Wednesday, May 3, 2017

Uber's Missed Opportunity to Connect a Shared Value

The recent Politico article, How Uber Lost Its Way in the Steel City, reveals how an unequal partnership has led the Mayor and many citizens of the city of Pittsburgh dissatisfied with Uber. The corporation that uses technology to offer an improved taxi service, partnered with the city to invest in an autonomous vehicle facility in exchange for cooperative policy. The focus of this agreement was on the research and development of autonomous vehicles.

Uber has been involved in many extremely costly legal battles with local governments all over the world just to secure the right to implement its basic service. The city of Pittsburgh has rolled out the red carpet for Uber and, not only allows their taxi service, but allows a fleet of autonomous vehicles to use the streets and test the service. There is clear connection between value provided to Uber and potential for investment in the locality.

Creating Shared Value by Michael Porter and Mark Kramer, explains that a corporate strategy that links societal and economic progress will produce a unique opportunity for growth. I believe Uber missed this opportunity and has created a open ended opportunity for other industry players.

Mayor Peduto of Pittsburgh, argued that Uber has not offered any further benefit to the community in which it operates. Last year, the city was a finalist for the federal Smart Cities grant which would provide a grant to invest in technological infrastructure. When the mayor reached out to the CEO of Uber to advocate for the up and coming city, Uber released a statement that it was not beneficial for Uber to advocate for the new technology.

Uber clearly missed an opportunity to empower and be involved in the foundation of tech innovation. This would provide a chance for the company to identify new ways to offer services in a way that could bring in more revenue. As the city grows from investment, Uber could find economic benefit as well. Neglecting to support the development of Pittsburgh opened the door to other firms to take advantage of the cluster of talent and sector expertise.

The city of Pittsburgh has historically been a leader in robotics and autonomous machines because of the academic institution, Carnegie Mellon University. Ford, an automobile giant, is attempting to exploit the missed shared value strategy and invest in the local community. Ford’s Argo AI, has invested $1 billion dollars in a new autonomous vehicle facility in Pittsburgh and is poised to take advantage of the cluster of talent and untapped potential that comes with working with the community. 

McDonald's in India


McDonald's in India
Global food giants have the $19 billion eating out Indian market firmly set in their views. As many as a dozen food companies set foot on the Indian market in the past year- like Burger King, Wendy’s, Carl’s Jr to name a few.[1] But an early entrant to the Indian market was McDonald’s, which entered the Indian market in 1996 as a joint venture between Oak brook III and two local partners.[2] It wasn’t an easy ride for McDonald’s as its signature product- beef burger- was a taboo in the Hindu majority country.  Through numerous trail and error, McDonald’s was able to capitalize on the rapidly growing culture of meals on the go via vegetarian and localized recipes. Let us try to discuss some of the challenges McDonald’s faced in this journey and how it worked around them to transform itself into a household name.



1.     Localization to meet the cultural challenges:

McDonald’s was a global giant that thrived on its signature burgers- beef and pork. This posed a threat for its own survival in India. India consists about 65% Hindus who abstain from consuming beef while pork was taboo to the 13% Muslim population.[3] McDonald’s offered a complete different menu to accommodate the Indian culture and taste. For instance, all the ingredients in the vegetable burgers were vegetarian, even the mayonnaise in them was eggless. The company classified the tools as well as employees in the vegetarian and non-vegetarian categories to honor the cultural values. [4]McDonald’s offered products such as Allo Tikki- a burger containing a patty of mashed potato and peas flavoured with Indian spices- which became an instant hit. Furthermore, they experimented with McMaharaja burger, Paneer Tikki burger, McCurry Pan and other innovations which received great response from the Indian consumers.  [5]



2.     On the go to family dining:

McDonalds’s was famous for its on the go model. However, in India, “family dining in” was the norm. Unlike the its global stores, McDonald’s stores in India are as huge as the traditional dining-in restaurants and can seat people anywhere between 50-200 depending on the location.  McDonald’s used this opportunity to project itself as an advocator of family and cultural values. With localized products, McDonald’s also introduced the concept of breakfast and lunch combos as part of its happy price menu which appealed to the dining values. McDonalds’s came up the taglines ‘Toh Aaj McDonald’s Ho Jaye’ and ‘McDonald’s Mein Hai Kuch Baat’ which resonated with Indian family values. This became the McDonald’s unique selling proposition in India.[6]

