Cases in Strategic Management: A Flexibility Perspective [1st ed.] 978-981-13-7063-2;978-981-13-7064-9

Table of contents :
Front Matter ....Pages i-xviii
Adani Group (Sanjay Dhir, Sushil)....Pages 1-24
American Express (Sanjay Dhir, Sushil)....Pages 25-36
Barbeque Nation (Sanjay Dhir, Sushil)....Pages 37-54
DHL (Sanjay Dhir, Sushil)....Pages 55-72
Essar Oil (Sanjay Dhir, Sushil)....Pages 73-89
Federal Express (Sanjay Dhir, Sushil)....Pages 91-105
Google India (Sanjay Dhir, Sushil)....Pages 107-125
Lemon Tree (Sanjay Dhir, Sushil)....Pages 127-145
Marriott Hotels (Sanjay Dhir, Sushil)....Pages 147-162
National Stock Exchange of India (Sanjay Dhir, Sushil)....Pages 163-181
National Thermal Power Corporation (Sanjay Dhir, Sushil)....Pages 183-206
ONGC (Sanjay Dhir, Sushil)....Pages 207-218
Punjab National Bank (Sanjay Dhir, Sushil)....Pages 219-229
State Bank of India (Sanjay Dhir, Sushil)....Pages 231-248
Tata Power (Sanjay Dhir, Sushil)....Pages 249-260

Citation preview

Flexible Systems Management

Sanjay Dhir Sushil

Cases in Strategic Management A Flexibility Perspective

Flexible Systems Management Series editor Sushil Department of Management Studies Indian Institute of Technology Delhi New Delhi India Editorial Board Members Gerhard Chroust, Institute for Telekooperation, Johannes Kepler University Linz, Austria Julia Connell, University of Newcastle, Newcastle, NSW, Australia Stuart Evans, Integrated Innovation Institute, Carnegie Mellon University, USA Takao Fujiwara, Toyohashi University of Technology, Toyohashi, Aichi, Japan Mike C. Jackson OBE, University of Hull, UK Rashmi Jain, Montclair State University, Montclair, NJ, USA Ramaraj Palanisamy, St.Francis Xavier University, Antigonish, NS, Canada Edward A. Stohr, Stevens Institute of Technology, NJ, USA

The main objective of this series on Flexible Systems Management is to provide a rich collection of research as well as practice based contributions, from different contexts, that can serve as reference material in this upcoming area. Some of these books will be published in association with ‘Global Institute of Flexible Systems Management’. It will help in cross-fertilizing ideas from different perspectives of flexibility so as to consolidate and enrich the paradigm of flexible systems management. The audience for the volumes under this series includes researchers, management students/teachers, and practitioners interested in exploring various facets of flexibility research and practice. The series features five types of books: • Post conference volumes containing peer reviewed high quality research papers around a theme and clustered in sub-themes that can act as good reference material. • Contributed thematic volumes based on invited papers from leading professionals, from academia as well practicing world, containing state of the art on an emerging theme. • Research monographs based on research work making a comprehensive contribution to the body of knowledge. • Books based on novel frameworks and methodologies covering new developments that are well tested and ready for wider application in research as well as practice. • Business practices and case-based books documenting flexibility practices, strategies and systems in real life organizations.

More information about this series at http://www.springer.com/series/10780

Sanjay Dhir Sushil •

Cases in Strategic Management A Flexibility Perspective

123

Sanjay Dhir Department of Management Studies Indian Institute of Technology Delhi New Delhi, India

Sushil Department of Management Studies Indian Institute of Technology Delhi New Delhi, India

ISSN 2199-8493 ISSN 2199-8507 (electronic) Flexible Systems Management ISBN 978-981-13-7063-2 ISBN 978-981-13-7064-9 (eBook) https://doi.org/10.1007/978-981-13-7064-9 Library of Congress Control Number: 2019933389 © Springer Nature Singapore Pte Ltd. 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

The significance of “strategic management and flexibility” is broadly recognized by academicians, professionals, and policymakers. New competitive scenery is growing to a great extent on the basis of strategic management of any organization. The industry and businesses are constantly evolving in India as it is one of the fastest-growing economies of the world. Further, India has a very challenging market, and managing a business in India requires an exceptional strategic approach. In order to create a dynamic competitive advantage, industry will depend on the creation of strategic flexibility in the twenty-first century. Strategic flexibility demonstrates the capacity to accelerate purposeful changes and adjust to environmental/natural changes through constant changes in current strategic actions and investment strategies. Flexibility is more important nowadays in fast-changing competition and markets. The industries acknowledge strategic flexibility through their actions like employing valuable strategies, practicing strategic leadership, and applying it to the organizations. Well-established strategic management by firms can transform the nature of competition in the market. This casebook presents flexibility aspects of strategic management in the context of Indian industries. The case studies in this book include a wide range of industries from trading, financial, food and beverages, logistics, couriers, e-commerce, hotel, electronic exchange, banking, and power and energy, which have been selected to provide a broad range of understanding of the flexible corporate strategic management ideas to learners. Apart from this, 5 of the 15 cases in this book are on power and energy sectors, e.g., Adani Power, Essar Oil, NTPC, ONGC, and Tata Power. Likewise, two cases are from the banking sectors like SBI and PNB. All 15 cases show different ideas of flexible strategic management prevalent in the industries. These include vision/scope, flexible strategy, flexible corporate and international strategy, business-level strategy, SWOT analysis, CAGE distance framework, flexible strategic implementation framework, execution of strategy, strategic control, and competitive advantage.

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The information available on all cases has been gathered from secondary sources such as company websites, published articles, journals, and others that are accessible in the public domain. Also, these case studies comprise an in-depth analysis of industry reports, government reports, news articles, and annual reports. In spite of the above, teaching notes for each of these 15 cases have been given as additional resources for mentors. These include learning objectives, possible use of the cases, and questions for discussion along with a detailed analysis of those questions. These teaching notes and cases have been tested in strategic management classes with IIT students. The intended audience of this casebook includes MBA and executive MBA students who are specialists in strategy. This book can be used as a supplementary text in strategic management and flexibility classes. Finally, management students, professionals, and managers will find this book helpful. This casebook will be useful to better understand the strategic management in the Indian context and gain bits of knowledge in their individual regions. We trust that you would discover this book exceptionally valuable. We thank you for utilizing this casebook and welcome your valuable input, recommendations, and reviews of cases depending on your experience and involvement in the classrooms. Please write to us at [email protected]. New Delhi, India

Sanjay Dhir Sushil

Contents

1

Adani 1.1 1.2 1.3 1.4 1.5 1.6

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1.8 1.9 1.10 1.11 1.12

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Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . About Adani Enterprises . . . . . . . . . . . . . . . . . Vision and Values . . . . . . . . . . . . . . . . . . . . . . Carmichael Coal Project . . . . . . . . . . . . . . . . . Threat to the Great Barrier Reef . . . . . . . . . . . . Current Resource Markets . . . . . . . . . . . . . . . . 1.6.1 Brief History of Coal Mining in India 1.6.2 In-House Production . . . . . . . . . . . . . 1.6.3 Imports . . . . . . . . . . . . . . . . . . . . . . 1.6.4 Resource Industry Across Borders . . . 1.6.5 Global Landscape . . . . . . . . . . . . . . . Options Available . . . . . . . . . . . . . . . . . . . . . . 1.7.1 Mining Options in Africa . . . . . . . . . 1.7.2 Mining Options in South America . . . About the Company . . . . . . . . . . . . . . . . . . . . Possible Solutions . . . . . . . . . . . . . . . . . . . . . . Maritime Trade in India and Ports . . . . . . . . . . Mundra Port . . . . . . . . . . . . . . . . . . . . . . . . . . PESTEL Analysis . . . . . . . . . . . . . . . . . . . . . . 1.12.1 Political Factors . . . . . . . . . . . . . . . . 1.12.2 Economic Factors . . . . . . . . . . . . . . . 1.12.3 Social Factors . . . . . . . . . . . . . . . . . . 1.12.4 Legal Factors . . . . . . . . . . . . . . . . . . 1.12.5 Environmental Factors . . . . . . . . . . . 1.12.6 Technological Factors . . . . . . . . . . . . Political Influence . . . . . . . . . . . . . . . . . . . . . . Expansion of Adani Ports . . . . . . . . . . . . . . . . Sustainable Growth Strategy . . . . . . . . . . . . . .

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External Factors: Opportunities and Treats . . . . . . . . . . . . 1.16.1 Macroeconomic Environment (World Economy, India’s GDP Growth, External Trade Growth, Etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.16.2 Industry Outlook . . . . . . . . . . . . . . . . . . . . . . . . 1.16.3 Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17 Internal Factors: Strengths and Weaknesses . . . . . . . . . . . 1.17.1 Strong Integration Through Holding and Subsidiary Companies . . . . . . . . . . . . . . . . 1.17.2 Implementation of Government Policies to Take Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17.3 Mandate to Grow . . . . . . . . . . . . . . . . . . . . . . . 1.18 Company’s Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19 Recent Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19.1 September 2016: Glencore . . . . . . . . . . . . . . . . 1.19.2 August 2016: Abbot Point Bulkcoal Pty Ltd. (APB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19.3 July 2016: TM Harbour Services . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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American Express . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Evolution of the Finance Industry—“The World as We Know” . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Market Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Strategic Decisions in Recent Times . . . . . . . . . . . . . . . . . 2.5.1 Service—Not a Cost Center . . . . . . . . . . . . . . . 2.5.2 Change in Marketing Strategy . . . . . . . . . . . . . . 2.5.3 Competitive Advantages of Marketing Strategies 2.5.4 Moving Down the Pyramid . . . . . . . . . . . . . . . . 2.6 The Threat of Fraud and Security . . . . . . . . . . . . . . . . . . . 2.7 The Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Barbeque Nation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Food Service Industry . . . . . . . . . . . . . . 3.1.2 Average Size of Barbeque Nation Outlet 3.2 Operations at Barbeque Nation . . . . . . . . . . . . . . 3.3 Menu Selection at Barbeque Nation . . . . . . . . . . .

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4

Management of Barbeque Nation . . . . . . . . . . . . . . . . . Pricing Policy at Barbeque Nation . . . . . . . . . . . . . . . . Automation and Information Technology at Barbeque Nation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Performance Review Process . . . . . . . . . . . . . . . . . . . . 3.7.1 Opening a New Barbeque Nation Outlet . . . . 3.7.2 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3 Suppliers and Purchasing Practices . . . . . . . . 3.7.4 Barbeque Nation Challenges . . . . . . . . . . . . . 3.8 Barbeque Nation Controversy . . . . . . . . . . . . . . . . . . . 3.9 HR Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9.1 Employee Training . . . . . . . . . . . . . . . . . . . . 3.9.2 Work Culture at Barbeque Nation . . . . . . . . . 3.9.3 Recruitment and Reward System . . . . . . . . . . 3.10 LS Nav Hospitality—An Integrated System . . . . . . . . . 3.11 Present Strategies of Barbeque Nation . . . . . . . . . . . . . 3.11.1 Team-Focused Culture to Preserve the Guests 3.11.2 Continuous Expansion in Indian Cities . . . . . . 3.11.3 Expanding Through Owned and Franchise Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11.4 Expanding Johnny Rockets Franchise to Different Indian Cities . . . . . . . . . . . . . . . . 3.11.5 Strategic Brand Acquisitions . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4.9

Go-Green Strategy . . . . . . . . . . . . . . . . . 4.9.1 DHL Rail Connect and Rail line 4.9.2 DHL Climate Neutral . . . . . . . . 4.9.3 DHL SeAir . . . . . . . . . . . . . . . . 4.10 DHL Go-Green Strategy for India . . . . . . 4.11 DHL Industry Sector-Focus Strategy . . . . 4.12 Continuous Innovation . . . . . . . . . . . . . . 4.13 DHL Express Core Product . . . . . . . . . . . 4.14 DHL Envirosolutions . . . . . . . . . . . . . . . . 4.15 Future Road Map . . . . . . . . . . . . . . . . . . 4.16 Augmented Reality in Logistics . . . . . . . . 4.17 The Parcelcopter . . . . . . . . . . . . . . . . . . . 4.18 Current Challenges . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Essar 5.1 5.2 5.3

Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil Industry in India . . . . . . . . . . . . . . . . . . . . . . . Essar Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Essar’s Major Areas of Business Activity . 5.4 Market Potential of India . . . . . . . . . . . . . . . . . . . . 5.5 Locational Advantage for CBM Deposit . . . . . . . . . 5.6 Locational Advantage for Vadinar Oil Refinery . . . 5.7 Rosneft: A Brief Introduction . . . . . . . . . . . . . . . . 5.8 Delisting of Essar Oil and Rosneft Deal Story . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Federal Express . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 FedEx’s History . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Conception to Implementation . . . . . . . 6.3 The FedEx Business Model . . . . . . . . . . . . . . . . 6.3.1 FedEx Business Segments and Services 6.4 Employee Focus . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Express Industry in India . . . . . . . . . . . . . . . . . . 6.6 FedEx’s Presence in India . . . . . . . . . . . . . . . . . 6.7 Customized Services for India . . . . . . . . . . . . . . 6.8 Growth Initiatives . . . . . . . . . . . . . . . . . . . . . . . 6.9 Mergers and Acquisitions . . . . . . . . . . . . . . . . . 6.10 Transition from B2B to B2C . . . . . . . . . . . . . . .

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Contents

6.11 India as Emerging Technology Hub . 6.12 Social Focus . . . . . . . . . . . . . . . . . . 6.13 Final Thoughts . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . 7

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Google India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 The Initial Years . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 The Core Values . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 Revenue Models . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Game Plan A: Introduction of Google Chrome . . . . . . . . . . 7.2.1 Announcement . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Google Chrome: Early Adoption in India . . . . . . . 7.2.3 Competitor: The Firefox Story . . . . . . . . . . . . . . . 7.2.4 Fighting for the User Base . . . . . . . . . . . . . . . . . 7.3 Game Plan B: Aligning with the Government and Catering to the Indian Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Incredible India Project . . . . . . . . . . . . . . . . . . . . 7.3.2 High-Speed Wi-Fi to Travelers . . . . . . . . . . . . . . 7.3.3 Internet Saathi . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.4 Training and Education . . . . . . . . . . . . . . . . . . . . 7.3.5 Diluting Language Barrier with Internet . . . . . . . . 7.3.6 Project Loon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.7 YouTube Go, Google Duo . . . . . . . . . . . . . . . . . 7.4 Game Plan C: Unmatching Technology Adoption— An Indian Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Google Analytics . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Competitor—Taking the Fight to the Den (Statcounter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.3 Google Nexus and Google Pixel . . . . . . . . . . . . . 7.4.4 Google Pixel—Redefining How India Looks at a Smart Phone . . . . . . . . . . . . . . . . . . . . . . . . 7.4.5 Google Maps—Redefining the Shortest Route for Every Indian . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Game Plan D—Overcoming Failures . . . . . . . . . . . . . . . . . 7.5.1 Google Chromecast—Streaming Online Solution that Failed to Inspire . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Google Chromebooks . . . . . . . . . . . . . . . . . . . . . 7.5.3 Google Goggles . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Game Plan E—A March to the Future . . . . . . . . . . . . . . . . 7.6.1 Recent Investments . . . . . . . . . . . . . . . . . . . . . . .

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107 107 107 108 108 109 110 110 110 111

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111 111 112 112 112 113 113 113

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7.7 Looking Forward 7.8 Analysis . . . . . . . Exhibits . . . . . . . . . . . . . References . . . . . . . . . . .

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119 119 121 124

8

Lemon Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 Initial Challenges . . . . . . . . . . . . . . . . . . . . . . 8.1.2 New Challenges to Lemon Tree Hotels . . . . . . 8.2 Hospitality Business in India . . . . . . . . . . . . . . . . . . . . . 8.3 History: Back in Days—The Rise of Lemon Tree Hotels 8.4 The Indian Root Factor of Lemon Tree Hotels . . . . . . . . 8.5 Positioning of the “Three Strong Brands” . . . . . . . . . . . . 8.5.1 Red Fox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.2 Lemon Tree Hotels . . . . . . . . . . . . . . . . . . . . . 8.5.3 Lemon Tree Premier . . . . . . . . . . . . . . . . . . . . 8.6 Major Players in the Game—Competitors . . . . . . . . . . . . 8.6.1 Competitive Advantage . . . . . . . . . . . . . . . . . . 8.7 Offer Rooms at Best Price—Pricing Strategy . . . . . . . . . 8.7.1 Marketing Campaigns . . . . . . . . . . . . . . . . . . . 8.8 Technology-Driven Hospitality . . . . . . . . . . . . . . . . . . . 8.8.1 NEC Facial Recognition Technology . . . . . . . . 8.8.2 Data Center and Cloud Services . . . . . . . . . . . 8.8.3 One-Stop Shop Revamped Web site . . . . . . . . 8.9 Reward Programs—Staying in the Game . . . . . . . . . . . . 8.10 Sustainability Plan—The 3P . . . . . . . . . . . . . . . . . . . . . 8.10.1 Planet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10.2 People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10.3 Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11 A New Shift of Focus . . . . . . . . . . . . . . . . . . . . . . . . . . 8.12 Changing the Game—Outlook for the Future . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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127 127 128 128 129 130 131 131 131 131 132 132 132 133 133 134 134 135 135 136 137 137 137 138 138 139 139 145

9

Marriott Hotels . . . . . . . . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . 9.2 History of Marriott Hotels . . . . . . . . . 9.3 Hospitality Industry in India . . . . . . . 9.4 Marriott India . . . . . . . . . . . . . . . . . . 9.4.1 Vision . . . . . . . . . . . . . . . . 9.4.2 Journey of Marriott in India 9.5 Competitors in Indian Market . . . . . . 9.5.1 Hyatt Hotels . . . . . . . . . . . . 9.5.2 Taj Hotels and Resorts . . . .

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147 147 147 149 150 150 150 151 151 151

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9.5.3 The Oberoi Group . . . . . . . . . . . . . . . . . . . . 9.5.4 Online Aggregators . . . . . . . . . . . . . . . . . . . . 9.6 Growth Strategies in India . . . . . . . . . . . . . . . . . . . . . . 9.6.1 India as a Growth Market for Marriott . . . . . . 9.6.2 Strategic Partnerships with Associates . . . . . . 9.6.3 Co-opetition . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.4 Cost Leadership . . . . . . . . . . . . . . . . . . . . . . 9.6.5 Franchise Model . . . . . . . . . . . . . . . . . . . . . . 9.6.6 Brand Leadership . . . . . . . . . . . . . . . . . . . . . 9.6.7 Brand Portfolio and Positioning . . . . . . . . . . . 9.6.8 Brand Power . . . . . . . . . . . . . . . . . . . . . . . . 9.6.9 Brand Loyalty . . . . . . . . . . . . . . . . . . . . . . . 9.7 Marriott International’s Acquisition of Starwood Hotels and Resorts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7.1 Starwood Hotels . . . . . . . . . . . . . . . . . . . . . . 9.8 Innovation and Continuous Improvement in Customer Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8.1 Rewards Program . . . . . . . . . . . . . . . . . . . . . 9.9 Future of Marriott Hotels India . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 National Stock Exchange of India . . . . . . . . . . . . . . . . . . . . 10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 World Stock Exchange Industry . . . . . . . . . . . . . . . . . 10.3 Most Influential Investors in NSE India . . . . . . . . . . . 10.3.1 Institutional Investors . . . . . . . . . . . . . . . . . 10.4 Indian Stock Exchanges . . . . . . . . . . . . . . . . . . . . . . . 10.5 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 Bombay Stock Exchange (BSE) . . . . . . . . . . . . . . . . . 10.7 National Stock Exchange . . . . . . . . . . . . . . . . . . . . . . 10.7.1 The Early Years: 1992–2000 . . . . . . . . . . . . 10.7.2 NSE in Twenty-First Century . . . . . . . . . . . 10.7.3 2017 Onwards . . . . . . . . . . . . . . . . . . . . . . 10.8 Indian Stock Exchange Battle . . . . . . . . . . . . . . . . . . 10.9 Evolving Indian Stock Exchange . . . . . . . . . . . . . . . . 10.10 Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10.1 Segments of NSE . . . . . . . . . . . . . . . . . . . . 10.10.2 Growth of Capital Market Segment of NSE . 10.11 Relative Study of Indian Stock Market in Comparison to International Stock Markets . . . . . . . . . . . . . . . . . . 10.12 NSE: Benchmark for New Entrants (IPOs) . . . . . . . . .

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151 152 152 152 153 153 153 153 154 154 155 155

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157 158 158 159 162

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163 163 164 164 165 165 165 166 167 167 168 168 169 170 171 171 171

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10.12.1 New York Stock Exchange . . 10.12.2 Tokyo Stock Exchange . . . . . 10.12.3 Hong Kong Stock Exchange . 10.12.4 Korean Stock Exchange . . . . 10.12.5 Circuit Breaker Analysis . . . . 10.13 Legal Maneuvers and Future Prospects . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . .

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174 174 174 174 175 175 177 181

11 National Thermal Power Corporation . . . . . . . . . . . . . . . . . . . 11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 Company Background . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.1 Power and Electricity Sector in India . . . . . . . . 11.2.2 Market Size . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.3 NTPC in Power and Electricity Industry . . . . . 11.2.4 Challenges and Operational Performance . . . . . 11.3 International Joint Ventures . . . . . . . . . . . . . . . . . . . . . . 11.3.1 Trincomalee Power Company Limited (TPCL) . 11.3.2 Bangladesh India Friendship Power Company Private Limited (BIFPCL) . . . . . . . . . . . . . . . . 11.4 Bangladesh Power Development Board (BPDB) . . . . . . . 11.4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4.2 Generation Capacity . . . . . . . . . . . . . . . . . . . . 11.4.3 Energy Generation . . . . . . . . . . . . . . . . . . . . . 11.5 Plant Efficiency and Maintenance . . . . . . . . . . . . . . . . . . 11.6 The Real Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7 Incorporation of BIFPCL . . . . . . . . . . . . . . . . . . . . . . . . 11.7.1 Main Objective of the Company (BIFPCL) . . . 11.7.2 The Proposed Project of 2  660 MW Maitree Super Thermal Power Plant . . . . . . . . . . . . . . . 11.7.3 Sundarban Conflict . . . . . . . . . . . . . . . . . . . . . 11.7.4 Energy Dilemma . . . . . . . . . . . . . . . . . . . . . . . 11.7.5 Final Decision . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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183 183 184 185 186 186 187 188 189

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189 189 189 190 190 190 191 191 191

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192 194 195 195 196 206

12 ONGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . 12.2 Industry Analysis . . . . . . . . . . . . . . . . . . 12.2.1 Crude Oil . . . . . . . . . . . . . . . . . 12.2.2 Natural Gas . . . . . . . . . . . . . . . 12.2.3 Oil and Gas Production in India 12.3 ONGC . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 Major Competitors . . . . . . . . . . . . . . . . .

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207 207 207 208 208 208 208 209

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12.4.1 Reliance Industries Limited . . . . . . . . . . . . . . . . 12.4.2 Oil India Limited . . . . . . . . . . . . . . . . . . . . . . . 12.4.3 Cairn India Limited . . . . . . . . . . . . . . . . . . . . . 12.5 Incorporation of ONGC Videsh Ltd. . . . . . . . . . . . . . . . . 12.5.1 Early Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5.2 Takeover of Imperial Energy Corporation and Further Acquisitions . . . . . . . . . . . . . . . . . . 12.5.3 Dispute Regarding Imperial Energy Corporation (IEC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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13 Punjab National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1.1 Market Size . . . . . . . . . . . . . . . . . . . . . . . . . 13.1.2 Industry Scenario of Indian Banking Industry . 13.2 Punjab National Bank . . . . . . . . . . . . . . . . . . . . . . . . . 13.2.1 Company History . . . . . . . . . . . . . . . . . . . . . 13.2.2 Company Profile and Business Performance . . 13.2.3 Digital Banking . . . . . . . . . . . . . . . . . . . . . . 13.2.4 Financial Inclusion . . . . . . . . . . . . . . . . . . . . 13.2.5 Corporate Social Responsibility . . . . . . . . . . . 13.2.6 Awards and Recognitions . . . . . . . . . . . . . . . 13.3 Competitor and Industry Analysis . . . . . . . . . . . . . . . . 13.3.1 Punjab National Bank Direct Competitors . . . 13.3.2 Comparison of Punjab National Bank and Direct Competitors . . . . . . . . . . . . . . . . . 13.3.3 Banking Industry Analysis . . . . . . . . . . . . . . 13.4 Punjab National Bank International Limited . . . . . . . . . 13.4.1 The Services Offered by PNBIL . . . . . . . . . . 13.5 Plans to Expand Global Operations . . . . . . . . . . . . . . . 13.6 Moving Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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14 State Bank of India . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 14.1.1 History of SBI . . . . . . . . . . . . . . . . 14.2 Organizational Structure of SBI . . . . . . . . . . . 14.3 India and the Changing Banking Environment 14.4 Going Global . . . . . . . . . . . . . . . . . . . . . . . . 14.4.1 SBI and the World . . . . . . . . . . . . . 14.5 International Operations by SBI . . . . . . . . . . . 14.6 S&P’s Revision of India’s Outlook for SBI . .

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14.7

Steps Taken by SBI to Grow Its Overseas Balance 14.7.1 Myanmar . . . . . . . . . . . . . . . . . . . . . . . 14.7.2 SBI in Myanmar . . . . . . . . . . . . . . . . . . 14.7.3 Potential New Markets . . . . . . . . . . . . . 14.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sheet . . . . 236 . . . . . . . . 236 . . . . . . . . 237 . . . . . . . . 238 . . . . . . . . 240 . . . . . . . . 241 . . . . . . . . 248

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15 Tata Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 Electricity Distribution in Delhi . . . . . . . . . . . . . . . . . . 15.2.1 State Electricity Boards . . . . . . . . . . . . . . . . . 15.2.2 Delhi Vidyut Board (DVB) . . . . . . . . . . . . . . 15.3 Delhi Power Reforms . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 Delhi’s Power Distribution Industry in the Twenty-First Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.5 Tata Power Delhi Distribution Limited . . . . . . . . . . . . . 15.5.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . 15.5.2 Technology Advancement . . . . . . . . . . . . . . . 15.5.3 Financials—Revenue, Expenses and Profits . . 15.5.4 Pricing Strategy . . . . . . . . . . . . . . . . . . . . . . 15.6 Political Influences and Role of Regulator . . . . . . . . . . 15.7 Energy Conservation Initiatives and Transition to Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . 15.8 Human Resource Practices . . . . . . . . . . . . . . . . . . . . . . 15.9 Social Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10 A Look into the Future . . . . . . . . . . . . . . . . . . . . . . . . Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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About the Authors

Sanjay Dhir is an Assistant Professor and Chair of the Strategic Management Group at the Department of Management Studies, IIT Delhi. He is also Director of the GIFT School of Strategic Alliances Management, and a fellow of the Indian Institute of Management (IIM), Lucknow. He worked at the R&D Department, Mahindra and Mahindra Ltd, Nasik, for three years. He has published several research papers in leading international journals, including case studies at Richard Ivey School of Business, Western Ontario jointly distributed by Ivey and Harvard Business School. His research papers have been included in several prestigious academic conference proceedings, such as Academy of Management (AoM), Academy of International Business (AIB), Strategic Management Society (SMS), Southern Management Association (SMA), International Simulation Conference of India (ISCI, IIT, Mumbai), and Strategic Management Forum (SMF, IIM Lucknow). His major areas of interest are strategic management, joint ventures, innovation management, management of change and transformation, implementation strategy and international strategy. He is also a coordinator of the stakeholders’ engagement cell at IIT, Delhi, Associate Editor of the Global Journal of Flexible Systems Management (Springer), and Editor of the e-journal Global Journal of Business Excellence, managed by the GIFT society, which aims to create and enhance business excellence practices in Asia and the Pacific. Sushil is Abdulaziz Alsagar Chair Professor (Professor of Strategic, Flexible Systems and Technology Management) in the Strategic Management Area at the Department of Management Studies, Indian Institute of Technology (IIT) Delhi. He was Visiting Professor and has delivered seminars at several leading universities, including Kyoto University, University of Minnesota, Stevens Institute of Technology, University of Lethbridge, and Université Paris 1 Panthéon-Sorbonne. He is an active researcher and has published 20 books in the areas of flexibility, strategy, systems thinking, and technology management. He has published over 300 papers in various refereed journals and conferences. A pioneer in the area of “flexible systems management,” he has made numerous original contributions to the field in the form of interpretive approaches in management. He is the founder xvii

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About the Authors

editor-in-chief of the Global Journal of Flexible Systems Management (Springer) and serves on the editorial boards of leading international journals. He is also the Series Editor of Springer series ‘Flexible Systems Management’ which has published 10 volumes on this niche topic so far. He is the founder president of the professional body “Global Institute of Flexible Systems Management” (GIFT). He has acted as consultant to both governmental and industrial organizations and has served as an independent director on the boards of Government of India enterprises such as Rashtriya Ispat Nigam Ltd (RINL) and HSCC (India) Ltd. (Hospital Services Consultancy Corporation Limited).

Chapter 1

Adani Group

1.1 Introduction Since 1988, the Adani Group, which started initially as a commodity trading firm, is growing at a fast pace and has expanded into imports and exports of multicommodities. The group has expanded into four verticals with its highly integrated infrastructure joining the list of top 50 performing companies in Asia by Forbes. The four companies being Adani Enterprises Ltd., Adani Ports and SEZ Ltd., Adani Power Ltd., and Adani Transmission Ltd. (see Exhibit 1.1). Adani Group had delayed its construction in Carmichael coal mine which is located in the north of Galilee Basin in Queensland, Australia, for the past six years. The mine in its peak capacity would produce 60 million tonnes of coal every year. Adani Group had pledged to invest $16.5 billion in the construction and development of this mine. However, there have been litigations by local environmental activists that have brought about this delay in the construction. Adani Group has scaled down its development project from $16.5 billion to $4 billion due to the litigation. Would the giant conglomerate go ahead with its plan of expanding its operations in Australia?

1.2 About Adani Enterprises Adani Enterprises Ltd. is the lead organization of Adani Group. Adani Group is an Indian aggregate which has its operations in different nations. It was established by Gautam Adani, who is presently Chairman of the group, in the year 1988. Headquartered in Ahmedabad, Gujarat, Adani Group has its organizations differentiated in the fields of assets, coordinations, agribusiness, and vitality. Adani Group has a tremenElectronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_1) contains supplementary material, which is available to authorized users. © Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_1

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dous work force of more than 10,000 representatives. The combination is evaluated to have incomes worth $11.9 billion. Adani Enterprises Limited is a worldwide incorporated foundation organization with organizations traversing coal exchanging, coal mining, oil and gas investigation, ports, multi-modular coordinations, control era, and transmission and gas appropriation. The company’s sections incorporate trading, power, port, agro, mining, city gas distribution (CGD), renewable energy, and others. Its topographical fragments incorporate inside India and outside India. It conducts city gas distribution through its backup, Adani Gas Limited, to give channeled characteristic gas (PNG) to the family unit, mechanical and business customers, and Compressed Natural Gas (CNG) for use in vehicles. It gives administrations, for example, mining, beneficiation (on location), and transportation to different utilization focuses. It conducts agribusiness through backups, for example, Adani Wilmar Limited, Adani Agri Logistics Limited, and Adani Agri Fresh Limited (AAFL). It offers coordination of its existing capacities and takes care of the transportation and delivery of cultivation through Adani Agri Fresh Limited.

1.3 Vision and Values Adani’s vision is “To be a global leader in the integrated resource, logistics, and energy business through sustainable, innovative and responsible value creation. Adani Group expresses their core values as courage, trust, and commitment and has passion, integration, results, entrepreneurship, and dedication imbibed in their culture. The group has set up the Adani Foundation to ensure that the development and progress are sustainable and inclusive, delivering the benefits of our success to a broad-based group of stakeholders.”

1.4 Carmichael Coal Project The Carmichael coal, railroad, and port venture incorporates building Australia’s biggest thermal coal mine in the North Galilee Basin around 160 km northwest of Clermont in Central Queensland, connected by another 388-km standard gauge rail line to another terminal at Abbot Point Port close to Bowen. The consolidated mine, rail, and port operations will give more than 10,000 direct and indirect job opportunities and provide favorable circumstances for local organizations. “The new first-phase target of 25 mtpa leaves Carmichael in a sweet spot of spending, volume and operating costs that mean the mine will operate in the first decile of the cost curve at best and the first quartile at worst,” was quoted by Adani Australia’s Chief Executive Officer Jeyakumar Janakaraj. Adding to the litigation problems, the prices of coal have plummeted in the recent past to $45. Adani Group needs the coal prices to be at $100 to sustainably maintain

1.4 Carmichael Coal Project

3

the Carmichael project operations. This drop in the prices would put pressure on the finances of the group. The delay in the project, as well as the financial pressure, has put this project in jeopardy.

1.5 Threat to the Great Barrier Reef The Carmichael coal project is located 500 km from the Australian coast. Adani Group would require a huge amount of investment in building the infrastructure for the Carmichael project to become operational. The coast which is close to Carmichael mines has Abbot Point, a port, which is located on the eastern coast of Queensland. This coal port is also very close to the UN World Heritage Site of the Great Barrier Coral Reef. With the activity being increased on the port due to the Carmichael project, the environment activists thought of the project to be a threat to the Great Barrier Reef. There are many endangered species which would be under a threat due to this project. Added to that, 20,000 ha of native bushland would have to be cleared for the project. The project would also need 12 billion liters of water for its mining activities—equivalent to drinking water for 3 years for every Queenslander. The increased operations due to mining would result in increased dumping and dredging in the seabed.

1.6 Current Resource Markets 1.6.1 Brief History of Coal Mining in India East India Company’s employees John Sumner and Suetonius started coal mining in India around 220 years before. However, the coal mining activities were sluggish for at least a half century. Introduction of steam locomotives gave a boost but was limited to some geographical extent. Very soon the production level boosted to 1 million metric tons. Later for World War I, the production has increased to 29 million metric tons, but after the war, the production remained the same for the further years. Till the independence, the growth factor remained the same. After the independence, economists released the importance of the coal mining and introduced various schemes in the first 5-year plans. There were many scientifically developed R&D technologies and incentives from the government for the development of coal mining across the country.

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1.6.2 In-House Production India has one of the largest coal reserves in the world. Details of Coal reserves are shown in Exhibit 1.2. However, we could see the top producing states like Odisha, Chhattisgarh, and Jharkhand. India is yet to exploit its full potential of coal production. There are coal mines where unscientific extraction takes places which cause lots of damage to the environment as well as to the labor. Not much data is available on those reserves. India is set to export coal for the first time, approximately 2–3 million tons to neighboring country Bangladesh.

1.6.3 Imports Even though India has the fifth largest coal reserves and is the third largest coal producer in the world, there is a huge demand–supply gap in the country. Also, non-availability of coking-grade coal forces us to explore opportunities across the border. As a result, we import coal from neighboring countries. Since coal is the backbone for the developing countries, we are the top buyers of coal from countries like Indonesia and Australia. As per the data, we imported 210 million tons of coal in 2014. Due to this, we sometimes end up paying a premium to the sellers. Coal import details are given in Exhibit 1.3.

1.6.4 Resource Industry Across Borders Globalization of markets enabled countries for free trade of goods across borders. This has helped to boost the production/consumption and fill the demand–supply gap for the product. The same applies to coal production as well. Exhibit 1.4 lists the list of top 10 coal-producing countries. We can see China, USA, and Australia among the top 3. We have also listed the largest coal exporters. Please refer Exhibit 1.12 for the details. As it comes to trade between two countries, bilateral relations take an important decision. Companies would be interested to do business if there are good relations between the countries and ease of trade norms. Among the top 15 countries, we can look at least 5 countries for future business proposals.

1.6 Current Resource Markets

5

1.6.5 Global Landscape Coal resources globally were approximated to be close to 900 billion tonnes, and India is a major contributor for this tonnage with almost over 25%. Countries that are contributing significantly are China, South Africa, the USA, Indonesia, and Mozambique. The Exhibits 1.6 and 1.7 projects the figures as in which country is contributing how much for the production.

1.7 Options Available 1.7.1 Mining Options in Africa Almost all the coal mines in Africa are located in southern parts of the African Continent like Botswana, Mozambique, and South Africa. South Africa ranks tenth in the list of largest coal-producing countries and is also the fourth largest coalexporting country in the world. Ninety-two percent of coal consumed on the African Continent is produced in South Africa. Further, Botswana apart from being the largest diamond miner in the world also has well-known coal reserves, and coal manufacturing is most likely to become of increasing value to the country. Botswana is estimated to have more than 200 billion tonnes of coal reserves, and the development of the coal sector has become a key priority.

1.7.2 Mining Options in South America South America also has many destinations for potential coal mines in its diverse geographical conditions like Colombia, Brazil, Venezuela, etc., though coal production levels are low compared to other countries/continents, and coal export percentage to that of productions is rather high in South America which can attract more foreign investments in such cases.

1.8 About the Company The group’s business grew 16-fold in barely a decade to revenue of about $12 billion in the fiscal year 2016, employing about 10,400 people of human resources across the globe. Its global presence is huge with about 70 locations in 50 countries. They

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believe in “Thinking big, Doing better” and claim that their mines, ports, and power plants help people to work, shop, cook, read, and go about their lives. Chairman Mr. Adani played a crucial role in developing a business model for ports, which are integrated, and logistics also made its business a national importance by establishing a critical supply chain of ports across Indian and Asian coastline mainly with inbound and outbound activities (see Exhibit 1.5). With multiple mergers and acquisitions, Adani Group made its presence felt in global business. In 2011, Mundra Port, a part of Adani Ports, has acquired abbot coal terminal from Queensland Government for $1.83 billion. In 2010, it acquired Linc Energy’s Galilee coal project for $2.7 billion and had long-term plans to invest about $6.5 billion in Galilee project. Australia’s Foreign Investment Review Board has approved for abbot’s further expansion of full capacity of railway upgrades. India and China’s trade relationship has strengthened in past few years, which is successfully exploited by Adani Group for getting all the technology and other resources for its energy sector. Bilateral union trade between the countries has increased the scope from just $2 billion from 2002 to close to $65 billion; in the process, China has become India’s largest overseas trade partner and made India China’s biggest export partner. Adani Group has not left any country untouched, which is rich in resources, and it has import agreements and strong trade deals with countries like Indonesia, South Africa, and Australia.

1.9 Possible Solutions With the present environmental issues increasingly being raised by environmentalists and faced by most of the companies in mining industry and especially by Adani Mining Pvt. Ltd. in this case with its venture in Australia alongside the Great Barrier Reef and considering Mr. Adani already being spent 3 billion dollars even before initiating the mining process just to get the process cleared which also took more than 3 years already, would it be feasible to keep investing time and money and wait indefinitely for the court’s judgments which is taking forever or Is it better to search for other alternatives around Africa and South American continents to explore new borders with their less expensive logistics costs considering the ports availability. There is also a possibility of staying back in the domestic markets of India and Indonesia where Adani already flourishes which can save import charges and manage with lower logistics costs.

1.10 Maritime Trade in India and Ports Maritime trade in India dates back to third century BC when the trade took place between Indus Valley and Mesopotamia. Maritime trade gained prominence during

1.10 Maritime Trade in India and Ports

7

fifteenth century when Portuguese sailor Vasco da Gama reached the Malabar Coast of India. Thereafter, India developed maritime trade relations with Portugal, France, Britain, and other European countries. Waterways have been an inexpensive method of transportation, specifically useful in the transportation of heavy cargo. With the increase in globalization, trade and commerce have become the backbone of growth and development of a country. In 1991 to boost the country’s economy, India introduced a series of trade reforms and India opened its economy to the global markets. This meant a major increase in trade through waterways. To facilitate the increased global trade, India needed to develop a robust shipping port infrastructure in the country (see Exhibit 1.8—Trade (% of GDP) in India). India has a coastline of approximately 7,500 km, and it has 12 major ports, namely Kandla, Mumbai, JNPT, Marmagoa, Mangalore, Kochi, Tuticorin, Chennai, Ennore (corporate), Vishakapatnam, Paradip, and Kolkata. Apart from these major ports, there are around 200 non-major ports (see Exhibit 1.9—ports in India). While the major ports are controlled by the union government under the supervision of Ministry of Shipping, the minor ports are controlled by state government. Over a period of time, the government has taken steady initiatives to promote the development of these ports. Some of the key initiatives are formation of National Maritime Development Program, the introduction of PPP model projects for modernization of ports, allowing up to 100% FDI in port development projects and 10-year tax holiday for enterprises in port development.

1.11 Mundra Port Mundra town in Kutch District of Gujarat was well known for salt and spice trading. Chronology of events: • In 1994, Gujarat Maritime Board decided on setting up of a port at Mundra. • In 1998, a joint venture was formed between Gujarat Ports Infrastructures Development Company, an undertaking of Gujarat Government and Adani Ports. The JV was named Gujarat Adani Port Limited. • In 2001, Adani Ports signed a concession agreement with Gujarat Maritime Board for development, operation, and maintenance of Mundra Port for a period of 30 years. • In 2005 Adani Ports was merged with Gujarat Adani Port Limited as per order of Gujarat High Court. • In 2006, Mundra was declared Special Economic Zone; thereafter, Adani Chemicals Limited, Mundra Special Economic Zone, and Gujarat Adani Port Limited were merged to form a single identity Mundra Port and SEZ Limited (MPSEZ) in 2006. • In 2007, Mundra Port and SEZ Limited (MPSEZ) got listed in BSE and NSE. It offered shares to its employees and the general public.

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• In 2012, Mundra Port and SEZ Limited (MPSEZ) changed its name to Adani Ports & SEZ Limited.

1.12 PESTEL Analysis To analyze the conditions in which Adani entered into port development, we have applied PESTEL analysis:

1.12.1 Political Factors 1. Adani Group had favorable relations with the Gujarat State Government. 2. The government was promoting trade and commerce. 3. The government was providing a framework to establish PPP model, tax concession, and land on lower prices. 4. The government had set up Special Economic Zone for trade promotion.

1.12.2 Economic Factors 1. Trade and commerce were on the rise after the introduction of liberal trade policy in the country. 2. Countries’ economic condition was improving, and people’s spending on imported goods was increasing. 3. The government was promoting the export of spices, tea, and coffee and providing incentives on imports such as agricultural equipment, renewable energy, and biodegradable products.

1.12.3 Social Factors 1. Culturally, people had become more open to Western products. 2. The local community was in favor of trade development. 3. Expanding population indicates a demographic increase in imports based on regional demands.

1.12 PESTEL Analysis

9

1.12.4 Legal Factors 1. The government had provided a legal framework in the form of SEZ development. 2. Setting up of JV and allowing private participation in port development.

1.12.5 Environmental Factors 1. Globally, awareness was increasing on maritime and coastal protection. UN Regional Seas Program was launched to protect the ocean and coastal areas. 2. Indian Maritime Organization had brought in stricter norms to regulate the ship breaking practices in the country.

1.12.6 Technological Factors Overall technological factors such as global connectivity, real-time tracking, better weather monitoring technology, and increased data processing helped the shipping and port sector. Thus, it can be seen that apart from environmental factors, rest of all factors favored the Adani Enterprises Limited in port development.

1.13 Political Influence Gautam Adani is one of the biggest business tycoons of India. He has led the Adani Group to a set of companies which now deal in 30 commodities and has a presence in 28 countries. But to reach this far, he had to start from a point. The point was the Mundra Port in the Rann of Kutch in Gujarat. It leveraged his good relations with the state government in Gujarat. This helped him in capital gains at the expense of state-owned land and money. The Adani Group got about 7,000 ha of land in Mundra in the name of Special Economic Zone at the rate of as low as 1 | per square meter (less than the price of floor tiles). The land obtained was relet to other companies at prizes as high as 600 | per square meter. This relationship was so visible that when Mr. Modi was declared the Prime Ministerial candidate, the share price of Adani Enterprises Limited increased by 265% in 12 months and its turnover increased 20 times (see Exhibit 1.10—market share prices since IPO in 2008).

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Undoubtedly, the Adani Group got initial favors from the state and then capitalized on his influence by acquiring more land in Gujarat and now across India. Not only in India, but Gautam Adani has also been able to establish great political links in Australia and has bagged world’s largest coal mine deal. Despite the opposition from fundamentalists and environmentalists, Adani has been able to sail through with these deals. Even the loans have been sanctioned by a government bank, SBI.

1.14 Expansion of Adani Ports The Adani Group entered the port business by building a world-class port in Mundra. Recently, they have built ports on the eastern coast of India in Hazira and Kattupalli. They are also building Australia’s largest coal mine in Queensland’s Galilee Basin. The mine will be connected through a railway network, and a port will be built. Most of the coal mined will be imported by India. Again, a commodity supplied by Adani will be bought by the Government of India. Mere building the ports is not the selling point; rather Adani has managed to build world-class centers which cater to huge infrastructure and facilities in and around these ports. The locations of these ports have also been proven to be strategically profitable. This has also allowed them to expand vertically and horizontally with the help of JV’s and subsidiaries.

1.15 Sustainable Growth Strategy APSEZ over the past few years has been able to grow consistently (see Exhibit 1.11—financial performance). In a subdued economic environment after the financial market collapse in the USA and later in Europe, major economies and companies are still finding themselves in a recovery mode; APSEZ has outperformed the market. APSEZ draws its strengths, weaknesses, opportunities, and threats from various internal and external factors. We have identified external and internal factors, discussed in following sections, that shape APSEZ’s strategy where they have used their strengths to exploit opportunities and avoid threats and overcame and minimized their weaknesses to use opportunities and avoid threats.

1.16 External Factors: Opportunities and Treats

11

1.16 External Factors: Opportunities and Treats 1.16.1 Macroeconomic Environment (World Economy, India’s GDP Growth, External Trade Growth, Etc.) The world economy grew at 3.4% in 2014, and it has not recovered totally from the financial crises and recession. Although the US economy is continuously growing, it is because of strong financial markets, upbeat private sector activity, improved housing sector, and rising domestic demand. Whereas Eurozone failed to sustain recovery and gain momentum, it has shown a sign of growth backed by improved consumer spending and higher net export. Japan’s growth was again disappointing primarily by a contraction in domestic consumption and declining investment in housing. The Chinese economy has managed to grow at a fast pace, but they have also slowed down by their own standards as investment has slowed in real estate and weakening demand in the global market. In 2016–17, growth in developed economies is expected to be better and in developing and emerging economies is projected to be weaker due to slow growth in emerging markets and major oil exporting countries (see Exhibit 1.12). Indian economy has been able to cope well with the economic slowdown, and it is now among the world’s fastest-growing major economies today. Lower oil prices, declining food inflation, lower interest rates, and the stable currency have helped India’s prospects. FDI inflows are expected to increase on the stable growth outlook. IMF estimated that Indian economic growth will be around 7.5% in 2019–20. These external macroeconomic factors directly affect the core business of APSEZ as external trade plays a huge role in port activities and poses a threat to the stainable growth of APSEZ. In recent times, APSEZ is looking to diversify its business and expand in areas where they get less affected by macroeconomic indicators of one single region. In the last five years, APSEZ has grown from a single-port to a multi-port operator. They now have ports in west and east coasts of India. This helped them capture growth and capitalize their integrated business model, wherein they have business across India, and having their own ports nearby helps them gather strengths. This clearly gets reflected by their growth numbers (see Exhibit 1.11—financial performance). APSEZ revenue grew at a compounded annual rate of 35.65% in the last three years for the year ending 2014.

1.16.2 Industry Outlook India has a natural coastline of 7517 km including nine maritime states with 13 major ports and 187 non-major and intermediates ports along the eastern and western coasts. They are critical in complementing India’s trade and economic growth as they handle around 94.5% of Indian merchandised export–import trade. Increasing energy

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imports, export, and import cargo containerization will continue to grow the cargo volumes at Indian ports. Indian ports’ capacity has increased five times in the last 15 years from a capacity of 258 MMTPA in 2000 to 1438 MMTPA in 2014. The capacity addition at nonmajor ports is expected to grow at a faster rate than at major ports. (see Exhibit 1.13—industry outlook) APSEZ has captured a big chunk of this growth by acquiring various ports across India. It now operates in 7 ports/terminals in 4 maritime states in India—Gujarat, Andhra Pradesh, Goa, and Odisha. It operates 14 terminals with 37 berths to handle liquid, dry, and container cargo. The Mudra Port of APSEZ handled cargo of 110.91 MMT and ranked first in cargo handling among seven Indian commercial ports.

1.16.3 Competitors APSEZ faces tough competition from state-run and private ports. APSEZ has been able to compete because of the following factors: • State-of-the-art port infrastructure facilities are being used at APSEZ ports including deep draft direct berthing, • APSEZ has domain expertise in the port service industry with rich experience of handling cargos for a long time, • APSEZ has established a reputation among its customers and has been able to build a strong relationship, • Flexibility in tariffs has helped them acquire customers in all sizes. With the above factors playing to APSEZ’s advantage, they have been able to attract substantial cargo increase over the years. State-of-the-art container handling, evacuation infrastructure, and cargo handling facilities have made APSEZ’s Mundra and Hazira Ports as preferred “Port of Call” to many global shipping liners.

1.17 Internal Factors: Strengths and Weaknesses 1.17.1 Strong Integration Through Holding and Subsidiary Companies APZEZ has secured growth for its port business with increased demand for imported coal and fertilizer by Adani Group’s other subsidiaries and vice versa is true for other subsidiaries as well as thermal power plants owned by Adani Power Limited require coal to be transported from Adani Group-owned mines in Australia.

1.17 Internal Factors: Strengths and Weaknesses

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We can see this clearly from the related party transactions done by APSEZ during FY15. (see Exhibit 1.14—related parties’ transaction that took place during the FY15).

1.17.2 Implementation of Government Policies to Take Advantage Indian Government introduced The Special Economic Zone Policy in April 2000 with intent to attract FDI, increase the exports, and increase economic growth. APSEZ was able to use this policy to their advantage and build: • Multi-product SEZ at Mundra. It is largest notified SEZ in India with an area of 6,456.3349 ha. • Mundra SEZ has multimodal connectivity including road, airport, rail, and seaport, and it is expected to attract investments in years to come. • APSEZ was able to set up a Free Trade and Warehousing Zone (FTWZ) at Mundra. • APSEZ was able to obtain an approval from Government of India (GoI) to set up another multi-product SEZ Mundra, which is adjacent to their existing multiproduct SEZ.

1.17.3 Mandate to Grow Upbeat with its past performance and performance of the group companies, APSEZ has set a challenging task for themselves to grow. The company is getting into merger and acquisition mode to fend off challenges like • shrinking margins—due to rising cost and stagnant shipping rates • global slowdown—lower exports from India • new players—private players are giving intense competition. To tackle these challenges, the company has started identifying new services and other areas which can give them a competitive advantage in the process they have identified: • Proving logistics solutions along with regular port services • Developing competent and qualified manpower—introduced the internal development training program to develop leaders through multifunctional training.

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1.18 Company’s Vision Adani’s Vision Statement is “Thinking big Doing better.” It is very clearly stated on their Web site that they want to be known globally and they are indeed thinking big. With 7.66 billion dollar market cap, Adani Group is set for huge global expansion. The expertise they have gained over the years will immensely help them. The duo of Gautam Adani (father) and Karan Adani (son) has to play an important role. In India, they had favorable political conditions and got cheaper lands in the name of SEZ’s, but the road ahead is harder. Adani Group recently had a good experience with the roadblocks in their coal mines in Australia. They will face similar challenges ahead. There is huge territory to explore where developing nations are looking to build new ports. They should focus on getting these deals. Further, they can also look for vertical expansion into areas of other infrastructure building.

1.19 Recent Acquisitions Adani Ports is on its way to growth through acquisitions. Most recent ones are given below in chronological order.

1.19.1 September 2016: Glencore Glencore is an Australian port operation and maintenance company. This would strengthen their position in Australia and would help them grow in this region.

1.19.2 August 2016: Abbot Point Bulkcoal Pty Ltd. (APB) Adani Ports’ subsidiary in Australia, Abbot Point Operations Pty Ltd. (APO), acquired APB. This is a strategical move as they are building one of the largest coal mines in Australia and they would need APB’s expertize.

1.19 Recent Acquisitions

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1.19.3 July 2016: TM Harbour Services DPCL is a subsidiary of Adani Ports, and TM Harbour Services provides tug services to DPCL. This acquisition will help the company provide effective and efficient marine services to DPCL.

