhar 519684

Mumbai Mirror English Mumbai 512374

Dainik Jagran Hindi Delhi 493748

Hindustan Times Hindi Patna 468186

The Telegraph English Kolkata 418813

Bartaman Bengali Kolkata 408759

Bhaskar Dainik Hindi Jaipur 407144

Sakal Marathi Pune 358158

Malayala Manorama Bilingual Kottayam 352659

Navbharat Times Hindi Delhi 340740

Title Languages City Circulation

Exhibit 4: A list of dailies with over one lakh circulation in India

2322

Ajay Sampath is a second year PGP student at IIM A h m e d a b a d a n d c a n b e r e a c h e d a t [email protected]

Shantanu Shekhar is a second year PGP student at IIM Ahmedabad and can be reached at [email protected]

Srikanteaswaran T K is a second year PGP student at IIM Ahmedabad and can be reached at [email protected]

1. Business Dictionary. (n.d.) Retrieved January 15, 2010, from http://www.businessdictionary. com/definition/print-media.html

2. CIOL News. (March 03, 2007). Readers prefer online newspapers – Study. Retrieved on January 15, 2010, from http://www.ciol.com/content /news/2007/107030304.asp

3. CIOL News. (October 16, 2009). India ranked #107 for average connections speed. Retrieved on January 15, 2010, from

References

http://www.ciol.com /Technology/News-Reports/India-ranked-107-for-avg-connections-speed/161009126443 /0/

4. Indian Media Industry – Print and TV Grows, Internet sulks. (June 17, 2008). Retrieved January 15, 2010, from http://www.pluggd.in/india-business/indian-advertising-media-industry-print-and-tv-grows-internet-sulks-1742/

5. India Today. (November 5, 2009). Magazines bucked recession: Pride. Retrieved January 15, 2010, from http://indiatoday.intoday.in /site/Story/69490/LATEST/20NEWS/Magazines+bucked+recession:+Purie.html

6. Media Monday: 60 new Magazines launched in India in past 12 months. (November 9 2009).

7. PricewaterhouseCoopers. (2009). Indian Entertainment and Media Outlook, 2009.

8. The Viewspaper. (December 12, 2009). Is Indian Newspaper Industry flourishing or floundering?

ExhibitsExhibit 1: Newspaper circulation in India in the last three decades

a b cNewspaper Circulation LanguagesNo. of titles No. of copies No.

1976 13 320 34 075 000 681986 23 616 64 051 000 921996 42 388 89 434 000 100

d2006 62 483 180 728 611 123

Notes : a Newspapers are printed (including cyclostyled) period works containing public news or comments on public news, as at 32 Match. Their periodicity can be daily, tri and bi-weekly, weekly, fortnightly, monthly and other.

b. Circulation is average number of copies sold and distributed free per publishing day. The circulation numbers may be understimates because not all newspapers submit their reports by due dates.

c. Includes English, main languages recognised in the Constitution of Republic India and other languages and dialects of India.

d. The year ending 31 March. Other years are calendar years.

Source : Registrar of Newspapers for India (2007)

Exhibit 2 : Growth of Indian Print Media Industry (newspapers and magazines) 2004-2008

In Rs. billion2004-08

Newspaper Publishing 86.5 94.6 112.1 131.5 140.7 12.9%

% Change 9.4% 18.5% 17.3% 7.0%Magazine Publishing 11.8 13.5 16.6 19.0 21.0 15.7%

% Change 14.5# 23.0% 14.9% 10.6%Total 98.3 108.1 128.7 150.5 161.8 13.3%

% Change 10.0% 19.1% 17.0% 7.5%

2004 2005 2006 2007 2008 CAGR

Exhibit 3: Growth of Indian Print Media Industry (advertising and circulation) 2004-2008


Print Industry Advertising 54.4 62.7 78.0 94.0 103.5 17.4%

% Change 15.3% 24.4% 20.5% 10.1%Print Industry Circulation 43.9 45.4 50.7 56.5 58.3 7.4%

% Change 3.4% 11.7% 11.5% 3.1%Total 98.3 108.1 128.7 150.5 161.8 13.3%

% Change 10.0% 19.1% 17.0% 7.5%

2004 2005 2006 2007 2008 CAGR

Source(for Exhibit 2 and 3): PricewaterhouseCoopers. (2009, p.51). Indian Entertainment and Media Outlook, 2009. Retrieved January 15, 2010, from http://www.pwc.com/en_IN/in/assets/pdfs/PwC-Indian-Entertainment-and-Media-Outlook-2009.pdf

List of Dailies Claiming more than One Lakh Circulation in India (2005-2006)

Ananda Bazar Patrika Bengali Kolkata 1234122

The Hindu* (P F12 DPP) English Chennai 1168042

Hindustan Times English Delhi 113664

The Times of India English Delhi 1102521

The Times of India English Mumbai 626568

Gujarat Samachar Gujarati Ahmedabad 561402

Divya Bhaskar Gujarati Ahmedabad 553164

Punjab Kesri Daily Hindi Jalandhar 519684

Mumbai Mirror English Mumbai 512374

Dainik Jagran Hindi Delhi 493748

Hindustan Times Hindi Patna 468186

The Telegraph English Kolkata 418813

Bartaman Bengali Kolkata 408759

Bhaskar Dainik Hindi Jaipur 407144

Sakal Marathi Pune 358158

Malayala Manorama Bilingual Kottayam 352659

Navbharat Times Hindi Delhi 340740

Title Languages City Circulation

Exhibit 4: A list of dailies with over one lakh circulation in India

2322

Ajay Sampath is a second year PGP student at IIM A h m e d a b a d a n d c a n b e r e a c h e d a t [email protected]

Shantanu Shekhar is a second year PGP student at IIM Ahmedabad and can be reached at [email protected]

Srikanteaswaran T K is a second year PGP student at IIM Ahmedabad and can be reached at [email protected]

1. Business Dictionary. (n.d.) Retrieved January 15, 2010, from http://www.businessdictionary. com/definition/print-media.html

2. CIOL News. (March 03, 2007). Readers prefer online newspapers – Study. Retrieved on January 15, 2010, from http://www.ciol.com/content /news/2007/107030304.asp

3. CIOL News. (October 16, 2009). India ranked #107 for average connections speed. Retrieved on January 15, 2010, from

References

http://www.ciol.com /Technology/News-Reports/India-ranked-107-for-avg-connections-speed/161009126443 /0/

4. Indian Media Industry – Print and TV Grows, Internet sulks. (June 17, 2008). Retrieved January 15, 2010, from http://www.pluggd.in/india-business/indian-advertising-media-industry-print-and-tv-grows-internet-sulks-1742/

5. India Today. (November 5, 2009). Magazines bucked recession: Pride. Retrieved January 15, 2010, from http://indiatoday.intoday.in /site/Story/69490/LATEST/20NEWS/Magazines+bucked+recession:+Purie.html

6. Media Monday: 60 new Magazines launched in India in past 12 months. (November 9 2009).

7. PricewaterhouseCoopers. (2009). Indian Entertainment and Media Outlook, 2009.

8. The Viewspaper. (December 12, 2009). Is Indian Newspaper Industry flourishing or floundering?

ExhibitsExhibit 1: Newspaper circulation in India in the last three decades

a b cNewspaper Circulation LanguagesNo. of titles No. of copies No.

1976 13 320 34 075 000 681986 23 616 64 051 000 921996 42 388 89 434 000 100

d2006 62 483 180 728 611 123

Notes : a Newspapers are printed (including cyclostyled) period works containing public news or comments on public news, as at 32 Match. Their periodicity can be daily, tri and bi-weekly, weekly, fortnightly, monthly and other.

b. Circulation is average number of copies sold and distributed free per publishing day. The circulation numbers may be understimates because not all newspapers submit their reports by due dates.

c. Includes English, main languages recognised in the Constitution of Republic India and other languages and dialects of India.

d. The year ending 31 March. Other years are calendar years.

Source : Registrar of Newspapers for India (2007)

Exhibit 2 : Growth of Indian Print Media Industry (newspapers and magazines) 2004-2008


Newspaper Publishing 86.5 94.6 112.1 131.5 140.7 12.9%

% Change 9.4% 18.5% 17.3% 7.0%Magazine Publishing 11.8 13.5 16.6 19.0 21.0 15.7%

% Change 14.5# 23.0% 14.9% 10.6%Total 98.3 108.1 128.7 150.5 161.8 13.3%

% Change 10.0% 19.1% 17.0% 7.5%

2004 2005 2006 2007 2008 CAGR

Exhibit 3: Growth of Indian Print Media Industry (advertising and circulation) 2004-2008


Print Industry Advertising 54.4 62.7 78.0 94.0 103.5 17.4%

% Change 15.3% 24.4% 20.5% 10.1%Print Industry Circulation 43.9 45.4 50.7 56.5 58.3 7.4%

% Change 3.4% 11.7% 11.5% 3.1%Total 98.3 108.1 128.7 150.5 161.8 13.3%

% Change 10.0% 19.1% 17.0% 7.5%

2004 2005 2006 2007 2008 CAGR

Source(for Exhibit 2 and 3): PricewaterhouseCoopers. (2009, p.51). Indian Entertainment and Media Outlook, 2009. Retrieved January 15, 2010, from http://www.pwc.com/en_IN/in/assets/pdfs/PwC-Indian-Entertainment-and-Media-Outlook-2009.pdf


Sandesh Gujarati Ahmedabad 335593

Times of India English Bangalore 328346

Punjab Kesri Hindi Delhi 328124

Deccan Chronicle English Secunderabad 324570

Ajit Punjabi Jalandhar 320245

Sangbad Pratidin Bengali Kolkata 294815

Maharashtra Times Marathi Mumbai 280446

Pudhari Daliy Marathi Kolhapur 274838

Jag Bani Punjabi Jalandhar 268825

The Tribune English Ambala 265794

Jagran Dainik Hindi Patna 265609

Jagran Dainik Hindi Kanpur 263592

Eenadu Telugu Hyderabad 254911

Gujarat Vaibhav Hindi Ahmedabad 251670

Deccan Chronicle English Chennai 246275

Mumbai Chaufer Marathi Mumbai 245139

Prajavani Kannada Bangalore 244681

Bhaskar Dainik Hindi Indore 242609

The Thanthi Daily Tamil Chennai 238954

DNA (Daliy News Analysis) English Mumbai 236678

Rajasthan Patrika Hindi Jaipur 227017

Lokmat Dainik Marathi Mumbai 223082

Hindustan Times Hindi Delhi 219601

Samaj Oriya Sambalpur 218969

Jagran Dainik Hindi Varanasi 218729

Bhaskar Dainik Hindi Bhopal 215908

Loksatta Marathi Mumbai 215005

Malayala Manorama Malayalam Ernakulam 210621

Gujarat Samachar Gujarati Mumbai 206484

Jagran Dainik Hindi Lucknow 202415

Vijaya Karnataka Kannada Bangalore 202371

Aaj Hindi Varanasi 201898

Navakal Marathi Mumbai 198367

State Times English Jammu 198292

Jagran Dainik Hindi Meerut 193418

Divya Bhaskar Gujarati Vadodara 193213

Times of India English Pune 188155

Divya Bhaskar Gujarati Surat 185773

Gujarat Samachar Gujarati Surat 185717

Ganashakti Bengali Kolkata 185634

The Aj Hindi Kanpur 183071

Dharitri Oriya Puri 176925

Jagran Dainik Hindi Jalandhar 176223

The Statesman English Kolkata 172366

Kashmir Times English Jammu 172183

Gujarat Samachar Gujarati Rajkot 166128

Sandesh Gujarati Surat 166078

Rajasthan Patrika Hindi Jodhpur 161288

Udayavani Kannada Manipal 159626

Sandhyanand Marathi Pune 158907

Lokmat Marathi Nagpur 158680

Jagran Dainik Hindi Agra 158450

Amar Ujala Hindi Delhi 157893

Nava Bharat Hindi Raipur 156946

Economic Times English Delhi 156446

Bhaskar Dainik Hindi Raipur 155141

Navbharat Times Hindi Mumbai 154919

Amar Ujala Hindi Meerut 154004

Samaya Oriya Bhubaneshwar 153335

Lokmat Marathi Pune 153289

Gujarat Samachar Gujarati Baroda 152798

Mid Day English Mumbai 152603

Herald Young Leader Hindi Ahmedabad 151200

Hindustan Hindi Ranchi 150025

The Times of India English Ahmedabad 149998

Hindustan (Dainik) Hindi Lucknow 147388

Times of India English Hyderabad 146487

Pragativadi Oriya Cuttack 145629

Mathrubhumi Malayalam Ernakulam 145058

Mahanagar Sandhya Ishaan Hindi Ghaziabad 145000

Samachar Jagat Hindi Jaipur 144862

Bhaskar Dainik Hindi Panipat 144458

Malayala Manorama Malayalam Thiruvananthapuram 144033

Sandesh (Baroda Edition) Gujarati Baroda 142943

Prabhat Khabar Hindi Ranchi 139454

Tarun Bharat Marathi Belgaum 139034


Sandesh Gujarati Ahmedabad 335593

Times of India English Bangalore 328346

Punjab Kesri Hindi Delhi 328124

Deccan Chronicle English Secunderabad 324570

Ajit Punjabi Jalandhar 320245

Sangbad Pratidin Bengali Kolkata 294815

Maharashtra Times Marathi Mumbai 280446

Pudhari Daliy Marathi Kolhapur 274838

Jag Bani Punjabi Jalandhar 268825

The Tribune English Ambala 265794

Jagran Dainik Hindi Patna 265609

Jagran Dainik Hindi Kanpur 263592

Eenadu Telugu Hyderabad 254911

Gujarat Vaibhav Hindi Ahmedabad 251670

Deccan Chronicle English Chennai 246275

Mumbai Chaufer Marathi Mumbai 245139

Prajavani Kannada Bangalore 244681

Bhaskar Dainik Hindi Indore 242609

The Thanthi Daily Tamil Chennai 238954

DNA (Daliy News Analysis) English Mumbai 236678

Rajasthan Patrika Hindi Jaipur 227017

Lokmat Dainik Marathi Mumbai 223082

Hindustan Times Hindi Delhi 219601

Samaj Oriya Sambalpur 218969

Jagran Dainik Hindi Varanasi 218729

Bhaskar Dainik Hindi Bhopal 215908

Loksatta Marathi Mumbai 215005

Malayala Manorama Malayalam Ernakulam 210621

Gujarat Samachar Gujarati Mumbai 206484

Jagran Dainik Hindi Lucknow 202415

Vijaya Karnataka Kannada Bangalore 202371

Aaj Hindi Varanasi 201898

Navakal Marathi Mumbai 198367

State Times English Jammu 198292

Jagran Dainik Hindi Meerut 193418

Divya Bhaskar Gujarati Vadodara 193213

Times of India English Pune 188155

Divya Bhaskar Gujarati Surat 185773

Gujarat Samachar Gujarati Surat 185717

Ganashakti Bengali Kolkata 185634

The Aj Hindi Kanpur 183071

Dharitri Oriya Puri 176925

Jagran Dainik Hindi Jalandhar 176223

The Statesman English Kolkata 172366

Kashmir Times English Jammu 172183

Gujarat Samachar Gujarati Rajkot 166128

Sandesh Gujarati Surat 166078

Rajasthan Patrika Hindi Jodhpur 161288

Udayavani Kannada Manipal 159626

Sandhyanand Marathi Pune 158907

Lokmat Marathi Nagpur 158680

Jagran Dainik Hindi Agra 158450

Amar Ujala Hindi Delhi 157893

Nava Bharat Hindi Raipur 156946

Economic Times English Delhi 156446

Bhaskar Dainik Hindi Raipur 155141

Navbharat Times Hindi Mumbai 154919

Amar Ujala Hindi Meerut 154004

Samaya Oriya Bhubaneshwar 153335

Lokmat Marathi Pune 153289

Gujarat Samachar Gujarati Baroda 152798

Mid Day English Mumbai 152603

Herald Young Leader Hindi Ahmedabad 151200

Hindustan Hindi Ranchi 150025

The Times of India English Ahmedabad 149998

Hindustan (Dainik) Hindi Lucknow 147388

Times of India English Hyderabad 146487

Pragativadi Oriya Cuttack 145629

Mathrubhumi Malayalam Ernakulam 145058

Mahanagar Sandhya Ishaan Hindi Ghaziabad 145000

Samachar Jagat Hindi Jaipur 144862

Bhaskar Dainik Hindi Panipat 144458

Malayala Manorama Malayalam Thiruvananthapuram 144033

Sandesh (Baroda Edition) Gujarati Baroda 142943

Prabhat Khabar Hindi Ranchi 139454

Tarun Bharat Marathi Belgaum 139034


Telugu Jaatiya Dina Patrika Vaartha Telugu Hyderabad 137621

Mathrubhumi Malayalam Thrissur 137606

Herald Young Leader Hindi Mehsana 136125

Deccan Chronicle English Bangalore 136048

Sandesh Gujarati Rajkot 135892

Uttar Banga Sambad Bengali Darjeeling 135354

Raj Express Hindi Bhopal 135142

Aaj Hindi Patna 135126

Malayala Manorama Malayalam Trichur 133526

Herald Young Leader Hindi Surat 133000

Jagran Dainik Hindi Ranchi 131190

Economic Times English Mumbai 130814

Hindustan Times English Mumbai 130751

Bhairao Times Marathi Ratnagiri 130349

Mathrubhoomi Malayalam Kozhikode 128687

Eswar Oriya Bhubaneshwar 128000

Lokmat (Dainik) Marathi Thane 127864

Bhaskar Dainik Hindi Jodhpur 127852

Jagran Dainik Hindi Dehradun 127310

Matru Bhasa Oriya Cuttack 127222

Bhaskar Dainik Hindi Chandigarh 126131

Mathrubhumi Malayalam Thiruvananthapuram 124467

Mathrubhumi Malayalam Calicut 122502

Mathrubhumi Malayalam Kottayam 122380

Malayala Manorama Malayalam Kollam 122055

Aaj Kall Bengali Kolkata 121340

Nav Jyoti Hindi Ajmer 119255

Sakal Marathi Kolhapur 118870

Amar Ujala Hindi Kanpur 118867

Bhaskar Dainik Hindi Hissar 118177

Ratnagiri Times Marathi Ratnagiri 117863

Siraj Malayalam Kozhikode 115808

The Hindu Business Line * (PF 13 DPP) English Chennai 115249

Malayala Manorama Malayalam Calicut 114926

Rashtra Doot Hindi Jaipur 113608

Ajit Samachar Hindi Jalandhar 113545

Sanmarg Hindi Kolkata 113318

Nyayadheesh Hindi Allahabad 112802

Jagran Dainik Hindi Gorakhpur 112720

Sandhya Kal Marathi Mumbai 112673

Vijay Times English Bangalore 109897

Anupam Bharat Oriya Chhatarpur 108200

Pratahkal Hindi Mumbai 107948

Yeshobhumi Hindi Dharavi 107855

Dina Malar Tamil Chennai 106342

Nava Bharat Hindi Nagpur 106149

Prajatantra Oriya Cuttack 105959

Nav Jyoti Hindi Kota 105630

Sambad Kalika Oriya Bhubaneshwar 105005

Mahka Bharat Hindi Jaipur 104825

Jagran Hindi Bareilly 104713

Mangalam Malayalam Kottayam 104589

Nava Bharat Hindi Mumbai 104523

Kholadwar Oriya Phulbana 103858

Jaipur Mahanagar Times Hindi Jaipur 102841

Pratan Kaal Hindi Udaipur 102683

Amar Ujala Hindi Dehradun 102277

Utkal Mail Oriya Rourkela 102181

Vir Arjun Daily Hindi Delhi 101514

Rajasthan Patrika Hindi Udaipur 101440

Bhaskar Dainik Hindi Jabalpur 101137

Samyuktra Karnatak Kannada Hubli 100721

Malayala Manorama Malayalam Palakkad 100569

Source: Ministry of Information and Broadcasting, Govt. of India. (10388) (As retrieved via access on 15 January 2010, from http://www.indiastat.com)

Exhibit 5: Circulation of Newspapers in India

Centre of Publication

Centre-wise Circulation of Newspapers in India(2000 and 2002-2003 to 2006-2007)

