A Roller-Coaster Ride

This blog entry is dedicated to the unconventional and enriching experience that was the SM-2 course in term 4. The course and its delivery brought me out of my comfort zone. It challenged me intellectually and taught me how to think on my feet. The unconventional 'spiral' method of pedagogy adopted by the professor, Sandeep Mann, taught me how to link together various pieces of relevant information into one coherent whole. Attending SM-2 classes made me realize that any business problem needs to be approached holistically from different points of view. The analogy of a consultant to a doctor really resonated with me and I attempted to develop a surgeon's eye for observation and analysis of the case provided.

Tackling the professor's unorthodox posers in class gave me the confidence to conduct a detailed and thorough analysis of any given problem. The professor stressed how one can link different pieces of information into one streamlined unit that provides a crisp and comprehensive analysis of any situation.

Both the mid-term and the end-term exams were doses of the same medicine dealt out by the professor in class- tackling any unconventional problem using the knowledge and tools at your disposal. A question paper in which one frames questions rather than giving answers was a stroke of genius. However, this paled in comparison to the googly that was the end term exam. Never in my wildest dreams did I imagine that I would be writing my own biography in the exam. The end term exam was a fair reflection of the entire SM-2 course as a whole- unconventional, immensely challenging, intellectually stimulating and guaranteed to get one into the 'consultant mode'. It was a roller-coaster ride but  by the end of it I'm glad I was on it.

Female Leadership at P & G

When Procter & Gamble set out to sell Pampers in India five years ago, it faced a daunting marketing challenge. Use-and-throw diapers were just not part of the cultural norm and women believed it was only lazy mothers that switched from cloth nappies to diapers.

P&G realised it had to change that mindset. A female member of the Pampers marketing team, drawing on her skills as both a marketer and a mother, suggested that they market it on the lines of the baby's health. When you put a baby in Pampers, she said, the wetness doesn't spread; the baby remains dry for several hours and therefore has less chances of contacting a fever or a cold. P&G decided top act on this insight today Pampers is India's largest selling diaper brand.

P&G's former chairman AG Lafley often said: everything starts and ends with understanding and serving consumers better. Given that about 70% of P&G's target audience is women, the promotion of women executives translates into a real competitive advantage. But P&G is taking it beyond the most obvious marketing connection.

A year ago, it put in place its first ever 'corporate diversity and inclusion' strategy, spearheaded by CEO Bob McDonald, which clearly outlines the policies and practices that encourage women's advancement. The goals are clear: P&G aspires to have half of the company's leadership as women. At the helm of this initiative sits Linda Clement-Holmes, P&G's new global diversity officer who reports directly into McDonald.

According to a recent Accenture survey, a diverse workforce helps put companies ahead. The research shows a significant correlation between both gender and the international diversity of a company's executive board and stock market performance. Five out of 12 members of P&G's global board are women.

The Concept of Sensory Branding

The movie 'Avatar' achieved success, not just because it had a well-known moviemaker and it used 3-D as the technology. It became a box office hit because it also allowed the audience to touch and feel - literally. The stimulation and the sense of being in the thick of action in a fictional story is what the movie sought to achieve.

From the big screens to television, one comes across commercials by brands that look to stimulate the senses - from sight to taste to smell. But look for the same triggers on the ground and chances are brands more often than not fail the litmus test when it comes to sensory branding.

However, with consumers having access to a plethora of information, add to that the high speed of change, the thin line between real and reality and very limited time — sensorial appeal will play a vital role in enticing consumers towards brands.

And globally, there are examples of brands creating an experience that appeal to the senses. In a presentation by Lowe Counsel called 'Sensory Extra', auto brand Ferrari is opening Ferrari World in Abu Dhabi in 2011. "Ferrari theme park will host over 20 state-of-the-art attractions, each designed to bring various facets of the Ferrari story to life," the presentation states.

So one will feel the rush of speed as the G-force takes over, or learn from the legends themselves in the factory or at the pit stop, the presentation adds. Yet another example of multi sensory branding is Starbucks now roasting beans in-house to enhance the authenticity of aroma in store. Nissan, the presentation adds is taking a hint from the pleasant effect of forest air on people.

Nissan studied the effects of aromas on human mental activity and "the resulting forest AC system intermittently and alternately furnishes two unique aromas, borneol and leaf alcohol, to alleviate boredom and stimulate the driver's brain."

Zoe Lazarus, director at Lowe Counsel says the categories, which have embraced sensory branding, and looking at neuro-marketing so far are entertainment (6-D cinemas), food (food/art experience) and travel with the advent of extreme adventure and survival holidays.

