Evolution to Revolution -  Why disruption of Status Quo is important
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Evolution to Revolution - Why disruption of Status Quo is important

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Strategy Paper on how Indian companies (and elsewhere) need to continuously disrupt their thinking processes and challenge the status quo, to ensure sustained growth, and keep their stakeholders......

Strategy Paper on how Indian companies (and elsewhere) need to continuously disrupt their thinking processes and challenge the status quo, to ensure sustained growth, and keep their stakeholders happy.

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  • 1. January 19, 2007 www.sterliteoptical.com Evolution to Revolution Dr. Anand Agarwal
  • 2. January 19, 2007 www.sterliteoptical.com Sterlite Optical Technologies Ltd. Infrastructure Equipment Makers (Wire & Cable) Mobile Network Operators Network Equipment Manufacturers The Content Chain The Application Providers Chain Subscription and Connection Retailers Accessories and Handset Retailers END USER Infrastructure Equipment Makers (Wire & Cable) Mobile Network Operators Network Equipment Manufacturers The Content Chain The Application Providers Chain Subscription and Connection Retailers Accessories and Handset Retailers END USER Backbone Network InternationalNational Access Network Backbone Network InternationalNational Access Network We are present at the start of the value chain. We manufacture Optical Fiber, Telecom Cables and provide Wireless Integration solutions. Our products carry your voice, data and video at all stages of the network.
  • 3. January 19, 2007 www.sterliteoptical.com Agenda - Evolution to Revolution • The Evolution of the Telecom and IT Bubble • The Boom and the Bust • Evolution to Revolution – The Optical Fiber Industry – Sterlite Optical Technologies Limited – The Indian Industry • Think Global, Act Glocal – Paradigm Shifts in the Industry – Case Study: The acquisition of Hutch • Bringing it all together
  • 4. January 19, 2007 www.sterliteoptical.com At the turn of the Century - The World was evolving • Predictions talked about bandwidth multiplying like transistors on PCBs • Telecom equipment majors were busy putting up capacities to cater to the humongous demands of Service Providers. • It seemed like good times were on a roll for Telecom and InfoTech.
  • 5. January 19, 2007 www.sterliteoptical.com A Variant of Murphy’s Law: “Everything will go wrong at one point of time.” Extension of the above Variant: “That time is always when you least expect it.” www.mkschubert.de But Murphy had other plans
  • 6. January 19, 2007 www.sterliteoptical.com Telecom Equipment Majors During the Telecom / IT Bubble Service Providers suddenly backed out of CAPEX promises. Telecom Service Providers: T: AT&T VZ: Verizon Telecom Eqpmt. Majors: ALU: Alcatel-Lucent #1 – System Integrator CSCO: Cisco #1 – Network Eqpt GLW: Corning #1 - Optical fiber Resurrection initiated Telecom and InfoTech The Boom and the Bust
  • 7. January 19, 2007 www.sterliteoptical.com Revolutionary Ideas are either • Accidents – with no/low financial costs incurred • High R&D efforts – Million/Billion $$$ investments Key Takeaway: Be alert for disruptive ideas and technologies – you will always come across one when things have gone wrong. Teacherlink.ed.usu.edu The Eureka moment …
  • 8. January 19, 2007 www.sterliteoptical.com Evolution to Revolution … … … • The bubble burst saw Equipment majors suffering huge losses. - This forced them to look for Cost reduction possibilities. • The Outsourcing industry and the Software cycle emerged as radical opportunities. - The IT revolution is the fastest growing contributor to the Indian GDP now. The Bust was immediately followed by a period of gains for the Indian IT majors. Bloomberg Was this sudden shift – an accident of epic proportions?
  • 9. January 19, 2007 www.sterliteoptical.com Evolution to Revolution … … … The World is Flat • According to Thomas Friedman – YES !!! He says: - The accident happened around the millennium - Ushered in the third era of Globalization, - A revolution happened that made Beijing, Bangalore and Bethesda as next door neighbours. • Three flatteners that revolutionized the World. - The fall of the Berlin Wall succeeded by the rise of Microsoft Windows 3.0. - The Netscape browser, commercialization of open transmission standards and investment of USD 1 trillion in fiber optic networks. - The Workflow revolution - development of application-to-application talking software (middleware) which connected the PC with the deployed bandwidth. The investment in fiber optic and submarine networks linked opportunity seeking nations like India & China with loss- making/profit-seeking nations like the US. This gave birth to the Outsourcing Industry
  • 10. January 19, 2007 www.sterliteoptical.com Back to the Optical Fiber industry 13 18 60 63 75 75 108 108 62 108 37 53 7 23 75 29 0 20 40 60 80 100 120 1990 1992 1994 1996 1998 2000 2002 2004 2006 E (inMillionFkm) 27% ’90-’97 CAGR 49% ’97-’00 CAGR GROWTH Deployments due to IT Boom DECLINE Market correction on over deployments (CRU Monitors) 19% ’03-’06e CAGR RESURRECTION FTTx and 3G driving fiber usage 100.3 Q3 A 13 18 60 63 75 75 108 108 62 108 37 53 7 23 75 29 0 20 40 60 80 100 120 1990 1992 1994 1996 1998 2000 2002 2004 2006 E (inMillionFkm) 27% ’90-’97 CAGR 27% ’90-’97 CAGR 49% ’97-’00 CAGR 49% ’97-’00 CAGR GROWTH Deployments due to IT Boom DECLINE Market correction on over deployments (CRU Monitors) 19% ’03-’06e CAGR 19% ’03-’06e CAGR RESURRECTION FTTx and 3G driving fiber usage 100.3 Q3 A Market Value (US$ bn) 2.2 3.4 5.3 6.8 2.6 2.5 3.02.9 8.1 - 1 2 3 4 5 6 7 8 9 1997 1998 1999 2000 2001 2002 2003 2004 2005 US$Billion Standard Single Mode OF 0 10 20 30 40 50 '2001 '2002 '2003 '2004 '2005 '2006 inUSD The meltdown in 2001-2002 had major repercussions on every company in the industry.