2000

Metropolitan Cities 219 14042175 298 11197123 685 16134142 1202 41373440

State Capital 264 9013830 425 6428026 235 2414915 924 17856771

Dailies, Tri & Weeklies Others TotalBi-weeklies

No. Circulation No. Circulation No. Circulation No. Circulation


Telugu Jaatiya Dina Patrika Vaartha Telugu Hyderabad 137621

Mathrubhumi Malayalam Thrissur 137606

Herald Young Leader Hindi Mehsana 136125

Deccan Chronicle English Bangalore 136048

Sandesh Gujarati Rajkot 135892

Uttar Banga Sambad Bengali Darjeeling 135354

Raj Express Hindi Bhopal 135142

Aaj Hindi Patna 135126

Malayala Manorama Malayalam Trichur 133526

Herald Young Leader Hindi Surat 133000

Jagran Dainik Hindi Ranchi 131190

Economic Times English Mumbai 130814

Hindustan Times English Mumbai 130751

Bhairao Times Marathi Ratnagiri 130349

Mathrubhoomi Malayalam Kozhikode 128687

Eswar Oriya Bhubaneshwar 128000

Lokmat (Dainik) Marathi Thane 127864

Bhaskar Dainik Hindi Jodhpur 127852

Jagran Dainik Hindi Dehradun 127310

Matru Bhasa Oriya Cuttack 127222

Bhaskar Dainik Hindi Chandigarh 126131

Mathrubhumi Malayalam Thiruvananthapuram 124467

Mathrubhumi Malayalam Calicut 122502

Mathrubhumi Malayalam Kottayam 122380

Malayala Manorama Malayalam Kollam 122055

Aaj Kall Bengali Kolkata 121340

Nav Jyoti Hindi Ajmer 119255

Sakal Marathi Kolhapur 118870

Amar Ujala Hindi Kanpur 118867

Bhaskar Dainik Hindi Hissar 118177

Ratnagiri Times Marathi Ratnagiri 117863

Siraj Malayalam Kozhikode 115808

The Hindu Business Line * (PF 13 DPP) English Chennai 115249

Malayala Manorama Malayalam Calicut 114926

Rashtra Doot Hindi Jaipur 113608

Ajit Samachar Hindi Jalandhar 113545

Sanmarg Hindi Kolkata 113318

Nyayadheesh Hindi Allahabad 112802

Jagran Dainik Hindi Gorakhpur 112720

Sandhya Kal Marathi Mumbai 112673

Vijay Times English Bangalore 109897

Anupam Bharat Oriya Chhatarpur 108200

Pratahkal Hindi Mumbai 107948

Yeshobhumi Hindi Dharavi 107855

Dina Malar Tamil Chennai 106342

Nava Bharat Hindi Nagpur 106149

Prajatantra Oriya Cuttack 105959

Nav Jyoti Hindi Kota 105630

Sambad Kalika Oriya Bhubaneshwar 105005

Mahka Bharat Hindi Jaipur 104825

Jagran Hindi Bareilly 104713

Mangalam Malayalam Kottayam 104589

Nava Bharat Hindi Mumbai 104523

Kholadwar Oriya Phulbana 103858

Jaipur Mahanagar Times Hindi Jaipur 102841

Pratan Kaal Hindi Udaipur 102683

Amar Ujala Hindi Dehradun 102277

Utkal Mail Oriya Rourkela 102181

Vir Arjun Daily Hindi Delhi 101514

Rajasthan Patrika Hindi Udaipur 101440

Bhaskar Dainik Hindi Jabalpur 101137

Samyuktra Karnatak Kannada Hubli 100721

Malayala Manorama Malayalam Palakkad 100569

Source: Ministry of Information and Broadcasting, Govt. of India. (10388) (As retrieved via access on 15 January 2010, from http://www.indiastat.com)

Exhibit 5: Circulation of Newspapers in India

Centre of Publication

Centre-wise Circulation of Newspapers in India(2000 and 2002-2003 to 2006-2007)

2000


State Capital 264 9013830 425 6428026 235 2414915 924 17856771

Dailies, Tri & Weeklies Others TotalBi-weeklies

No. Circulation No. Circulation No. Circulation No. Circulation


Union Territory 17 912776 15 163664 30 88752 62 1165192

Big Cities 950 33973098 1553 18691482 974 10713310 3477 63377890

Small Towns 73 1971448 96 802700 81 416322 250 3190470

Total 1523 59913327 2387 37282995 2005 29767441 5915 126963763

2002-03

Big Cities 1249 42215878 1894 19360296 1133 10343676 4276 71919850


State Capital 417 15748776 544 8304807 394 3227576 1355 27281159

Small Towns 13 156542 38 123673 15 73191 66 353406

Union Territory 29 922099 15 213824 50 135610 94 1271533

Total 1931 73486348 2808 40979239 2417 27539956 7156 142005543

2003-04

Big City 1102 42172219 1295 14759096 735 7852564 3132 64783879

Metropolitan City 232 15290835 303 11839374 652 13022432 1187 40152641

State Capital 379 16027227 477 7680788 316 2866423 1172 26574438

Smaller Towns 17 406873 25 172538 13 37917 55 617328

Union Territory 19 816733 8 90297 18 52272 45 959302

Total 1749 74713887 2108 34542093 1734 23831608 5591 133087588

2004-05

Big City 1109 42394632 1568 17800537 1181 12120195 3858 72315364


State Capital 429 17788021 639 9380897 495 6170937 1563 33339855

Smaller Towns 38 922416 37 364836 38 287509 113 1574761

Union Territory 22 899706 10 127381 24 76115 56 1103202

Total 1874 79243139 2627 42163994 2724 35312076 7225 156719209

2005-06

Big City 1321 49062792 2102 22883548 1395 14862184 4818 86808524


State Capital 479 18609320 842 11363987 492 4885796 1813 34859103

Smaller Towns 30 674164 41 270374 43 173882 114 1118420

Union Territory 25 896595 11 186651 11 36089 47 1119335

Total 2169 89429246 3428 50580648 2915 40728717 8512 180738611

2006-07

Big City 1402 53208873 1796 22720476 1403 15388215 4601 91317564


State Capital 568 23217786 872 12096657 554 5923416 1994 41237859

Smaller Towns 29 1023472 53 419814 37 152906 119 1596192

Union Territory 25 1251483 11 199689 10 29539 46 1480711

Total 2374 99574820 3210 52082091 3091 40420483 8675 192077394

Source: Ministry of Information and Broadcasting, Govt. of India. (10388) (As retrieved via access on 15 January 2010, from http://www.indiastat.com).

Source: Rocky Mountain News. (February 2009). Goodbye Colorado. Retrieved on 16 January 2009, from http://www.rockymountainnews.com/news/2009/feb/27/goodbye-colorado/


Union Territory 17 912776 15 163664 30 88752 62 1165192

Big Cities 950 33973098 1553 18691482 974 10713310 3477 63377890

Small Towns 73 1971448 96 802700 81 416322 250 3190470

Total 1523 59913327 2387 37282995 2005 29767441 5915 126963763

2002-03

Big Cities 1249 42215878 1894 19360296 1133 10343676 4276 71919850


State Capital 417 15748776 544 8304807 394 3227576 1355 27281159

Small Towns 13 156542 38 123673 15 73191 66 353406

Union Territory 29 922099 15 213824 50 135610 94 1271533

Total 1931 73486348 2808 40979239 2417 27539956 7156 142005543

2003-04

Big City 1102 42172219 1295 14759096 735 7852564 3132 64783879


State Capital 379 16027227 477 7680788 316 2866423 1172 26574438

Smaller Towns 17 406873 25 172538 13 37917 55 617328

Union Territory 19 816733 8 90297 18 52272 45 959302

Total 1749 74713887 2108 34542093 1734 23831608 5591 133087588

2004-05

Big City 1109 42394632 1568 17800537 1181 12120195 3858 72315364


State Capital 429 17788021 639 9380897 495 6170937 1563 33339855

Smaller Towns 38 922416 37 364836 38 287509 113 1574761

Union Territory 22 899706 10 127381 24 76115 56 1103202

Total 1874 79243139 2627 42163994 2724 35312076 7225 156719209

2005-06

Big City 1321 49062792 2102 22883548 1395 14862184 4818 86808524


State Capital 479 18609320 842 11363987 492 4885796 1813 34859103

Smaller Towns 30 674164 41 270374 43 173882 114 1118420

Union Territory 25 896595 11 186651 11 36089 47 1119335

Total 2169 89429246 3428 50580648 2915 40728717 8512 180738611

2006-07

Big City 1402 53208873 1796 22720476 1403 15388215 4601 91317564


State Capital 568 23217786 872 12096657 554 5923416 1994 41237859

Smaller Towns 29 1023472 53 419814 37 152906 119 1596192

Union Territory 25 1251483 11 199689 10 29539 46 1480711

Total 2374 99574820 3210 52082091 3091 40420483 8675 192077394


Source: Rocky Mountain News. (February 2009). Goodbye Colorado. Retrieved on 16 January 2009, from http://www.rockymountainnews.com/news/2009/feb/27/goodbye-colorado/

31AUDIRE - IIM ABC CONSULTING REVIEW30

Exhibit 7: Number of newspapers in circulation


Number of Newspapers in India(1991 to 2001, 2002-2003 to 2006-2007)

1991 3229 257 9621 17107 30214 6.04

1992 3502 271 10375 17809 31957 5.77

1993 3740 275 11136 18461 33612 5.18

1994 4043 294 11973 19291 35601 5.91

1995 4236 316 12695 20007 37254 4.64

1996 4453 317 13624 20755 39149 5.09

1997 4719 325 14743 21918 41705 6.53

1998 4890 331 15645 22962 43828 5.09

1999 5157 337 16872 24289 46655 6.45

2000 5364 339 17749 25693 49145 5.34

2001 5638 348 18582 27392 51960 5.73

1.1.2002 to31.3.2003 5966 358 19631 29825 55780 7.35

2003-04 6287 361 20329 31492 58469 4.82

2004-05 6530 364 20831 32688 60413 3.33

2005-06 6800 368 22008 33307 62483 3.43

2006-07 7131 374 22113 35380 64998 3.86

Year Dailies Tri/Bi- Weeklies Others Total % Growth weeklies over previous years

Exhibit 8: Top Ten English and Top Ten Hindi Newspapers (readership figures in lacs)

Publication 2008 R1

The Times of India 136.41

Hindustan Times 63.46

The Hindu 55.51

The Telegraph 30.38

Deccan Chronicle 30.28

The Economic Times 20.11

Mid-Day (Eng) 17.64

The New Indian Express 19.77

Mumbai Mirror 15.91

DNA 13.11

2009 R1

133.47

63.41

53.73

28.18

27.68

19.17

15.83

15.66

15.67

14.89

Publication 2008 R1

Dainik Jagaran 565.57

Dainik Bhaskar 319.37

Amar Ujala 296.13

Hindustan 251.65

Rajasthan Patrika 136.57

Punjab Kesri 111.39

Aj 74.14

Navbharat Times 61.84

Prabhat Khabar 49.70

Nava Bharat (Mah/Chh) 51.83

2009 R1

545.83

335.50

286.74

267.69

140.51

106.45

59.05

54.02

46.71

44.77

Exhibit 10: Forecasted growth for Indian Print Media (newspapers and magazines)

In Rs. billion 2008 2009 f 2010 f 2011 f 2012 f 2013 f CAGR2009-13

Newspaper Publishing 140.7 146.4 154.8 166.5 178.1 184.8 5.6%

% Change 7.0% 4.0% 5.8% 7.5% 7.0% 3.7%

Magazine Publishing 21.0 22.1 23.4 24.9 27.0 28.8 6.5%

% Change 10.6 % 5.1% 5.7% 6.5% 8.3% 6.8%

Total 161.8 168.5 178.2 191.4 205.1 213.6 5.7%

% Change 7.5% 4.2% 5.8% 7.4% 7.2% 4.1%

Exhibit 9: Top Ten Magazines (readership figures in lacs)

Periodicity Magazines Readership language

2208R1 2009 R1

Fortnightlies Saras Sali 97.77 73.65 Hindi

Weeklies Kumudam 74.45 66.58 Tamil

Weeklies Kungumam 73.75 60.96 Tamil

Fortnightly Vanitha 59.82 59.97 Malayalam

Weeklies India Today 66.61 54.56 Hindi

Fornightly Grih Shobha - 53.69 Hindi

Monthly Meri Saheli 59.15 49.15 Hindi

Weeklies Ananda Vikatan 56.36 49.43 Tamil

Monthly Cricket Samrat 52.01 44.19 Hindi

Exhibit 11: Forecasted growth for Indian Print Media (circulation and advertising)


Print Industry Advertising 103.5 111.5 122.5 133.8 145.5 152.0 8.0%

% Change 10.1% 7.7% 9.9% 9.2% 8.8% 4.5%

Print Industry Circulation 58.3 57.0 55.7 57.6 59.6 61.6 1.1%

% Change 3.1% -2.2% -2.3% 3.4% 3.4% 3.3%

Total 161.8 168.5 178.2 191.4 205.1 213.6 5.7%

% Change 7.5% 4.2% 5.8% 7.4% 7.2% 4.1%

Source: PricewaterhouseCoopers. (2009, p.60). Indian Entertainment and Media Outlook, 2009. Retrieved January 15, 2010, from http://www.pwc.com/en_IN/in/assets/pdfs/PwC-Indian-Entertainment-and-Media-Outlook-2009.pdf


Exhibit 7: Number of newspapers in circulation


Number of Newspapers in India(1991 to 2001, 2002-2003 to 2006-2007)

1991 3229 257 9621 17107 30214 6.04

1992 3502 271 10375 17809 31957 5.77

1993 3740 275 11136 18461 33612 5.18

1994 4043 294 11973 19291 35601 5.91

1995 4236 316 12695 20007 37254 4.64

1996 4453 317 13624 20755 39149 5.09

1997 4719 325 14743 21918 41705 6.53

1998 4890 331 15645 22962 43828 5.09

1999 5157 337 16872 24289 46655 6.45

2000 5364 339 17749 25693 49145 5.34

2001 5638 348 18582 27392 51960 5.73

1.1.2002 to31.3.2003 5966 358 19631 29825 55780 7.35

2003-04 6287 361 20329 31492 58469 4.82

2004-05 6530 364 20831 32688 60413 3.33

2005-06 6800 368 22008 33307 62483 3.43

2006-07 7131 374 22113 35380 64998 3.86

Year Dailies Tri/Bi- Weeklies Others Total % Growth weeklies over previous years

Exhibit 8: Top Ten English and Top Ten Hindi Newspapers (readership figures in lacs)

Publication 2008 R1

The Times of India 136.41

Hindustan Times 63.46

The Hindu 55.51

The Telegraph 30.38

Deccan Chronicle 30.28

The Economic Times 20.11

Mid-Day (Eng) 17.64

The New Indian Express 19.77

Mumbai Mirror 15.91

DNA 13.11

2009 R1

133.47

63.41

53.73

28.18

27.68

19.17

15.83

15.66

15.67

14.89

Publication 2008 R1

Dainik Jagaran 565.57

Dainik Bhaskar 319.37

Amar Ujala 296.13

Hindustan 251.65

Rajasthan Patrika 136.57

Punjab Kesri 111.39

Aj 74.14

Navbharat Times 61.84

Prabhat Khabar 49.70

Nava Bharat (Mah/Chh) 51.83

2009 R1

545.83

335.50

286.74

267.69

140.51

106.45

59.05

54.02

46.71

44.77

Exhibit 10: Forecasted growth for Indian Print Media (newspapers and magazines)


Newspaper Publishing 140.7 146.4 154.8 166.5 178.1 184.8 5.6%

% Change 7.0% 4.0% 5.8% 7.5% 7.0% 3.7%

Magazine Publishing 21.0 22.1 23.4 24.9 27.0 28.8 6.5%

% Change 10.6 % 5.1% 5.7% 6.5% 8.3% 6.8%

Total 161.8 168.5 178.2 191.4 205.1 213.6 5.7%

% Change 7.5% 4.2% 5.8% 7.4% 7.2% 4.1%

Exhibit 9: Top Ten Magazines (readership figures in lacs)

Periodicity Magazines Readership language

2208R1 2009 R1

Fortnightlies Saras Sali 97.77 73.65 Hindi

Weeklies Kumudam 74.45 66.58 Tamil

Weeklies Kungumam 73.75 60.96 Tamil

Fortnightly Vanitha 59.82 59.97 Malayalam

Weeklies India Today 66.61 54.56 Hindi

Fornightly Grih Shobha - 53.69 Hindi

Monthly Meri Saheli 59.15 49.15 Hindi

Weeklies Ananda Vikatan 56.36 49.43 Tamil

Monthly Cricket Samrat 52.01 44.19 Hindi

Exhibit 11: Forecasted growth for Indian Print Media (circulation and advertising)


Print Industry Advertising 103.5 111.5 122.5 133.8 145.5 152.0 8.0%

% Change 10.1% 7.7% 9.9% 9.2% 8.8% 4.5%

Print Industry Circulation 58.3 57.0 55.7 57.6 59.6 61.6 1.1%

% Change 3.1% -2.2% -2.3% 3.4% 3.4% 3.3%

Total 161.8 168.5 178.2 191.4 205.1 213.6 5.7%

% Change 7.5% 4.2% 5.8% 7.4% 7.2% 4.1%

Source: PricewaterhouseCoopers. (2009, p.60). Indian Entertainment and Media Outlook, 2009. Retrieved January 15, 2010, from http://www.pwc.com/en_IN/in/assets/pdfs/PwC-Indian-Entertainment-and-Media-Outlook-2009.pdf

like Dr. Reddy's Laboratories and Ranbaxy made the most of the opportunity. However, this stage has now seamlessly merged into the stage of collaborative R&D where India is making the entire world sit up and take notice of it as a potential R&D partner due to the inherent cost advantages and technological capabilities.

Now that the industry is tightly regulated and patent protection is in place, although still not

quite as much as in several other emerging economies like Brazil, Korea etc, the dynamics of the industry have changed completely. In fact, one of the pointers to the slew of change has been the conquest of US

generics market led by Ranbaxy and followed suit by others. This was but a natural outcome of the capabilities that Indian firms were coming up with over the years. However, when caught in the whirlwinds of tightening regulations and opening domestic competition, an indigenous industry's survival strategy can either be to innovate rapidly to create a competitive advantage or do more of the same in more efficient ways. The Indian giants chose to innovate, albeit in an innovative fashion! The model adopted has been an 'imitation to innovation' model whereby the aim is to come at equal terms with foreign R&D-based companies

rather than to open up new frontiers. All this while still retaining a strong focus on developing-economies generics market which has so long been an indefatigable revenue-earner.

The successful strategies the Indian pharmaceutical companies were following so far are faced with a need to rethinking and

reformulation in the light of several emerging factors which complicate the business environment for the Indian pharmaceutical companies and place significant challenges in their path.

The winning strategy that was based on the successful formulation of generics is threatened by the fact that the big pharmaceutical companies are trying to beat the Indian manufacturers at this game. Foreign pharmaceuticals companies have attempted to enter the generics space by introducing 'authorised generics'. They have also adopted the strategy of selling 'branded' (but not patented) versions of their original formulations at higher prices. This has led to brutal pricing pressures in the US markets.

Foreign pharma giants' strategy to enter new markets is also another cause for concern. Faced

New Challenges

AdvanceCapability

Intermediatecapability

Basiccapability

Basic KnowledgeBase

Analogue researchNDDS

Generation

Reverse engineeringR&D

Complex KnowledgeBase

Innovative R&DNCE research

Acquisitio

Assimilation

Improvement

Assimilation

Acquistion

GenericsR&D

Improvement

Assimilation

Acquisition

Improvement

DuplicativeImitation

CollaborativeR&D

CreativeImitation


Indian Pharmaceuticals Industry:Evolution And The Road Ahead

one of sparse patent protection and sizeable drug manufacturing infrastructure.

Before the patent protection came into effect, India was almost the emancipator of the developing and the underdeveloped nations providing the poor singlehandedly with a large share of their drug requirements. The choice always obviously was between curing the poor man's whooping cough and letting the MNC mint huge profits. This is how the Indian companies' developed diverse production capabilities ranging not just from generic production of a vast array of molecules but also Research and Development. This ability is still holding them in good stead as this gives a clear stronghold on not just Indian turf but also an enviable share in the American generics business.

The slow but steady transition of the Indian pharmaceutical industry has been well documented by Kale and Little (Figure 1 below). The pre-1970s era was an era when most, if not all, medicines on your prescription would be imported or at least MNC-made. Thereafter ensued, the age of duplicative imitation with the legalization of reverse engineering via Indian Patents Act, 1970. It was then that the Indian firms were ramping up their basic R&D as well as mass production abilities. This led to the aggregation of a robust knowledge base with Indian firms. However, the patent laws were failing to create any long-lasting value in the absence of any effective expertise-protection. With the pharmaceutical markets opening up in mid-1990s, India moved to the stage of 'creative imitation' where the focus was on developing molecules equally effective as the patented one through a process which doesnot infringe on the patent. This was the age of generics. Companies

Abstract

Introduction

The Journey So Far

This article takes a look at the way the Indian pharmaceuticals industry has evolved and challenges faced by the generics strategy. We examine the various emerging opportunities and recommend strategies to capitalize on these opportunities for sustainable future growth.

India, in the last two decades, has like several other emerging economies been the subject of much global interest courtesy its strong economic fundamentals, a healthy growth despite severe business cycles and more specifically due to sweeping reforms in most sectors. The pharmaceutical sector is worth around $9 billion now and according to a McKinsey report is slated to touch $ 20 billion by 2015!

The foreign giants have already started competing on Indian turf for a slice of the generics pie. Indian companies which have always had the home advantage will now be up against a stiff challenge, to say the least.

The story of Indian generics had for long been

Figure 1 : Transition of the Indian Pharmaceutical Industry

like Dr. Reddy's Laboratories and Ranbaxy made the most of the opportunity. However, this stage has now seamlessly merged into the stage of collaborative R&D where India is making the entire world sit up and take notice of it as a potential R&D partner due to the inherent cost advantages and technological capabilities.

