Building a Sunshine Nation

India has one of the highest Solar potential in the World. Can it tap into it build a sustainable economy?

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Source: The Hindu

India generated 68% of its electricity from coal in the fiscal 2013-14. The inability of Coal India Ltd (the state-owned monopoly) to ramp up coal production resulted in 65,000 MW of installed capacity being stranded, causing a power deficit of 5.4% in the fiscal 2013-14. To plug the gap, imports rose to 152 million tonnes in 2013-14 (20% of total coal requirement) resulting in higher power prices. This situation, together with climate change imperative impels a rapid movement towards greener and cheaper sources of power, primarily solar energy.

Rising dreams and falling prices

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Source: Financial Express

 

The movement is already under way as a result of Government’s ambitious ‘National Solar Mission’ announced in 2009 which envisages 20,000 MW solar capacity installed in the country by the year 2022. The Narendra Modi-led Government raised that target last month to 1,00,000 MW of installed solar capacity, inviting domestic and foreign companies to invest about $ 100 billion in the country’s Solar power sector. The buoyant mood behind this ambitious target is supported by 4 key factors. First is the abundant solar resource availability. India receives about 4.5-7 kWh/m^2 of solar energy on average with 1500-2000 hours of sunshine per year (depending on the location). This is enough to generate power more than 1000 times the current demand. A second factor is the falling prices of Solar Photovoltaic modules. Large-scale production, especially in China, has caused the module prices to drop by 80% between 2008 and 2014, dropping by 12% last year alone. As a result the tariffs for grid-interactive solar power have fallen from Rs.17.91/ kWh in the year 2011 to Rs. 5.73 /kWh in the latest round of auctions held by the Andhra Pradesh state government.

Nearing Grid-Parity

The third factor has been the tremendous rise in efficiencies of solar PV-modules. Over the last 8 years, research and mass-scale production have resulted in rise of conversion-efficiency for crystalline silicon modules from 12% to about 19% and that for thin-film (Cd-Te) modules from 8% to 13%. Companies like SunPower (in USA) are already manufacturing silicon modules with 25% efficiency commercially. Scientists at Fraunhofer Institute in Germany recently developed solar cells modules with 44.7% efficiency. This combination of falling costs and rising efficiencies has resulted in solar power approaching grid-parity. KPMG, a consulting firm, predicts solar tariffs to achieve grid-parity by the year 2018-19. Solar power is already more economical than diesel power with an average tariff of Rs. 7/kWh against Rs. 15/kWh for the latter.

The fourth significant factor has been the Government support to build the solar power sector. The ambitious ‘National Solar Mission’ provided various fiscal incentives like preferential feed-in tariff, excise duty concessions, wheeling-charge concessions, income-tax holiday, an 80% accelerated depreciation on solar-equipment, etc. Besides, off-grid solar plants receive a capital subsidy of 30% of the entire-project cost (and of 70% in North-eastern states and J&K). These factors along with falling prices have resulted in rise in installed capacity from 161 MW in 2010-11 to 2,319 MW in 2013-14.

Sunshine on the horizon

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Source: Aditya Greens

This is however only a small amount of the total potential, which is estimated to be in the range of 7,00,000 to 11,00,000 MW. For the non-grid applications, Rooftop solar represents the most lucrative opportunity. It can fulfil 30% of the entire demand generated during the sunshine hours. The example of Germany shows that with robust and attractive policy, Rooftop solar can be effectively leveraged upon. Out of the total Solar capacity in Germany, 80% is via Rooftop solar modules which can meet about 10% of total demand on a typical summer day.

Apart from using Photovoltaic modules, Solar energy can be harnessed through thermal systems as well. In this domain, Solar cooking and Process-heating are the major segments. Of these, Solar cooking is the most mature category with an estimated potential of 2.6 lakh m^2 collector area and target installation sites like temples, hostels, canteens and prisons. Already, successful examples of mass-solar cooking like Shirdi temple and IIT-Roorkee’s student messes exist. But the most lucrative opportunity (of about 46 lakh sq. Metres of collector area) lies in the industrial heating segment. Indian industry accounts for 40% of the total primary energy consumption of which thermal-form accounts for a massive 70%. Solar process heating can easily replace Diesel, LDO or FO-fired boilers in industries like Textiles, Dairy, Pulp & paper and Food processing.