"The challenge of sensory branding is to think more broadly about how people experience products in the real world and find ways to enhance these experiences," says Lazarus. In India, the advent of modern trade provides an opportunity of creating a sensorial experience.

Why the world is shifting to cloud computing

Cloud computing is fast evolving from a futuristic technology into a commercially viable alternative for companies in search of a cost-effective storage and server solution. In fact, Gartner Inc. predicts that by 2012, 80 percent of Fortune 1000 enterprises will pay for some cloud-computing service, while 30 percent of them will pay for cloud-computing infrastructure. While the technology has its fair share of drawbacks (such as privacy and security concerns), an undeniable silver lining is currently turning skeptics into enthusiasts.

Scalability: IT departments that anticipate an enormous uptick in user load need not scramble to secure additional hardware and software with cloud computing. Instead, an organization can add and subtract capacity as its network load dictates. Better yet, because cloud-computing follows a utility model in which service costs are based on consumption, companies pay for only what they use.

Easy Implementation: Without the need to purchase hardware, software licences or implementation services, a company can get its cloud-computing arrangement off the ground in record time — and for a fraction of the cost of an on-premise solution.

 Skilled Practitioners: When a particular technology becomes popular, it’s not uncommon for a whole slew of vendors to jump on the bandwagon. In the case of cloud computing, however, vendors have typically been reputable enough to offer customers reliable service and large enough to deliver huge datacentres with endless amounts of storage and computing capacity. These vendors include industry stalwarts such as Microsoft, Google, IBM, Yahoo! Inc. and Amazon.com Inc..

Frees Up Internal Resources: By placing storage and server needs in the hands of an outsourcer, a company essentially shifts the burden placed on its in-house IT team to a third-party provider. The result: In-house IT departments can focus on business-critical tasks without having to incur additional costs in manpower and training

Quality of Service: Network outages can send an IT department scrambling for answers. But in the case of cloud computing, it’s up to a company’s selected vendor to offer 24/7 customer support and an immediate response to emergency situations. That’s not to suggest that outages don’t occur. In February 2008, Amazon.com's S3 cloud-computing service experienced a brief outage that affected a number of companies. Fortunately, service was restored within three hours.

There is plenty of concern surrounding cloud computing and its attendant security risks. What a lot companies fail to understand, however, is that many vendors rely on strict privacy policies, as well on sophisticated security measures, such as proven cryptographic methods to authenticate users. What’s more, companies can choose to encrypt data before even storing it on a third-party provider’s servers. As a result, many cloud-computing vendors offer greater data security and confidentiality than companies that choose to store their data in house.

Indian Banking Sector- A Strategic Analysis

In 2008, when the global banking industry was being shaken by the tremors of the unfolding financial crisis, only one bank in India felt the aftershocks, and this, only because one of its overseas subsidiaries had made an opportunistic bet on debt issued by the failed investment bank Lehman Brothers. While the market valuations of all the leading banks in India slipped as equity prices tumbled, their businesses were not affected and their balance sheets remained healthy.

Most domestic commentators continue to hold up this episode as evidence of the inherent strengths of the Indian banking industry and have lauded the Reserve Bank of India (RBI), the country’s central bank and banking regulator, for sticking with its conservative approach. When regulators around the world were loosening their grasp over the banking and financial services industry, RBI steadfastly held on to the strings that prevented banks in India from making risky investments and following highly aggressive business practices.

Though some of the country’s younger banks have fast growing asset management and insurance businesses, the industry’s bread and butter is still industrial lending. Asset Backed Securities and Collateralized Mortgage Obligations are still unheard of in the country, while Indian lenders warmed up to the idea of teaser rate mortgages only after the global financial crisis. So far, they do not appear to be any worse for it.

The Indian banking industry is also well capitalized and capital ratios are above the global average. The average tier-1 capital adequacy ratio of the Indian banking industry is above 10%, when compared to the Basel III norm of 8.5% including the contingency buffer. The average total capital of banks in India stood at 14.5% as of March 31, 2010, compared to the Basel III requirement of 10.5%.

However, it can also be argued that the cautious regulatory controls have stifled the growth of the banking industry in India. This is the sector with the most entry barriers as the RBI has not issued new banking licenses for well over a decade. Foreign shareholdings in domestic banks are restricted and foreign banks have to wait years to get permission to start banking operations or expand their network. Except for a few cases where the large banks were encouraged by the RBI to acquire failing banks, the industry has not seen any meaningful consolidation.