3.     Competition in the price sensitive Indian food market:

Though McDonald’s was one of the first global giant to enter the Indian food business, it has very stiff competition now. For Instance, Domino’s has more than 1000 outlets, KFC 700+ restaurant and 150+ Dunkin Donut stores.[7] The competition provides Indians with a wide range of eat outs. McDonald’s realized that the Indian food market id highly price sensitive. They offered burgers starting at INR 25 (approx. $0.33). The low pricing ensured high sale volumes which was essential to its sustainability. This attracted the youth and college students who were awed by the price and taste. The low prices and quality food products have impacted in an overall increase in dining out numbers among Indians.[8]

4.     Adapting to the local needs:

Lettuce was an integral part of the McDonald burgers. However, there was no lettuce supply chain in India. McDonald’s had to start form the scratch to meet its product requirement. McDonald’s initially imported lettuce from the neighboring countries briefly. Later, they were able to convince the local farmers to from lettuce from whom they purchased. Similarly, all kitchen fabrication is done locally. Outlet requirement such as refrigerators, chillers, freezers and furniture are all locally made. However, the global suppliers fulfilled the local requirements of McDonald’s other countries.  In India, McDonald’s obtain 99% of its needs from within the country.[9]

5.     Marketing and soaking in the local culture to become a household name:

To improvise sales, McDonald’s conducted various surveys and internal audits. McDonald’s wasn’t happy with its sales despite introducing localized product. They turned to marketing to realize their full potential. McDonald’s started advertising in local languages to reach out to the people.

For the first-time McDonald’s aired commercial in local language for its soft serve coned ice cream- softie- which became a huge hit. The success for softie of not only attributed to local language advertisement but also its price (10 cents).[10]

Since its success, McDonald’s has been using the same advertising modeling. This has helped them to get feedback from the customers and improvise based on it. Going a step further, McDonald’s has hired staff who can converse well with local language as well as English. The menu too was available in local language as well English. These measures were amid at servicing customers with diverse background.



These were some on the solutions to the challenges that the R&D team at McDonald’s formulated. This can be blue print for other global giants who are eyeing the enter the Indian market.



[1] Gauba, Vaishali. "This Is Fast Food's next Mega-market." CNBC. CNBC, 02 Apr. 2015. Web. 03 May 2017.
[2] "Key Milestones." McDonald's Key Milestones - McDonald's Restaurant in India. N.p., n.d. Web. 03 May 2017.
[3] Orgi. "Religion." Census of India: Religion. N.p., n.d. Web. 03 May 2017.
[4] Ap. "McDonald's to Beef up in India with Meatless Menu." CBS News. CBS Interactive, 05 Sept. 2012. Web. 03 May 2017.
[5] Gasparro, Annie, and Julie Jargon. "In India, McDonald's Plans Vegetarian Outlets." The Wall Street Journal. Dow Jones & Company, 05 Sept. 2012. Web. 03 May 2017.
[6] Kannan, Shilpa. "How McDonald's Conquered India." BBC News. BBC, 19 Nov. 2014. Web. 03 May 2017.
[7] "Global Fast Food Giants like Fatburger,Jhonny Rockets, BurgerKing Are Flexing Muscles in Indian Market." Global Fast Food Giants Flexing Muscles in Indian Market. N.p., n.d. Web. 03 May 2017.
[8] "Competing to Go Native." KFC Takes on McDonald's with a Cheap Potato Burger. Living Media India Limited, n.d. Web. 03 May 2017.
[9] Kelly, Nataly. "McDonald's' Local Strategy, from El McPollo to Le McWrap Chèvre." Harvard Business Review. N.p., 07 Aug. 2014. Web. 03 May 2017.
[10] Rautray, Samanwaya. "McDonalds’ Soft Serve Should Be Classified as Ice-cream for Determining Excise Duty: Supreme Court." The Economic Times. Economic Times, 03 Dec. 2012. Web. 03 May 2017.