Clouds spoil the mood

Despite massive potential and Government’s good intentions, severe challenges face the nascent Solar power sector in India. The utility-scale projects through PPA-mode (Power Purchase Agreement) have persistently been under the shadow of poor financial condition of the state-owned distribution companies. The retrospective tariff reduction by Gujarat’s power utility and non-honouring of PPA agreement by Tamil Nadu’s power utility has made the investors apprehensive, lately. The health of the utility-scale projects via REC-mode (Renewable Energy Certificate) is even more precarious. Non-enforcement of RPOs (Renewable Purchase Obligations) by the state-governments has forced the REC prices to tumble by 70% from Rs. 9.5/kWh to Rs. 2.85/kWh. Only 2% of total solar RECs were traded in October 2014 as compared to 18% in April 2012. This has put projects of 500 MW capacity (1/6th of India’s current solar capacity) in a cash-crunch.

For the Rooftop solar industry, the main hurdle has been the indecisiveness in coming up with an effective policy for residential rooftops. In August 2014, a 30% capital subsidy was announced for Rooftop installations but this was applicable to only Government buildings. Moreover, there have severe delays for the last 8-10 months in subsidy payments as the MNRE budget was reduced from US $246 million in 2013-14 to US $72 million in 2014-15. A local rooftop installer, Zolt Energy’s Pradeep Palleli, said “Announcing subsidies and not releasing it in time is really a major hurdle hindering the growth of the rooftop solar industry.” Even the Solar thermal industry has hit a road-block after the Government withdrew the 30% capital subsidy on solar water heaters on October 1, 2014.

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Who will make them?

The weakest pillar in India’s solar industry however is the crippled manufacturing-base. Global over-supply of cheap modules from manufacturers in China and USA has put many domestic-manufacturers out of business. For those who are left, capacity-utilization of factories remains below 30%, putting them on verge of bankruptcy. The high cost of domestic finance has been another major disadvantage. Solar-developers are getting access to loans at 3-4% from US Export-Import Bank (Ex-Im) while domestic interest-rates remain above 13-14%. Solar-developers have taken loans in excess of US $1 billion from the US Ex-Im Bank. But these come with riders to procure modules from US-based manufacturers, thus putting Indian module-manufacturers out of business.

Government to the rescue

To eliminate the barriers and shortfalls in the sector, the Government has to take proactive steps. Foremost among them should be creating an environment of certainty and stability, where in, programs are sustained and incentive-payments never delayed. To reduce the debt costs for developers, funding avenues like long-tenure, tax-free solar bonds. Lastly, the government can also leverage the ‘Make in India’ campaign to create a robust and sustainable solar-manufacturing industry in the country. Solar-sector focused Manufacturing and Investment zones should be set up to provide business friendly ecosystem along with superior physical infrastructure.

Work has already begun on many investment-encouraging initiatives. As a result, India is building the world’s largest solar-power plant in Rajasthan with a capacity of 4,000 MW, which is expected to bring the cost of solar down to retail tariffs (and even lower in some locations). Big business-houses like Tata-group, Mahindra Group, Reliance, NTPC, Aditya Birla Group and others have already planned investments worth thousands of crores to make the best of the solar-opportunity. The US $ 100 billion solar-investment plan by the Modi Government takes India’s commitment to solar technology to an unprecedented level. The sun has begun dawning on India. Combined effort by Government and Businesses can take it up the horizon and shine upon India’s future.

 

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Harsh Jain is a second year student at IIM-Ahmedabad. He completed his graduation in mechanical engineering from IIT-Roorkee. With extensive research exposure in the form of market research projects and industry review reports in the energy sector, Harsh is an environment enthusiast and actively follows the latest trends in the power and automobile industries.

 

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GE’s Alstom Acquisition: How Smart is the Move ?

On June 22nd 2014, one of Europe’s fiercest acquisition battles ended. French Government officially supported Alstom’s purchase from General Electric. During the previous two months, Siemens and Mitsubishi also played important roles in the bid. Both strategic and political reasons lie behind the structure of the deal.