Now that the industry is tightly regulated and patent protection is in place, although still not

quite as much as in several other emerging economies like Brazil, Korea etc, the dynamics of the industry have changed completely. In fact, one of the pointers to the slew of change has been the conquest of US

generics market led by Ranbaxy and followed suit by others. This was but a natural outcome of the capabilities that Indian firms were coming up with over the years. However, when caught in the whirlwinds of tightening regulations and opening domestic competition, an indigenous industry's survival strategy can either be to innovate rapidly to create a competitive advantage or do more of the same in more efficient ways. The Indian giants chose to innovate, albeit in an innovative fashion! The model adopted has been an 'imitation to innovation' model whereby the aim is to come at equal terms with foreign R&D-based companies

rather than to open up new frontiers. All this while still retaining a strong focus on developing-economies generics market which has so long been an indefatigable revenue-earner.

The successful strategies the Indian pharmaceutical companies were following so far are faced with a need to rethinking and

reformulation in the light of several emerging factors which complicate the business environment for the Indian pharmaceutical companies and place significant challenges in their path.

The winning strategy that was based on the successful formulation of generics is threatened by the fact that the big pharmaceutical companies are trying to beat the Indian manufacturers at this game. Foreign pharmaceuticals companies have attempted to enter the generics space by introducing 'authorised generics'. They have also adopted the strategy of selling 'branded' (but not patented) versions of their original formulations at higher prices. This has led to brutal pricing pressures in the US markets.

Foreign pharma giants' strategy to enter new markets is also another cause for concern. Faced

New Challenges

AdvanceCapability

Intermediatecapability

Basiccapability

Basic KnowledgeBase

Analogue researchNDDS

Generation

Reverse engineeringR&D

Complex KnowledgeBase

Innovative R&DNCE research

Acquisitio

Assimilation

Improvement

Assimilation

Acquistion

GenericsR&D

Improvement

Assimilation

Acquisition

Improvement

DuplicativeImitation

CollaborativeR&D

CreativeImitation


Indian Pharmaceuticals Industry:Evolution And The Road Ahead

one of sparse patent protection and sizeable drug manufacturing infrastructure.

Before the patent protection came into effect, India was almost the emancipator of the developing and the underdeveloped nations providing the poor singlehandedly with a large share of their drug requirements. The choice always obviously was between curing the poor man's whooping cough and letting the MNC mint huge profits. This is how the Indian companies' developed diverse production capabilities ranging not just from generic production of a vast array of molecules but also Research and Development. This ability is still holding them in good stead as this gives a clear stronghold on not just Indian turf but also an enviable share in the American generics business.

The slow but steady transition of the Indian pharmaceutical industry has been well documented by Kale and Little (Figure 1 below). The pre-1970s era was an era when most, if not all, medicines on your prescription would be imported or at least MNC-made. Thereafter ensued, the age of duplicative imitation with the legalization of reverse engineering via Indian Patents Act, 1970. It was then that the Indian firms were ramping up their basic R&D as well as mass production abilities. This led to the aggregation of a robust knowledge base with Indian firms. However, the patent laws were failing to create any long-lasting value in the absence of any effective expertise-protection. With the pharmaceutical markets opening up in mid-1990s, India moved to the stage of 'creative imitation' where the focus was on developing molecules equally effective as the patented one through a process which doesnot infringe on the patent. This was the age of generics. Companies

Abstract

Introduction

The Journey So Far

This article takes a look at the way the Indian pharmaceuticals industry has evolved and challenges faced by the generics strategy. We examine the various emerging opportunities and recommend strategies to capitalize on these opportunities for sustainable future growth.

India, in the last two decades, has like several other emerging economies been the subject of much global interest courtesy its strong economic fundamentals, a healthy growth despite severe business cycles and more specifically due to sweeping reforms in most sectors. The pharmaceutical sector is worth around $9 billion now and according to a McKinsey report is slated to touch $ 20 billion by 2015!

The foreign giants have already started competing on Indian turf for a slice of the generics pie. Indian companies which have always had the home advantage will now be up against a stiff challenge, to say the least.

The story of Indian generics had for long been

Figure 1 : Transition of the Indian Pharmaceutical Industry



towards the diseases which typically affect about 10% of the global population. This essentially means that the diseases afflicting the people in poor countries are neglected in terms of drug-development research. Indian firms have already taken advantage of this need-supply gap by being active in the field of vaccine development (neglected as a low profit opportunity by global majors). Indian companies need to focus more on this avenue as their low-cost production abilities make them particularly suitable as manufacturers of drugs for poor people.

The research in neglected drugs is also attractive as these drugs can be developed through the novel organizational framework of PPPs, essentially by partnering with governments, national health systems and international humanitarian agencies. Such partnerships already exist around diseases like HIV, Malaria and TB and funding is available through organizations like the Gates Foundation etc. Indian companies need to explore this avenue more.

Such partnerships have clear advantages. These give firms an opportunity to be parts of global coalitions and benefit from knowledge sharing with other organizations and the academia. Also, partnering with governments surely promise greater opportunities for advocacy and hence advantages with regard to regulation.

The growth of biotech has matched or surpassed that of pharmaceuticals every year since 2000 and herein lies another opportunity for the Indian companies- biogenerics. Indian entities like Matrix Laboratories, Dr. Reddy's laboratories and several more are not just establishing research and production capabilities for biogenerics (through collaborations, takeovers or in-house) but are also engaging in establishing frontends on foreign soil so as to be able to expedite and lubricate the marketing chain in no time.

Conclusion

About the Authors

References

Indian pharmaceutical companies have built critical competencies through the various stages of different innovation models that they have employed. The future requires them to evolve with new strategies and innovation systems. The key to success will be to leverage on one's acquired strengths and competencies and adopt strategies which are best suited to those abilities. Hence, we expect that in future Indian pharma companies will increasingly evolve from being generics competitors to being research-partners , research-outsourcing service providers, clinical trial outsourcing service providers, biogenerics players , manufacturers of drugs for neglected diseases and partners in PPPs.

Abhirup Ganguly is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Chemical Engineering from Jadavpur University and can be reached at abhirup.ganguly09@iimb. ernet.in

Chinmaya Kumar Sharma is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Aeronautical Engineering from IIT Kharagpur and can be reached at [email protected]

Kunal Deep Bhagat is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Electronics and Communications Engineering from Vellore Institute of Technology and can be reached at [email protected]

1. Chataway, Joanna, Tait, Joyce and Weld, David, September 2007, “Frameworks for Pharma- ceutical Innovation in Developing Countries— The Case of Indian Pharma”, Technology Analysis and Strategic Management, Vol.19, No.5, 697-708

AUDIRE - IIM ABC CONSULTING REVIEW36 AUDIRE - IIM ABC CONSULTING REVIEW 37

with meager growth rates of 3-4% in their own markets (global pharmaceuticals market is worth about $800 billion, US, $300 billion), they are aggressively entering India (a market worth $8billion but growing rapidly at around 14%). The global multinationals with deep pockets have the ability to indulge in predatory pricing to gain footholds in these attractive growing markets and hence pose serious threats.

Also the generics business is becoming increasingly competitive with challenges from other generics players like TEVA and Watson who compete at the higher end of the generics market.

The Indian generics industry is at such a crucial juncture where there are as many opportunities as challenges. It is quite simple to comprehend that a patent-protected industry can well be a blessing in disguise if the concerted R&D efforts of these companies were to bear fruit. The stakes are high as post patent-protection the market now resembles a winner-takes-it-all game.

With an estimated $60 billion of drugs going off-patents by 2013, there is undoubtedly opportunities for profit in the generics business and Indian pharmaceutical companies are expected to continue to play well the game they have mastered over so many years.

However, the emerging challenges also necessitate the adoption of forward-looking strategies which will place the Indian pharma companies on the path of sustainability and future growth.

Little and Kale, through the use of the capability creation model have displayed that the Indian pharmaceutical companies have sequentially built increasingly more valuable and sophisticated research and development capability through the stages of reverse-engineering, duplicative imitation and creative imitation. One major strength that has resulted

The Road Ahead

for them from this process of sequential move up the value-chain is that they have developed strong capabilities for manufacturing process innovations. This is of strategic importance to them at the present situation. This is so because as the predominant innovation model so far followed by major global pharma companies, the 'Blockbuster Drug-Development' model is showing signs of maturity with increasingly lower chances of ensuring superior profitability, global pharma majors are looking to partner with Indian companies in the R&D space to gain insights into process innovations. The fact that India promises high-quality research manpower at low costs (resulting in the cost of a drug –development in India being about one-tenth of that in the US) and immense opportunities for inexpensive clinical trials are also making Indian companies attractive targets for research partnering and outsourcing. This opportunity is to be taken by the Indian companies as partnering will provide them with the scope to build the competencies that the global majors have built up, namely, expertise in original drug-discovery. Most Indian companies are hence, willing to enter into these partnerships with the understanding that they will, in future embark independently on the path of original drug-discovery once they learn the relevant skills from their foreign partners. Hence the preferred mode of partnering is marketing-cum-manufacturing alliances to sell drugs in emerging markets.

However, the fact that the prevalent 'blockbuster drug discovery' model is already facing pressures of maturity makes it imperative that Indian firms also look at alternate innovation models. The fact that they have mastered low cost production makes two strategies particularly attractive – these are those of focusing on neglected diseases and the PPP (Public Private Partnership) model.

The so called 90/10 rule in the pharmaceutical industry refers to the fact that about 90% of pharmaceutical research funding is directed

towards the diseases which typically affect about 10% of the global population. This essentially means that the diseases afflicting the people in poor countries are neglected in terms of drug-development research. Indian firms have already taken advantage of this need-supply gap by being active in the field of vaccine development (neglected as a low profit opportunity by global majors). Indian companies need to focus more on this avenue as their low-cost production abilities make them particularly suitable as manufacturers of drugs for poor people.

The research in neglected drugs is also attractive as these drugs can be developed through the novel organizational framework of PPPs, essentially by partnering with governments, national health systems and international humanitarian agencies. Such partnerships already exist around diseases like HIV, Malaria and TB and funding is available through organizations like the Gates Foundation etc. Indian companies need to explore this avenue more.

Such partnerships have clear advantages. These give firms an opportunity to be parts of global coalitions and benefit from knowledge sharing with other organizations and the academia. Also, partnering with governments surely promise greater opportunities for advocacy and hence advantages with regard to regulation.

The growth of biotech has matched or surpassed that of pharmaceuticals every year since 2000 and herein lies another opportunity for the Indian companies- biogenerics. Indian entities like Matrix Laboratories, Dr. Reddy's laboratories and several more are not just establishing research and production capabilities for biogenerics (through collaborations, takeovers or in-house) but are also engaging in establishing frontends on foreign soil so as to be able to expedite and lubricate the marketing chain in no time.

Conclusion

About the Authors

References

Indian pharmaceutical companies have built critical competencies through the various stages of different innovation models that they have employed. The future requires them to evolve with new strategies and innovation systems. The key to success will be to leverage on one's acquired strengths and competencies and adopt strategies which are best suited to those abilities. Hence, we expect that in future Indian pharma companies will increasingly evolve from being generics competitors to being research-partners , research-outsourcing service providers, clinical trial outsourcing service providers, biogenerics players , manufacturers of drugs for neglected diseases and partners in PPPs.

Abhirup Ganguly is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Chemical Engineering from Jadavpur University and can be reached at abhirup.ganguly09@iimb. ernet.in

Chinmaya Kumar Sharma is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Aeronautical Engineering from IIT Kharagpur and can be reached at [email protected]

Kunal Deep Bhagat is a 2nd year PGP student at IIM Bangalore. He holds a Bachelors degree in Electronics and Communications Engineering from Vellore Institute of Technology and can be reached at [email protected]

1. Chataway, Joanna, Tait, Joyce and Weld, David, September 2007, “Frameworks for Pharma- ceutical Innovation in Developing Countries— The Case of Indian Pharma”, Technology Analysis and Strategic Management, Vol.19, No.5, 697-708

AUDIRE - IIM ABC CONSULTING REVIEW36 AUDIRE - IIM ABC CONSULTING REVIEW 37

with meager growth rates of 3-4% in their own markets (global pharmaceuticals market is worth about $800 billion, US, $300 billion), they are aggressively entering India (a market worth $8billion but growing rapidly at around 14%). The global multinationals with deep pockets have the ability to indulge in predatory pricing to gain footholds in these attractive growing markets and hence pose serious threats.

Also the generics business is becoming increasingly competitive with challenges from other generics players like TEVA and Watson who compete at the higher end of the generics market.

The Indian generics industry is at such a crucial juncture where there are as many opportunities as challenges. It is quite simple to comprehend that a patent-protected industry can well be a blessing in disguise if the concerted R&D efforts of these companies were to bear fruit. The stakes are high as post patent-protection the market now resembles a winner-takes-it-all game.

With an estimated $60 billion of drugs going off-patents by 2013, there is undoubtedly opportunities for profit in the generics business and Indian pharmaceutical companies are expected to continue to play well the game they have mastered over so many years.

However, the emerging challenges also necessitate the adoption of forward-looking strategies which will place the Indian pharma companies on the path of sustainability and future growth.

Little and Kale, through the use of the capability creation model have displayed that the Indian pharmaceutical companies have sequentially built increasingly more valuable and sophisticated research and development capability through the stages of reverse-engineering, duplicative imitation and creative imitation. One major strength that has resulted

The Road Ahead

for them from this process of sequential move up the value-chain is that they have developed strong capabilities for manufacturing process innovations. This is of strategic importance to them at the present situation. This is so because as the predominant innovation model so far followed by major global pharma companies, the 'Blockbuster Drug-Development' model is showing signs of maturity with increasingly lower chances of ensuring superior profitability, global pharma majors are looking to partner with Indian companies in the R&D space to gain insights into process innovations. The fact that India promises high-quality research manpower at low costs (resulting in the cost of a drug –development in India being about one-tenth of that in the US) and immense opportunities for inexpensive clinical trials are also making Indian companies attractive targets for research partnering and outsourcing. This opportunity is to be taken by the Indian companies as partnering will provide them with the scope to build the competencies that the global majors have built up, namely, expertise in original drug-discovery. Most Indian companies are hence, willing to enter into these partnerships with the understanding that they will, in future embark independently on the path of original drug-discovery once they learn the relevant skills from their foreign partners. Hence the preferred mode of partnering is marketing-cum-manufacturing alliances to sell drugs in emerging markets.

However, the fact that the prevalent 'blockbuster drug discovery' model is already facing pressures of maturity makes it imperative that Indian firms also look at alternate innovation models. The fact that they have mastered low cost production makes two strategies particularly attractive – these are those of focusing on neglected diseases and the PPP (Public Private Partnership) model.

The so called 90/10 rule in the pharmaceutical industry refers to the fact that about 90% of pharmaceutical research funding is directed


inflection point in the history of innovation. The realm of competitive leadership through ingenuity in process and design which has so far been the exclusive province of the West is shifting to the emerging markets. Emerging economies are not merely challenging the lead in innovation; they are unleashing a wave of disruptive breakthroughs that are, as they spread to the rich world, shaking many industries to its foundations. It's time we rethink innovation.

There's a marked difference in the concept of innovation in the West and in emerging markets. When the US thinks innovation, it typically focuses more on products than on processes and mostly on big bang breakthroughs than incremental changes. Supercomputers, blockbuster pharmaceuticals, nanotechnology- innovations like these capture popular imagination in the West. Yet very few companies can create significant shareholder value through breakthrough product innovations; most economic wealth comes from more modest ones that accumulate over time. Even more important are process innovations, which help a company sustain its competitive advantage. Dell and Wal-Mart, for instance, have used process innovations to game-changing effects. The developing countries on the other hand have taken a more holistic view towards innovation that values incremental changes. Companies that start out with limited capabilities can rapidly build them over time through a series of modest product and process innovations. Ultimately, individual innovations may matter less than the institutional capacity to sustain a series of

GLOBALIZATION/GLOCALIZATION REVERSE INNOVATION

Phase 1 Phase 2 Phase 3 Phase 4

Local design, made in EM for the world

Local Design, made in EM for EM

U.S. product defeatured, made in

EM to EM

U.S. products defeatured, made in

U.S. for EM

The Power to DisruptAbstract

How emerging markets are driving global innovation

The world of business innovation is at a major crossroads. Among the 50 most innovative companies in the world today, the majority are Asian- up from just 5 in 2006. This article takes a look at how competitive leadership in systematic innovation is gradually shifting from the West to the emerging markets. Emerging economies are not merely challenging the lead in innovation; they are using concepts like reverse innovation to game-changing effects- like unlocking the 'bottom-of-the-pyramid' fortune. It's time we rethink innovation

In the world of business innovation, a paradigm shift is underway. In the 2010 Bloomberg Business Week's annual ranking of the 50 most innovative companies in the world, 15 are Asian- up from just five in 2006. In fact, for the first time in the history of the rankings, the majority of corporations in the Top 25 are based outside the US. In another equally interesting report published by the OECD, the corporate funding of R&D in China has reached the levels found in the West. Fortune 500 companies now have 98 R&D facilities in China and 63 in India. General Electric's healthcare arm has spent more than $50 million to build a R&D centre in Bangalore, its biggest anywhere in the world. Microsoft's R&D centre in Beijing is its largest outside its American headquarters in Redmond. These developments are a testimony to a major

improvements and the pace at which they are developed and disseminated through the network. The earliest to adopt this paradigm successfully were the Japanese in the 1970s. Dubbed 'lean manufacturing', it helped Japanese carmakers displace American giants Ford and GM as the world's leading car producer. Soon every factory around the world was lean- or a ruin.

Today it's hardly news that the world's centre of economic gravity is shifting to the emerging markets. The emerging world is enjoying the most spectacular growth in history. Its share of global GDP at purchasing power parity increased from 36% in 1980 to 45% in 2008 and looks set to reach 51% in 2014. About 70% of the world's growth in the next few years will come from these markets with 40% coming

from just two countries, India and China. Emerging market consumers have been outspending the Americans since 2007; by last year their share of global consumption had gone up to 34% against America's 27%.

Yet even these figures understate the change that is taking place within. While it is true that developing countries are becoming the new epicentres of innovation, there is something refreshingly different about the nature of this change. Companies are starting with the needs of some of the world's poorest people and redesigning not just products but entire processes to meet those needs profitably. This has been called 'frugal' or 'reverse' innovation for it begins with not the consumer but the non-consumer at the 'bottom of the pyramid'(BOP) population. And it pushes the two familiar ideas- economies of scale and self-reinforcement beyond their previously existing limits.

A reverse innovation is any innovation likely to be adopted first in the developing world. The fundamental driver of reverse innovation is the income gap that exists between the emerging markets and the rich countries. In the case of local markets with idiosyncratic preferences, it is often difficult to successfully introduce a product tailored for US mass consumption. Buyers in poor countries demand solutions on an entirely different price-performance curve. They want new, high tech solutions that deliver ultra-low costs and 'good enough' quality. This

6,000

5,000

4,000

3,000

2,000

1,000

0

2011 2012 2013

2008 2009 2010

GDP, % change on previous year

Emerging markets

United States

Advanced economies

1980 85 90 95 2000 05 10 14

Source: IMF

Figure 1 : Paradigm shift in Business Innovation

Africa & Middle East

Rest of Asia Pacific

Indian Sub-Continent

Far East & China

Eastern Europe

Western Europe

South America

North America

Figure 2 : Total service provider mobile money transfer revenue opportunity per annum in $ million (Regional Forecast 2008 - 2013)

Exhibit 1 : GDP, % change on previous year


inflection point in the history of innovation. The realm of competitive leadership through ingenuity in process and design which has so far been the exclusive province of the West is shifting to the emerging markets. Emerging economies are not merely challenging the lead in innovation; they are unleashing a wave of disruptive breakthroughs that are, as they spread to the rich world, shaking many industries to its foundations. It's time we rethink innovation.

There's a marked difference in the concept of innovation in the West and in emerging markets. When the US thinks innovation, it typically focuses more on products than on processes and mostly on big bang breakthroughs than incremental changes. Supercomputers, blockbuster pharmaceuticals, nanotechnology- innovations like these capture popular imagination in the West. Yet very few companies can create significant shareholder value through breakthrough product innovations; most economic wealth comes from more modest ones that accumulate over time. Even more important are process innovations, which help a company sustain its competitive advantage. Dell and Wal-Mart, for instance, have used process innovations to game-changing effects. The developing countries on the other hand have taken a more holistic view towards innovation that values incremental changes. Companies that start out with limited capabilities can rapidly build them over time through a series of modest product and process innovations. Ultimately, individual innovations may matter less than the institutional capacity to sustain a series of

GLOBALIZATION/GLOCALIZATION REVERSE INNOVATION

Phase 1 Phase 2 Phase 3 Phase 4

Local design, made in EM for the world

Local Design, made in EM for EM

U.S. product defeatured, made in

EM to EM

U.S. products defeatured, made in

U.S. for EM

The Power to DisruptAbstract

How emerging markets are driving global innovation

The world of business innovation is at a major crossroads. Among the 50 most innovative companies in the world today, the majority are Asian- up from just 5 in 2006. This article takes a look at how competitive leadership in systematic innovation is gradually shifting from the West to the emerging markets. Emerging economies are not merely challenging the lead in innovation; they are using concepts like reverse innovation to game-changing effects- like unlocking the 'bottom-of-the-pyramid' fortune. It's time we rethink innovation

In the world of business innovation, a paradigm shift is underway. In the 2010 Bloomberg Business Week's annual ranking of the 50 most innovative companies in the world, 15 are Asian- up from just five in 2006. In fact, for the first time in the history of the rankings, the majority of corporations in the Top 25 are based outside the US. In another equally interesting report published by the OECD, the corporate funding of R&D in China has reached the levels found in the West. Fortune 500 companies now have 98 R&D facilities in China and 63 in India. General Electric's healthcare arm has spent more than $50 million to build a R&D centre in Bangalore, its biggest anywhere in the world. Microsoft's R&D centre in Beijing is its largest outside its American headquarters in Redmond. These developments are a testimony to a major

improvements and the pace at which they are developed and disseminated through the network. The earliest to adopt this paradigm successfully were the Japanese in the 1970s. Dubbed 'lean manufacturing', it helped Japanese carmakers displace American giants Ford and GM as the world's leading car producer. Soon every factory around the world was lean- or a ruin.