Exhibits

Exhibit 1.1 Adani Group companies. Source http://www.adani.com/businesses

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State Jharkhand Odisha Chhattisgarh West Bengal Madhya Pradesh Telangana Maharashtra Uttar Pradesh Meghalaya Assam Nagaland Bihar Sikkim Arunachal Pradesh Assam TOTAL

Coal Reserves 80356 71447 50846 30616 24376 22155 10882 1062 577 511 315 160 101 90

Type of Coalfield Gondwana Gondwana Gondwana Gondwana Gondwana Gondwana Gondwana Gondwana Tertiary Tertiary Tertiary Gondwana Gondwana Tertiary

3 Gondwana 293500

Exhibit 1.2 Coal reserves in India (Million tonnes). Source http://coal.nic.in

Coal Coking Coal Non-Coking Coal Total Coal Import Coke

20112012201320142015201612 13 14 15 16(Prov.) 17* 31.8 35.56 36.87 43.72 43.5 5.83 71.05 110.23 129.99 174.07 156.38 29.26 102.85 145.79 166.86 217.78 199.88 35.09 2.37 3.08 4.17 3.29 -0.8

Exhibit 1.3 Coal imports in India (Million tonnes). Source http://coal.nic.in

Exhibits

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Rank

Country

Coal production (million tonnes)

1 2

3,874.00 906.9

8 9

China United States Australia India Indonesia Russia South Africa Germany Poland

10

Kazakhstan 108.7

3 4 5 6 7

644 537.6 458 357.6 260.5 185.8 137.1

Exhibit 1.4 Top 10 coal-producing countries in the world. Source http://www.worldatlas.com/ articles/the-top-10-coal-producers-worldwide.html

Exhibit 1.5 Business model. Source www.adani.com

Exhibit 1.6 Global coal production. Source BP’s Statistical Review of World Energy, June 2012

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Exhibit 1.7 Demand for coal in India. Source http://coal.nic.in Trade (% of GDP) in India 50 45 40 35 30 25 20 15 10

Trade % of GDP in India

Exhibit 1.8 Trade (% of GDP) in India. Source https://data.worldbank.org

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

0

1960

5

Exhibits

Exhibit 1.9 Ports in India. Source https://en.wikipedia.org/wiki/Ports_in_India

19

20

Exhibit 1.10 Market share prices since IPO in 2008. Source www.adani.com

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Exhibits

21

Exhibit 1.11 Financial performance. Source www.adani.com

1. Australia: US$28.4 billion (36% of total coal exports) 2. Indonesia: $16.4 billion (20.8%) 3. Russia: $9.3 billion (11.7%) 4. United States: $5.7 billion (7.2%) 5. South Africa: $4.3 billion (5.4%) 6. Colombia: $4.3 billion (5.4%) 7. Netherlands: $3 billion (3.8%) 8. Canada: $2.7 billion (3.4%) 9. North Korea: $1.1 billion (1.4%) 10. Poland: $737.2 million (0.9%) 11. Mongolia: $542.6 million (0.7%) 12. China: $498.2 million (0.6%) 13. Czech Republic: $327.9 million (0.4%) 14. Vietnam: $265.1 million (0.3%) 15. Belgium: $232.9 million (0.3%) Exhibit 1.12 Top 15 coal-exporting countries in the world. Source http://www.worldstopexports. com/coal-exports-country

22

1 Adani Group Cargo capacity growth estimate – CAGR 17.5% Cargo Capacity (MMT) 3000

2493

2500 2000

1806

1500 1000 500 0 FY15

FY17 Cargo Capacity (MMT)

Cargo Traffic Growth Estimate – CAGR 27.4% Cargo Traffic (MMT) 1000

943

800 600

581

400 200 0 FY15

FY17 Cargo Traffic (MMT)

Container Demand Growth Estimate – CAGR 62% Container Demand (Million TEU) 25

21

20 15 10

8

5 0 FY15

FY17 Container Demand (Million TEU)

Iron Ore Traffic Growth Estimate – CAGR 128% Iron Ore Traffic (MMT) 250

228

200 150 100 50

43.6

0 FY15

FY17 Iron Ore Traffic (MMT)

Exhibit 1.13 Industry outlook. Source www.adani.com

References

23

Rela on

Company Name

Nature of Business

Joint Venture

Adani Interna onal Container Terminal Pvt. Ltd.

Ports

Associate

Dholera Infrastructure Pvt. Ltd

Real estate

Fellow Subsidiary

Adani Power Ltd.

Power genera on

Adani Power Dahej Ltd. Adani Mining Pvt. Ltd.

Power genera on Mining of coal

Adani Gas Ltd.

Gas transmission

Chemoil Adani Pvt. Ltd.

Port bunkering facili es

Adani Global FZE, Dubai Adani Infra (India) Ltd.

Distribu ng coal and other mineral ores

Adani Power Rajasthan Ltd.

Power produc on

Adani Power Maharashtra Ltd.

Power produc on

Adani Welspun Explora on Ltd.

Oil explora on and produc on

Kutchh Power Genera on Ltd.

Power produc on

Adani Agri Fresh Ltd.

Agriculture products supply chain

Exhibit 1.14 Related parties’ transaction that took place during the FY15. Source www.adani.com

References Adani ports and SEZ—annual report FY (2015) http://www.adaniports.com/docs/download/AR_ 2015. Accessed 25 Sept 2016 Adani’s official website (2016) Section: about us. http://www.adaniports.com/about-us/one-visionone-brand. Accessed 25 Sept 2016 Draft red herring prospectus of Mundra port and SEZ Ltd. August 13, 2007 submitted to SEBI http://economictimes.indiatimes.com/adani-ports-&-special-economic-zone-ltd/ infocompanyhistory/companyid-20316.cms. Accessed 25 Sept 2016 http://www.adani.com/businesses http://www.adani.com/docs/Corporate37AussiAcquisition http://www.adani.com/docs/CorporateBrochure http://www.adani.com/docs/Ports27ChinaFirmsPowerRisingIndianEmpire http://www.adani.com/gautam-adani http://www.adaniaustralia.com/businesses/carmichael-coal-mine-and-rail-project

24

1 Adani Group

http://www.business-standard.com/article/companies/adani-slashes-oz-project-size-to-4-bn116092300012_1.html http://www.thehindubusinessline.com/opinion/coal-sector-still-an-area-of-darkness/ article7151267.ece https://en.wikipedia.org/wiki/Adani_Group, https://en.wikipedia.org/wiki/Carmichael_coal_mine https://www.pwc.in/assets/pdfs/industries/power-mining/icc-coal-report.pdf “Indian logistics focus on infrastructure creation to sustain and drive growth”—Delloitte report, 2014 February Indian maritime history—wikipedia. https://en.wikipedia.org/wiki/Indian_maritime_history. Accessed 25 Sept 2016 Public private patnerships in India. http://www.pppinindia.com/sector-ports.php. Accessed 25 Sept 2016 Thakurta PG (2015) The incredible rise and rise of Gautam Adani: part one. 26 April. http://www. thecitizen.in/index.php/NewsDetail/index/1/3375/The-Incredible-Rise-and-Rise-of-GautamAdani-Part-One. Accessed 25 Sept 2016 Thakurta PG (2015) The incredible rise and rise of Gautam Adani: part two. 26 April. http://www. thecitizen.in/index.php/OldNewsPage/?Id=3378&The/Incredible/Rise/and/Rise/of/Gautam/ Adani:/Part/Two. Accessed 25 Sept 2016 World Bank data on trade % of GDP. http://data.worldbank.org/indicator/NE.TRD.GNFS.ZS. Accessed 25 Sept 2016

Chapter 2

American Express

2.1 Introduction The need for hard cash as a medium of exchange has been on the decline thanks to innovations such as traveler’s check and most importantly the plastic currency of debit and credit cards which are ubiquitous today. Recent disruptions in the field like—mobile wallets, Internet banking, and cryptocurrencies—are further bringing in sweeping changes which are redefining how people use their hard-earned money. American Express or Amex is a global brand which has been at the forefront of all these changes throughout history. It has shaped and taken advantage of how money changes hands, i.e., transfer of value between entities. It popularized the use of traveler’s checks and brought in the concept of a charge card. It has dramatically influenced the retail trade business among various segments. It is the only company to hold “The Record” for 35 years from 1948 to 83, i.e., it showed not only growth but continuous growth with increasing income year on year. Today, the company has charge and credit card products, travel service products, network services, stored value products, and even loans. Its core businesses are issuing cards, merchant acquisition, and global network processing. This being the case will it continue to be an industry leader with traditional business models or will it have to redefine itself to the rapidly changing financial environment to stay relevant?

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_2) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_2

25

26

2 American Express

2.2 History American Express, currently one of the largest financial organizations, did not start out as a company related to financing and credit business. It was formed on March 18, 1850, by the merger of three transport companies, namely Livingston, Fargo & Co., Wells & Co., and Butterfield & Wasson. The way the company transformed itself from an express transport giant into one of the most influential financial institutions in the world is a story of 150 years of constant innovation, at all fronts. Post the merger in 1850; the same founders also started another transport company, known as Wells Fargo Company in 1852 as the founders were divided on the geographical expansion plans. With the end of the American Civil War, the transport business saw a massive boom but landed up both the firms in stiff competition. The founders realized that it was not sustainable for the two companies and finally the American Merchants Union Express Company was set up in November 1868, with Fargo taking over as the president. Later, when in 1881, Fargo passed away, his younger brother James Congdell Fargo took charge of the company. It was during his reign that the erstwhile transport giant transformed and made the transition into a finance- and credit-related company. During one of his trips to Europe (between 1888 and 1890), JC Fargo had an awful experience and came back frustrated. Even though he was the president of American Express and was carrying traditional letters of credit, he had a tough time to obtain cash in most of the places he visited except some big cities. He realized that this was a pain point for many travelers across the globe and hence a business opportunity which had not yet been tapped into. Thus, 1891 saw the introduction of American Express traveler’s checks, which redefined the way people used funds while on international travel. Under the 33 years of JC Fargo’s presidency, the company brought in many innovations like the American Express Money Order (1882) and the American Express Traveler’s Check (1891). The same period also saw the company expanding in international territories with offices being set up in England (1896) and Germany (1898) and extending services in countries like China, Japan, Egypt, Brazil, Argentina, and India. Post World War I; the governmental policies forced American Express to shift its focus from the cargo business to other opportunities. Soon, American Express found its new found interest in travel services business and started providing luxury steamship travel across the globe, along with other travel-related services for the passengers. The traveler’s check business grew in tandem with the new line of business, and American Express saw its profits soaring throughout the period. Discussions for a new travel charge card started in American Express’ boardrooms as early as in 1946, but when Diners Club launched its first card in March 1950, American Express realized that they had lost the first-mover advantage and they needed to up their game. The rest is history. Over the next 60–70 years, American Express has brought in various innovations in products, pricing, marketing, communications, and even their business model to emerge as a leading name in the credit card industry.

2.2 History

27

2.2.1 Evolution of the Finance Industry—“The World as We Know” Historical evidence suggests that around the time humans started trade practices, the very next activity which came into existence was of finance or credit. Earlier transactions used the barter system which slowly gave way to coin-based economies of the kingdoms of old. However, coins were difficult to manage, and their safety at individual levels was a cause for concern. Primitive homes were not the safest places to keep savings or borrowings of money, and people usually turned to temples to keep their additional funds. Hence, it logically followed that in various civilizations and cultures, temples started to function as banks to a certain level. The temples landed up becoming pseudo-financial centers of cities and were usually one of the first targets in case of empire annexations. However, as civilizations matured, the finance and credit sectors evolved into a more structured industry. Experts believe that by the fourteenth century, full-fledged banks had started to emerge. One such famous bank is the Banca Monte dei Paschi di Siena (from Italy), which is supposed to be the oldest existing functioning bank.

2.2.1.1

Part 1: Growth of the Finance Industry

As technology progressed, the finance industry was one of the earliest adopters of innovations. The earliest entrants were the courier and telegraph services. The Western Union Telegraph Company pioneered in the field by introducing an interesting debt instruments system that combined Morse code with couriers delivering cash in the middle of nineteenth century. Later, in the 1870s, the Gold and Stock Telegraph Company also started to use Morse code and human clerks for delivering couriers. By the turn of the twentieth century, information flow started to become more fluidic. In 1918, the Reserve Banks developed Fedwire Funds Service which connected 12 Reserve Banks, the Treasury Department, and the Board. The ever-expanding footprint of the finance and credit sectors made it difficult to manage operations, and it looked for innovations which could streamline its functioning and reduce the dependence on humans for simple clerical jobs. Innovators did not disappoint the sector, and soon the Wall Street offices were flooded with thousands of stock ticker machines. By 1950s, credit cards came into existence which was about to revolutionize how consumers make purchases. These credit cards brought in the unparalleled convenience of cheap, easy, short-term finance and removed the burden of carrying bills. As information technology progressed, a new era of processing systems and data delivery was introduced in the 1960s. Computers started replacing the stock ticker machines, and automated teller machines (ATMs) began replacing the tellers and branches. Later, the introduction of Bloomberg terminals for trade execution further accentuated the role information technology was about to play in the sector.

28

2 American Express

The dawn of the World Wide Web in the 1990s further propelled the shift of the finance and credit sectors into FinTech. Multiple untraditional players like PayPal entered the industry and started to exploit the electronic payment space. At the same time, online banking increased ease for customers, improved efficiency, and reduced costs for the credit and finance companies. Henceforth, the online space brought in new business models and business entities like mobile wallets, an area into which even the traditional players like banks had to forcefully enter, due to the fear of being left out.

2.2.1.2

Part 2: The FinTech Industry

Dedicated systems like Bloomberg terminals combined information with trade execution. Some of these functionalities were ported to online networks. The dot-com boom in the 1990s boosted the growth and popularity of companies like PayPal and other electronic payment options. Online banking brought with it a financial tech revolution eliminating the need for bank clerks to manually write checks on behalf of account holders and putting them in the mail. Currently, the role of traditional banking has reduced significantly by the introduction of mobile wallets and digital cash. The latest technology wave has been of block-chain which brings in the functionality of transferring money anywhere in the world without the need for any central authority. Though it is currently in a nascent stage, some experts believe that this could be the future, redefining the credit and finance sectors, forever. Recently, cryptocurrencies which make use of block-chain technology are gaining a lot of traction and have given a way to bypass the central banking system. It is still quite new and has not yet been widely accepted as the standard for money transfers.

2.3 Business Model Similar to other players in the credit card industry, Amex receives the majority of its revenues from one of the following sources. First, fees paid by merchants for every transaction which is done via the Amex network, second the membership fees paid by the customers, and third the interest paid by customers who pay their dues beyond the free credit limit period. Currently, Amex’s overall revenue stream comprises US cards, international cards, Global Network and Merchant partners and the Global Commercial Services. The largest income-generating source is the US cards business which brought in net revenues of 16.995 billion USD in 2013, resulting in a net income of 3.193 billion USD. The second largest income-generating arm of the business was the Global Network and Merchant services which provided a net profit of 1.575 billion USD in 2013 (see Exhibits 2.1 and 2.2).

2.3 Business Model

29

The Global Network and Merchant partners division is responsible for onboarding of merchants onto the Amex network globally, offering a range of services from point-of-sale servicing, fraud prevention, settlement to marketing services. The Global Commercial Services offers expense management services to organizations across the globe via the Global Commercial Card and Global Business Travel Services. This helps Amex to lead in the international markets of commercial cards and travel management for businesses (see Exhibit 2.3).

2.4 Market Competition Amex Visa—crossing the trillion dollar mark in 1997—has used a range of strategies to stay ahead of the curve. It was the first company to introduce neural networks in its systems to reduce credit fraud in 1993. It came up with EMV, a standardized chip card to facilitate interoperability in 1995. It used advanced authorization to calculate risk score which analyzes credit risk in real time on every transaction. It restructured itself to form Visa Inc. in 2007 and launched its mobile platform in 2008 to improve the value-added services offered. It focused on ease of use and came out with Visa Checkout to pay online through any device in 2014. MasterCard focused more on their programs and campaigns to counter the rising competition. New and innovative ideas for making their product appealing by providing exclusive airport lounge access and indulgence in a host of other leisure activities were explicitly aimed at attracting the high-spending customers. This, in turn, created a huge base of people who wanted to become a part of this new club. Soon MasterCard tried to increase its portfolio and user base by providing offers in various fields such as shopping and lifestyle, dining, and travel as well. They identified tourism as one of their key areas of growth and worked toward getting multiple options to show their exclusivity. They also came up with the easy bill payment methods to provide an edge over other players.

2.5 Strategic Decisions in Recent Times 2.5.1 Service—Not a Cost Center Amex for a long time saw after-sale service to customers as a cost center and tried to minimize it by optimizing efficiency. Under the leadership of Jim Bush starting from 2005, there was a change in perspective. Services began to be seen as opportunities to improve customer relationships and thus lead to increased revenues. Focus shifted to the top line instead of the bottom line. Amex started the change in the traditional call center approach from the USA and moved outwards. Customer care professionals (CCPs) were expected to focus

30

2 American Express

on whether the customers would recommend the product to others or not instead of sticking to the predetermined script. CCPs no longer had to keep an eye on the clock, and the customers decided the duration of the calls. Amex came up with “Relationship Care,” an initiative focused on the thousands of CCPs who are in daily touch with customers. Employee-centric changes were brought in place like flexible scheduling, on-site health screening, and incentive pay tied to customer feedback. Latest IT technology was also introduced to help CCPs deliver personalized advice to each customer with customized product recommendations. All this led to a substantial increase in customer satisfaction and increased spending of 8–10% on Amex products.1

2.5.2 Change in Marketing Strategy When we think of American Express, the first thing that comes to our mind is international credit cards or a large finance company. But Amex is also known for its content marketing and is doing well since its inception. During the time of initial 1900s, print media was the only available option for advertising. When Amex started giving travel agency services in 1915, it positioned itself as the company which took care of the customers who travel and gave many taglines like “The world’s largest travel company” and “the company for the people who travel.” It started publishing many travel guides. These brochures were made to highlight the purpose of Amex which was to give importance to traveling by displaying tourist spots, tips, and other marketing content like its local offices in those places to build the presence of the company in customers’ minds. In 1967, Amex started producing its own traveler’s guide called American Express Traveler’s Guide which was made for highway travelers. Its main intention to launch this guide was to provide information on restaurants, hotels, road maps, tourist sight for the travelers which Google Map and various other apps are doing digitally today. Joseph Handleman, Professor of Information Systems and Innovation at the Ross School of Business, University of Michigan, wrote an Article in Financial Times titled “Case study: American Express.” To further expand its magazine business, it purchased US Camera Publishing company whose camera magazines were quite popular. Amex after this purchase started selling its magazines like Travel and Camera to rebrand itself and pull customers to it. It even did a direct mail campaign by sending around 2 million emails to its customers’ homes who were using its credit card. It started providing magazines on a subscription basis and used to provide advertising slots for other companies to put their product ads over there. With this, it got the advantage to attract customers who were buying these magazines not for the travel purposes but also for the products whose ads were published in those magazines.

1 Forbes

Welcome. (2018). Forbes.com.

2.5 Strategic Decisions in Recent Times

31

Just in a year, it became the highest selling magazine in travel space, and after some years it was rebranded and was renamed to Travel and Leisure to bring in more customers to this space. With the growing demand for magazines, it started printing various other magazines like Executive Travel, Food and Wine, and Departures. In 1983, Amex wanted to position itself as a company which cares about social places and environment. So, it invented the term cause-related marketing when it raised around $ 1.7 million for the preservation of the Statue of Liberty and Ellis Island. This benefited Amex in two ways. By doing this marketing, it created awareness of these historical monuments among the people as to how precious they are and showed that it cares about these precious spots. And second, it brought awareness about these geographical places by marketing it as must-see tourist places and to use Amex services to visit these places. During 1990s, focus of the company shifted from travel to credit card and financial service space. So, it started expanding its credit card business and sold its magazines rights and division to TIME Inc. But that did not mean Amex would stop doing content marketing. It started an open forum platform where readers from around the world could ask questions related to the marketing strategies they need for their businesses and experts provided a solution to it. With this, they also started a campaign called “Small Business Saturday” where they called for marketing ideas for its small business partners. These became very popular and are used as a successful case study in content marketing at various institutions. During the time of 1997 till 2002, Amex roped in various celebrities like Tiger Woods and Seinfeld to position itself as a company whose cards are exclusively for elite people. But with changing times, it also had to change its marketing strategy. Since it had to expand its business while maintaining its initial position of exclusivity, it started a campaign called “Do More” and designed its ads specific to different groups like women, entrepreneurs, and small businessman. Many experts believed that this marketing campaign would be a colossal failure. But Amex posted a growth of 17% from 16.4% with 15% increase in its card volume purchase. Currently, Amex is using Instagram more than any other social media platforms for its social content marketing. Amex cards are very impressive in design, so travelers post their cards images on Instagram and the company is tapping into this free publicity. It hires artists to design its cards which it has named as “Card Art” to build more presence in this space and also among customers. Facebook is still an important media which is used for “couponless deal” through which it gave coupons based on the feeds they like and comment on and provide credits on every hashtag of Amex they post on Twitter. This type of marketing created a considerable impact on social media and marked its presence in the mind of the customers.

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2 American Express

2.5.3 Competitive Advantages of Marketing Strategies 2.5.3.1

Premium Positioning

Since Amex is known for its high-quality care services and offers, it is positioned as a company whose goal is to provide quality services to wealthy individuals with state-of-the-art technology.

2.5.3.2

Closed-Loop Network

In a closed-loop network, Amex tries to analyze customer information and data and builds specific algorithms to identify pattern and profile of the customers. These help it to customize its products according to the customers and make it more attractive and personalized.

2.5.3.3

Broad Product Portfolio

Since Amex has linkages with a large number of traders and different customers, it helps them to create new products and services which results in customer spending more on Amex and less on others.

2.5.3.4

International Brand

Amex has positioned itself as a company which provides services globally and is trusted among customers worldwide as it does not offer its cards or services to any individual. First, they have to qualify to use Amex cards. These types of segments have created a clear position and have differentiated its products accurately according to the consumers it wants to target.

2.5.4 Moving Down the Pyramid Having wholly saturated the premium segment of the market with a sizeable market share, the only way to increase revenues was to target a broader consumer base. So in February 2014, Amex introduced the “Amex Every Day Credit Card” (Amex every day) which did not have the traditional subscription model and did not charge an annual fee. It was meant for students and homemakers who were enticed with a rewards program for frequent use. Clear focus was on getting more people to use the cards and increase the volume of transactions. An apparent shift from quality

2.5 Strategic Decisions in Recent Times

33

to quantity, as the premium segments, became cluttered with competitors offering similar products. Online payment processing companies also posed a problem as they were eating away their customer base with cheaper alternatives. But they made sure to keep their super premium customers satisfied as the sheer volume spends of these customers was very large and could not be neglected.2

2.6 The Threat of Fraud and Security With the increasing digitization of the credit services, the credit card industry had threats of increased frauds and treachery, as it provided more avenues for hackers to crack into the network. However, one leader from American Express decided to use technology to company’s benefit and landed up establishing industry standards in the field of data-driven risk analysis. The leader was a fresh MBA—Finance graduate from Columbia University, Ash Gupta, who joined American Express in 1976. A case study from ICMR, IBS Centre for Management Research titled “American Express Redefines Its Strategy.3 ” As of today, Ash retires in March 2018 as President for Global Credit Risk and Information Management, completing a stint of 41 years at American Express, leaving behind a company which has evolved itself into a data-driven company.4 Four decades ago, when Ash joined American Express, traveler’s checks were a dominant product for the organization and the card services were a part of its emerging business. However, as the card business picked up steam, the company increased its focus on credit and fraud risk management, converting it from an “apprentice based” to a “data and decision science-based” task.5 In the next decade, American Express created a Center of Excellence in India, further reinforcing its focus on data science and the humongous possibilities it could bring in a fast-changing dynamic global market. The center was bestowed upon with the responsibility for the entire global operations of American Express. In the past decade, American Express worked upon creating Big Data and machine learningbased decision science capabilities and teams, which transformed the entire customer experience, right from product design, marketing, risk control, and servicing. Gupta reflects, “My greatest accomplishment has been winning the hearts and minds of my colleagues that investments in data and decision science will bring lasting benefits to

2 Interview with Ash Gupta, President, Risk and Information Management Group, Chief Risk Officer,

American Express—Duke Corporate Education. (2018). Duke Corporate Education. Footnote 2. 4 See Footnote 1. 5 See footnote 2. 3 See

34

2 American Express

our brand, our customers, our people, and forever accelerate our mode to a listening and learning organization.” He continues, “I hope my legacy will leave a lasting effect—a commitment to collaboration, learning, and innovation among my American Express colleagues who I’ve had the privilege of serving over the past 41 years”.

2.7 The Future Even with sweeping changes in technology which increased exponentially since the dawn of the twenty-first century, American Express has remained true to its tagline of “Don’t Leave Home Without It” by concentrating on its brand image of a card issuing financial services company. With e-payments gaining traction and mobile wallets here to stay, not to mention potential disruptors like cryptocurrencies right around the corner it remains to be seen if this approach is sustainable or a complete overhaul would be required for survival.

Exhibits

300 250 200 150 100

American Express S&P 500 Index S&P Financial Index 2011

2012

2013

2014

2015

2016

Exhibit 2.1 Benchmarking Amex with the top 500 companies of USA using S&P Index. Source Quotes.morningstar.com (2018). AXP American Express Co Stock AXP chart. Note The values on the y-axis represent the market value of 100$ invested in Amex in comparison with the growth of the US economy over different years

Exhibits

35 American Express Co (AXP)

Year

2013

Revenue Selling, General and Administrative Expenses

2014

2015

2016

32974 34292

32818

32119 33471

16405 17499

16445

17135 17797

Compensation and benefits

6191

4976

5259

5258

Advertising and promotion

10267 11073

3109

3650

3217

Nonrecurring expense

6518

6793

439

1411 4678

6095 6089

2017

Provision for income taxes

2529

3106

2775

2688

Net income

5359

5885

5163

5408

2736

Preferred dividend

NA

46

62

80

81

Net income available to common shareholders

5359

5839

5101

5328

2655

Operating Income

7,888

8,991

7,938

8,096

7,414

Operating Margin (%)

24

26.3

24.2

25.2

22.2

Net Income

5,359

5,885

5,163

5,408

2,736

Earnings Per Share (USD)

4.88

5.56

5.05

5.65

2.97

Dividends Per Share (USD)

0.66

1.24

1.13

1.22

1.34

Number of Shares (Mil)

1,089

1,051

1,003

935

886 13,540

Operating Cash Flow

8,547

10,990

10,972

8,224

Tax Rate (%)

32.06

34.55

34.96

33.2

63.1

Net Margin (%)

16.25

17.03

15.43

16.45

7.87

Debt/Equity Ratio

2.84

2.8

2.32

2.29

3.06

Exhibit 2.2 Selected financial information, 2013–17. Source Quotes.morningstar.com (2018). AXP American Express Co Stock AXP chart. Note The values on the y-axis represent the market value of 100$ invested in Amex in comparison with the growth of the US economy over different years

Exhibit 2.3 Share prices of Amex since it went public in Jan 1978 to Feb 2018 along with the volume of trade. Source Quotes.morningstar.com (2018). AXP American Express Co Stock AXP chart [online]. Available at http://quotes.morningstar.com/chart/stock/chart.action?t=AXP& region=usa&culture=en-US (Accessed 8 Mar 2018). Note A view of the share prices of Amex in the NYSE since it became public in January 1978 till February 2018 with values mentioned for local maxima and minima

36

2 American Express

References Annual Report (2015) https://ir.americanexpress.com/Cache/1500081626.PDF?O=PDF&T=&Y= &D=&FID=1500081626& https://ir.americanexpress.com/AsReported/Index

Chapter 3

Barbeque Nation

3.1 Introduction Things did not go as per plan for Prosenjit Roy Choudhury whose childhood dream was to follow his father’s footsteps and become a Pilot; unfortunately, he failed in the medical examination. After school, he joined the prestigious Institute of Hotel Management and Catering Technology in Bhopal and later became the CEO of Barbeque Nation. The journey for the chain started in the Bombay Suburbs. Pali Hill, a place in Mumbai, witnessed first of its kind grill-based eatery. It was 2006, and by the looks and feel of it, Prosenjit Roy Choudhury understood that this idea of him would eventually turn bigger. Having completed his hotel management degree, Prosenjit joined Sayaji Hotels as a management trainee. He wanted to keep food and beverages (F&B) as the top priority in his job. The CEO of the hotel chain, Sajid Dhanani, invested in Prosenjit’s business idea of a live grill-based restaurant and eventually the first store was set up in Pali Hill with an investment budget of Rs. 2 crore. Prosenjit did not have the experience of running a chain of eateries over various regions. So, he needed strong leadership and management capabilities. They opened branches in Bangalore, Hyderabad, and Gurgaon within a year of the launch of the store in Mumbai. The growth was a phenomenon. By 2011–12, Barbeque Nation had 18 working outlets, and by the conclusion of 2012–13, they had managed to operate 36 outlets. Barbeque Nation planned to tap at slightest 12 cities in the current year and open 60 outlets by the conclusion of 2014 (see Exhibit 3.1: The presence of BBQ Nation). The rate at which Barbeque Nation developed was simply exceptional, being 24% development rate. In 2012, they earned INR 136 crore, and the figures in 2013 were around INR 200 crore. Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_3) contains supplementary material, which is available to authorized users. © Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_3

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3 Barbeque Nation

By the conclusion of 2014, with all the extra outlets, the Barbeque Nation group reached nearly INR 380–400 crore income. With the advent of each passing year, they started growing in strength in terms of a number of outlets in India. They had a very swift strategy of moving from metro to tier 1 cities and slowly and steadily expanding to tier 2 cities in India. It also had international expansion plans as it saw the flourishing demand for the doit-yourself grill dining experience, owing to its uniqueness. Their first international store was opened in Dubai in the month of November in the year 2016. What helped on their rapid expansion was their vision that tier 2 and 3 would have to take a few time. Moreover, spreading into numerous cities is not the standard procedure since overseeing the supply chain and maintaining quality in the eateries gets to be an exceptionally huge challenge. Thus, they would adhere to the cluster technique where they enter a city and open 2–4 outlets, depending on the measure, populace, and expendable wage of the citizens. Based on this, they would move into any other city. Barbeque Nation has built up R&D to routinely collect and examine the client input. They had a tele-caller group that used to call 20% of the clients from each of their outlets to rate their experience on the food, eatery climate, cleanliness, effortlessness of booking, and responsiveness of organization. This visitor fulfillment list empowers the company to decide their position from a client’s viewpoint and gives a genuine picture of how each outlet is performing. It also enables to take quick helpful measures. Eatery commerce is people’s trade, and to make clients cheerful, one requires having a vigorous and dedicated team. They have been very particular in the way they have incorporated feedbacks they received from varied customers from various outlets. BBQ Nation has been exceptionally shopper-arranged company and has an exceptionally solid feedback component, wherein after each feast, they made an attempt to get 60–80% of clients to fill up the input shapes. It empowered them to serve the customers superior the next time they visit their outlet. It makes a difference by gazing the various aspects and trying to find out more about the customer’s desires, responses to advertising, etc., hence making criticism an inner component of the framework. So far, the overall journey for the chain has been exiting with a nationwide reach and interesting mechanism pertaining to supply chain and expansionary plans within the nation itself. With all these components in place and already international stores operating in the Middle East, it still remains to look how the strategy of expansion in South-Eastern developing nations like Nepal and Sri Lanka hold for the company which has done exceedingly well in terms of stores across India.

3.1.1 Food Service Industry The Indian economy is aimed at reaching an estimated US$3.5 trillion by the fiscal year 2020. Food Service Industry is rising as a key portion in the Indian economy, with a general market worth of US$50 billion as of the fiscal year 2017, which is

3.1 Introduction

39

nearly eight times greater than that of hotel industry. The market’s development will be fuelled by evolving customer flow and expanding market multiplication by brands in the space. The gross value added (“GVA”) by hotels and restaurants has seen a yearly increment in both total and relative terms. The share of food services in Indian GDP is expected to increase from current 2.3 to 2.6% by the fiscal year 2022 due to its faster growth as compared to overall GDP growth. Indian food service market has taken a dramatic change from the 1980s when there were only a few brands available in the market and the market was ruled by unorganized restaurants. Food industry saw a revolution in the fiscal year 1996 with the opening up of eateries by McDonald’s, Pizza Hut, and Dominos. A section of brands such as Subway and BBQ Nation started after the year 2000. Following this, homegrown brands like Haldiram and Moti Mahal also joined. Since then, the food market has been growing rapidly and seen many changes regarding rising disposable income, accessibility of quality manpower, and utilization of innovation. With the advent of Digital India, online food delivery players like FoodPanda, Zomato, and Swiggy have done remarkably well in their respective domains of specialized services and their unique points of differentiation. The organized food industry thus has witnessed a good growth in recent years in India. Growing at a CAGR of 11%, it is expected that the industry currently values at USD 40 Billion and would reach a value of USD 65 Billion by the end of this year. (see Exhibit 3.2: Food Service Industry.) The Indian food enterprise is poised for a big increase, raising its contribution to world food exchange each year. In India, the food quarter has emerged as an excessive-boom and an excessive-earnings zone due to its large ability for cost addition, specifically within the meals processing enterprise. (see Exhibit 3.3: Structure of Indian Food Services Market.) The authorities of India have been instrumental in the boom and improvement of the food processing industry. The government through the Ministry of Food Processing Industries (MoFPI) is making all efforts to encourage investments inside the commercial enterprise. It has accredited proposals for joint ventures (JVs), foreign collaborations, business licenses, and a hundred percent export-oriented gadgets. The Indian food and grocery marketplace is the arena’s sixth largest, with retail contributing 70% of the sales. Food has additionally been one among the largest segments in India’s retail area, which turned into worth US$ 490 billion in 2013. The Indian food retail market is expected to reach INR 61 lakh crore by the end of 2020. It is thus certainly one of the most important industries in India and is ranked fifth in phrases of manufacturing, intake, export, and predicted growth. Indian food service industry is at US$78B which was estimates for 2018. The Indian gourmet food market is presently valued at US$ 1.3 billion and is developing at a CAGR of 20%. India’s organic food market is predicted to boom via three times by 2020.

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3 Barbeque Nation

Ordering-in has emerged as a fundamental part of the ingesting revel in, and numerous coordination players are imparting last mile delivery for eating places. As a result, food services are rising as a key contributor for the Indian economic system, inclusive of employment generation, talent development, boom within the allied industries, entrepreneurship, and tourism and developing studies for the Indian consumer. And this is exactly where BBQ Nation can leverage on the fact of its perceived effectiveness (see Exhibit 3.4). The realization of the food service as an industry needs to be done by the government to unleash its full potential and define clear policies and benefits that this growing industry deserves to have and on which dine-in restaurants can take major advantages and can attract a lot of investments in the future.

3.1.2 Average Size of Barbeque Nation Outlet The size of a Barbeque Nation outlet depends on the market size it is catering to, rent or lease rate, competitor presence in that particular area, etc. Generally, in a Metro city, the average size of a Barbeque Nation varies from 5,500 to 6,500 square feet, and in a tier 1, it is between 4,000 and 5,000 ft2 and 3,000–4,000 ft2 for tier 2 city.

3.2 Operations at Barbeque Nation The administration worked toward promoting the culture of sharing innovative ideas and information so that the company gets to benefit from the scale of operations and embrace best practices overall brands. All the restaurants had a standardized way of offering their services while giving autonomy to the individual branch manager in daily operations. Some of our common procedures and frameworks include: Barbeque Nation restaurants regularly offer visitors no less than five vegetarian dishes and five non-vegetarian precooked starters they can season and grill on barbecue installed in their table and the customer can select main course buffet and a choice of desserts for a fixed cost; incorporated cloud-based reservation and customer feedback frameworks; solid IT frameworks including concentrated information preparing; proper training for the employees if the company to incorporate the company’s vision, mission, core values, technical and behavioral competencies and safety and health audits; the company used GSI tracking for guest service focused culture. (see Exhibit 3.5: Cost Structure of BBQ Nation outlet.) The core management team intended to advance productivity in regulating, coordinating, and supporting our activities, quality affirmation frameworks, hiring process, and preparing programs in various regions and cities. The central administration of all general business and operations is at present situated in the corporate headquarter in Bengaluru. The corporate headquarter is in charge of both administrative management and operation management, for example, finance management and analysis,

3.2 Operations at Barbeque Nation

41

internal audit, IT framework advancement, new restaurant openings, administrationlevel enlistment, finance, property administration, central acquirement, coordination and deals, and advertising.

3.3 Menu Selection at Barbeque Nation Menu and food preparation so as to advance consistent quality at all of the Barbeque Nation restaurants, all the best practices are applied to monitor all the steps of food service offerings like from the creation and support of the endorsed items list to supplier choice, menu item endorsement and training of specialists, chefs, and staff. The company had committed resources for the development of the standard menu for both the brands Barbeque Nation and Johnny Rockets. The menu items are rated on the basis of the taste and ease of preparation of the dishes. Both the brands have dedicated professional chefs who focused that the quality standards of the recipes and ingredients remain consistent. As of June 30, 2017, the company had two grocery stores, one each in Delhi NCR and Pune. The Pune commissaries work from one of their outlets. These stores serve various close-by Barbeque Nation restaurants by getting ready dishes on a volume premise and further acknowledging economies of scale. They expect to modify their menu as per changing customer inclinations. The greater parts of the dishes are crisply arranged by the prepared culinary experts in every restaurant kitchen. The recipe preparation time is dependent on the consumption pattern of the customers. This is done to forecast prior requirements and minimizing time lapse between preparations and serving the dishes to the customers. In light of the experience of our culinary experts and business chiefs, the company evaluates the consumption level of a number of dishes of each menu item. Subsequently, the chefs can ascertain raw material needs and the planning time of menu things so that maximum freshness and minimum wastage can be attained.

3.4 Management of Barbeque Nation Barbeque Nation has an integrated management to control the outlets centrally and maintain harmony between them. Each Barbeque Nation has its own business manager, and they report to the regional manager who takes care of different cities in a particular region. These regional managers are highly experienced in the food and hospitality industry. The business managers go through centralized induction and training process which covers areas like basic management skills, food quality and production, basic finance knowledge, managing labors, and resolving their issues in a proactive manner, operations. They are held responsible for the daily operation of the Barbeque Nation branch under them. Business managers generally adhere to a predecided budget and work to improve the net sales, operating income, net profit,

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3 Barbeque Nation

margin, etc., and try to achieve the goals set by the senior management. Barbeque Nation outlets have their own staffs that are divided into chefs, captains, and servers. Barbeque Nation tries to recognize potential at an early stage, provide the proper training, and promote them. Barbeque Nation encourages ownership and responsibility taking capability among its staff.

3.5 Pricing Policy at Barbeque Nation The pricing policy of Barbeque Nation broadly looks at two major factors—the cost of operation and raw materials and market analysis of competitors’ positioning. They follow a fixed price model which ranges between |437 and |982 for one customer + taxes. This fixed price varies based on the city or region the restaurant is located, type of meal, i.e., lunch or dinner, the day of week, i.e., weekday or weekend, the timing of the meal (special discount on early dining of the customer). They follow a unique concept of early-bird discount where they incentivize the guests who come earlier than regular meal timings in order to maximize table turn and efficiency. Barbeque Nation follows a different model for their Johnny Rockets restaurants. They provide a fixed price as well as a la carte dining for their guests. These restaurants operate at comparative lower-end prices, fixed meal range starting from |449 to |499 per guest + taxes. It also offers vegetarian and non-vegetarian unlimited burger combos. They review their prices frequently taking care whenever there is price fluctuation.

3.6 Automation and Information Technology at Barbeque Nation Ordering and customer management have been automated using Chatbots (artificial intelligence) at BBQ Nation restaurant chain. Chatbots help in automating the conversation which can be built into Facebook messenger by anyone. Technology firm Rytangle has created the BBQ Nation’s Chatbot. It helps customers to find the outlets in their city, overviewing the menu, price checking, and table booking. Barbeque Nation effectively uses information technology with a target of increased efficiency and scalability. They use a mixture of commercially available and custom developed software and hardware services. All their branches are connected through a central system which enables them to effectively monitor the performances, fixed assets, and payroll on real-time basis. They use a smartphone app called “BBQApp” which presently has more than 460,000 downloads. In the financial year 2017, 17% of their total reservations were done through this app.

3.6 Automation and Information Technology at Barbeque Nation

43

Barbeque Nation has a guest-focused culture by providing high-quality services and excellent dining experience. They believe that the quality of service is directly related to the long-term performance of the company. They strongly focus on the reviews and feedbacks given by the customers; in fact, they ask for feedback during the dining experience and incorporate changes in the food preparation suggested by the guest then and there. They obtain all the feedbacks by their internally managed GSI system and store the data in a cloud-based platform. Barbeque Nation has a dedicated guest relation team based out of Indore who contacts the guests dined the last day and gather feedback. The feedback, when added to their system, creates a daily index across restaurants, clusters, and regions and as a whole at the company level. If some restaurant receives a negative rating below their internal benchmark, they have to take immediate measures to rectify the faults indicated by the guests. They also conduct third-party hygiene audits regularly to evaluate the dining area and kitchen both.

3.7 Performance Review Process Various KPIs to measure the performance at different branches of Barbeque Nation include guests served per day, average per cover, table turn, cost of the raw material, cost of the staff, etc. They review the financial performance based on gross margin, branch-level EBITDA, and corporate-level EBITDA. They carry out reviews with business managers, regional and cluster managers as well.

3.7.1 Opening a New Barbeque Nation Outlet Barbeque Nation follows a systematic process before opening a new outlet, and it comprises four steps: First, business development team: A suitable location is one of the key parameters for the success of the outlet. The BD team searches for potential locations looking at the presence of other restaurants in the locality, expected type of customers, lease or rent cost in that area, spending capacity of that area, etc. Second, project team: Based on the research results provided by the BD team, the project team looks into the technical aspects of the site such as space for dining area, parking provisions, rules, and regulations for the permit. Third, commercial development team: They develop a detailed business model for a site looking at five-year projection with quantitative criteria including expected guest traffic, the average cost of the meal, and qualitative criteria like competitor positioning and other factors. Finally, site approval team: This team reviews the report submitted by the previous three committees and finally gives the approval.

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3 Barbeque Nation

3.7.2 Marketing The BBQ Nation’s business success mainly depends on its marketing and advertising effective branding. The branding model includes three key factors, namely highquality food at affordable prices in unlimited quantities, varied and comfortable ambiance, and service quality. They control their standards centrally for the use of their brands in various forms of their business. People with an inclination for fresh, DIY casual dining at reasonable prices are targets for their advertising specifically. Improving brand awareness is the main area on which their advertising strategy is focused on. A third-party agency helps them with their marketing and advertising. Their advertising includes varied media like billboards, city formats, and banners, radio, print media, direct marketing, message services, social media and sites, etc. Periodic food festivals are also celebrated which involve different cuisines or their fusion to attract the customers. Some of their popular food festivals are as follows. (see Exhibit 3.6: Food festivals arranged by Barbeque Nation.)

3.7.3 Suppliers and Purchasing Practices The capacity to keep up consistent quality all throughout their branches depends to some extent upon their capacity to ingredients and related raw materials from reliable and authentic sources as per the details in every one of the areas in which they work. Whenever the company is commencing operations in any new region, they follow vendor identification process also in case if they need additional and substitute vendors. The information about potential vendors is obtained by a database of existing vendors and extensive research. Their vendor choice criteria incorporate investigation of all potential acquisition choices to enhance costs. The company keeps up various suppliers for every one of our key fixings, which they accept can help relieve pricing instability. Given that the company regularly depends on direct delivery to their Barbeque Nation restaurants, the managers look to streamline the numbers of suppliers for every item in light of recurrence of conveyance and distance from the supplier. For example, perishable items like fruits and vegetables we may contract with more than one supplier inside a similar city so that transportation expenses become economically efficient. When the supply of an item is known to be inconsistent, the managers contact with more than one supplier.

3.7.4 Barbeque Nation Challenges Generally, the conventional dine-in restaurants in the same price category of Barbeque Nation, 100 customers per day suffice the food cost, whereas in Barbeque Nation, it is required to have at least 300 customers per day to meet the food costs.

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45

Since they provide unlimited buffet option to the customers, the amount of food wastage is very high and it needs to be worked upon although they have mastered many other aspects of operation already. They follow fresh-in-fresh-out methodology, and they have a centralized kitchen. The chefs study the consumer behavior and accordingly forecast the raw material requirements. For an example, on an average one customer eats 50 gm of prawn. They prepare food for 300 customers at one go in order to optimize serving time. The main challenge of Barbeque Nation at this moment is to make menu variations and focus to capitalize on special occasions and celebrations like birthdays, festivals, office parties, and treats.

3.8 Barbeque Nation Controversy Barbeque Nation got involved in a controversy in the year 2014 when Vikas Kuthiala, a customer from Chandigarh, lodged a complaint against the hospitality chain for allegedly charging service charge of 4% amounting to Rs. 193.60. The government made it clear that service charge is not a government levy and the District Consumer Redressal Forum penalized them with Rs. 17,196. This incident was a black spot in the reputation of the Barbeque Nation Hospitality Group, and later on, the group not only eliminated Service Charge but also strictly restricted their waiters, chefs, and other staff from taking any “tips” from the customer.

3.9 HR Practices As of June 30, 2017, Barbeque Nation had over 4,800 employees across its restaurant network. The employees of Barbeque are not covered under any labor union as such. Employee welfare is carried out by offering bonuses and other incentives to their staff. They follow the transfer of employees’ strategy across their network to maintain core values.

3.9.1 Employee Training BBQ Nation has its own chef training school which includes them among the club of few Indian companies in the organized CDR segment of the Indian restaurant industry. Training for their chefs is carried out at this facility since July 2016. Their development structure includes a certified restaurant-level trainer, increasing technical skills and behavioral competencies for managers, introducing learning management systems, and schooling for hygiene audits.

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3 Barbeque Nation

3.9.2 Work Culture at Barbeque Nation BBQ Nation was awarded as one of the top 10 retail companies to work for in India by Great Place to Work Institute in coalition with Retailers Association of India for the year 2017. The Great Place to Work Institute conducted an anonymous employee survey at every organization assessed that emphasizes human resource policies and practices. Initiatives like My First Seven Days Program called Swaarambh and Umang which is an annual employee engagement activity have increased BBQ Nation as a brand among its employees. The main aim of Swaarambh is to ensure that all new employees have a thrilling induction phase with efficient learning, whereas Umang is celebrated as a festival across the nation. Also, each employee can voice their opinion through VOE or Voice of Employee, and they can give suggestions to improve customer experience through Prayaas—an employee suggestion program. Apart from feeling responsible and exuberant, employees have developed a sense of pride in their work culture through these initiatives. In 2016, Great Place to Work Institute conducted a survey across 16 different industries and BBQ Nation stood 37th among the top 100. (see Exhibit 3.7: Awards won by Barbeque Nation.) Speaking on the occasion, Sameer Bhasin, CEO, Barbeque Nation Hospitality Ltd., said, “In the food and hospitality business, we witness a direct correlation between employee satisfaction and customer satisfaction and the latter depends on the former. Barbeque Nation as a brand is widely recognized in the country today for the dining experience we offer and this has been possible with contribution from employees at all levels. What we have facilitated is an environment that allows them to give their best and the rest follows. This recognition from Great Place to Work Institute has once again made us proud. I would like to congratulate all our employees on this occasion”—he added. More interesting fact is that 80% of the employees began their career there.

3.9.3 Recruitment and Reward System Barbeque Nation believes in the ownership of the employees across different levels of the company. They provide employees with a direct 25% profit sharing to facilitate employee engagement. The HR manager of Barbeque Nation Mr. Sajid with the help of some HR consultancy had designed a three-hour psychometric test that all employees have to clear and the new recruits go through this test while being hired. Since the first stage of expansion in the year 2018 did not go as planned after establishment of branches in Mumbai, Bangalore, Hyderabad, and Gurgaon, Founder of the group Mr. Choudhary stressed on allocating responsibility and rewards to the branch managers so that there is no gap in the communication, and they are aligned with the strategy of the company.

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47

Therefore, Mr. Choudhary stopped expansion and created a review system in order to measure the performance of the particular branch. They started an in-house call center in Indore to get customer feedback regularly and feed to the Guest Satisfaction Index, and they also measured staff satisfaction, attrition rate, cost and sales. When the store reached the benchmark, the staff of the particular store was rewarded with a 100% bonus of their current salary.

3.10 LS Nav Hospitality—An Integrated System Barbeque Nation uses an integrated point of sale system at their transaction which consists of multi-language systems which help in enhancing the efficiency of dining and food serving at their restaurants by increasing the speed, making faster transactions, and making guests happy. This solution saves a lot of time, thus overcoming all the operational challenges to expand further. One more important feature of this solution is customization. Customization can be done as per restaurant and location need which is very crucial in the changing business world and hospitality field. The POS tool and other modules are user-friendly and flexible, and even an entry-level staff can operate it without requiring a technical person. The staff’s response to this solution is very positive LS Nav hospitality reduces human dependency and centralizes the monitoring by sending daily data end to end from POS to head office with defined date and time even offline. This solution is directly connected to the account/stock module within a single solution. Some of the problems faced with LS Nav hospitality solution are to manage the orders when there is a hierarchy of multiple kitchens, during offer and discount season, connecting POS to the dining table, and data consolidation of all the restaurants spread across the country. Barbeque Nation currently has set up 1–2 POS machines in each of their restaurants. Integration with Microsoft Dynamics NAV makes the solution completely reliable for the business by sharing data and report quickly on time. Implementation of LS Nav Hospitality at Barbeque LS Nav hospitality helped overcome the biggest challenge faced by Barbeque Nation to track material consumption and wastage across all the kitchens in a single restaurant for all locations. Account mapping with each location allowed the identification of consumption accounts for the same item posted in different locations within the same restaurant. Replenishment system was designed to ensure proper and timely generation of purchase orders and ensures there is no stock out of any SKU at any location. Also, this solution made it easy to plan a meal at different locations by the Head Chef and to take immediate actions when needed. The reservation has been linked with the POS so that user can view their reservation themselves at POS itself. The staffs get the reservation notification of the

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particular table on the POS screen and help in table allocation effectively. Purchase price decision locationwise is done through LS hospitality by defining purchase price at the vendor and item level.

3.11 Present Strategies of Barbeque Nation 3.11.1 Team-Focused Culture to Preserve the Guests Employees are important stakeholders for the guest-focused business of Barbeque Nation. They internally assess the employees frequently in order to identify the gaps and provide opportunities like job rotation, training to take care of the gap. They have successfully been able to manage attrition in the organization and build a cohesive team of talented people. They continuously reengineer the organization to maintain the lean structure. Some of the key initiatives of Barbeque Nation are: inclusion of innovative dishes and “live counters” to prepare food customized according to the preference of the customer; increasing the revenue by offering different cuisines of food to the guests during various food festivals; creating attractive décor and welcoming atmosphere to increase the guest traffic; controlling cost through centralized purchase decisions and inventory management through third-party-managed warehouses; consolidating food processing in centrally managed kitchens and hence saving cost; optimizing restaurant-level staffing to save labor cost; diversifying product offering to expand the reach of the core brand including increase option of alcoholic beverages.

3.11.2 Continuous Expansion in Indian Cities Barbeque Nation has continued to expand in untapped metro cities and started entering into tier 1, 2 and 3 cities. They opened 9, 21, 13 outlets in the year 2015, 16, 17, respectively. They deliberately choose to keep away from the prime locations in the metro cities as the rent is very high. Rather they take bookings through advance reservations to make themselves a destination brand where customers plan to dine in advance by the word-of-mouth publicity on the social media pages. Presently, they own and operate all the outlets on their own. See Exhibit 3.8: Revenue of Barbeque Nation in different Fiscal Years.

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49

3.11.3 Expanding Through Owned and Franchise Model Barbeque Nation is targeting at franchise-owned model at several international locations. They have prioritized their expansion in the markets where they can leverage their existing infrastructure and expertise.

3.11.4 Expanding Johnny Rockets Franchise to Different Indian Cities Johnny Rockets is an already established brand for good food and ambiance. They are looking at repositioning the brand as an American hamburger chain in India by replicating the Barbeque Nation guest service model. They are looking at few metro cities like Delhi, Mumbai, Bangalore, and cities with a high young population like Manipal. With the introduction of fixed price model to this brand, Barbeque Nation is focusing at reduced bite size so that consumption of a variety of dishes is encouraged.

3.11.5 Strategic Brand Acquisitions Barbeque Nation is trying to leverage their market position and brand image in the food service industry by introducing some International brands into the Indian market through partnership and acquisitions anticipating the high growth in CDR sector in India. They are trying to position their portfolio such that they can offer to different price points and attract different customer segments and can maintain a unique identity.