On April 30th, Alstom (€21 billion revenues) presented the details of the proposed acquisition from GE (€120 billion revenues): all assets and liabilities related to the Energy activities transferred to GE for an Enterprise Value of 11.4 billion Euros to be paid in cash.

Figure 1

Source: GE Website

Is the deal value fair ? 

By using the comparable method, it emerges that GE has undervalued Alstom. Indeed, GE’s offer implied a EV/EBITDA multiple equal to 7,87, while Damodaran suggesting that a fair multiple for the sector should be equal to 9,78 and Valuemetrics to 10,44.  The main reasons of this undervaluation may be the industry trend and Alstom’s recent performance.  According to an Ernst & Young research of 2012, the M&A trend in the power and utilities industry has been decreasing in terms of value and number of deals. Considering similar transaction multiples of the recent past in the European market, they confirm the trend and are similar to the ones of Alstom’s acquisition. For example, in 2012 Electricite de France acquired Edison International with a EV/EBITDA multiple of 9.7 and Snam was acquired by Cassa Depositi e Prestiti with a multiple equal to 8.7. Moreover, the whole European energy sector has been facing threats due to the raise of energy resource prices.  Alstom has also negatively performed in the last years. In 2013, Net Income fell 28% to €556 million due to higher restructuring costs. Operating Profit fell 3% to €1.4 billion, with Operating Margin dropping from 7.2% to 7% and orders to 10% (€21.5 billion) because of a weak performance in the thermal power division.

The underlying strategy

The strategic rationale behind the deal is to integrate the Alstom energy activities (€14.8 billion revenues and 65.000 employees) within GE to strengthen its development’s prospects. The main sources of synergies are the complementary capabilities among the two firms: GE’s excellence in Gas Turbines and Wind Onshore and Alstom’s superiority in Hydro, Grid, and Steam turbines. Moreover, Alstom could use the cash received to refocus on the transportation sector.

The deal is likely to be very successful due to various elements. It strengthens GE’s position as the most competitive infrastructure Company in the world. Moreover, the type of technology that is going to be acquired is complementary to the existing capabilities of the company, thus increasing the likelihood of benefiting from the potential synergies in the short-term. Indeed, the synergies that GE is going to leverage are concrete and clear because Alstom mostly conducts business in areas where GE is already present, so the learning curve necessary to generate value is not very difficult to be achieved.

The benefits that GE is more likely to achieve are in the power business, especially regarding the production of clean energy. Indeed, the demand of pollution-free energy is likely to increase in the near future, especially from Asian countries like China or India. Thus the acquisition has taken place in an opportune moment in terms of industry cycle and given the huge scale that the company is going to put in place, it will be able to largely satisfy the future demand.

According to estimates provided by GE, the cost synergies opportunities that the company is expected to generate is about $1.2 billion within 2020 (see graph below for a more articulated analysis), a $4 billion increase in operating profits by 2018 and an EPS increase of $.04-.06 within 1 year.

 Another relevant factor is the past success in dealing with acquisitions of France and European companies. Among them we remember Jenbacher, an Austrian company that has been the cornerstone of GE’ global distributed power business and that under GE’s control has increased revenues 3x times. This success ranges also from various industries, not only in the power sector, ensuring that the post-merger integration phase will be conducted appropriately by GE given the previously developed skills.

 What are the Challenges ?

 Although the deal has a huge potential to be very successful, it is not immune to risk. The first important point that GE should be aware of is the strength of the France unions in the context of the France labor market. Any time it will take decisions regarding the firing or the reconversion of the France labor force may be very difficult to be implemented (or may be implemented at higher costs than in other countries of the world).

Another risk factor is the large amount of transactions costs that will be present as soon as the deal will be completed. They mainly derive from the terms of the deal, which require the constitution of three Joint Ventures that were not present in the first bid by GE. Thus, GE will face much more pressure in generating profits given the larger cost structure.