Today it's hardly news that the world's centre of economic gravity is shifting to the emerging markets. The emerging world is enjoying the most spectacular growth in history. Its share of global GDP at purchasing power parity increased from 36% in 1980 to 45% in 2008 and looks set to reach 51% in 2014. About 70% of the world's growth in the next few years will come from these markets with 40% coming

from just two countries, India and China. Emerging market consumers have been outspending the Americans since 2007; by last year their share of global consumption had gone up to 34% against America's 27%.

Yet even these figures understate the change that is taking place within. While it is true that developing countries are becoming the new epicentres of innovation, there is something refreshingly different about the nature of this change. Companies are starting with the needs of some of the world's poorest people and redesigning not just products but entire processes to meet those needs profitably. This has been called 'frugal' or 'reverse' innovation for it begins with not the consumer but the non-consumer at the 'bottom of the pyramid'(BOP) population. And it pushes the two familiar ideas- economies of scale and self-reinforcement beyond their previously existing limits.

A reverse innovation is any innovation likely to be adopted first in the developing world. The fundamental driver of reverse innovation is the income gap that exists between the emerging markets and the rich countries. In the case of local markets with idiosyncratic preferences, it is often difficult to successfully introduce a product tailored for US mass consumption. Buyers in poor countries demand solutions on an entirely different price-performance curve. They want new, high tech solutions that deliver ultra-low costs and 'good enough' quality. This

6,000

5,000

4,000

3,000

2,000

1,000

0

2011 2012 2013

2008 2009 2010

Getting richer fasterGDP, % change on previous year

Emerging markets

United States

Advanced economies

1980 85 90 95 2000 05 10 14

Source: IMF

10

8

6

4

2+0-2

4

F'CAST

Figure 1 : Paradigm shift in Business Innovation

Africa & Middle East

Rest of Asia Pacific

Indian Sub-Continent

Far East & China

Eastern Europe

Western Europe

South America

North America

Figure 2 : Total service provider mobile money transfer revenue opportunity per annum in $ million (Regional Forecast 2008 - 2013)

Exhibit 1 : GDP, % change on previous year

AUDIRE - IIM ABC CONSULTING REVIEWAUDIRE - IIM ABC CONSULTING REVIEW40 41

makes it necessary to cut costs to the bone and eliminate all but the most essential features of a product or a service. The evolutionary process of reverse innovation can be seen in four distinct phases-

Companies bu i ld unprecedented economies of scale by selling products and services to markets all around the world. Innovation happens at home, and then the new offerings are distributed everywhere through vast channels.

However, most companies soon realize that while globalization has minimized costs, they are not as competitive in local markets as they need to be. It therefore becomes necessary to adapt global offerings to local needs. Innovation still originates with home-country needs, but products and services are modified to win in each market.

- In this phase the focus is on developing products in-country tailored to local needs. Companies take a 'market-back' perspective, starting with a zero-based assessment of customer needs and delving further into product and design. As teams develop products for the local market the company enables them to remain connected to and benefit from the global resource base.

Once tested and proven locally, products developed in-country are scaled up for worldwide use which involves pioneering radically new applications, establishing lower price points, and even cannibalizing higher-margin products.

Developing countries are becoming hotbeds of reverse innovation in much the same way as Japan pioneered lean manufacturing in the 1980s. Emerging markets are replete with frugal products and services that have generated significant economic value from the bottom of the pyramid. Tata Motors has developed the

i ) Globalizat ion-

(ii) Glocalization-

(iii) Local Innovation

(iv) Reverse Innovation-

world's cheapest car Nano for $2000; GE has designed a hand-held ECG which reduces monitoring costs to just $1 a patient; ITC has created a new market ecosystem for rural Indian farmers through its 'E-Choupal' platform. Evidently, there is more to this than simply cutting costs to the bone. Frugal innovation is not just about redesigning products at dramatically lower costs; it involves rethinking entire production processes and business models. Companies need to squeeze costs while maintaining quality and accept thin margins to gain volume. One way to do this is to apply mass production techniques to sophisticated services. This had started with India's outsourcing firms, which demonstrated that economies of scale and scope could be reaped from services that are

highly fragmented and geographically rooted. Now, the same paradigm is being pushed to include specialized areas like banking and healthcare. The results have been far reaching. Not only has it helped companies gain access to a much larger market but also created entirely new categories of services through technical and business model innovations. Africa, for example, is the world's leading market in mobile money. Perhaps we should take a closer look at some of these products along with their supporting

Tata NANO - Innovation through a small car

(Saving Details)

Low Vehicle Content

Low cost designs

Low Cost Labor

Co-location of Suppliers

Utilization of non-traditional

Suppliers (starting from lower

cost base)

0%1%3%

63%

16%17%

ecosystem innovations. Consider the Tata Nano. The Nano's business model is aimed towards new market disruption at the bottom of the pyramid. It had identified tremendous opportunities in the existing price gap between cars and two-wheelers and positioned itself to address this void. Its value proposition is offering a safe, four-wheeled vehicle to a BOP customer at marginal costs. The Nano did not start with the were withal to develop the world's cheapest car; it instead focused on a reverse exploratory process. It took the cheapest available incumbent in the market Maruti 800 as the base model and worked backwards to reduce costs using lean principles and non-traditional resources. And in the process it improvised not just the product but its entire value chain to become the most competitive low-cost car manufacturer. A better example still would be the portable ultra-cheap electrocardiogram developed by General Electric's R&D centre at Bangalore. The device, called Mac 400, is a masterpiece in frugal innovation. It is driven by a state-of-the-art algorithm but excludes all the associted frills. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a backpack and can run on batteries as well as on the mains. It sells for $800 compared to $2000 for a conventional ECG and reduces the cost of ECG to just $1 per patient. The healthcare industry is rife with frugal innovations of similar kinds. Mass production techniques are being applied in new and unexpected ways with surprising results. The Narayana Hrudayalaya Hospital in Bangalore, founded by India's most celebrated heart surgeon Dr. Devi Shetty, has drastically reduced the cost of heart surgery through economies of scale and specialization. Dr. Shetty and his team perform about 600 operations a week. The sheer number of patients allows surgeons to acquire world-class expertise in particular operations and the

generous back-up facilities allow them to concentrate on their speciality instead of wasting time on administration. The hospital charges about $2000 for open-heart surgery against $20000-$50000 in America with equal success record. The entire enterprise is surprisingly profitable given the number of poor people it treats. It records a profit of 7.7% per year compared to 6.9% in the best American private hospitals. However, the most remarkable instances of reverse innovation are coming not from automobile or healthcare but from the communications and high tech industry. There are now over 4 billion mobile phone users around the world, a critical mass that gives rise to endless opportunities. As the developed markets become more saturated, telecoms are increasingly looking at emerging economies as their next growth drivers. As a result the mobility industry is seeing frugal innovations in the form of low cost $15 handsets, sharedphones, ultra-cheap call rates and mobile financial services. Cell phones also serve as a platform for social innovation in emerging markets. The Grameen Foundation has launched the 'Village Phone' business in rural Bangladesh, setting up micro-finance loans to villagers without any access to telecommunications. In 2009, the Bill Gates Foundation in partnership with a worldwide consortium of mobile industries announced the 'Mobile Money for the Unbanked' (MMU) initiative with a goal of supplying 20 million people with mobile financial services by 2012. The ability to use a mobile device for financial activities- banking as well as payments is of immense value in underdeveloped markets where traditional financial services are absent. Mobile payments are poised for a viral effect in these markets for it allows for small-denominated and frequent top-ups that fit the need of a cash-starved population. Mobile money has successfully disrupted traditional banking in African markets.

Reverse innovation is already making its presence felt in the West. From automobiles to

Figure 3 : Tata Nano - Innovation through a small car(saving details)

AUDIRE - IIM ABC CONSULTING REVIEWAUDIRE - IIM ABC CONSULTING REVIEW40 41

makes it necessary to cut costs to the bone and eliminate all but the most essential features of a product or a service. The evolutionary process of reverse innovation can be seen in four distinct phases-

Companies bu i ld unprecedented economies of scale by selling products and services to markets all around the world. Innovation happens at home, and then the new offerings are distributed everywhere through vast channels.

However, most companies soon realize that while globalization has minimized costs, they are not as competitive in local markets as they need to be. It therefore becomes necessary to adapt global offerings to local needs. Innovation still originates with home-country needs, but products and services are modified to win in each market.

- In this phase the focus is on developing products in-country tailored to local needs. Companies take a 'market-back' perspective, starting with a zero-based assessment of customer needs and delving further into product and design. As teams develop products for the local market the company enables them to remain connected to and benefit from the global resource base.

Once tested and proven locally, products developed in-country are scaled up for worldwide use which involves pioneering radically new applications, establishing lower price points, and even cannibalizing higher-margin products.

Developing countries are becoming hotbeds of reverse innovation in much the same way as Japan pioneered lean manufacturing in the 1980s. Emerging markets are replete with frugal products and services that have generated significant economic value from the bottom of the pyramid. Tata Motors has developed the

i ) Globalizat ion-

(ii) Glocalization-

(iii) Local Innovation

(iv) Reverse Innovation-

world's cheapest car Nano for $2000; GE has designed a hand-held ECG which reduces monitoring costs to just $1 a patient; ITC has created a new market ecosystem for rural Indian farmers through its 'E-Choupal' platform. Evidently, there is more to this than simply cutting costs to the bone. Frugal innovation is not just about redesigning products at dramatically lower costs; it involves rethinking entire production processes and business models. Companies need to squeeze costs while maintaining quality and accept thin margins to gain volume. One way to do this is to apply mass production techniques to sophisticated services. This had started with India's outsourcing firms, which demonstrated that economies of scale and scope could be reaped from services that are

highly fragmented and geographically rooted. Now, the same paradigm is being pushed to include specialized areas like banking and healthcare. The results have been far reaching. Not only has it helped companies gain access to a much larger market but also created entirely new categories of services through technical and business model innovations. Africa, for example, is the world's leading market in mobile money. Perhaps we should take a closer look at some of these products along with their supporting

Tata NANO - Innovation through a small car

(Saving Details)

Low Vehicle Content

Low cost designs

Low Cost Labor

Co-location of Suppliers

Utilization of non-traditional

Suppliers (starting from lower

cost base)

0%1%3%

63%

16%17%

ecosystem innovations. Consider the Tata Nano. The Nano's business model is aimed towards new market disruption at the bottom of the pyramid. It had identified tremendous opportunities in the existing price gap between cars and two-wheelers and positioned itself to address this void. Its value proposition is offering a safe, four-wheeled vehicle to a BOP customer at marginal costs. The Nano did not start with the were withal to develop the world's cheapest car; it instead focused on a reverse exploratory process. It took the cheapest available incumbent in the market Maruti 800 as the base model and worked backwards to reduce costs using lean principles and non-traditional resources. And in the process it improvised not just the product but its entire value chain to become the most competitive low-cost car manufacturer. A better example still would be the portable ultra-cheap electrocardiogram developed by General Electric's R&D centre at Bangalore. The device, called Mac 400, is a masterpiece in frugal innovation. It is driven by a state-of-the-art algorithm but excludes all the associted frills. The multiple buttons on conventional ECGs have been reduced to just four. The bulky printer has been replaced by tiny gadgets used in portable ticket machines. The whole thing is small enough to fit into a backpack and can run on batteries as well as on the mains. It sells for $800 compared to $2000 for a conventional ECG and reduces the cost of ECG to just $1 per patient. The healthcare industry is rife with frugal innovations of similar kinds. Mass production techniques are being applied in new and unexpected ways with surprising results. The Narayana Hrudayalaya Hospital in Bangalore, founded by India's most celebrated heart surgeon Dr. Devi Shetty, has drastically reduced the cost of heart surgery through economies of scale and specialization. Dr. Shetty and his team perform about 600 operations a week. The sheer number of patients allows surgeons to acquire world-class expertise in particular operations and the

generous back-up facilities allow them to concentrate on their speciality instead of wasting time on administration. The hospital charges about $2000 for open-heart surgery against $20000-$50000 in America with equal success record. The entire enterprise is surprisingly profitable given the number of poor people it treats. It records a profit of 7.7% per year compared to 6.9% in the best American private hospitals. However, the most remarkable instances of reverse innovation are coming not from automobile or healthcare but from the communications and high tech industry. There are now over 4 billion mobile phone users around the world, a critical mass that gives rise to endless opportunities. As the developed markets become more saturated, telecoms are increasingly looking at emerging economies as their next growth drivers. As a result the mobility industry is seeing frugal innovations in the form of low cost $15 handsets, sharedphones, ultra-cheap call rates and mobile financial services. Cell phones also serve as a platform for social innovation in emerging markets. The Grameen Foundation has launched the 'Village Phone' business in rural Bangladesh, setting up micro-finance loans to villagers without any access to telecommunications. In 2009, the Bill Gates Foundation in partnership with a worldwide consortium of mobile industries announced the 'Mobile Money for the Unbanked' (MMU) initiative with a goal of supplying 20 million people with mobile financial services by 2012. The ability to use a mobile device for financial activities- banking as well as payments is of immense value in underdeveloped markets where traditional financial services are absent. Mobile payments are poised for a viral effect in these markets for it allows for small-denominated and frequent top-ups that fit the need of a cash-starved population. Mobile money has successfully disrupted traditional banking in African markets.

Reverse innovation is already making its presence felt in the West. From automobiles to

Figure 3 : Tata Nano - Innovation through a small car(saving details)

Climate change negotiations and its linkswith Wind Energy


healthcare emerging market companies are moving up the value chain. The Tata Nano plans to introduce its no-frills European version in 2011. GE's $800 ultrasound device, originally developed for Chinese markets, has become the basis of a global business. This year around 6 million Americans are expected to travel to developing countries for affordable healthcare. The West is also ripe for frugal innovation. As the US and European markets emerge from recession, profligacy is giving way to austerity. Governments are increasing taxes and cutting back on debt-fuelled consumer spending. Frugal innovation will encourage, rather than undermine consumer innovation in the rich

world. Cheaper goods and services will be a blessing for the West which faces increasing deficits and a rapidly ageing population. Frugal innovations may well prevent America's health-

care system (which consumes 17% of its GDP) from swamping the rest of the economy.

Emerging markets on the other hand will continue to hold the lead in innovation at least for another decade. The potential market is huge, populations are enormous and hundreds of millions of people are expected to enter the middle class in the coming years. By 2018 China will produce 10 million graduates per year and India around 6 million, adding to the already formidable repository of cheap and abundant brainpower. And companies which once found their fortunes at the bottom of the pyramid will move significantly upwards as the emerging world would have fully emerged. The dreams for the future "are not just colourful but steroidal". †

† Quoted by Anand Mahindra, Chairman M&M

Riddhiman Kundu is a 2nd year PGP student at IIM Calcutta. He holds a Bachelor's degree in Instrumentation and Electronics Engineering from Jadavpur University, Calcutta and can be reached at [email protected].

About the author

Count your consumers

Population forecasts, bn

0 1 2 3 4 5 6

Asia

Africa

Europe

LatinAmerica

NorthAmerica

201020302050

1

es_by_carbon_dioxide_emissions, 2010)

The Copenhagen Conference was held in Denmark in December 2009. Crucially, even as no binding agreement or even the framework of a possible agreement emerged from the conference, some developing nations, led by China and India, were seen to have moved away significantly from their oft stated position on climate change mitigation by committing to non-binding emissions reductions for the first time. India, for instance, declared its commitment to cut its carbon emissions by 20 to 25% by 2020 over 2005 levels (Pasricha, December 2009), while China asserted that it will cut the carbon intensity of its economy by 40-45% on 2005 levels by 2020. At the same time, no legally binding emissions cuts were decided on for the developed nations, a development leading to many environmentalists labeling the meet as an abject failure. (news.bbc.co.uk/2/hi/8426835.stm, 2009)

In this context of the much awaited summit being perceived as having failed in its objectives of fueling a new climate change treaty, let us examine the role wind energy may have played, and may play in the future, in leading to a more concrete outcome as far as climate change negotiations are concerned.

Copenhagen saw the emergence of a distinct sense of optimism as far the potential of wind energy towards combating climate change is concerned.

The Global Wind Energy Council (GWEC)

The Copenhagen Summit

The Copenhagen Summit and Wind Energy

Abstract

The Kyoto Protocol

Global climate change negotiations and India's position therein have paved the way for the formulation and implementation of a national policy framework for wind energy. The adoption of the National Action Plan on Climate Change and the provisions for a National Renewable Portfolio Standard contained therein would further strengthen the Clean Development Mechanism and facilitate technology transfer.

Along with other initiatives such as inter-state renewable energy certificates trading and incentivizing generation of wind power as opposed to merely capacity installation, the above developments would facilitate growth in the Indian wind energy sector in the near future.

(http://en.wikipedia.org/wiki/ Kyoto_protocol)

The most significant treaty to emerge out of climate change negotiations was the Kyoto Protocol of 1992 which set the tone for dealing with the issue for the next two decades. The Kyoto Protocol laid the key principle of common but differentiated responsibility, which imposes binding emission cuts on developed nations which have been the primary source of global warming since the mid-19th century while developing nations remain outside the ambit of legally binding emission cuts.

However, as some of the developing nations' economies have expanded, notably those of China and India, wherein China has already overtaken the US to become the largest emitter of greenhouse gases in the world, there are ever more vociferous calls from the developed country bloc that these countries be made accountable for their emissions too. (http://en.wikipedia.org/wiki/List_of_countri

Figure 4 : Count your consumersSource: United Nations Population Division

Climate change negotiations and its linkswith Wind Energy


healthcare emerging market companies are moving up the value chain. The Tata Nano plans to introduce its no-frills European version in 2011. GE's $800 ultrasound device, originally developed for Chinese markets, has become the basis of a global business. This year around 6 million Americans are expected to travel to developing countries for affordable healthcare. The West is also ripe for frugal innovation. As the US and European markets emerge from recession, profligacy is giving way to austerity. Governments are increasing taxes and cutting back on debt-fuelled consumer spending. Frugal innovation will encourage, rather than undermine consumer innovation in the rich

world. Cheaper goods and services will be a blessing for the West which faces increasing deficits and a rapidly ageing population. Frugal innovations may well prevent America's health-

care system (which consumes 17% of its GDP) from swamping the rest of the economy.

Emerging markets on the other hand will continue to hold the lead in innovation at least for another decade. The potential market is huge, populations are enormous and hundreds of millions of people are expected to enter the middle class in the coming years. By 2018 China will produce 10 million graduates per year and India around 6 million, adding to the already formidable repository of cheap and abundant brainpower. And companies which once found their fortunes at the bottom of the pyramid will move significantly upwards as the emerging world would have fully emerged. The dreams for the future "are not just colourful but steroidal". †

† Quoted by Anand Mahindra, Chairman M&M

Riddhiman Kundu is a 2nd year PGP student at IIM Calcutta. He holds a Bachelor's degree in Instrumentation and Electronics Engineering from Jadavpur University, Calcutta and can be reached at [email protected].

About the author

Count your consumers

Population forecasts, bn

0 1 2 3 4 5 6

Asia

Africa

Europe

LatinAmerica

NorthAmerica

201020302050

1

es_by_carbon_dioxide_emissions, 2010)

The Copenhagen Conference was held in Denmark in December 2009. Crucially, even as no binding agreement or even the framework of a possible agreement emerged from the conference, some developing nations, led by China and India, were seen to have moved away significantly from their oft stated position on climate change mitigation by committing to non-binding emissions reductions for the first time. India, for instance, declared its commitment to cut its carbon emissions by 20 to 25% by 2020 over 2005 levels (Pasricha, December 2009), while China asserted that it will cut the carbon intensity of its economy by 40-45% on 2005 levels by 2020. At the same time, no legally binding emissions cuts were decided on for the developed nations, a development leading to many environmentalists labeling the meet as an abject failure. (news.bbc.co.uk/2/hi/8426835.stm, 2009)

In this context of the much awaited summit being perceived as having failed in its objectives of fueling a new climate change treaty, let us examine the role wind energy may have played, and may play in the future, in leading to a more concrete outcome as far as climate change negotiations are concerned.

Copenhagen saw the emergence of a distinct sense of optimism as far the potential of wind energy towards combating climate change is concerned.

The Global Wind Energy Council (GWEC)

The Copenhagen Summit

The Copenhagen Summit and Wind Energy

Abstract

The Kyoto Protocol

Global climate change negotiations and India's position therein have paved the way for the formulation and implementation of a national policy framework for wind energy. The adoption of the National Action Plan on Climate Change and the provisions for a National Renewable Portfolio Standard contained therein would further strengthen the Clean Development Mechanism and facilitate technology transfer.