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Exhibits States/UT of India

Number of Cities/State or UT

Andhra Pradesh

3

Assam Bihar Chandigarh Chhattisgarh Delhi Goa Gujarat

1 1 1 1 1 1 4

Haryana

2

Jammu & Kashmir Karnataka

1

Kerala

4

Maharashtra

5

Nagaland Odisha Puducherry Punjab

1 1 1 5

5

Rajasthan

2

Tamil Nadu

8

Telangana Uttar Pradesh

1 8

Uttarakhand West Bengal Total

1 1 59

Number of Outlets/ City

Number of Outlets/State or UT

Nellore Vijayawada Visakhapatnam Guwahati Patna Chandigarh Raipur New Delhi Goa Ahmedabad Rajkot Surat Vadodara Faridabad Gurugram Jammu

1 1 1 1 1 1 1 7 1 2 1 1 1 1 3 1

3

Bangalore Hubballi Mangalore Manipal Mysore Ernakulam Kozhikode Thrissur Trivandrum Kolhapur Mumbai Nagpur Nashik Pune Dimapur Bhubaneswar Puducherry Amritsar Jalandhar Ludhiana Mohali Patiala Jaipur Udaipur Chennai Coimbatore Erode Madurai Salem Tiruchirappalli Tirupur Vellore Hyderabad Bareilly Ghaziabad Greater Noida Jhansi Kanpur Lucknow Meerut Noida Dehradun Kolkata

10 1 1 1 1 1 1 1 1 1 14 1 1 5 1 1 1 1 1 1 1 1 1 1 5 1 1 1 1 1 1 1 3 1 1 1 1 1 1 1 1 1 2 101

Cities

Exhibit 3.1 The presence of BBQ Nation. Source http://www.barbequenation.com

1 1 1 1 7 1 5

4 1 14

4

22

1 1 1 5

2 12

3 8

1 2 101

Exhibits

51

Exhibit 3.2 Food service industry. Source KPMG Food Service Industry Report 2016

STRUCTURE OF INDIAN FOOD SERVICES MARKET Key segments in the Food Services Market

Average spend per person

Unorganized segment - It includes roadside eateries and Dhabas which 10-100 have been the most common eating out option Organized segment - consists of: Standalone restaurants across all formats with less than 3 outlets Chain format which has 3 or more outlets across all formats

Exhibit 3.3. Structure of Indian food services market. Source KPMG Food Service Industry Report 2016

52 S.

3 Barbeque Nation Chain Segment

No.

1

Café

Coffee and chai bars as well as parlors and bakeries. High 50focus on beverages supported by food items. E.g.: Starbucks, 250 CCD etc.

2

Quick

Service Focused on speed of service, affordability and convenience, 75-

Restaurants

strong focus on takeaway & delivery with minimal table 250

(QSR)

service. E.g.: Haldiram, McDonald

3

4

Frozen

Comprises small kiosk formats of ice-cream brands and has 50-

Desserts/Ice-

now extended the dine-in concept to frozen yogurt brands. 150

cream (FD/IC)

E.g.: Baskin-Robbins, Red Mango etc.

Casual

Dining A restaurant serving moderately to high priced food in an 250-

Restaurants

ambience oriented towards providing an affordable dining 1000

(CDR’s)

experience, with table service along with some restaurants offering high quality interiors and high standards of service. The offerings bridge the gap between QSR’s and Fine dining restaurants E.g.: BBQ Nation, Oh! Calcutta, Sagar Ratna etc.

5

Dining A full service restaurant with premium interiors, specific >1000

Fine

Restaurants

cuisine specialty and high standard of service. They offer a

(FDR’s)

unique ambience and upscale service with the help of highly trained staff. E.g.: The Great Kebab Factory, Olive Bar etc.

6

Pubs, Bar Cafe This format mainly serves alcohol and beverages and includes 750and (PBCL)

Lounges night clubs and sports bars. E.g.: Beer Cafe, Xtreme Sports Bar 1500 etc.

Exhibit 3.4 Chain segment. Source KPMG Food Service Industry Report 2016

Exhibits

53

Exhibit 3.5 Cost structure of BBQ Nation outlet. Source http://www.barbequenation.com

Name of the festival

Cuisine

Africa Magica

African cuisine

Sawatdee

Thai street food

Grills and Chills

Range of beverages (both alcoholic and non-alcoholic)

Magic of Mohammed ali road

Mumbai’s street food

Best of the Coast

Coastal cuisine from Maharashtra, Goa and Karnataka

Wahrabia Fest

Middle Eastern cuisine

Exhibit 3.6 Food festivals arranged by Barbeque Nation. Source https://m.economictimes.com/ industry/services/hotels-/-restaurants/barbeque-nation-to-expand-footprint/articleshow/51894029. cms

Exhibit 3.7 Awards won by Barbeque Nation. Source http://www.barbequenation.com

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Exhibit 3.8 Revenue of Barbeque Nation in different fiscal years. Source http://www. barbequenation.com

References https://www.sayajihotels.com/data/Annual_Report_2017.pdf http://www.cxotoday.com/story/barbeque-nation-implements-ls-hospitality-solution/ https://m.economictimes.com/industry/services/hotels-/-restaurants/barbeque-nation-to-expandfootprint/articleshow/51894029.cms http://www.forbesindia.com/article/work-in-progress/rapid-expansion-the-way-forward-forbarbeque-nation/35427/1 http://www.adageindia.in/marketing/cmo-strategy/barbeque-nation-tries-to-woo-new-customerswith-its-debut-tvc/articleshow/61849089.cms http://www.barbequenation.com/ http://www.indiantelevision.com/mam/media-and-advertising/ad-campaigns/barbeque-nationlaunches-campaign-to-promote-family-dining-during-diwali-171018 https://www.sebi.gov.in/sebi_data/

Chapter 4

DHL

4.1 Introduction DHL started its Indian operation in 1979. It had its services covering all the domains like ground express service, airfreight, and shipping facilities. Since the beginning, DHL has high-end technology-enabled logistic solutions and this has always given it an edge over its competitors (see Exhibit 4.1). The intervention of foreign companies in Indian market gave logistics a new meaning. It helped in improving the end to end of the supply chain. Facilities like online tracking and status of the package through SMS and emails were started by DHL. Different features of Jumbo box and Junior Jumbo were some air logistics provided by DHL. DHL joined hands with AFL and got an advantage over other logistics companies which were trying to enter India like FedEx. After 2 years, DHL acquired Blue Dart and got the advantage of its infrastructure, employees, ground resources, and brand value. India has always provided an open environment to logistics companies for easy expansion. Implementation of Goods and Services Tax bill gave ease to DHL. Expanding operations to tier 2 and tier 3 cities of India is one of the targets of the company. The growth of the logistics sector in India is 25%, and DHL has maintained a growth rate well above it (see Exhibit 4.2).

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_4) contains supplementary material, which is available to authorized users.

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4.2 Reach of DHL 4.2.1 The Late 1990 DHL started with its setup in India by entering into an alliance with Air Freight. It got AFL’s infrastructure and employee network.

4.2.2 The 2000’s In 2002, DHL and AFL agency alliance ended and signing with Blue Dart came into existence. DHL and Blue Dart got into sales alliance through which DHL could operate with Blue Dart’s name. Later in 2004, DHL acquired Blue Dart for 730 crores. Through this alliance, DHL gained a market share of over 50% in the Indian market. In 2010, Blue Dart offered another service of Express Pallet which provided palletized and easy packaging for the boxes. The pricing included the facility of the door-to-door service both for air and ground operations.

4.2.3 From 2011 to Present DHL and Blue Dart combined had the most expensive network in India with 26,804 locations and 419 retail outlets. DHL and Blue Dart gave logistics industry a new direction by the launch of Smart Truck in 2011. The Smart Truck increased efficiency for pickup and delivery. It uses new RFID technology for route planning and advanced navigation. This technology helped the trucks in moving in a less congested area and take better routes. Smart Trucks are equipped with all required information one night before the next trip which included details like from where the parcel needs to be collected, the most efficient route, and place from where parcels need to be on-boarded. In 2014, Smart Truck plan was given “Great Place to Work” award for the 5th time in a row.

4.3 Worldwide Position of DHL Shipping was the main mode of international cargo transportation till the late twentieth century. The time taken for customs clearance was acting as a bottleneck to the already long transit times. Dalsey, Hillblom, and Lynn found an untapped opportunity here and launched air express service which can carry the customs-related

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documents to the port of call well ahead of the ship’s arrival so that clearance can be done in lesser time. This service, which was the first of its kind, received a prodigious response from the shipping industry. They launched their maiden door-to-door air express services connecting San Francisco and the Hawaiian Islands in the year 1969. After receiving a thumping response in the USA, they have expanded aggressively in much geography around the world. Just after two years of inception, they were present in the South Pacific, Southeast Asia, and even in the Far East. Eventually, they have expanded to Europe (1975) and Canada (1976) and also started their services in the Caribbean islands, Latin America, and Mexico in the year 1978. With the start of the emergence of China as a manufacturing hub of the world, DHL has started their China operations in the year 1986 (see Exhibit 4.3). With their robust expansion vigor, they have expanded to all over the world and are now operating in around 220 countries and have 350 thousand human personnel working for them. By continuously keeping them ahead of the competition through their best in class operating procedures and futuristic technology, DHL stands ahead of the competition with over 34% market share in the international cross-border express air cargo industry (see Exhibit 4.4).

4.4 Logistics in India India acted as a center for world trade, and it is an integral part of Indian history. Logistics is very critical for the flow of goods in any economy, without which doing business is impossible. In India, around 15% of the gross domestic product (GDP) is spent on logistics, unlike developed nations which spend 9% of their GDP on logistics. These figures imply that India Inc. is spending a lot in logistics, which is indirectly affecting the cost of goods. Indian logistics have always been dominated by roadways with a market share of 65% in domestic transportation. Indian road network is the second largest in the world with over 5.7 million kilometers of road throughout the country (see Exhibit 4.3). India is the third largest and is one of the fastest-growing domestic aviation markets in the world. Both domestic and international cargos have been growing doubledigit in recent years with domestic cargo growing over 10% and international cargo growing little over 19% in 2017–18 (April–September). To further enhance air connectivity throughout the country, the government has allocated funds in its annual budget for the construction of new airports and revival of existing airstrips. Railways are said to be the cheapest mode of transportation of goods for distances over 300 km. But often late, railways are facing a tough time in the country because of their costly tariff structure compared to other modes of transportation. The freight carried by the railways has just grown by a little over 5% in the year 2017–18. Being fully owned by them, the Government of India has launched many initiatives for the overhaul of the organization to make railways the most sought after mode for both passenger transport and freight transport.

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Historically, shipping is the most preferred mode of transport for international trade with a share around 95% by volume, and over 68% by value being hauled by sea. India had a sound fleet strength of 1374 ships with around 34% of them being owned by the state-led Shipping Corporation of India (SCI). With a coastline of over 7,500 km, India is heavily dependent on shipping for both foreign and coastal trade. With its inherent drawback of being the most time-consuming mode of transportation, the shipping industry may face difficulties in the future when the ever-increasing demand for faster deliveries reaches a significant level.

4.5 Competitor Analysis The year 1969 marked the era when DHL Express was founded. Within two to three decades, due to the competitive advantage that they leveraged helped them to become the global leader in the logistics industry. Its strong presence over 220 countries made them become the market leader with 34% market share in the international express market. DHL’s competitors were UPS, FedEx, and TNT. DHL’s main competitor when they entered the market is United Parcel Service which was founded in the year 1907. In the 1970s, UPS strong global network was one of the main reasons that they were the leading freight provider. DHL’s current strong competitor in the market is FedEx, which was founded in the year. DHL and FedEx have relatively lower employers than their competitor UPS. But however, all these companies have more or less access to around 220 countries. In the year 2011, Dutch-based logistics company Track & Trace was founded. Within such a short span, they have started their operations in 61 countries. However, in May 2016, TNT was acquired by FedEx. In terms of the service provided, all of these companies provide similar customer service with their main task to deliver goods and emails via any of the following sea, land, and air to other places that suit the customer’s requirement. UPS, on the other hand, has a critical freight consisting of multiple modes of transportation such as the surface, charter, air, hand carry via the advancement in tracking accessible through the Internet and has various other value-added services and specialized equipment. FedEx has a range of customized offerings that include shipping supplies such as box sizes, mailing tubes, padded envelopes, plastic bubble wrap, corrugated, packing tape. They also have separate portfolios to manage the high-end tech items, such as mobile phones, pads, laptops, music players, and smart TVs. FedEx also supplies a customized and cushioned Small Electronics Box and FedEx Laptop Box. On the other hand, DHL also adopted to use the different high-end technology to ensure their smooth business operations by tracking their goods and mails, while TNT has been good at introducing and managing their special services. For example, TNT even transported two pandas to their desired location. From the early 80s, DHL has expanded its global network reach and has been providing international express delivery services. Their early presence in Europe and the Asia-Pacific coupled with their competitive advantage made them become

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one of the largest logistics networks in the globe. Also, In India, DHL has its strong presence through Blue Dart which they have acquired in 2004, a leading logistics player in India (see Exhibits 4.5 and 4.6).

4.6 Pricing Strategy of DHL Since its entry in India, DHL focused on keeping its costs low. By doing major mergers and acquisitions in India, DHL established its roots in India without incurring any expenses. Its expenditure on advertising was very less if we compare to DHL’s global spending. The offerings of DHL are unique and reliable but are available at higher price bracket as compared to its competitors. With such pricing strategy, DHL continues to be the first choice of customers because of its service quality, consistency, and reliability. Such values make it a trusted brand, and hence, customers do not mind paying a premium for its services.

4.7 Major Acquisitions 4.7.1 From 1999 to 2005 In 1999, Deutsche Post DHL acquired European-based logistics firm Nedlloyd Logistics which essentially helped them to spread their wings across Europe. They acquired Air Express International (AEI) in 2000, which helped DHL to enter into US market. The strong presence of AEI in the US assisted DHL to gain a foothold in the US market. In the subsequent years, they went on to Global Mail, SmartMail, Mayne Logistics Loomis.

4.7.2 From 2005 to Present In 2005, global logistics major DHL Express acquired 68.21% stake in Blue Dart Express. This acquisition of Blue Dart by DHL paved the way for DHL to utilize Blue Dart current sales alliance and bring together two premium brands. The strong presence of Blue Dart in India with respect to B2C courier services helped DHL to gain the market presence in India. They have also made their business as usual with its all existing client relationships unchanged. Soon, they became one of the most prominent leaders in the logistics space. In 2016, they acquired MIT Safetrans—one of the Italian’s leading logistics provider in the niche market by proving hi-tech values. This move enabled them to completely utilize all recent technologies, hi-tech

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solutions, life sciences in Italy particularly healthcare sector. DPDHL later acquired UK Mail in the year 2016. This helped DPDHL to leverage its operations in the UK. Later in the same year, it acquired Street Scooter (see Exhibit 4.7).

4.8 Present Sustainable Strategy 4.8.1 DHL Green Logistics Strategy Good for the Environment, Good for Business.

4.8.2 Mission: Zero Emissions by 2050 DHL is identifying and being the forerunner in reducing emissions, and they feel this would actually make their businesses more sustainable for the future following the concept of circular economy by three-step approach. DHL has benchmarked various best practices under the green logistics integrating suppliers and vendors in its value chain for green optimization in all of the following: warehousing, waste recycling, packaging, transport, and climate-neutral shipment services (see Exhibit 4.8). Via in parallel optimizing its logistics, it is leveraging the Go-Green strategy to differentiate itself following a sustainable expansion model. See Exhibits for more details on green production function and green outbound function (see Exhibits 4.9 and 4.10).

4.9 Go-Green Strategy 4.9.1 DHL Rail Connect and Rail line It is the environment-friendly solution of Less than Container Load, leveraging railways via rail multimodal services which is reliable and follows some defined schedules. It is a faster way to connect Asia-Pacific all along and is much more cost efficient. It will standardize operations of delivery.

4.9.2 DHL Climate Neutral DHL is being the forerunner for the brand that is reducing its carbon footprint and is climate-friendly. In these parameters, it is setting off its greenhouse gas emis-

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sions both for inbound and outbound function (see Exhibit for details) and following climate control solutions in its express delivery solutions and supply chain solutions.

4.9.3 DHL SeAir Via this, it is leveraging optimization by using multimodal freight by air and ocean routes reducing carbon footprint compared to only air routes.

4.10 DHL Go-Green Strategy for India By the year 2025, the various goals have been set. First and foremost, it is targeting to improve carbon efficiency by 50% in comparison with the 2007 level. Further, it has an aim to improve the lives of people at the place they are working by the use of cleaner pickup and delivery solutions for approximately about 70% of the first and the last mile service, via green electric vehicles and bicycles. Green Solutions are to be incorporated in 50% of the customer sales to have greener supply chains even for the customers integrating forward as well as backward. DHL has also launched Go-Green specialists and doing a certification for about 80% involving them in environmental protection activities. One such initiative includes planting 1 million trees every year to protect the forests.

4.11 DHL Industry Sector-Focus Strategy Instead of having an overall general strategy for logistics, DHL Express follows sector strategy focusing on particular industries like healthcare, technology-based, life science, energy and power, manufacturing, and related engineering so that it gets the best and the most customized optimal solutions for that specific industry base.

4.12 Continuous Innovation DHL follows the model of Continuous and Disruptive innovation along its entire value chain. The elements of innovation model are as follows: • Network orchestration (Routing, Data Analytics) • Sustainable Delivery • Last mile Automation (Postbot)

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4.13 DHL Express Core Product This is the DHL Express service for critical products in terms of time for the doorto-door service mostly in the international service. It is one of the premium services and has an end-to-end tracking. “TDI,” (times definite internationally)—which is the premium division within the Express Industry. It has offerings such as DHL Express: 9:00, 12:00; Express Worldwide, Express Easy all of which are time-sensitive and critically acknowledged.

4.14 DHL Envirosolutions Via the DHL Envirosolutions, DHL has also entered into consulting and advisory services, leveraging its own Go-Green technologies and expertise and end-to-end Supply Chain and Express services to provide business solutions for a sustainable and green logistics. It is providing configurative solutions for the optimization of Supply Chain, improving the fleet management and looking for sustainable business solutions not only for outside customers but also for across its businesses and verticals across the globe with benchmarking solutions coming up as a lead environmental partner.

4.15 Future Road Map The logistics sector in India has a huge potential for growth. Most of the big players and the new entrants in this sector are trying to adopt technology solutions to make their operations more efficient. DHL believes that e-commerce is the future of logistics in India. As the Indian customer gets familiar with making transactions online, the sector will need a strong backbone of trustworthy logistics to support it. Therefore, DHL plans to invest in its IT infrastructure and increase its warehouse capacity with advanced facilities. Recently, it has adopted FarEye to optimize its resources, enhance its customer experience, and deliver real-time alerts and smart analytics so that the parcel shops are more efficient and have complete visibility. FarEye’s platform made the IT infrastructure adaptable and agile as it was quite compatible with the organization’s existing systems. DHL gained the flexibility to move with the demand levels, and this further supported its ability to adapt to any work environment. In, India DHL plans to work with Blue Dart which was acquired by its parent company DPDHL. Till 2020, DPDHL has pledged to invest $250 million in India, of which $45 million will be allocated to DHL Express.

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DHL plans to incorporate a new Free Trade and Warehousing Zone (FTWZ) in North India next year and also take part in the rail-based transportation. FTWZ would be its third zone in India, and it is expected that DHL will invest between Euro 5 million (USD 5.4 million) and Euro 15 million (USD 16.3 million). It plans to have major investments in the state-of-the-art warehouses. These warehouses will be set up in regions such as Ahmedabad, Ambala, Mumbai, Kolkata, and Kochi where the demand growth is high. Moreover, a new airport at at Bombay is expected with new technologies as introduction of drones for delivery and logistic management. DHL has successfully adopted the “Green technology,” and by 2050, it plans to increase the use of alternative energy sources and reduce the logistic-related emission, as group’s climate protection goal, to result in a net zero. DHL Express has taken proactive steps in India so that it is with the group’s vision. It has set up various green practices which are using LED lights across many of its facilities and also a fleet of vehicles that run on compressed natural gas. Supply Chain of DHL India has plans of investment of more than $100 million for building up additional capacity in the forthcoming years, with as much as 65% of which will be done in warehousing capacity. It also aims to boost its warehousing space to more than 10 million square feet by 2020 from the current 7 million. Large multiple client centers there near metro cities such that it has 70% space of the total, and moreover the remaining will be spread across various other cities, towns whichever is closer to the consumer. Supply Chain of the DHL is also boosting up the warehouse space, with the intention that bolsters and upgrades the transportation network and is used to deliver products from businesses to industrial and retail customers. The company currently is transporting goods by the roads, mainly by the contracted truck from dedicated suppliers and vendors, and is looking to using railroads where it can thus improve time and the fuel cost and efficiencies. Also, the company has the aim to increase the penetration of DHL in the smaller towns of the nation and as fast as it can do so. Mr. Ken Lee, the CEO of Asia-Pacific at DHL Express has said, “the company sees potential and a market for its electric vehicles “Street Scooters” to transport courier in Indian cities as there are a conducive regulatory framework and a growing infrastructure for electric vehicles in the country.” DHL is also catering to all of the Temperature Controlled Logistics which includes food, perishables, and health care via DHL Air Thermonet. In the pursuit to expand its service offering for the Life Sciences and Healthcare Industry, DHL is adding Mumbai, Bengaluru, and Hyderabad to its Thermonet Network of Certified Life Sciences. These facilities provide control of temperature, replenish dry ice, and handle active as well as non-active containers. They are essential in the storage of pharmaceuticals and vaccines.

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The Good Distribution Practices certified DHL’s RFID SmartSensor technology and 24/7 monitoring based on predetermined touch points enable DHL’s Thermonet to provide a seamless temperature visibility throughout the supply chain. The proprietary LifeTrack IT platform can be used to track temperature data and logistics events. It also houses all product-specific SOPs, facilitating early intervention and making document control simpler.

4.16 Augmented Reality in Logistics DHL is looking at augmented reality as a potential game-changer in the logistics industry. Following are the various use cases for AR that has been highlighted in the “DHL Logistics Trend Radar.” “PickBYvision” optimizes picking by equipping staff with wearable AR devices while picking with the main objectives pf decreasing picking errors and search time. Digital navigation efficiently finds the route as well as the item. “Warehouses Planning” Creating a simulation of warehouse operations, Modifications, and adjustment of planned redesign measures by testing in the real environment, Reducing the cost of warehouse redesign and planning are the main objectives. “Complete Check” Completion of delivery tracked by AR devices, Recognizes the undamaged parcels and automatically confirms pickup after the correct number has been reached, Time savings, completeness check, and damage detection are the main objectives. “International Trades” Worldwide trade service providers supported by AR, AR devices can verify trade documents detect commodity code classification, Translating foreign trade terms or parcel labels, Facilitating trade documentation and international freight handling is the main objectives. “Dynamics Traffic Support” Integrating windshields of delivery vehicles with AR devices for advanced navigation systems, Analysis of current traffic data and display of required information the driver’s field of vision, Placing critical information on vehicle, cargo, and the surrounding, Main objectives are to optimize routing on the fly, improve driving safety, minimizing driver distraction. “Freights Loading” Optimization of cargo loading done through AR devices, AR device displays the load plan and instructions for the loader; the Main objective is to accelerate the freight loading process. “Parcels Load and Dropoff” AR devices provided to staff for parcel handling, loading, and delivery processes, AR supports the information and instruction handling and parcels are loaded intelligently, Main objectives are to refine parcel handling, avoid improper handling and make certain of load optimization.

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4.17 The Parcelcopter Being a pioneer in drone delivery services, DHL has been conducting numerous tests of the fully automated parcelcopter Skyport into its delivery chain but this technology needs many further iterations of development for a proper assessment; we can only assume that it will take some time until the prototype is fully evaluated in rural conditions. For now, the adoption of the parcelcopter does not seem to have a place in the immediate future of logistics. We can only speculate about the benefits that this technology might bring (see Exhibit 4.11).

4.18 Current Challenges With the growth trajectory for DHL Express and DHL as a whole, sustaining this growth is the biggest challenge especially in India with many smaller players coming up across the industry with innovative break through and the existing players like FedEx and UPS gaining ground. Green Strategy can be seen as a sustainable model, but it will have to explore newer strategies as well and along with newer customer segments and market if it wishes to stay as the market leader in this space.

Exhibits

Exhibit 4.1 Divisions of DHL. Source DPDHL Group Business Profile Report, 2017

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Exhibit 4.2 Logistics performance index (LPI): India’s ranking. Source World Bank

Exhibit 4.3 Modal share of various modes of inland freight transport (percentage). Source World Road Statistics, International Road Federation

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Exhibit 4.4 Financial summary. Source http://www.dpdhl.com Exhibit 4.5 Asia-Pacific market share 2016. Source DPDHL Group Business Profile Report, 2017

Asia Pacific Market Share 2016 [EUR 6.8bn]

Others 21% DHL 44% FedEx 20% UPS 11% TNT 4%

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Global Market Share 2016 [EUR 20.1bn]

Others 12% DHL 34% FedEx 26% TNT 6% UPS 22% Exhibit 4.6 Global market share. Source DPDHL Group Business Profile Report, 2017 1999 DANZAS Van Gend & Loos Nedlloyd Logistics

2000 ASG Ducros Services Rapides Air Express International

2001

2002

DHL International

Global Mail

2003 Airborne Mayne Logistics Loomis Sinotrans International Air Securior Omega

2004 Interlanden Narrondo Desarrollo SmartMail

2005 Koba Blue Dart Express Mail Merge

2006 Williams Lea

Unipost

Exel

2016 UK Mail StreetScooter MIT Safetrans

Exhibit 4.7 Acquisitions by DHL. Source http://www.dpdhl.com

PPL

Exhibits

Exhibit 4.8 Sustainable future. Source http://www.dpdhl.com

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Exhibit 4.9 Green production function. Source http://www.dpdhl.com

Exhibit 4.10 Green outbound function. Source http://www.dpdhl.com

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Exhibits

Exhibit 4.11 DHL Parcelcopter. Source https://www.ebnonline.com

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References Current presentation. (n.d.). Retrieved 15 Feb 2018, from http://www.dpdhl.com/en/investors/ events_and_presentations/current_presentation.html DHL | Global | English. (n.d.). Retrieved 19 Feb 2018, from http://www.dhl.com/. Ramani KV and McKinney R (2002) DHL goes ‘open’. Retrieved 19 Feb 2018, from https://www.sciencedirect. com/science/article/abs/pii/0963868794900132 DHL to invest $16.3 million and introduce drones in India. (n.d.). Retrieved 19 Feb 2018, from https://economictimes.indiatimes.com/industry/transportation/shipping-/-transport/dhl-toinvest-16-3-million-and-introduce-drones-in-ndia/articleshow/50108396.cms. (n.d.). Retrieved 16 Feb 2018, from http://wap.dhl.com/info/history.html DHL investors relations, 2017. Retrieved 15 Feb 2018, from https://www.dpdhl.com/content/dam/ dpdhl/Investoren/Veranstaltungen/Reporting/2017/FY2016/DPDHL_Business_Profile_2017. pdf DHL fact sheet. Retrieved 15 Feb 2018, from http://www.dpdhl.com/content/dam/dpdhl/presse/ mediathek/fact_sheet_dhl_en.pdf. Augmented reality in logistics. Retrieved 5 Feb 2018, from http://www.dhl.com/content/dam/downloads/g0/about_us/logistics_insights/csi_augmented_ reality_report_290414.pdf DPDHL group business profile report, 2017. Retrieved 15 Feb 2018, from https://www.dpdhl.com/ content/dam/dpdhl/Investoren/Veranstaltungen/Reporting/2017/FY2016/DPDHL_Business_ Profile_2017.pdf Integrated solutions | DHL supply chain (n.d.). Retrieved 16 Feb 2018, from https://www.logistics. dhl/us-en/home/our-divisions/supply-chain/solutions/integrated-solutions.html Is DHL’s parcelcopter the future of logistics? (n.d.). Retrieved 15 Mar 2018, from https://www. ebnonline.com/author.asp?section_id=1364&doc_id=280888

Chapter 5

Essar Oil

5.1 Introduction Established in 1998 Essar Energy PLC is an India-based energy company with headquarter in Port Louis, Mauritius. The company has diversified itself by entering exploration, production, refinery, and retail business in the power sector. The main business units for Essar Energy are Essar Exploration and Production Business, Essar Oil and Gas Business and Essar CBM (coalbed methane) Business. The company held state-of-the-art refinery facility at Vadinar in Gujrat. It is India’s second largest refinery located at a single location with a production capacity of 20 million tons per annum (see Exhibit 5.1). As per Exhibit 5.2, the company holds the debt–equity ratio of around 75%. With the decision to sell 49% stake of Vadinar refinery, which is the only profit-making division of Essar Oil, to Russian giant Rosneft, Essar is trying to pay back the debt owed to major banks of India. The story began in the year 1997–98 when the Government of India conceptualized New Exploratory Licensing Policy to accelerate the pace of hydrocarbon exploration. As per this policy, the government invited bids for exploration of potential oil and gas depositions throughout the country. Bidders were awarded easy access to loans through banks. Essar Oil seized the opportunity and undertook huge loans from banks, but the majority of their projects failed or resulted in lower “hit rate.” Further, in the year 2015, the world has seen one of the biggest falls in Brent crude oil price internationally (see Exhibit 5.3). Essar Oil was not well prepared to handle such a crisis and thus the loss further plunged in.

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_5) contains supplementary material, which is available to authorized users.

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As per the report submitted to the parliament by Minister of State (I/C) for petroleum and natural Gas, Shri Dharmendra Pradhan, Essar Oil Limited is the third highest bidder in terms of area for exploration and exploitation of coal gas methane. As per the report, not a single unit given to Essar Oil in the allocated areas is functional till date. Due to heavy debt and constant inefficiency, Essar’s loans were on the verge of being declared as non-performing assets by the banks and thus they were forced to sell their most profitable refinery facility in 2016.

5.2 Oil Industry in India Of all the eminent and most important sectors in India, The oil and gas sector is the most prominent one. It plays a very crucial role in influencing the decision making regarding the other sectors of the Indian economy. New Exploration Licensing Policy (NELP) was introduced by the Government of India in 1997–1998 to fill the gap between demand and supply in this sector. A recent report states the worth of Indian oil and gas industry to be $139.8 billion by 2015. The growth of any economy is closely related to energy consumption and its ever-increasing demand. Since this demand keeps on increasing in case of developing country like India, the need for oil and gas is projected to grow more, thereby making the sector quite conducive for investment. Since the demand in this sector is ever rising, the Government of India has adopted several policies. One of the major transformations in this sector is hundred percent FDI in this sector which has attracted many domestic and international players in this industry. Of all the countries in the world, India is the sixth largest consumer of oil in the world. It ranks ninth in the crude oil importer. The contribution of this sector in GDP is about fifteen percent. The total reserve of crude oil in India is about twelve thousand million metric tonnes. This data have been quoted by the Ministry of Petroleum and Gas, India. The segmentation of the oil industry can be done by dividing it into three components stated below: • Upstream—This stream consists of activities related to exploration and production. • Midstream—This stream involves storage and transportation of oil and gas. • Downstream—This segment does refining, processing, and storage. There are seventeen public refineries and three refineries in the private sector in India. In 2010, there were about thirty-six thousand four hundred sixty-two retail outlets of public sector oil marketing companies. These public sector oil marketing companies had about one hundred fifteen million LPG consumers in 2010.

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The demand for oil in India is growing at a CAGR of 3.6% which accounts for four hundred fifty-eight MTOE by 2040. The demand for energy is predicted to double in the next twenty years. The economy is predicted to grow more than five times its current size. The demand for gas is predicted to touch 90 billion cubic meters till 2040. The demand for natural gas will grow at CAGR of 4.6% to touch 149 MTOE.

5.3 Essar Group Essar started off as a construction company in 1969 and has established its presence in manufacturing, services, and retail. The growth strategy over the past four decades has been partnerships and strategic global acquisitions along with Brownfield and Greenfield development projects in Asia, Europe, Africa, and America.

5.3.1 Essar’s Major Areas of Business Activity 5.3.1.1

Essar Steel

Essar Steel with an annual production capacity of 10 million ton and 20 million ton pellet facility in India is one its largest producer of steel. Additionally, it has operations in Algoma (Canada) with a production capacity of 4 million ton of steel and a 7 million ton direct reduced iron (DRI) facility is being set up in Minnesota (USA). With global steel prices under pressure because of excess steel supply from China, steel companies are finding their balance sheets stretched as never seen before. Essar Steel debt was around 36,303 crore in FY 2015 and is considered a non-performing asset (NPA) by Indian banks such as SBI (with an exposure of Rs 5,000 crore with Essar Steel).1

5.3.1.2

Essar Oil

Essar Oil is a completely incorporated oil and gas organization of global scale with strong presence over the hydrocarbon value chain from exploration and generation to refining and oil retail. Essar Oil possesses one of the world’s most sophisticated and among India’s biggest single site refineries in Vadinar, Gujarat, which has a limit of 20 million tons. With both onshore and offshore operations, it has reserves of around 1.7 billion barrels of oil. There are more than 2,100 Essar-marked oil retail outlets in different parts of India.

1 https://www.livemint.com/Companies/nqaH9COJWgo3gzgHSs1FHI/Essar-Steel-on-Bank-of-

Indias-NPA-list.html.

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Essar Power

It is one of the India’s largest energy-producing private sector companies. It possesses power plants in India and Canada with an aggregate generation capacity of 6,100 MW, of which 4,705 MW is operational. The operating plants in India are at Salaya, Vadinar, Mahan, Hazira, Paradip, and Tori. It possesses around 500 million tons of coal reserves and assets in four continents. Essar Power got listed on the London Stock Exchange in 2010.

5.3.1.4

Essar Projects

It is India’s second largest engineering, procurement and construction organization (EPC). It provides end-to-end solutions to the accompanying ventures: oil and gas (upstream, midstream, and downstream), including cross-country pipelines and terminals (Offshore and Onshore); infrastructure (ports and marine, civil and building); power (counting hydroelectric); and minerals and metals. The organization has a presence in more than 20 nations spread crosswise over five continents.

5.3.1.5

Essar Ports

It is one of the biggest port organizations of India, with a present capacity of 140 million tons that is being extended to 194 million tons. Essar Ports has four operational port terminals at Hazira, Vadinar, Paradip, and Visakhapatnam. The company is additionally setting up a dry mass terminal at Salaya, and growing its Hazira and Visakhapatnam port limits. It is listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE).

5.3.1.6

Essar Shipping

It operates a fleet of 14 cargo ships, including VLCCs, Capesize, Mini-capsize, and Supramax. It is an integrated logistics solution provider with investments in logistics services, sea transportation, and oilfield drilling services. Essar’s shipping business delivers end-to-end logistics services on the sea, lighter age services to plants, intraplant logistics, and dispatching finished products to the final customer. The company is listed in Bombay Stock Exchange.

5.4 Market Potential of India As per the Ministry of External Affairs, India is one of the largest consumers of petroleum products among non-Organization for Economic Co-operation and Development (OECD) countries. As per the latest report dated August 1, 2016, import of

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crude oil has increased by 9.1% Y-O-Y to 18.81 million metric tons. India is also the fourth largest liquefied natural gas importer and accounts for 5.8% of the total global trade. LNG demand is expected to grow by 16.89% to 306.54 million metric standard cubic meter per day (MMSCMD) by 2021, its current capacity is 64 MMSCMD. As reported by International Energy Agency (IEA), the greatest potential related to unexploited natural gas deposit lies with coalbed methane (CBM) (see Exhibit 5.4). India and Natural Gas Trends: As per IEA report, the demand for conventional source of natural gas, i.e., from the onshore field, will remain stagnant, and the opportunity will arise in offshore basins and onshore CBM, which is assumed to start increase by 2020 (see Exhibit 5.5). India has the fifth largest coal reserve in the world and thus holds a significant potential in CBM deposits. CBM is considered an unconventional source of natural gas highly regarded as a potential solution for supplementing India’s energy source. It is explored and exploited under ORD Act 1948 and P&NG Rules 1959.

5.5 Locational Advantage for CBM Deposit Essar oil is the largest company in India to extract the coalbed methane (Exhibit 5.1). It has one of the largest CBM blocks at Raniganj, West Bengal with a total acreage of around 2,700 km with a 35 years’ contract with Government of India for exploration and production of CBM. The block was assigned to Essar during Phase 1 of block allocation in 2002. As of September 1, 2011, Raniganj has total test production of 22,000 SCMPD of gas. In addition, the company has also earned Rajmahal CSG block of Jharkhand in CBM fourth round of bidding. This block is approximately 100 km from existing Raniganj block covering an area of 1,128 km2 ; thus, helping Essar to capitalize of locational advantage in terms of parenting, transfer of equipment and technology from parent block of Raniganj. Along with the above allocation, Essar is constantly looking for nearby CBM blocks to capitalize on the economy of scale. It is looking forward to the acquisition of Talchir block in Odisha which is 209 km from Raniganj. Apart from CBM business, Essar is also capitalizing of locational advantage due to rich coal and iron ore deposit in Chota Nagpur area with the majority of its power and steel plants functioning in this area. (see Exhibits 5.5 and 5.6).

5.6 Locational Advantage for Vadinar Oil Refinery Vadinar oil refinery is a state-of-the-art refinery facility present in port city Vadinar in Gujrat. Commissioned in 2006 it is the second largest single production unit in terms of volume in India. Again, it lies in a cluster where other major players also function

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(Exhibit 5.7). Thus, it has abandoned raw material imports catering to economy of scale as well as caters to combined tax advantage offered by the Government of Gujrat. The refinery is powered by its own dedicated 120 MW power plant with a planned expansion to 1,200 MW in near future. The docking facility at the nearby port which is 8 km from the plant is capable of handling vessels up to 350,000 deadweight tonnage (DWT) with interconnected pipelines. Due to this plant, it can work on Sahara blend (extremely light, very low Sulfur content) of oil imported for the Middle East. The locational advantage is further enhanced due to the presence of both suppliers and customers at one location. Majority of crude oil in India is imported from the Middle East.

5.7 Rosneft: A Brief Introduction Rosneft is the largest oil company of Russia. Company’s important functions include exploring hydrocarbon deposits, processing of crude, and production of oil, gas, and petroleum products. It also handles marketing and distribution of oil and gas products in various countries. The company is state-owned entity with largest shares held by OJSC Rosneftegaz (an entity of Russian Government) with 69.50% of equity shares, and BP holds 19.75% of equity shares while remaining shares are free floating. Rosneft generally has very high reserve replacement ratio (RRR), which is an indicator of operating performance of oil and gas exploration and production companies. In 2015, it enjoyed RRR of 168% which means its crude reserves were 1.68 times the oil produced by the company. In March 2013, Rosneft took over TNK-BP International which was the third largest oil producer in Russia at that time. TNK-BP has previously owned BP plc (50%), OGIP Ventures (25%), and Alfa Petroleum Holdings Limited (25%) The $55bn (£36bn) deal made the Russian state-owned oil company the world’s largest listed oil producer in 2013. The deal gave BP $16.7bn in cash and 12.5% stake in Rosneft taking its share to 19.75% in Rosneft.

5.8 Delisting of Essar Oil and Rosneft Deal Story On December 12, 2014, the Russian giant Rosneft, the largest public sector-based oil and gas company in terms of liquid hydrocarbon production and reserves, signed an “oil and oil products supply deal”2 with Essar Oil refineries in India. This deal would essentially safeguard the interest of Essar Oil to ensure long-term supply to

2 http://indianexpress.com/article/business/business-others/debt-laden-essar-steel-likely-to-

bringin-strategic-investor.

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feed its refineries as well as for Rosneft which would like to expand the distribution cover and build deliveries to the South Asian region. The deal was an agreement to supply 10 million tonnes of crude oil per annum for a 10-year period which was likely to begin in the year 2015. This deal was seen to be as a standard partnership between the two countries, Russia and India, in terms of upstream and downstream integration. It will also decrease the dependency of Indian refineries on oil from Iran. A billion-dollar credit line was also established from the Russian bank named VTB Bank. This deal was in line with the Russian President Vladimir Putin’s visit to India in December 2014. From the Indian Government’s point of view, a deal of such magnitude not only strengthened the ties but also decreased the countries’ energy dependency on a limited number of suppliers. In the year 2014, the share of crude oil imports was divided as per the chart. From a strategic point of view, the global refining industry was facing several major challenges such as weaker demands, uncertainties with the new capacity installations and identifications, and dominating legal influence of both the supplier and receiver countries (see Exhibit 5.8). It was important to note that it was costlier in terms of importing crude from Russia than to import crude from the West Asia region. The key constituents of the cost included the logistic cost of transporting the crude, the proximity of the crude source country, and the grade of the crude oil. Essar’s refineries evidently distinguished itself in handling the toughest crude in the world. Heavy and ultraheavy crudes generally met with greater discounts and hence were beneficial for the company. Thus, this cost-benefit outweighed the disadvantage of the higher logistic cost. Another consideration was in terms of the payment problems of Essar in relation with Iran due to the imposed sanctions by the EU and the US. Essar showed signs of acquisitions of large-scale and low-cost refineries (which showed a longer lifespan) rather than increasing its current capacities at the established refineries like Vadinar. But the real concern for Essar was debt restructuring and they were concerned with the notion to derisk the business from the currency fluctuations. This was to be done by converting long-term debts into dollars. Essar was in the process of delisting from the market at that time. But the non-responding minority shareholders and revisions of the then existing delisting norms failed the delisting process. Under the “Optima Plus program” at Vadinar refinery, Essar was taking much low-investment short-gestation period-based initiatives which were aimed to ensure a gross $1 margin uplift per barrel improvement over a period of 2 years. (Margin was $7 per barrel in the year 2014). The installation of new refinery units moved the complexity of refinery from 6.1 to 11.8 on the Nelson Index (The higher the value, the better equipped to refine lower-quality crude) (see Exhibit 5.9: Stock price movement of Essar Oil). In the month of June 2015, Essar was again in news. This time the company was to sell 49% of the Ruia’s stake to Rosneft for Rs. 10,500 crores. The transaction was in progress in the initial months of 2015 and the valuation bids were on. The

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open offer for the other minority shareholders was expected to be floated as per the progress of the deal as per the SEBI takeover norms. The stock price movement (as depicted in Fig. 2) rose by 43% in the last four trading sessions and the companies value was estimated to be somewhere around Rs. 21,163 crores.3 Whereas the company’s total enterprise valuation in accordance with Bloomberg was around Rs. 37,897 crores. This was so as speculators saw an eminent transaction soon and Ruia’s stake would fall from 90% to a minority shareholder (see Exhibit 5.10). On the other side, Essar Oil was pushing4 for higher coal gas (CBM) production in the flagship Raniganj Coalfield. Though the investment of Rs. 4,000 crore was evident to the industry, the establishment was yet to provide feedstock to its dominant customer. Matix Fertilizers and Chemicals Limited, a company with the world’s largest ammonia and urea making stream plant. Essar’s investment in the CBM exploration and development (E&D) activities over time have been propelled as per the company’s requirement to fulfill the needs of the Matix Fertilizers and Chemical urea facility for the start of their commercial production. In April 2016, CEO of Essar Oil E&P Division stated that the company is capable to produce the 1 million standard cubic meter of CBM per day and would start their work in the Raniganj Field from the month of June 2016. Essar at the time was producing around 0.85 mmscmd gas, the maximum in Indian CBM industry yet the INR 5,000 crore urea plant required around 2.8 mmscmd of gas to function at full potential. The later has been on trial run since the last 3 years. It needed at least 1.3 mmscmd to function. The mitigation was underway still the company’s past records created doubts over prospects of the promise. The primary reason for this could be the countries’ lack of experience with CBM exploration and alongside lack of industry data. Most of the work Essar and GEECL are doing is as a pioneer in the Indian Industry and hence the downside is the failure in delivery at relevant stages. The company innovated to reduce land use and increase efficiency yet the challenges in geological terms and local environment keep on popping up. Market potential is huge, but to access that is a big challenge if one does a PESTEL analysis of the external factors. But the market sentiments were not captured positively by the analysts. Essar Oil had a debt burden of around Rs. 25,000 crore and the market expected that this selling of stake shall finally abate it. Yet the analysts believed that this was not possible. They expected that the promoters of the company will surely retain a large part of the deal and hence the balance sheet will remain stressed for a prolonged period. This bearish sentiment5 was further promoted by the uncertainties associated with the selling of existing holdings by shareholders or issues of fresh share or both in 3 http://www.business-standard.com/article/companies/russia-s-rosneft-to-supply-oil-to-essar-s-

refineries-114121100765_1.html. 4 http://www.business-standard.com/article/companies/essar-seeks-to-hedge-oil-risks-with-

russian-crude-115010701122_1.html. 5 http://www.business-standard.com/article/companies/ruias-to-sell-49-in-essar-oil-to-rosneft-for-

rs-10-500-cr-115061500684_1.html.

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case. Foreign companies sought Essar Oil as the only company to invest in as rest other was public sector companies and Reliance; the dominant private sector player was very well funded. Another threat was the decline in oil prices as they decreased the effective margins in the industry thus hampering the progress of the company. Finally, the deal was completed in the month of July 2015. Rosneft, under a nonbinding agreement, bought about 49% of the stake in Essar’s Vadinar refinery. The price was estimated to be $ 3.2 billion (Rs. 20,480 crore) as per considerations of Rosneft’s evaluation and interests of minority shareholders. Rosneft called the deal strategic in nature and associated the scale to be of significance for the relationship of Russia and India. Essar Oils’ stock rose but the investors kept guessing. Either the money had to flow to the Essar’s books or it the promoters might be selling the stake (so Essar Group gets the money) or both in the case as mentioned earlier. Also, missing details in deal maintained bearish sentiments for long-term investors; however, the situation was good for short-term investor profits. As per the company, the arrangement barred Essar Oil’s coalbed methane gas squares yet incorporated its 1,500 fuel pumps and the 20 million ton Vadinar refinery. The organization was setting up another 1,500 pumps the nation over. This was done to gain market share, volumes, and importantly land which could be monetized later. Meanwhile, the company aimed to have 10% of the market in fuel retailing. Under the exploration and production business, the firm planned to create 1.2 million standard cubic meters of gas every day (mscmd) from its Raniganj resource in the following couple of months and take it up to 2.5–3 mscmd and hoped to complete it by May 2016 as per the infrastructural investments and advancements. In November, major lending banks stressed upon the company to pay up its debts. A group of moneylenders, including ICICI Bank, Axis Bank, and Standard Chartered Bank, had requested that the Essar Group reimburse its credit, coming up short which the banks would consider selling down the loans to reduce their respective exposure in the Indian market. As SEBI granted the group over proposed delisting, the delisting price was determined to be Rs. 146.05, primarily based on FCCB regulations. The reverse book building offer was to be done in December to decide final exit offer. Finally, in December, Essar Oil completed the delisting for Rs. 3,745 crores to shareholders (itself being valued at Rs. 38,000 crores). This made this event as the largest payout for privatization of a publicly listed company in India. Meanwhile, Essar Oil’s debt after delisting is $4.5 billion with $3 billion dues to Iran for past oil purchases on Essar Oil books. Essar continued to explore options to resolve the debt crisis on Essar oil, but the other entities of Essar group like Essar Steel also were burdened with 36,303 crores in financial year 2015 and were facing pressure from Indian banks (which were under pressure to clear their NPAs) to clear the dues. The turnaround strategy was still in dark for Essar Oil and debts continued to rise for Essar Oil and Essar Steel. How Essar group would go ahead, remained a question?

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Exhibits

Exhibit 5.1 CBM production projection. Source Director General of hydrocarbons, Web site

Exhibit 5.2 Balance sheet “Essar Group”. Source Ace Equity: http://www.acekp.in/balance-sheet-new/100134

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Exhibit 5.2 (continued)

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Exhibit 5.3 Historic data of Brent crude oil international price fluctuation

Exhibit 5.4 Natural gas resources by category in India, End-2014 (bcm). Source IEA Database, BGR (2014)

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Exhibit 5.5 Natural gas production in India and gas resources developed in India. Source IEA Database

Exhibit 5.6 Statewise CBM deposit. Source Director General of hydrocarbons, Web site

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Exhibit 5.7 Adjacently sited Reliance Jamnagar refinery, Which can produce over 27 mmtpa. Source www.essar.com

Suppliers for Vadinar refinery of Essar Oil

34%

West Asia Domestic Suppliers

50%

South America

16%

Exhibit 5.8 Share of crude oil imports for EOL. Source www.essar.com

Exhibit 5.9 Stock price movement of Essar Oil. Source www.business-standard.com/article/ companies/compass-2-essar-oils-rosneft-deal-leaves-investors-guessing-115070900849_1.html

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Exhibit 5.10 Essar Oil’s share holding pattern as on March 2015. Source http://www.businessstandard.com/article/companies/compass-2-essar-oils-rosneft-deal-leaves-investors-guessing115070900849_1.html

References http://www.bloomberg.com/news/articles/2013-03-21/rosneft-completes-55-billion-acquisitionof-oil-producer-tnk-bp http://pib.nic.in/newsite/PrintRelease.aspx?relid=116602 http://indianexpress.com/article/business/business-others/debt-laden-essar-steel-likely-to-bringin-strategic-investor/ https://www.theguardian.com/business/2013/mar/21/rosneft-takes-over-tnk-bp http://www.bloomberg.com/news/articles/2013-03-21/rosneft-completes-55-billion-acquisitionof-oil-producer-tnk-bp http://www.business-standard.com/article/companies/russia-s-rosneft-to-supply-oil-to-essar-srefineries-114121100765_1.html http://www.business-standard.com/article/companies/essar-seeks-to-hedge-oil-risks-with-russiancrude-115010701122_1.html http://www.business-standard.com/article/companies/ruias-to-sell-49-in-essar-oil-to-rosneft-forrs-10-500-cr-115061500684_1.html

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http://www.business-standard.com/article/markets/essar-oil-scrip-jumps-10-as-ruias-seek-highervaluation-115061800748_1.html http://www.business-standard.com/article/pti-stories/essar-oil-to-ramp-up-coal-gas-production-inbengal-115053100112_1.html http://www.business-standard.com/article/companies/essar-oil-deal-or-not-analysts-remainbearish-115061900269_1.html http://www.business-standard.com/content/b2b-chemicals/russia-s-rosneft-inks-deal-to-buy-49stake-in-essar-oil-s-vadinar-refinery-115070900575_1.html http://www.thehindu.com/todays-paper/tp-business/rosneft-to-acquire-nearly-half-of-essar-oil/ article7405336.ece http://www.business-standard.com/article/companies/essar-oil-aims-to-have-10-market-share-infuel-retailing-115093000938_1.html http://www.business-standard.com/article/companies/banks-step-up-pressure-on-essar-group115110500069_1.html http://www.thehindu.com/todays-paper/tp-national/tp-mumbai/essar-oil-delists-in-rs-3745-crpayout/article8047801.ece http://www.essar.com/article.aspx?cont_id=qb06UaiUQgs= https://www.pwc.in/assets/pdfs/publications/2016/india-gas-sector-survey-2016.pdf http://www.ibef.org/industry/indian-oil-and-gas-industry-analysis-presentation http://indiainbusiness.nic.in/newdesign/index.php?param=industryservices_landing/345/1 http://www.dghindia.org/index.php/page?pageId=60&name=INDIA%E2%80%99S%20E% 20and%20P%20REGIME http://petroleum.nic.in/docs/resources.pdf http://www.dghindia.gov.in/index.php/page?pageId=63 http://www.hydrocarbons-technology.com/projects/essar/ http://www.thehindubusinessline.com/companies/essar-oil-assures-matix-fertiliser-ofcoalbedmethane-supply-from-june/article8528898.ece

Chapter 6

Federal Express

6.1 Introduction The tortoise and Achilles were all set to have a footrace. At the starting point, the tortoise challenged Achilles that he would win the race if he was given a small head start. The mightier and swifter Achilles laughed at this idea and promptly agreed, seeing no apparent threat to his win. But according to Zeno, the Greek philosopher, this was not a good move by Achilles. Zeno explains that by the time Achilles covers the head start distance, the tortoise would have moved a little further. By the time Achilles attempts to cover this extra distance, the tortoise would have moved further ahead. Apparently, Achilles would always have to cover a “little extra” distance to catch the tortoise and would never be able to overtake it. Zeno’s paradox, dating back to 450 BC, is a perfect example of Federal Express (FedEx) and DHL’s businesses in India. FedEx, since its inception, has crafted a new industry and maintained its dominance as a market leader worldwide (clearly Achilles). However, despite 20 long years of operations in India, the ambitious company has not been able to narrow the gap with DHL. Moreover, the rising threat of disruption in India’s logistics sector and ever-rising demands in e-commerce is fueling the complexity of problems in its India operations (see Exhibit 6.1).