 Figure 2Source: Author’s elaboration on company’s data

Conclusion

 The deal has high chances to turn to be very successful and may be considered as a game changer in the industry. Although the initial terms had to be modified by GE due to the competition that arose from Siemens-Mitsubishi, the benefits are both large and concrete, and very likely to be monetized in the short-term. This is also related to the nature of the estimated synergies. Indeed, they are of the cost-saving type, which have a higher probability to be achieved compared to the growth ones. However, challenges arise from the institutional environment that surrounds GE’s activities in France, where the power of unions is very high as well as the high amount of transactions costs that arose in order to positively conclude the deal.

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Gianmarco Bonaita is a Double Degree student of PGP coming from Bocconi University. He completed his undergraduate degree in Business Administration and Management at Bocconi University. He has been elected city councilman and has worked as a collaborator of journal for 3 months. He has had an internship in an Italian SME. He is passionate about travelling, skiing and photography.

Strategy Digest Vol 1 (Jan)

BMW and Affordability

An affordable BMW sounds like a classic oxymoron. Surprisingly, BMW has gone ahead with a well thought out strategic move to launch the entry level SUV – BMW X1 – in India. The X1’s price tag at INR 22 to INR 29 lakhs puts it in direct competition with the Honda CRVs and Toyota Fortuners of the extremely fast growing SUV segment in India.
The high end luxury car market in India is growing at an astonishing 74%. The playground offers attractive rewards with ever growing sales figures and BMW seems to have played the card just right. The BMW brand tag offers much more value to the Indian customer than a Toyota or a Honda and that is exactly where the BMW X1 scores over the competition.
However, if BMW really wants to conquer the Indian market even more convincingly it needs to capture the depth of the market that extends beyond the metros of India today. It needs to establish a robust after sales service network to make sure that models like X1 realize the sales potential they seem to possess. The X1 is a great launch and it’ll be interesting to see how Toyota, Honda and Hyundai face the new found competition from the grand daddy of automobiles.

The Mobile Store: Ready to evolve

With over 1200 stores and a 45% share of the organized cell phone retail market in India, The Mobile Store has been going great even with a strong pressure on margins. With a drastic shift in consumer preferences towards smart phones and falling price tags, The Mobile Store plans to change the phone shopping experience for its customers.
The Mobile Store plans to develop 300 of its stores across 50 cities into experience stores. These stores will allow users to get a feel of the phone, utilities, apps and new technology. It plans to do away with the cheap plastic dummy phones that we get to see presently. With trained Mobile Store personnel who will help the consumers choose apps and phones according to their needs, it plans to make it interactive for its consumers to make a wise choice while they buy a phone.
This plan undertaken by The Mobile Store is capital intensive and will surely put heavy pressure on the already squeezed margins in cell phone retail. Currently a retailer earns anywhere between 5-8% on the price. Moreover, the market is heavily price conscious and people make it point to get the cheapest deal even after they try out phones at outlets such as The Mobile Store. The implementation of the plan on a massive scale is also an issue with aggressive retailing tactics being employed by a growing number of competitors. 

Bypassing investment bankers in valuations

The selling of Honda’s stake in Hero Honda, Ranbaxy’s sale to Daiichi, Fortis-Wockhardt deal and the $3.7 bn Abbott-Piramal deal among many have a strikingly common story: There were no bankers involved in the valuations. It is a recent trend that has emerged lately when a lot of corporates strongly feel that “No Banker can ever know their business better that them”.
To add to it, more than 80 percent of the banker-madated deals in India are conducted completely by the promoters themselves and the bankers are left to pure mathematical execution. This trend seems to be fully justified and also enhances the confidentiality aspect of the deals. Information leaks have been a major cause of mammoth deals being brought down in a matter of days and bypassing the bankers seems to be a way of avoiding that. Other major examples include the TATA-JLR deal where the valuation was done by Tata’s close team and not bankers advising or executing the deal.
The bankers on the other hands are not losing out on the dealbook business but their profile of work is shifting more towards the financing, fund raising and implementation phases of the deals. It will be interesting none the less to follow the role of bankers in the deals to come in 2011.