Along with other initiatives such as inter-state renewable energy certificates trading and incentivizing generation of wind power as opposed to merely capacity installation, the above developments would facilitate growth in the Indian wind energy sector in the near future.

(http://en.wikipedia.org/wiki/ Kyoto_protocol)

The most significant treaty to emerge out of climate change negotiations was the Kyoto Protocol of 1992 which set the tone for dealing with the issue for the next two decades. The Kyoto Protocol laid the key principle of common but differentiated responsibility, which imposes binding emission cuts on developed nations which have been the primary source of global warming since the mid-19th century while developing nations remain outside the ambit of legally binding emission cuts.

However, as some of the developing nations' economies have expanded, notably those of China and India, wherein China has already overtaken the US to become the largest emitter of greenhouse gases in the world, there are ever more vociferous calls from the developed country bloc that these countries be made accountable for their emissions too. (http://en.wikipedia.org/wiki/List_of_countri

Figure 4 : Count your consumersSource: United Nations Population Division


estimates that emissions reductions of at least 25-40% below 1990 levels are required to avoid the worst impacts of climate change. With wind energy technologies that are available now, global wind energy alone could contribute 34% of a 25% emissions reduction and 21% of a 40% emissions reduction.

GWEC further goes on to add that the wind energy sector stands ready to contribute a total of 10 billion tons of CO2 reductions by 2020 and asserts that industrialized countries can and must review their pledges for reduction targets and raise them very substantially, as well as assist developing countries' often ambitious programs to decarbonize their electricity systems with both public finance and private investment t h r o u g h t h e c a r b o n m a r k e t s . (http://www.windpowerworks.net, 2010)

Based on our reading of their views and analyses, the GWEC stresses on the following points as regards wind energy's use in combating climate change:

· The potential for reduction of emissions by developed nations is much greater than claimed by them if wind energy is harnessed.

· The view of wind energy as being a sustainable substitute for fossil-fuel based energy has grown significantly in the last two years due to significant additions to wind power potential worldwide and marked improvements in technology. In fact, the remarkable growth in wind energy capacity is implied by the fact it stood at 121 GW at the end of 2008, out of which 47 GW was added in 2007 and 2008 alone. (Ishan Purohit and Pallav Purohit, 2009)

· The failure to harness the full potential of wind energy can be attributed to the glaring absence of a legally binding international treaty for emissions reductions. The resulting ambiguity and lack of national

policies has led to absence of investor interest in the industry.

Thus, it seems clear that the goal of securing a legally binding treaty on climate change and emissions reductions, an ambitious though notably elusive goal, is consistent to a remarkable degree with the aim of establishing a global wind energy-led renewable energy renaissance.

Our view is that climate change negotiations provide a significant window of opportunity to use the potential of wind energy to push for more meaningful talks on climate change addressing the issue of emissions cuts, while promoting the use of this renewable resource by means of formulating clear policy directives, a d o p t i n g n a t i o n a l f r a m e wo r k s f o r implementation, diffusing complex technology and enhancing investor interest.

Various implications can be attached to these recent developments on climate change as regards developments in the wind energy sector in India:

· Quite apart from not receiving much by way of reciprocation by the developed nation bloc, India's declaration regarding voluntary emissions cut (albeit not subject to international verification) can be seen as signaling India's intent to combat climate change and may in fact be the catalyst for a new thrust to wind energy generation in the country

· As pointed out by the GWEC in the Copenhagen Summit, the major barriers to successful and large-scale exploitation of wind energy in the world consist of lack of all encompassing national policies and technology. The barrier stated herein stands to be overcome by this announcement.

Thus, the change in India's stance complements

Revisiting the Copenhagen Summit

its commitments to build a national policy framework to combat climate change, provoke result-oriented dialogue and, concomitantly, address issues of harnessing renewable sources of energy.

Impact on India's Wind Energy sector: Government, Climate Change and Wind Energy

Table 1:Renewable energy capacity additions during 10th/11th Five Year Plan

Source: MNRE

India has the fifth largest installed capacity of wind power in the world. Table 1 shows renewable energy capacity additions in the 10th and 11t h 5-year Plans, as also wind energy'sshare in the same. In this section we propose to revisit some of the main concerns with regard to the wind energy industry and analyze how recent developments in climate change would inf luence the course ofdevelopment of the massive wind energy potential India possesses.

Even as India has developed a strong domestic manufacturing base for wind energy (led by Suzlon), its development has mainly been driven by progressive state level legislation. At the moment, there is no coherent national renewable energy policy to drive the development of wind energy. This is urgently needed to realize the country's full potential and reap the benefits for both the environment and the economy. (Pullen et. al., 2009) It is our belief

that the NAPCC and recent overtures made by India at Copenhagen mark a shift in the latter.

India's new commitments point to an increased use of the CDM under which India had already registered 301 wind energy projects as on March 2009, with a potential of 5659 MW, second only to China. Effective implementation of the CDM, besides providing an important

The Clean Development Mechanism (CDM) and Carbon Prices

Technology Target 2003-07 (MW) Actual 2003-07 (MW) Target 2008-12 (MW)

Windpower 2200 5426 10500

Small Hydro(<25 MW) 550 537 1400

Biomass power/Cogeneration 725 759 1700

Biomass Gasifier 37 26 -

Solar PV 2 1 -

Waste to Energy Programme 70 47 400

TOTAL 3584 6795 14000


estimates that emissions reductions of at least 25-40% below 1990 levels are required to avoid the worst impacts of climate change. With wind energy technologies that are available now, global wind energy alone could contribute 34% of a 25% emissions reduction and 21% of a 40% emissions reduction.

GWEC further goes on to add that the wind energy sector stands ready to contribute a total of 10 billion tons of CO2 reductions by 2020 and asserts that industrialized countries can and must review their pledges for reduction targets and raise them very substantially, as well as assist developing countries' often ambitious programs to decarbonize their electricity systems with both public finance and private investment t h r o u g h t h e c a r b o n m a r k e t s . (http://www.windpowerworks.net, 2010)

Based on our reading of their views and analyses, the GWEC stresses on the following points as regards wind energy's use in combating climate change:

· The potential for reduction of emissions by developed nations is much greater than claimed by them if wind energy is harnessed.

· The view of wind energy as being a sustainable substitute for fossil-fuel based energy has grown significantly in the last two years due to significant additions to wind power potential worldwide and marked improvements in technology. In fact, the remarkable growth in wind energy capacity is implied by the fact it stood at 121 GW at the end of 2008, out of which 47 GW was added in 2007 and 2008 alone. (Ishan Purohit and Pallav Purohit, 2009)

· The failure to harness the full potential of wind energy can be attributed to the glaring absence of a legally binding international treaty for emissions reductions. The resulting ambiguity and lack of national

policies has led to absence of investor interest in the industry.

Thus, it seems clear that the goal of securing a legally binding treaty on climate change and emissions reductions, an ambitious though notably elusive goal, is consistent to a remarkable degree with the aim of establishing a global wind energy-led renewable energy renaissance.

Our view is that climate change negotiations provide a significant window of opportunity to use the potential of wind energy to push for more meaningful talks on climate change addressing the issue of emissions cuts, while promoting the use of this renewable resource by means of formulating clear policy directives, a d o p t i n g n a t i o n a l f r a m e wo r k s f o r implementation, diffusing complex technology and enhancing investor interest.

Various implications can be attached to these recent developments on climate change as regards developments in the wind energy sector in India:

· Quite apart from not receiving much by way of reciprocation by the developed nation bloc, India's declaration regarding voluntary emissions cut (albeit not subject to international verification) can be seen as signaling India's intent to combat climate change and may in fact be the catalyst for a new thrust to wind energy generation in the country

· As pointed out by the GWEC in the Copenhagen Summit, the major barriers to successful and large-scale exploitation of wind energy in the world consist of lack of all encompassing national policies and technology. The barrier stated herein stands to be overcome by this announcement.

Thus, the change in India's stance complements

Revisiting the Copenhagen Summit

its commitments to build a national policy framework to combat climate change, provoke result-oriented dialogue and, concomitantly, address issues of harnessing renewable sources of energy.

Impact on India's Wind Energy sector: Government, Climate Change and Wind Energy

Table 1:Renewable energy capacity additions during 10th/11th Five Year Plan

Source: MNRE

India has the fifth largest installed capacity of wind power in the world. Table 1 shows renewable energy capacity additions in the 10th and 11t h 5-year Plans, as also wind energy'sshare in the same. In this section we propose to revisit some of the main concerns with regard to the wind energy industry and analyze how recent developments in climate change would inf luence the course ofdevelopment of the massive wind energy potential India possesses.

Even as India has developed a strong domestic manufacturing base for wind energy (led by Suzlon), its development has mainly been driven by progressive state level legislation. At the moment, there is no coherent national renewable energy policy to drive the development of wind energy. This is urgently needed to realize the country's full potential and reap the benefits for both the environment and the economy. (Pullen et. al., 2009) It is our belief

that the NAPCC and recent overtures made by India at Copenhagen mark a shift in the latter.

India's new commitments point to an increased use of the CDM under which India had already registered 301 wind energy projects as on March 2009, with a potential of 5659 MW, second only to China. Effective implementation of the CDM, besides providing an important

The Clean Development Mechanism (CDM) and Carbon Prices

Technology Target 2003-07 (MW) Actual 2003-07 (MW) Target 2008-12 (MW)

Windpower 2200 5426 10500

Small Hydro(<25 MW) 550 537 1400

Biomass power/Cogeneration 725 759 1700

Biomass Gasifier 37 26 -

Solar PV 2 1 -

Waste to Energy Programme 70 47 400

TOTAL 3584 6795 14000

46 47

Figure 1 : Carbon trend prices

economic incentive to investors keen to invest in wind energy generation, also furthers the case for developed nations adopting legally binding emission cuts, since wind power generation expansion in countries like India coupled with efficient trading of carbon emission reductions with other countries nullifies, to a considerable extent, concerns over economic growth stagnating in the latter (since emission cuts can be traded effectively).

By providing for an incentive to transfer wind power technologies to developing nations on the part of developed nations, the CDM also addresses the crucial lacuna currently existing in the form of a lack of a credible technology transfer regime.

In a related context, India' and China's

commitments towards cutting domestic emissions may also lead to an upswing in carbon prices, thereby strengthening the carbon trading framework. Carbon prices had crashed in the aftermath of the credit crisis as developed nations abandoned green technologies and a fall in carbon trading volumes ensued. Then, more recently, the Copenhagen Summit's failure to evolve a binding climate change treaty fueled uncertainty about the future of carbon trading,

causing prices to fall. (Flood and Harvey, 2009)

By signaling their respective governments' intent to invest in green technologies and encourage the private sector to so the same, India and China represent higher future volumes in carbon trading thereby increasing the attractiveness of investing in wind energy.

Recession-hitShare prices, November 1st 2007-100

S&P 500

Wilderhill New Energy Global

Innovation index

2007 08 09

Source: Thomson Reuters

100

80

60

40

20

Policy change and its effects

A national commitment on combating climate change also provides for effective signals to investors keen to invest in India's wind energy industry. According to the GWEC report, “Currently, incentives include a mix of federal and state level initiatives. The former consist of import duty concessions and high rates of allowable depreciation; while the latter consist of certain states offering special tariffs, energy buy-backs and guaranteed markets through specified renewable portfolio standards in some states (10 states in India have launched RPS where quotas for renewable energy share from wind of up to 10% have been set and preferential tariffs introduced).

While a national feed-in tariff was launched in June 2008, which is a national generation-based incentive scheme for grid connected.

wind power projects, it is in fact too low to have a significant impact on a project's viability (emphasis added by us).” (Pullen et. al., 2009).

Thus, we can conclude that India's tremendous wind energy resource has only been partially realized due to the lack of a coherent national renewable energy policy and inconsistent implementation of state government initiatives is hampering genuine progress.

In the context of the above, the importance of a national level renewable portfolio standard envisaged by the NAPCC cannot be underestimated. By providing for a wind energy quotas at the national level, and allowing for trading of renewable energy certificates as advocated by the GWEC, such a policy will be an internal inter-state version of the CDM itself. The CDM in conjunction with renewable energy certificate trading within the country would:

· Lend stability to the policy atmosphere, currently dominated by state level policies

· An efficient inter-linkage between state-

based RPSs and NAPCC led policies will ensure maximization of investment returns. States with high wind power generation capacity are already offering state based incentives with high quotas, and the national RPS envisages an equal minimum quota for each state while dictating that state-level quotas have to fulfilled as well (i.e. Minimum wind energy to be produced = Max(National RPS for wind energy, State level RPS for wind energy). This would ensure maximum efficiency generated from investments by introducing a market-based system wherein states with high potential could substantially overshoot their national quotas and trade the certificates with other states.

· The RPS allows for only grid connected electricity to benefit, thereby correcting the traditional focus on incentivizing only installation instead of actual power generation. Thus there will follow a closing of the gap between installed capacity and actual generation.

Due to its cost advantages, wind power remains the most promising source of renewable energy in India. Emissions trading through the CDM route as an aftermath of the recent thrust in climate change negotiations and concerns would further incentivize the transfer of technological expertise and investment in this field from developed countries. In the context of a possible increase in carbon prices due to the global economic recovery and China and India taking an active part in emission reductions, such a development promises aggressive growth in the Indian wind energy sector in the coming decade.

The impending implementation of a national RPS would provide incentives to renewable energy generation facilities connected to the grid network. This would favor the wind energy industry (due to its large installed capacity base)

Concluding comments

46 47

Figure 1 : Carbon trend prices

economic incentive to investors keen to invest in wind energy generation, also furthers the case for developed nations adopting legally binding emission cuts, since wind power generation expansion in countries like India coupled with efficient trading of carbon emission reductions with other countries nullifies, to a considerable extent, concerns over economic growth stagnating in the latter (since emission cuts can be traded effectively).

By providing for an incentive to transfer wind power technologies to developing nations on the part of developed nations, the CDM also addresses the crucial lacuna currently existing in the form of a lack of a credible technology transfer regime.

In a related context, India' and China's

commitments towards cutting domestic emissions may also lead to an upswing in carbon prices, thereby strengthening the carbon trading framework. Carbon prices had crashed in the aftermath of the credit crisis as developed nations abandoned green technologies and a fall in carbon trading volumes ensued. Then, more recently, the Copenhagen Summit's failure to evolve a binding climate change treaty fueled uncertainty about the future of carbon trading,

causing prices to fall. (Flood and Harvey, 2009)

By signaling their respective governments' intent to invest in green technologies and encourage the private sector to so the same, India and China represent higher future volumes in carbon trading thereby increasing the attractiveness of investing in wind energy.

hare prices, November 1st 2007-100

Source: Thomson Reuters

Policy change and its effects

A national commitment on combating climate change also provides for effective signals to investors keen to invest in India's wind energy industry. According to the GWEC report, “Currently, incentives include a mix of federal and state level initiatives. The former consist of import duty concessions and high rates of allowable depreciation; while the latter consist of certain states offering special tariffs, energy buy-backs and guaranteed markets through specified renewable portfolio standards in some states (10 states in India have launched RPS where quotas for renewable energy share from wind of up to 10% have been set and preferential tariffs introduced).

While a national feed-in tariff was launched in June 2008, which is a national generation-based incentive scheme for grid connected.

wind power projects, it is in fact too low to have a significant impact on a project's viability (emphasis added by us).” (Pullen et. al., 2009).

Thus, we can conclude that India's tremendous wind energy resource has only been partially realized due to the lack of a coherent national renewable energy policy and inconsistent implementation of state government initiatives is hampering genuine progress.

In the context of the above, the importance of a national level renewable portfolio standard envisaged by the NAPCC cannot be underestimated. By providing for a wind energy quotas at the national level, and allowing for trading of renewable energy certificates as advocated by the GWEC, such a policy will be an internal inter-state version of the CDM itself. The CDM in conjunction with renewable energy certificate trading within the country would:

· Lend stability to the policy atmosphere, currently dominated by state level policies

· An efficient inter-linkage between state-

based RPSs and NAPCC led policies will ensure maximization of investment returns. States with high wind power generation capacity are already offering state based incentives with high quotas, and the national RPS envisages an equal minimum quota for each state while dictating that state-level quotas have to fulfilled as well (i.e. Minimum wind energy to be produced = Max(National RPS for wind energy, State level RPS for wind energy). This would ensure maximum efficiency generated from investments by introducing a market-based system wherein states with high potential could substantially overshoot their national quotas and trade the certificates with other states.

· The RPS allows for only grid connected electricity to benefit, thereby correcting the traditional focus on incentivizing only installation instead of actual power generation. Thus there will follow a closing of the gap between installed capacity and actual generation.

Due to its cost advantages, wind power remains the most promising source of renewable energy in India. Emissions trading through the CDM route as an aftermath of the recent thrust in climate change negotiations and concerns would further incentivize the transfer of technological expertise and investment in this field from developed countries. In the context of a possible increase in carbon prices due to the global economic recovery and China and India taking an active part in emission reductions, such a development promises aggressive growth in the Indian wind energy sector in the coming decade.

The impending implementation of a national RPS would provide incentives to renewable energy generation facilities connected to the grid network. This would favor the wind energy industry (due to its large installed capacity base)

Concluding comments


over the solar energy industry. It would also address the gap between wind energy production and installed capacity that exists today. As a result, growth in the coming years would not be limited to turbine manufacture, but would also include the different parts of the value-chain.

Arjun Upmanyu is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's in Economics from St. Stephen's College, Delhi and can be reached at [email protected]

Teemish Gupta is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's and Master's in Biochemical Engineering and Biotechnology from IIT Delhi and can be reached at [email protected]

Nikhil Ummat is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's in Nautical Sciences from T.S. Chanakya and can be reached at [email protected]

1. Angelika Pullen, Steve Sawyer, DVGiri, TFJayasurya, Srinivas Krishnaswamy (2009), India Wind Energy Outlook 2009, GWEC. Retrieved January 14, 2010 from:www.indianwindpower.com/pdf/GWEO_A4_2008_India_LowRes.pdf

2. Indian Wind Turbine Manufacturer's Association, Wind Energy in India. Retrieved January 14, 2010 from:http://indianwindpower.com/iw_energy.php Suzlon, Wind Power Growth Drivers. Retrieved January 14, 2010 from: http://suzlon.com/ wpgd_wind_energy.aspx Wikipedia, Kyoto Protocol, Retrieved January 14, 2010 from:http://en.wikipedia.org/wiki/Kyoto_protocol

3. Wikipedia, List of countries by carbon dioxide emissions, Retrieved January 14, 2010 from:

About the Authors

References

http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions

4. Anjana Pasricha (December 22, 2009), India satisfied with Copenhagen Summit, Voice of America News. Retrieved January 13, 2010 from:http://www1.voanews.com/english/news/India-Satisfied-with-Copenhagen-Climate-Summit--79888187.html

5. COP15 News 2009, Wind Power Works. Retrieved January 13, 2010 from: http://www.windpowerworks.net/cop15/news_cop15/news_2009.html#none

6. Why did Copenhagen fail to deliver a climate deal?, December 22, 2009, BBC News. Retrieved January 13, 2010 from:

http://news.bbc.co.uk/2/hi/8426835.stm

7. Chris Flood and Fiona Harvey, December 22, 2009, Carbon prices fall in wake of Copenhagen, Financial Times. Retrieved January 14, 2010 from:http://www.ft.com/cms/s/0/c1a7aade-ee98-11de-944c-00144feab49a.html?nclick_check=1

8. The Green Slump, December 3, 2009, The Economist. Retrieved January 14, 2010 from: http://www.economist.com/specialreports/displaystory.cfm?story_id=14994802

9. Ishan Purohit and Pallav Purohit, , July 2009, Wind Energy in India: Status and Future Prospects, Journal of Renewable and Sustainable Energy. Retrieved January 13, 2010 from: http://jrse.aip.org/jrsebh/v1/i4/p042701_s1

Leveraging the Power of NPSin B2B Markets

that are in relatively better position to sail through the testing times. This will again depend on the status of being a successful In-Supplier.

Enhancing In-Supplier status with the power of customer Loyalty (NPS)

Translating the merit of being an impressive In-Supplier to lead to increased revenue opportunities is achieved by leveraging customer

loyalty as a proven source for referral power/potential and an indicator of the

repurchase power/potential that is so critical to repeat businesses. Net Promoter Score (NPS) has been identified as a comprehensive measure of customer loyalty and is being increasingly deployed in gauging the power and economics of referral and re-purchase behaviors. Recent trends across several industries indicate that the NPS is an integral part of B2B and B2C marketing strategies. However there seems to be a certain scope for improving the overall implementation of NPS in the context of B2B markets to truly leverage its power.

Differentiated Buyer and User identities in B2B customers

One of the very critical aspects of a customer that is differentiated between the B2C and B2B

markets is the oneness of the “buyer” and “user” behaviors in a given customer in B2C markets as opposed to the physical separation and behavioral differentiation of these two identities in the customer in B2B markets.

With the exceptions of certain consumer products/markets targeting children and senior citizens, much of the B2C market's typical

customer is the buyer and also the user of the

Abstract

Business Value of being an In-Supplier

NPS is gaining attention and several companies across various industries have adopted the measurement, evaluation and management of NPS as being critical to their success. The extent of its success seems to be associated with how successfully it is applied to the specific context that each company operates across each of the target markets of its respective product or service offerings. This paper has identified one such subjective element in the context of B2B customer namely the differentiation of the buyer and user attributes and how appropriate evaluations can lead to creating powerful strategic and tactical actions to enhance the power of marketing and sales operations.