6.2 FedEx’s History Federal Express was founded by Frederick W. Smith in 1971 with a dream of delivering couriers overnight to its customers. FedEx has played a pivotal role in crafting Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_6) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_6

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the overnight parcel delivery industry and maintained itself as a dominant player through efficient services and customer focus.

6.2.1 Conception to Implementation Frederick Smith was born in Mississippi on August 11, 1944. Smith spent his childhood in Memphis and left to attend Yale University in 1962. In 1965, Smith wrote a term paper for his economics class, which outlined the concept of a rapid parcel delivery system aimed toward time-sensitive packages. This idea did not impress his professor, and he received an average grade for his work. Smith gave little importance to the idea and enlisted for US Marine Corps after his graduation. His passion for flying took him to several missions in Southeast Asia. In 1969, after three years of dedicated service, Smith was discharged of his duties with several honors. Smith returned to the USA in 1971. His experience as a pilot in the military and passion for aircraft led him to buy an aircraft maintenance company called Arkansas Aviation Sales. Within a few months of operation, Smith faced the difficulty in getting packages and parts delivered within a day or two. The inefficiency in the existing delivery system was impacting his business leading to unprecedented delays in aircraft repairs. With the idea of his term paper in mind, Smith set out on a journey to redefine the parcel delivery business. As a result, the Federal Express was born. The name “Federal” was kept with an objective to grab customer’s attention and establish a sense of trust. The company was headquartered at Memphis, primarily for two reasons. Memphis was centrally located in the USA, and operations were rarely affected due to bad weather.

6.2.1.1

Initial Days

Federal Express first launched its operations on April 17, 1973 with a team size of 389 members. On the first night of operations, 186 packages were successfully delivered across US cities by 14 small Dassault Falcon aircrafts. Within a brief span of two years, the company established itself as a premier carrier of time-sensitive packages. The company started to become profitable in 1975. In the following years, the company witnessed increasing demand and felt the need for larger aircraft. FedEx became a prominent player in lobbying for air cargo deregulation. The legislation was passed in 1977, and FedEx acquired McDonnellDouglas DC-10 s and Boeing 727 s, which put them in the rapid growth trajectory.

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By 1980s, Federal Express was a well-established name in the industry, growing annually at a rate of 40%. In 1983, it proudly became the first American company to reach the $1 billion revenue mark within 10 years of operations with organic growth. With a long-term vision of sustained growth, Federal Express started diversifying into related businesses. In 1988, it acquired Caliber System Inc. and was rename to FedEx Corporation to renew its global brand image.

6.2.1.2

International Expansion

Since 1988, FedEx has been ambitious to expand globally and acquired several prominent names in logistics space like Tiger International Inc., Kinko’s Inc. Currently, FedEx has 4,800 operating facilities worldwide, with teams working 24 × 7 in 220 countries including the United Kingdom, China, Hungary, India, Mexico, Poland, Brazil, Africa, and North America. Recently, the strategic acquisition of TNT Express helped FedEx to enter European markets. According to industry estimates, FedEx connects more than 99% of world’s Gross Domestic Product (GDP).

6.3 The FedEx Business Model FedEx has emerged as a prominent global brand with revenues in excess of $60 billion in 2017. It provides a wide range of services (e-commerce, transportation, and business-related services) through wholly owned subsidiaries. The company employs around 400,000 people worldwide and has been named in the “100 Best Companies to Work For” in United States (rated by Fortune Magazine). FedEx values its employees and is focused on their safety with highest levels of professional and ethical standards for satisfaction of its customers.

6.3.1 FedEx Business Segments and Services FedEx Corporation operates through four business segments and services. The strategy to compete collectively and operate independently gives it an edge to the company over its competitors. (see Exhibit 6.2 FedEx Corporation: Businesses Segments and Exhibit 6.3 FedEx Corporation: Comparison of Revenue between Business Segments, 2017).

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FedEx Express

FedEx Express is the flagship service offered by FedEx, with a promise of its pioneering overnight delivery services. The company owns a fleet of 650 + modern fuel-efficient aircraft and more than 1.5 lakh ground vehicles. The packages are routed through information technology backed state-of-the-art sorting facilities called the “Superhubs,” which ensures efficient and accurate deliveries every single day. According to company reports, 5.5 million packages and 24 million pounds of freight are transported each day.

6.3.1.2

FedEx Ground

The ground services specialize in delivering small packages, especially in cities. The business is powered by a huge fleet of fuel-efficient ground vehicles. This business also includes supply chain offerings, where end-to-end supply chain management needs of businesses are efficiently handled by FedEx.

6.3.1.3

FedEx Freight

FedEx, through this service, has revolutionized the Less Than Truckload (LTL) freight sector. The company specializes in transporting goods for different haul lengths at a very optimal operational cost. The freight business also includes FedEx Custom Critical services, which has the expertise to transport time and environmentsensitive shipments like medical supplies.

6.3.1.4

FedEx Office

FedEx is diversifying in related service segments, by leveraging its core business expertise. Through this business, FedEx aims to provide sales, marketing, information technology, communications, customer service, technical support, and billing and collections services to its customers. FedEx has already built success stories of helping customers in event management with the highest levels of customer satisfaction. Despite a robust business model, which has been tested over decades, FedEx has been impacted by several external factors. These factors include macroeconomic factors, changes in the global economy, purchasing behavior of customers, fluctuations in demand and price, and cost patterns that change with the varying volume levels.

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6.4 Employee Focus One of the primary factors which differentiate FedEx from its competitors is the presence of a committed and motivated workforce. FedEx believes in giving freedom to its employees and supports them to grow in the direction of their liking. The “People—Service—Profit” (PSP) set the objectives and expectations of each employee upfront, and also provides details of what the individual can earn. These practices are backed by a transparent performance management and compensation system. The “Guaranteed Fair Treatment” process lets its workforce to take up any conflict that may arise between peers or with the management. People are encouraged to identify areas of weakness through the personal development programme (PDP), and take up courses from its online training library. The library is equipped with courses in varied areas, ranging from leadership to operations. Moreover, a test at the end of the training ensures that employees take it seriously and complete the training successfully. FedEx also gives its employees $3,000 per year as reimbursement toward education. The employee development programmes are not only limited to the United States but spans across its global centers. For example, in India, FedEx spends 40% of the company’s expenditure on such activities.

6.5 Express Industry in India The express industry in India has evolved significantly since its origin in the 1980s. The industry has expanded both in its reach and size. The small players of 1990s have scaled up operations to become large businesses at present. The industry has heavily invested in information technology and upgraded logistic services to handle rapidly growing volumes. The economic growth, followed by the boom in the e-commerce sector (trade growth) has been the driving factors for growth in the express industry. Additionally, technology-driven efficient last mile delivery model is further accelerating growth in this sector. The industry is a significant contributor to the national exchequer and an employment creator. However, the industry faces an imminent threat from any slowdown in the economic activity. The customers are offered integrated delivery services by players in this industry. The customer first needs to select the preferred service provider and book the services for package delivery. Once booked, the customer would be able to track the entire journey of the parcel through online tracking mechanisms. However, behind the scenes, the operations of this industry are extremely complex involving multiple time-sensitive activities and intermediaries.

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The industry was initially fragmented with a large number of players. Over the years, it has consolidated, with larger players including the Government Postal Services having 72% of market shares. The larger players have wide reach serving domestic as well as international locations. The medium sized players are focused on specific regions, and the smaller players limit their operations within cities or towns. The larger players are heavily invested in information technology to ensure timely delivery of consignments. These players own branches and service points in almost all cities and towns where the consignments are collected from customers. From these points, the packages are connected to hubs and distribution centers, where they are sorted and further connected, or delivered to the consignee within stipulated timelines. The consignment carried by the express service providers can be divided into two categories—documents and non-documents. Documents include letters, mailers, check books, etc. whereas non-documents refer to electronic items, parts, etc. The share of non-document-related business is showing rapid growth as compared to document business, as a consequence of the boom in the e-commerce sector. (see Exhibit 6.4 Shipment Profile—Share of Documents and Non-Documents) Moreover, the domestic destinations have a larger share over the international destinations. Within the domestic destinations, cities have the biggest share. In the international segment, United States, Europe, and the Middle East contribute to the majority of the destinations (see Exhibit 6.5 Shipment Profile by Destination). In terms of competition, the presence of a large number of players in this space gives bargaining power to the customers. Moreover, there is the threat of new entrants and disruptors due to lower initial investment to start a business. These risks are offset to an extent by lower threats of substitute and lesser bargaining power of suppliers. On the whole, all these factors contribute to a very high level of competition in the express delivery industry (see Exhibit 6.6 Competitive Forces in the Express Industry) The players offering better service quality and reach gain a competitive advantage.

6.6 FedEx’s Presence in India FedEx is operating in India since 1997. In the initial years, Prakash Air Freight (Pafex) was appointed as the Global Service Participant (GSP) for its India operations and provided logistics support within the country. The company also has ties with Jeena & Co., which provides nationwide customs broker capability. Currently, FedEx operates ten flights a week from Mumbai to Europe and Asia. FedEx has also started direct operations between India and China to decrease the transit time, and boost the relationship between the two countries. FedEx operates eight centers (up from four earlier) and has established branch offices in Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Coimbatore, and Ahmedabad. The company has also enhanced its custom clearance capabilities from one inbound gateway initially

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to eight inbound and outbound gateways at present. Additionally, it has extended support for its business customers through high-value goods clearance centers in Delhi, Mumbai, Chennai, Kolkata, Bangalore, Coimbatore, and Cochin.

6.7 Customized Services for India With plans to increase its footprint in India, FedEx has consistently tried to customize its offerings for its Indian customers. A few initiatives include customized packaging solutions for its clients from the fashion industry, e-documentation support for export-oriented rapidly growing sectors like pharmaceuticals, heavy engineering, jewelry, and automobile to name a few. FedEx has further increased destinations enhanced the speed of international connections from India. In an attempt to build close relationships with its clients, the company leverages its global experience and started sharing reports on industry forecasts. FedEx also introduced technological solutions (like Global Trade Manager and FedEx InSightTM ) in the Indian market, as part of its strategy to match Indian operations with International standards. The FedEx Global Trade Manager was an automated technological solution to help small and medium businesses with their paperwork. FedEx InSightTM was designed to help its business clients track inbound and outbound packages without the need to enter tracking numbers for each parcel. G-tracker was a hand-held computer with efficiently assisted in country-specific documentation, and provided information on the availability of services by country or location name or postal code in real time.

6.8 Growth Initiatives Over the years, FedEx has witnessed the rapid growth of the Indian logistics industry to $160 billion (with estimates to touch $215 billion by 2020). In an attempt to keep pace with the boom in the logistic sector, FedEx has tried to take several initiatives. The first one was Project Indigo (Indian Domestic and International Growth Opportunity) in early 2008. Through this project, the company wanted to bring about structural changes in its operations over the past 11 years. The project had plans for several initiatives including investments in infrastructure for tier 2 and tier 3 cities, expansion of ground logistics network to enhance the reach and reduces costs, the inclusion of Bangalore in the FedEx Global Network and increasing flights between India and other Asian countries to add capacity. However, Jacques Creeten, the then managing director of FedEx Express India did not find value in the proposition and the project was rejected within six months of its launch. According to Creeten, agency model was best suited for India. In this model, an external agency handles the last mile movement of the packages, without any investment by FedEx to set up the network.

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While FedEx management was debating over the best strategy for India, its competitor DHL made a perfect move by acquiring Blue Dart (former FedEx’s domestic partner) in 2004. Blue Dart helped DHL gain market dominance by giving access to more than 400 towns and villages through its expansive network. It also led to cost savings through common information technology platforms and shared infrastructure. At the same time, TNT strengthened its presence in India by acquiring Speed Age to gain a significant position in the domestic road transportation business.

6.9 Mergers and Acquisitions In the year 2007, FedEx was losing market share to its competitors and started exploring alternatives to increase its presence. At the same time, Rajan Manchanda, the promoter of Pafex, was looking for options to exit. FedEx feared that its delivery backbone in India might end up in the hands of its competitors. Moreover, considering the circumstances, it could not afford turbulence in the entire system, as faced during acquisition of Blue Dart by DHL a couple of years ago. In a frantic move, FedEx acquired Prakash Air Freight (Pafex) in 2007, but it proved to be a defensive step and did not aid in their expansion plans. In the wake of these developments, senior executives at FedEx India met in Mumbai in March 2010 to develop sound strategies for future sustenance. The committee decided to acquire AFL as a strategy to expand its network and close the gap with DHL. AFL already had a presence in more than 160 cities in India with around 50 warehouse facilities, along with a strong IT backbone and trained people. The acquisition process started in 2011 and the complete integration was completed by 2014. This strategic move helped supplement FedEx’s operations with an excellent ground infrastructure—a key to success for any logistic player. (see Exhibit 6.7 FedEx Corporation: Increase in Capacity of FedEx after Integration with AFL).

6.10 Transition from B2B to B2C FedEx as an integrator was operating nearly 31 flights in a week and serving approximately 220 countries across the globe showing their extensive international network. The introduction of the e-commerce industry in India made FedEx look at the Indian domestic market aggressively for logistics. The increase in consumption of products online through the e-commerce route opened up opportunities for FedEx to establish itself more firmly in the expanding market. FedEx entered India in 1997 and since the inception itself, it was focused on the B2B segment and its presence in the imports and exports in the international front. But the evolution and acceptance of Flipkart in

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the Indian market made them pay more attention to the domestic market, particularly in the C2C and B2C sectors, which were mostly concentrated in tier 2 and tier 3 cities. FedEx started transforming their business strategies and moved their focus more on individual shippers to understand the market requirements and offer services accordingly. The marketing orientation started moving toward strengthening their portfolio in the Indian market. FedEx was looking to become more domestic and started moving their brand presence beyond metros. This made them acquire two freight businesses from India: Prakash Air Freight (Pafex) in 2007 that got them into small parcel logistics market and Airfreight (AFL) and its subsidiary in 2011. The move seemed logical as the rise of e-commerce led to an increase in the freight traffic movement in the country. The acquisitions were necessary as rival DHL was constantly spending to upgrade their fleets and were expanding their warehouse presence in the country. Blue Dart Express was acquired by DHL in 2004 and even that raised concerns for FedEx with their strategies in place. The e-commerce landscape made the B2C market to grow closely at the rate of 30–40% every year. Having a strong logistics partner for the e-commerce players was emerging to be the real differentiator in the market and hence FedEx started developing their capabilities to serve the B2C market. Handling liquid cash in terms of availing cash on delivery option became the differentiating pointer between B2B and B2C and hence FedEx started focusing on building its strength in the cash remittance space. While B2B is a credit market but the B2C customers in the country were still hesitant in paying online and relied more on cash payments and cash settlements. With the introduction and maintenance of robust systems at the backend for domestic markets, the e-commerce sector became the fastest-growing segment for FedEx with 35–40% growth. The Indian market was reaching a maturity level wherein the businesses were looking for associations that are reliable, provide services but also get involved in cost cutting for their associate companies. FedEx has tried to stick with their Purple Promise philosophy of providing exemplary customer experience. They spend time and money in understanding and laying down the requirements of their customers and develop solutions accordingly. Outside-in approach is seen more popular here than the inside-out approach. In 2014, in terms of reach and presence, FedEx had expanded their coverage to over 19,000 postal codes in India with hub space and office capacity touching million square feet. They started offering solutions based on the segmentation of customers. The large customers with their complex needs are more solution oriented rather than just dealing with standard products whereas the small and medium customers are satisfied with the package delivery itself. FedEx implemented localized communication plan approach to reach out to the masses using Hindi in TVCs specifically addressing the Indian consumers. It started getting associated with the local festivals like Rakshabandhan among others, projecting it as flexible and local when it came to branding their space.

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6.11 India as Emerging Technology Hub With global technological leadership strategy in mind, FedEx is trying to leverage India’s IT solution development potential. It has created an 11 member technical team to develop cutting-edge solutions for its international operations. In the future, there are plans to merge the operations with its setup in Dubai. The company has also entered into strategic partnerships with Indian IT vendors like Mphasis based in Bangalore. A team of 300 dedicated software professionals is already developing software applications for its expanding global business.

6.12 Social Focus In 2017, FedEx launched a road safety programme called Indian Road Assessment Programme (IndiaRAP), as part of its CSR activities. This shows a growing commitment to FedEx toward the Indian market. The programme assesses the existing condition of roads in the country and aims toward reducing road accident deaths by improving the infrastructure. The company has already assessed 10,000 km of roads to keep up to its commitment. It has plans to invest 12,000 crore INR by 2020 to make this project a success.

6.13 Final Thoughts FedEx came with the correct mind-set and had linked three core elements to its mission in India: To establish itself as a carrier, employer, and neighbor of choice. But having set up operations in 1984 and direct presence since 1997, FedEx still has only 0.31% of its global market share here in India. (see Exhibit 6.8 FedEx Corporation: FedEx Market Share across the Globe and Exhibit 6.9 FedEx Corporation: Customers Leaving From and Migrating to FedEx since 2011) This has been a concern for the company going forward that has failed to leave its mark on the country. 67 current Web sites that have associations with FedEx and the number of Web sites getting added (130 in a month) and getting dropped (114 in a month) is also drastic. This talks about the instability seen in the market still after years of establishment. Among the logistic players in India, FedEx is ranked third after UPS (44.87%) and DHL (27.88%) with 21.47% of market share. With almost 73% with the market leaders, it would be tough for FedEx to strengthen its customer base in the region wherein it is constantly losing its customers (net) to UPS and DHL. FedEx would need to rethink its strategy in terms of network, additional services and come up with solutions that are logical and sustainable in today’s highly competitive market.

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Exhibits

FedEx Corporation Statistics FedEx Revenue 2017 FedEx Revenue 2016 FedEx Revenue 2015 Number of packages shipped annually by FedEx Total miles travelled each day by FedEx couriers (equivalent to 100 trips around earth) Number of countries and territories FedEx delivers to Number of full time FedEx employees Percent of shipped packages lost by FedEx Number of delivery vans in the FedEx fleet Number of airplanes in the FedEx fleet FedEx air fleet total daily lift capacity Total daily miles travelled by the FedEx air fleet Number of hybrid-electric vehicles in the FedEx fleet Number of electric vehicles in the FedEx fleet Amount of CO2 emission reduced each year Gallons of fuel saved each year

Data $60.30 billion $50.37 billion $47.45 billion 1.25 billion 2.5 million 220 3,00,000 0.55% 43,000 664 30 million pounds 5,00,000 365 43 3000 metric tons 3,00,000

Exhibit 6.1 FedEx Corporation: Data on FedEx Operations. Source http://investors.fedex.com

Exhibit 6.2 FedEx Corporation: Businesses Segments. Source https://www.ibef.org

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Exhibit 6.3 FedEx Corporation: Comparison of Revenue between Business Segments, 2017. Source https://www.ibef.org

Exhibit 6.4 Shipment Profile—Share of Documents and Non-Documents. Source https://www. ibef.org

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Exhibit 6.5 Shipment Profile by Destination. Source https://www.ibef.org

Exhibit 6.6 Competitive Forces in the Express Industry. Source http://www.investors.fedex.com

Parameter Postal Code Coverage Ground Transport Fleet Office & Hub Space Capacity

Before 4000 5000 0.3 million sq. ft.

After 19000 10000 1 million sq. ft.

Exhibit 6.7 FedEx Corporation: Increase in Capacity of FedEx after Integration with AFL. Source http://investors.fedex.com/company-overview/overview-of-company/default.aspx

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Exhibit 6.8 FedEx Corporation: FedEx Market Share across the Globe. Source https://trends. builtwith.com/shipping/FedEx/Market-Share

Exhibit 6.9 FedEx Corporation: Customers Leaving From and Migrating to FedEx since 2011. Source http://www.investors.fedex.com

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References FedEx market share and competitor movement (2018). Retrieved on 8 Mar 2018 from https://trends. builtwith.com/shipping/FedEx/Market-Share FedEx Express. Federal Express India. Retrieved on 1 Mar 2018 from https://www.ibef.org/ download/FederalExpress.pdf Ghosh A, Mishra A (2011). Forbes India. Retrieved on 3 Mar 2018 from http://www.forbesindia. com/article/big-bet/fedex-tries-to-catch-up-in-india/28192/1 Harsh & Himani. E-Commerce lets Fedex shift strategy from to B2B to B2C. Retrieved on 10 Mar 2018 from http://www.pitchonnet.com/blog/2012/11/14/e-commerce-lets-fedex-shiftstrategy-from-to-b2b-to-b2c Jeremy Hill (2017) UPS and FedEx: facing economic and policy risks, benefiting from industry tailwinds. Retrieved on 1 Feb 2018 from https://www.forbes.com/sites/jeremyhill/2017/ 03/24/ups-and-fedex-facing-economic-and-policy-risks-benefiting-from-industry-tailwinds/# 462e10962b7e Overview of company (2017). Retrieved on 1 Feb 2018 from http://investors.fedex.com/companyoverview/overview-of-company/default.aspx Sarah Halzack (2017) The shipping industry is poised for massive upheaval. Can FedEx weather the storm? Retrieved on 1 Feb 2018 from http://www.latimes.com/business/la-fi-fedex-shipping20161219-story.html Top competitors of Fedex in India (2018). Retrieved on 10 Mar 2018 from https://www.datanyze. com/market-share/logistics/India/fedex-market-share

Chapter 7

Google India

7.1 Introduction Larry Page and Sergey Brin wrote, “Google is not a conventional company and we will never become one”. Pichai Sundarajan, the CEO, Google Inc. shifted uncomfortably in his chair. He had just got a call from the head of Strategy and Operations informing him of Amazon surpassing Alphabet’s market cap for the first time ever, in the NASDAQ ratings. Google had lost its position to Amazon which was now the second most valued company in the world (Exhibit 7.1). He glanced haphazardly at the revered quote of Mr. Page and Mr. Brin flashing at him from his tabletop. He shifted his gaze slightly to the map of India stuck firmly on his target sheet. If he ever needed some inspiration, it was now.

7.1.1 The Initial Years The initial foray Google made in India was through its search engine in early 2003. The search engine supported English and used to show results spanning ten results per page. It quickly started identifying itself with the local Indian commune. Through Google doodles and its innovative search algorithms, Google made sure it always had that extra edge over its competitors. In the initial years, the stiffest competition Google had to make do came from Yahoo. With an array of personalized services of their own, Yahoo had their mailboxes and home pages customized for an Indian audience. MSN was the next preferred site by Indian users. Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_7) contains supplementary material, which is available to authorized users. © Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_7

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This forced Google to rethink its strategy and business model. Identifying India as a possible driver for future growth, the company preferred to use its technological superiority by passing its competition. It quickly added Hindi, Bengali, Telugu, Marathi, and Tamil as secondary languages on its platform. Google decided to take on the competition heads on by launching their own mail service, Gmail that made writing emails easier. Google also hosted its own social network platform Orkut which ate up the revenue share of its direct competitor, Yahoo messenger. Having started with about five employees in 2004, Google India grew to be one of the largest employee bases outside the USA with a count close to 1,700 employees in a span of five years. India had crossed more than 400 million Internet user marks and with every Indian using 4 GB data on average every month, Google identified India as the next big market (Exhibit 7.2).

7.1.2 The Core Values Google always believed in indulging in smaller speculative and impulsive markets as compared to the trending businesses. It always identified itself primarily as an information company. Its drive in India was in line with its vision of seeing the Internet as the world’s most powerful equalizer. Google always strongly abide by its belief that data should be brought to as many people as possible. Reckoning that much of India was still lacking in minimal infrastructure, Google focused on providing products that are fast and useful. This was aimed at the areas where the speed and connectivity are areas of concern. With the Internet not having penetrated much of the Indian landscape at its time of entry, India was the market Google could lay its roots in. Google has never as an organization, believed in incremental change. It always believed in revolutionizing the industry it is a part of. With a mission statement of making sure all the information in this world is organized and accessible to everyone, Google implemented the Google Chrome browser. The Chrome browser was an upgrade on the snail browser, Internet browser.

7.1.3 Revenue Models Revenue from various advertisement models supports Google (Exhibits 7.3 and 7.4). Google follows the pay per click model as well as the pay per convert model for earning money from firms willing to advertise their products on the Internet (Exhibit 7.5). Google currently follows the performance-based model as well as the brand advertising model for its operations.

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Google Chrome – A tailor made success story

The web browser was supposedly named “Chrome” to highlight the content half of the browser. It was added at a later stage, chosen from various other alternatives for a connotation of agility. As of today, Stat Counter estimates that around 66% of the web surfing population prefers to go online with Google’s customized solution, Google Chrome web browser. The market is estimated to be 56% divested in all platforms combined. This has further led to Google starting an array of products under the Chrome banner such as Chrome OS, Chrome boxes, and Chromium notebooks. Fig. 7.1 Google Chrome. Source Author

The performance-based model enables the company to connect users and the companies based on relevant advertising on the specific pages. Brand advertising includes Google’s commitment to creating awareness about a business’s products and services.

7.2 Game Plan A: Introduction of Google Chrome Google Chrome was released in 2008. It was developed first for Microsoft Windows and later ported to Mac OS and Linux. The first hints of a global release first surfaced in late 2004 when international newspapers started heralding the news that Google was hiring web developers in droves. During this period, the Web browser market had witnessed a gentle upheaval following the release of Mozilla Firefox 1.0. With a sleek, easy-to-use interface, the new player was aggressively attracting user base and quickly eating into the until then hallowed terrain of Internet Explorer which was facing security vulnerabilities. The Google CEO of that time, Eric Schmidt remained passive and maintained that the company had no intention of taking the players out in “bruising browser wars” as portrayed by the global media. Larry Page and Sergey Brin, however, had different ideas. They hired a few of Mozilla Firefox developers, to aid with the design of the conceptualized browser. Later that year, the browser was demonstrated live to Schmidt, and he admitted that it was so good that he is forced to rethink his position on the browser market. Also, see Fig. 7.1.

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7.2.1 Announcement The release was slated originally for September 3, 2008. A comic strip designed by Scott McCloud was distributed among journalists as well as bloggers to explain the stand-alone characteristics of the exciting new browser. The copies earmarked for Europe were sent early, and a German Blogger uploaded the scanned version of the 38 pager document online. This subsequently led to Google having to make an early release. The browser was released for Windows XP with a support for 43 languages as a beta version. The first stable update was launched on December 11, 2008.

7.2.2 Google Chrome: Early Adoption in India In India, the exponential increase in smartphone user base, as well as improving infrastructure, enabled the browser to reach peaks it could never reach globally. At this juncture, the Google board of directors realized that unlike other Western counterparts where mobile apps are the bridge between the user and the Internet, in India, it was the mobile browsers which played a similar role.

7.2.3 Competitor: The Firefox Story Mozilla Firefox was a free stand-alone browser made jointly by Mozilla Foundation with its subsidiary, Mozilla Corporation. It was introduced for Windows followed by late developments for MacOS and Linux. The highlight of the product was that it was developed on open-source web code and had a unique developer mix to alter its design and reach. It was designed in early 2002 under the title “Phoenix” by the developer community. Thanks to its speed and security, it was benchmarked above the then dominant Internet Explorer at Beta level testing. Following its release in late 2004, it scaled a staggering 60 million downloads in a period of nine months. The usage peak of the browser was attained in the end of 2009 with the release of version 3.5 which was later christened as the world’s most popular browser. As per statistics in 2014, Firefox had a billion users surfing the Web through its offering. Following a surge of mobile users, the company decided to take the plunge into the mobile space. Eventually, the mobile versions of the browser were released for Android and IOS.

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7.2.4 Fighting for the User Base The mobile app for Chrome was much in demand, and the download charts swelled up for Google in the playstore results. Nearly 80% of the user base in India preferred to connect to the Internet through their mobile devices. Further, Google capitalized on the smartphone revolution by pre-installing their pocket browser on the Android handsets sold in the Indian market. Google now governed 92% of the mobile phones used by the Indian populace. It was identified that it was the smartphone adoption that played a major role in Google capturing the browser market. As per current stats, the market share of the browser has increased to 29.27 from 13.45% just a year ago. This was in reflection to other browsers such as Opera losing user interest (Exhibit 7.6).

7.3 Game Plan B: Aligning with the Government and Catering to the Indian Customer Google was preoccupied with the idea of making the Indian customer base its own by now. It came up with various business models that were unique to the Indian customer. The company partnered with the Government in various schemes to endorse the goodwill of the people. It went one step ahead in stating its products as handcrafted for the Indian community and redesigned them to align with the popular needs and beliefs. This inner connect helped the company take further forward, its array of products in the Indian market.

7.3.1 Incredible India Project In the year 2013, Google tied up with Ministry of Tourism, Government of India for the promotion of tourism in India. A Google plus page was created, namely “Incredible India”, where the contest was conducted. The contest was to upload original pictures captured by the contestants who convey and portray the essence of India. There were no monetary rewards for the competition winners but a week-long tour of his/her favorite place was promised to the winner. The participants were not required to be an Indian citizen; anyone who is interested from anywhere in the world can participate. The main objective of this tie-up between the Google and Government of India was to promote tourism with advertisement help from Google.

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7.3.2 High-Speed Wi-Fi to Travelers Google India has collaborated with Indian railways and RailTel to provide free public Wi-fi facility to the travelers. The motive is to provide high-speed Internet to travelers in 400 railway stations all over the nation. By October 2017, they have achieved this over 200 plus railway stations in India with 7.7 million travelers accessing the Internet at the railway station. The target for the company is to provide free Internet facility at 400 major railway stations all over the country by the year 2018. I come here every day after school, to use the Wi-Fi. It has helped me watch Taekwondo training clips on YouTube. I got recently inducted into a Taekwondo national championship. I download martial arts related clips to my device to watch later—Ritik, Jammu.

7.3.3 Internet Saathi Google India is more socially responsible and sensible toward their vision and mission. There are very few internet users in rural India, in which women are merely utilizing the Internet for their betterment. Google India decided to bridge the gender gap and to provide awareness of the Internet among the women in the rural areas. Google in collaboration with Tata trusts launched the “Internet Saathi” initiative. In the year 2016, they provided Internet-enabled devices to the women in the rural area with basic skills to access the Internet. The objective is clear that to empower the women of villages to access the Internet and find information online about government policy and schemes, health, etc. By October 2017, they have achieved to train more than 12 million women through “Internet Saathi” initiative.

7.3.4 Training and Education Google wants to help India to become a leader in mobile app development by 2018 because according to Google there will be more than four million developers by 2018. But at the same time, many graduates and students lack the skills to build mobile applications. Google tied up a partnership with several universities in India and Udacity (Online platform for learning; for acquiring skills). Thus, Google boosts the engineering strength of India with world-class course for computer science students. The students will obtain the skills and eventually can opt for certification by giving an examination (For example, Associate android developer certification). So far, around five lakh developers have been trained.

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7.3.5 Diluting Language Barrier with Internet India has a huge collection of native languages. Google has noted that approximately 234 million Indians out of 410 million internet users access internet in their native languages (Source: A Study by KPMG in India and Google, May 2017). Keeping the facts in mind, Google emphasized to provide convenience to the users. Google Gboard and Google Translate are such examples for their efforts in keeping the language barrier in mind. Google Gboard provides a one-stop solution for users to type easily in their native language, it supports 22 languages so far. On the other hand, Google translate helps the user to understand the meaning of unknown language and for translation.

7.3.6 Project Loon Having already introduced this in the USA and New Zealand, Google India aims at providing network connectivity to various small villages pan India through balloons floating at distances of 20 km from the surface of the earth. The balloons provide Internet access through Wi-fi and have been designed to stay afloat for about 100 days. This is one of the major plans the company has in the pipeline for the Indian customers.

7.3.7 YouTube Go, Google Duo Having had owned a major chunk of its success in India to its mobile services, Google is intent on providing the Indian community with the best of experience. The company redesigned its flagship service YouTube to empower the Indian user with limited data to connect and accessibility, to stream videos effortlessly. The app provides a cheap and effective solution to the customer who wants to surf the Internet. Google Duo is an alternative to Skype. Google Duo allows users to have video conferences on unstable Internet connections with slow transfer rate.

7.4 Game Plan C: Unmatching Technology Adoption—An Indian Perspective During the past one decade, Google has made leaps on the technology front that is unmatched by its competitors. It has diversified its products and defined a niche place for itself in various key markets. From an Indian perspective, Google’s revolutionary driverless car is yet to make inroads. However, some of the technology amendments

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that the company has brought about which have left permanent etch in the timeline pertaining to the Indian industry and business are Google analytics, the pixel, and Nexus mobile series and Google Maps.

7.4.1 Google Analytics Google Analytics comes to the fray as one of the innovative services brought by Google. It helps to track and report Web site traffic. It was launched in November 2005 following the acquisition of Urchin. It was optimized in combination with Measure Map, a product from Adaptive Path which was also acquired by Google. Initially, a stand-alone application of Urchin under the label Urchin Web Analytics Software was sold to the public. High demand for the product forced Google to adopt a lottery-based invitation system for sign-ups. User required an invitation code to sign up. However, after August 2006, the services were opened to the public. This model has enabled Indian consumers and business to review their online marketing promotions by analyzing the conversion rate on their homepage. It also allows companies to keep a lid on parameters such as sales, views, and downloads. Google Analytics provides a dashboard data view for the novice user while an indepth analysis for businesses. It has allowed various Indian start-ups as well as conglomerates in segmenting and building up sales. With very few players offering the same services at this point, Google has managed to cement its position true to its technology capabilities. Currently, it also provides real-time dynamic analysis through its real-time analytics. Google Analytics provides Google Web site Optimizer to help the various Web sites to customize and adapt to their customer base.

7.4.2 Competitor—Taking the Fight to the Den (Statcounter) Statcounter remained the chief competitor for Google in this domain. Like Google Analytics, it also had a free base services kit. The statistics from the tool were used to determine the Web usage share. The statistics were based on hits in about 3 million Web sites which employed the tool for its analytics purposes. The stat which worked in Google’s favor and brought down Statcounter was the inability of the company to use artificially generated weightings to adjust the readings for sampling bias. This leads to constraints in usage and many Web sites preferring the Google services over those offered by Statcounter. This led to Google Web Analytics being utilized at a major rate, especially in India, where multiple businesses and entities depend solely on the trend results to establish their market base.

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7.4.3 Google Nexus and Google Pixel The Nexus was Google’s flagship Android model. Recognizing the untapped potential and the high demands, especially in the Indian and Chinese markets, Google ventured into the hardware space in joint ventures with Original Equipment Manufacturers (OEMs) such as Samsung, and HTC. The first phone that was rolled out in the series was “Nexus One”, in January 2010. It was made in collaboration with HTC. Multiple phones were released in the series with improved hardware and software capabilities. The last Nexus to hit the shelves was the successful Nexus 6P which was released on September 29, 2015. The series also had tablets and media players although they did not hit the same sales as the Nexus did. After 2016, Google launched no more Nexus products. Instead, they decided to come up with their own manufactured pieces under the brand “Pixel.” This allowed them to have total control over the development and design of the phone from end to end. In May 2017, Google completed the transition to the Pixel series by ending the sales of the Nexus player and rebranding the Nexus launcher to Pixel Launcher in allay with the shift.

7.4.4 Google Pixel—Redefining How India Looks at a Smart Phone The Google Pixel and the Pixel XL were first announced in a press conference on October 4, 2016. They were the first phones in the new rebranded series. On launch, the phones hosted features such as the Android Nougat operating system, a lifetime backup in Cloud, and the live technical support services. In India, they were available by pre-order through outlets such as Croma and Reliance Digital. E-commerce sites such as Flipkart also offered the phones for sale. The phone heralded mixed reviews with the verge remarking that they were the best Android phones money can buy. In late 2017, the Pixel 2 and the Pixel 2 XL were released in continuation with the lineage. The phones had the Android Oreo as the operating system and were in direct competition with flagship phones such as the iPhone 8 and the Samsung Galaxy S8. The cameras were improved, the specs a notch higher. The phones offered water resistance as an added incentive for prospective buyers. The Google team branded the Pixel 2 as “designed for you, the best of Google built in.”

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7.4.5 Google Maps—Redefining the Shortest Route for Every Indian One of the path-breaking apps that Google brought out ever was the Google Maps. Packed with a GPS, a user can do many activities such as finding places or live navigation. Discovering places like restaurants, cinema halls, and transport hubs becomes easy with this. Later with upgraded versions of the application, Google used the traffic data to provide users with the live traffic in the surroundings. Offline navigation and discovering places became simple and accessible when they introduced the option to download the map of the area which the user requires. This gave an advantage to the user in a way that user does not need to use his/her Internet data always and map can be used where Internet reachability is minimum. Nowadays, Google Maps are popular for use in transit navigation, photographs, and information about places. Users use the map to discover the place with reviews and ratings of the places. From an Indian perspective, the significance of the app lays in the fact that in a country as vast as India, the map provided a gateway solution for connecting people and making sure that the way of life was smooth and business run in an optimized manner. The map had landmarks and reviews of city hot spots as well as business hubs. Further, taxi aggregators like Ola and Uber used the app to enhance their offerings and simplify the Indian way of living.

7.5 Game Plan D—Overcoming Failures 7.5.1 Google Chromecast—Streaming Online Solution that Failed to Inspire Google Chromecast is a digital media player developed by Google. It was launched in the US market on July 24, 2013, for the price of $35. Nearly after one and a half year, the product was launched in the Indian market in 2014. It was priced 2,999 INR in the Indian market. Google revealed that 30 million units of Chromecast by mid-2016 since the launch. Google Chromecast was sold to Indian market through e-commerce platform; collaborating with Snapdeal. In India, Chromecast supported Youtube, EROS now, YuppTV, and Google Play Movies. For the promotion launches, Airtel and EROS offered some special subscription subsidy offers to the customers. Airtel offered 20 GB data per month up to three months. Google Chromecast 2 was launched in the Indian market in April 2016, at the cost of Rs. 3,399. This time it was available in both online and offline stores. Chromecast was considered doing profitable business in the west. On the other hand, the number of services in India is limited to cater the great experience to the Chromecast customers of India.

7.5 Game Plan D—Overcoming Failures

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7.5.2 Google Chromebooks A Chromebook is a Chrome-based OS laptop. The first Chromebooks manufactured by Samsung and Acer Inc. went on sale in June 2011. Google also came up with a desktop version known as Chromebox in 2012. They are sold directly from Google and from company’s retail partners. Schools constitute their largest customer partner. It failed to create an impact in the Indian market because of the requirement to be perpetually online in order to use the devices. It was not a product customized for a market like India. Google came back in the market in 2017 with Pixelbook. It is a thin, expensive, and well-built laptop which can be converted into a tablet by flipping the screen over. According to Matt Vokoun, the director of the product management for the Pixelbook, one of the reasons for the high cost is to keep the generation of students as customers. Google wanted to follow the same path which Apple used for sustaining its Mac business on students who use computers in school and wanted to keep using them while they graduated. Chromebooks are not meant for playing high-end games. The cost involved as well as the lack of infrastructure in providing constant connection is deterrents that keep the devices from being a success in India.

7.5.3 Google Goggles Google launched Google Goggles in 2009 to attempt to take over the traditional search methods which were either by typing or speaking. Google goggle is a visual search application which was compatible with Android phones initially but later introduced for iOS platforms too. The intent of this technology was to give users an edge against the traditional searching where inputs given for search were typing and speaking, but now the users can search by taking a photo. During the years 2009 and ’10, the technology was in its early stages but still showed better results in searching books, business cards, details of a painting, landmark information and translation of an unknown language it showed poor results while searching with the pictures of food, plants, animals, etc. Google Goggles has been downloaded 10 million to 50 million times so far from the Google playstore. Google stopped updating the application in the year 2014, the last update was on May 28, 2014. As Google mentioned its vision regarding this technology, they moved on to the next level of this application which incorporated AI in order to help the users to get more information about their surroundings in real time.

118 Fig. 7.2 Google—Amazon Tussle. Source Author

7 Google India

Google – Amazon Tussle Google and Amazon are involved in direct market rivalry in various product markets. From similar home speakers with integrated AI technology to the Hardware on offer, Google and Amazon have entered into a fight of mammoths. Having already won the fight over mobile phones, the two giants are now engaged in an ugly spat in the entertainment sector. With Amazon refusing to sell the Google products on its e-commerce site, the customer has been the bigger loser with Google deciding to pay Amazon back in the same coin by blocking access to YouTube on the Amazon fire stick.

7.6 Game Plan E—A March to the Future Google has tried to make inroads in the Indian smartphone market through its Pixel series. However, nearly 71% of the smartphones sold in India belonged to the sub—$150 section. With the Pixel phones being high-end devices marked up at the extreme price ranges, Google needs to find a new business strategy that will adhere to the Indian market. Again, despite India having the second largest number of Internet users, Internet penetration is still a matter of concern. Compared to 88% Internet penetration in the USA and 53% in China, the Indian Internet penetration stays at 34%. This is a barrier Google India has to overcome in order to promote its products further in the Indian market. There have been clouds of competition arriving from every industry threatening to bite into Google’s share of the market. Microsoft has launched Edge browser aiming to recapture the lost ground. Amazon has been threatening the company on the hardware sector through its Echo speakers, the phone sector using the Kindle devices, the services front with Amazon play, Amazon music, etc. (see Fig. 7.2).

7.6 Game Plan E—A March to the Future

119

7.6.1 Recent Investments Google has recently acquired a part of HTC’s smartphone operations for $1.1 billion. The added boost by the research and development team from HTC is augured to help Google strengthen its position in the smartphone market. Further, the Internet giant has also announced plans to open exclusive brick and mortar stores to increase the sales of its phones. They have hired Apple executives to spearhead the process and plan to sell products like Google Home Smart Speakers, Pixel Laptops, and Daydream Viwe Virtual reality headsets through these dedicated outlets.

7.7 Looking Forward It had taken him a lot of hard work to reach here. From the dusty classrooms of the IIT to the posh Silicon Valley, Sundar Pichai had come a long way. He recapped the decisions Mr. Page and Mr. Brin had always made when at the helm of the things. He closed his eyes and relaxed. Google will reposition with the aid of its mass market appeal and win back the forte that was lost.

7.8 Analysis (1) Google India has the vision statement of providing world’s Information at one click. The mission statement of the company is to organize all the world’s information and make it accessible and available to all. (2) Google started its journey in India with its search engine in 2003 and customized it for multiple Indian languages. Initially, it faced competition from Yahoo but owing to its innovative strategies, it had an edge over its competitors. (3) Google connected with the Indian Government on multiple projects to show their inclination toward betterment of Indian society. (4) Google came up with multiple technological innovations like Google Analytics and Google Maps which were further improved to cater to needs of its customers. (5) Not every product that was launched by Google is a success, it has come up with many products like Chromecast which were not a hit in the then market but they learned from their failures and stopped supporting services for those products on time. (6) Revenue is earned online chiefly through advertising activities promoted by Google through its Adwords program. (7) Google’s major competitor is Amazon, giving it stiff competition in the hardware and the software sectors.

120

7 Google India

Fig. 7.3 Growth graph—Google India. Source Bold360

(8) Google India’s customers include the smartphone retailers as well as the Indian consumer class consisting of students and office goers. The suppliers for Google India were initially companies like Samsung, LG, and HTC. The complimentary services available for the products and services catered by Google India include the apps made by various start-ups to enhance Android phone use among the community and the broadband enablers that helped Google India penetrate the market. The substitution services include the Firefox browser for Chrome and the Bing search engine instead of Google search. (9) Google has ventured into all the possible avenues and has always come with a strategy to make its mark in the market either by customizing the products/services or by utilizing the first mover advantage. (10) Google has recently shifted from first position to second position as the most valuable company in the world losing its position to Amazon. Now Pichai Sundarajan needs to contemplate what strategy they need to adopt now to win back their position (see Fig. 7.3).

Exhibits

121

Exhibits

Exhibit 7.1 Market capitalisation of Amazon, Apple and Alphabet for Year (2008–2017). Source Bloomberg

Search Engine Market Share in India February 2018 Baidu, 0.01%

Yahoo, 0.90%

DuckDuckGo, 0.03% Seznam, 0.01%

Bing, 1.39%

Google, 97.65%

Google

Bing

Yahoo

DuckDuckGo

Seznam

Baidu

Exhibit 7.2 Search engine market share in India (February 2018). Source Data Retrieved from Stat counter

122

7 Google India

REVENUE & EARNINGS OF ALPHABET INC (2004 - 2017) AMOUNT IN BN $ 110.86

EARNINGS

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

12.66

16.35

19.48

66 14.14

55.52 12.92

46.04 10.74

37.91 9.74

29.32 8.51

23.65 6.52

21.8 4.23

16.6 4.2

10.6 3.08

6.14 1.47

3.2 0.4

74.99

90.27

REVENUE

2017

Exhibit 7.3 Google’s revenue and earnings from 2004–2017. Source Alphabet’s financial statements 250

233.72

229.23 215.64

Revenue in billion US dollars

200

182.8 170.9 156.5

150 109.65

108.2

100 65.2 62.48 58.44

60.42

50

37.5

42.9

21.8

23.7

2008

2009

29.3

69.94

73.72 50.18

77.85 55.51

86.83 65.67

93.58 74.54

89.46 85.32

89.95

37.9

0 2010

2011

2012

Apple

Google

2013

2014

2015

2016

2017

Microsoft

Exhibit 7.4 Revenues of Apple, Microsoft and Google from 2008–2017. Source Statisa. Retrieved from: https://www.statista.com/statistics/234529/comparison-of-apple-and-google-revenues/

Exhibits Year

123 Advertising revenues

Advertising Non Non Revenue as % of advertising Advertising revenues revenue as % Total Revenue of Total Revenue

Total

2008

21.13

96.93 %

0.67

3.07 %

21.8

2009

22.89

96.79 %

0.76

3.21 %

23.65

2010

28.24

96.28 %

1.09

3.72 %

29.33

2011

36.53

96.39 %

1.37

3.61 %

37.9

2012

43.69

94.90 %

2.35

5.01 %

46.04

2013

50.58

91.05 %

4.97

8.95 %

55.55

2014

59.62

90.79 %

6.05

9.21 %

65.67

2015

67.39

90.41 %

7.15

9.59 %

74.54

2016

79.38

88.73 %

10.08

11.27 %

89.46

Exhibit 7.5 Advertising and Non-advertising revenues of Google segment for 2008–2016 (Amount in Billion $). Source Alphabet’s financial Statements

Browser Market Share in India February 2018

2.05% 3.91% 7.93% 1 35.72% 2.52% 45.34%

0.00%

5.00%

10.00%

15.00%

Samsung Internet

20.00% Firefox

25.00%

30.00%

35.00%

Opera

UC Browser

Safari

40.00%

45.00%

Chrome

Exhibit 7.6 Browser market share in India. Source Data retrieved from Statcounter

50.00%

124

7 Google India

References 10 Of Google’s Biggest Competitors (2016, Apr 19) Retrieved 22 Mar 2018, from http://eskify. com/10-googles-biggest-competitors/ Aggarwal V (2017, July 17) Google launches professional consulting services in India. Retrieved 22 Mar 2018, from https://www.thehindubusinessline.com/info-tech/google-launchesprofessional-consulting-services-in-india/article9773590.ece Akolawala T (2016, Aug 01) Google says sold 5 million Chromecast Dongles in Last 2 Months. Gadgets 360. Retrieved from https://gadgets.ndtv.com/tv/news/google-says-sold-5million-chromecast-dongles-in-last-2-months-867767 Alba A (2017, May 17) Google lens is a super enhanced Google goggles—Remember That? Vocativ. Retrieved from http://www.vocativ.com Ananth V (2014, Sept 30) The rise, fall and subsequent death of Orkut. Retrieved 22 Mar 2018, from http://www.livemint.com/Consumer/zAYIirsyDYC2ZVcNxGkXcJ/The-risefall-and-subsequent-death-of-Orkut.html Anwer J (2014, Aug 13) What is a Chromebook and why you should (or should not) buy it. Retrieved 22 Mar 2018, from https://www.indiatoday.in/technology/buying-guide/story/what-is-a-chromeand-why-you-should-or-should-not-buy-it-203804-2014-08-12 Bohn D (2017, Oct 04) Google’s Pixelbook is a stunning $1,000 laptop. Retrieved 22 Mar 2018, from https://www.theverge.com/2017/10/4/16405214/google-pixelbook-laptop-photosvideo-hands-on-pen Broum M (2010, Oct 05) Open your eyes: Google goggles now available on iPhone in Google Mobile App. Google mobile blog. Retrieved from http://Googlemobile.blogspot.in Cuthbertson A (2017, Oct 04) Can Google’s pixel 2 smartphone prove to be an iPhone killer? Retrieved 22 Mar 2018, from http://www.newsweek.com/iphone-killer-how-google-pixel-2compares-smartphone-rivals-677634 Google Nexus (2018, Mar 21) Retrieved 22 Mar 2018, from https://en.wikipedia.org/wiki/Google_ Nexus Firstpost (2017, Dec 28) Google Pixel 2 and Pixel 2 XL review: unbeatable camera makes you overlook the average design-Tech Reviews. Retrieved 22 Mar 2018, from http://www.firstpost.com/tech/reviews/google-pixel-2-and-pixel-2-xl-review-unbeatablecamera-makes-you-overlook-the-average-design-4229823.html Times of India (n.d.) Google Pixel sales have been low due to high price and tough competition. Retrieved 22 Mar 2018, from https://www.google.co.in/amp/s/m.timesofindia.com/companies/ google-pixel-sales-have-been-low-due-to-high-price-and-tough-competition/amp_articleshow/ 56746616.cms Google (2018) Google play. Retrieved from https://play.Google.com Google. India. Forward. Retrieved from https://forindia.withGoogle.com Hachman M, Mark MH (2013, Mar 21) 6 note-taking alternatives to Google keep. Retrieved 22 Mar 2018, from https://www.pcmag.com/feature/309501/6-note-taking-alternatives-to-google-keep Hartley M (2012, Nov 30) Google snaps up Waterloo startup BufferBox. Financial Post. Retrieved from http://business.financialpost.com/technology/google-snaps- up-waterloo-startup-bufferbox Is the Google-Facebook Duopoly Cracking? (2018, Mar 21) Retrieved 22 Mar 2018, from https:// finance.yahoo.com/news/google-facebook-duopoly-cracking-004600170.html Jakarta Post (n.d.) Google to stop supporting Nexus and Pixel devices. Retrieved 22 Mar 2018, from http://www.thejakartapost.com/life/2017/06/13/google-to-stop-supporting-nexusand-pixel-devices.html Jurevicius O (2018, Jan 20) Alphabet (Google) SWOT analysis 2018. Retrieved 22 Mar 2018, from https://www.strategicmanagementinsight.com/swot-analyses/google-swot-analysis.html Ladage R (2013, Sept 07) Incredible India Contest on Google Plus! Indiatimes. Retrieved from https://www.indiatimes.com

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Martonik A (2016, Aug 30) The end of Nexus: this year’s Google phones to forge new path. Retrieved 22 Mar 2018, from https://www.androidcentral.com/end-nexus-2016-google-phonesforge-new-path Moon M (2017, June 10) Google reveals when it’ll stop supporting Pixel and Nexus phones. Retrieved 22 Mar 2018, from https://www.engadget.com/2017/06/10/google-reveals-pixelnexus-end-of-life/ Moss C (2014, February 20) Google offered to buy WhatsApp for $10 billion before Facebook swooped in with more money. Retrieved 22 Mar 2018, from https://www.businessinsider.in/ Google-Offered-To-Buy-WhatsApp-For-10-Billion-Before-Facebook-Swooped-In-With-MoreMoney/articleshow/30737740.cms Palm L, Zhang J (2011, Jan 10) Google goggles gets faster, smarter and solves Sudoku. Google mobile blog. Retrieved from http://Googlemobile.blogspot.in Patkar M (2016, May 01) Google Chromecast 2 in India: who needs it, and what exactly does it offer? The Indian Express. Retrieved from http://indianexpress.com/article/technology/gadgets/ google-chromecast-2-india-review-specs-features-use-buy-apps-2778689/ Pierce D (2017, Oct 27) How Google goggles won, then lost, the camera-first future. Wired. Retrieved from https://www.wired.com Pixel (smartphone) (2018, Mar 21) Retrieved 22 Mar 2018, from https://en.wikipedia.org/wiki/ Pixel_(smartphone) Saxenal A (2014, Dec 09) Google Chromecast launched in India at Rs. 2,999. The Times of India. Retrieved from https://timesofindia.indiatimes.com/topic/TOI-Tech Slater-Robins M (2015, Dec 28) An ex-Google employee explains the biggest challenges facing the company in India—and how to fix them. Retrieved 22 Mar 2018, from https://www.businessinsider.in/An-ex-Google-employee-explains-the-biggest-challengesfacing-the-company-in-India-and-how-to-fix-them/articleshow/50354339.cms Upadhyay A (2017, Mar 01) 8 best alternative to Google Maps—classic old Map. Retrieved 22 Mar 2018, from http://www.igismap.com/8-best-alternative-to-google-maps-classic-old-map/ YouTube (2009, Dec 06) Google goggles [Video file]. Retrieved from https://www.youtube.com/ watch?v=Hhgfz0zPmH4

Chapter 8

Lemon Tree

8.1 Introduction In May 2004 when Patanjali Keswani opened the first hotel under Lemon Tree Hotel name, he would not have had foreseen the tremendous growth the company witnessed in the Indian market (Exhibit 8.1). In a period of just over a decade, Lemon Tree within a medium-priced segment of hotels has become the largest hotel chain in India. According to Horwath Report June 2017, it became the third largest hotel chain overall, regarding controlling interest in leased and owned rooms. In no time the presence of the hotels spread wide all across India from metro regions, including the Hyderabad, Bengaluru, Chennai, and NCR, to tier 1 and tier 2 cities such as Ahmedabad, Aurangabad, Chandigarh, Indore, Jaipur, and Pune. The operation of Lemon Tree Hotels extends across various value chain activities ranging from land acquisition to ownership, leasing of hotels, development, management, and marketing hotels. The hotels mainly fall into the category of self-owned and managed hotels. With the vision to become a largest and finest chain of resorts and hotels of India in mid-scale and budget segment, Lemon Tree Hotel (LTH) emerged as India’s fastestgrowing hotel company where the number of rooms grew at a rate of 43% from 2014 to 2018. The chain was growing rapidly. Indian setup comes with a lot of rules and regulations which, therefore, poses a lot of challenge to businesses across sectors. In April 2013—Keswani’s then 11 years of experience in the hospitality sector was of little help in dealing with the problems at the macroeconomic level. The issue was with the pending clearance on the operations in Premier Hotel and Red Fox located in Aerocity, New Delhi. The hotels were losing money.