Strategy Digest Volume 1 (Dec)

Top newspapers gearing up to make readers pay for online content

Some of the world’s top newspapers including “The New York Times” and “The Times of London” have showcased a serious intent to charge readers for online content. In recent times, the US and UK newspaper industries have been continuously plagued by steeply declining advertisement revenues. The decision to charge for online content comes with its share of serious difficulties that include the possibility of a heavy decrease in online readership which might make advertising through this medium less attractive for marketers. The publishing houses are still sometime away from actual implementation but it is interesting to see the starkly different strategies that they plan to implement.
The Times of London – The Times of London plans to establish an opaque pay wall which will allow readers to access the content for a price of £1.00 for a day or £2.00 for a week. A similar strategy which seemed to work for the business counterpart, “The Financial Times”, in the earlier stages failed to deliver results for The Times which witnessed a grave downfall in readership by almost 90 percent during test runs.
The New York Times – NYT’s plan of going for a “metered” tariff is very different. It plans to charge readers after they have accessed a limited number of free articles on the website. FT has been using this model for the last few years and at present the digital revenue at FT represents about 20 percent of the total revenue.
The publishing houses strongly believe that paid subscriptions allow them to gather valued data which in turn helps fine tune advertising programmes for the target audience. This offers better value to the marketers and increases the efficiency of advertising revenue for the newspapers.

“The Great India Nautanki Company” in China

Kingdom of Dreams, which is India’s first of its kind live entertainment complex, is ready to be established in China. The Great India Nautanki Company (GINC) which controls the Kingdom of Dreams has entered into a JV with China’s leading stage equipment manufacturer Dafeng to setup 10 live entertainment destinations in China at an investment of roughly $100mn each. It is common to hear about Bollywood popularity in the USA and Europe, but GINC’s strategic move into China with its theatrical firepower presents an interesting strategy that has been adopted by the company. GINC is banking on China’s local tourism where more than 30 million people travel each year.
The idea behind Kingdom of Dreams is to deliver an assortment of complete Indian entertainment which would include Indian handicraft, architecture, exotic Indian cuisine and India’s most expensive theatrical extravaganza – “Zangoora”. Wireless interpretation machines and dubbed dialogues will pave the way for our Chini brothers to understand and enjoy Indian art. The move sounds fresh and aims at more than 24 percent ROI.

Dell enters the smart phone market in India

A month after unveiling the Dell Streak tablet, Dell has launched two Android based smart phones, XCD 35 and XCD 28 attractively priced at Rs. 16,990 and Rs. 10,990 respectively. After establishing a strong foothold in the laptop market in India, it is interesting to see Dell exploring the hyper-competitive smart phone market in India.
The smart phone segment in India has seen a dramatic turnaround from being the corporates’ delight to becoming an affordable gadget for the tech lovers. The competition is intense and has proved to be tough to deal with, even for supremely experienced players like Nokia. The segment is growing at an attractive 30 percent. With Apple, Nokia, Samsung and HTC fighting it our hard in this segment Dell is obviously a late entrant and will have to perform exceptionally to make a name.
Dell’s strategy is banked upon a) The upcoming rollout of 3G services in India which will further boost demand for smart phones, b) Dell’s established clientele in the laptop segment and it’s highly rated after sales support network and c) The growing acceptance of Google’s Android mobile platform in India.
Dell wishes to couple this launch with an extension of its retail network in India to enhance sales. The customer is at the winning end with tonnes of choices in the smart phone segment and Dell’s entrance will be another headache for Nokia which has been struggling lately.

Walt Disney of India

Suppandi, Shikari Shambhu, Ramu and Shamu, King Hooja, Amar Chitra Katha

All these kindle fond memories in most of us, a reminder of what we read in our childhood days. These old brands of Tinkle and Amar Chitra Katha which we fondly associated with the famous Uncle Pai, have now been acquired by a relatively new venture known as ACK Media or Amar Chitra Katha Pvt. Ltd.

ACK Media, a venture launched in 2007, was founded and is headed by Samir Patil, an ex-Mckinsey partner with 10 years of experience in media, hi-tech, and healthcare firms. ACK Media started with acquisition of Amar Chitra Katha and Tinkle brands from the India Book House in November 2007. Then, in April 2008 they acquired a controlling stake in Karadi Tales (series of popular audio books for children). Since then a number of steps have been taken to develop and revamp the old charm of the ACK characters and stories.