As a result, while India continues to move up the ranks of the largest economies in the world, most Indian banks are significantly smaller than their global counterparts. They are no match to even banks in other emerging economies like China, and only one bank from India is ranked among the global top-100 in terms of asset size. Also the cost of financial intermediation is relatively high in India and banks enjoy wide net interest margins. Access to banking services is poor across vast areas of the country’s rural hinterlands and as a result, more than 40% of the population does not have bank accounts and only about 15% have received some form of bank credit. The World Economic Forum currently ranks India 37^th out of 55 countries in financial development, behind other large emerging economies like China, South Africa, and Brazil.

Banking regulation remains cautious

As in most countries, the central bank is entrusted with the role of banking regulator in India and the Reserve Bank of India is widely acknowledged as an efficient, but cautious regulator. The government still drives the broader policy framework for the industry, including setting the limits for foreign investments in the sector.

While the Indian government has opened up most sectors of the economy to foreign investors over the last two decades, it has been more guarded about banking and financial services. Accordingly, the aggregate foreign investment limit in domestic private banks increased from 49% to 74% only in 2004, but it remains at a low 20% in banks where the government is the major shareholder. The limit covers all investments by foreigners, including portfolio investments.

In addition, the RBI has other restrictions that are aimed at ensuring wider distribution of bank shareholding. Investments exceeding 5% of a bank’s equity capital by a foreign investor require RBI approval, and a single foreign investor cannot hold more than 10%. These restrictions have also been progressively applied to the domestic shareholders of the smaller private banks, but some of the larger and healthier banks have been given specific exemptions. Further, no bank can hold more than 5% of the shares of another bank, except when a bank on the verge of failure is acquired.

The limits on foreign investment do not apply to foreign banks starting a subsidiary or branch network, wholly-owned by the promoting bank. Like regulators in some other countries, in granting new banking licenses, the RBI often favours applicants from countries that have favourable policies for Indian banks seeking to open overseas branches or expand existing ones. As a result, it may take several years for a new foreign aspirant to get a license. More than a dozen applications from foreign banks for banking licenses now await RBI approval, including well-known names like Goldman Sachs. The RBI has also been careful when allowing new branches for existing foreign banks, but the number of branches approved has always exceeded India’s WTO commitment of a dozen new branches a year.

What’s more, the RBI also has policies to direct bank credit to sectors that are deemed socially or economically important by the government. Accordingly, all domestic banks are required to lend at least 40% of their total net credit outstanding to exporters, farmers, small businessmen, and low-income borrowers. For foreign banks, the requirement is lower at 32% of net credit. Limited deposit

insurance is available to customers of all banks, including foreign banks.

Though it influences the credit policies of the banking industry through specific lending requirements, the Indian government generally has less sway over banks when compared to select other emerging economies like China. By and large, banks in India do not boost or curtail credit flows at the government’s bidding. Though the government occasionally encourages the banks to increase credit availability, as it did during the global financial crisis, even the government-controlled banks are not forced to comply. This apparent autonomy, though limited in many ways, has allowed most Indian banks to follow prudent credit standards and prevent excessive bad loan losses. However, there have also been cases of banks being pushed to the verge of failure by corruption and political manipulation.

Some of the leading banks have also occasionally disagreed with regulatory policies and guidance, though the senior officers of all government-controlled banks are appointed by the government with the consent of the RBI. For instance, the State Bank of India recently refused to withdraw its teaser rate mortgages from the market though the RBI repeatedly expressed its dislike for such loans.

Consumer credit to drive future growth in banking

Like in most other emerging economies, the share of consumer credit remains very low in India, despite the recent growth. Average income levels are still very low and subsistence spending takes away most of the personal incomes of the lower income groups. This leaves very little earnings surplus available for debt servicing and reduces their creditworthiness, and banks will be hesitant to lend to them. Hence, the marketing efforts by banks to promote consumer finance products and services are now mostly limited to cities and towns where there is a larger concentration of higher income customers.

However, as average income levels are expected to rise further, the number of potential bank customers with sufficient earnings surplus will also grow. Though the growth of income levels is likely to be measured and the potential loan size will remain small, the aggregate market size for consumer credit will become larger because of the large population size. This market will be made more attractive by India’s demographic advantage of a relatively young population, who are likely to see faster income growth. Besides, younger customers are generally considered to be more receptive towards new financial products and services.