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_8) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_8

127

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8 Lemon Tree

8.1.1 Initial Challenges During the years 2010–2012, the hotel industry was struggling with slow demand growth and high debts due to economic downturn effect of the 2008 crises. There was a huge pile of debts on hotels’ balance sheets. Except ITC, no Indian hotel company was putting in money. ITC had cash flowing in from other businesses. Years after a slowdown, the hotel chains starting restructuring their business. Oberoi Group of hotels started to sign more management contracts and moved away from spending its capital in the expansion process. Many other big players took this route. Lemon Tree was no different. Under the name of Carnation Hotels, Lemon Trees started taking hotels on lease and extended a hotel management arm to generate revenues. To deal with the rising land prices and other skyrocketing operational costs, Lemon Tree started investing in mid-market and budget category where reaching break-even point is relatively quick. Another way-out plan was to mixed model by building two hotels of different category in the same complex which helped in better utilization of workforce. In the first decade of twenty-first century, hospitality business was facing a lot of challenges like high land cost, complex taxation structure, and inadequate skilled manpower. Finding a suitable land was the biggest task of that time and proved to be the major factor slowing down the growth of Indian hotel industry.

8.1.2 New Challenges to Lemon Tree Hotels The industry paradigm is shifting from mere lodging to customized personal experience. The businesses are transforming into customer-driven models. To give exclusive experience to the customer, all big players are evolving and technology is playing an important role in the evolution. From the very first step of going to the Web site to book a room to the ordering of favorite food in dinner, everything is becoming frictionless. The customer gets everything at the tap of a thumb. Big giants like Taj, ITC, and Hyatt are evolving to techno-driven hospitality hubs. This builds pressure on the other peers—Lemon Tree Hotels. This pressure is pushing the chain of hotels to adopt new phenomenon of operations. This calls for heavy investments. At the time when LTH is expanding, this new mandate to stay competitive can make the management take tactical decisions in long-term strategy. In the budget hotel—Red Fox, new entrants like OYO, Zostel, etc., are starting to eat market shares in different tier cities. This change is inevitable and is bound to happen. The challenge always comes with opportunities. LTH has been giving in best to keep the Red Fox floating. Despite all these challenges, the growth prospects of the Indian hotel industry are promising and enormous. The sector has survived the tough times and is moving to an international standards era of untapped opportunities. This evolving business is creating an impact on the nation at large, and Lemon Tree chain of hotels is making a mark via its differentiated business.

8.2 Hospitality Business in India

129

8.2 Hospitality Business in India In recent years, the hotel industry in India has witnessed a growth which took after by a recessionary period. Beginning in 2004 till 2008, hotel in the nation saw a significant development in performance, substantial advancement in the scale of new lodging rooms, and establishing a general bullish approach toward the segment of financial specialists. This immediately turned with the beginning of the Global Financial Crises in 2008, quickly took after by concerns rising out of the residential political and economic atmosphere of the nation. From 2009 onward to end of 2014, in markets saw a decrease in both lodging occupancy and “average daily rate” (ADR), regardless of increasing demand at a rate of 7.8% in a similar period (Exhibit 8.2). There have been indications of recuperation from 2015 onward, with demand developing at a strong pace and supply increments abating. The business is presently stepping by step picking up certainty to lift ADRs and spotlight on driving general revenue per available room (RevPAR) development, with solid request levels supporting development. In 2016, the main eleven markets in India saw an occupancy increment of 3.0% which focuses Y-O-Y that is opposite from demand which is increasing by 8.5% and supply by 3.4%. While ADRs expanded by 2.6%, RevPAR developed by 7.6% Y-O-Y. The year 2016 has numerous credits to its execution. Not exclusively did the main 11 markets demonstrate a considerable increment in RevPAR execution alongside request continuing twofold digit development, RevPAR and demand developed at rates speedier than the supply out of the blue since 2008. This change is a huge takeoff from the previous years where the supply overhang eclipsed enhancements in the market, and the business is presently all around situated to develop. In general, hotels in India are categorized into four segments: resorts, budget hotels, heritage hotels, and luxury hotels. Resorts are located in the middle of the natural and scenic beauty of nature. They are generally situated in tourist places like beaches and hill station. They are places to enjoy with family or friends or a perfect spot for a honeymoon stay. Budget hotels are those kinds of hotels which resemble a home away from home; the main customers who these hotels cater to are from upper middle class and middle class. These hotels are also called economy class hotels or business hotels. These hotels have a modern infrastructure and facilities for a comfortable and pleasurable stay. Heritage hotels are mostly the old traditional townhouses called Haveli and mansions of princely states which have been turned to luxurious where customers get the essence of the rich cultural heritage of India and revel in royal delight in a traditional atmosphere. These hotels are mostly in the states of Madhya Pradesh, Rajasthan, Delhi, and Mysore. Luxury hotels are the hotels which are well equipped with all the modern worldclass infrastructures and facilities. They offer their customers a fine experience of lodging and dining. Their primary customers are an elite-class and upper-class executives.

130

8 Lemon Tree

8.3 History: Back in Days—The Rise of Lemon Tree Hotels In 2004, “Lemon Tree Hotel” was firstly opened in Gurugram, Haryana. In 2006, Maplewood (the investment arm of Warburg Pincus) was the major investor in the hostel. A major investment came from Maplewood (the investment arm of Warburg Pincus) in 2006. In 2008, another major investment from Citron came to the chain of hotels. In 2009, the company opened its first “Red Fox” hotel in Jaipur, Rajasthan. In 2010, “Lemon Tree Premier” was opened at the location of Leisure Valley in Gurugram. It was the third, most premium category hotel. In 2012, APG and the business of management hotels invested, through the subsidiary, carnation, commenced. Lemon Tree Hotel is the one among India’s fastest-growing hotel companies. The number of rooms grew at a rate of 43% from the year 2014–2017. Starting from Gurugram, the company started its hotels in Goa, Pune, and East Delhi fueled by the investments from Warburg Pincus investment in 2006. Goa was the first city to see the setting up of Red Fox Hotels. Then in the year 2008, Kotak Realty Fund and Shinsei Bank invested in the firm to expand its operations in Aurangabad, Ahmedabad, Indore, Alleppey, and Chennai. In 2011, a brand of Lemon Tree Premier was launched in Hyderabad and Bangalore. The next year itself in 2012, Carnation Hotels was promoted with the help of APG investment in Chandigarh. Lemon Tree Hotels have shown unprecedented growth in major Indian cities and are planning to expand further (Exhibit 8.3). The latest ongoing project of the company is the construction of 140 service apartments in Ahmedabad. The development consisted of 16 hotels and 1291 rooms in managed hotel segment. The management agreement and hotel operations are in place for few of the forthcoming hotels but the hotels are yet to start in Patna, Alwar, Corbett, Coimbatore, Siliguri, Jammu, Lucknow, Amritsar, and in eight more cities. The tourism and hospitality industry accounts for 7.5% of the nation’s GDP, with the development of the middle class, discretionary cash flow and an increase in the rise of purchasing power. According to a report by KPMG, India’s accommodation area is relied upon to develop at 16.1% CAGR and by 2022, it is expected to achieve Rs. 2,796.9 thousand crores. Chief Operating Officer, Lemon Tree, Mr. Sumant Jaidka in an interview said that they are very pleased to launch the mid-scale Lemon Tree Hotel brand in IT hub of Hyderabad. As it attracts business and leisure travelers throughout the year, managing director and chairman, Mr. Patanjali Keswani, Lemon Tree Group, also identified the key factors for the demand of mid-priced rooms which included urbanization, middle-class segment, high disposable income, and a growing economy. Further, the company has plans to scale up in Kolkata, Udaipur, and Mumbai.

8.4 The Indian Root Factor of Lemon Tree Hotels

131

8.4 The Indian Root Factor of Lemon Tree Hotels The members on the board Mr. Patu Keswani and Rattan Keswani brought more than sixty years of experience and competence in areas of managed and owned spaces. Having worked in the hotel industry, they bring rich hotel management experience with previous engagements with Taj and Oberoi Group of hotels, respectively. Lemon Tree Hotel Chain is a homegrown brand. It is first hospitality company of India to grow this fast. The management understands the consumer’s pulse—whether he is the value conscious mid-scale family man, the upscale, or polished business traveler. Their vision statement—“Lemon Tree Hotels shall be India’s largest and finest chain of upscale, mid-scale and budget hotels and resorts”—gives a clear picture of what the chain has to offer to different segments. The inception of this chain was driven by a refreshing concept of fresh, spirited, and youthfulness.

8.5 Positioning of the “Three Strong Brands” Lemon Tree operates under three brands to satisfy all needs of hotels across all levels: Red Fox (economy segment), Lemon Tree Hotels (mid-scale segment), and Lemon Tree Premier (upper mid-scale segment) (Exhibit 8.4).

8.5.1 Red Fox Red Fox is the third category in brands that welcomes guests with its refreshing décor and design, as well as hygienic rooms. These economical hotels delight the guests with unsurpassed value and reliable standards of safety. The facilities provided by Red Fox includes an efficient meeting room, hi-speed Wi-Fi, Cyber Kiosk, Clever Fox Café, a well-equipped gym, and laundry service. These hotels become the foremost choice for budget-conscious travelers. In this segment, there are 1,071 rooms across eight hotels.

8.5.2 Lemon Tree Hotels Lemon Tree Hotels are leisure and medium-segment business hotels which according to the company help customers uplift their mood after a long and tiresome day. It is named after the fruit lemon which symbolizes cool, fresh, and sparkles with enthusiasm. The hotel with bright and fresh interiors is designed to refresh the guests with spirited humor and atmosphere. It provides the customers the comfort along with its smart amenities in-room, fitness center, recreation bar, pool, vibrant café,

132

8 Lemon Tree

etc., at an unbeatable value. In this segment, there are 2,090 rooms across 24 hotels. The above two brands offer various state of the art facilities. They provide exciting dining options, including 24 × 7 Citrus Café that has an Indian and international menus. Hotels have their recreation bar—slounge, an award-winning Asian restaurant—Republic of Noodles. The hotels are well equipped with business travelers’ needs and include meeting rooms, video conferencing setup for teleworking.

8.5.3 Lemon Tree Premier The Lemon Tree Premier’s spacious and comfortable décor and furnishing drive the enthusiasm up a notch. It aims to elevate the experience of Lemon Tree hotels along with maintaining the same energy, freshness, and quirkiness for which that lemon tree is well known. It indulges with the upbeat traveler and style conscious customers with its customized services, fun experiences, premium in-room amenities, and awardwinning restaurants. In this segment, there are 1,128 rooms across eight hotels. One thing that remains constant across all the segments is customer-driven services. The value addition regarding happy customer plays a crucial role in repeating customer bookings (Exhibit 8.5).

8.6 Major Players in the Game—Competitors Major competitors of Lemon Tree Hotels are The Leela, ITC Hotels, Taj, and Oberoi Hotels and Resorts. Taj leads the pack with a maximum number of rooms (12,879), while Lemon Tree Hotels standing at the third position regarding the number of rooms (3,000+). All the competitors had self-owned and managed inventory of hotels. ITC Fortune has 40 hotels with 68 operational alliances in over 50 cities and provides quality accommodation in affordable price catering to business and leisure travelers. Ginger Hotels are a part of TATA Group which has 28 hotels all over the country and cater to the needs of the executive-level employee and regular business travelers. Courtyard Marriott owns 16 hotels in different locations of India. Enjoying high brand recognition, the business travelers are the major targets of the company. By standing in the league of heritage and international hotels, Lemon Tree Hotels own ~4% of total Indian branded hotel rooms; with a major presence in the high-end segment (Exhibits 8.6 and 8.7).

8.6.1 Competitive Advantage The chain made a loyal customer base by offering 60% of amenity that a five-star hotel would offer at a 50% rate. It also hired 450+ differently abled employees and allowed employees to keep ponytail. This unconventional style shocked many, but customers

8.6 Major Players in the Game—Competitors

133

loved it. Also, such strong and remarkable CSR initiatives have been successful in building a good image of the brand. Offering five-star luxuries at affordable price Lemon Tree Hotels has reset the market. This was possible because of the cut in average room size to 240 ft2 instead of conventional 320 ft2 . Similarly, rooms with built-in beds reduced the work of housekeeping as they do not have to clean under the beds and thus were able to clean at an average 22 rooms against the industry norms of 15 in an hour. Besides all this, it charged customers in cash with 10–15% surcharge on services like phone calls, fax, laundry, etc. This strategy kept the cash register ringing. This helped the chain to maintain average occupancy of Lemon Tree Hotels at 75% to the average market occupancy of 60%. Additionally, the Indian root factor amalgamated with the cultural experience helps the chain attract more Indian and international customers. The strong brand connects, and loyalty programs play a major role in repetitive bookings. The strong brand trio provides the differentiation advantage to the chain. Rahul Pandit, COO of Lemon tree, believes their hotels’ fresh, fun-spirited ambiance coupled with elegant interiors gives them an edge over their competitors.

8.7 Offer Rooms at Best Price—Pricing Strategy Lemon Tree Hotels give different offers to customers depending on different days, weekends, seasons, occasions, festivals, etc. They thrive on low-cost strategy for competitive advantage from their competitors. Lemon Tree Premium’s room price ranges from Rs. 5,500 to Rs. 7,500, Lemon Tree Hotels from Rs. 3,500 to Rs. 5,500, and Red Fox from Rs. 2,500 to Rs. 3,500. Among the three brands, Lemon Tree Premium uses differentiation as its strategy for advantage and the other two Lemon Tree Hotels, and Red Fox uses low cost as their competitive strategy. The mid-scale segment is the segment where this company holds the major part of the market share. It is like giving an experience of a five-star hotel at a lower cost. It has started giving cash back offers for different customers depending on the stay, time, and occasion like Early Bird, Weekend Vacation, Stay More Save More, Business Package, Advance Purchase, Suite Surprise, etc. Red Fox Hotels’ rooms are priced at a level that competes with new entrants like OYO, Zostel, Stayzilla, etc. The solo travelers, on-the-go travelers, couples, students—all these segments fall under this offering. Red Fox offers rooms at Rs. 999 for 8 AM–8 PM bookings.

8.7.1 Marketing Campaigns The company has emphasized not much on marketing campaigns and has very low visibility yet it has been able to establish itself as the third largest hotel chain in India. Not much of marketing campaigns have been done by the company. Since

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8 Lemon Tree

most of the customers are business persons and employees, it mainly depends on the mouth-to-mouth marketing of the company. It also organizes many corporate events and meetings for the corporates which serve as a platform to showcase the quality of the hotel in front of potential customers. It has very few ads on the online platform, and also the content in the company’s offices and booking Web site is very limited. Some major campaigns of the company are “Happy Song from Lemon Tree Red Fox Hotel” to show that the workers in the company are very happy “Happiness is us”, Flash Mob at Lemon Tree Premier Hyderabad by the employees, Silent National Anthem by employees of different hierarchy, Veer Campaigns which encourages employment of differently abled people.

8.8 Technology-Driven Hospitality Continuous technology-driven innovation at Lemon Tree Hotels has given them an edge over peers in the industry. The company has tied up with technology companies like Tata Communications, NEC, etc., to solve its business problem. Ajai Kumar, CIO of Lemon Tree Hotels, has established a strong relationship with Tata Communications as Lemon Tree’s technology strategic partner. Protecting the data and making the property safe and secure for the guests are imperative facility provided by any hospitality company. Lemon Tree goes one step ahead by implementing state of the art IT solutions.

8.8.1 NEC Facial Recognition Technology To understand the penetration of IT solutions in the business operations, consider Lemon Tree Premier, situated in the Aerocity Hospitality District. The hotel needed a surveillance and security framework. The high number of individuals going to any neighbor property amid the day made it extremely intense for the security workforce to watch everybody. Therefore, the reconnaissance of the 10-story, 81-room Lemon Tree Premier was perceived as a huge test as it was hard to track every one of that was occurring all through the property. Another test was to distinguish the arrangement that would be the best fit with the point-by-point command and recommended rules given by Indian security offices. NEC’s face acknowledgment arrangement intends to catch quick and exact facial pictures from live CCTV camera and attempts coordinating the caught appearances to the database at the backend continuously. Describing the project in detail, the Project Head, NEC India says that the strength of the face recognition technology employed in the hotel is its ability to capture and process poor-quality images. The highly compressed surveillance videos and images were taken through the camera can be processed and put into the categories defined by the hotel as “black-list” and “white-list.” The captured face is matched with all the facial templates in the

8.8 Technology-Driven Hospitality

135

database, and thus the usage of hiding apparel like cap, glasses or hats or the change in growth of facial hair is well recognized, and the person cannot hide his/her identity. Apart from security advantages, the technology provides the benefit of providing top-notch services to the “white-list” recognized people. For example, if a VIP is recognized, then the staff is notified immediately, and they provide the hospitality accordingly. The details of the customer visiting pop up in front of the hotel management and hence the workers can meet and greet them with their names and provide them with facilities according to the details they have about the guest.

8.8.2 Data Center and Cloud Services Lemon Tree Hotels had the task of developing a solution to meet its requirements for a centralized, remotely hosted server and storage system. It needed a telecommunications provider for dealing with its rapidly increasing IT infrastructure, including all IT hosting, Internet connectivity, storage, and security. To enable the staff to focus more on its core capabilities and work of providing an unmatched hospitality business, Lemon Tree Hotels gave the management of network and IT infrastructure to Tata Communications’ Managed Services Operation Centre (MSOC). Already, Lemon Tree Hotels had aided applications at every individual in the area. At present, however, the organization required to have a multi-level property application. To meet these needs, Tata Communications has established a concentrated and powerful system design arrangement. Tata Communications helped Lemon Tree scale up rapidly, what’s more, meet its extension design prerequisites, killing the need to maintain an enormous, in-house IT staff, and diminishing operational consumptions. As the hotel network keeps on extending crosswise over India, administration of Lemon Tree Hotels is keen on outsourcing extra IT administrations to Tata Communications, and investigating arrangements, for example, messaging and collaborative video conferencing—making it a perfect stay for corporate travelers.

8.8.3 One-Stop Shop Revamped Web site Internet Moguls, “the digital hospitality agency” has partnered with Lemon Tree Hotels to dispatch India’s quickest developing lodging network’s recently overhauled Web site. The Web site is fueled by utilizing a blend of developing and built-up advancements. With this dispatch, Lemon Tree Hotels aim to improve its visitor’s online experience. Features of the new Web site include live feeds to allow a guest to peruse live feed of the online networking channels of Lemon Tree Hotels on the Web site. The Web site is set to be more informative to draw in and advise visitors. Finely composed

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8 Lemon Tree

and directing goal-based Web journals will be presented as a unique area helping visitors design their business trips and additionally recreation breaks better. A guest on the Web site would have more noteworthy straightforwardness and data to settle on a choice. The new Web site engages him/her with a solitary window examination of all inns in a specific city, helping him/her advantageously pick the most loved in light of key parameters like the best accessible rate, the decision of room classification, the distance from railway station and airport. The user-friendly navigation which the Web site provides gives the users a better experience while making a booking. An optimized and lesser number of steps involved in browsing and then booking and a vivid view of the property being presented gives the users a seamless experience. Loyalty Program Membership Process has been made simpler with revamped and expanded functionalities. The joining of the “Smiles” program to get exclusive offers, exciting benefits, and bonus points is just a click away now. The revamped Web site had an enormous effect on the business of Lemon Tree Hotels. The results showed up in just 45 days of the launch of a new Web site with the average time spent on the Web site increasing from 5.50 to 11.40 min. This showed that the users were intrigued by the Web site and were exploring the new features and look. Within a very short span of time, the clicks on the booking engine grew by 216%. Talking about the tremendous increase in the notable metrics of the business, conversions increased by 39% and unique purchases increased by 61%. The number of room nights increased by an amazing 75%, and the online revenue grew by a good 20% (Exhibit 8.8).

8.9 Reward Programs—Staying in the Game Loyalty rewards’ program has become essential for the growth of any successful business. From airlines to e-commerce service providers and restaurants to hotels all have started offering a reward program. Consumers are having regular dealing with the business demand to be offered extra benefits to lure them into becoming more frequent. Lemon Tree offers “Lemon Tree Smiles” as its reward program. People of age 18 years and above have the option to become a member of this program and enjoy its privileges through obtaining points. Members of different tiers are offered 10–12 points on every Rupees 100 spent (net of taxes) on room tariff for their stay at the hotel or their partner hotels. Lemon Tree Smiles offer three tiers of membership according to points earned, viz. silver, gold, and platinum. Silver member is entitled to rewards including free room nights, free shopping vouchers, free Wi-Fi, flexible cancellation. Gold members are entitled to all rewards offered to silver members with the addition to bonus points earned, surprises, and also free nights for second guests. Similarly, the platinum members are even offered complimentary room upgrades, early check-in/late check-out features, free laundry services, and 48-h room guarantee among other rewards.

8.9 Reward Programs—Staying in the Game

137

Another regard program is “Lemon Tree Engage”—for partners. This helps the company establish strong connection and loyalty from corporate houses. The program is integrated into the Web site and offers the bookers a one-stop shop. The recurring accounts get redemptions in the form of hotel vouchers and shopper stop coupons. Currently, it manages a database of over 7,000 registered members.

8.10 Sustainability Plan—The 3P Lemon Tree as a company understands its responsibility toward the environment and the society, and so through its initiatives, it aims to achieve a healthy “triple bottom line,” viz. planet, people, and profit.

8.10.1 Planet Protection of the environment is highly taken care of by the management by taking steps to obtain efficiency in energy and water consumption. They have replaced LPG with a more environmentally friendly CNG and use eco-friendly building materials to support their initiatives. Their hotel buildings are built by Universal Design Concepts and Leadership in Energy and Environmental Design (LEED) Gold Standards. They plant trees and shrubs in the premises of the hotel. Their medium- to long-term goals aim at shifting toward wind and agro-power, using recycled water, heat pump for energy conservation, use of LED light fittings, among others. The company has a program by the name of Pooch Policy wherein every hotel adopts 2–3 stray dogs and raise them in the campus itself. They are fed with meals, given love and attention and also executive designation.

8.10.2 People Lemon Tree seems to give very high regards for the people associated with them as they have been awarded by the Great Places to Work Institute among the “Best Companies to Work For” from 2011 to 2017 consecutively. Also, it was ranked in the fourth position in the Top 100 Great Places to Work. They are regarded as one of the few equal opportunity employers as they actively invite people with disabilities. They are one of the largest employment providers for people with disabilities in India. They provide an equal opportunity to the people with disabilities to realize their full potential. The goal of Lemon Tree is to mainstream “Opportunity Deprived Indians” (ODIs) into its human resource. Opportunity Deprived Indians includes two components of people. First one is employees with disability that is a physical disability which

138

8 Lemon Tree

includes acid survivors (AS), low vision (LV), orthopedically handicapped (OH), visually impaired (VI), and speech and hearing impaired (SHI). The second one is intellectual disability which includes Down’s syndrome and autism, and people who are from the marginalized section, orphans/abandoned girls, economically/socially weak segment, individuals from economically weak families, widowed/destitute/divorced women, and many more. This shows their support to these people and their sense of responsibility toward society. As January 31, 2018, they have an approximately 21% representation of Indian deprived in some or other way. They have these people working in various departments across the hotel including housekeeping service, kitchen, food and beverage service, etc. They have a goal to grow this number substantially in the coming years.

8.10.3 Profit Lemon Tree has the financial objective of minimizing in cost structure both in development and operation of hotels to provide its investors with the best return on capital employed over the longer run. They have supported this objective by hiring consultants for developing their organizational finance (Exhibit 8.9).

8.11 A New Shift of Focus The Lemon Tree Hotel Company is shifting its focus from people traveling for business purposes to more leisure-oriented destinations as the Indians are willing to spend more money on leisure-based travel now and the market is expected to grow in upcoming years. The company is keeping in mind the estimate that an Indian domestic traveler will be taking an average of 3–4 leisure breaks in a year. Based on this, it is expanding in domestic tourist places like Siliguri, Jammu, Udaipur, Shimla, etc. In a recent interview, Vikramjit Singh, President of Lemon Tree Hotels, has said that the company will be coming up with a new hotel every alternate month. Talking about the industry environment, Singh has said that the hotels of the company have an average occupancy of 76% as compared to the national average of 61%. Lemon Tree Hotels culture is based on one simple equation which implies that the customer, management, investors are happy if employees are happy. In the hotel industry, employees are the face of the hotel and deal directly with the customers. So, Lemon Tree Hotels have mainly two sets of customers—the employees, served by management, and the guests, served by employees.

8.12 Changing the Game—Outlook for the Future

139

8.12 Changing the Game—Outlook for the Future Along with the expansion plans to open 28 hotels in the country and to tap the capital market, the company is all set to raise Rs. 1,000 crores via IPO. Private equity investor Warburg Pincus and other promoters plan to sell 19.6 crores shares or 24.9% stake as part of IPO. Doing this will help the company enhance visibility, brand image in the market and provide liquidity to the stakeholders. The company has earned numerous awards and accreditations for the quality it offers, the employment environment provided among many other fields (Exhibit 8.10). Chairman and Managing Director, Lemon Tree Hotels, Mr. Patanjali Keswani, said, “By 2020–21, as per predictions made by Horwath, there will be a complete shortage of branded hotels rooms and more so in the mid-market space. The Indian traveler is fast moving to a mid-market segment where he seeks quality and valuefor-money stay.” With this in consideration, the company is planning to add a new brand in resort space—Lemon Tree Resorts. Till date, Lemon Tree Hotels have been able to expand and build a brand that stands tall in the hotel business in India. How the company will grow and expand in the new IPO setup with ever-increasing competition makes Lemon Tree Hotels a definite lookout for investors.

Exhibits

12000 10000 8000 6000 4000 2000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Lemon Tree Hotel Owned

Lemon Tree Hotel Managed

Lemon Tree Premier Owned

Lemon Tree Premier Managed

Red Fox Hotel Owned

Total Number of Rooms

Exhibit 8.1 Growth since the inception. Source https://www.lemontreehotels.com

140 200 150 100 50 0

8 Lemon Tree

Supply and Demand of Hotel rooms across India

80 70 65 63 60 60 59 59 59 58 58 57 50 40 170 30 125 125 20 78 37 10 24 0 0 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 69

68

68

Supply

Demand

70

76

73

% Occupancy

Exhibit 8.2 Supply and demand in the hotel industry in India. Source www.ibef.org UpperMidscale Rooms (Hotels)

Midscale Rooms (Hotels)

Economy Rooms (Hotels)

Owned or leased Managed Rooms (Hotels) Rooms (Hotels)

OperaƟonal as of July, 2017

NCR

502 (4)

473 (5)

455 (3)

1,165 (10)

265 (2)

Bengaluru Chennai

188 (1) -

305 (2) 162 (2)

-

493 (3) 108 (1)

54 (1)

Hyderabad Pune

267 (1) -

190 (1) 124 (1)

121 (1) -

578 (3) 124 (1)

-

Ahmedabad

63 (1)

99 (1)

-

99 (1)

63 (1)

Goa Others

108 (1)

99 (2) 638 (10)

495 (4)

99 (2) 505 (6)

736 (9)

Total

1,128 (8)

2,090 (24)

1,071 (8)

3,171 (27)

1,118 (13)

736 (2) 142 (1) 84 (1) 199 (1) 331 (3) 1,492 (8)

921 (14) 1,291 (16)

Under Development as of July, 2017

Mumbai NCR Kolkata Hyderabad Pune Others Total

736 (2) 142 (1) 199 (1) 312 (3) 1,389 (7)

372 (2) 84 (1) 847 (13) 1,303 (16)

91 (1) 91 (1)

Exhibit 8.3 Geographical distribution in India. Source www.ibef.org

Exhibits

141

Brand Lemon Tree Hotels

Price Range USD 80-100 (INR 45005500)

Current Locations ● Ahmedabad (Navrangpura) ● Aurangabad (Chikalthana) ● Bangalore (Electronics City; Whitefield) ● Chandigarh (Industrial Area) ● Chennai (Guindy; anapakkam) ● Dehradun (Pacific Mall) ● Ghaziabad (East Delhi Mall) ● Goa (Candolim) ● Gurgaon (Sector 29; Udyog Vihar) ● Indore (R.N.T Marg) ● Kerala (Vembanad Lake) ● Pune (Hinjawadi) ● Vadodara (Sayajigunj)

Lemon Tree Premier

USD 100-150 (INR 55007500)

● Bangalore (St. John’s Road) ● Gurgaon (Leisure Valley, Sector 29) ● Hyderabad (HITEC City) ● Delhi Aerocity (Hospitality District) ● Jaipur (Bani Park) ● Ahmedabad (Khanpur Road)

Red Fox by Lemon Tree Hotels

USD 40-60 (INR 25003500)

Delhi (Mayur Vihar) ● Hyderabad (HITEC City) ● Jaipur (Jawahar Lal Nehru Marg) ● Delhi (Aerocity )

Exhibit 8.4 Price range and location of three brands of lemon tree hotels. Source https://www. lemontreehotels.com 3500

40

3000

35 30

2500

25

2000

20 1500 15 1000

10

500

5

0

0 2005-06

2006-07

2007-08

2008-09

2009-10

Number of rooms

2010-11

2011-12

Repeat (%)

Exhibit 8.5 Repeat customers. Source https://www.lemontreehotels.com

20012-13 20013-14

142

8 Lemon Tree

Total Number of Rooms Owned by Major Player - 2015

14000 12000 10000 8000 6000 4000 2000 0 Taj Group

ITC Hotels

Lemon Tree Hotels

Owned/Leased

Oberoi Group of Hotels

Managed

Leela

Total

Exhibit 8.6 Total number of hotels owned by major players—notable start years are: Taj Group—1903, ITC Hotels—1975, Lemon Tree Hotels—2004, Oberoi Group of Hotels—1949 and Leela Hotels—1981. Source www.equitymaster.com

(a) As of March 31, 2017 Rs. in million

As of March 31, 2016 Rs. in million

As of March 31, 2015 Rs. in million

As of March 31, 2014 Rs. in million

As of March 31, 2013 Rs. in million

Non-current assets Current assets

12,660.71 401.42

12,716.87 396.03

12,703.72 261.45

12,413.34 523.83

11,854.61 302.18

Liabilities

3,789.83

3,959.51

3,689.13

3,726.90

3,222.15

Revenue

2,237.65

1,945.47

2,242.02

1,947.84

1,453.82

Expense

1,587.62

1,483.96

1,558.14

1,362.60

1,239.42

Profit/Loss before taxes Total Profit/Loss

62.43

(159.44)

26.77

161.52

(231.84)

54.71

(162.81)

(9.54)

143.75

(207.51)

Exhibit 8.7 Comparison of financial growth of Lemon Tree Hotels with its competitors. a Lemon Tree Hotels, Source https://www.lemontreehotels.com. b Taj Hotels. c Oberoi Hotels. d Leela, Source https://www.moneycontrol.com/news/business/ipo/lemon-tree-to-raise-rs-1000crore-via-ipo-open-28-new-hotels-2531571.html

Exhibits

143

(b) As of March 31, 2017 Rs. in million 693.81

As of March 31, 2016 Rs. in million 696.19

As of March 31, 2015 Rs. in million 694.27

As of March 31, 2014 Rs. in million 623.59

As of March 31, 2013 Rs. in million 631.91

Current assets

44.29

36.03

32.79

43.25

39.85

Liabilities

589.71

607.53

632.05

550.66

552.01

Revenue

269.78

272.00

250.02

245.13

254.24

Expense

253.78

256.43

251.85

240.51

238.94

Profit/Loss before taxes Total Profit/Loss

18.64

15.56

(1.83)

8.73

13.60

10.38

8.42

(1.97)

4.98

8.78

As of March 31, 2017 Rs. in million 1,573.34

As of March 31, 2016 Rs. in million 1,499.4

As of March 31, 2015 Rs. in million 1,497.3

As of March 31, 2014 Rs. in million 1,559.8

As of March 31, 2013 Rs. in million 1,534.3

3,085.69

3,016.1

2,969.5

2,023.7

1,912.8

Liabilities

548.9

799.56

1,224.56

849.48

940.88

Revenue

948.96

1,323.72

761.06

705.86

742.50

Expense

472.83

665.44

334.48

295.11

298.80

Profit/Loss before taxes Total Profit/Loss

476.13

658.28

426.57

410.75

443.69

320.65

475.47

304.77

295.12

327.47

As of March 31, 2017 Rs. in million 4,540.02

As of March 31, 2016 Rs. in million 4,681.33

As of March 31, 2015 Rs. in million 5,561.35

As of March 31, 2014 Rs. in million 5,996.03

As of March 31, 2013 Rs. in million 6,046.18

193.00

191.63

158.83

199.00

217.78

Liabilities

4,738.73

4,962.52

5,828.26

6,285.10

6,351.59

Revenue

713.79

670.34

762.01

768.18

660.50

Expense

816.30

835.55

1,048.90

1,255.50

1,085.20

Profit/Loss before taxes Total Profit/Loss

(102.51)

(378.61)

(470.17)

(487.35)

(421.30)

(102.51)

(180.16)

(415.88)

(441.47)

(433.46)

Non-current assets

(c)

Non-current assets Current assets

(d)

Non-current assets Current assets

Exhibit 8.7 (continued)

144

8 Lemon Tree

Outcomes within 45 days of revamping the website Clicks to booking engine Average Ɵme spent E-commerce conversion rate Online Revenue Unique Purchases Bookings 0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

Exhibit 8.8 Impact of revamped Web site. Source https://www.lemontreehotels.com As of December As of March As of March As of March As of March As of March 31, 2017 31, 2017 31, 2016 31, 2015 31, 2014 31, 2013 Rs. in million Rs. in million Rs. in million Rs. in million Rs. in million Rs. in million Non-current 12,445.36 assets Current assets 778.42

12,660.71

12,716.87

12,703.72

12,413.34

11,854.61

401.42

396.03

261.45

523.83

302.18

Equity

9,512.49

9,272.30

9,153.39

9,276.04

9,210.27

8,934.64

Liabilities

3,711.29

3,789.83

3,959.51

3,689.13

3,726.90

3,222.15

Income

1,743.09

2,237.65

1,945.47

2,242.02

1,947.84

1,453.82

Expense

1,225.88

1,587.62

1,483.96

1,558.14

1,362.60

1,239.42

Profit/Loss before taxes Total Profit/Loss

154.48

62.43

(159.44)

26.77

161.52

(231.84)

125.98

54.71

(162.81)

(9.54)

143.75

(207.51)

Exhibit 8.9 Financial position of Lemon Tree Hotels. Source https://www.lemontreehotels.com

References

145

Year 2011

Awarded National award for the empowerment of persons with disabilities

2012

National award for the empowerment of persons with disabilities

2014

Hospitality Exemplary Practice award

2015

Asian Human Capital Award

2016

Ranked in the 9th position in the list of India’s best companies to work for National award for the empowerment of persons with disabilities

2016 2016 2016 2017 2017

2017

Best Company in India for workplace culture transformation The joint overall winner in the category of best accommodation for responsible employment Ranked 4th in the list of India’s Best Companies to Work for Awarded for being among the best in: (i) the special category of utilizing analytics to drive a great place of place of work (ii) the industry of hotels and resorts (iii) the special category of employer branding Ranked 19th in the category of the best large workplace in Asia

By Ministry of Social Justice and Empowerment, Government of India Ministry of Social Justice and Empowerment, Government of India Cornell University at the Cornell Hotel Research Summit Ministry of Manpower, Singapore and the Human Capital Leadership Institute Economic Times and the Great Place to Work Institute, India Ministry of Social Justice and Empowerment, Government of India Economic Times and the Great Place to Work Institute, India World Responsible Tourism Awards in World Travel Market, London Economic Times and the Great Place to Work Institute, India The Economic Times and the Great Place to Work Institute, India Great Place to Work Institute

Exhibit 8.10 Major awards among many others given to Lemon Tree Hotels. Source https://www. lemontreehotels.com

References Carnation Hotels—An Overview. https://www.lemontreehotels.com/factsheet/Carnation% 20Presentation%20for%20the%20Website.pdf Lemon Tree Hotels Website. https://www.lemontreehotels.com/about-us.aspx LTHL_ANNUAL_REPORT_2015-16_ Link LTHL_ANNUAL_REPORT_2016-17_ Link Tata Communications Lemon Tree Hotels Case Study. http://www.tatacommunications.com/sites/ default/files/CORP-LemonTree-CS-20160101.pdf NEC Lemon Tree Hotels Case Study. http://www.nec.com/en/case/lemontreehotels/ Money Control—LTH File for IPO. https://www.moneycontrol.com/news/business/ipo/lemon-treeto-raise-rs-1000-crore-via-ipo-open-28-new-hotels-2531571.html Business Today April 2013—Finding Elbow Room Article https://www.sebi.gov.in/sebi_data/attachdocs/oct-2017/1509179942020.pdf

Chapter 9

Marriott Hotels

9.1 Introduction “As domestic travel increases and Indian travelers continue to demand more sophistication in terms of both quality and experience, the company has significant opportunity to grow its brands across India,” said Mike Fulkerson, who is the Vice President of Brand and Marketing for Marriott International in the Asia-Pacific region, with a focus on premium and select brands in the new Marriott International portfolio, specifically in the Asia-Pacific regions. Today, India is the second largest market after China for Marriott Hotels. With more and more Indians traveling within India, there is a significant opportunity in India in the hospitality market segment, where it now leads as the largest hotel company after the acquisition of Starwood Hotels and Resorts. However, in the age of online aggregators and fast-changing consumer preferences, Marriott may still face many challenges while trying to maintain its lead in the hospitality industry in India.

9.2 History of Marriott Hotels 1927–1956 John Willard Marriott with his wife Alice and Hugh Colton, his business partner, founded Marriott (called A&W at that time) in Washington D.C., which was a root beer stand back in 1927. Later in the same year, they updated their menu with hot food items and first franchise was opened with the name of Hot Shoppes. In 1928, Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_9) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_9

147

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they opened additional two Hot Shoppes restaurants including the first-ever drive-in restaurant located in East Coast. They started catering services for in-flight passengers at the Hoover Airport in the South of Washington D.C., in the year 1937. In 1953, they went public by the name Hot Shoppes, Inc. 1957–1992 In 1957, Bill Marriott opened the world’s first motor hotel in Arlington, Virginia. In his first hotel, J.W. Marriott used to counsel every employee individually about their personal problems; he used to value his employees, informed them about the latest news and happenings, and provided them with excellent training. From here onward, the history of taking care of its employees started in Marriott Hotels. In 1969, Marriott went on to open its first international hotel in the city of Acapulco, Mexico. It partnered with SunLine to become the first-ever hotel company to enter the cruise business in 1972. Further, in 1972, J.W. Marriott Jr. was named the CEO of the company. In the year 1982, Marriott acquired Host International which was one of the leading service providers in the USA, to become the largest operator of food and beverages at airport terminals. In 1983, the first courtyard hotel was launched, specifically for business travelers, which was a moderate price segment hotel. J.W. Marriott Sr. passed away in 1985 which led to J.W. Marriott Jr. being elected as the chairman of the Board. In 1980s, Marriott started working on an innovative model that focused on “One Company, Many Brands” policies. It acquired Residence Inn in 1987 and also opened the Fairfield Inn chain to diversify its portfolio. 1993–1998 In the year 1993, Marriott Corporation divided into two different companies—Marriott International and Host Marriott Corporation. The company implemented MARSHA (Marriott’s Automatic Reservation System for Hotel Accommodations) in 1995 and was one of the first hotel companies to offer reservation online. In 1995, Marriott went on to acquire a 49% stake in The Ritz-Carlton Hotel Company which was a troubled chain at that time as it had a significant number of properties which were into losses. After being acquired by Marriott, thanks to the deep pockets of the company and in-house expertise of its own, Ritz-Carlton was able to expand into lucrative timeshare market. In 1997, William J. Shaw became the chief operating officer of Marriott International. It further acquired Renaissance Hotel Group, which doubled the Marriott’s presence worldwide. In 1997, it launched TownePlace Suites and SpringHill Suites in 1998. In 1998, it increased its ownership in Ritz-Carlton Company to 98%. 1999–2006 With the maturing of the US hotel industry, Marriott began expanding into countries with emerging economies. Marriott Hotels entered into the Indian market with Goa Marriott Resort in 1999. In the same year, it launched ExecuStay by Marriott. To ensure most comprehensive electronic procurement network, it entered into a joint venture with Hyatt and Club Corporation in 2000. In 2001, Marriott managed to be

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the preferred choice which is evident by its Marriott Rewards membership reaching the 16 million mark. In the coming years, bookings through Marriott.com increased by over 53% as compared to 2001. Gross bookings through Web site topped $1.8 billion in 2004. 2007–2017 In 2007, it joined hands with Nickelodeon to develop a hotel for fun-loving and adventure seeking travelers with the name Nickelodeon by Marriott. In 2013, the Fairfield brand was extended to the Asian region with its first hotel being opened in Bangalore, India. In 2016, it acquired Starwood for the US $12.2 billion, to become the largest chain of hotels in India. In 2017, Marriott introduced mobile check-in and check-out feature in 1,600 of its hotels worldwide. By the year-end, the service was available to around 6,000 hotels. Gross bookings on Marriott.com totaled about $19 billion and mobile bookings totaled around $4 billion in 2017. Exhibit 9.1 shows Marriott’s revenue and income for the year 2017.

9.3 Hospitality Industry in India The tourism and hospitality sector in India has been witnessing a healthy growth, accounting to almost 7.5% of the country’s GDP in the year 2017. The growing middle class and increasing disposable income are the main factors driving this growth. As per a report by KPMG, the expected growth rate for the hospitality industry in India is around 16.1% CAGR and it is estimated to reach around twenty hundred thousand crore Indian rupees by the end of 2022. The hospitality sector is a major job provider both directly and indirectly. The hospitality and tourism industry in India is one of the top ten sectors to attract foreign direct investment (FDI). As per the data made available by Department of Industrial Policy and Promotion (DIPP), it drew FDI worth of US$10.48 billion during the period April 2000—June 2017. Since it attracts the most FDI inflows, it is an important net foreign exchange earner for the Indian economy. The foreign exchange earnings of India have shown a 20.4% yearly growth to US$ 24.655 billion due to the foreign direct investment attracted by the hospitality sector. Indian hospitality industry has a huge growth potential, and even government is taking up initiatives to promote the hospitality industry like e-Visa scheme which is expected to double the flow of tourists in India. According to a study of Assocham and Yes Bank, this industry has the potential to expand by 2.5%. The international hotel chains currently have the market share of around 44% in India which is expected to increase up to 50% by 2022 with their increasing expansion and investment plans.

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9.4 Marriott India 9.4.1 Vision Marriott aspires to be the world number one in the hospitality industry. It aims to achieve the same through the creation of a wide portfolio of brands, hotels, and systems and deliver finest experiences to its guests so as to develop preference and loyalty for the brand and create the intent to return.

9.4.2 Journey of Marriott in India Marriott’s journey in India started in December 1999, when it first opened Goa Marriott Resort. With this, it was one among the few international hotel chains to captivate the opportunity in the rising hotel market of India. Taking advantage of the “first-mover” in the country, it subsequently went on to open three more hotels in the span of next three years, namely Renaissance, JW Marriott, and Marriott Executive Apartments in Mumbai. By the end of 2012 in India, it already launched 5 of its total 23 brands and was planning to bring at least two out of its total five-star brands. So far, the Marriott Group made a niche in the luxurious five-star to four-star hotel categories in India. However, they soon turned the story around by launching “Fairfield,” renamed from “Fairfield Inn,” which was its first budget brand in India. They positioned this brand in the midmarket scale with several add-ons such as conference halls, restaurants, and bars. In order to add 50 more hotels in the period from 2015 to 2016, it joined hands with big players in the Indian real estate business including big names like Viceroy Group, Rahejas, and Panchsheel, among others. Also, by the end of 2015, Marriott had made inroads into the secondary markets like Bhopal in Madhya Pradesh, Bilaspur in Chhattisgarh, to name a few and had moved beyond the conventional tier 1 and tier 2 city approach. Before 2016, Marriott and Starwood stood at number four and five, respectively, with Taj leading the market in India with approximately 13,200 rooms, but after the merger between Marriott and Starwood, it became the market leader with 13,500 rooms beating the Taj hotels. At the time of this acquisition, Arne M Sorenson, the President and CEO of Marriott International, stated that the revenue per available room (RevPAR) of Marriott was around 8% whereas the industry RevPAR stood at 0.8%. Together they now offer 13 different brands varying from premium to budget hotels like Ritz-Carlton, JW Marriott, Westin, Sheraton, etc. After the merger, they got huge properties to scale up their business and also launched “Shaadi by Marriott” in which they provide Indian Chefs to prepare food at destination weddings of Indians. Even the guests are recognizing the importance and benefits of this merger and joining the revamped loyalty programs.

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Marriott Hotels is expecting to increase its revenue two times from the Indian market over the next three years. According to Marriott’s Asia-Pacific president Craig Smith, a combination of management contracts and reinventing the existing properties will help them achieve this goal.

9.5 Competitors in Indian Market 9.5.1 Hyatt Hotels Jay Pritzker founded Hyatt in the year 1957 in the city of Los Angeles. For the next ten years, Jay along with his brother Donald worked together to make Hyatt a famous “North American Management and Hotel Ownership Company,” that went public in the year 1962. A separate public company Hyatt International was formed in 1968. Hyatt entered into India around 30 years back which makes it one of the oldest international hotel chains in India. The first hotel opened by Hyatt was Hyatt Regency Delhi. Hyatt has introduced many hotel brands in India in the past 30 years like Grand Hyatt, Park Hyatt, Hyatt, Hyatt Place, and Hyatt Regency. In India, Hyatt Hotels stands as the seventh largest hotel chain in terms of room inventory.

9.5.2 Taj Hotels and Resorts Taj Hotels started its operations in 1899 under Indian Hotels Company Limited and went on to open their first hotel in Mumbai in the year 1903 named Taj Mahal Palace. Taj Hotels has 98 hotels across 61 locations globally including countries in America, Europe, and Asia-Pacific. Taj Hotels is famous in India for its unparalleled fusion of Indian hospitality accompanied with modern luxury and world-class service.

9.5.3 The Oberoi Group The Oberoi Group was founded in 1934 in Kerala, India. It is present in six countries under two brand names: Oberoi and Trident. It is not only involved in the hotel industry but also has a presence in in-flight catering, airport restaurants, car rentals, project management, travel and tour services, etc. A distinctive feature for Oberoi Hotels and Resorts is their customer service. They provide personalized, attentive, and warm service. The Oberoi Group believes in the quality of service provided, and thus, “The Oberoi Centre of Learning and Development” was established in New Delhi in 1966. This learning center is a recognized institute in Asia which produces

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100 successful students each year. It is planning to open a luxury jungle resort near Gir National Park, Gujarat. The jungle resort is named Oberoi Gir and is expected to inaugurate in the last quarter of 2019.

9.5.4 Online Aggregators The major competitors for Marriott Hotels are the online aggregators like OYO and Airbnb. Airbnb has recently launched new rental categories for wealthier travelers, Airbnb Plus and Beyond by Airbnb. One million Indians have traveled using Airbnb, and thus, there is a great demand for personalized and exclusive luxury accommodation options. OYO has also launched OYO Townhouse to provide luxurious stay options to the travelers and positioned itself as friendly neighborhood option. The hotel industry is facing a stiff competition from these online aggregators as the international hotels generally do not have small-sized hotels, and thus, there is a scope which is being utilized by the online aggregators. As per Mr Navjit Ahluwalia, Senior Vice President, Hotel Development (South Asia), Marriott International, the fight between hotel operators and online travel aggregators (OTA) is the key reason for the Starwood acquisition. Backed by large funding, the OTAs are changing the way the hospitality industry operates. OTAs such as Airbnb, Expedia, and Booking on a global scale, whereas OYO Rooms, MakeMyTrip, Yatra, and Cleartrip in India on the domestic level, are giving the hotel chains a run for their money.

9.6 Growth Strategies in India 9.6.1 India as a Growth Market for Marriott India is one of the primary growth markets especially in Asia for Marriott as it is seen as a young start-up company as compared to the USA which is a matured cash cow. It is the third largest market for the brand with its rapidly growing travel industry both for family and business travelers especially with the emerging startup and entrepreneurial space, improved supply–demand dynamics and demographic dividend. Marriott is eyeing 100–150% growth in revenues in India post the Starwood acquisition to compete for head to head with Taj. It plans to grow not just through acquisition but also by expanding its pipeline. From the early 2000s to late 2015, it saw a shift in the customer base from 60:40 ratio of international and domestic travelers to 35:65. Thus, the domestic travelers have far bypassed the international customer base reflecting the success of brand awareness and penetration achieved in Indian travel and hospitality industry.

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Also, it looks at the Indian and Chinese markets as a demand creator for its US and European hotels through strong brand loyalty from outbound travelers.

9.6.2 Strategic Partnerships with Associates Marriott’s key associates include the Rahejas in Mumbai, the Chordias of Pune, the Salgaonkars for Goa hotels to name a few. As per AON Hewitt’s report on associate engagement, Marriott surpasses best-in-class benchmark of 78% and it has achieved 84% engagement, one of its key drivers of performance. It has been very selective in its deals with associates and has provided them with numerous opportunities to grow to their full potential leading to mutually benefitting partnerships and has enabled it to achieve a competitive advantage.

9.6.3 Co-opetition It has signed a joint-venture deal with a hotel investment fund Samhi Hotels for expansion of Fairfield in India. It has effectively collaborated with other food chains like Pizza Hut to improve its efficiency in operations and marketing and reap the benefits of synergies and also strengthened the brand of the partner in the alliance.

9.6.4 Cost Leadership Marriott credits its success to significant benefits in terms of costs attained through scale. The franchise model cuts down the cost of capital significantly and gives resistance against losses due to seasonality while ensuring consistent revenues from fees. It has integrated its cost savings in procurements, OTA commissions, and operations by constantly maintaining benchmarks and lowering loyalty costs. The management focuses on revenues and group intermediary savings places Marriott in an extremely advantageous position that it leverages against its competitors.

9.6.5 Franchise Model Lately, Marriott has heavily relied on the franchise model in India to achieve cost savings and overcome seasonality in industry. Marriott functions primarily as a managed model in India. A managed model is where the hotel chains run hotels, owned by developers, in return of an annual fee. The annual budget is approved by the hotel owners and Marriott has to manage everything from day-to-day operations,

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bookings to marketing. Marriott has always focused on establishing their brands first, and once the brand identity is established, it switches to a franchise model. Over the next 10 years, it aims to expand its franchise business and make it bigger than the managed business.

9.6.6 Brand Leadership Marriott’s journey from a root beer stand to a world-class hospitality service provider has been phenomenal, a lot owing to its strategic growth through one of the most well-balanced and diversified portfolios of brands. It currently has 13 brands in India with a unique spread across the budget, mid-scale, upper-scale, and boutique or ultraopulent luxury hotels to serve the varied needs of business and leisure travelers. It has the first-mover advantage in offering frequent traveler program rewards across multiple brands, in applying yield management principles to lodging and offering high-quality services in medium- to high-scale segment in India. It ensures that through its portfolio of brands, it can cater to the unique needs of each customer group and thus has the right product offered at the right price.