At a broad-level revenue in B2B markets can be classified as,

New-New New revenue opportunity from New business customer

Existing-New New revenue opportunity from Existing business customer

Generally it is observed that Existing-New revenue and the ability to sustain its growth based on reliable and reasonable demand estimations depends greatly on the strength of the company to be the best-in-class In-Supplier. Additionally during these testing economic times it is quite common to witness the financial

failures of several suppliers who enjoy In-S u p p l i e r s t a t u s i n a g i v e n B 2 B market/company, and their inability to maintain the desired levels of service required by the customers. This leads to the potential opening

up of addit ional displacement and

replacement opportunities for other suppliers

?

?


over the solar energy industry. It would also address the gap between wind energy production and installed capacity that exists today. As a result, growth in the coming years would not be limited to turbine manufacture, but would also include the different parts of the value-chain.

Arjun Upmanyu is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's in Economics from St. Stephen's College, Delhi and can be reached at [email protected]

Teemish Gupta is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's and Master's in Biochemical Engineering and Biotechnology from IIT Delhi and can be reached at [email protected]

Nikhil Ummat is a 2nd year PGP student at IIM Ahmedabad. He did his Bachelor's in Nautical Sciences from T.S. Chanakya and can be reached at [email protected]

1. Angelika Pullen, Steve Sawyer, DVGiri, TFJayasurya, Srinivas Krishnaswamy (2009), India Wind Energy Outlook 2009, GWEC. Retrieved January 14, 2010 from:www.indianwindpower.com/pdf/GWEO_A4_2008_India_LowRes.pdf

2. Indian Wind Turbine Manufacturer's Association, Wind Energy in India. Retrieved January 14, 2010 from:http://indianwindpower.com/iw_energy.php Suzlon, Wind Power Growth Drivers. Retrieved January 14, 2010 from: http://suzlon.com/ wpgd_wind_energy.aspx Wikipedia, Kyoto Protocol, Retrieved January 14, 2010 from:http://en.wikipedia.org/wiki/Kyoto_protocol

3. Wikipedia, List of countries by carbon dioxide emissions, Retrieved January 14, 2010 from:

About the Authors

References

http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions

4. Anjana Pasricha (December 22, 2009), India satisfied with Copenhagen Summit, Voice of America News. Retrieved January 13, 2010 from:http://www1.voanews.com/english/news/India-Satisfied-with-Copenhagen-Climate-Summit--79888187.html

5. COP15 News 2009, Wind Power Works. Retrieved January 13, 2010 from: http://www.windpowerworks.net/cop15/news_cop15/news_2009.html#none

6. Why did Copenhagen fail to deliver a climate deal?, December 22, 2009, BBC News. Retrieved January 13, 2010 from:

http://news.bbc.co.uk/2/hi/8426835.stm

7. Chris Flood and Fiona Harvey, December 22, 2009, Carbon prices fall in wake of Copenhagen, Financial Times. Retrieved January 14, 2010 from:http://www.ft.com/cms/s/0/c1a7aade-ee98-11de-944c-00144feab49a.html?nclick_check=1

8. The Green Slump, December 3, 2009, The Economist. Retrieved January 14, 2010 from: http://www.economist.com/specialreports/displaystory.cfm?story_id=14994802

9. Ishan Purohit and Pallav Purohit, , July 2009, Wind Energy in India: Status and Future Prospects, Journal of Renewable and Sustainable Energy. Retrieved January 13, 2010 from: http://jrse.aip.org/jrsebh/v1/i4/p042701_s1

Leveraging the Power of NPSin B2B Markets

that are in relatively better position to sail through the testing times. This will again depend on the status of being a successful In-Supplier.

Enhancing In-Supplier status with the power of customer Loyalty (NPS)

Translating the merit of being an impressive In-Supplier to lead to increased revenue opportunities is achieved by leveraging customer

loyalty as a proven source for referral power/potential and an indicator of the

repurchase power/potential that is so critical to repeat businesses. Net Promoter Score (NPS) has been identified as a comprehensive measure of customer loyalty and is being increasingly deployed in gauging the power and economics of referral and re-purchase behaviors. Recent trends across several industries indicate that the NPS is an integral part of B2B and B2C marketing strategies. However there seems to be a certain scope for improving the overall implementation of NPS in the context of B2B markets to truly leverage its power.

Differentiated Buyer and User identities in B2B customers

One of the very critical aspects of a customer that is differentiated between the B2C and B2B

markets is the oneness of the “buyer” and “user” behaviors in a given customer in B2C markets as opposed to the physical separation and behavioral differentiation of these two identities in the customer in B2B markets.

With the exceptions of certain consumer products/markets targeting children and senior citizens, much of the B2C market's typical

customer is the buyer and also the user of the

Abstract

Business Value of being an In-Supplier

NPS is gaining attention and several companies across various industries have adopted the measurement, evaluation and management of NPS as being critical to their success. The extent of its success seems to be associated with how successfully it is applied to the specific context that each company operates across each of the target markets of its respective product or service offerings. This paper has identified one such subjective element in the context of B2B customer namely the differentiation of the buyer and user attributes and how appropriate evaluations can lead to creating powerful strategic and tactical actions to enhance the power of marketing and sales operations.

At a broad-level revenue in B2B markets can be classified as,

New-New New revenue opportunity from New business customer

Existing-New New revenue opportunity from Existing business customer

Generally it is observed that Existing-New revenue and the ability to sustain its growth based on reliable and reasonable demand estimations depends greatly on the strength of the company to be the best-in-class In-Supplier. Additionally during these testing economic times it is quite common to witness the financial

failures of several suppliers who enjoy In-S u p p l i e r s t a t u s i n a g i v e n B 2 B market/company, and their inability to maintain the desired levels of service required by the customers. This leads to the potential opening

up of addit ional displacement and

replacement opportunities for other suppliers

?

?

AUDIRE - IIM ABC CONSULTING REVIEW 51AUDIRE - IIM ABC CONSULTING REVIEW50

product. However that is most often not the case

with a B2B customer as the buyer is usually

different from the user due to Organizational (Hierarchical), Geographical or Functional differentiation. Apart from these select organizational attributes it is even more critical to note the distinctiveness between the Buyer and User behavioral attributes within a B2B DMU (Decision Making Unit). Therefore in B2B markets these inherently complex attributes of the customer have to be evaluated more closely while designing the measurement and application of NPS.

Conventional measurement of NPS is based on the response to the single question, “Will you recommend the product/brand/company?” typically rated on the 11-point scale from 0 to10 and response to this question is used as baseline to identify “Promoters” and “Detractors” the Promoters expected to be more open to extending positive referrals and also involve more predictably and favorably in repurchase decisions. Typically the above question is deemed to provide an aggregated indication of the overall experience of the customer with the several key attributes of the product/brand.

However this is not as straightforward in the case of B2B market customers as there are instances wherein the buyer and user differentiation is so complex that a single respondent's response (either a buyer or user entity) to the single question cannot truly represent the consolidated view of customer loyalty. Certainly not accurate enough to derive NPS and identify actionable data such as referral and repurchase power/potential of the customer.

It is therefore imperative that the differentiated and divergent identities of buyer and user behaviors are factored into the application of NPS to enhance the accuracy and effectiveness of the data as well as actions defined on its basis.

Reengineering NPS

This paper identifies two key areas that require more focus, they are:

Estimating Customer Loyalty and quantifying referral and repurchase power/economics

Strategic and Tactical decision leading to specific actions defined as part of overall marketing-mix

To illustrate the above challenges in measurement and application of NPS in a real-life B2B customer setting, we have used the case of Communications Software Technologies m a r k e t w h e r e t h e O E M s o f Telecommunications equipment are the customers of independent software product suppliers. The DMU typically in OEMs are characterized by the combination of several decision makers across different functions such as Strategic sourcing (purchase), Product Line Management, R&D at the minimum. The key personnel from these functions recommend and influence the buying decision with each one evaluating the product's technological and commercial attributes from its respective buying

objectives. The buyer behavior is exhibited by the personnel from the sourcing function. Post-

sales, the user behavior is typically exhibited by the personnel from the R&D function (system architects and system engineers in the R&D).

Post-sales it is this aggregated identity of user entity that the supplier corresponds primarily in terms of products support, product upgrades, professional services etc.

In this setting, the software supplier undertakes a customer satisfaction (loyalty) survey exercise to specifically measure the OEM's customer satisfaction and the customer loyalty. The survey

1. NPS - Measurement and Evaluation

2. NPS - Analysis and Actions

Illustration

?

?

is carried out by sending questionnaires most often responded to by only the user entity within the customer as that is currently the only actively engaging entity within the customer. This leads to the data collected being only partial as the user entity will have presented feedback from the perspective of how it has engaged with the various attributes of the company and the product. If the supplier specifically extends the

survey to include personnel from the buyer entity it will also similarly have a partial coverage effect. So the software supplier is finally left with

independent feedbacks from the buyer and the user entities. If it tries to consolidate these on its own the final view is still not appropriate and may not be consistent with the overall consolidated view if it had come directly from the OEM customer. This is a critical issue in the measurement and evaluation of the NPS in the B2B context that needs to be addressed to improve upon the effectiveness and accuracy of the NPS derived from such a survey.

A divergent view of the customer satisfaction

(loyalty) feedback from the buyer and user entities also impacts the various strategic and transactional activities (across demand forecasting, business development, integrated-marketing etc) that the supplier defines based on the overall measure of the referral and repurchase power/potential derived from the NPS. Let us consider the case of a different business (products) unit within the OEM that intends to license the software technologies and internally checks for preferred In-Suppliers. The supplier is at advantage if it receives higher

referral mileage from both the buyer and the

user entities of the previous buying-center. This pre-requires that the supplier has thoroughly studied the independent customer loyalty of the

buyer and user entities of the previous buying-center and has a better sense of the respective referral potential/power this is even more critical for external businesses outside the customer.

In summary, with this real-life case of a B2B market we have established the following key challenges with NPS in the context of B2B markets,

1. Vital for the supplier to measure and evaluate the customer loyalty (NPS) of the

buyer and user entities independently.

2. Critical to also obtain a consolidated view of the overall measure of customer loyalty (NPS) of the customer directly from the customer as opposed to deriving this from the independent views of the buyer and user entities.

3. Extend the integrated-marketing mix with elements of strategic and tactical activities that adequately leverage the referral and

repurchase power/economics of buyer and

user entities rather than merely adopt adhoc means to only trigger successful conversion of leads.

In this section a set of recommendations to enhance the overall impact of NPS in B2B markets have been identified in the context of Communications Software Technologies market in the OEM telecommunications equipment industry.

1. Reengineer the customer satisfaction (loyalty) survey to independently measure

and evaluate the NPS of the buyer and user entities within the customer buying-center.

2. Create an internal channel between the buyer and user entities within the customer's buying-center to ensure the independent feedback of the survey from each entity flows to the other and this in turn enables a platform for the customer to directly offer a consolidated view of the overall customer loyalty.

Recommendations

NPS - Measurement and Evaluation

AUDIRE - IIM ABC CONSULTING REVIEW 51AUDIRE - IIM ABC CONSULTING REVIEW50

product. However that is most often not the case

with a B2B customer as the buyer is usually

different from the user due to Organizational (Hierarchical), Geographical or Functional differentiation. Apart from these select organizational attributes it is even more critical to note the distinctiveness between the Buyer and User behavioral attributes within a B2B DMU (Decision Making Unit). Therefore in B2B markets these inherently complex attributes of the customer have to be evaluated more closely while designing the measurement and application of NPS.

Conventional measurement of NPS is based on the response to the single question, “Will you recommend the product/brand/company?” typically rated on the 11-point scale from 0 to10 and response to this question is used as baseline to identify “Promoters” and “Detractors” the Promoters expected to be more open to extending positive referrals and also involve more predictably and favorably in repurchase decisions. Typically the above question is deemed to provide an aggregated indication of the overall experience of the customer with the several key attributes of the product/brand.

However this is not as straightforward in the case of B2B market customers as there are instances wherein the buyer and user differentiation is so complex that a single respondent's response (either a buyer or user entity) to the single question cannot truly represent the consolidated view of customer loyalty. Certainly not accurate enough to derive NPS and identify actionable data such as referral and repurchase power/potential of the customer.

It is therefore imperative that the differentiated and divergent identities of buyer and user behaviors are factored into the application of NPS to enhance the accuracy and effectiveness of the data as well as actions defined on its basis.

Reengineering NPS

This paper identifies two key areas that require more focus, they are:

Estimating Customer Loyalty and quantifying referral and repurchase power/economics

Strategic and Tactical decision leading to specific actions defined as part of overall marketing-mix

To illustrate the above challenges in measurement and application of NPS in a real-life B2B customer setting, we have used the case of Communications Software Technologies m a r k e t w h e r e t h e O E M s o f Telecommunications equipment are the customers of independent software product suppliers. The DMU typically in OEMs are characterized by the combination of several decision makers across different functions such as Strategic sourcing (purchase), Product Line Management, R&D at the minimum. The key personnel from these functions recommend and influence the buying decision with each one evaluating the product's technological and commercial attributes from its respective buying

objectives. The buyer behavior is exhibited by the personnel from the sourcing function. Post-

sales, the user behavior is typically exhibited by the personnel from the R&D function (system architects and system engineers in the R&D).

Post-sales it is this aggregated identity of user entity that the supplier corresponds primarily in terms of products support, product upgrades, professional services etc.

In this setting, the software supplier undertakes a customer satisfaction (loyalty) survey exercise to specifically measure the OEM's customer satisfaction and the customer loyalty. The survey

1. NPS - Measurement and Evaluation

2. NPS - Analysis and Actions

Illustration

?

?

is carried out by sending questionnaires most often responded to by only the user entity within the customer as that is currently the only actively engaging entity within the customer. This leads to the data collected being only partial as the user entity will have presented feedback from the perspective of how it has engaged with the various attributes of the company and the product. If the supplier specifically extends the

survey to include personnel from the buyer entity it will also similarly have a partial coverage effect. So the software supplier is finally left with

independent feedbacks from the buyer and the user entities. If it tries to consolidate these on its own the final view is still not appropriate and may not be consistent with the overall consolidated view if it had come directly from the OEM customer. This is a critical issue in the measurement and evaluation of the NPS in the B2B context that needs to be addressed to improve upon the effectiveness and accuracy of the NPS derived from such a survey.

A divergent view of the customer satisfaction

(loyalty) feedback from the buyer and user entities also impacts the various strategic and transactional activities (across demand forecasting, business development, integrated-marketing etc) that the supplier defines based on the overall measure of the referral and repurchase power/potential derived from the NPS. Let us consider the case of a different business (products) unit within the OEM that intends to license the software technologies and internally checks for preferred In-Suppliers. The supplier is at advantage if it receives higher

referral mileage from both the buyer and the

user entities of the previous buying-center. This pre-requires that the supplier has thoroughly studied the independent customer loyalty of the

buyer and user entities of the previous buying-center and has a better sense of the respective referral potential/power this is even more critical for external businesses outside the customer.

In summary, with this real-life case of a B2B market we have established the following key challenges with NPS in the context of B2B markets,

1. Vital for the supplier to measure and evaluate the customer loyalty (NPS) of the

buyer and user entities independently.

2. Critical to also obtain a consolidated view of the overall measure of customer loyalty (NPS) of the customer directly from the customer as opposed to deriving this from the independent views of the buyer and user entities.

3. Extend the integrated-marketing mix with elements of strategic and tactical activities that adequately leverage the referral and

repurchase power/economics of buyer and

user entities rather than merely adopt adhoc means to only trigger successful conversion of leads.

In this section a set of recommendations to enhance the overall impact of NPS in B2B markets have been identified in the context of Communications Software Technologies market in the OEM telecommunications equipment industry.

1. Reengineer the customer satisfaction (loyalty) survey to independently measure

and evaluate the NPS of the buyer and user entities within the customer buying-center.

2. Create an internal channel between the buyer and user entities within the customer's buying-center to ensure the independent feedback of the survey from each entity flows to the other and this in turn enables a platform for the customer to directly offer a consolidated view of the overall customer loyalty.

Recommendations

NPS - Measurement and Evaluation


3. Understand the balance of buying-power

between the buyer and user entities and ensure the consolidated feedback does come from the more powerful entity. This ensures the feedback received is commensurate and consistent with the real buying dynamics of this buying-center.

Typically the NPS data is analyzed to qualify the referral power of the customer as one of 3 possible levels Low-Medium-High and a list of top-5 or 10 customers selected from across varying customer-types is identified. This set is then used to solicit referral quotes, feedback, press-releases etc that are then used as favorable customer experiences (positive references) to help in the tactical closure/conversion of leads within the customer or from a different customer. It is recommended that the supplier analyses the NPS data of each customer both at the buying-center level (consolidated view) and

the buyer and user entity level (independent view) to identify specific subjective elements a non-exhaustive list can be the following:

Does the buyer or the user entity exhibit greater referral power?

Which is more critical to the success of the referral process given the dynamism of the buying-power in the buying-center? This can be subjective to the specific nature or the life-cycle stage of the product.

In the context of the above illustration, the software supplier might offer legacy/mature products that are related to older generation technologies and also new products related to the latest in communications technologies. For legacy/mature products from the buying-center's point of view the buying-power may

NPS - Analysis and Actions

1. Dealing with Referral Power

Application

?

?

shift more towards the buyer entity as opposed

to the user entity. It may be more appropriate to evaluate the product with higher weightage to

parameters characteristic of the buyer behavior (sourcing department) such as,

1. Evaluating the supplier-stability to offer continued AMC for a legacy technology,

2. Ease of purchase with a straight-rebuy that is also reliable.

3. Better pricing-models etc

over parameters characteristic of the user behavior (R&D department) such as,

1. Recognized as best-in-class supplier of latest technologies.

2. Credentials of successful deployment in rea l- l i fe networks and proven Interoperability etc.

But for new products dealing with futuristic state-of-the-art technologies the buying-power at the buying-center may be more influenced by the user entity (R&D department) as opposed to

the buyer entity (sourcing department). It is imperative that the software supplier appropriately uses the referral power of its

existing customers from either the buyer entities or user entities independently depending upon the specific nature of the product and the buying-center's characteristics and dynamics.

NPS is a fairly reasonable and reliable indicator of the repurchase behavior of the customer and can be used by companies to perform demand forecasting, demand generation types of activities to good effect and success. However in the B2B context, it is recommended that the repurchase potential of the customers is also subjectively analyzed - primarily to differentiate

the buyer and user NPS scores, on various relevant attributes before identifying specific

2. Dealing with Repurchase Potential

application to business operations.

Evaluate the relative balance of buying-

power between the buyer and user entities and associate it with the independent repurchase potential

Original source for need leading to a product buy situation/decision?

Type and Nature of products or technologies whose buy situations/ decisions are more commonly triggered by key functions in either the buyer or user entities of the buying-center

Need for a product buy situation arises due to specific triggers from any of the different functions and their respective personnel in the DMU. The supplier is recommended to quickly map that need/lead to a repurchase decision of a buy decision/transaction that the buying-center previously completed with that supplier.

In the context of the illustration described above, consider the case where the need for a product buy situation in the area of latest

A non-exhaustive list can be the following:

Application

?

?

?

technologies is always triggered by the Product Line Management (PLM) function (playing the role of “influencer” in the DMU), but the actual buying process is operated by the Sourcing and R&D functions. In such situations it is very vital for the supplier to appropriately map the “influencer” role of PLM organization and measure the NPS independently to measure the repurchase potential. The supplier can focus all demand generation activities by specifically targeting the PLM function and tactically use the measured repurchase potential to influence the b u y i n g d e c i s i o n s t o w a r d s e a r l y conversion/closure.

Vishwanathan (Vishwa) Sahasranamam is a 2nd year PGSEM student in IIM Bangalore. He is currently employed in Aricent Technologies as Manager Product Management and Marketing, and has over 9 years of experience in the communications industry. He can be reached at [email protected]

1. Articles in Journals - HBR Article, “The One Number You Need To Grow”, Frederick F. Reichheld, HBR Dec-2003

About the Author

References


3. Understand the balance of buying-power

between the buyer and user entities and ensure the consolidated feedback does come from the more powerful entity. This ensures the feedback received is commensurate and consistent with the real buying dynamics of this buying-center.

Typically the NPS data is analyzed to qualify the referral power of the customer as one of 3 possible levels Low-Medium-High and a list of top-5 or 10 customers selected from across varying customer-types is identified. This set is then used to solicit referral quotes, feedback, press-releases etc that are then used as favorable customer experiences (positive references) to help in the tactical closure/conversion of leads within the customer or from a different customer. It is recommended that the supplier analyses the NPS data of each customer both at the buying-center level (consolidated view) and

the buyer and user entity level (independent view) to identify specific subjective elements a non-exhaustive list can be the following:

Does the buyer or the user entity exhibit greater referral power?

Which is more critical to the success of the referral process given the dynamism of the buying-power in the buying-center? This can be subjective to the specific nature or the life-cycle stage of the product.