Even in business banking, India may continue to offer attractive growth opportunities. The ratio of total business credit to GDP in India is less than half the level in China. While this gap mostly reflects the substantially larger industrial sector in China, it also indicates the potential credit requirement if Indian industry sustains its growth. Bond markets remain grossly underdeveloped in India, while exchange risks reduce the attractiveness of international bond markets to domestic borrowers. Hence, it is likely that most of the increased industrial credit requirements will have to be financed by banks.

However, it is also widely accepted that the Indian banking industry may find it difficult to achieve its potential without further regulatory initiatives. It is evident that without increased competition, financial intermediation costs will remain high and banking services will not spread widely across the vast rural areas of the country. Also, to improve efficiency and compete better, it is believed that domestic banks in India need to build scale through consolidation. As past reports and policy statements by the Indian government and the RBI have made repeated references to these issues, it is hoped that entry barriers will come down in the banking sector and restrictive policies will be diluted. It is expected that the shareholding and investment norms will be further liberalized, while new banking licenses will be made available to both domestic players and foreign banks.

The government and the RBI have already announced a new policy framework to issue new banking licenses to domestic applicants. While the RBI is expected to maintain its preference for wider shareholding distribution in banks, corporations with good reputation and track record that have large public shareholdings, may also be allowed to promote new banks. Confirming the attractiveness of the Indian banking sector, it has been reported that nearly a dozen applicants, including some of the most prominent business groups, are eager to acquire licenses.

The banking sector is one of the most crucial sectors in any economy, and plays an instrumental role in promoting economic growth. In India, the sector is even more important as the expansion of banking services to rural areas may also play a significant role in reducing poverty and ensuring sustainable income levels. If favourable regulatory support is ensured, India will likely have a mature banking industry with sufficient scale and reach to support its fast growing economy.

The Strategy of Portfolio Diversification

Portfolio diversification is the means by which investors minimize or eliminate their exposure to company-specific risk, minimize or reduce systematic risk and moderate the short-term effects of individual asset class performance on portfolio value. In a well-conceived portfolio, this can be accomplished at a minimal cost in terms of expected return. Such a portfolio would be considered to be a well-diversified.

Although the concepts relevant to portfolio diversification are customarily explained with respect to the stock markets, the same underlying principals apply to all types of investments. For example, corporate bonds have specific risk that can be diversified away in the same manner as that of stocks.

Unfortunately, there's no concise definition of asset class. The definition of asset class is dependent on the context in which the term is used, the investment strategy employed in the management of a portfolio, and to some extent, the person who is rendering the definition. Suffice it to say that asset classes are significantly different investments.

Eliminate Specific Risk and Minimize Systematic Risk

It is assumed that all investors are rational and will therefore hold portfolios that are diversified to the point where specific risk has virtually been eliminated and their only exposure to risk is to that which is inherent in the market itself. Thus, the residual risk of a portfolio should be equal to market risk, a.k.a. systematic risk, and systematic risk can be reduced by investing over a broader market, i.e., a larger universe.

International diversification provides a good example of the effects of diversifying across asset classes. A portfolio invested 50% in domestic large-cap stocks and 50% in international large-cap stocks would have approximately half the residual risk of a portfolio comprised solely of domestic large-cap stocks, assuming that the investments in each market were sufficiently diversified to eliminate specific risk.

Some investors may choose to be exposed to specific risk with the expectation of realizing higher returns. But this is contrary to financial theory and such investors are therefore deemed to be irrational. Deliberate exposure to specific risk is unnecessary and is essentially gambling...unless you are trading on inside information, but we won't go there, as trading on inside information is a flagrant violation of the securities laws.

Moderate the Effects of Individual Asset Classes

Moderating the effect of individual asset class performance on portfolio value is another benefit of portfolio diversification. This is desirable because the lower the variance of your portfolio value, the greater the certainty of its value at any given time, which is extremely important if you have a need to liquidate all or part of your portfolio for some reason, not to mention the fact that lower variation will reduce stress and anxiety.

If you're saving for retirement, you should have a targeted value at the date you plan to retire. That value is considered to be the terminal value of your portfolio, a.k.a. your terminal wealth, at the end of your holding period, and your holding period would be from the present to that future date. As part of your planning, you must make projections of the average rate of return and the standard deviation of returns over your holding period. Thus, your terminal wealth is uncertain and can be assumed to be a range of values rather than a fixed value. This range is known as your terminal wealth dispersion (TWD).