9.6.7 Brand Portfolio and Positioning Marriott was quick to predict the evolution of Indian Industry structure and hence adopted a broad differentiation strategy to provide unique traveler experiences to different classes of customers. It has chosen 13 of its 30 brands for India, including those of recently acquired Starwood hotels.

9.6.7.1

Luxury

JW Marriott is the flagship brand of the group and positioned as a quality-tier brand of its hotels. Currently opened in Jaipur is a 365-room sophisticated luxury hotel with an all-day dining international hotel called Okra. This was the 14th hotel in India opened in 2011. Ritz-Carlton is a premier luxury hotel brand that is positioned as a distinctive brand associated with prestige and pride for the travelers. Bangalore’s Ritz-Carlton, opened in 2013, is one of its most sophisticated hotels.

9.6.7.2

Upscale

Renaissance is an upscale, full-lodging service brand tailored to suit local flavors and cuisine, offering individuality targeting business travelers who are lifestyle-oriented.

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At present, two cities have an open-managed Renaissance Hotel. Each one has its own personality and local flavors and offers innovations like Navigator program to help guests discover and experience the soul of the neighborhood and evenings at Renaissance providing live music, art exhibits, and mixology demonstration.

9.6.7.3

Mid-scale

Marriott realized early on that there was a great need for Meetings, Incentives, Conferencing, and Exhibitions (MICE) hotels across the country. And hence, they started specifically focussing on the MICE and mid-segment hotels across India. Both the courtyard and Fairfield brands were in the moderate tier and targeted the new traveling Indian middle class. Fairfield offers affordable pricing for mid-tier cities and customers while at the same time maintaining consistent quality at a reasonable budget. The brand is doing extremely well in the Indian market, and a number of them are in pipeline especially in tier 2 and tier 3 cities like Indore, Belgaum, Kochi, Jodhpur, Lucknow, Surat, and Amritsar. Courtyard by Marriott that has its presence in 13 cities in India is designed as a Select Service Lodging for business travelers in the moderately priced segment.

9.6.8 Brand Power Marriott brands have a premium return on investment as compared to its competitors that helps it earn RevPAR significantly above industry standards. In 2000, Marriott launched a new, customer-centric marriott.com integrated with its information systems to provide its customers with customized offers and personalized service. Its automated salesforce system enables its sales team to capture more business across its hotel brands in India. After the launch of marriott.com in 2000, its sales generated through the platform nearly tripled while its system-wide sales increased roughly 12% from the previous year.

9.6.9 Brand Loyalty Studies show that Marriott’s brands are preferred by at least 2:1 over its closest competitors in India through its consistently high level of customer service, strong local partnerships with experienced and well-established associates, strong presence in India’s key cities, and its best-in-class loyalty and reward programs.

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9.7 Marriott International’s Acquisition of Starwood Hotels and Resorts Starwood was acquired by Marriott worldwide in a deal of US $13 billion in September 2016. Now, with around 1.1 million rooms across its 5,700 hotels in almost 110 countries globally and 14,700 rooms across its 83 hotels in India, Marriott became the largest hotel company not only in the global market but also in India. With this move, Marriott overtook the Taj Hotels, Resorts, and Palaces and changed the top order of India’s biggest hotel companies. Exhibit 9.2 shows the room inventories of the leading hotel chains in India. Exhibit 9.3 shows all the Marriott brands that are present in India post the Starwood acquisition. With expectations of adding around 15–20 new hotels every year, Marriott expects to reach the target of 200 hotels in the following five years. Exhibits 9.4 and 9.5 show the brand distribution of Marriott in India and brand composition of Marriott in Asia-Pacific, respectively. With the Starwood acquisition, Marriott also gained access to the Starwood Preferred Guest (SPG) loyalty program which is linked with its Marriott Rewards program. As the structure of both the programs was different, it did not collate them into one giant program with 100 million members. The ways in which the points are earned and redeemed in both the programs are not the same. For example, in SPG, the points can be redeemed against experiences while in the Marriott Rewards program, the points can be redeemed only against products. However, they expect to merge both the programs within the next two years after acquisition. Also, there is a difference between the Marriott and Starwood culture of operations. While Marriott is disciplined and process-oriented, Starwood was an innovative organization. Marriott follows a regimented policy when it comes to architecture, i.e., it follows a more disciplined and prototypical approach to the product. For example, all Fairfield by Marriott properties exhibits the same pattern of wood on the back of the reception desk. The color of the upholstery of the furniture is the same. On the contrary, Starwood was strong on innovation in design. For instance, Starwood’s Sheraton brand in different cities has different characters. Sheraton in Bangalore, Sheraton in Hyderabad, and the Maurya Sheraton in Delhi have individual identities. They are recognized for their high degree of individualities and not necessarily for their consistency in architecture. With the Starwood acquisition, Marriott’s rise to the top has left the other leading hotel chains in India unsettled. Some of the hotel chains facing competition from Marriott in India are the Taj Group, Oberoi Hotels, the Leela Group, and ITC Hotels.

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9.7.1 Starwood Hotels 9.7.1.1

Westin

This brand of Starwood brands itself as a super health and wellness center with its Westin Workout studios, SuperFoodsRx dishes, jogging happy hours, and heavenly beds. The brand is a substantial addition to Marriott’s existing chain since none of its hotels emphasizes health and fitness the way Westin does.

9.7.1.2

Sheraton

This brand is Starwood’s biggest brand and is especially important for the Indian Market as it is one among the No. 1 hospitality brands in Asia and has an incredible recognition in the region despite having an inconsistent presence in the USA.

9.7.1.3

Le Meridien

This is an upper upscale brand of Sheraton born in Paris. It seems to be in the category of the most underutilized brands across the industry which Marriott can improve leveraging on the brand’s distinct lobby concept with a café’-inspired ambience, high-impact music, and F&B experience and the bohemian feel appealing to the millennials.

9.8 Innovation and Continuous Improvement in Customer Service When Marriott entered India, it took them some time to understand that food is something very close to the hearts of the Indians and thus they changed their strategy to focus more on the local food taste. Marriott’s key strength lies in food and beverages, and it does an average of 15,000 covers at each courtyard every month. They strive to offer local cuisine so as to achieve last mile customization. For instance, it came up with an all-vegetarian restaurant in 2013 in Ahmedabad called Shakahari, which was a shift from its existing models and was done to cater to the Indian food culture. It then replicated the model in Pune, which was also a success story. Further, the chefs tour the city and neighboring states for several months before the launch of the restaurants to study the local cuisine. In 2017, it also added mobile check-in and check-out facilities across all its hotels and rolled out guestvoice system technology.

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9.8.1 Rewards Program Marriott’s Rewards program, a premier frequent traveler program that rewards points to its members for their stays at Marriott hotels, has nearly 110 million members and they represent close to half of the occupied rooms. As of 2015, it is the industry’s most preferred loyalty program and is one of its most effective marketing tools for creating a loyal customer base as a means of low-cost, high-impact source of revenue generation. Under the umbrella of “Loyalty Programs,” it runs Marriott Rewards, Ritz-Carlton rewards, and SPG in parallel allowing linking, elite status match and transfer of points among them. It continuously fine-tunes its rewards programs to maintain its dominant position with modification in terms and new credit card agreements. It does portfolio marketing and drives membership for its rewards program which provides some of these tangible benefits—Free Wi-Fi on every stay, 48-h special services, and other benefits exclusively for members, suit upgrades, discounts on foods and beverages, mobile check-ins, specialized access to its facilities like spa, gyms, pools, etc. Further, rewards program members get invites for JW private events and parties. Exhibit 9.6 shows the number of reward customers of Marriott across different Asia-Pacific countries as of 2017. “Indian travellers are inspired and influenced by global travel trends. Indian travellers prefer the confluence of tradition and modern which makes them stand out from other travellers today. Travel is becoming an instrument of discretionary expenditure, giving a major boost to luxury travel and stay. It is also being observed that people have started placing more significance on the overall experience rather than just paying a visit to the place.” as quoted by Mr Mike Fulkerson while being interviewed by Business World in 2017. Marriott Group has seen excellent growth in India in terms of their loyalty base. Many of the Indians traveling within the country as well as overseas prefer to stay with them.

9.9 Future of Marriott Hotels India Currently, Marriott has 84 hotels operating in India under its 15 brands and plans to expand it to 100 properties by 2018. They are bringing in more brands under luxury and premium segments in metropolitan, tier 2 and tier 3 cities like Vishakhapatnam, Coimbatore, Jodhpur, Srinagar, etc. Marriott Hotels India already has 80 hotels in the pipeline to be launched in the coming 5 years. The target customer is not only the international travelers but the Indians who are traveling within India for business or other purposes, more they travel, more revenue the company will generate. Also, when these travelers travel outside India, they can stay with Marriott worldwide. Betting big on the revival in leisure spending by domestic tourists and increased business travels in India, global hotel chain Marriott International hopes to extend its

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chain in India by including 20 more properties under its brand from the current 98 hotels in the following one year. Internationally, Marriott is planning to triple their presence by 2020 in Europe. This is a part of Marriott’s global growth strategy. Marriott is very strict about its sustainability measures; it has green sustainability program called “Soul to Preserve” under which they try to reduce the consumption of fuel and water in their hotels. Apart from this, they also have various “Leadership in Energy and Environmental Design (LEED)” programs. Lately, Marriott International conceived the idea of a new brand representing a List of Boutique Luxury hotels called the ‘EDITION’ located in the world’s gateway cities wherein each property is designed to give guests a curetted taste of the local city and personalized service featuring the best food and drinks, world-class entertainment and service. It already has four open properties and is planning to expand to India in Gurgaon in collaboration with The Hero Group for which the agreement has already been entered into. Marriott has a huge number of properties, and its target is to expand and increase income by capping their cost of each room. The parameter for the measuring the execution among the similar properties is RevPAR by dividing the total number of room deals by the total number of room evenings available to the visitors for that particular period. Marriott endeavors to keep on cutting expenditure and customer care center around client as well as worker fulfillment with a specific end goal to hold business. “The reality is that size does matter,” said Mr. Govil. Marriott seems to be betting big on size and scale to dominate the market.

Exhibits

Exhibit 9.1 Financial information as per Annual Report of Marriott International for the year 2017. Source http://www.marriott.com

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Hotel Brands Marriott-Starwood Taj Hotels Resorts and Palaces Carlson Rezidor Hotel Group ITC Hotels Accor Hotels

Room Inventory 14,700 13,600 8,500 8,000 7,500

Exhibit 9.2 Room inventory of Top 5 hotel brands in India as of 2017. Source View from the Top, retrieved from https://www.businesstoday.in/magazine/features/view-from-thetop/story/ 256080.html accessed on 20th March 2018

Luxury Hotels St. Regis The Luxury Collection Ritz Carlton JW Marriott W Upscale Renaissance Hotels Marriott Hotels Westin Sheraton Le Meridien Marriott Executive Apartments

1 11 1 8 1

2 7 6 4 9 1

Exhibit 9.3 Marriott Brand Portfolio as of 2017. Source View from the Top, retrieved from https://www.businesstoday.in/magazine/features/view-from-thetop/story/256080.html accessed on 20th March 2018

Exhibits

Exhibit 9.4 Broadbrand distribution in India. Source http://www.marriott.com

Exhibit 9.5 Broadbrand distribution in Asia-Pacific. Source http://www.marriott.com

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38

In

40 35 30 25 20 15 10 5 0

19 9

12

11 6

5

Exhibit 9.6 Number of reward customers of Marriott in Asia-Pacific countries as of 2017. Source http://www.marriott.com/marriott/aboutmarriott.mi

References About Marriott International—Find Your World (2018) Retrieved from http://www.marriott.com/ marriott/aboutmarriott.mi. Accessed on 30-03-2018 India among top Growth Markets for Marriott Hotels (2016) The economic times. Retrieved from https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/india-amongtop-growth-markets-for-marriott-hotels/articleshow/51852136.cms. Accessed on 30-03-2018 Marriott to Operate 100 Hotels in India by Year End (2017) Forbes India. Retrieved from http://www.forbesindia.com/article/special/marriott-to-operate-100-hotels-in-india-by-yearend/46107/1. Accessed on 30-03-2018 Marriott dethrones Taj as India’s No. 1 Hotel Chain (2016) The Times of India. Retrieved from https://timesofindia.indiatimes.com/business/india-business/Marriott-dethronesTaj-as-Indias-No-1-hotel-chain/articleshow/54491516.cms. Accessed on 30-03-2018 The Marriott Game Plan (2011) The Hindu BusinessLine. Retrieved from https://www. thehindubusinessline.com/catalyst/The-Marriott-game-plan/article20307750.ece. Accessed on 30-03-2018

Chapter 10

National Stock Exchange of India

10.1 Introduction After being part of the financial sector during the 2008 global crisis, Vikram Limaye is not new in handling crisis and undertook the most challenging project of his career to take the top job at the National Stock Exchange (NSE). The NSE is one of the leading stock exchanges in India and 11th largest stock exchange in the world by market capitalization. NSE was founded in 1992 as a demutualized electronic exchange and is classified as the largest stock exchange in India in terms of daily sales, total sales, and average equity on the basis of annual reports by Sebi. Limaye took the position of CEO and MD Exchange in July 2017 when his predecessor Chitra Ramakrishna left the organization a year before her term was to be completed, and Limaye became the first person to head the exchange from outside the founding party. Exhibit 10.1 summarizes NSE’s financial performance 2012–2017. The country’s largest stock exchange has been in a precarious situation for over two years now. The main issues NSE is facing at present are allegations of unfair access to certain brokers at its co-location facility that it is battling with SEBI since 2015. Headlines in the press have begun to express crisis in the exchange: “Challenges Ahead as Limaye takes charge at NSE.” Many important things like IPOs and other new products have been halted because of the conflict. “Everything depends upon how quickly NSE is able to settle the pending regulatory issues”, said a senior executive at NSE, adding that a lot of shareholders were beginning to lose patience. While Limaye is expected to turn the situation around quickly, it will not be easy for someone who has no experience working for an exchange, to head the exchange since its inception in 1992, particularly at a time when employee morale is low due to an increase in scrutiny amid various internal and external audits. Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_10) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_10

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10.2 World Stock Exchange Industry Around the world, trade between countries has become highly interlinked with the presence and stable working of various stock/securities exchanges. There are about 60 stock exchanges in the world with only 16 being in the $1 trillion clubs. These major exchanges greatly influence the trade dynamics of the world. Unusual fluctuations in one can trigger worldwide instability as they are highly linked. Following are the most important and reputed stock exchanges in the world: New York Stock Exchange (NYSE) is located in Wall Street, New York. It is the largest stock exchange in the world with a market capitalization of US $19.3 trillion. NASDAQ Stock Exchange (NASDAQ) is also located in the New York, USA. It is the second largest stock exchange with a market capitalization of US $7 trillion. Tokyo Stock Exchange (TSE), headquartered in Tokyo, is the biggest stock exchange in Asia and has a market capitalization of US $4.03 trillion. London Stock Exchange (LSE) is the largest in Europe and third largest in the world with the US $6.06 trillion of market capitalization. Euronext is a cross-country stock exchange of Europe present in many major cities, with a market capitalization of US $3.7 trillion. NSE India is not far behind these big players that dominate the world markets. It is the 11th largest stock exchange in the world and has a market capitalization of US $1.43 trillion. These are giant, globally networked, and organized marketplaces where money moves back and forth every day. The trade volume for a year is more than the entire value of goods and services in the global economy. Hence, one must also be aware of the big risks involved with such interlinkages. A crisis in one place can spread quickly to other parts of the world, as evident from the financial crisis in 2007–2008. The crisis originated in the USA but quickly spread and deteriorated economic conditions around the world as all the other exchanges also collapsed.

10.3 Most Influential Investors in NSE India Rakesh Jhunjhunwala, founder of Rare Enterprises, is one of the top investors. His top holdings include Titan, Lupin, and CRISIL. He is known as the Warren Buffett of India. Ramesh Damani, founder of Ramesh S Damani Finance Pvt. Ltd., has holdings in Infosys, TCS, BEL, and BEML. Radhakishan Damani, investor from Avenue Supermarket, has top investments in DMart, VST Industries, and Blue Dart Express. Parag Parikh, chairman and CEO of PPFA, is a very old-school investor with his own financial advisory firm. Chandrakant Sampat is an individual investor who started trading in capital markets in the 1950s. His top holding includes Hindustan Unilever and Gillette India. Raamdeo Agrawal, co-founder of Motilal Oswal Financial Services Ltd., has invested in Hero Honda in the late 1990s.

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10.3.1 Institutional Investors The last 15 years saw an increase in participation from institutional investors, which lead to the development of Indian stock markets. These were of both Indian and foreign origins. They had 18% of the total market capitalization having major asset holdings in the market. A significant part of the market movement occurs according to the direction of flow of funds by these institutional investors. The unique thing about them is that they function on behalf of others, who want to earn money from the stock market but do not have the know-how. Even others who have a fair idea about stock markets sometimes trust the actions or estimates of these investors more than their own, for making rational choices. Some example of institutional investors includes banks, investment advisors, insurance companies, hedge funds, mutual funds, among others. When the investor comes from a foreign country, they are known as foreign institutional investors (FIIs). Some of the biggest FIIs in Indian stock markets are the EuroPacific Growth Fund, Government of Singapore, Oppenheimer, Abu Dhabi Investment Authority, among others. In addition, there are some major domestic institutional investors (DIIs) that have a significant role in the Indian stock market. They generally act as investment advisors or have mutual funds in which common man can invest. Some of them are Kotak Mahindra Asset Management Group. Lastly, there exist promoters in the stock market, also known as investment bankers who have a duty to not mislead any potential investors. This is insured with their performance being linked to the success of the clients.

10.4 Indian Stock Exchanges Stock exchange market in India is started in 1875 with the foundation of the BSE. The stock market was slow in growth at that time, and since the BSE was open for trading to only a selected few, the general public did not have any participation in the market.

10.5 Background After the Indian independence in 1947, the people here were left with little wealth. The economy was in a bad position at that point of time, and a lot of development and economic issues were prevalent then. The economy took many years to recover, and there was a slow accumulation of wealth. BSE at that time grew at a very affordable price, but some fraud in the financial market shook the stock market in India. With the gradual increase in their disposable income, the Indians began to be bolder in money matters and decided to invest in the market. Therefore, the stock market was a positive choice to obtain a reasonable return on investment savings.

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10.6 Bombay Stock Exchange (BSE) The Bombay Stock Exchange is a leading stock exchange in India which was started in undivided India in 1875. It is the oldest exchange in Asia with its headquarters in Mumbai. Started by prominent Indian businessman Premchand Roychand in the nineteenth century, it is said to be the world’s quickest stock exchange with a superfast commercial speed. What is interesting about the position of BSE is that its current position in Dalal Street is not its original location. Some of his first meetings were held in an open environment, i.e., under banyan trees in a part of Mumbai where Horniman Circle is situated. After independence, BSE was the first exchange to be in 1957; the BSE was the first stock exchange to be identified by the central government under the Securities Act. It moved to its present location in 1980, and its benchmark market index BSE SENSEX was developed in 1986. It expanded its trading platform gradually with the derivatives market opening in 2000. This was followed by the development of the options market in 2001 and the equity derivatives market in 2002, and this led to more visibility for the exchange. It used to operate in a non-digital fashion for a long period of time, and it was only in 1995 that it switched to an electronic trading system. Creditably for the BSE, this transition from a non-digital system to an electronic trading system took only 50 days. The BSE also expanded its operations on an international level, and in 2016 it established India INX, the first international exchange of the country. Over the years, it has evolved and operated in its field in a highly successful manner and has accordingly been awarded numerous awards. Despite all its successes and operational excellence, the BSE has been clouded with many controversies and frauds. Prior to its demutualization in 2005, the SEBI issued directions to all the exchanges in the country needed to immediately demutualize themselves and be run by a company in which the general public had to be the major shareholder. In response to this, the BSE converted itself into a company and gave its traders shares and trading rights. Then, the BSE facilitated the sale of shares of individuals to the general public and public corporations. The new company BSE Limited was allotted shares as a part of the demutualization process, and it subsequently transferred some of the shares for a considerable amount. The issue that arose out of this situation is related to the acquisition cost of the shares transferred and the computation of capital gains’ tax on these shares. The revenue department contended that the membership of BSE by BSE Limited was an intangible asset and thus the written down value of the shares should be taken as the cost of acquisition of the shares. The case dragged on for a while, and finally, the court upheld the view of the Department of Revenue. A classic example of fraud related to the BSE was the Harshad Mehta case in the late 1980s. Harshad Mehta was an Indian stockbroker who cleverly maneuvered the banking system and the share market to make a huge amount of money using a fraudulent company. Harshad became a member of BSE in 1984, and with the help of some associates, he established a stock advisory company. He was able to find loopholes in the banking system in India and by chiseling out money from various

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banks, he pumped in a lot of money in the share market. Having convinced many people to invest in his “fake” company, he was able to deceive the public a huge amount of money. His crime came to light in 1991–1992 and left people shocked by the ease with which the fraud was conducted. A lot of critics of the BSE have often stated that the various scams faced by it were in part due to the closed system of BSE in which only some people were allowed to trade in the exchange. It has often been said that the BSE needs to improve the transparency in the system and make the shareholders’ protection system safer.

10.7 National Stock Exchange NSE is the supreme stock exchange in India, with its headquarters in Mumbai. The NSE took birth in 1992 as the first demutualized electronic exchange in the country. NSE provided a modern, completely advanced screen-based system for electronic trading in India, offering facilities for easy investing and trading for the investors and traders across the country. NSE has $1.43 trillion worth of market capitalization with a shareholding across various diversities of both local and international investors. Vikram Limaye got the top job in NSE as Managing Director and Chief Executive Officer (MD and CEO) in 2017. Exhibit 10.2 shows the Selected Financial Data on National Stock Exchange of India, 2013–2017.

10.7.1 The Early Years: 1992–2000 After multiple controversies related to the BSE, the general public was skeptical about the Indian share market and there was a marked decline in the investor confidence levels. The Government of India realized this situation and decided to regularize the market so that people can invest in the share market in a clean and transparent way. This caused the creation of the Securities and Exchange Board of India (SEBI) and subsequently to the formation of the NSE. Although NSE began in 1992 as demutualized electronic exchange and was acknowledged as a stock exchange by SEBI in 1993, it began its operations in 1994. Compared to the BSE, trade membership in the exchange was open to all experienced and qualified people and those who met standard requirements related to financing and investment. Since traders were allowed to trade a minimum of one share, NSE eliminated the paperwork and also the chances of forged or fake certificates became almost zero. Therefore, the NSE was able to fill in some gaps in the system of BSE and gained great popularity among the general masses. Thus, the NSE took off on a successful note and it was hoped that the NSE would continue its success story.

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10.7.2 NSE in Twenty-First Century NSE has launched NIFTY 50 Index as its benchmark index for trading in 2001. Single-stock futures: It also launched single-stock futures which were also released in the same year. The NSE started to expand its product portfolio, and derivatives were the first new offering of the NSE. The currency derivatives were introduced in India in 2008 by the NSE, and in the following years, the exchange decided to enter the global market. EMERGE platform was released in 2012 by NSE for the trading of SME securities. In a huge achievement, the NSE made its debut on the Dow Jones Industrial Average and it proceeded on its path, and the next investments were made in the British and Japanese stock exchanges. The NSE also started India’s first dedicated debt platform for trading in debt-related products. The NSE and the BSE have, over the years, been highly fruitful in providing a conductive environment to the traders and the general public to invest in the share market. In addition, due to their beautiful shape, the appetite for risk-taking of Indian people has experienced tremendous growth. However, the NSE, in the recent past, has been involved in some controversies.

10.7.3 2017 Onwards The current CEO of the NSE is Mr. Vikram Limaye. Vikram was the CEO and Managing Director of IDFC before this assignment. He started his career with Arthur Andersen in Mumbai, and since then he has been on the boards of numerous corporates, educational institutions, and not-for-profit organizations. He succeeded Chitra Ramakrishna, who resigned from the exchange due to personal reasons, a year before her tenure was to end. Having been at the helm during the phase when NSE is stuck in the case court, Chitra leaves the company in a precarious position and Vikram had his hands full. Vikram is the first NSE CEO from outside the founding team that set up the exchange, and he also has to make sure that the IPO issue process goes smooth after a long battle with investors who wanted the exchange to be listed earlier. To add to the situation, he comes in at a time when the SEBI is examining allegations against the NSE on preferential treatment extended to some traders based on its trading platform. Many industry experts feel that his down-to-earth personality and unquestionable integrity make him the right choice to lead the NSE at this point in time.

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Fig. 10.1 Growth in NIFTY 50 Index. Source Annual report of NSE 2018

10.8 Indian Stock Exchange Battle As of now, the three most known exchanges in the country are the NSE, BSE, and the Metropolitan Stock Exchange (MSE). All of these exchanges have gained popularity among the stock market experts and the general public. The BSE is the oldest of the three and was established in India in 1875. On the other hand, the NSE had its roots ranging back to early 1990s, and the third stock exchange, the Metropolitan Stock Exchange, was started in September 2008. On an international level, the BSE is placed as the 10th largest stock exchange in the world in capitalization of the market and the NSE ranks as 11th largest exchange in market capitalization. The MSE is still a small player in this regard, and an interesting point about the MSE is that its validity as a stock exchange lasts only up to September 2018. The BSE and NSE at this stage cater to 5,911 and 1,808 companies and in comparison, around 1,500 companies are trading in the MSE. While the BSE is regarded as one of the oldest exchange of Asia, the NSE has successfully emerged as a larger exchange in India for turnover of daily stock and trade volume. Market share of NSE for various segments in India is shown in Fig. 10.2. The benchmark index for BSE is SENSEX (BSE 30), and the corresponding index for NSE is NIFTY 50. The growth of NIFTY 50 Index is shown in Fig. 10.1. What also distinguishes NSE from BSE and other competitors are the fact that NSE was the foremost demutualized exchange in India. Thus, NSE had the first mover advantage of being the first exchange to minimize paperwork in the stock markets in India. NSE tops the BSE in terms of liquidity, and most of the intraday investors prefer NSE. On the other hand, if we consider the long-term scenario, it is clear that BSE is preferred by long-term investors. Exhibit 10.3 shows top competitors of NSE in India.

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Fig. 10.2 NSE’s market share as on March 31, 2017. Source Annual report of NSE 2017

Unfortunately for the BSE, it has faced a long history of scams and frauds and even today the transparency protections in BSE are not of the best quality. In this regard, the NSE was established with the very aim of minimizing fraud instances and it boasts of a robust transparency protection system. Thus, it can be inferred that the BSE, NSE, and MSE have contributed to the stock exchange industries in India in their own unique ways and they have their own strengths and weaknesses. In India, NSE has emerged as the largest stock exchange in daily stock turnover and number of trades. Over the years, the NSE has transformed into a stock exchange which has minimized fraud cases and the transparency protection systems are particularly robust.

10.9 Evolving Indian Stock Exchange Before NSE arrived, trading membership was limited to a group of brokers and investment into stocks was not widely available for the general public from various parts of India. NSE completely changed the system in India and made stock market investing available to the masses. The electronic system replaced the earlier system, and an active risk management system was implemented so that investors could be protected against broker non-payment of settlements. NSE brought the much-needed technology in the field and became attractive to local and international investors in a short period of time and became a leader in the country. NSE provided a fair and transparent securities market when India was going through a difficult phase in the stock market sector. The high security and other incentives that NSE offered greatly increased the popularity of the Indian stock market among domestic and international investors.

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10.10 Operations On the order of the government, NSE was established by a team of a financial institution to clean up the share market. As recommended by the Pherwani Committee, NSE was set up with a diverse team consisting of global and domestic investors. The main domestic investors included State Bank of India, IFCI Limited, and other experienced domestic investors. The main global investors included GS Strategic Investments Limited and a host of other companies. NSE offers trading, clearing, and settlement services in a variety of sectors. NSE was the first one to introduce technology into trading, and this provided a very good platform to all the investors of the country. NSE has numerous VSATs and leased lines covering the whole country. In June 1994, NSE started its operation in the wholesale debt market (WDM) segment and operations in the capital market (equities) segment in November 1994 started soon after.

10.10.1 Segments of NSE Investors can invest in all types of securities on the platform provided by NSE. The exchange provides trading in three segments, the first being the debt market in which one can invest in a wide range of debt securities which consists of various types of debt securities. The second one is futures and options segment in which trading can be done on derivative instruments, and this segment made a mark globally in just eight years after its operations; the final one is a capital market segment. This consists of all trading transactions in equity shares, preference shares, and convertible debentures. This segment offers a technologically based platform known as National Exchange for Automated Trading (NEAT). This type of system has no need for the traditional type of brokers. Investors can directly place their orders with the help of automated trading screens, and so now brokers are needed only for the settlement of the responsibilities. Operations commenced in Mumbai and have expanded all over the country.

10.10.2 Growth of Capital Market Segment of NSE In the late 1980s, the process of liberalization and deregulation began which directly affected the capital market of the country. The Government of India had taken a number of steps to bring back the economy on the track. As NSE commenced its operation in the capital market segment in November 1994, begins with trading in over 200 securities and subsequently, securities have been added gradually. Liquidity can be considered as a substitute for measuring turnover in the country. Across exchanges, in India, the growth rate of turnover is not uniform as shown in

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Exhibit 10.4. Out of the total 23 stock exchanges, 16 stock exchanges have a minor portion of the total turnover. From the exhibit, we can see that NSE and BSE are the major exchanges in India but NSE has a higher share in the market. Also, there is a constant increase in the turnover till the starting of 2005–2006. The reason is the emergence of Internet stock trading in the capital market segment in February 2000. In comparison to other years, the total turnover of all the exchanges shows a fall up to 2005–2006 but the share of turnover of NSE increases rapidly. With the establishment of NSE InfoTech Services Ltd., the total turnover rose to Rs. 2,903,058 crore. However, the performance of the turnover of the exchanges fluctuated, whereas NSE recorded a rise of 71%. During 2009–2010 (April–May), NSE performed really very well and held a large market share. Hence, trading volumes in the Indian capital market are relatively larger than that in other emerging markets. The total turnover on NSE is increasing despite the fall in prices. In other stock exchanges, the turnover generally became close to nil because of non-liquid scrips. In just a few years, most of the regional stock exchanges became insignificant. As the new major market reforms come into place, the trading volumes in these stock exchanges took a nosedive soon. The market presence of regional stock exchanges was decreasing day by day. What worsened the trend has been the provision of trading terminals of the two principal exchanges. The NSE has always been an all India exchange. The BSE was forced to innovate and extend its own trading system “BOLT” upon seeing the competition. In addition, the major increase in turnover may also be due to the recent expansion of the NSE’s trading network. Turnover statistics show that within the first year of its starting, NSE became the largest exchange in terms of transaction volume. To everyone’s surprise, NSE grew very quickly in trading volume in its second year and third year. The turnover ratio in NSE increased exponentially from 1995–1996 to 1999–2000. The turnover ratio which tells us about the volume of trading in relation to the size of the market has been increasing steadily after the introduction of Internet-based trading system by NSE. The percentage share of listed securities in total traded securities at NSE was growing very quickly. Within a short period, NSE became famous among investors, issuing companies and financial institutions; and the share of listed securities to total traded stock started increasing. By the end of March 1995, 135 scrips were listed on NSE with market capitalization of Rs. 73,223 crore. During 2009–2010 (April–May), total securities are 1425 which covers a 100% share of only listed securities. The average daily turnover on NSE (Rs. 276 crore) went past that of BSE in 1995–1996, and this pattern has continued up to 2009. The settlement is guaranteed on the exchange through capital, and the clearing system is very transparent. The difference between the average daily turnovers recorded was huge in 1996–1997. However, this difference has come decreased substantially in recent years. It is clear that the gap between the two exchanges has become much smaller as far as average daily turnover is concerned and the NSE is slowly losing its competitive advantage over the BSE. In 2000–2001, the average daily turnover on NSE increased a lot because of the installation of many VSATs all over the country (see Exhibit 10.5).

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10.11 Relative Study of Indian Stock Market in Comparison to International Stock Markets In the following part of the case, we shall study the movements in Indian stock market (especially with respect to NSE) in comparison to other international players like New York Stock Exchange (NYSE), Hong Kong Stock Exchange (HSE), Tokyo Stock Exchange (TSE), Russian Stock Exchange (RSE), and Korean Stock Exchange (KSE). The time period of this study has been segregated into separate time zones for analyzing correlation among various exchanges. NYSE, originating in May 1792, is among the largest exchanges worldwide in terms of monetary volume and second largest with respect to the number of companies. The TSE, originating in May 1878, is one of the second largest in terms of monetary volume. In 1943, this exchange was integrated with ten other exchanges across the country to create an individual stock exchange for the whole of Japan. HSE, being the eighth largest in the world, started on November 24, 1969. By aggregating the different regional stock exchanges into one platform, the RSE came to life in 1995. The KSE was initiated by successfully integrating the major three Korean Spots and Futures Exchanges. Events like “dot-com bubble,” soaring oil prices, etc., brought about a standardized shift in the economic environment on a global scale. With the advent of globalization, companies started getting the better operational scope into these markets due to the increased integration and flow of wealth across nations. This led the economy to mature with increasing relaxations in regulations, with India being on the major hot spots for investors abroad. Upon extended research by scholars in this field, many have concluded the effect of seasonal changes in the stock market and that it has a global impact on other exchanges. Studies by Noor, Azuddin Yakob, Diana Beal and Delpachitra, Sarath (2006), Masih, M.M. Abul and Masih, Rumi (1997), Lau, S.T., and Diltz, J.D. (1994) support this phenomenon of how these stock exchanges are integrated and created a global impact. In the qualitative analysis, the company has compared parameters like market capitalization (no. of the common shares current price of those shares), the number of listed securities or firms, listing agreements with the government, risk management framework, and finally its settlement process. Even though India has the third largest investor base, it still ranked 11th in the world in terms of market capitalization.

10.12 NSE: Benchmark for New Entrants (IPOs) Paid up capital should not be less than 10 crores, and market capitalization should not be less than 25 crores. Must have particulars of the following for at least the past three years.

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The Board for Industrial and Financial Reconstruction (BIFR) must not have referred to the firm; the net worth has not gone negative and has no wound up petition from the court, and no disciplinary actions initiated against it by other stock exchanges or regulatory bodies.

10.12.1 New York Stock Exchange Total pretax earnings over the last 3 years should not be less than 10 million USD. Lowest in any of the last two years should not be less than 2 million USD. Total operating cash flow over the last three years should be at least 25 million USD. Revenue for the most recent fiscal year should be at least 75 million USD and global market capitalization of at least 750 million USD. Stockholders’ equity and net assets should not be less than 60 million USD each.

10.12.2 Tokyo Stock Exchange Three years of successful operation must have passed before the day of listing on the stock exchange. Profit in the first year of the latest two years should be more than 100 million yen, and it should be more than 400 million yen for the last of the latest two years.

10.12.3 Hong Kong Stock Exchange Profits for shareholders should constitute around $50 million from the recent three fiscals. Market cap should be above $500 million for the latest fiscal year. They demand a positive cash outflow of at least $100 million for the past three fiscal years.

10.12.4 Korean Stock Exchange No. of shares should be more than 1 million as per the applied date. A net worth of KRW 10 billion as per application date and sales amount should at least cross KRW 30 billion for the latest fiscal year. Must maintain at least 50% reserve ratio (25% for giant corporations) according to the latest financial report. It should at least have operated for 3 years since its inception.

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Table 10.1 Tech boom impact across Exchanges Exchange

Percentage change to trigger circuit breaker

NSE

Market as a whole: three stages—10, 15, and 20% of index movement. Individual scrips: 2, 5, and 10%

BSE

Market as a whole: three stages—10, 15, and 20% of index movement. Individual scrips: 2, 5, and 10%

TSE

Two stages: 5 and 10%

NYSE

Three stages: 10, 20, and 30%

KSE

Single stage: 10%

Source https://www.greatlakes.edu.in

10.12.5 Circuit Breaker Analysis Circuit breakers are the values at which the stock exchange will come to halt trading for a period of time as a result of considerable drops in stock market value. It was first witnessed during Black Monday (Monday, October 19, 1987), when Dow Jones Industrial Average (DJIA) had a drop of 22.6%. In order to avoid such contingencies, circuit filters were introduced which operate in alignment with the rules and procedures of the stock market. In exhibits below, we can see how changes in NSE stock exchange rates correlated with changes in other stock exchange rates. When we compare NYSE and NSE (Exhibit 10.6), NYSE had a success story largely due to tech giants which reflected their sharp increase. NSE also had risen significantly because of IT impact from the USA and the tech boom. The high interdependence of both nations over this tech boom has been reflected in Table 10.1. When we compare the NSE and Korean Stock Exchange (Exhibit 10.7), both of them had a similar start and trends across the various periods. Due to the East Asian crisis, Korea was much more impacted due to its affiliation with East Asian economies. This has helped us analyze stock market correlation among various exchanges.

10.13 Legal Maneuvers and Future Prospects In November 2009, Metropolitan Stock Exchange (MSE) filed a case against NSE alleging monopolistic practices and thus violating the Competition Act. In 2008, currency future contracts were launched by both MSE and NSE. NSE offered transaction charges on these contracts at zero prices, and because of NSE’s superior position, MSE was left with no choice but to adopt zero pricing as well. This had a significant negative impact on the financial position of MSE, which filed a complaint with CCI

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complaining about the predatory pricing (waiver of transaction fees, data-feed fees, and admission fees) and filed a case for an award of compensation against NSE of Rs. 856 crore. CCI found NSE guilty and imposed a fine of Rs. 55.5 crore. NSE filed an appeal with the Competition Appellate Tribunal (COMPAT), which too found NSE guilty. NSE then moved to the Supreme Court, and its appeal is still going on. Now, NCLAT will hear the Rs. 856 crore predatory cases against NSE as COMPAT ceased to exist. The NSE’s troubles do not seem to end. NSE is facing the co-location issue with the stock market regulator since 2015. The matter is of some brokers having an advantage of greater access to the exchange’s servers through co-location facility during 2011–2014, and it came to notice through a whistleblower. The exchange stopped the facility since 2014. More than two years after the regulator came to know about the case, many entities are being investigated and the scope of the case is becoming larger. Earlier, the market regulator sent notices to 14 individuals and entities. Since some former and current NSE officials are also being examined in this high-profile case, the government will probably ask the help of Serious Fraud Investigation Office (SFIO) for looking into the alleged violations of companies’ law. In a bid to understand the facts behind allegations against NSE in the co-location issue, SEBI formed its own internal team of core officials in January 2018 to look into the evidence collected by other agencies. This is the first time that SEBI has set up its own investigation team since allegations were leveled against NSE in 2015. Besides SEBI, many important government institutions like the RBI are also looking into the matter. Through this investigation, SEBI is attempting to find out the exact role of each of the NSE employees who were issued notices by it earlier or even others who could be connected to the matter. Mainly, SEBI is looking at two aspects—the first if there is any case of internal lapse and the second as to who got benefits from it. SEBI’s Technical Advisory Committee (TAC) in 2016 had said in its report that, “Preferential access was given by NSE to stockbrokers, which allowed a stockbroker to access multiple dissemination servers through a huge number of Internet protocols assigned to them.” NSE has continuously denied the allegations. So far, all investigations into the matter have been undertaken by external agencies, but the main team of SEBI officials is looking into it only now. Both SEBI and NSE have said that there will not be an initial public offer (IPO) till the co-location controversy is settled. “My immediate priorities would be solving the regulatory issues, improving stakeholder relationships, which might have worsened in the past few years, boosting employee morale, strengthening controls and taking the NSE public, the timing of which will be dependent on when the regulatory issues get solved,” says Vikram Limaye. NSE chairman Ashok Chawla underlined the challenges faced by NSE: “It has been a period of challenges on the organizational front, stress over the legacy technology issues, reenergizing of relations with stakeholders across the spectrum from the regulator to shareholders.”

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In the largest trade directory in the country, which itself is the financial nerve of India, Vikram Limaye will also face extreme control of all stakeholders, including brokers, regulators, government, shareholders, and the general public. In spite of all the controversy surrounding NSE, it has full potential to come up on top and continue being the leading exchange in the country through its core values and soundtrack record.

Exhibits

Particulars

2012-13

2013-14

2014-15

2015-16

2016-17

Income Expenditure Profit before prior period adjustments Prior period adjustment Profit before exceptional item Add: Profit on sale of shares of subsidiaries Profit Before tax Provision for tax Profit after tax Surplus from previous year Excess corporate dividend tax Amount available for appropriation General Reserve Provisional transfer to NSCCL Proposed Dividend Corporate dividend tax Balance carried to Balance sheet

1648.11 450.15 1120.93

1669.77 471.67 1121.13

1918.12 631.35 1286.77

2044.54 691.90 1352.64

2318.41 761.42 1556.99

(0.17) 1120.76 36.38

(5.65) 1115.48 227.34

(0.22) 1286.55 -

(2.58) 1350.06

1157.14 279.53 877.61 227.36 29.20 1134.17

1342.82 323.54 1019.28 466.55 1485.83

1116.55 336.87 779.68 567.72

588.54 149.21 439.33 887.03

1340.81

1853.55

430.00 225.00 12.62 466.55

105.00 254.82 306.00 32.89 567.72

52.97 357.75 43.06 887.03

-

-

328.50 34.81 1490.24

5890.14

1422.92 389.99 1032.93 5675.73

Exhibit 10.1 NSE financial summary 2012–2017 (Rs. in crore). Source NSE annual reports

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2014

2015

2016

2017

Total Revenue (Rs. Cr)

1813.62

1920.63

2291.04

2359.17

2680.83

Revenue from operations (Rs. Cr)

1280.19

1363.09

1729.60

1863.54

2104.26

Profit before tax (Rs. Cr)

1261.43

1402.57

1706.63

1729.44

1908.71

Earnings per share (Rs.) Face Value Rs.1

17.2

18.5

23.0

22.8

26.4

5.00

6.80

7.95

7.30

20.20

Dividend per share (Rs.)

Exhibit 10.2 Selected financial data on National Stock Exchange of India. Source NSE annual reports Particulars

NSE

BSE

MSE

Equity Cash Equity Derivatives Interest Rate Derivatives

85% 94% 79%

15% 6% 17%

3%

Currency Derivatives Corporate Bonds ETFs Stock Options Index Options Index futures Currency options Currency opt Ions Stock Futures

59% 80% 77% 97.9% 91.8% 99.7% 65.2% 56.1%

36% 20% 23% 2.1% 8.2% 0.3% 34% 37.7%

5% 0.8% 6.2%

100%

-

-

Exhibit 10.3 Comparative study of top 3 Indian stock exchanges in FY16. Source www.greatlakes. edu

Exhibits

179

Exhibit 10.4 City-wise Distribution of Turnover of Equity Cash Segment at BSE (Percentage share in Turnover). Source Handbook of Indian securities market

180 Exhibit 10.5 Average daily turnover comparison of BSE and NSE (crore rupees). Source https://www. moneycontrol.com/stocks/ marketstats/turnover/

10 National Stock Exchange of India Year (March)

BSE

NSE

2018

78,358.59

594,845.38

2017

289,106.73

556,229.89

2016

62,823.03

356,947.39

2015

471,451.86

359,131.86

2014

62,124.50

276,740.12

2013

39,744.92

212,598.02

2012

62,717.17

272,482.14

2011

72,456.58

255,711.89

2010

99,778.73

286,245.54

Exhibit 10.6 Time series plot of NSE and NYSE. Source www.greatlakes.edu

References

181

Exhibit 10.7 Time series plot of NSE and Korean Stock Exchange. Source www.greatlakes.edu

References Juman M (2015) Bonfring International Journal of Industrial Engineering and Management Science (PDF file). Retrieved from http://www.journal.bonfring.org/papers/iems/volume5/BIJ-8017.pdf Mukherjee D (2007, April 11) Comparative analysis of Indian stock market with international markets. Retrieved from https://www.greatlakes.edu.in NSE (2018, March 21) Products and contents. Retrieved from https://www.nseindia.com

Chapter 11

National Thermal Power Corporation

11.1 Introduction India is aggressively differentiating and diversified into renewable energy to diminish overdependence on conventional resources, for example, coal, natural gas, and oil. The demand for power is slowly expanding because of economic development, rapid urbanization, industrialization, and general improvement and development activities. The primary initiative to execute a megascale coal-fired thermal power plant was attempted at Rampal in Bagerhat District in 2010. Indian Prime Minister Dr. Manmohan Singh was invited by the Prime Minister of Bangladesh, Hasina, on a state visit to Bangladesh in September 2011. In a warm, sincere, and well-disposed atmosphere, the two-sided talks among Bangladesh and India were held on, reflecting the amazing friendship relations that exist between the neighboring countries. They recalled and noted the visit of Bangladesh PM to India in January 2010 and discussed how during the previous visit the two countries had agreed on a set of initiatives that had taken the two-sided friendship and ties to new levels. The two prime ministers were satisfied with recent elevated talks, exchanges, and visits and agreed that this relation helped them to reach to an answer and understanding on a large portion of the issues under discussion and consented to empower all the more such high-level collaborations between the two sides. The two sides signed two noteworthy accords and eight respective archives (Exhibit 11.1) and approved the settlement of the comprehensive “Framework Agreement on Cooperation for Development” that blueprints the common vision for solid, extended, and everlasting participation and corporation to accomplish mutual peace, stability, dependability, and prosperity.

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_11) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_11

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The two prime ministers noticed that both countries had effectively marked the standard procedures for operations permitting trucks’ movement conveying products and goods carried from Nepal and Bhutan to land customs stations in Bangladesh and consented to work toward a settlement of Motor Vehicles Agreement for regulation of Cargo Traffic and Passenger. Both the countries signed the MoU for participation and collaboration in the renewable energy sector, as collaboration in this sector was crucial to supplement the conventional sources and to meet the developing energy needs of the two nations. The prime ministers of both the countries asked for a speedy and efficient completion of agreement of purchasing of power between NTPC and BPDB for buying 250 MW power capacity from India by Bangladesh. According to the agreement, Bangladesh would be buying another 250 MW of power from the Indian market, making use of the complete capacity of the power transmission line being established through intergrid connectivity at Behrampur and Bheramara. Both countries noticed that NTPC and BPDB were moving toward finishing up an agreement for joint venture for the whole purpose of establishing a 1,320 MW coalfired power plant in Bagerhat. They asked and guided all the authorities concerned to complete all formalities for starting the project as soon as possible. In addition to this, they asked the authorities concerned to start and complete the feasibility study for the establishing a 1,320 MW coal-fired power station at an appropriate site situated in Chittagong. Considering the importance of Sundarban’s biological ecosystem, one of the world’s largest mangrove woods, both the countries agreed on signing the MoU on the preservation of Sundarban and the Royal Bengal Tigers. They also assured that the joint venture would definitely preserve and safeguard this common heritage (see Exhibit 11.2). Prime ministers of both the countries emphasized the importance of the multilateral framework with strong importance given to the guidelines of the United Nations. They also agreed that the changes in the environment were one of the most serious challenges faced by the world. They also assured that proper precautions and steps were taken based on the principles of “United Nations Framework Convention on Climate Change” (UNFCCC). It was made very clear that environmental protection programs were important for battling against the changes in the environment. They both agreed to work together for the protection of ecological systems, which are common to both the countries.

11.2 Company Background NTPC Limited, established in 1975, is a central public sector undertaking(CPSU) under the Ministry of Power, Government of India, involved with the matter of distribution and generation of power and related tasks. It was incorporated under the Companies Act 1956 and a “Government Company” inside the significance of “meaning of the act.” In May 2010, the Union Government of India gave “Maharatna status” to NTPC, it is now one of the four organizations to be granted such status. In

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Forbes Global 2000, NTPC is positioned 424th among the world’s 2000 biggest and most capable public companies. Vision: “To be the world’s leading Power Company, energizing India’s growth.” Mission: “Provide reliable power and related solutions in an economical, efficient and environmentally friendly manner, driven by innovation and agility.” Core Values of NTPC—“BE COMMITTED” B E C O M M I T T E D

Business ethics Environmentally and economically sustainable Customer focus Organizational and professional pride Mutual respect and trust Motivating self and others Innovation and speed Total quality for excellence Transparent and respected organization Enterprising Devoted.

NTPC is India’s biggest power sector conglomerate established in 1975 to increase the development of power and energy in India. Ever since it has grown and established as one of the biggest players in the power segment with both backward and forward integration across the entire value chain of the power industry, it uses both conventional energy sources like fossil fuels and non-conventional renewable sources like hydro and nuclear energy for the power generation processes. The change from conventional to renewable energy sources has helped them to lower the carbon footprint by reducing the emissions of greenhouse gases. For the enhancement of its key business, the organization has moved into various fields such as consultancy, trading of power, coal mining, electrification of rural areas, training of power professionals, and utilization of ash as well.

11.2.1 Power and Electricity Sector in India Power is the most critical among the most basic segments of infrastructure pivotal for the financial growth and development of countries. The presence and development of sufficient framework for infrastructure is the key to the sustainable development of the economy of India. Indian energy sector is a standout among the most diversified on the planet. Sources of power generation go from conventional sources, for example, coal, oil, natural gas, lignite, hydro, and atomic energy to practical non-traditional sources, for example, solar, wind, agricultural, and residential waste. Power request in the nation has expanded quickly and is anticipated to further increase in upcoming years. With

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the desired end goal to take care of the expanding demand for electricity in the country, a massive expansion to the installed generating capacity is needed. The Indian power framework is the fifth biggest on the planet and among the most complex. With a yearly power generation of 1,031 billion units (BU), India is one of the main five power consumers over the world, and by 2020, the power capacity demand is anticipated to reach 1,900 BU. Development in modern activities such as population, urbanization, and economy, alongside rising per capita power utilization, has augmented the gap of power access in the nation. The gross power generated by utilities is 1,106 and 166 TWh by captive power plants. The net power generation incorporates auxiliary power utilization of power plants. In the year 2013, India turned into the world’s third biggest producer of power with 4.8% worldwide share in power generation outperforming Russia and Japan. In the fiscal year 2015–2016, the Indian per capita power generation was 1,010 kWh with aggregate power utilization (utilities and non-utilities) of 938.82 TWh or 746 kWh per capita power consumption. Recorded electrical energy utilization in farming was highest, i.e., 18.45% in 2015–2016 among all nations. The per capita power utilization is lower contrasted with numerous nations regardless of cheaper electricity tariff in India.

11.2.2 Market Size The power sector in India is undergoing a significant change that has changed the business outlook. Sustained economic growth keeps on driving electricity demand in India. Indian government is concentrating on attaining “Power for All” has accelerated capacity expansion in the country. At the same time, the focused intensity is also increasing at both supply sides such as labor, funds, logistics, and fuel and the market side. As of August 2016, the installed capacity of power plants in India remained at 305,554.25 MW. Power generation is rising 5.69 for each cent every year to 486.44 BU amid April 2016–August 2016. The Planning Commission’s Twelfth Five-Year Plan estimates add up to domestic power generation to achieve 669.6 Mn Tons of Oil Equivalent (MTOE) by 2016–2017 and 844 MTOE by 2021–2022. India’s wind power capacity installed in 2016 is assessed to build 20% over a year ago to 2,800 MW@ and drove by positive policy support that has empowered both independent power producers (IPPs) and non-IPPs.

11.2.3 NTPC in Power and Electricity Industry In India, PSU companies are those where central or state government holds more than 51% of the equity of the company. The significant goal for the establishment of a public organization is to enhance economic development through improvement

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in infrastructure and industrialization. It was expected that formation of such organizations would bring business and employment generation, income redistribution, promotion of small-scale and subordinate companies, and balanced regional improvement.

11.2.4 Challenges and Operational Performance Working on one of the biggest fleets on the planet, comprising of 120 units of business operation, NTPC’s operational excellence is at par with world benchmarks and standards with high levels of reliability and capacity utilization through utilization of best practices and latest technologies. NTPC is focused on continuous improvement in productivity and generation to scale still higher levels of operational excellence.

11.2.4.1

Financials

NTPC converts its robust development and operational performance into sound financials. Wise usage of financial resources guarantees that the basics of the organization stay solid and are utilized for future development and better results. Regardless of the various difficulties, hardships, and challenges are confronted by the power sector and economy of the country, NTPC is walking ahead with better outputs and results with the assistance of thoroughly formulated plans and policies thought out systems.