In addition to improving content in print, magazines, comics, home video space, ACK wanted to improve its distribution network and have a better relationship with the end customer. Hence, it acquired India Book House in May 2010, and gained control of a distribution network that includes 400 cities, 2500 stores and over 22000 vendors. Also, in order to cash in on the growing size of web users, websites of Tinkle Online, Amarchitrakatha.com etc. were launched which have been developing considerable traction ever since. Also, to capitalize on the telecommunication and mobile data access revolution, there are several mobile games and apps in the making.

There has been a lot of activity in TV & film production space as well. Apart from a deal it struck with Cartoon Network for an animated series, ACK has a content partnership with Turner Broadcasting System to produce two animated films and a series on Amar Chitra Katha stories. Other Indian comic book houses are also making similar attempts to revive the market For example, Raj Comics has tied up with a mobile services provider, and Diamond comics is slated to launch a TV channel this year.

In the near past, ACK had said that they were looking to raise Rs. 100 crore by selling stakes to private equity firms in order to increase their product portfolio, mostly in the digital space. The latest buzz is that Kishore Biyani is interested in acquiring 40% of ACK. Biyani’s reasons are still unclear, but it seems that Biyani wants ACK to venture more into animation and eventually theme parks, as part of his ambitions of creating the Disneyland of India.

The concept of making cartoons popular by involving social media, creating TV & Films animations and launching theme parks sounds fascinating, but there is a catch. Firstly, the world of children that grew up on Tinkle and Amar Chitra Katha has grown up into adults now. The current generation of children has too many options in terms of entertainment, and hence domestic comics figure forms a very small part of their leisure time, if at all . Secondly, the urban children population in Tier I and Tier II cities has undergone an anglicization of reading habits, which is steering them towards Noddy, Archies, Enid Blyton rather than Suppandi and Shikari Shambhu. Majority of the children who are still passionate about Tinkle and Amar Chitra Katha will probably belong to a class that might not be the target population for the web/mobile ventures, animations and especially theme parks that ACK is planning to launch.

In this background, how successful would web ventures, animation or an entertainment park based on Tinkle or Amar Chitra Katha be? It is all right for Samir Patil to aspire to be the Walt Disney of India, but is that a possibility with his current brand portfolio? To be fair to ACK, they have followed a very structured process – they have tried to revamp the brand by adding newer titles, by reaching out to the end consumer via a revamped and much improved distribution network, by generating online content to increase reach etc. All these are attempts to revive the comic books market and create a market demand for ACK/Tinkle characters and stories. ACK is assuming that by the time they launch animations and theme parks, this market would have undergone a complete revival, thus creating a pull for the brand.

But whether a successful revival is possible in this era of Archie’s, Noddy, Tin Tin, Nancy Drew etc., remains to be seen. Only time will tell!

The price is right!

For a long time in business, the pricing decision was the last cog in the wheel. The consumer needs were identified, product attributes were defined, the technology to be deployed was given consideration, production centre established, then while starting the marketing process, pricing came in as a final step.

For the most part, pricing was cost-based and hence fraught with the basic chicken-egg problem. The cost depends on the volume of the production, the volume depends on the price charged from the consumers, and yet price was being decided on the basis of cost. The logic feels a little bizarre, but in many cases such a strategy would seem to work fine. It took some years before it dawned on people that pricing could be used as a strategic vehicle – to segment, to position, to differentiate, to effectively enter the market etc. and also that pricing could have a significant effect on market share. In fact in a recent report by McKinsey, it has been stated that a one-percentage-point improvement in the average price of goods and services leads to an 8.7 percent increase in operating profits for the typical Global 1200 company (the world’s largest 1200 companies by market capitalization).

Many brands have committed pricing blunders and went down under. A good example is the direction that Indian telecom operators have taken; their continuous price wars have left the industry in danger of becoming unsustainable. Similar is the case with airlines, their price slashes have caused the airline industry to bleed badly. On the other hand, several brands have exploited innovative pricing to their advantage. In the mid 90s, Ford reduced the price of their high-end cars a little bit, to stimulate purchase but not enough to cut into their margin. This price cut led to greater sale of the high-end cars, but also led to cannibalisation of their low-end cars. But since it was in the high-end cars that they had more profit margins than the low-end cars, in spite of the market share that they lost, their profits soared. Having learnt by several such examples, many companies are now investing in pricing infrastructure, right from establishing separate pricing departments to developing and acquiring pricing systems to collect accurate current pricing data and tools to transform that data into information.