Inherent Vice - Lessons from the Food and Beverage Industry

In their work, Strategies That Fit Emerging Markets, authors Tarun Khanna, Krishna Palepu and Jayant Sinha speak of fast-growing/emerging markets being poor ground for profit making. They suggest that companies from developed markets need to be prepared for institutional voids and not just rely on composite indices before they set foot in emerging territory. Despite the very cynical nature of the article, there seem to be a few companies/brands that have mastered the art of being successful in global markets. Coca Cola, McDonalds, Pepsi, Dominos, Red Bull, Nestle to name a few.

What do they have in common?
They are all food and beverage companies.

I believe the authors’ framework for dynamically applying strategies based on geography, while still holds true, drastically dilutes when applied to food and beverage companies, and this can be evidenced by detailing the scheme for one of the companies – McDonalds.

McDonalds’ golden arches are said to be the most recognizable symbol in the world. It embodies the American dream and it is said that McDonalds is about the 200th biggest country in the world if all its worldwide restaurant area is integrated to form a single mainland.

How did it circumvent all the issues that the authors talk about and get there?
I believe the answer lies in the fact that food and beverage are among basic human vices;

Political and Social systems
McDonalds has to deal with social aspects such as conforming to religious food sentiments in a region. McDonalds doesn’t necessarily get entangled in debates about the specifics of the bureaucracy or the judiciary, given its simplistic franchise model and the appeal of fast food.

Openness
McDonalds has presence in 119 countries, which is the largest for a restaurant chain. It alludes to the fact that countries are more open to food and beverage ventures and that possibly a country’s FDI laws (Foreign direct investment) are least stringent on the food industry.

Product Markets
McDonalds has a glocal policy for their products. They have a set menu that provides the McDonalds experience all around the world like the Happy Meal, Egg McMuffin etc. whereas they have local menu items such as McArabia in the middle east.

Labor Markets
Working at a McDonalds has gained an urban reputation for requiring least amount of skill. McDonalds does not need to think long and hard about the labor and skills in different world locations.

Capital Markets
Capital markets are much less of a concern since McDonalds is in the low-cost food industry, much less susceptible to any local financial activity. Given their size, processes, and product appeal, the lack of sophistication in financial markets isn’t too much of a concern.

The same arguments hold for brands such as Subway, KFC etc. Food and drink are human needs that transcend culture and region, deeming diverse business climates inconsequential.

For the food and beverage industry, all the world is Rome, and everyone is a Roman.


 Ref.
McDonald's Winning Strategy, At Home and Abroad, Panos Mourdoukoutas - https://www.forbes.com/sites/panosmourdoukoutas/2012/04/20/mcdonalds-winning-strategy-at-home-and-abroad/#4de3acae2a92
How McDonald's CONQUERED the world, Adrian Lee - http://www.express.co.uk/news/world/570567/How-McDonald-s-became-global-phenomenon

Shared Value and the Developing World



In the “Creating Shared Value” article, Porter and Kramer speak a bit about how the three methods described can help the developing world. Such as reconceiving products, which was a part of the creation of low-priced cell phones introduced into various nations in Africa.  The example for redefining the value chain included Nestle’s build-up of their African and Latin American suppliers.  Yara’s investment of infrastructure in Africa was used as an example for improving existing clusters. The common idea is that business views parts of the developing world as a place where profit cannot be found, so investment in these areas is not needed. Companies rather think that philanthropy is the better solution, which will help the poor while not hurting the company’s bottom line.  As stated in the article, this assumption is wrong and hurts both the developing world and the business. 




An interesting field that shared value has been created in the developing world is in the pharmaceutical industry.  This type of connection makes sense, as drug companies will profit from their drug sales while also giving benefit to those who are taking their medicine, essentially saving their lives.  Pharmaceutical spending in low and medium income markets is expected to grow by 14%, while high-income markets will expand by only 4%.  There is an opening here for companies to step in and reap the benefits of this increase in growth. 