11.2.4.2

Exports

NTPC had established a subsidiary called NTPC Vidyut Vyapar Nigam to exclusively trade in fly ash and also to increase the publicity of fly ash in various nations. The trucks that are covered with tarpaulins transport the fly ash to abandoned mines. NTPC’s Talcher Thermal Power Plant is dispatching slurry of fly ash through a pipeline to the abandoned mine pit. It is also involved in ash business involving selling cenosphere from NTPC’s different coal-based power plants. In 2006, 7,500 tonnes of clean fly ash was transported to Qatar from Simhadri plant of NTPC as a first consignment. It is also acting as a nodal agency for trading across the border with neighboring countries like Bangladesh and Bhutan. It has signed an agreement with Bangladesh (BPDB) for 25 years for the supply of 250 MW power from NTPC’s various power plants.

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Growth of NTPC’s Power Generation

Including the JVs, the total installed capacity limit of the organization is 47,178 MW. It has eighteen coal-fired power stations, seven gas-based stations, and one hydrobased station. It has nine renewable energy projects and nine joint ventures which are a coal fueled power station. The capacity will have an improved fuel blend. NTPC has been working its power stations at high-efficient levels. By 2032, NTPC’s portfolio will have approximately 28% of power created by non-fossil fuel. In spite of the fact that the organization has 17.73% of the average national capacity, it contributes 24% of aggregate power generation because of its concentration on high productivity and efficiency (Exhibit 11.3). The company is lead by the “People before Plant Load Factor” principle, which is the basis for all its manpower-related strategies. As per the India Chapter of the ‘Great Places to Work Organization’ in 2014, a joint project with ET newspaper, NTPC has been positioned as “sixth best organization to work for in India” among the PSU organizations and big companies.

11.2.4.4

Business Development

NTPC, with a high ordeal of construction, engineering, development, and operation of approximately 35,000 MW of warm production capacity, is the biggest and a one of the most efficient power and energy sector companies of India, with standard operations and benchmarks that match the worldwide. By 2032, NTPC has set out upon a longing and ambitious plan to achieve a total installed capacity of 128,000 MW. To solve our country’s development challenges, NTPC has received and choose multi-pronged methodology and master plan, for example, joint venture, greenfield and brownfield projects, and acquisition route. Aside from this, NTPC has also chosen the strategy of diversification in associated business ranges, for example, coal mining, trading, and exchange of power, services, manufacturing to guarantee strength, robustness, growth, and development of the organization.

11.3 International Joint Ventures NTPC has formed two joint venture companies with other international companies so far: • Trincomalee Power Company Limited (TPCL) • Bangladesh India Friendship Power Company Limited (BIFPCL) See Exhibit 11.4.

11.3 International Joint Ventures

189

11.3.1 Trincomalee Power Company Limited (TPCL) Trincomalee Power Company Limited is a JV of NTPC and CEB for establishing a thermal coal-fired power plant project of 2 × 250 MW at Sampur, Trincomalee in Sri Lanka. NTPC Ltd. India and the Government of Sri Lanka, and CEB signed their first MoU in December 2006 for the coal-fired power plant of initial 500 MW phase, and the Sampur Power Station was a desired coal-fired power plant which was planned to work in Sampur, Trincomalee in Sri Lanka. But the agreements for Power Purchase, Implementation, Land Lease, BOI, Coal Supply, etc., were signed in 2013 between the related parties. Initially, Sri Lanka Government had agreed on the commission of the power plant on the condition that after the construction of Sampur power plant, no more coal-fired power plant will be constructed in Sri Lanka. But the commissioning of the power station was postponed for a long time, i.e., almost 10 years due to various conditions. In September 2016, by the application filed by an environmental organization in May 2016, the Ministry of Power and Renewable Energy informed Sri Lankan Supreme Court as fundamental rights that the projected coal-fired thermal power plant would not be built in Sampur.

11.3.2 Bangladesh India Friendship Power Company Private Limited (BIFPCL) Bangladesh India Friendship Power Company Pvt. Ltd. was registered on October 31, 2012, with Registration No. C-105370/12, with the Registrar office of Joint Stock Companies and Firms (JSCF) situated in Dhaka, the capital city of Bangladesh, and vide the Certificate of Incorporation. It is a private company incorporated under the Companies Act 1994 and limited by shares duly incorporated in Bangladesh.

11.4 Bangladesh Power Development Board (BPDB) 11.4.1 Background A judicial body is incorporated by the Government of Bangladesh in May 1972, after the divergence of Bangladesh Water and Power Development Authority, and it was named Bangladesh Power Development Board (BPDB). The board was under the power sector division of the Ministry of “Power, Energy, and Mineral Resources,” Government of Bangladesh. BPDB initiated its operations with an initial installed generation capacity of 200 MW and later increased it. As of November 2016, the installed capacity of power generation has been increased to 13,000 MW. The major

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part of the responsibility of BPDB is distribution and generation of electricity mainly in a major portion of urban section of Bangladesh except Dhaka and Bangladesh west zone (see Exhibit 11.5). According to PSMP-2010, BPDB has taken a massive plan to increase the capacity. Expansion plan of the capacity is to add approximately 11,600 MW power capacity in coming 5 years to achieve the power capacity of 24,000 MW, and the power system of the plant has been developed to keep up with the ever-growing requirements and needs. The aim of BPDB is to achieve desired economic and social development and provide reliable and quality power to all the people of Bangladesh (see Exhibits 11.6 and 11.7).

11.4.2 Generation Capacity Total generation capacity was 10,939 MW which includes 2,627 MW IPP/SIPP, 2,121 MW rental power, and 251 MW in REB (for PBS) and 500 MW import from India. The maximum peak generation was 7,817 MW which was 6.27% more than power generation in the previous year. The reason for lower peak generation with respect to generation capacity was: • Out of operation state of few plants due to maintenance, overhauling, and rehabilitation. • Derated capacity of some plants due to aging. • Gas storage of the plant (Exhibit 11.8).

11.4.3 Energy Generation Total energy generation (excluding REB) in keep FY 2015 was 43,738 MW, which was 8.54% greater than the preceding year’s total generation of 40,296 GWh. Gross energy generation in the public sector was 21,103 and 19,255 GWh in the private sector. Another 3,380 GWh was imported from India (see Exhibits 11.9 and 11.10).

11.5 Plant Efficiency and Maintenance The overall thermal efficiency (net) of public sector power plants in FY2015 was 33.29%, higher than the previous year’s 33.06% efficiency. Three-year maintenance plan was prepared at the beginning of FY 2013 to improve overall thermal efficiency (Exhibit 11.11).

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11.6 The Real Challenge Ever since its inception, Bangladesh was confronting severe power shortage and almost two-fifths of Bangladesh’s 160 mn population does not have access to electricity. It had an installed capacity of 10,283 MW which was much lower than the total required capacity. The country faces a daily shortage up to 1,500 MW of electricity which was retarding the growth of the economy of the country. So, one of the most important aspects of the India–Bangladesh friendship and ties was the power cooperation and power generation between the two nations. It badly needs financial and technical assistance to improve its power sector, and India needs to increase their international presence and hence could assist the eastern neighbor in meeting its rising demand for electricity as well.

11.7 Incorporation of BIFPCL A MoU was sanctioned by India and Bangladesh, the two countries on January 11 to strengthen the friendship and collaboration between the two neighboring nation during the first visit of honorable PM of Bangladesh to India in 2010, through the development of cooperation for mutual benefit for both the nation. The MoU envisioned many things including cooperation in the power and energy sector, grid connectivity, Exchange of Cross-Border Power and Power Generation. BPDB signed the MoU with NTPC in August 2010 and created a JV called Bangladesh India Friendship Power Company Pvt. Ltd. (BIFPCL) with fifty-fifty partnership of both parties, to set up an imported coal power plant of 1320 (2 × 660) MW situated in Khulna division. The company came into existence on October 31, 2012. The main objective of the firm was to establish and maintain the operations of coal-fired thermal power plant project in Bangladesh.

11.7.1 Main Objective of the Company (BIFPCL) The primary reasons for which the BIFPCL was established are to— • The attempt, wherever essential the development and construction of transmission line and ancillary work for coordinated, timely and facilitated exchange of electricity and power. • Configure, engineer, design, produce, manufacture, ensure finance, test, acquire, commission, develop, finish, permit, construct, claim, work, maintain, and operate thermal power ventures. • Bear on the matter and business of purchase, offering, selling, export, and import, creating, exchanging, producing, trade, generally managing and manufacture in all parts of electric power.

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• Establish, work, operate, manage, and deal with every single essential plant, foundations, and works in other associated businesses.

11.7.2 The Proposed Project of 2 × 660 MW Maitree Super Thermal Power Plant BIFPCL is currently working on the execution of a “FAST TRACK” Project of Bangladesh Government at Rampal power plant where full generated power will be given to Bangladesh. The project is a coal-fired super critical power plant named as 2 × 660 MW Maitree STPP.

11.7.2.1

Project Scope

The Project has an approved capacity of 1320 MW (2 × 660 MW) and will benefit by providing 100% Power to BPDB of Bangladesh (see Exhibit 11.12).

11.7.2.2

Project Inputs

The project requires inputs of land, water, fuel and tenders along with an approved EIA study (see Exhibit 11.13).

11.7.2.3

Location and Land

The proposed 1834 acre plant site is on the Passur River in the Ganges tidal floodplains in the southwest of Bangladesh. The site is 14 km in the north of the “Sundarbans Mangrove Forest,” and it is a “UNESCO World Heritage Site” and one of the few final remaining kinds of wood of the world. The site is 23 km southeast of the city of Khulna. The site averages 2 m above sea level an obviously key financial and operating risks factor given that it is a tidal delta where the historical maximum surge factor reported is 5 m. A key construction requirement is to raise the average site elevation by 5 m, but the site would remain at risk of flooding. It is considered that the site’s location and elevation are an extreme risk over the medium to long-term, in that ash ponds and infrastructure could easily be washed away (see Exhibit 11.14).

11.7 Incorporation of BIFPCL

11.7.2.4

193

Fuel and Resources

To run the plant in its operation would require 3.8 million tons per annum of coal at 80% plant load factor. The plant is being developed to use 5,800–6,100 kcal/kg calorific value of coal imported from Indonesia, South Africa, and Australia. Since Indian coal is of low energy and high ash content, the quantity of coal required would be around 6 million tons per annum and yield only 4,700 kcal/kg. So, in May 2016, it was reported that plant will use coal imported from China, Indonesia, and state-run Coal India Ltd. The plant would solely rely for water on the nearby Passur River for its operations.

11.7.2.5

Community Relocation

As per reports of EIA for Rampal Project, the project needs to displace 150 households and the estimated figure can change and go up. There are many reports in the media about inadequate compensation to the local residents.

11.7.2.6

Funding by Export–Import Bank of India

EXIM Bank was established to finance, facilitate, and further promote International Trade and Investment of India. The Government of India fully owns the EXIM Bank. A bid by Bharat Heavy Electrical Ltd. was backed by EXIM Bank. The bid was for providing the equipment and supplies for the plant and is currently in the midst of supplying the complete portion of the debt of the capital structure which amounts to the US $1.6bn. As EXIM bank depend on international borrowing of funds (49%) and funding the project would be a huge risk and shows a possibility of losing the sources of the fund (see Exhibits 11.15 and 11.16).

11.7.2.7

Delay in Implementation and Serious Flaws in Project

There is a chance of an increase in electricity rates in Bangladesh due to the project. The project has a revenue requirement that will call for a tariff level that is 32% more than the current cost of production. Not providing the subsidy will result in a cost of production that is 62% higher than the current cost. The inevitable delays in the project execution could further increase the cost of capital for the plant and could push up the tariffs again. • The assumption that 80–85% load factor will be achieved is not guaranteed. • The consumers could be exposed to global market risks as the plant predominantly relies on imported coal. • The project is located in the pathway of storm surges and is in a “wind risk zone.” • There is no clear plan for managing accidents and emergencies.

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EXIM Bank will be at high risk by the proposition to fund the Rampal debts. All the promoters and consumers of the project will be exposed to financial risks, and it puts explicit risk to EXIM Bank. The very fact that it is a coal-fired plant could create a risk of refinance for EXIM Bank. As the project makes up a major portion of loan book of the EXIM Bank, the international fundraising capacity of the EXIM Bank could be put at risk.

11.7.3 Sundarban Conflict The Sunderbans lie in the delta created by Ganges, Meghna, and Brahmaputra rivers on the Bay of Bengal and are the biggest and one of the few remaining mangrove kinds of wood of the world. It provides habitat for the Bengal tiger, mangrove forests, crocodiles, and a variety of different flora and fauna. Sunderbans also act as a barrier, a protection from storm and flood for millions of people who live near the delta. But this treasured piece of land is also under danger resulting from the growth and developments happening in the area. Being a developing economy, Bangladesh needs power and energy. UNESCO’s judge committee while acknowledging the Sundarbans said that the forest contains and nurtures an extraordinary biodiversity, which includes the “Bengal tiger” and with a broad variety of wildlife, fauna and flora. It presents a notable and ideal specimen of existing ecological systems such as monsoon rain, tidal influence, the formation of delta, flooding, and plant and vegetation colonization. In the preceding year, the Apex Court gave an order to delay the project following a common interest case filed by Human Rights and Peace for Bangladesh (HRPB) representing the people living there and against starting the plant. But the court took back its order non-permanent basis for a short time followed by a return petition filed by the general lawyer. By the time, Bangladesh authority has got the go-ahead sign from the Department of Environment (DoE) giving them a clearance for the project, while at the same time, they were planning to include some boundaries, terms, and conditions on measures to reduce or completely check the damages and hazards caused by the plant—established around nine km off the Sundarbans. The government has a short time ago assigned 62.45 crores (approx. £4.8 m) for the acquisition of land of 1,834 acres in Koigordashkathi and Satmari-Katakhali areas of Lubachhora under Rampal Upazila. The whole cycle of land acquisition for the project began officially earlier the last month, by keeping yourself away from public and news and publishing checks of 2.5 crore rupees among 67 owners of land, with support from the Khulna mayor and local MP. Bangladesh government also took a step to increase the depth of 10 km of the Possur River to make way for easy entry and exit of Indian ships to carry coal for the plant.

11.7 Incorporation of BIFPCL

195

11.7.4 Energy Dilemma The proposed project if properly implemented would significantly contribute to improving the power crisis situation existing in the country along with decreasing the pressure on the decreasing volume of reserves of natural gas. But there are some negative sides to the project too. With the strict regulations and laws present to conserve the biodiversity and the environment, the government has recently come to a conclusion of declaring dolphin sanctuaries in the part of Andharmanik and Pasur rivers. The project is certainly expected to change and reduce the underground water level because of the use of huge tube wells to pull in water for coal cleansing, and the excepted drawing is almost 25,000 m3 of water on a daily basis. Moreover, discharging the used water, which is relatively on higher temperature and either treated or not, into the river thereby poses a huge threat to the availability of drinking water and the living beings which depend on water. The large amounts of waste which are expelled due to the burning and processing of the coal will lead to the pollution of underground water and the water of the Poshur. The wastes in the form of liquid or sludge contain hazardous chemicals such as chromium, mercury, arsenic, and cadmium. These poisonous and hazardous chemicals which are released can pollute and contaminate the potable drinking water and create a danger to the humans like damage to the nervous system and the vital organs of people residing in and around the location, and it will also destroy the Sundarbans and its natural resources. Environmental enthusiasts are not sure whether the pollution of air will be on the higher side than expected if it uses Indian coal. The coal of Barapukuria is accepted to be of better or greater quality because of its less content of sulfur which is less than 1% while Indian coal is considered to be of lower quality because of the high sulfur content. Moreover, when a standard coal-fired power plant utilizes approximately 35% of the coal’s heat for the generation of electricity, most of the part of the produced heat will have to be released into the atmosphere or will have to be absorbed by the cooling water.

11.7.5 Final Decision A technical advisor, Mr. Shahjahan, commented that “We won’t accept it if the environmental hazard mitigation measures found not to be satisfactory.” A DoE senior official said that the location clearance was given by the DOE after meeting certain conditions which include a complete EIA report. For solving the issue, it would be better to publicly debate the issue and publish the pros and cons for drawing public opinion. But till now, the government was reluctant in revealing any further details.

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Exhibits

Exhibit 11.1 Two sides signed the following historic accords. Source http://www.ntpc.co.in

Exhibit 11.2 Source of electricity capacity by fuel type (MW, May 2016). Source Bangladesh Power Development Board, IEEFA calculations

Exhibits

197

Exhibit 11.3 NTPC PLF versus all India PLF. Source http://www.ntpc.co.in

Exhibit 11.4 International JVs of NTPC. Source powermin.nic.in

Exhibit 11.5 Average cost of electricity generation in Bangladesh has increased sustainability. Source Bangladesh Power Development Board Annual Reports

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Exhibit 11.6 Generation capacity by plant and fuel type. Source powermin.nic.in

Exhibit 11.7 Generation capacity (national) by fuel type with comparison. Source powermin.nic. in

Exhibit 11.8 Growth in installed capacity: NTPC, NTPC group, and all India. Source http://www. ntpc.co.in

Exhibits

Exhibit 11.9 Total net generation (national) by fuel. Source powermin.nic.in Exhibit 11.10 Composition of power sources. Source powermin.nic.in

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Exhibit 11.11 Locations of different power stations. Source https://ipfs.io

Exhibits Name of the Project

201 2X660MW Maitree Super Thermal Power Project

Location

Upazila: Rampal; Division: Khulna; District: Bagerhat, Bangladesh The site is located about 23 km southward of Khulna City and 14 km north of Mongla Port.

Nearest Railhead / Airport

36 km from Khulna Junction Rly Stn 105 km from Jessore Airport,12 kms from proposed Khan Jahan Ali Airport.

Approved Capacity

1320 MW (2 X 660 MW )

Beneficiaries

100% Power to BPDB of Bangladesh

Power Evacuation System

Generation Step up voltage is 400 KV. 400KV DC Line for connecting Dhaka ring main and 220KV DC Line for connecting Khulna substation.

Financing of Main Plant EPC Package

Financing of Main Plant EPC (Turnkey) Package is being done by Indian EXIM Bank

Exhibit 11.12 Project scope. Source Bangladesh India Friendship Power Company (P) Ltd

202 Land Requirement

11 National Thermal Power Corporation 915.5 acres of land available for the project. Land is owned by BPDB for which land lease agreement under signing with BPDB.

Water Source

Saline water from Pussur River for meeting cooling water requirement. Sweet water required for meeting the potable water, plant service water, cycle makeup (DM water), etc, shall be produced using Desalination process from saline water through Reverse Osmosis process.

Fuel

Usage of imported coal envisaged for the project.

EIA Study

EIA report has been approved by DOE (Dept of Environment), Bangladesh on 05.08.2013.

Tendering for Main Plant

NIT for Main Plant EPC Package done on 12.02.15. Bids opened on 22.09.15. Recommendation for Award of EPC Contract approved by BIFPCL Board on 23.12.15.NOA issued to M/s BHEL on 31.01.2016.

Synchronisation Schedule

Synchronisation of U#1 in 41 months from zero date which shall commence on issuance of Notice to Proceed after achieving Financial Closure

Exhibit 11.13 Project input. Source Bangladesh India Friendship Power Company (P) Ltd

Exhibits

203

Exhibit 11.14 Plant location. Source Environmental impact statement by CEGIS, January 2013

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Exhibit 11.15 Balance sheet BIFPCL as on June 30, 2015

Exhibits

Exhibit 11.16 Profit and loss statement as on June 30, 2015

205

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11 National Thermal Power Corporation

References http://mea.gov.in/bilateral-documents.htm?dtl/5147/Joint+Statement+on+the+occassion+of+the+ visit+of+the+PM+of+India+to+Bangladesh http://www.eurasiareview.com/28042016-growing-power-cooperation-between-india-andbangladesh-analysis/ http://www.business-standard.com/article/news-ians/dhaka-activists-protest-against-indiabangladesh-power-plant-116081601033_1.html http://www.vccircle.com/news/power/2016/02/09/backed-aggressive-financing-india-secures16b-bangladesh-power-project-order http://ep-bd.com/online/details.php?cid=35&id=17745 http://www.ntpc.co.in/en/rti/details/particulars-organisation-functions-and-duties http://www.ntpc.co.in/en/investors/corporate-governance http://economictimes.indiatimes.com/industry/energy/power/bhel-bags-ntpcs-bangladesh-project/ articleshow/53210731.cms https://www.google.co.in/?gws_rd=ssl#q=gurdeep+singh+bangladesh+power+project+2010 http://thedailynewnation.com/news/100035/deal-to-build-rampal-power-plant-signed.html# http://timesofindia.indiatimes.com/business/india-business/BIFPCL-signs-contract-agreementfor-Bangla-Thermal-Power-Project/articleshow/53211857.cms http://www.business-standard.com/company/ntpc-12001/information/company-history http://www.ntpc.co.in/en/about-us/board-of-directors https://www.google.co.in/?gws_rd=ssl#q=government+ask+NTPC+to+initiate+power+ generation+project+in+Bangladesh+2010 http://www.huffingtonpost.in/jai-sharda/the-india-bangladesh-rampal-power-project-is-a-wasteof-resource/ http://www.business-standard.com/article/economy-policy/ntpc-s-bangladesh-project-puts-eximbank-s-global-credibility-at-risk-ieefa-116061700926_1.html http://www.countercurrents.org/muhammad190913.htm http://www.climatechangenews.com/2012/02/23/fighting-for-the-survival-of-the-sundarbans/ http://ep-bd.com/online/details.php?cid=33&id=20346 http://mea.gov.in/bilateraldocuments.htm?dtl/5147/Joint+Statement+on+the+occassion+of+the+ visit+of+the+PM+of+India+to+Bangladesh

Chapter 12

ONGC

12.1 Introduction Mr. Narendra Kumar Verma took over the proceedings as Managing Director of ONGC Videsh Ltd., a subsidiary and foreign arm of ONGC in August 2014. He has an insurmountable peak to climb as the company’s target is to achieve a production of 20 MMTPA (oil and oil equivalent gas) by 2018 and 60 MMTPA by 2030. The present production capacity of ONGC Videsh Ltd. is 8.916 MMTOE (crude oil—5.510 MMT and natural gas—3.406 BCM) as of April 2016. In the last fiscal year, the effective ONGC Videsh’s share in the foreign asset is (−7.22) MMTOE as the company apart from producing the capacity, terminated five E&P contracts of Imperial Energy Corporation, Russia, which amounted to 15.296 MMTOE. The two options before the MD are that he has to reconsider the targets or he has to come up with a strategy to achieve the required objective. He heads toward the meeting hall hoping that the strategy team will come up with a solution to the pertaining problem.

12.2 Industry Analysis The three major sources of energy in the world are coal, oil, and natural gas.

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12.2.1 Crude Oil Crude oil is a compound of hydrocarbons, and oil is formed by accumulating hydrocarbons. Natural gas and crude oil are usually found under the earth’s surface. The benefits of crude oil are it is transportable and storable. Gasoline, diesel fuel, and aviation or jet fuel, the products of crude oil, are derived by processing the crude oil in a refinery. The purpose of the refinery is to remove the non-hydrocarbons and break down the oil into other components based on weight and boiling point. Different types and products of fuel are listed in Exhibit 12.1.

12.2.2 Natural Gas Natural gas falls under the category of fossil fuels and is considered to be one of the cleanest fuel when compared to other fossil fuels. Methane is the major contributor to natural gas with a percentage between 70 and 90%. It is easily convertible to other forms like LNG, CNG, and PNG. It is basically a mixture of gaseous hydrocarbons.

12.2.3 Oil and Gas Production in India The production of crude oil in India will continue to decline in 2016–17 as per BP statistical review of world energy. It is also estimated that the actual oil production in India is just 5% of the total reserves which are available. The total crude oil reserves are around 800 million tons by the end of 2015. In 2016–17, it is expected that the crude oil production will decline by 0.2% to 36.9 million tons due to fall in output of joint ventures and private oil companies. This sluggish oil production by the domestic players will lead to increased crude oil imports with more refined capacity. In India, the oil production of domestic players like ONGC and Oil India is expected to increase by 0.6 and 0.8%, respectively. The financial performance of the industry has an impact due to the increased imports and falling international crude oil prices. As the prices fell, the net sales were steeper compared to the operating expenses and the operating profits reduced by 36%. The interesting thing is the profits increased by 2.7%, and this is due to the fall in depreciation and tax expenses (see Exhibits 12.2 and 12.3).

12.3 ONGC Until 1955, two private companies had the capability for the oil and hydrocarbon production and one company did the exploration part in India. In 1955, the Government

12.3 ONGC

209

of India realized the importance of hydrocarbon resources as a proponent of growth and decided to set up an Oil and Natural Gas Directorate, under the jurisdiction of Ministry of natural resources and scientific research. Foreign experts from USA, USSR, West Germany, and Romania visited India and trained on oil exploration and production. It was soon realized that as a “Directorate” with limited administrative and financial authority, the functioning would be inefficient. So, it was raised to the position of “Commission” and then further to a statutory body through an act of the parliament in October 1959. The parliamentary act stated the function of ONGC as the following—“to plan, promote, organize and implement programs for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it”. During the time period of 1961–1990, ONGC found new oil basins in Assam, Cambay, East Coast, and Bombay High. All this leads to the discovery of 5 billion tonnes of hydrocarbons in the country. ONGC always strived for self-reliance and development of core competence in the area of E&P at global levels and standards. ONGC, today, is the leader in exploration and production (E&P) activities in India contributing 72% to crude oil production and 48% of the natural gas production of India. ONGC produces 1.2 million barrels of oil equivalent/day (see Exhibit 12.5). It stands proudly in the Fortune “World’s Most Admired Companies” and is ranked third worldwide in the “E&P industry globally on the Platts Top 250 Rankings 2014” (see Exhibit 12.4).

12.4 Major Competitors 12.4.1 Reliance Industries Limited The company was started in the year 1966 as textile-based firm. Later on by 1985, it has expanded by integrating backward majorly with petrochemicals and crude oil refining of oil and gas. It is one of the largest petrochemical manufacturers company and is ranked among the top 10 globally. The company is into exploration and production with the majority of the interest in the Krishna–Godavari basin (60%). K-G basin is considered to be the major source of gas production, but it has been declining gradually. The production in 2010 was 61.5 mmscmd, and it reduced to 13.3 mmscmd in March 2015. For RIL crude oil and natural gas production details, refer to Exhibit 12.5. In the international arena, RIL has production sharing contracts for a couple of blocks in Myanmar in 2015–16, and apart from this, they have five conventional blocks, two of which are located in Yemen, two in Myanmar, and the remaining one in Peru. Reliance Industries has 76% stake in four entities of Gulf Africa Petroleum Corporation (GAPCO). GAPCO owns large petroleum storage facilities and also has

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a retail distribution network in eastern part of the African countries. RIL has also made huge investments in shale gas reserves in the USA. Reliance also operates in Dubai as Reliance exploration and production DMCC founded in 2007, which is a subsidiary of RIIHL. In Dubai, the company operates in well drilling, onshore, and offshore oil and gas field services, oil and natural gas development board, and repairing equipment board.

12.4.2 Oil India Limited Oil India Limited (OIL) stands out to be one of the largest producers of crude oil and natural gas in India with a production of 3.3 million tonnes in 2015–16. It falls under the public sector player and is mainly into exploration, development, and production of crude oil and natural gas and transportation of crude oil and LPG production. It has a market share of 10% in the domestic crude oil production segment. Despite the falling prices of crude oil, the company managed to have a flat operating income of Rs. 97.6 billion. In India, it has signed production sharing contracts with various players like Essar Oil and GeoGlobal Resources in the exploration and production business (see Exhibits 12.6 and 12.7). On the whole, OIL has a total of 54 blocks, of which 41 are in India and the remaining 13 blocks are spread foreign countries like Nigeria, Yemen, Libya, Gabon, Venezuela, Egypt, Bangladesh, Russia, Mozambique, and USA. When it comes to expanding internationally, the focus of OIL is acquisitions. OIL is continuously striving to use its acquisition strategy to acquire E&P assets in the Middle East, South America, and Africa.

12.4.3 Cairn India Limited In the private sector, it is one of the largest players in the exploration and production segment. Vedanta Group is the promoter of Cairn India Limited. It has two blocks, one in South Africa and the other in Sri Lanka, where the operations are yet to start in the later. It operates in nine blocks in India and the company contributes 20% to the overall production of oil in India. It is also observed that there is a decline of 3 percent in the year-on-year production. This is due to the lower production from its Rajasthan block. The top line and the profits are declining gradually due to fall in oil prices. In South Africa, it has entered into a farm-in agreement with PetroSA in the Orange basin in 2012.

12.5 Incorporation of ONGC Videsh Ltd.

211

12.5 Incorporation of ONGC Videsh Ltd. On March 5, 1965, an entity named Hydrocarbons India Pvt. Ltd. is incorporated to explore and develop Rostam and Raksh oil fields in Iran. It took on a service agreement in Iraq. Later On June 15, 1989, Hydrocarbons India Pvt. Ltd. is renamed as ONGC Videsh Ltd. or OVL. ONGC Videsh Ltd. became a subsidiary of ONGC that takes care of exploring, development, and production of oil and gas outside India. The Indian crude oil production increased from 10.51 MMTPZ in 1980 to 34 MMTPA by 1990, but the oil wells were literally flogged to death and hence the production reduced to 26 MMTPA by 1992. Foreseeing the same, the growth in the expansion of OVL is radical post-2000 as the government granted special empowerments to the company to take decisions on acquiring assets across various countries. The key idea is to expand the business so as to benefit Indian oil production and hence the special empowerment is given to the company that overruled the power of the Board as well. At present, OVL has 13 oil and gas assets across ten different countries (by April 2016) and 17.5% of oil production in India is contributed by OVL. Exhibit 12.8 illustrates all the projects being handled by OVL.

12.5.1 Early Growth OVL started exploring the oil fields in the countries Egypt, Yemen, Tunisia, and Vietnam in the early nineties. OVL retained a block in one of the oil fields in Vietnam. By 2000, it had only one asset. ONGC then decided to extend its operations in the international level so as to increase its capacity and diversify and hedge the risk at the same time. OVL secured 20% of the equity in Sakhalin-I, Russia, for approximately USD 1.7 billion (one of the biggest deal during that point in time) in 2001. OVL which acted as a sole licensee acquired Block-8, Iran, to explore and develop the oil field. The contract is not fulfilled initially due to the then conditions in Iraq in April 2003, but OVL held on to the contract subsequently after the Iraqi government passed a separate law to ratify some contracts. Apart from the above acquisitions, OVL acquired 20% stake in Myanmar Block A-1, 40% stake in Farsi block, Iran, 49% stake in NC-188 and NC-189 blocks, Libya, 60% stake in Block-XXIV, Syria, 24.125% stake in Block 5A and 5B, Sudan, 70% stake in North Ramadan, Egypt by October, 2006. In 2006, OVL entered into a joint venture with the Mittal Steel Group and incorporated ONGC Mittal Energy Limited (OMEL) in Cyprus. OVL and Mittal Steel Group each held 50% shares of OMEL.

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OVL produced about 6.62 MMTPA of oil and oil equivalent gas from its assets in 2005–06, and it had a target to acquire 20 MMTPA of oil and oil equivalent gas by 2020.

12.5.2 Takeover of Imperial Energy Corporation and Further Acquisitions To meet the objective of reaching 20 MMTPA by 2020, OVL increased its speed in acquiring oil fields after 2008. OVL acquired 40% PI in San Cristobal, Venezuela, in 2008 for $356 million. Further, it planned to acquire Imperial Energy Corporation in Russia, a listed company in London Stock Exchange that has oil blocks in western Siberia and some parts of Kazakhstan. To acquire the same, OVL needs approval at least 90% of the shareholders. Subsequently, 96.8% of the shareholders accepted the takeover leading to the delisting of the company from LSE and OVL successfully acquired Imperial Energy Corporation in January 2009 for a whopping $1.9 billion. Imperial Energy is expected to have approximately 6.8 billion barrels of oil in reserves. Further acquisitions of OVL are listed in Exhibit 12.9. The capital investments in oil and natural gas field are always linked with operational and legal risks. In line with the same, OVL faced huge operational and legal risks in Venezuela which is worth of almost $2.5 billion in 2014. ONGC Videsh is facing problems of implementation of even the signed contracts with Venezuelan state oil company, PdVSA. While the dividends approved for San Cristobal for four years from 2009 to 2012, totaling about $421 million have not been paid, various provisions in the contracts for Petro Carabobo project have been reopened, exposing OVL to higher investment risk in the country. ONGC’s foreign arm said in a letter to the oil ministry.

Still, OVL is keen to invest in Venezuela as it has the largest reserves of oil (even more than Saudi Arabia) and OVL did not want to lose an opportunity to increase its capacity. Hence, it encouraged the government to come up with bilateral agreements to minimize the overall risk.

12.5.3 Dispute Regarding Imperial Energy Corporation (IEC) IEC is expected to produce 35,000–80,000 barrels per day, but it produced only 19,200 barrels of oil per day on an average and the total cost incurred on the project stood at $2.9 billion as on August 2015. The senior management and the center had to justify its acquisition and prove that it was not an unrealistic estimate in front of a parliamentary panel that is set up to inquire about the shortfall of production.

12.5 Incorporation of ONGC Videsh Ltd.

213

The center was sure that the oil field of that capacity can be exploited easily with appropriate technology. Further, the IEC reserves were certified by an internationally reputed US-based reserves audit firm DeGolyer and MacNaughton (D&M). OVL partnered with an US-based exploration and production company for a pilot project—using fracking and horizontal drilling to exploit these reservoirs. The center is keen on a turnaround, but OVL requires some time to achieve the same. The panel is set to enquire on August 13, 2015, and the dilemma is will the center negotiate and get enough time to force a turnaround or will the center succumb to the panel’s decision and get ready to sell off the stake in IEC? The center successfully negotiated with the panel regarding the same and asked to be appraised of the pilot project and the subsequent improvements in IEC at that point of time, but the company subsequently sold off five E&P contracts in the fiscal year 2015–16. OVL was quickly back on the track after the dispute and continued to enhance its capacity and exposure. It acquired 15% stake in Vankor, the second biggest oil field in Russia, paying an amount of $1.3 billion, the company’s fourth-largest acquisition ever (in terms of amount paid). It further revised the targets to achieve 20 MMTPA by 2018 and an ambitious target of 60 MMTPA by 2030. While the government is trying to support OVL by enabling bilateral ties and creating provision worth $3 billion by selling stake of 5% in ONGC, the challenges of dip in global oil prices (Exhibit 12.2), increase in the affordability of alternate energy sources, and increase in financial and operating risks are making Mr. Verma to rethink the strategy of organic growth in meeting the target of 2030.

Exhibits

Type

Products

Liquefied petroleum Gas (5 -10%)

Ethane, Propane, Butane

Light Ends (30-35%)

Gasoline

Middle distillates (30 -35%)

Diesel and Jet Kerosene

Residual fuel oil (15 -20%)

Coke Sulphur and Bitumen

Exhibit 12.1 Types and products of fuel oil. Source CRISIL Research

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12 ONGC

108.39

28.94

Exhibit 12.2 Trend of Brent crude USD. Source World Bank Oil Price Forecast

Exhibit 12.3 World Bank Oil Price Forecast. Source World Bank Oil Price Forecast

Exhibits

215 2015-16 2014-15 2013-14 2012-13 2011-12

EQUITIES AND LIABILITIES Equity Share Capital Reserves and Surplus Minority Interest Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Total Capital And Liabilities ASSETS Fixed Assets Non-Current Investments Deferred Tax Assets [Net] Long Term Loans And Advances Other Non-Current Assets Current Investments Inventories Trade Receivables Cash And Cash Equivalents Short Term Loans And Advances Other Current Assets Total Assets Contingent Liabilities

4,278 180,467 2,507 7,321 33,886 17,232 5,431 356,211

4,278 176,177 2,473 4,289 30,387 16,867 2,259 337,683

4,278 167,873 2,913 13,907 30,678 21,819 947 324,911

4,278 148,250 1,947 11,608 18,619 17,097 1,048 253,457

4,278 132,161 2,208 10,015 18,133 19,817 2,397 231,650

236,329 5,894 1,192 10,951 25,435 3,088 10,090 9,686 25,784 8,956 1,163 356,211 79,611

223,201 4,747 585 10,719 21,367 2 10,606 18,797 16,097 10,033 1,387 337,683 65,487

209,603 4,720 689 10,221 18,169 25 14,801 16,028 24,480 6,820 1,000 324,911 80,190

164,705 2,045 624 19,468 2,470 83 12,780 15,396 19,619 5,332 2,609 253,457 57,115

141,243 2,041 19 17,578 2,920 880 13,168 11,714 27,890 4,931 1,468 231,650 58,863

2015-16 129,278 35,875 6,731

2014-15 159,070 61,913 21,803

2013-14 173,245 68,277 7,121

2012-13 161,466 61,730 30,369

2011-12 146,369 46,787 29,229

723

1,723

-719

-1,121

-464

2,713 2,157 18,009 6,080 37,095 8,417 14,124

9,361 2,862 18,033 10,951 11,436 9,697 18,334

2,531 624 16,581 8,488 38,240 12,760 26,507

2,459 484 12,094 11,046 11,865 12,752 24,220

1,696 435 12,933 10,514 10,173 14,375 28,144

Profit and Loss Statement (INR in Crores) Revenue From Operations [Net] Cost Of Materials Consumed Operating And Direct Expenses Changes In Inventory: FG,WIP And Stock-In Trade Employee Benefit Expenses Finance Costs Depreciation And Amortization Expenses Miscellaneous Expenses Written Off Other Expenses Total Tax Expenses Consolidated Profit

Exhibit 12.4 ONGC financials—consolidated balance sheet (INR in crores). Source http://www. ongcindia.com

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12 ONGC

(a) 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

RIL: Crude Oil ProducƟon (in Million Tonnes) 0.9

0.6 0.5

0.4

2011-12

(b) 14

0.5

2012-13

2013-14

2014-15

2015-16

RIL: Natural Gas ProducƟon (billion cubic metres) 12.8

12 10 8

6.7

6

3.9

3.4

3

2013-14

2014-15

2015-16

4 2 0 2011-12

2012-13

Exhibit 12.5 RIL crude oil and natural gas production. a Source CRISIL Research. b Source CRISIL Research Exhibit 12.6 Overview—crude oil and natural gas. Source CMIE Industry Outlook

Sales Growth Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

% change -7.43 13.85 10.75 16.5 3.85 -3.76 -10.04

Qtly Sales Growth Qtr. Ended Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

% change 12.41 -0.63 0.18 -1.53 -4.46 -25.77 -21.88

Exhibits

217

Year

Crude Oil Production

Natural Gas

Imports

Production

Imports

Consumption

Quantity

Value

Quantity

'000 tonnes

'000 tonnes

USD million

Million Million cubic Million cubic cubic metres metres metres

2010-11

37,711.70

153,119.40

92,513.30

52,218.70

11,627.90

63,333.10

2011-12

38,089.70

165,711.50 134,253.10 47,558.60

13,443.30

61,642.60

2012-13

37,862.00

185,533.10 144,276.00 40,679.30

14,484.50

53,736.00

2013-14

37,788.40

189,178.30 143,754.10 35,406.90

14,245.80

48,029.40

2014-15

37,461.00

187,913.60 116,011.90 33,656.30

15,176.40

47,212.00

2015-16

36,950.00

202,314.30

65,596.20

32,249.20

21,092.70

52,659.00

2016-17*

36,285.20

217,931.00

69,412.10

31,650.40

24,977.10

56,629.50

2017-18

36,262.00

227,410.00

80,286.20

31,329.10

27,672.10

58,440.00

2018-19

36,909.00

231,300.00

88,590.30

31,536.70

29,534.60

60,425.00

2019-20

37,578.00

235,554.00

97,119.60

31,837.40

31,450.00

62,700.00

2020-21

38,185.00

246,054.00 108,961.10 32,273.10

33,900.00

65,300.00

Exhibit 12.7 Production, imports and consumption of crude oil and natural gas. *Values in bold indicate the projected figures. Source CMIE Industry Outlook Exhibit 12.8 Projects being handled by ONGC. Source ONGC Annual Report 2015–16

Country Vietnam Russia Sudan South Sudan Myanmar Syria Brazil Columbia Venezuela Azerbaijan

No. of Projects 1 2 1 2 2 1 1 1 1 1

218

Year 2010 2011 2012 2013 2013 2014 2014 2014

12 ONGC

Acquisitions 11% stake in Carabobo-1 Project-Venezuela 25% participating interest in Satpayev Block, Caspian Sea, Kazakhstan 100% PI in GUA offshore in Colombia 2.72% stake in ACG Azerbaijan, 2.36% stake in BTC pipeline 12% PI in block BC-10, Brazil Bought 6% stake from Videocon and an additional 10% stake in the Rovuma Area 1 Offshore Mozambique for a whopping $4.125 billion. 97% participating interest in two onshore blocks in the Myanmar 100% stake in offshore block 14-TAR-R1 in New Zealand

Exhibit 12.9 Acquisitions/PI of ONGC in the past 5 years. Source ongcvidesh.com

References CMIE Industry Outlook Company Published Annual Reports CRISIL Research https://knoema.com/infographics/yxptpab/crude-oil-price-forecast-long-term-2016-to-2025-dataand-charts http://www.ongcindia.com/ http://www.ongcvidesh.com/ http://www.investing.com/commodities/brent-oil

Chapter 13

Punjab National Bank

13.1 Introduction Indian banks have adequate capital and sufficiently regulated under the Reserve Bank of India. The economic scenario of India is also much better than the other countries. The risk assessment studies on parameters of market, credit, and liquidity also indicate similar stability and resilience in the Indian banking sector to survive through the global recession. The industry off late has adopted innovative models for banking such as payment and micro finance models of banking. The financial year 2015–16 saw 10 small finance and 11 payment banks being principally approved for functioning by RBI. Such novel steps being rolled by the Central Bank of India will be instrumental to give a new shape to the Indian banking industry in the long run.

13.1.1 Market Size The Indian banking industry is constituted by foreign banks, public and private domestic banks, urban and rural banks, cooperative and regional banks along with the credit institutions of cooperatives. Major share up to 80% is held by the public sector banks. The private and other players have thus little share left for them. A total of 26 public sector banks are functional in India in comparison to the 25 private banks. Foreign banks are also considerable with a count of 43. Urban cooperative banks’ count runs above 1500. Rural banks are regional, 53, as well as cooperative, 93,550.

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Banking through mobile phones is also being encouraged and gaining customers swiftly. The credit share which was less than 10% in 2014 for the Indian banking sector has been estimated to grow up to 11–13% by the year 2017 (Standard and Poor Report).

13.1.2 Industry Scenario of Indian Banking Industry The banking sector in India has grown more qualitatively than quantitatively. It is anticipated to be so for next years as well but with a decreased pace of growth. The Vision 2020 document by Planning Commission forecasts and draft 10th FYP had also forecasted similarly. By 2010, scheduled banks’ assets were calculated to be INR 4,090,000 crores, which is estimated to be 65% of current GDP. The system of Indian banking is regulated by the 1949 Banking Regulation Act of India. The two major categories banks have been classified into are scheduled and non-scheduled. The category of scheduled banks includes cooperative and commercial banks. The commercial bank can also be classified as nationalized, private, SBI with its group banks, and regional rural banks. This categorization will be based on the ownership. The category of private sector banks is coming up as leaders in the services of the Internet and mobile banking and ATM. The foreign banks are in the offing to get ahead in the Indian banking industry.

13.2 Punjab National Bank 13.2.1 Company History Punjab National Bank had its roots in Lahore when Lala Lajpat Rai, Babu Kali Prasono Roy, and Sardar Dyal Singh inspired its foundation in 1894. The Indian Companies Act of 1882 in its Act VI enshrined the bank with a capital amount of 2 Lac. Withstanding the pressures of partition and financial crisis, the bank did away with 40% of its deposits by closing one-third of its offices which were in West Pakistan. Delhi became the new location for registered office by shifting it from Lahore in June 1947. New partners as Bharat Bank and Indo Commercial bank were added by PNB to establish a hold in the market of new India. In 1969, nationalization by the GoI covered 13 other banks along with PNB. The growth story of PNB comprises of mergers and takeovers. The timeline has witnessed seven private banks being absorbed and the only merger of a nationalized bank, New Bank, in India. PNB has also funded regional rural banks (RRBs) with the aim to reinforce credit delivery mechanism in rural India.

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221

In 2003, the Nedungadi Bank Ltd (e-NBL) of Kerala was merged with PNB. The motive was satisfied the capital needs as per Basel II norms. Follow-on Public Offers (FPOs) were also rolled out in 2005 to bring down the stake held by GoI under 6%.

13.2.2 Company Profile and Business Performance PNB has its headquarters in New Delhi. Its offices count around 5,400 making it second biggest nationalized bank network. Bank provides an array of services to both its categories of clients, retail and corporate. Its products include credit cards, insurance, private banking, consumer banking, wealth and equity management. Simultaneously, it has met its social responsibilities along with becoming a tech-savvy organization. Shri Sunil Mehta is currently serving as the MD and CEO of the bank. The branches’ number near seven thousand, and the ATMs count around ten thousand. It ranks high in most of the financial parameters as operating profit, business across globe, and deposits. Its business has been growing at an annual rate of 5%, and the liabilities of global deposits are on the rise with a YoY growth of 7%. The saving deposits grow annually by 14%. The assets for PNB, net advances, grow by around 3% annually. Retail credit has witnessed a growth of 20%, agricultural credits by 10%, and MSME advances by 8%. The operating and net profits have also risen. PNB has one of the highest domestic net interest margin and a CRA ratio of around 12%. The cost of deposits has fallen slightly.

13.2.3 Digital Banking The bank has also launched many innovative digital products and services. An app to spot ATMs and record complaints has been launched as “PNB ATM Assist.” Other digital solutions as MobiEase and SleepEase have also been made available for touch banking and Internet and mobile banking, respectively. Customers can also get an instant PIN by using GreenPIN app. SMS banking has been rolled out in ten widely spoken local languages like Punjabi, Urdu, Kannada, and others. Customers have been provided the facility to register for mobile banking with ease across its network of ATMs. Online facilities for opening PF and RD accounts together with securing a locker across the country have been made available at PNB Web site. “Book your LockerAnywhere in India” has made it easy for customers to locate a vacant locker in any city. PNB has also made its brand presence on social media with Twitter and LinkedIn accounts.

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13 Punjab National Bank

13.2.4 Financial Inclusion PNB was among the first movers in rolling out Pradhan Mantri Jan Dhan Yojana (PMJDY) and mobilizing deposits. More than a 100 lakh Rupay debit cards have been issued by the bank, and around 135 lakh accounts were opened to mobilize nearly two thousand crores. The “Vitiya Jan Chetna Abhiyan” by PNB was an added attempt to impart financial awareness across the population. Micro-ATMs were first deployed by PNB to enable financial operations across backward locations.

13.2.5 Corporate Social Responsibility PNB opened “Sukanya Samriddhi” accounts for women to deposit safely. Other schemes Vanita financing, Mahila Kaushal Vikas Yojana, Power Ride and Savings are an effort toward women empowerment. “Akshaya” branches of PNB are wholly managed by and cater to women only.

13.2.6 Awards and Recognitions PNB has collected many awards and accolades across domains. The major ones include “Golden Peacock National Training Award 2016”, “Best Bank for PMJDY (Large Bank),” “The Brand Trust Report 2016,” “RBI Rajbhasha Award,” “Agriculture Leadership Award 2015,” “Most Respected Public Sector Bank,” and “Banking Excellence Award 2015.” It ranks globally in the top 200 banks and first in the nationalized Indian banks. It is also the most trusted brand among banks, as per the Trust Research Advisory

13.3 Competitor and Industry Analysis 13.3.1 Punjab National Bank Direct Competitors There are many banks operating in India which belong to different categories such as public sector banks, regional rural banks, foreign banks, private sector banks, and cooperative banks. Currently, there are 27 public sector banks; out of it 19 are nationalized. There are many foreign banks which are having its branches in India with huge investments. All these are the direct competitors of Punjab National Bank.

13.3 Competitor and Industry Analysis

223

13.3.2 Comparison of Punjab National Bank and Direct Competitors Ratio analysis with direct competitors in the industry is shown in Exhibit 13.1.

13.3.3 Banking Industry Analysis There are many factors affecting the banking industry in India. There is a need to do PESTEL analysis of the industry to understand a better idea about the industry.

13.3.3.1 • • • • • • • •

Factors Affecting the Industry

Government interaction in the industry Labor law and tax policy Environmental law Trade restrictions Tariffs and political stability Regulation of government Budget and budget measures Foreign direct investment limits.

13.3.3.2

Economic Factors

RBI declares its six-month economic policies which have a high impact on the banking industry. Economic measures to boost economic growth will have an influence on the savings, deposits, and other banking interaction with the customers.

13.3.3.3

Sociocultural Factors

Cultural aspects, health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety affect the investment behavior of customers (see Exhibit 13.2).

13.3.3.4

Technological Factors

Technology plays a very important role. Using technology, new products and services are introduced.

224

13.3.3.5

13 Punjab National Bank

Environmental Factors

The environment in India is changing in the banking industry. Growth in the service industry is 55%. As there is an increase in the growth in service sectors, increase in income will increase lending and savings.

13.3.3.6

Legal Factors

There are two major factors determining the legal aspects of policy. Banking regulation Act 1949 was enacted. Intervention by RBI will intervene in smooth sharp movements in the rupee. PNB has branches in Dubai and Hong Kong outside India. Both countries have different external environments compared to India. Hong Kong • High concentration of banks, almost 70 of the 100 best banks in the world have branches in Hong Kong • The reason behind this situation is the tall transparency standards in the market, and institutions are handled prudently. • The Global Financial Centers Index (GFCI) by the Z/Yen Group listed Hong Kong third in September 2015. • In 2001, china became a member of WTO. From then, the government policies have been helpful to accommodate foreign banks to establish in Hong Kong and the Mainland. Dubai • The scenario in Dubai is different from the rest of the places, as recently there is a surge of Islamic banking in that region. Most of the banks are opening Islamic banking divisions or converted to Islamic banking itself/ • The government of UAE is concentrating on infrastructural development in UAE, which gives banks to participate in these projects. • It has political stability and favorable tax laws, and is also a peace-loving country. • So PNB should try to formulate strategies which pertain to only this country. UK • PNB has fully owned subsidiary in UK. It has seven branches across UK. • Political interference looms over banking sector which marks a question on the capacity of government, and its policies and frameworks need to be reviewed. • Recently, Brexit and other related political activities have a huge impact on the banking sector. • Bank strategies are being controlled by the political regulations inside UK. Economy is also an open economy. It has investment from all around the world.

13.4 Punjab National Bank International Limited

225

13.4 Punjab National Bank International Limited The international unit of PNB, Punjab National Bank (International) Limited (PNBIL), was seeded in 2006 in the UK and authorized the next year to carry out the financial services. This is a subsidiary under the Indian PNB unit. PNB connects its branches through Core Banking Solution to ensure its services are available anytime and anywhere. PNBIL is also backed from the Indian institution. PNBIL started with two branches and has now grown into seven branches across the UK. It is the fastest-growing Indian bank in London and has built an asset size above 500 million dollars. The bank has aims to improve its service and match its own Indian targets of clearing checks in a single day.

13.4.1 The Services Offered by PNBIL • Remittances with reach across its around seven thousand Indian branches • Current, savings, and business accounts • NRI and FCNR accounts with Indian branches for global currencies as Dollar, euro, and Sterling • Inquiry facility on your Indian accounts with the bank • Attractive FDs • International debit card • Internet banking • Cash ISA. PNB should increase its international presence by opening offices through: • • • •

Establishment of subsidiaries Branches Representative offices Joint ventures.

After the successful wholly owned subsidiary at London, Punjab National Bank should focus toward Canada due to the tremendous presence of Punjabi population.