If you take this thought process a step farther, you'll realize that your holding period is made up of an infinite number of shorter holding periods and that each period has its own TWD. Your TWD at any point in time is the risk you are faced with when liquidation is necessary. Reducing this risk to an acceptable level can be achieved by diversifying across asset classes with only a minimal cost in terms of expected return.

If, for example, you blend five assets that are not highly correlated and all of those assets have expected returns of 12% and standard deviations of 10%, your expected return will be 12% but the standard deviation of your portfolio's returns will be significantly less than 10%. If the assets were only slightly correlated and/or negatively correlated, your portfolio standard deviation would be very significantly less than 10%. Individually, these assets are equivalent investments based on their risk and return, but together they form an investment that is superior to each of the individual assets, which can be attributed to the lack of perfect correlation between the assets. Portfolio diversification is a very good deal. So be sure you take full advantage of it.

Asset classes tend to go through periods of under-performance and over-performance which tend to offset each other in the long run. However, as we don't get to select our holding periods after the fact, it's desirable to insure ourselves against the probability of liquidating at a time when under-performance outweighs over-performance within our holding periods. This is where the correlation between asset classes really comes into play. Asset classes that are not highly correlated can be expected to under- and over-perform at different times. Thus, holding a variety of asset classes that are not highly correlated is insurance against the probability of having a low terminal value when liquidation occurs during or shortly after a period of under-performance of a minority of the asset classes in a portfolio. In such cases, the other asset classes should moderate or fully offset the effects of the under-performing asset class or classes.

Postponement Strategy

Sensing customer demand is one thing, but profitably responding is another, especially when you offer a large array of options or highly configurable final products. In certain industries, however, customers are demanding more options to personalize products to their tastes and needs. With so many products and options, a company easily risks having too much nonselling inventory and too little of the hottest selling models available, mirroring the perils of the high fashion industry.

While fashion apparel or footwear isn't really capable of being configured into the desired style in store, several other types of products--computers, mobile phones and medical devices, for example--can be at a very late stage or even built-to-order.

There are challenges in product and option proliferation. With so many variations of final product configuration, a company's product design and supply chain strategy becomes critical to profitability. What demand-driven companies don't want to do is forecast a number for each configuration, make them, push them into the market and then hope they sell.

Designing products for postponement and performing late-stage product completion as close to demand as possible is vital for profitability. Companies must put the right products into the hands of the right customer at the right time for the right cost.

Designing products for postponement is key, and it means engineering products to be a set of core components, sometimes called platforms, where the options or configurations can be easily plugged together at a later time. In many cases, the options for final configuration might involve loading or enabling specific software or firmware options.

For example, a product like a popular mobile phone might have more than 2,500 variations a customer can select as part of the phone and service. However, if designed right, those variations can be assembled and configured from just 200 different components and software options. A company needs only to forecast, make and move the right amounts of those 200 different components and then, using late-stage product completion, build just enough of the 2,500 various options as customers demand them.

A few of the benefits with this model include:

--Minimize wrong inventory, expedited shipping costs and obsolete and markdown products.
--The use of low-cost country manufacturing of components becomes more effective.
--More options are available to customers without increasing costs.

In certain cases, outsourcing late-stage product completion makes a lot of sense, especially if the products are sold, distributed and fulfilled globally. Banta Global Turnkey, a third-party supply chain outsourcing company, specializes in just that.

With Banta's physical presence in a number of countries, including the U.S., Ireland, the Czech Republic, Mexico and China, companies are finding they can expand their postponement strategy to global markets rather quickly and cost effectively. Banta claims its additional value for customers comes not only from final configuration and fulfilment activities, but also from its specialization in the local sourcing of class-C products that are needed to complete many final product kits (think power cables and speaker wires that come with your new PC).

Aside from the general benefits of postponement mentioned above, companies that are outsourcing the product completion function find the following to be true:

--Global markets are reached faster, with fewer assets and capital.
--Richer customer insights are gained for new products.
--There is the ability to focus on innovation and product design for supply.
--There is time to concentrate on high intellectual property items and not mundane execution tactics.

As the relationship between the OEM and the service provider matures, with the provider showing proven performance in quality and efficiency, a level of trust develops. Companies report that when a strong trust-based relationship is in place, they gain results better together than as separate interacting entities. For example, service provider staff members interact directly with their peers at the OEM as part of a team in IT, product development, logistics and the like.

It is best to capitalize on product completion if you can. Not all companies are able to take advantage of postponement strategies and late-stage product completion (food manufacturers, for example). For companies that are seeing customer demand proliferate products and options, we do see the leading companies using postponement strategies and late-stage product completion to respond to the demand more profitably.