  • 11. January 19, 2007 www.sterliteoptical.com Sterlite Optical Technologies Ltd. Revenues and Profits Revenues and Profits took a nosedive… forcing us to develop a comprehensive turn-around plan and unparalleled differentiators. 480.2 544.4 659.9 1,037.6 699.8 132.0 103.2 370.6 623.9 108.5 103.7 136.8 300.8 100.2 (86.1) (45.0) 10.2 40.8 (200) - 200 400 600 800 1,000 1,200 1997-98 1998-99 1999-00 2000-01* 2001-02 2002-03 2003-04 2004-05 2005-06 inRs.Crores (* annualized)
  • 12. January 19, 2007 www.sterliteoptical.com In order to have a turnaround, a multi-pronged approach was adopted
  • 13. January 19, 2007 www.sterliteoptical.com CommodityTechnology Silicon Chlorine Furnace Oil SiCl4 Commodity Commodity Power Hydrogen Oxygen Glass Preforms Optical Fiber Direct Sales Optical Fiber Cables Drawing Commodity Technology Costs - Indexed to Oct. 2001 0 20 40 60 80 100 120 O J A J O J A J O J A J O J A J O J A J O Indexedto100asonJanuary2001 Raw Material Cost 2002 2003 2004 2005 2006 Power Plant Hydrogen Plant Moved 100% to SOC Core Production Nitrogen Plant SiCl4 Plant Glass Production Glass Production Go on drilling into the Value chain to make a Technology product from Commodities. Capture inefficiencies in the Value Chain. Challenge every norm – there are no holy cows. Keep trying ‘long-shot’ & ‘sure-shot’ projects. 1. Attain Cost Leadership Confidential to Company
  • 14. January 19, 2007 www.sterliteoptical.com Indian OFC Market Size 2.2 1.9 1.5 2.0 2.3 3.1 - 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2001-2 2002-3 2003-4 2004-5 2005-6 06-7 (e) inmillionfkm (CRIS-INFAC, Company Estimates) 27% ’03-’07e CAGR Infrastructure / Real Estate Applications BPO & KPO Telecom Utilities Relationships with all stakeholders are the Key to Success. 2. Grow the Indian Market
  • 15. January 19, 2007 www.sterliteoptical.com Do not be afraid of venturing into something new, if your fundamentals are correct and you have belief in your capabilities. 10.5 13.3 13.9 15.0 17.9 11.4 2% 2% 4% 8% 11% 0.4% - 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 (e) ChinaOFMarketSize(Km-Mn) 0% 2% 4% 6% 8% 10% 12% SterliteMarketShare(%) China Market Size (Km-Mn) Sterlite Market Share (%) Source: CRU, KMI, Company Geographical Focus Areas 0 20 40 60 80 100 120 140 FY02 FY03 FY04 FY05 FY06 H1 07 0% 5% 10% 15% 20% 25% 30%Export Export % of total 3. Enhance our Global Footprint Confidential to Company
  • 16. January 19, 2007 www.sterliteoptical.com P A T E N T S Inform ation Techno logy S I X S I G M A SOTL • Widespread use of six sigma • Every employee trained on its usage • End to end data collection & analysis • Reduced /eliminated errors • 42 Global patents filed in Last 2 years • 4 Patents awarded • 3 so far in FY 06-07 Global presence Market Leadership 4. Focus on R&D, IT and Quality
  • 17. January 19, 2007 www.sterliteoptical.com Continuing Dominance Knowledge The New Differentiator Indian Companies are increasingly realizing that they need to – “Think Global, Act Glocal” Revolution in the Indian Industry • India is turning local to global. - Internal to External - Profits to Value - Short-term to Long-term - Operations focus to Customer & Shareholder focus Value Proposition Applications New Ways to Work Entrepreneurship Productivity Ubiquity ROI Marketplace Availability Licensing Agreements Advertising / Awareness Pricing Models Substitutes Cost Technology Interoperability Standards and Protocols Optimize available resources Innovate existing products Security QoS New Path to Dominance
  • 18. January 19, 2007 www.sterliteoptical.com Think Global, Act Glocal … … … ??? • Indian Companies are interacting, buying and selling internationally to grow their businesses. - Heads of international bigwigs are PIO’s (Vodafone, Pepsi, Arcelor-Mittal, …) - Indians are taking over foreign companies (Wipro, Tata, Dr. Reddy’s, …) - Exports have grown significantly (Auto ancillary, Software, Pharma, …) • Focusing on global partners or customers who have - Robust business processes and systems. - Sustainable business models. - Adaptability/Flexibility towards change. • Indian co’s are acting increasingly for Customer and Shareholder benefit. - Intangible benefits and cost advantages passed on to customer ensuring Customer Delight factor. - Management’s key role is to deliver on these stakeholders’ expectations. - Organizational capabilities are being developed having them as the focus. As mentioned by Tom Friedman, this is the new mantra of Collaboration and Convergence.