In the context of the above illustration, the software supplier might offer legacy/mature products that are related to older generation technologies and also new products related to the latest in communications technologies. For legacy/mature products from the buying-center's point of view the buying-power may

NPS - Analysis and Actions

1. Dealing with Referral Power

Application

?

?

shift more towards the buyer entity as opposed

to the user entity. It may be more appropriate to evaluate the product with higher weightage to

parameters characteristic of the buyer behavior (sourcing department) such as,

1. Evaluating the supplier-stability to offer continued AMC for a legacy technology,

2. Ease of purchase with a straight-rebuy that is also reliable.

3. Better pricing-models etc

over parameters characteristic of the user behavior (R&D department) such as,

1. Recognized as best-in-class supplier of latest technologies.

2. Credentials of successful deployment in rea l- l i fe networks and proven Interoperability etc.

But for new products dealing with futuristic state-of-the-art technologies the buying-power at the buying-center may be more influenced by the user entity (R&D department) as opposed to

the buyer entity (sourcing department). It is imperative that the software supplier appropriately uses the referral power of its

existing customers from either the buyer entities or user entities independently depending upon the specific nature of the product and the buying-center's characteristics and dynamics.

NPS is a fairly reasonable and reliable indicator of the repurchase behavior of the customer and can be used by companies to perform demand forecasting, demand generation types of activities to good effect and success. However in the B2B context, it is recommended that the repurchase potential of the customers is also subjectively analyzed - primarily to differentiate

the buyer and user NPS scores, on various relevant attributes before identifying specific

2. Dealing with Repurchase Potential

application to business operations.

Evaluate the relative balance of buying-

power between the buyer and user entities and associate it with the independent repurchase potential

Original source for need leading to a product buy situation/decision?

Type and Nature of products or technologies whose buy situations/ decisions are more commonly triggered by key functions in either the buyer or user entities of the buying-center

Need for a product buy situation arises due to specific triggers from any of the different functions and their respective personnel in the DMU. The supplier is recommended to quickly map that need/lead to a repurchase decision of a buy decision/transaction that the buying-center previously completed with that supplier.

In the context of the illustration described above, consider the case where the need for a product buy situation in the area of latest

A non-exhaustive list can be the following:

Application

?

?

?

technologies is always triggered by the Product Line Management (PLM) function (playing the role of “influencer” in the DMU), but the actual buying process is operated by the Sourcing and R&D functions. In such situations it is very vital for the supplier to appropriately map the “influencer” role of PLM organization and measure the NPS independently to measure the repurchase potential. The supplier can focus all demand generation activities by specifically targeting the PLM function and tactically use the measured repurchase potential to influence the b u y i n g d e c i s i o n s t o w a r d s e a r l y conversion/closure.

Vishwanathan (Vishwa) Sahasranamam is a 2nd year PGSEM student in IIM Bangalore. He is currently employed in Aricent Technologies as Manager Product Management and Marketing, and has over 9 years of experience in the communications industry. He can be reached at [email protected]

1. Articles in Journals - HBR Article, “The One Number You Need To Grow”, Frederick F. Reichheld, HBR Dec-2003

About the Author

References

54 AUDIRE - IIM ABC CONSULTING REVIEW 55

video recorder and ask your CEO to engage in extreme blending wherein he blends marbles, golf-balls, chicken and Coke to show off the power of his blender. Upload this video on your URL and within days, clips of the CEO's extreme blending exploits will pop-up in Youtube and your brand will get instant fame – all for $50. This is the story of BlendTec, a Utah-based blender's successful viral marketing campaign.

This is just one among the numerous colourful examples of the ways marketers are harnessing the power of social media marketing.

Facebook CEO Mark Zuckerberg says that the social networking site now has over 200 million users. If Facebook was a country, it would be the 5th largest in the world! In May 2007, Facebook opened its network to external developers. This

Recent Developments in Social Media Marketing

YourBusiness

del.icio.us

Reader

Your Site

Marketing for Tomorrow:Social Media Marketing

Abstract

Introduction

Today's marketers are increasingly harnessing the viral power of social media marketing (marketing through online social forums and social networking sites) through innovative campaigns. The proportion of marketing spend allocated to this marketing form is predicted to quarduple in the next 5 years. This article looks at social media marketing through various lenses and examines ways in which it scores over traditional marketing. Validation of social media marketing from a social psychology perspective has been presented and several innovative campaigns have been discussed.

What do you do when you are faced with the seemingly impossible job of creating visibility for a tiny brand on a shoestring budget and you are promoting something as unexciting as a blender? Here's an idea: Take $50, use it to purchase a rotisserie chicken, Coke, a bag of marbles, golf balls and a URL. Then, turn on the

marked the beginning of numerous social media marketing innovations. Other common social media marketing tools include Twitter, blogs, LinkedIn, Flickr and YouTube.

According to a 2009 survey, a company's spend on social media marketing averages around 3.5% of its total marketing budget. This figure is predicted to grow to 6.1% within an year and to 13.7% within five years.

In this article, we explore various facets of social media marketing and find out what sets it apart from other traditional marketing methods.

Through the lens of Social Psychology – The Third Person Effect

Sears has a unique strategy for generating word-of-mouth publicity through female Facebook users. Instead of naively pursuing each user on its own, it asks women to 'help others choose their prom dresses'. Sears has correctly identified the implications of the “Third-person effect”. Numerous social psychology studies have demonstrated that we consider other people to be more influenced by media than us. This effect is particularly strong in the context of social-networking websites. Hence Facebook users believe that they can help others, who they believe to be more gullible to aggressive

marketing communication, by recommending brands they personally believe in. These and other such behavioral tendencies of consumers can be exploited by social media marketers by careful planning of their campaign.

Nokia has initiated a very successful Facebook marketing campaign called “Somebody Else's Phone” which is a flash micro-site that allows one to look into the phone of a hero named Luca. The idea is as follows: by exploring somebody else's phone (text messages, address book, music stored, etc) one can tell a lot about the person and his way of life. Users can then ask Luca questions through his fanpage to guage if they have understood him correctly.

Nokia's campaign satisfies a very basic human craving – the urge to peek into other people's lives. The internet can prove to be extremely liberating for it allows us to indulge in our otherwise difficult to satisfy needs from behind a shroud of anonymity. Nokia's initiative shows how marketers can satisfy otherwise elusive human emotional needs by using internet technology.

Despite the challenges involved, several companies are finding innovative ways of integrating social media into their brands. IKEA is one such example; the company was successful in converting idle browsing into a flourishing bottomline. An account of one of their store managers was created on Facebook and showroom furniture images were uploaded to his Using the all-popular “tagging” feature, customers were able to locate items in the pictures and put their name on it. The first person to tag an object got to take it home.

Facebook users started embedding links and images in their own profiles and across news

Transcending Beyond Reality

Integrating Social Media Marketing into Brands

Facebook photo album.

Source: Marketing Executives Networking Group (MENG), “Social Media in Marketing” as cited in press

release, Nov 2008

Figure1: Percentage of MarketsUsing New Media Elements in Direct Marketing

Blogs

Social Networks

Online Video

Podcasts

RSS Feeds

Wikis

Others

25.60%

18.10%

24.40%

17.50%

11.30%

1.90%

7.50%


video recorder and ask your CEO to engage in extreme blending wherein he blends marbles, golf-balls, chicken and Coke to show off the power of his blender. Upload this video on your URL and within days, clips of the CEO's extreme blending exploits will pop-up in Youtube and your brand will get instant fame – all for $50. This is the story of BlendTec, a Utah-based blender's successful viral marketing campaign.

This is just one among the numerous colourful examples of the ways marketers are harnessing the power of social media marketing.

Facebook CEO Mark Zuckerberg says that the social networking site now has over 200 million users. If Facebook was a country, it would be the 5th largest in the world! In May 2007, Facebook opened its network to external developers. This

Recent Developments in Social Media Marketing

YourBusiness

del.icio.us

Reader

Your Site

Marketing for Tomorrow:Social Media Marketing

Abstract

Introduction

Today's marketers are increasingly harnessing the viral power of social media marketing (marketing through online social forums and social networking sites) through innovative campaigns. The proportion of marketing spend allocated to this marketing form is predicted to quarduple in the next 5 years. This article looks at social media marketing through various lenses and examines ways in which it scores over traditional marketing. Validation of social media marketing from a social psychology perspective has been presented and several innovative campaigns have been discussed.

What do you do when you are faced with the seemingly impossible job of creating visibility for a tiny brand on a shoestring budget and you are promoting something as unexciting as a blender? Here's an idea: Take $50, use it to purchase a rotisserie chicken, Coke, a bag of marbles, golf balls and a URL. Then, turn on the

marked the beginning of numerous social media marketing innovations. Other common social media marketing tools include Twitter, blogs, LinkedIn, Flickr and YouTube.

According to a 2009 survey, a company's spend on social media marketing averages around 3.5% of its total marketing budget. This figure is predicted to grow to 6.1% within an year and to 13.7% within five years.

In this article, we explore various facets of social media marketing and find out what sets it apart from other traditional marketing methods.

Through the lens of Social Psychology – The Third Person Effect

Sears has a unique strategy for generating word-of-mouth publicity through female Facebook users. Instead of naively pursuing each user on its own, it asks women to 'help others choose their prom dresses'. Sears has correctly identified the implications of the “Third-person effect”. Numerous social psychology studies have demonstrated that we consider other people to be more influenced by media than us. This effect is particularly strong in the context of social-networking websites. Hence Facebook users believe that they can help others, who they believe to be more gullible to aggressive

marketing communication, by recommending brands they personally believe in. These and other such behavioral tendencies of consumers can be exploited by social media marketers by careful planning of their campaign.

Nokia has initiated a very successful Facebook marketing campaign called “Somebody Else's Phone” which is a flash micro-site that allows one to look into the phone of a hero named Luca. The idea is as follows: by exploring somebody else's phone (text messages, address book, music stored, etc) one can tell a lot about the person and his way of life. Users can then ask Luca questions through his fanpage to guage if they have understood him correctly.

Nokia's campaign satisfies a very basic human craving – the urge to peek into other people's lives. The internet can prove to be extremely liberating for it allows us to indulge in our otherwise difficult to satisfy needs from behind a shroud of anonymity. Nokia's initiative shows how marketers can satisfy otherwise elusive human emotional needs by using internet technology.

Despite the challenges involved, several companies are finding innovative ways of integrating social media into their brands. IKEA is one such example; the company was successful in converting idle browsing into a flourishing bottomline. An account of one of their store managers was created on Facebook and showroom furniture images were uploaded to his Using the all-popular “tagging” feature, customers were able to locate items in the pictures and put their name on it. The first person to tag an object got to take it home.

Facebook users started embedding links and images in their own profiles and across news

Transcending Beyond Reality

Integrating Social Media Marketing into Brands

Facebook photo album.

Source: Marketing Executives Networking Group (MENG), “Social Media in Marketing” as cited in press

release, Nov 2008

Figure1: Percentage of MarketsUsing New Media Elements in Direct Marketing

Blogs

Social Networks

Online Video

Podcasts

RSS Feeds

Wikis

Others

25.60%

18.10%

24.40%

17.50%

11.30%

1.90%

7.50%


feeds. In turn, thousands and thousands of users willingly promoted IKEA. The cost of reaching out to thousands of these users was just that of giving away some furniture.

There are several avenues through which social media marketing scores over other traditional methods:

? Consumers initially targeted via social media pass along marketing messages to a large number of their friends and the overall growth of marketing campaigns snowballs very quickly. Most recently, Harley-Davidson zeroed in on social media marketing. They launched social media initiatives on Facebook on July 2008 by creating an account for their brand. They accrued 145,904 fans on Facebook within a period of just 10 months.

? The rise in fan base achieved by Harley-Davidson was purely through organic growth, without any promotional pushes. Such growth helps companies to reach out to like-minded people, to fish where the fish are, so to speak. Hence, marketing campaigns can be designed in a focussed and targetted way.

? One of the

Social Media Marketing versus Traditional Marketing

Viral Nature:

Focussed and Targetted Growth:

Voice of the Customer:

greatest advantages for social media is the voice of the customer. If Harley-Davidson posts a question, such as, 'Are you in favor of darkening the bike out, blackening the bike out or shiny chrome?', it is not unusual to receive 300 to 500 comments. Social Media marketing helps companies to intercept what consumers are saying about its brands outside its walls.

?

Traditional marketing often uses celebrity influence to further their brands. Nowadays, bloggers and site owners also represent an exceptional and dedicated segment of the communications and media landscape and their influence is on the rise. Social media marketing helps in harnessing their support and promotion through such endorsers is more economical as well. HP used this influence to their advantage by providing 31 HP laptops to bloggers to create their own unique contests specifically catered to their readers, winners of which would receive the HP laptops (one per blog). The promotion spread over 31 days, garnered positive discussion about HP on the internet which quickly led to a rise in sales. HP registered a 84% increase in sales of the model being promoted and 14% overall increase of traffic on their website.

? The total cost of the HP promotion was that of the systems given out and shipping; this amounted to just $ 250,000. The economics of social media initiatives usually compares very favourably in terms of economics with traditional marketing methods producing similar benefits.

Social media marketing offers an unique opportunity to marketers to achieve marketing success by making best use of its viral and focussed nature. The trick to perform well in this game is to understand the forces that guide

Harnessing Influencial Personalities:

Economics:

Conclusion

human interaction and creating innovative campaigns to harness these forces. Several successful social media marketing campaigns show us that if the campaign is well designed and is innovative enough to create a buzz, the cost of marketing is really low in social media marketing. Hence, in future one expects to see more creative talent in social media marketing and campaigns which will extend the boundaries of creativity these forces.

Abhirup Ganguly holds a Bachelor of Engineering degree in Chemical Engineering from Jadavpur University, Kolkata and is currently a 2nd year student of the Post Graduate Programme at the Indian Institute of Management, Bangalore. He can be reached at [email protected]

Tanvi Saraf holds a Bachelor of Technology degree in Chemical Engineering from the Indian Institute of Technology, Bombay and is currently a 2nd year student of the Post Graduate Programme at the Indian Institute of Management, Bangalore. She can be reached at [email protected]

1. Barnes, Courtney M., “How to Win Friends and Influence People: Social Media Marketing in the Modern Communications”, Sales & Marketing Management, Nov2009, Vol. 161, Issue 6

2. Frommer, Dan, 8 April 2009, “Facebook NowThe Fifth-Largest Country In The World”, http://www.businessinsider.com/facebook-now-the-fifth-largest-country-in-the-

About the Authors

References :

Figure 2 : Main Benefits of Using Social Media MarketingAccording to Marketing Executives (% of Respondents)

Customer engagement

Direct customer communications

Speed of feedback/resuls

Learning of customer preferences

Low cost

Grand building

Market research

Credibility of the "crowd"

Reach

85.40%

65%

59.90%

59.10%

51.10%

48.20%

42.30%

40.10%

37.20%

world-2009-4

3. Atal, Maha, 22 August, 2007, “Profiting from Social Networking”, http://www.business week.com/innovate/conent/aug2007/id20070822_791378.htm

4. CMO Survey, August 2009, sponsored by the Fuqua School of Business at Duke University and the American Marketing association

5. Zhang, Jie, Daugherty, Terry, Fall 2009, “American Journal of Business”, Vol. 29, Number 2

6. Warren, Christina, 25 November 2009, “Facebook Marketing: IKEA's Genius Use of Photo Tagging”, http://mashable.com/2009 /11/25/facebook-marketing-ikeas-genius-use-of-photo-tagging

7. 29 April, 2009, “How Harley-Davidson Drives Mobile Marketing, Facebook”, http:// www.brandweek.com/bw/content_display/news-and features/direct/e3i7def68b2d246e0d 2e66f3ec8a10ad251

8. Meiners, Janet, 30 September, 2008, “Bloggers Increase HP Laptop Sales 85%”, http:// www.marketingpilgrim.com/2008/09/bloggers-increase-hp-laptop-sales-85.html


feeds. In turn, thousands and thousands of users willingly promoted IKEA. The cost of reaching out to thousands of these users was just that of giving away some furniture.

There are several avenues through which social media marketing scores over other traditional methods:

? Consumers initially targeted via social media pass along marketing messages to a large number of their friends and the overall growth of marketing campaigns snowballs very quickly. Most recently, Harley-Davidson zeroed in on social media marketing. They launched social media initiatives on Facebook on July 2008 by creating an account for their brand. They accrued 145,904 fans on Facebook within a period of just 10 months.

? The rise in fan base achieved by Harley-Davidson was purely through organic growth, without any promotional pushes. Such growth helps companies to reach out to like-minded people, to fish where the fish are, so to speak. Hence, marketing campaigns can be designed in a focussed and targetted way.

? One of the

Social Media Marketing versus Traditional Marketing

Viral Nature:

Focussed and Targetted Growth:

Voice of the Customer:

greatest advantages for social media is the voice of the customer. If Harley-Davidson posts a question, such as, 'Are you in favor of darkening the bike out, blackening the bike out or shiny chrome?', it is not unusual to receive 300 to 500 comments. Social Media marketing helps companies to intercept what consumers are saying about its brands outside its walls.

?

Traditional marketing often uses celebrity influence to further their brands. Nowadays, bloggers and site owners also represent an exceptional and dedicated segment of the communications and media landscape and their influence is on the rise. Social media marketing helps in harnessing their support and promotion through such endorsers is more economical as well. HP used this influence to their advantage by providing 31 HP laptops to bloggers to create their own unique contests specifically catered to their readers, winners of which would receive the HP laptops (one per blog). The promotion spread over 31 days, garnered positive discussion about HP on the internet which quickly led to a rise in sales. HP registered a 84% increase in sales of the model being promoted and 14% overall increase of traffic on their website.

? The total cost of the HP promotion was that of the systems given out and shipping; this amounted to just $ 250,000. The economics of social media initiatives usually compares very favourably in terms of economics with traditional marketing methods producing similar benefits.

Social media marketing offers an unique opportunity to marketers to achieve marketing success by making best use of its viral and focussed nature. The trick to perform well in this game is to understand the forces that guide

Harnessing Influencial Personalities:

Economics:

Conclusion

human interaction and creating innovative campaigns to harness these forces. Several successful social media marketing campaigns show us that if the campaign is well designed and is innovative enough to create a buzz, the cost of marketing is really low in social media marketing. Hence, in future one expects to see more creative talent in social media marketing and campaigns which will extend the boundaries of creativity these forces.

Abhirup Ganguly holds a Bachelor of Engineering degree in Chemical Engineering from Jadavpur University, Kolkata and is currently a 2nd year student of the Post Graduate Programme at the Indian Institute of Management, Bangalore. He can be reached at [email protected]

Tanvi Saraf holds a Bachelor of Technology degree in Chemical Engineering from the Indian Institute of Technology, Bombay and is currently a 2nd year student of the Post Graduate Programme at the Indian Institute of Management, Bangalore. She can be reached at [email protected]

1. Barnes, Courtney M., “How to Win Friends and Influence People: Social Media Marketing in the Modern Communications”, Sales & Marketing Management, Nov2009, Vol. 161, Issue 6

2. Frommer, Dan, 8 April 2009, “Facebook NowThe Fifth-Largest Country In The World”, http://www.businessinsider.com/facebook-now-the-fifth-largest-country-in-the-

About the Authors

References :

Figure 2 : Main Benefits of Using Social Media MarketingAccording to Marketing Executives (% of Respondents)

Customer engagement

Direct customer communications

Speed of feedback/resuls

Learning of customer preferences

Low cost

Grand building

Market research

Credibility of the "crowd"

Reach

85.40%

65%

59.90%

59.10%

51.10%

48.20%

42.30%

40.10%

37.20%

world-2009-4

3. Atal, Maha, 22 August, 2007, “Profiting from Social Networking”, http://www.business week.com/innovate/conent/aug2007/id20070822_791378.htm

4. CMO Survey, August 2009, sponsored by the Fuqua School of Business at Duke University and the American Marketing association

5. Zhang, Jie, Daugherty, Terry, Fall 2009, “American Journal of Business”, Vol. 29, Number 2

6. Warren, Christina, 25 November 2009, “Facebook Marketing: IKEA's Genius Use of Photo Tagging”, http://mashable.com/2009 /11/25/facebook-marketing-ikeas-genius-use-of-photo-tagging

7. 29 April, 2009, “How Harley-Davidson Drives Mobile Marketing, Facebook”, http:// www.brandweek.com/bw/content_display/news-and features/direct/e3i7def68b2d246e0d 2e66f3ec8a10ad251

8. Meiners, Janet, 30 September, 2008, “Bloggers Increase HP Laptop Sales 85%”, http:// www.marketingpilgrim.com/2008/09/bloggers-increase-hp-laptop-sales-85.html

Quo Vadis, Affiliate Marketing


Affiliate marketing is also responsible for much of the spam that clogs inboxes, contaminated search results, and the barrage of pings and fake TrackBacks that have driven many bloggers to shut down comments on their sites. The system allows individuals and other businesses to become freelance marketers for a company and generate income from individuals following links on websites or in e-mails sent to them. (Singel, 2005)This kind of abuse from affiliates has severely affected the usage of affiliate marketing in the past and consumer trust levels have certainly dropped. This has consequently led to a decrease in the effectiveness of affiliates as a legitimate marketing channel. The difficulty in predicting the future of Affiliate marketing, if and how it will rebuild from here on, is that the future of this marketing method need not necessarily be an extrapolation of the past. We do not yet have a theoretical foundation for understanding the existence, creation and destruction of network effects in Affiliate marketing. Neither do we have an existing model to help an observer develop a sense of what the important entities in the industry are nor are the qualities of these entities in the Affiliate marketing universe explained in any way. In this

paper, we develop a causal Model that models the inter-play between the entities involved in the Affiliate Marketing universe. More importantly, the model provides a sound foundation to develop an understanding of how affiliate marketing would perform in the changing dynamics of the future.