There are different kinds of pricing strategies that a firm can deploy:

Differential Pricing Strategy: This strategy is deployed in order to sell the same product at different prices to consumers. Some examples of this strategy are Second market discounting, where the products are sold cheaper at a second geography assuming that arbitrage is not possible due to transaction costs by consumers; Periodic discounting where the prices vary at different periods of time depending on utility and need of consumers (Happy Hours concept in bars); Random discounting where some search or effort by consumers will result in discovering discounts (in several foreign tourist cities, discount coupons are freely available for tourists, but need to be enquired about).

Competitive Pricing Strategy: If there is a threat of competition, the periodic discounting gives way to penetration pricing and experience curve pricing, where scale and experience economies are exploited, respectively; in these pricing mechanisms the products are priced less as compared to the competitor since the producer can take low prices better due to volume or experience.

Product line Pricing Strategy: When an organization has some related products it can try different pricing strategies like price bundling/two-part pricing where products are bundled to extract maximum value from buyer (McDonald’s Happy Meal; Entry into amusement parks and separate payment for some rides); premium pricing where one brand/product of a firm may be positioned as better in quality and hence more costly than another brand/product (Hotel rooms: Suites, Luxury, Deluxe).

These were limited examples, but several more pricing strategies exist and the appropriate ones can be chosen depending on the kind of product, brand life cycle and objective of the organization. It is time to recognise that pricing plays a critical role in driving performance of an organization. Hence, organizations need to invest in appropriate pricing infrastructure and utilize pricing as a strategic tool to achieve their objectives.

References: Beyond the many faces of price: An integration of pricing strategies – Gerard J. Tellis

Building a better pricing infrastructure – McKinsey Quarterly

NSE to form Global Alliances

The recent deal between NSE and LSE to work out a joint venture and allow CNX Nifty and FTSE 100 to be traded on each other’s exchange is of great strategic significance. With such a deal in place, CNX Nifty, will become a globally traded contract and NSE will be able to offer a basket of top traded global indices. This move is expected to benefit both the exchanges and the investor community and seems to emerge out of a strong economic logic. The landscape in which stock markets have operated globally are fast changing. With advancement in IT services and almost negligible marginal costs involved in executing trades, the traditional parameters for judging a stock exchange’s competency are fast losing ground.


Typically, stock exchanges earn revenues from member subscriptions, fees from listing, trading, clearing and settlement services and charges for providing company news, quote and trading data. But with negligible marginal costs involved with each of these activities, the associated margins have dwindled significantly. Therefore, the economic viability of any exchange to a large extent is determined by the volumes of trade being transacted through it. The traded volumes in turn are dependent on the reach and liquidity offered by the stock exchange. In stock markets, liquidity breeds liquidity. Because of higher liquidity, the bid-ask spreads (the difference between the best buy and best sell prices of any scrip) become lower, which brings down the transaction costs for brokers. Because of lower transaction costs more brokers trade on the exchange, increasing the liquidity again.


Given the changing nature of the market forces, a strong case is set out for alliances among the stock exchanges. Alliances among stock exchanges will provide them with a positive network externality as a wider network would result in greater liquidity. With a wider network in place, more traders are expected to trade on that network as an order being sent out by them is more likely to get executed if there are others sending out their orders on the same network. Therefore, a network with a large order flow will attract more orders.


Apart from the strategic interests of the exchanges, such a tie-up will also benefit the investors. Traditionally, the high trading costs have limited Indian investors from taking positions in foreign stocks. The tie-ups between Indian and foreign stock exchanges are likely to make it easier for Indian investors to invest in foreign stocks.


The success of this deal is expected to set the path for future global tie-ups of Indian exchanges and provide synergies from other tie-ups of foreign exchanges. These tie-ups will add to the reach of the Indian stock exchanges and enable them to provide a wide range of trading options.