Day 20 – Monday Sept 27th 2010

Yet another bright and beautiful Monday - many of the staff here here have been telling us that AMP179 is  lucky because we have been having some fine weather during our stay here. I hope this continues till the end of the program.

In order to get a different flavour to the class discussions, one interesting practice followed here is this: all of us are split into 4 sections - A, B, C and D. And two sections are part of one classroom. So at any point of time, there are two classroom sessions going on. Except for the first few classes, when we are allocated classrooms by our Living Groups, we are allocated to classrooms by sections. Last week, it was A&B in one class and C&D in another. This week it is A&C and B&D. You get to hear different people in class, and combined with the fact that you seat is also different every week, you get to meet different neighbours in class. Neat, isn't it ?

Today we have three sessions - one on Australia, one on Marketing and one of Finance. 

Australia was a fascinating study on how much has changed in the last few decades. It is interesting when you analyze a country from a historical, political and financial perspective, which is what we do in class. Here are some interesting things I learnt:

• High dependence on mineral export for many years - and it continues even today
• High growth in labour cost combined with growth in output/hour led to high growth in wages of ~ 5.4%/year for over 10 years -- which means an increase of 30%
• The above fact alone made the non-mineral sector highly uncompetitive, which is visible in the manufacturing goods exports going down from 14.9% in 1990 t0 9.5% in 2008.
• Low savings rate country
• And the bad news is this - after the recent elections, we have a coalition government in power and they will not be able to take any hard stands on increasing savings, or increasing productivity or increasing services sector
• With US $1.2 trillion external debt projected for 2011, this is not good news

With many Australians in the class, there was a good debate on issues like tax rebates for second homes, unions at the work place, exports to China and Australians love for spending.

The second session was again an eye-opening capital structure related class.  The session was on a hypothetical example of how changes in a firms capital structure can influence, (a) the total market value of it stock, and (b) its competitive strength within an industry.

The argument is this: you can leverage debt to a higher extent and reduce your equity proportionately, so that given the same EBIT levels, your EPS would go up. This is especially true in countries which allow interest to be treated as a tax deductible expense. In our example, with a lot of assumptions of course, the market value per share at different debt levels looked like this:

What this means is, under certain circumstances, you can increase your debt to give a higher return to your shareholders, but after a point, the cost of debt weighs in quite heavily. Basically, you should look for efficiencies in capital costs, just like you look for efficiencies in any other element of cost. In summary:

• Debt can increase the value of the firm to the shareholders
• While the increase in significant, it is not so significant that managers are forced to use it; it is in the band of managerial discretion
• Too much debt can raise bankruptcy risk to the point where it overwhelms the benefit of tax savings

The third case was how to handle the brand clashes, when Lenovo acquired the IBM personal computer division. This required the Lenovo managers to assess the global potential and positioning of the Lenovo Think and IBM brands. Some good discussion ensured, the learning's are below:

• Branding approaches during M&A
• Master brand approach (Examples : Intel, Microsoft, etc)
• House of brands (Example: P&G)
• Synergy approach (Example: Apple iPod)
• Hybrid approach (Example :Lexus/Toyota having a separate brand for luxury and mass market products)
• The concept of having a Master brand will work only if the acquirer (in this case Lenovo) is at the top and the acquired brand is lower (in this case Thinkpad. However in this case, it was not so, and hence they decided to take a hybrid approach.
• Do not debate too much on the acquired brand - there will be a huge furore in the beginning, but in 3-4 weeks everyone will forget - so do it quickly and globally

There was some discussion on brand positioning. And brand positioning with clarity requires three questions to be answered:

1. Target market
2. Superiority claim - why your product or service is superior to your competition
3. Reason for superiority claim - which is the most difficult

For example Avis today advertises that employees own the company, implying that owners provide better services. If you don't position your brand, competitors will position it for you - which will confuse your customers ! Drawing up a chart like the following will help you decide what the real benefits of your products/services:

For example, claim of safety by airlines is a clear example of a defensive benefit. Everyone one will claim it, you also have to claim it, but it is not going to differentiate one airline from another.

There is an interesting HBR reports on how global brands compete. The  key theme there is that when a brand is marketed worldwide, that fact alone gives it an aura of excellence - and a set of obligations. There are three dimensions of a global brand - a signal of quality, a global myth and social responsibilities. While quality is understood, the global myth theory states that people want to associate with a global brand, because it makes them feel like global citizens ! And global brands have a higher obligation towards social responsibilities - they are bench marked to a higher standard.

Long day, heavy stuff but fascinating discussions. More later ....