13.5 Plans to Expand Global Operations “In terms of our international operations, we are now present in nine countries. We are in the process of a few more expansions of getting into Australia in the form of a rep (representation) office for which we have already received license and efforts are on,” bank’s Managing Director says. “Our license for a subsidiary in Canada is pending with the Canadian regulator and we are pursuing it. We are also pursuing our application for upgrading our office in Oslo in Norway into a full-fledged branch,”

226

13 Punjab National Bank

he said. He said. “We are exploring the possibility of moving in Europe, keeping London as our international headquarters”. The bank has begun hiring consultancy firms to aid its network with local regulators for securing branch licenses and other necessities. The GM for overseas expansion at PNB said, “Our proposed joint venture in Bhutan has been finalized and very soon, we may announce the details of the new subsidiary that is expected to have a majority stake of PNB. Since most of the power projects in Bhutan are currently being set up by Indian companies, our new venture is expected to reap maximum benefits. Also, we are actively looking at opening PNB branches in countries like Sri Lanka, Bangladesh, and Pakistan since expansion across the SAARC region is our prime focus.” PNB has already secured approval from RBI for branches in Singapore. “The local regulator in Singapore has cleared most of the documents required to acquire the license for opening a branch,” said Dhawan. PNB has aimed to reach Japan, Australia, and South Africa, and meetings are being organized with regulatory officials in Kazakhstan for upgrading its office into a fully functional branch. “PNB has also finalized to open full-fledged branches in Shanghai in China, Dubai’s International Finance Centre, and Norway. We will be the first Indian bank to open a branch in the Scandinavian region as bilateral trade between the Scandinavian nations and India is currently pegged over $1 billion per annum,” added Dhawan. Branch extension has been planned in Canada across Vancouver and Toronto. Similar blueprints have been approved by the MD for Leicester and Birmingham. Punjab National Bank has expanded in countries that have a good base of Indian origin population. So, because of a similar customer base in these countries as in India, there is not much of a cultural distance. But, considering the fact that a large portion of customers for PNB belong to rural India, there emerges quite a bit of difference between the customers in India and the regions in which PNB has already expanded and plans to expand further. Similarly, there is a lot of difference in the economies of the countries considering the fact that India is relatively a closed economy. Punjab National Bank already has a large pool skilled human resource at its disposal, which has already gained a lot of domain knowledge in the context of the banking sector of India. In terms of other resources, such as IT infrastructure, it is still growing as is the Indian setup. And this difference in the digital expertise might pose some difficulties for it when it plans to expand in areas that are digitally ahead of India.

13.6 Moving Forward For the current financial year, the bank’s focus is on trimming its stressed assets and enhances asset quality. The bank is equally pertinent toward its strategy of “Retail PNB—Digital PNB” which is driven by rallying low-cost deposits and adding to small ticket advances’ share through technological push, thus empowering the growth of the business.

13.6 Moving Forward

227

In order to sustain the advantage, I as a CEO would be concentrating on some of the factors which will be effective in generating a competitive edge over the competitors. Operational efficiency is one area that needs to be improved. PSBs lag behind the private players in cost management. The rocketing cost income ratios demonstrate the same. Digital initiatives will be the beginning steps. Branch channels can be cost analyzed to provide real costs for digital service to customers. This prevents customers from migrating to other players. Adding front desk staff along with selfservice kiosks will help. Digitalization can hugely reduce the costs and enhance the probability of transactions. The daily baggage is also reduced on systems. Long-term relationships can be established by involving customers. The opening of e-zones where customers locate kiosks have machines convenient for customer handling, and provide video communication with the banking staff. Technology aids ease problem identification and solution. Documents as proof can aid service disposition.

Exhibits

EQUITY SHARE DATA

Ratios

UNITS

PNB

AXIS BANK

PNB Vs AXIS BANK

SYNDICATE

PNB Vs

FEDERAL

BANK

SYNDICATE

BANK

PNB Vs FEDERAL BANK

YES BANK

PNB Vs YES BANK

Earnings per share

Rs

-19.6

35

-56%

23

-85%

12.3

-159%

60.2

-33%

Dividends per share

Rs

0

5

0%

4.7

0%

2.2

0%

10

0%

Book value per share

Rs

212.9

224.8

95%

216.1

99%

89.9

237%

327.3

65%

X

0.5

2.8

16%

0.4

110%

1.4

33%

2.3

20%

Avg P/E ratio

X

-6.1

14

-44%

5.9

-103%

9.8

-62%

12.4

-49%

Dividend payout

%

0

14.3

0%

20.4

0%

17.8

0%

16.6

0%

No. of employees

`000

70.8

50.1

141%

29.1

243%

11

645%

8.8

805%

Rs m

65,645

40,193

163%

22,294

294%

9,131

719%

13,198

497%

Rs Th

-542.8

1,665.40

-33%

523.3

-104%

963.3

-56%

2,875.30

-19%

Avg Price / Income ratio

Total wages & salary

Avg. net profit/employee

Exhibit 13.1 Ratio Analysis with Industry Competitors. Source www.pnbindia.in

228

13 Punjab National Bank

INCOME DATA

Net interest income

Rs m

1,64,733

1,70,650

97%

55,209

298%

24,314

678%

45,680

361%

Operating expense

Rs m

1,03,499

1,06,114

98%

36,211

286%

16,752

618%

30,050

344%

Gross profit

Rs m

61,234

64,537

95%

18,998

322%

7,562

810%

15,630

392%

Gross profit margin

%

12.1

15.6

77%

8.8

137%

10.1

119%

11.5

104%

Profit before tax

Rs m

-52,931

1,26,899

-42%

19,976

-265%

15,274

-347%

37,564

-141%

Tax

Rs m

-16,299

43,323

-38%

4,730

-345%

5,153

-316%

12,268

-133%

Profit after tax

Rs m

-38,430

83,497

-46%

15,245

-252%

10,578

-363%

25,297

-152%

Net profit margin

%

-7.6

20.2

-38%

7.1

-107%

14.1

-54%

18.7

-41%

Debt/equity ratio

X

15.6

8.6

181%

19.7

79%

9.5

164%

10.4

150%

Net Cashflow

Rs m

1,87,902

-27,747

-677%

88,242

213%

2,503

7508%

6,615

2841%

Exhibit 13.1 (continued)

Cultural Distance

Geographical

Economic

Administrative

Distance

Distance

Distance

The difference

Different languages Country Level

Connectivity Different Religions

issues

(Bilateral/

Different Values

Physical

Unilateral)

norms and

Distance

in income/

Lack of

labor costs

common currency

The difference in capital costs

hostility

dispositions

Country

Traditionalism

Level (Unilateral) Inscrutability

Geographical Size Remoteness

Exhibit 13.2 Factors of Influence. Source Author

Political

Low per capita income Weak Infrastructure

Weak Institution Closed Economy

Reference

Reference www.pnbindia.in

229

Chapter 14

State Bank of India

14.1 Introduction The State Bank was set up in India with the goal of becoming the banker to every Indian (Exhibit 14.1). This was the first Indian bank to open a foreign branch, with its New York branch. Today, SBI is present in over 37 countries all over the world with 198 foreign offices. It also has a large number of foreign subsidiaries and joint ventures in place (Exhibit 14.2). With its large expansion in place, it aims to become one of the largest banks in the world, giving direct competition to the most famous and big banks. The question in front of us was simple. Though the status of a global bank comes with high credibility and respect, the decision lies with the State Bank of India to follow this dream at the cost of profitability.

14.1.1 History of SBI SBI is India’s largest commercial bank with around INR 2 lakh crore as market capitalization and government stake of around 61% and with more than 270,000 employees, over 18,000 branches, and 30,000 ATMs with the PAT of INR 9951 crores. SBI’s linkage can be traced to the first presidency bank of India, i.e., Bank of Bengal which was established for the right to issue currency by the government. After that, two more presidency banks, namely Bank of Madras and Bank of Bombay, were conferred with the same right and status. In 1861, this right was taken back and they were ensured by the duty of managing the circulation of money within the system. Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_14) contains supplementary material, which is available to authorized users. © Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_14

231

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14 State Bank of India

In the year 1921, Imperial Bank of India was formed by the government by merging all the three banks (Bank of Bengal, Bank of Madras, and Bank of Bombay). SBI gets its roots from the Imperial Bank of India, which ceased to exist in 1935 after the formation of RBI. During the period between the 1960s to 1990s, the number of branches was increased from 500 to over 8000. It played a pivotal role in the development of rural India. People banked with them for the sheer money power. It was a market leader in both deposits and advances. The major role of SBI was financing the modernization of the country’s agricultural industry. It ventured and strengthened its roots into merchant banking, housing finance, and the institutional investor services. In a way, SBI became the flag bearer of the Indian banking industry. Even after multiple branch expansion, the technology upgradation was always late at the table. High manpower and excess space demand caused a crack at the profitability which was quite significant after the late 1990s as the private banks such as HDFC and ICICI entered the arena and took the market by a spin. A lot of it was to do with the organizational structure of the bank too. Roles were narrowly defined; hence, a general process became repetitive, consuming time, energy and human labor and incurring a lot of additional cost in the way of redundant labor. It was in the 90 s that computerized back offices came into play, and by the year 2003, Centralized Online Real-Time Environment Banking Solution (CBS) was implemented to link the branches. They realized that technology transformation was the need of the hour for the reorganization of business processes. This, with the changing generation and the varying consumer demand of ease rather than security, took SBI for a spin, and their market share fell to 15% by 2006. The ratings too nose-dived from 82 in 2004 to 107 in 2006.

14.2 Organizational Structure of SBI The employees are mainly divided into three hierarchical divisions: • Officers • Clerical staff • Subordinate staff Executive and clerical staff are selected through a countrywide exam. Sometimes, even the clerical staffs are promoted to the executive level. The recruitment of the executives is at the post of probationary officers, and after the completion of training, they are promoted as the assistant managers. The road to the chairman from the assistant manager consists of nine different levels.

14.2 Organizational Structure of SBI

233

There are 14 administrative circles of the bank, and each is headed by chief general manager. Further, they have two networks of branches with the general manager as its head. The bank assigns each employee to any of these circles, and with due course of their service, they are either promoted in the same circle or posted on deputation to different circle within every three to five years. The intent behind such movement of the employees is to give them a wholesome experience across various functions. However, non-executives are not transferred from their respective circles. Decision making was collective in most of the cases at the senior level. The bank’s apex committee (The Central Management Committee) comprises the chairman, managing director, and deputy managing director. To evaluate the progress, they met twice a month to formulate the strategy for major business decisions. The reporting of this committee was to the board of directors.

14.3 India and the Changing Banking Environment The Indian Government took the step of nationalizing 14 commercial banks in 1969 and 6 in 1980. The government took control of 91% of the banking business. Both national banks and private banks coexisted, but there were high restrictions in their activities and strict vigilance on their branching out. Also, priority sector banking came into the picture and with these nationalized banks chose the aggressive growth strategy. Banks saw a huge demand, and the deposits grew at CAGR of 19%. However, the decision making was very limited with the bankers. This led to overburdening of the nationalized banks with large NPAs due to unregulated lending practices and risk management techniques which were outdated. In 1990, the large current account deficit and government at the brink of default were forced to take drastic economic reforms. These included dilution of ownership in nationalized banks and disclosure of financials. RBI rolled out the guidelines for the deregulation of interests rate, which led to allowing banks to take the decision with respect to their lending and deposit rates. They also encouraged competition by reducing the restrictions on new banks to open their branches. New private players such as ICICI and HDFC entered the market over the next several years. There was a sudden realization for foreign banks such as Citibank, Standard Chartered, and HSBC to expand their presence in India. Through phone and Internet, the concept of remote banking came into existence. The ATM network, networked branches, and centralized processing helped them along with the natural advantage of the already existing large physical branch network. Changing their legacy was proving to be a challenge with the decision of moving toward a centralized network system.

234

14 State Bank of India

A novel branch experience was offered by the new entrants. The interior of the branches was modern contrary to the public sector banks. The salary packages were attractive for the new talents they hired often from the public sector banks. This was unmatched with the public sector banks’ salary packages which were under government-imposed restrictions. The customer experience was drastically enhanced with the new entrants. The concept of relationship banking lured the large young population who were techsavvy and brand-conscious though the older generation still preferred the traditional way of banking. Banking sector played an essential role in the growth of the Indian economy. In the year 2006, a growth of 7.8% was recorded. In terms of PPP, India was considered the fourth largest economy. These rising income of large young population and greater availability of credit and financing options contributed to the growth of consumer finance, and the revenues were expected to grow by 20% over a period of several years due to personal loans and mortgages.

14.4 Going Global “The desire to find a place in the global list for Indian banks probably emerges as we increasingly integrate with the global economy and progress to fuller capital account convertibility,” says a discussion paper, titled “Banking Structure in India: The Way Forward”. “The globalization of Indian banks,” the paper says, “would further integrate the Indian economy with the vicissitudes of global finance, exposing it thereby to higher degrees of contagion and external sources of systemic risks.” SBI is the favoured candidate for this growth. Various experts from different financial and economic fields have offered opinions on this matter (Exhibit 14.3).

14.4.1 SBI and the World SBI has offices in around 27 countries across the globe (Exhibit 14.4). Out of these locations, SBI achieves competitive advantage in the following locations: • • • • •

China Japan Belgium Bahrain Oman

As SBI’s main global strategy revolves, is closely knit with the Indian economy, and is basically meant to supplement the businesses in India for their global ventures and help the NRIs with their repatriations back home.

14.4 Going Global

235

Exhibit 14.5 lists the trading partners of India on the basis of the ranks achieved through the volumes of trade. We came up the above-mentioned list for securing competitive advantage by considering the available trading partners and the size of the banks along with their presence or absence in these countries. For example, China is the largest partner with India, but none of the Chinese banks have a presence in India that gives SBI the competitive advantage to scoop up the trader’s accounts and repatriation accounts from China. As far as other competitors from India are concerned out of the listed 135 largest banks in the world, only SBI features in the list at the spot of 63 (Exhibit 14.6). (1) China—As already explained above, although China has bigger banks than SBI, none of them have a presence in India and given the size of the trades that happen with China, SBI quite clearly has a competitive advantage in the country. SBI entered in China with the first branch in Shanghai under a license received from CBRC after it had already run an RO for 6 years. It waited till 2003 after Shanghai signed the WTO agreement so that there would be less stringent entry norms. To bring its service charges down for its clients, it has tied up with the Industrial and Commercial Bank of China. (2) Japan—Japan also has bigger banks but they also have no presence in India giving SBI a competitive advantage, and coupled with high trades, this makes them the sweet spot. (3) Belgium—None of the banks from Belgium are bigger than SBI, although some European Banks are but almost none of them have a presence in India. Hence, SBI has a clear advantage in this geography too. SBI, Antwerp, was opened on the July 15, 1983. The branch’s main focus was meeting the growing trade requirements between the BENELUX countries (Belgium, Netherlands, and Luxemburg) and India, with emphasis on the growing Belgo-Indian diamond trade. (4) Bahrain and Oman—These two geographies do not necessarily have a high level of trade with India, but given a large amount of Indians working in these countries and no other national banks having presence in India, this allows SBI to gain a lot of the repatriation accounts and thus provide a clear competitive advantage in these two geographies. SBI entered the two locations in the early 2000s. It entered both the locations without any partnerships or joint ventures. It entered Bahrain as the Conventional Wholesale Bank Licensee of the Central Bank of Bahrain and Oman under the full commercial banking license in 2004.

14.5 International Operations by SBI In June 2014, SBI had a monetary record size of about $47 billion in worldwide keeping money as against $300 billion of general asset report size. There is a considerable measure of the degree to develop the IB book. Actually, in the event that one spotlights on the development in the benefits book, it has been more, as far as

236

14 State Bank of India

a rate (on a year-on-year premise), in the universal book when contrasted with the household book (Exhibits 14.7 and 14.8). By and large, credit development in the Indian side of the business has encountered a stoppage, yet that lull is not noticeable at the global front. It is to notice that additionally in light of the fact that there is a parcel of credits, which were affirmed previously, that are presently being reduced. Along these lines, the possibility of fair development in the universal credit book is high. Currently, SBI is developing (worldwide business) at 17–18 for every penny. In three or four years’ opportunity, they ought to develop at 20–25 for each penny. Along these lines, about a fourth of the bank’s monetary record’s development ought to originate from the global book.

14.6 S&P’s Revision of India’s Outlook for SBI Top management at SBI anticipates about a decent sign that S&P has understood that the Indian economy is recuperating. It is on the mode of bounce back and showing improvement. In spite of the fact that swelling is still maybe somewhat high as per the RBI’s appraisal, there is a high preferable control in contrast to what it was in the meantime a year ago. Moreover, GDP has shown signs of improvement. By and large, S&P has perceived that there is some change that has occurred in the Indian economy, and in future, it may show signs of improvement as we proceed.

14.7 Steps Taken by SBI to Grow Its Overseas Balance Sheet SBI maintains relation overseas with major banks which help them in participating in loan syndication, etc. It is an initiative to integrate the community those are performing well in the UK, USA, and Johannesburg.

14.7.1 Myanmar Myanmar, formally the Republic of the Union of Myanmar, an Asian country which is also known as Burma, is a sovereign state in Southeast Asia surrounded by Bangladesh, India, China, Laos, and the Asian nation. 33% of Myanmar’s combination border is 1930 km of coastline along the Bay of Bengal and Andaman. With 51 million individuals, its population density is far under most Asian countries. Its capital town is Naypyidaw, and its biggest town is national capital Yangon (Rangoon).

14.7 Steps Taken by SBI to Grow Its Overseas Balance Sheet

237

For the majority of its autonomous years, the nation has been drenched in uncontrolled ethnic strife. In one the reports by the United Nations and other associations have stated about the methodical human rights infringement in the nation. In the year 2011, the military was authoritatively disintegrated taking after a 2010 general race, and an ostensibly non-military personnel government was introduced. While previous military pioneers still use mammoth power in the nation, the Burmese military has considered surrendering the legislature’s control. This has led to enhancement of nation’s human rights record, and relations overseas have facilitated the exchange and other authorizations related to monetary. In the historic elections of 2015, Aung San Suu Kyi’s party won in both upper and lower houses. All the banks were nationalized by Myanmar’s military in 1962 after they seized control. Since 2011, power dynamics have led to political and monetary changes, encouraging the West to lift the greater part of the assents. Both the militarysponsored government and Aung San Suu Kyi, a Nobel Laureate’s party National League for Democracy, have given assurance for a more streamlined approach for monetary development and streaming of capital.

14.7.2 SBI in Myanmar A preparatory endorsement is given to four new outside banks, and State Bank of India is one such bank to have 100 branches across Myanmar. The Central Bank of Myanmar has given the introductory endorsement to four banks such as South Korea’s Shinhan Bank, the State Bank of India, Vietnam’s Bank for Investment and Development, and Taiwan’s E.SUN Commercial Bank. After due deliberation, the licensing committee is decided to go ahead with these four banks. The declaration stated that “The Central Bank of Myanmar said the preparatory endorsement is substantial for 12 months amid which the fruitful candidates will need to satisfy duties made, take every single vital measure to guarantee useful managing an account operation from the very first moment of business and will need to conform to prerequisites set around the Central bank of Myanmar. An endless supply of the above-expressed necessities the Central Bank of Myanmar will concede the last permit to work in Myanmar.” It is believed by most researchers around Southeast Asia that the Greater Mekong and Myanmar will come to play a pivotal role in the new “factory Asia” that will develop in Southeast Asia as production companies and factories migrate from the comparatively expensive economies of China, Japan, and South Korea to the economies of the South that are newer, abundant, and cheaper. Southeast Asia’s key challenge is to manage the free capital flow and increased interconnectivity. The complete absence of FDI (except by China) during the country’s 50 years of economic isolation, while the rest of Asia was swept up in a wave of industrialization, has been one of the main factors behind Myanmar’s stark underdevelopment (Exhibit 14.9).

238

14 State Bank of India

If an FDI-friendly environment is set up by Myanmar’s government, the capital infusion will be streamlined and the utilization of the skill and usage of technology transfer will make shift the agrarian economy of Myanmar into a manufacturing economy. This will be the fastest phase of industrialization an Asian country has ever witnessed. The re-engagement that will take place with the world is likely to be rapid. Growth is currently accelerating in Myanmar, and it is expected that the economy will experience sustainable growth of between 8–9% over the following five years. It is also expected that the deficit in the current account of the country would significantly widen as capital goods and technology need to be imported, and monetary growth will be extremely fast as transactions are increasingly monetized for the first time. By its very nature, the ambitious reform program that is aimed at opening up the economy is going to lead to large capital inflows. This would provide a perfect opportunity for SBI to enter the underdeveloped financial sector of Myanmar, capturing both the market and earning handsome returns on project investments due to high growth. There are ample opportunities in the world for trade and foreign investments and to leverage the potential of the markets which are still unexplored. The immediate period is, however, not without significant risks to both the country and the institutions that would be setting up their businesses in the country. There lies a lot beneath the surface when it comes to tapping the unskilled workforce, regulatory structures that are not tested, and financial institutions which are poorly capitalized. The entry of foreign banks could prove to be an additional burden on these newly established supervisory and regulatory agencies that have had extremely limited exposure to international finance.

14.7.3 Potential New Markets To become a truly global bank, SBI may have to shed its self-imposed constraints on selecting new markets. Analysis of current data indicates that SBI prefers to expand in those countries where the presence of NRIs or Indian domiciled countries is high. In effect, this means that SBI’s global strategy is primarily based on providing support services to Indian citizens and Indian businesses. To accelerate growth, SBI needs to shed this mind-set of being a support service provider overseas. As the consolidation of SBI affiliates continues back home in India, SBI needs to remember the reason why it is being done in the first place, i.e., to become a heavyweight in the international banking system. While a radical departure from the current strategy is not recommended, SBI can explore a few markets which are lynchpins in the international banking system, while in parallel exploring countries the Indian presence is considerable.

14.7 Steps Taken by SBI to Grow Its Overseas Balance Sheet

239

Keeping this in perspective, these are some of the new markets that SBI can explore: (1) New Zealand Part 5 of the Reserve Bank of New Zealand Act 1989 (the Act) states that there lies the power with the Reserve Bank to supervise and register the banks that serve the purpose of maintaining a sound financial inclusion system and to combat any damage that might occur in case of the failure of a registered bank. New Zealand ranks highest in Ease of Doing Business survey released by World Bank. With a GDP of $173.2 billion and GDP growth rate of 3.45%, it can easily accommodate a new bank which has 160,000 people of Indian origin, including NRIs, which is 2.6% of the population. (2) Kuwait After more than half a decade of heavy provisioning and regulatory reforms, Kuwait’s banking sector has witnessed enormous reforms during the early stages of renewal of credit issuance. There is a remarkable improvement in the performance of the industry since 2007–2008’s global economic breakdown due to the new guidelines and steps taken by the Central Bank of Kuwait (CBK) and other regulatory authorities. Kuwait holds the status of one of the oldest and developed financial industries in the region of Gulf that comprises of 11 domestic and 11 foreign banks. Kuwait ranks 102 in Ease of Doing Business survey released by World Bank. With a GDP of $282.06 billion supported by oil money, Kuwait should be a sure shot destination for SBI. Kuwait has 580,000 people of Indian origin, including NRIs, which is 21.6% of the population. (3) Netherlands As per the report by the International Monetary Fund and World Bank, Netherland held the position of the 18th largest economy worldwide in the year 2012, while the population of the country is about 17 million people. To combat the European sovereign debt crisis and financial crisis, the European Commission took certain steps to develop an ecosystem of safe and sound economic policies for the banking sector. This included greater capital requirements (resulting from the European implementation of the Basel III framework), better protection for depositors, the creation of banking supervision on a European level, and a framework to manage to fail financial institutions, including but not limited to banks. Other recent measures include the revised national deposit guarantee scheme and the new EU framework for recovery and resolution of banks. These measures have been taken forward by the Dutch legislator and regulators and have been implemented in Dutch law. SBI will have to be ready for such stringent regulations. The Netherlands ranks 28 in Ease of Doing Business survey released by World Bank. With a GDP of $752 billion and GDP growth rate of 1.9%, it is the most attractive market for financial services. The Netherlands has 215,000 people of Indian origin, including NRIs, which is 0.7% of the population.

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(4) Trinidad and Tobago In the Caribbean region, Trinidad and Tobago is the wealthiest country and holds the third position in the world after the USA and Canada as the richest country in terms of GDP (PPP) per capita. Moreover, it is recognized as a high-income economy by the World Bank. Unlike most of the English-speaking Caribbean, the country’s economy is primarily industrial, with an emphasis on petroleum and petrochemicals. The country’s wealth is attributed to its large reserves and exploitation of oil and natural gas. The banking sector comprises commercial banks, which are licensed to conduct the business of banking, and non-bank financial institutions, which are licensed to conduct the business of a financial nature, under the Financial Institutions Act, 2008. All institutions in the banking sector are listed below. Most of the banks have expanded their operations to other countries in the Caribbean region. The products and services offered by the banking sector are wide-ranging and include TT- and US-dollar savings and investment instruments, foreign exchange dealings, money market instruments, trade financing, project financing, floating, and underwriting of shares and bonds. Trinidad and Tobago ranks 96 in Ease of Doing Business survey released by World Bank. With a GDP of $30 billion, it is the wealthiest market in the Caribbean. Trinidad and Tobago has 525,000 people of Indian origin, including NRIs, which is 40.02% of the population.

14.8 Conclusion State Bank of India has made it evident about its conscious decision of establishing its banks in 36 countries with large Indian expatriate community. Countries like the USA, Canada, Mauritius, South Africa, Bahrain, and Singapore are among the few where SBI has branched out. On visiting the Web site of SBI for the USA, it gives the impression that it is catering only to the Indian community residing in that country. SBI’s slogan of “Your Best Link to India,” highlights the ease of doing business transactions in India by the Indians residing in the USA. Other banks such as JP Morgan and Citibank are still aiming to provide such services to its customers. Does SBI want to limit itself to just this target audience? And going into Myanmar is the safest decision for SBI in these turbulent times.

Exhibits

Exhibits

Exhibit 14.1 Vision, mission, and values. Source SBI Annual Report 2016

241

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14 State Bank of India

Exhibit 14.2 Foreign banking subsidiaries and joint ventures. Source SBI Annual Report 2016

Exhibits

243 Experts

Opinions

DK Mittal (Former secretary, department of financial services)

“Merger will become inevitable if the economy remains so (in crisis). NPAs will then touch about 10-15% (from the present 45%). In that case, either the good banks or the government would have to bail out the bad banks. This situation, rather than politics or pressure from trade unions, will force PSBs to merge among themselves.” “There can be quid pro quo – if other countries do not let Indian banks to work, and then there can be agreement with that country: you open a bank here, and Indian banks will do the same.”

Nirupama Soundararajan (Additional director, FICCI committee on banking and financial institutions) Pradeep Shankar (Former MD, State Bank of Indore)

“Consolidation in the banking sector may pave the way for stronger financial institutions with the capacity to meet corporate infrastructure funding needs. Like in the case of Tata buying Corus, Indian banks can chip with the funding.” “If big banks fail, it will hurt the economy. Failure of small banks will not hurt much. Recent trend says big banks are failing often.”

Jyoti Prakash Gadia (Convener, CII panel on banking and finance) “There are restrictions in operating in other countries. Getting a CS Jog (Former general banking foothold in the West is not easy, as new licences are not manager-credit, PNB) easily given. Most western countries have got strict regulators.”

Exhibit 14.3 Expert opinions on expansion plans of SBI Exhibit 14.4 Offices of SBI. Source www.sbi.co.in

S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Country Canada USA Egypt Angola South Africa Mauritius Russia Turkey Iran Israel Bahrain Oman Nepal Bangladesh China Sri Lanka Maldives Singapore Hong Kong Philippines Japan Australia UK Germany Belgium

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14 State Bank of India

Exhibit 14.5 Trading partners of India (in US $). Source http://www.sbi.co.in

Exhibits

Exhibit 14.6 Largest banks in the world. Source http://www.economist.com

245

246

Exhibit 14.6 (continued)

14 State Bank of India

Exhibits

Exhibit 14.7 Performance of foreign offices (in US$ billions). Source http://www.sbi.co.in

Exhibit 14.8 Number of foreign branches/offices. Source http://www.sbi.co.in

247

248

14 State Bank of India

Exhibit 14.9 Cost of economic isolation for Myanmar. Source CEIC ANZ Research

References http://www.thehindubusinessline.com/money-and-banking/sbi/article6478911.ece http://www.governancenow.com/news/regular-story/look-how-sbi-preparing-be-state-bank-world http://www.sbi.co.in/portal/web/international/international/wholesale https://www.sbi.co.in/portal/web/international/international/globaltrade https://www.thedollarbusiness.com/magazine/in-an-expensive-global-race/1421 https://s3-eu-west-1.amazonaws.com/papillon-local/uploads/5/7/AU20519IIBInDepthReport_ Shortform_Myanmar_AW.pdf https://www.central-bank.org.tt/ SBI Annual Report 2014, 2015, 2016

Chapter 15

Tata Power

15.1 Introduction On February 16, 2018, Director’s lounge, IIT Delhi—Mr. Praveer Sinha, CEO of Tata Power Delhi Distribution Limited (TPDDL), was waiting to proceed to the seminar hall for inaugurating Parivartan’18—the annual management, sports, and cultural festival of the Department of Management Studies (DMS), IIT Delhi. He was in conversation with the management students of DMS, coordinating the event, where he discussed the transformation journey of TPDDL in the past 18 years. He gave insights about the particular challenges faced by the company owing to its PPP ownership structure. He also recollected about the power situation in Delhi years ago and talked about major steps taken by TPDDL in order to successfully solve the pertaining issues and bring the figures on the balance sheets to remotely optimistic values from the deep losses accumulated in past decades. Since its origin in 2002, TPDDL has continuously endeavored to reduce the accumulated technical and commercial (AT&C) losses that it had inherited from the Delhi Vidyut Board (DVB) upon creation of the public–private joint venture. It has set many successful benchmarks since then in its operations, distributions, customer service, and technical innovations to brighten the power scenario of Delhi.

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/978-981-13-7064-9_15) contains supplementary material, which is available to authorized users.

© Springer Nature Singapore Pte Ltd. 2019 S. Dhir and Sushil, Cases in Strategic Management, Flexible Systems Management, https://doi.org/10.1007/978-981-13-7064-9_15

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15.2 Electricity Distribution in Delhi 15.2.1 State Electricity Boards Before independence, authorities controlled electricity production and distribution in India. After independence, Electricity Supply Act of 1948 came into being which empowered the state to take control over these companies once their licenses expired. This led to the formation of State Electricity Boards (SEBs) in each state which were intended to be politically autonomous and commercially independent. Initially, these SEBs were able to successfully expand power supply and provide electricity access to rural areas, but with time, it was realized that these SEBs were not as independent in their decision making as was the intent as per the Electricity Supply Act, 1948. The main issues that plagued these boards were that they prioritized development of the people over the financial viability and depended on grants from the government for their existence. This effectively led to officers in these boards take decisions without considering their financial viability as they were not held accountable for it. Poor management practices also led to widespread corruption and collusion between SEB officials, customers, and state governments which led to unprecedented power losses and thefts in the country. As the SEBs kept on misusing funds, money for maintenance and expansion became lesser. Poor services led to customers defaulting on bill payments, thereby increasing T&D losses. Sky-high tariffs for industrial customers forced them to shun electricity from SEBs and use private generators for their electricity requirements. Since the subsidy for agricultural customers was dependent on high prices charged to industrial customers, the shortfall in earnings from industrial customers led to insufficient funds available for subsidizing prices and financial health of SEBs saw a steep decline.

15.2.2 Delhi Vidyut Board (DVB) Delhi’s State Electricity Board, DVB, too, like other state boards in the country, was suffering from huge commercial and transmission and distribution (T&D) losses in the 1990s. T&D losses were approximately 23 percent in fiscal year (FY) 1991–92, and they reached 43 percent by 1998. In absolute terms, commercial losses grew from 109 million USD in FY 1994–95 to 191 million USD in FY 1997–98. In the period 1994–2001, Aggregate Technical and Commercial (AT&C) losses ranged from 40 to 54% of the total power. AT&C losses peaked to more than 55% in 2002. Per capita consumption in Delhi was about 1228 units against the national average of 338 units. Rapid growth in load and consumption combined with growing Delhi’s population and rapid expansion of urbanized area in a largely unplanned manner added to the woes of DVB. DVB also suffered from demand and supply imbalance. Although the demand for the energy kept increasing throughout the period, the power

15.2 Electricity Distribution in Delhi

251

supply from the plants remained stagnant. In spite of having an installed capacity of a good 700 Megawatts, it could not generate more than 300–350 MW. The biggest reason for it was the archaean power generating stations.

15.3 Delhi Power Reforms By 1998, the commercial deficit in DVB had almost doubled from | 342.22 crore in 1994 to | 694.67 and the issue of power outages became a political talking point in Delhi. Sheila Dikshit, then the leader of Delhi’s Indian National Congress Party, came to power in 1998 as the Chief Minister of Delhi on the back of promises of reforming the power sector in Delhi. After the elections, when Mrs. Dikshit and the Chairman of DVB, Mr. Jagdish Sagar, sat down for working out a plan to bring about power reforms in Delhi, there first and foremost concern was to find ways to attract investors and maintain their support for the project. This was tough as the problems that lay ahead of private players were huge as the system was plagued with cases of electricity theft, crippled network, and widespread corruption. They also needed to protect the interests of the consumers by controlling tariff and, at the same time, ensure that private players get some returns on their investment. Keeping this in mind, a strategy paper was released by the government, and subsequently, Delhi Electricity Regulatory Commission was established in 1999, which was tasked with regulating electricity tariffs in Delhi, and distributors were legally bound to respect the verdict of the DERC. This was done, primarily, to remove government’s control from setting tariffs and at the same time attract private investors. Following the formation of Delhi Electricity Regulatory Commission (DERC) in 1999, as per Delhi Electricity Reforms Act, 2000 and Delhi Electricity Reform (Transfer Scheme) Rules, 2001, DVB was unbundled into six PPP entities: Delhi Transco Limited, Indraprastha Power Generation Company Limited, Delhi Power Company Limited, North Delhi Power Limited (known today as Tata Power Delhi Distribution Limited), BSES Rajdhani Power Limited, and BSES Yamuna Power Limited, where the latter three took control of distribution in three regions of Delhi. The Delhi Government divested 51% of its own into these private distribution companies.

15.4 Delhi’s Power Distribution Industry in the Twenty-First Century The move from Sheila Dikshit’s government made a move to privatize electricity distribution in the state of Delhi. By 2013, the subsidy provided by the Government of Delhi to the three discoms dropped from | 1200 to 1500 crores annually to | 200–300

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crores. Also, the combined subsidy claimed by them in the period 2007–2013 was | 1533 crores which were 50–100% less than subsidy claimed by SEBs in states like Punjab, UP, Gujarat, etc. Even the accumulated losses by these states ranged from | 4500 crores to | 47,500 crores till 2012–13 which is something that has not happened with private companies in Delhi since their inception. Distribution through PPP model has led to firms becoming financially stable and technologically advanced and reduced the burden on the government of subsidizing electricity. Reduction in AT&C losses, which was one of the main reasons behind the privatization of electricity distribution in Delhi, has been reduced to 15%, which is the lowest in the entire northern region. Tata Power-DDL has been the front-runner among the three power distribution companies in Delhi. By 2014, it brought a drastic reduction in AT&C losses to 10% from 53% in 2002 (see Exhibit 15.2). Its competitors, BSES Rajdhani Power Limited and BSES Yamuna Power Limited, are lagging with 15.16% and 17.94% AT&C losses, respectively.

15.5 Tata Power Delhi Distribution Limited 15.5.1 Background Tata Power Delhi Distribution Limited (TPDDL), erstwhile North Delhi Power Limited, is a joint venture between Tata Power Company Limited and Delhi Vidyut Board, following a PPP model. TPDDL was formed in July 2002 as an outcome of the electricity reform process in Delhi. TPDDL was operated in north and northwest Delhi regions. Distribution in other regions is under the control of BSES Yamuna and BSES Rajdhani. The ownership structure is 49% each of Tata Power Limited and Delhi Government, and 2% of Tata Sons.

15.5.2 Technology Advancement A major challenge that TPDDL faced and needed to overcome in order to improve its internal processes, distribution network, customer service, and information and communication network was lack of technology adoption, upgradation, and innovation. Since its takeover in 2002, the company executives spearheaded the process of latest technology intervention in almost all the processes of the company, be it operational, internal, or customer interaction. TPDDL hired the world-renowned consultants on power business, KEMA Consultants, to develop an “automation road map” and “IT road map.” TPDDL automated its substations, with improved network technology for detecting and repairing faults. For the first time in India, TPDDL started using a centralized system for a real-time

15.5 Tata Power Delhi Distribution Limited

253

view of the entire network. The company switched to using supervisory control and data acquisition (SCADA) over telephonic and manual ways to obtain realtime form and further monitor and control 35 grid stations from a central location. Access to central data helped in effective load forecasting and appropriate measure like prescheduled load shedding. All these initiatives reduced distribution losses and led to reliable supply. SCADA was aided by the geographical information system (GIS), a real-time satellite map of north and northwest Delhi along with TPDDL installations and network assets. Outage management system (OMS) was implemented for timely restoration and repair. Outage statistics were used to predetermine vulnerable failure points and fix them in advance. A system-generated SMS was dispatched to the zonal staff on receipt of any complaint via call center or Internet. OMS reduced the response and repair time by multiple hours. The company invested, in laying fiber optic cables as well, for uninterrupted communication. This project was undertaken in collaboration with Tata Telecom. This high-bandwidth and secure network supported all the communication systems between SCADA and the grid stations as well as the enterprise systems, eliminating dependency on any third party for communication network requirements. Since the beginning, the billing and collection processes were extremely inefficient. Faulty meters gave low readings. Foremost, old and slow, taper-prone electrostatic meters were gradually replaced by new tamper-proof electronic meters. This led to a significant drop in the company’s vastly accumulated aggregate technological and commercial (AT&C) losses. These meters also record the consumption pattern of usage. Later, automatic meter reading (AMR) feature was added to these meters for enabling remote reading of consumption, thus saving additional manpower. TPDDL, in-house, developed automatic meter reading and data acquisition (AMRDA) system which is capable of communicating with various types of meters deployed by TPDDL. Electricity theft in unauthorized colonies was one of the major contributors of the AT&C losses incurred by the company. TPDDL adopted the use of high-voltage distribution system and heavily insulated wires for domestic distribution, which made it very difficult to steal electricity by tapping the wires. TPDDL created centralized customer database of 100% customers, and state-ofthe-art IT infrastructure was deployed for database management and maintenance. Further, TPDDL implemented an integrated CRM in order to monitor the revenue management cycle of customers. They introduced online routes for new meter connection and load upgradation or load reduction, which was earlier possible only via visits to the centers. Their GIS system was also integrated with the CRM for household mapping. TPDDL, for the first time in India, created a centralized database of 100% customers—the SUGAM billing database. This allowed customers to pay bills at any of the centers citywide instead of just the centers in their zones. Moreover, TPDDL introduced options for online electronic bill payment through multiples avenues—TPDDL Web site, third party wallets, and mobile application. This has reduced the long waiting queues in the centers and considerably eased the bill payment process for customers.

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15.5.3 Financials—Revenue, Expenses and Profits The past four years have shown a considerable improvement in terms of financials of the power sector. The revenues have grown at a CAGR of 16.19% consistently. This can be attributed to the privatization which has led to efficient billing process and recovery of bills from a customer. Most of the customers never paid their bills or performed electricity theft, and TPDDL has been successful in curbing down AT&C losses and inculcated cost reduction measures in the system. Profit after tax (PAT) of the company has shown an unprecedented rise of 82.32% in the past four years. The revenue deficit has been a constant pain point in the financials of all discoms, and TPDDL is no exception to it. The major issue is in accordance with the power purchase cost which forms a major proportion of the TPDDL expenses. There is also an investment in the order of 3000 crores to facilitate network strengthening, and the major focus was also to build an effective customer feedback system. TPDDL has been able to reduce the AT&C losses by appointing zonal managers and allotting them different regions of approximately 50,000 populations. This helped them a great deal in segregating areas of theft and devising an area-specific plan to cater to them, and this had led to an exemplary reduction in losses and also bringing onboard the customers who earlier were not encouraged to take a connection. TPDDL has cut the aggregate technical and commercial loss (AT&C) in its area of north, northwest Delhi from an opening AT&T loss level of 53% in July 2002 to 10.78% by end of FY 2012–13 (Exhibit 15.1). Power purchase cost is a major portion of cost almost 72%. TPDDL has tied up 90% of its power from government-owned Gencos such as NTPC, NHPC, DVC, and Satluj and Delhi State-owned plants like Indraprastha, Rajghat, and Bawana. TPDDL has consistently pitched the DERC for allowing them independence in choosing optimized power generation sources.

15.5.4 Pricing Strategy The pricing strategy of TPDDL can be broadly studied by two factors—(a) power purchase cost which refers to the cost at which the organization is able to procure electricity; this majorly contributes to the second factor; (b) tariff charged by customer which refers to the price that customer must pay per unit consumption of electricity. If we refer the financial sheet of TPDDL, we can see the revenue gap which is substantial, and this can be attributed to the inefficient sources of purchasing power (see Exhibit 15.3); the political declaration by Delhi Government to cut tariffs results in no revision in tariff for two consecutive years and AT & C losses. TPDDL is able to achieve major curtailing in the AT&C losses, but that is not sufficient to bring a change in tariff burden on the customers. Though it has enthused some accountability and relief, much has to be done in the purchase power cost and renewable sources integration.

15.5 Tata Power Delhi Distribution Limited

255

The tariffs are not something that TPDDL can regulate; it is fixed by Delhi Electricity Regulatory Commission (DERC) as a response to the petition submitted by TPDDL entailing the aggregate revenue requirement (ARR) of that year and the increase in tariff proposed to recover it for that year. Thus, DERC needs to hike tariff in the interest of the consumer and the financial viability of the service providers. The populist measures should not be adopted, and economic equilibrium between quality of service and ARR of providers should always be maintained insight of the greater good of power sector. The initial efforts of control period that is from 2002 to 2007 to curtail AT&C losses did not bring substantial effect on tariff reduction for the customers. Thus, the policy of Multi Year Tariff (MYT) Regime was launched post-2007 (see Exhibit 15.2). This enables the service providers to set up preperformance targets and plan their targets on a broader bandwidth. This diminishes the annual fluctuations of tariffs and ensures stability for the investors to understand and take speculative measures. Under this regime, a service provider can segregate their costing into (1) controllable costs such as salaries, historical loss level, and allocation to repair and maintenance and (2) non-controllable costs as bulk power purchase which must be included in tariffs. Thus, the discoms get a wider timeline to work upon their efficiency and targets and not affected by the annual tariff fluctuations.

15.6 Political Influences and Role of Regulator Privatization has brought transformative changes in terms of quality of offerings, reduction of losses, and performance of the power sector. But one cannot neglect the presence of government and political influences that this sector is still exposed to. The ruling Aam Aadmi Party came into power majorly by banking on the populist declaration of low tariffs which resulted in no tariff hike for two years consecutively. Other subsidy schemes like consumers who consume up to 400 units get a flat 50% on their bills have a significant effect on the financial viability of the sector and is highly evident from the revenue gap in the discoms financial statement. There have been repeated allegations propping up regarding the unethical practices and bribery from the board employees to secure more lucrative positions and regular payment to maintain their current roles in Delhi State Electricity Board (DSEB). From the stakeholder perspective, politicians receive a financial and political support in exchange for defending their interests in decision making. One can relate to an infamous incident of removal of DERC President Krishna Saini by Lt. Governor of Delhi Najeeb Jung. The Chief Minister was in support of Krishna Saini and wanted the governor to reconsider his decision. So, time and again, we have seen how the political powers try to influence the functioning of the discoms. Thus, it becomes a primary concern for the discoms like TPDDL to inculcate the values in each employee and attenuate all the focus toward the customer and quality of service delivered despite all political disparities and populism strategies.

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15.7 Energy Conservation Initiatives and Transition to Renewable Energy Tata Power always remained one step ahead of its contemporaries in its energy conservation initiatives. Tata Power has spread its footprint nationwide, in its quest to deliver sustainable energy—it is now India’s largest green energy player. In 2016, the company added 1463 MW of renewable capacity with the ongoing construction of another 500 MW. The company generates 693 MW of hydropower, 933 MW of solar power, 1140 MW of wind power, and 375 MW of waste-based powers. Tata Power Renewable Energy Limited (TPREL) has acquired Welspun Renewables Energy Private Limited (WREPL) which has 1140 MW of renewable power assets. Tata Power-DDL has kept sensitive approach while dealing with the upcoming challenge of climate change and has taken many initiatives to counter the same. The company has planned to generate 400 MW of power through renewable sources. As wind energy would not be possible in the area like Delhi because of the topographical constraints. The company has already installed the solar panels throughout the campus and is promoting the same to the consumers. The company has given a commitment to introducing energy-efficient cleaner technologies. It was started to identify the mitigation and offset opportunities in the most cost-effective manner. A committee has been formed to look into the upcoming domain which will focus on the spreading awareness related to use of renewable sources of power, green and clean power, energy conservation drive throughout the Delhi and the nearby areas, demand-side management (DSM), review of practices to build in environmentalfriendly norm and policies. TPDDL was the first power distribution company in India to promote the concept of e-bills. In 2015–16, TPDDL came up with a scheme of rewarding customers a minor discount on opting for e-bills and discontinuing paper bills. TPDDL also promoted a scheme for air conditioner replacement for domestic power conservation and reduction in summer peak load. 10,800 air conditioners were made available under this scheme on first-come first-serve basis. The consumers could get discount up to 50% on MRP for BEE 5-star rated AC or inverter ACs in exchange of their nonstar ACs, as the domestic sector accounted for almost 50% of energy consumption in Delhi, with ACs’ power consumption as a key component.

15.8 Human Resource Practices When the company came into existence in 2002, the employees who were on part of Delhi Vidyut Board (DVB) which was government body created issues because they did not want to be a part of Tata Power. So, options were given to the employees to be either a part of DVB or of Tata Power. The employees who joined Tata Power were considered private employees and were having the same HR policies as of Tata organizations, whereas those who wanted to be part of DVB had the same HR

15.8 Human Resource Practices

257

policies as before under the Delhi Government. So, the synergy of the private and public employees was the biggest challenge the company faced in the initial years. Since then, TPDDL has started acquiring, developing, and retaining a talented workforce for a successful performance in today’s world. The company has been ranked as the 2nd best in “Energy, Oil and Gas sector” and 37th among the “India’s best companies to work for 2017” in a survey conducted by Economics Times. Every employee who is a part of TPDDL imbibes the values of TATA’s ethical standards. Every employee that is hired possesses the motivation and skill to contribute to the company in the upcoming future. Employees at TPDDL have excellent in customer service, technological developments, and innovations. The company has openness and honesty between the management and the employees. The company believes in the two-way process of communication and emphasis on providing its employee’s opportunities to learn and grow. The company uses competency-based evaluation and performance-linked incentives to keep everyone motivated. The company is known for providing equal opportunity, gender-neutral employer, and extremely merit oriented while simultaneously understanding the importance of work–life balance. TPDDL encourages its employees to participate in social innovation initiatives and ensure that the employees also indulge in activities to keep them happy, satisfied, and motivated.

15.9 Social Initiatives Tata Power-DDL has been empowering the deprived communities, primarily, the people residing in Jhughi Jhopri clusters north and northwest Delhi. The CSR division of Tata Power-DDL has been renamed as “Social Innovations Group (SIG)” and is responsible to deliver services to the deprived communities, primarily, the people residing in Jhughi Jhopri clusters north and northwest Delhi. The company’s initiative of Social Innovations Group has been clustered under the umbrella of name SAATHI which is connected with four pillars that cater to various initiatives. SAATHI include UNNATI, ABHA, SANJEEVANI, UJJWAL, THE CLUB ENERJI. Through all these initiatives, the company has been giving benefits to over 1 million people of Delhi and its nearby areas.

15.10 A Look into the Future Coming years, a major challenge for TPDDL would be to bring down the incidents of power theft to zero and zero tolerance toward power disruptions caused due to network faults. In terms of managing employees, TPDDL would benefit tremendously inefficient human resource management if it can do away with employee unions and government interference in recruitment, promotions, compensation, and termination

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of employees. Would TPDDL be successful in these endeavors? Will we witness another landmark reform in power distribution in Delhi? How will TPDDL reach out to the low-income areas in the periphery of north and northwest Delhi? How will the company reduce its accumulated AT&C losses further despite significant political pressures in tariff decisions?

Exhibits

All figures in Rs. crores

a) b)

Net Sales/Income from other operations (Less) Operating Expenditure

Consolidated FY17 FY16

Standalone FY17

FY16

₹ 27,288.00

₹ 28,526.00

₹ 7,282.00

₹ 8,316.00

₹ -22,051.00

₹ -22,354.00

₹ -5,109.00

₹ -5,737.00

₹ 2,173.00

₹ 2,579.00

Operating Profit (Less) Add: Forex (Loss) Gain

₹

5,237.00

₹

6,172.00

₹

-383.00

₹

-663.00

₹

- 78.00

₹

- 57.00

₹

586.00

₹

754.00

₹

992.00

₹

962.00

₹

-3,114.00

₹ -3,236.00

₹ -1,296.00

₹ -1,146.00

₹

2,326.00

₹

3,027.00

₹ 1,791.00

₹ 2,338.00

₹ -1,649.00

₹ - 634.00

₹ - 604.00

i)

Add:Other Income (Less): Finance Cost Profit before depreciation and tax (Less): Depreciation / Amortisation / Impairment Profit before exceptional item

₹

1,378.00

₹ 1,157.00

₹ 1,734.00

j)

(Less): Exceptional Item

₹

-651.00

₹

- 98.00

₹ - 651.00

₹ -

k)

Profit (Loss) before tax (Less): Add: Tax Expenses or Credit

₹

-314.00

₹

1,281.00

₹

506.00

₹

46.00

₹

-681.00

₹

- 223.00 ₹

₹

- 268.00

₹

600.00

₹ 283.00

₹ 1,355.00

₹

1,217.00

₹

186.00

₹ -

₹ -

c) d) e) f) g) h)

l)

m) Net Profit (Loss) after taxes Add: Share of Profit of Associates and Joint n) Ventures

₹ -1,989.00 ₹

337.00

₹ 1,734.00 - 379.00

Exhibit 15.1 P&L statement of TPDDL for FY 2016–17. Source http://tatapower-ddl.com

Exhibits

o)

259 ₹

949.00

₹

786.00

₹

283.00

₹ 1,355.00

₹

746.00

₹

662.00

₹

283.00

₹

1,355.00

₹

203.00

₹

124.00

₹

-

₹

-

₹

-133.00

₹

- 23.00

₹

- 121.00 ₹ - 258.00

₹

816.00

₹

762.00

₹

162.00

₹ 1,097.00

₹

613.00

₹

619.00

₹

162.00

₹ 1,097.00

₹

203.00

₹

₹

-

₹

Net Profit for the year Attributable to~Owner of the company

p) q)

~Non-controlling Interests Other comprehensive income (Net of Tax) Total Comprehensive Income Attributable to~Owner of the company ~Non-controlling Interests

123.00

-

Exhibit 15.1 (continued)

Tata Power - DDL Loss ReducƟon Trajectory from 2002-03 to 2016-17 60 50

47.6 47.79

40

45.35 40.85 44.86

35.35 31.1

30

33.79 22 26.52

20

20.35

18.68

23.73 18.56

10

17 13

16.74

15.16 13.75

12.5

11.5

11

10.8

10.5

11.49 10.78

10.5

9.78

8.88

8.59

FY12

FY14

FY15

FY16

FY17

0 FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

DERC Target

FY11

FY13

Actual

Exhibit 15.2 Tata Power—DDL loss reduction trajectory from 2002–03 to 2016–17. Source http:// tatapower-ddl.com

260 States Haryana Tamilnadu UP Karnataka Gujarat MP Punjab Kerala Uttarakhand Orissa HP National Average Delhi

15 Tata Power Overall Purchase Cost 4.18 4.09 3.82 3.73 3.72 3.06 3.05 3.00 2.94 2.88 2.57 3.49 5.49

State Genco's Cost 3.89 3.44 3.03 2.42 3.21 2.45 3.94 1.09 1.23 2.65 3.89 2.93 5.00

Exhibit 15.3 Overall purchase cost versus state’s generation cost in the different states of India. Source http://tatapower-ddl.com. Delhi’s bulk power rate is 60% higher than national average (| 5.49 v/s. | 3.49). Delhi’s state generation cost is 70% higher than average cost of other state generators (| 5.00 v/s. | 2.93). Delhi does not have access to center’s unallocated pool

Exhibit 15.4 Changes in Business Regulatory Framework during Multi Year Tariff Regime. Source http://tatapower-ddl.com

References Aggregate Technical & Commercial (AT&C) Losses in power sector (August 02, 2017) https:// data.gov.in/catalog/aggregate-technical-commercial-atc-losses-power-sector Accessed on 12 Feb 2018 Best practices and strategies for distribution loss reduction Final report (July 2016) http://www. forumofregulators.gov.in/Data/study/11.pdf. Accessed on 18 Feb 2018 Measures to Reduce AT&C Losses (2013, March 12) http://pib.nic.in/newsite/PrintRelease.aspx? relid=93530. Accessed on 14 Feb 2018 TPDDL Case Study_COMPLETION OF 10 YRS https://www.tatapower-ddl.com/ UploadedDocuments/TPDDLCaseStudy_COMPLETIONOF10YRS.pdf. Accessed on 20 Feb 2018