To understand the behavior along with the mechanisms by which various entities in our model influence each other, one must first examine the importance and characteristics of these entities. We consider three primary entities in the Affiliate marketing universe namely, the Merchant, Publishers and the Affiliate Marketer. The overall targeted consumer base for internet marketing is expected to keep growing given the increasing importance of Internet marketing and the growing number of internet users. The Internet is used by 1663 million people all over the world or about 24.5% of the world's population, as of June 2009. (Internet growth statistics, 2009) The only question for affiliate marketing is whether it can successfully leverage this reach the internet as a marketing medium provides them.

The chief attraction of affiliate marketing lies in the sheer number of affiliates, also known as publishers. For example, in a given affiliate network, there would typically be 400,000 affiliates with an incentive to try different approaches and monitor performance rather than just 500 marketers or sales people, as would happen in the non-virtual sibling of this model. In a sense, affiliates can be visualized as a network, which becomes more dynamic and more intelligent as more 'nodes' are added to it. (Kelly, 1998) Affiliate marketing allows the merchant to have a larger number of 'sales people' at an effectively lower cost. It also allows him the opportunity to leverage the sheer size of t h i s n e t wo r k t h r o u g h l e a r n i n g by

The Entities In The Affiliate Marketing Universe

Source http://en.wikipedia.org/wiki/File:Affiliate_Marketing_Illustration.png

Affiliate marketing is an ancient phenomenon in the rapidly changing world of e-commerce and e-business. However, there are very few strong established metrics of understanding how this business works and how it can be made sustainable. The most popular story about the origin of affiliate marketing places the invention of this concept in the hands of Jeff Bezos, CEO and founder of Amazon.com. There is a large body of evidence to the contrary though, which suggests that Cybererotica, an adult site, was either the first or among the early innovators in affiliate marketing with a cost-per-click program. (Collins, 2000) Though Amazon.com was not the first merchant to offer an affiliate program, but its program was the first to become widely-known and serve as a model for subsequent programs. In recent years, Websites and services based on Web 2.0 concepts-blogging and interactive online communities-have greatly impacted the affiliate marketing world. New media has allowed merchants to become closer to their affiliates and improve communication between them. (Hinchcliff, 2006) Online affiliate marketing networks besides directly increasing the visibility of advertisers also have indirect network effects on the ranking of advertiser's web sites in search results. Growth in visitors coming from search engines would be a direct result of this improvement in search engine rankings. Therefore it is believed that cost-benefit metrics associated with affiliate marketing programs, such as the average marketing cost will decrease when the positive effects of affiliate marketing on search engine rankings are taken into account. (Janssen & Van heck, 2008)

Abstract

Introduction

Affiliate Marketing is a low cost method of exploiting a large network of web-sites to act as a channel to advertise for a particular product or service. Affiliate marketing is gaining increasing importance as a channel, as the internet reaches more and more people. However, this form of internet marketing faces several issues as it grows in the light of several recent scams. In this paper we follow a modeling approach to determine the most important factors which will help affiliate marketing overcome its pastignominy.

As the internet proliferates to reach more people in the far corners of the earth, the success of a brand, especially an e-brand, stands to be driven to a great extent by online marketing. The Internet has brought many unique benefits to marketing, one of which is lower costs and greater capabilities for the distribution of information and media to a global audience. The interactive nature of Internet marketing, both in terms of providing instant response and eliciting responses, is a unique quality of the medium. Affiliate marketing, but one of the many ways in which internet marketing can be done, is eliciting an increasing amount of interest these days among researchers, experts and marketers around the world. In a line, affiliate marketing is using one website to drive traffic to another. It is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's marketing efforts.

Figure 1. Illustration of the concept of affiliate marketing

Step 1

Step 2

Step 3Customer

Brand/Seller Affiliate

Quo Vadis, Affiliate Marketing


Affiliate marketing is also responsible for much of the spam that clogs inboxes, contaminated search results, and the barrage of pings and fake TrackBacks that have driven many bloggers to shut down comments on their sites. The system allows individuals and other businesses to become freelance marketers for a company and generate income from individuals following links on websites or in e-mails sent to them. (Singel, 2005)This kind of abuse from affiliates has severely affected the usage of affiliate marketing in the past and consumer trust levels have certainly dropped. This has consequently led to a decrease in the effectiveness of affiliates as a legitimate marketing channel. The difficulty in predicting the future of Affiliate marketing, if and how it will rebuild from here on, is that the future of this marketing method need not necessarily be an extrapolation of the past. We do not yet have a theoretical foundation for understanding the existence, creation and destruction of network effects in Affiliate marketing. Neither do we have an existing model to help an observer develop a sense of what the important entities in the industry are nor are the qualities of these entities in the Affiliate marketing universe explained in any way. In this

paper, we develop a causal Model that models the inter-play between the entities involved in the Affiliate Marketing universe. More importantly, the model provides a sound foundation to develop an understanding of how affiliate marketing would perform in the changing dynamics of the future.

To understand the behavior along with the mechanisms by which various entities in our model influence each other, one must first examine the importance and characteristics of these entities. We consider three primary entities in the Affiliate marketing universe namely, the Merchant, Publishers and the Affiliate Marketer. The overall targeted consumer base for internet marketing is expected to keep growing given the increasing importance of Internet marketing and the growing number of internet users. The Internet is used by 1663 million people all over the world or about 24.5% of the world's population, as of June 2009. (Internet growth statistics, 2009) The only question for affiliate marketing is whether it can successfully leverage this reach the internet as a marketing medium provides them.

The chief attraction of affiliate marketing lies in the sheer number of affiliates, also known as publishers. For example, in a given affiliate network, there would typically be 400,000 affiliates with an incentive to try different approaches and monitor performance rather than just 500 marketers or sales people, as would happen in the non-virtual sibling of this model. In a sense, affiliates can be visualized as a network, which becomes more dynamic and more intelligent as more 'nodes' are added to it. (Kelly, 1998) Affiliate marketing allows the merchant to have a larger number of 'sales people' at an effectively lower cost. It also allows him the opportunity to leverage the sheer size of t h i s n e t wo r k t h r o u g h l e a r n i n g by

The Entities In The Affiliate Marketing Universe

Source http://en.wikipedia.org/wiki/File:Affiliate_Marketing_Illustration.png

Affiliate marketing is an ancient phenomenon in the rapidly changing world of e-commerce and e-business. However, there are very few strong established metrics of understanding how this business works and how it can be made sustainable. The most popular story about the origin of affiliate marketing places the invention of this concept in the hands of Jeff Bezos, CEO and founder of Amazon.com. There is a large body of evidence to the contrary though, which suggests that Cybererotica, an adult site, was either the first or among the early innovators in affiliate marketing with a cost-per-click program. (Collins, 2000) Though Amazon.com was not the first merchant to offer an affiliate program, but its program was the first to become widely-known and serve as a model for subsequent programs. In recent years, Websites and services based on Web 2.0 concepts-blogging and interactive online communities-have greatly impacted the affiliate marketing world. New media has allowed merchants to become closer to their affiliates and improve communication between them. (Hinchcliff, 2006) Online affiliate marketing networks besides directly increasing the visibility of advertisers also have indirect network effects on the ranking of advertiser's web sites in search results. Growth in visitors coming from search engines would be a direct result of this improvement in search engine rankings. Therefore it is believed that cost-benefit metrics associated with affiliate marketing programs, such as the average marketing cost will decrease when the positive effects of affiliate marketing on search engine rankings are taken into account. (Janssen & Van heck, 2008)

Abstract

Introduction

Affiliate Marketing is a low cost method of exploiting a large network of web-sites to act as a channel to advertise for a particular product or service. Affiliate marketing is gaining increasing importance as a channel, as the internet reaches more and more people. However, this form of internet marketing faces several issues as it grows in the light of several recent scams. In this paper we follow a modeling approach to determine the most important factors which will help affiliate marketing overcome its pastignominy.

As the internet proliferates to reach more people in the far corners of the earth, the success of a brand, especially an e-brand, stands to be driven to a great extent by online marketing. The Internet has brought many unique benefits to marketing, one of which is lower costs and greater capabilities for the distribution of information and media to a global audience. The interactive nature of Internet marketing, both in terms of providing instant response and eliciting responses, is a unique quality of the medium. Affiliate marketing, but one of the many ways in which internet marketing can be done, is eliciting an increasing amount of interest these days among researchers, experts and marketers around the world. In a line, affiliate marketing is using one website to drive traffic to another. It is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's marketing efforts.

Figure 1. Illustration of the concept of affiliate marketing

Step 1

Step 2

Step 3Customer

Brand/Seller Affiliate

6160

experimentation at minimal cost. Affiliate marketing has a more elaborate feedback mechanism as well because there is tracking performed and more data is available to participants. This further enables the results of these 'experiments' to percolate down to the merchant quickly so that more effective forms of marketing can be used in future. As we shall further see in this paper, Affiliate marketing needs to be extremely performance-oriented. A totally decentralized system is not efficient; at times it is downright defective because total autonomy can paralyze a system. Hence the importance of performance measurement metrics such as Cost Per Sale (CPS) in establishing guidelines of behavior for affiliates. The four ways in which the compensation system in affiliate marketing works is through Cost per click, cost per mille (together <1%), CPS (usage 80%) and Cost Per Action (CPA) (usage 19%). In perfor mance based pricing/compensation models, like CPS and CPA, advertisers and publishers share the risk of a visitor that does not convert. Performance-oriented compensation measures help align the objectives of the merchant and the affiliate and thus address the agency problem that would otherwise crop up, as has been seen in the past with issues such as click-fraud and other affiliate scams.

Typically, the complexity of the market now warrants another tier of players apart from the merchant and the affiliate. They can be called Affiliate Managers and for the purpose of this paper include Affiliate Management Agencies, Super-Affiliates and Specialized Third Parties vendors. The affiliate marketers are brokers. For the merchant who wants to market his product, the path to Affiliate marketing these days starts with finding the best Affiliate marketer or Network. An affiliate network allows website publishers to more easily find and participate in affiliate programs which are suitable for their website and thus generate income from those programs. It allows websites offering affiliate

programs (typically online merchants) to reach a larger audience by promoting their affiliate programs to all of the publishers participating in the affiliate network. They are the middle men who provide access to networks and often act as neutral monitors to ensure the effectiveness of ads placed. The key value for the broker, merchants and affiliates lies in the economies of scale, which means additional affiliates can be added to the network at very little additional cost. Practically, once a merchant pays the affiliate network his initial set-up fee, he can add new affiliates almost for free and conversely, new affiliates need not pay anything to join an affiliate program. For the same reason, the traffic generated by an affiliate marketing network is likely to be unfocussed and ineffective as there are no costs, no qualifications and hence no entry barriers for an affiliate to enter the network.

The issue of trust in the affiliate marketing universe has been an important one, more so given recent events and the consequent need for all parties on the chain to put in place measures to elicit trust. Brokers often serve as a neutral party that measures performance and monitors the network. They act as a third party who verifies results between merchant and affiliates and serve as a boundary spanner between to create a closer community between the two. Brokers also ease the process of billing and payment and work as Aggregators who provide a single point of contact for both merchants and affiliates. As such there are very few checks for any entity to start off as an Affiliate Marketer and make improper use of gullible affiliates.

Commonsensically, we can arrive at the relationship between the number of merchants using an affiliate marketing campaign and the number of users or leads obtained from the affiliate marketing campaign. As the base of leads (modeled here as user base) goes up it

A MODELING APPROACH TO AFFILIATE MARKETING

Publisher User baseMerchant

++

Performance

-

-

Figure 2: Relationship between Merchant,publisher and user base

would incite more merchants to sign up and of course more merchant signing up would keep increasing the user base, albeit at a decreasing rate as competition heats up. To model the necessity for ads to be contextual we introduce a variable called Performance, which is essentially an index conveying the relevance and contexuality of the affiliate marketing network. The more ads are placed in context, the better the quality of the ads, the higher this index. Now in the causal loop below, we assume that as the number of merchants in the affiliate marketing universe increase, The number of publishers would also consequently be driven up. Correspondingly, with an increase in reach more merchant would come into the universe. However, as the number of publishers exceeds the affiliate marketer's capacity for monitoring, the performance index is likely to go down. This would trigger the causality of the relationship between increasing publisher numbers and merchants to turn negative. Now because of the decreasing quality of ads and their lower effectiveness and of course the consequent word of mouth, merchants would flee the universe.

As discussed before we expect the over targeted number of consumers or internet users to keep increasing given the increasing importance of Internet marketing and the growing number of internet users. An increasing Consumer base of course drives more affiliates to tie in with an

Affiliate Marketer PublisherPerformance

+

Consumer trust

++

-

+

Figure 3: Relationship between affiliate marketerperformance, consumer trust and publishers

affiliate network. We model the brokers or Affiliate marketers as the efficiency index of the set of affiliate marketers. Stronger the network, better the performance monitoring, the higher would be the efficiency index and consequently higher the monetary value of this business for affiliate marketers. Now as this index increases, we would believe that the performance index referred to previously would also consequently increase. More contextual advertisements and searches would mean more useful results for the consumer. Consequently we would expect consumer trust in the affiliate marketing channel to increase as the usefulness of these advertisements increase. However, as the number of publishers increases so would experimentation be likely to increase in the channel. As we have previously mentioned, control on the network in essential to the relevance and success of affiliate marketing. As the number of publishers burgeons beyond the capabilities of Affiliate marketers, performance in terms of contextuality of ads is likely to suffer and misuse of the channel might become more probable. Hence we theorize than this would bring down the performance index and consequently consumer trust as well.

An important player in this whole model is the way performance based payment systems for affiliates are designed. If the objectives of the publishers and merchants can be aligned to a high extent with the help of these performance

6160

experimentation at minimal cost. Affiliate marketing has a more elaborate feedback mechanism as well because there is tracking performed and more data is available to participants. This further enables the results of these 'experiments' to percolate down to the merchant quickly so that more effective forms of marketing can be used in future. As we shall further see in this paper, Affiliate marketing needs to be extremely performance-oriented. A totally decentralized system is not efficient; at times it is downright defective because total autonomy can paralyze a system. Hence the importance of performance measurement metrics such as Cost Per Sale (CPS) in establishing guidelines of behavior for affiliates. The four ways in which the compensation system in affiliate marketing works is through Cost per click, cost per mille (together <1%), CPS (usage 80%) and Cost Per Action (CPA) (usage 19%). In perfor mance based pricing/compensation models, like CPS and CPA, advertisers and publishers share the risk of a visitor that does not convert. Performance-oriented compensation measures help align the objectives of the merchant and the affiliate and thus address the agency problem that would otherwise crop up, as has been seen in the past with issues such as click-fraud and other affiliate scams.

Typically, the complexity of the market now warrants another tier of players apart from the merchant and the affiliate. They can be called Affiliate Managers and for the purpose of this paper include Affiliate Management Agencies, Super-Affiliates and Specialized Third Parties vendors. The affiliate marketers are brokers. For the merchant who wants to market his product, the path to Affiliate marketing these days starts with finding the best Affiliate marketer or Network. An affiliate network allows website publishers to more easily find and participate in affiliate programs which are suitable for their website and thus generate income from those programs. It allows websites offering affiliate

programs (typically online merchants) to reach a larger audience by promoting their affiliate programs to all of the publishers participating in the affiliate network. They are the middle men who provide access to networks and often act as neutral monitors to ensure the effectiveness of ads placed. The key value for the broker, merchants and affiliates lies in the economies of scale, which means additional affiliates can be added to the network at very little additional cost. Practically, once a merchant pays the affiliate network his initial set-up fee, he can add new affiliates almost for free and conversely, new affiliates need not pay anything to join an affiliate program. For the same reason, the traffic generated by an affiliate marketing network is likely to be unfocussed and ineffective as there are no costs, no qualifications and hence no entry barriers for an affiliate to enter the network.

The issue of trust in the affiliate marketing universe has been an important one, more so given recent events and the consequent need for all parties on the chain to put in place measures to elicit trust. Brokers often serve as a neutral party that measures performance and monitors the network. They act as a third party who verifies results between merchant and affiliates and serve as a boundary spanner between to create a closer community between the two. Brokers also ease the process of billing and payment and work as Aggregators who provide a single point of contact for both merchants and affiliates. As such there are very few checks for any entity to start off as an Affiliate Marketer and make improper use of gullible affiliates.

Commonsensically, we can arrive at the relationship between the number of merchants using an affiliate marketing campaign and the number of users or leads obtained from the affiliate marketing campaign. As the base of leads (modeled here as user base) goes up it

A MODELING APPROACH TO AFFILIATE MARKETING

Publisher User baseMerchant

++

Performance

-

-

Figure 2: Relationship between Merchant,publisher and user base

would incite more merchants to sign up and of course more merchant signing up would keep increasing the user base, albeit at a decreasing rate as competition heats up. To model the necessity for ads to be contextual we introduce a variable called Performance, which is essentially an index conveying the relevance and contexuality of the affiliate marketing network. The more ads are placed in context, the better the quality of the ads, the higher this index. Now in the causal loop below, we assume that as the number of merchants in the affiliate marketing universe increase, The number of publishers would also consequently be driven up. Correspondingly, with an increase in reach more merchant would come into the universe. However, as the number of publishers exceeds the affiliate marketer's capacity for monitoring, the performance index is likely to go down. This would trigger the causality of the relationship between increasing publisher numbers and merchants to turn negative. Now because of the decreasing quality of ads and their lower effectiveness and of course the consequent word of mouth, merchants would flee the universe.

As discussed before we expect the over targeted number of consumers or internet users to keep increasing given the increasing importance of Internet marketing and the growing number of internet users. An increasing Consumer base of course drives more affiliates to tie in with an

Affiliate Marketer PublisherPerformance

+

Consumer trust

++

-

+

Figure 3: Relationship between affiliate marketerperformance, consumer trust and publishers

affiliate network. We model the brokers or Affiliate marketers as the efficiency index of the set of affiliate marketers. Stronger the network, better the performance monitoring, the higher would be the efficiency index and consequently higher the monetary value of this business for affiliate marketers. Now as this index increases, we would believe that the performance index referred to previously would also consequently increase. More contextual advertisements and searches would mean more useful results for the consumer. Consequently we would expect consumer trust in the affiliate marketing channel to increase as the usefulness of these advertisements increase. However, as the number of publishers increases so would experimentation be likely to increase in the channel. As we have previously mentioned, control on the network in essential to the relevance and success of affiliate marketing. As the number of publishers burgeons beyond the capabilities of Affiliate marketers, performance in terms of contextuality of ads is likely to suffer and misuse of the channel might become more probable. Hence we theorize than this would bring down the performance index and consequently consumer trust as well.

An important player in this whole model is the way performance based payment systems for affiliates are designed. If the objectives of the publishers and merchants can be aligned to a high extent with the help of these performance

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based systems, the system benefits. The threshold up to which an increase in publishers will act as a boost to the entire system rather than being seen as 'unmanageable' would increase as the effectiveness of performance based payment systems increases. In an ideal performance monitoring system for affiliates, they would act as an extension of the merchant entity and there would be no agency conflict.

In conclusion we can say that the two most important levers which need to be kept cognizance of in the Affiliate marketing universe would be performance monitoring of affiliates and consumer trust. Our model shows that rebuilding affiliate marketing in the future would closely involve rebuilding consumer trust as well. In order for this to happen, Affiliate marketers will have to take a stronger stance in their role as a neutral third party and may have to get their hands dirty in monitoring misuse. There is also a need to set down guidelines for entities to become Affiliate Marketers in the first place. Given the strong role of trust and dependency in and affiliate marketing network, the affiliate marketers would also need to pay attention to partnering merchants with the correct set of affiliates to ensure contextuality of ads. As such these methods of performance monitoring need to be supplemented by educating affiliates about how best to generate leads and sales for the merchant and prove to be useful channels of information to the everyday internet user, rather than bombarding them with distracting banners and information which ultimately falls on deaf ears. Affiliates can also serve as an important source of information for merchants on how to design their advertisements to better appeal to

Conclusion

consumers. The closer affiliates can be made to

mirror a fully commissioned sales-force, the brighter the future of affiliate marketing.

Chandrima Das is an alumnus of IIM Calcutta, Batch of 2010. She currently works in Oliver Wyman as a Consultant and can be r eached at [email protected]

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4. Janssen, D., & Van heck, E. (2008). How Will Online Affiliate Marketing Networks Impact Search Engine Rankings? . Social science research Network .

5. Kelly, K. (1998). New rules for the New Economy.

6. Singel, R. (2005). Shady Web of Affiliate Marketing. Retrieved from www.wired.com. Janssen, David and Van Heck, E.,How Will Online Affiliate Marketing Networks Impact Search Engine Rankings?(March 7, 2007). Erasmus Research Institute of Management ERIM, Forthcoming. A v a i l a b l e a t S S R N : http://ssrn.com/abstract=1314664

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