  • 19. January 19, 2007 www.sterliteoptical.com Focus of Any Business Stakeholders on the Business Lifecycle Curve Design& Development Introduction Growth Maturity Decline Revenues/Profits/M-Cap/Size Time Consumer:  Focus on Customer Applications.  Design Solutions as per His Needs.  Develop IP for these applications.  Find customized differentiators. Shareholder:  Expects continuous business growth in Revenues and Profits.  Expects sustainable Returns on Investment. Govt. Vendors Mgmt. Community Employees Pressure groups
  • 20. January 19, 2007 www.sterliteoptical.com What has this led to: The Current Paradigm Shift in Valuations INTANGIBLES are IMPORTANT in the New Economy Technology Related Human Capital Related Market Related Skilled Manpower Efficient Management Man Management Systems … Know-how (Expertise) Documentation Intellectual Property Customer Certifications … Brand Distribution Channel Customer Database Customer Relationships … Currently, Value of a Business = Customer Access + IP + Sustainable Growth + Competitive Differentiation
  • 21. January 19, 2007 www.sterliteoptical.com Hutch Price Subscribers EV / Subscriber Subscriber Base Min Bid 14 bn 23 mn 610 Wireless Max Bid 22 bn 23 mn 950 Assets Value for Hutch Value Subscribers EV / Subscriber Subscriber Base Mid-2006 11 bn 17 mn 650 as per Morgan Stanley report Comparable Listed Companies M-Cap Subscribers EV / Subscriber Services Bharti 28.54 bn 31 mn 920 Wireless + Internet Reliance 11.83 bn 29 mn 408 Wireless + ILD MTNL 2.27 bn 2 mn 1135 Wireline + Wireless + Internet Case Study: Hutch Valuations! Vodafone picked up a 10% stake in Bharti at an EV/Sub of $1000 in Nov 2005. Maxis picked up 74% in Dishnet Wireless at EV/Sub of $360 in Dec 2005.
  • 22. January 19, 2007 www.sterliteoptical.com These intangibles are considered as Business and Intellectual Property of the Company and a corresponding premium is added while deciding on the final value of the Company. Case Study: Hutch Valuations! Valuations based on Number of Subscribers – 23 million Quality of Subscribers – Majority Post-paid Applications on offer - 1st to offer TV on Mobile - Chhota Hutch recharge - … … Avg. Revenue per User - # 2 (over Rs. 350 p.m.) Retention of Subscribers Technological Capability - to offer better services - to upgrade network
  • 23. January 19, 2007 www.sterliteoptical.com What does this mean for you • Technology is becoming a key differentiator between a Good and a Great Company. • Ability to manage and focus technology towards customer applications is the key role of the Company’s management. • Adaptability and flexibility in changing technological and value offerings to customer is key. • The value of a company/individual is more on its ‘knowledge capabilities’ and ability to deliver value from this knowledge – rather than only on Physical Assets.
  • 24. January 19, 2007 www.sterliteoptical.com Thank You
  • 25. January 19, 2007 www.sterliteoptical.com Key Takeaways Evolution to Revolution • Predictions on the exponential rise of Telecom and IT companies were not fulfilled. This was a boon for India and China. - Evolution of fiber optic networks in US facilitated the outsourcing revolution in India. - Opportunities need to be identified in adversity. - Companies that succeed are those who successfully adapt their business models to the prevailing situation. • Sterlite Optical has turned around successfully after the IT meltdown. - Technology and Knowledge based revolution acted as the base. - Challenge all norms and assumptions. - Focus on your core competencies. - Do not be afraid to venture into the unknown. • The Indian industry is beginning to reap the fruits of the IT revolution. - Global opportunities have changed the outlook of Indian companies. - Organizations with differentiators that focus on customers and shareholders are the most likely to succeed. - The value of an individual or a company is now more in terms of their intangible value than their physical assets.