Some companies have already started to look into the developing world’s markets, and have used the methods described by Porter and Kramer to guide how they can create shared value in the developing world. GE, for example, is reconceiving its products to fit into the market. The company has changed its $500 portable electrocardiogram machine to become less expensive and easier to use for those who do not have experience with the device.  Pfizer and GSK have reconfigured its value chain by creating a new jointly owned company, VIIV Healthcare. VIIV Healthcare combines the facilities of both Pfizer and GSK in Africa to create an easier infrastructure route to transport HIV drugs.  Becton Dickinson and Company is improving existing clusters by building laboratories. These buildings will eventually carry the companies’ drugs and health devices, which will ensure income from the project.




There already exist companies who have benefited from a shared value strategy in the developing world. Such as Novo Nordisk, which invested heavily into China’s healthcare system.  Novo has saved 140,000 life years, while in the process building an insulin market which is currently valued at $1 billion.  Investment into the developing world’s health infrastructure can create shared value for both the company and society.  Saving lives is extremely important, and these businesses have the capacity to help while also receiving some value.







Article used: https://www.theguardian.com/sustainable-business/blog/developing-countries-healthcare-creating-shared-value

Grasping the opportunity of creating shared value, when entering emerging markets

Grasping the opportunity of creating shared value, when entering emerging markets

This short blog post combines some insights from the article of Khanna, Palepu, and Sinha (2006) on ‘Strategies That Fit Emerging Markets’, with the article of Porter and Kramer (2011) on ‘Creating Shared Value’.  

Khanna, Palepu and Sinha (2006) discuss in their article what is needed for companies to extend to emerging markets, often in different countries or even continents. What they state is that there is often a lack of ‘soft’ infrastructures from the point of view of the company. These soft infrastructures are mainly composed of services like market research providers, end-to-end logistics or human resource firms. These services are crucial for the success of any company and would thus need to be in place for companies to become successful in the emerging markets. But because of the emerging nature of the markets, these services are inherently not yet in place, or not large scale enough to incorporate the new business.

Khanna et al. (2006) also state that, when companies are looking at an expansion to emerging markets, after assessing the benefits of expansion and the costs of extra coordination, three distinct strategic choices are available:
1) Adapting the business model, whilst keeping the core value propositions constant,
2) Attempt to change the context
3) Stay out of countries where adaptation of strategies is not profitable or is impractical

The second strategic choice brings the possibility of creating ‘shared value’, as discussed in Porter and Kramer (2011). Shared value is posed in this article as value that is created on both the corporate side, in the form of higher efficiency or profitability, as well as on the societal side, in the broadest sense of increased societal wealth and wellbeing, and environmental sustainability.

In case a successful company attempts to enter an emerging market, where there are no or not enough soft infrastructures in place for efficient functioning of the company, this company will have the opportunity to attempt to change this ‘soft’ context. By stimulating the service industries needed by the company, it may create a cluster of business around itself, affecting not only its own wellbeing, but also that of the community around it. This community will be able to benefit from the created cluster, as it brings both opportunities for employment, as well as use of the new services.


When implementing this cluster strategy correctly, a company that is seeking opportunities in emerging markets, might find themselves on a springboard into profitability, as synergies with three things: 1) the community provides them with increasing productivity 2) it provides them an increasing client base as the cluster grows, and 3) increasing benefits for the community and environment around the company. 

Arbitrage of information: a strategy for the Indian labor market


Warning: this strategy may not align with your ethical viewpoints; however, I believe that this business model is feasible and can be profitable.

Arbitrage involves taking advantage of price differences of a certain product or service in different markets while the price differences still exist. By buying it in a market where the price is low, and then selling it in a market where it is valued at a higher price, one can easily and quickly make a profit. Usually such opportunities don't last very long, as the markets tend to reach equilibrium due to trading. However, this is not always the case for services. One avenue for arbitrage that has existed for years (and will continue to exist for years) is the difference in valuation of solutions to homework problems and exams in different parts of the world. Although there are a few existing services that outsource homework and test problems already, they are unreliable and poorly set up due to a diffused focus on personnel management.

The difference in valuation described above is the result of variations around the globe in many parameters - costs of investment required for good schooling; levels of student competitiveness and capabilities; the buying power of a given sum of money etc. Education costs in the US are much higher than in India, the number of people in the US who can provide answers is lower, and the buying power of a given sum is significantly higher in India than in the US. In the article "Strategies That Fit Emerging Markets", Khanna et al suggest that a company interested in international markets should analyze the country's institutional context. Based on this analysis, the company should adjust its strategy accordingly [1].

In the case of India, I suggest creating or adapting a business model that capitalizes on the educated Indian labor market. The Indian labor market consists of a sufficiently large number of well-educated yet poorly compensated (relative to US income standards) graduates. A large number of them understand English, thanks to the large number of English-medium schools in India. Additionally, the intense competition among students in India results in many qualified graduates. Under the Modi administration, top-level corruption of government officials has been significantly curbed, and India's openness to international companies willing to invest in Indian talent has increased. The "Make in India" initiative is reflective of this change in outlook. These factors all support launching this business with service centers in India. However, one area of concern pointed out by Khanna et al is the power of trade unions in India. To avoid this hurdle, I suggest that respondents are rewarded and rated on an individual basis, based on the quantity and quality of their submitted answers. This will leverage the competitiveness prevalent in the Indian labor market and prevent powerful trade unions from forming. To ensure that this business can reliably deliver results, talented local managers will be required to delegate tasks and incentivize performance among known top respondents. Additionally, given the rapid increase in low-cost mobile broadband connectivity in India and the influx of economical smartphones from Chinese manufacturers, this company will likely rely solely on human capital. This allows for reduced service costs, as this business will not require a dedicated physical infrastructure setup.

[1] Khanna, T., Palepu, K., and Sinha, J., Strategies That Fit Emerging Markets, Harvard Business Review, June 2005

My strategies for ITC Limited

The case “ITC Limited’s Dairy Development Initiative” is written by Vidhi Chaudhri and Asha Kaul on ITC Limited, one of India’s foremost multi-business enterprise with a market capitalization of US $ 45 billion and a turnover of US $8 billion. ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine and as 'India's Most Admired Company' in a survey conducted by Fortune India magazine and Hay Group. The study is about all the factors which have brought the company to which it has transformed into today and its’ unique business models which have always centered on the principle of creating shared value rather than being socially responsible.

From 2012, ITC started considering the new social initiative in the diary sector. To create societal value and increase poverty, ITC was already helping farmers increase milk production from six to nine times. Now the company wants to go beyond societal value to create a model of shared value and it can definitely extend its existing business model to incorporate dairy development. Although there might be few difficulties that need to be overcome due to dairy development being an unorganized industry and perishable nature of product also meant many logistical problems.

ITC prided itself on its key competencies but wondered whether the company had capabilities to enter and compete in the diary business. Many approaches were mapped so that any company could pursue independently or in co-existence of such a business model. One of the options suggested was that the company should realize that by delivering CSR as a business model, it could increase its scalability and sustainability. The pilot project in Bihar definitely gave a lot of insights on its value chain productivity. There were many issues that were deliberated including whether there was a market specifically for the diary and whether the company had the capability of serving that market.


But, ITC could make farmers produce their own milk, develop Milk Producer’s Group (MPG) and later get integrated into Agri-Business Division. ITC not only could enjoy its shared value but also help farmers earn a livelihood by providing suitable compensation for the product they provide. Many things needed to be figured out in regards to logistics. But the brand and presence of ITC might give them a certain edge when compared to the other small businesses. ITC would not have an advantage in the market because Amul who had already built a service like this was already leading in the market. The company might need to figure out strategies like offering competitive prices so that it would not be a failure.

Are Non-Profits Toxic to the idea of shared value?

When you ask anyone what a non-profit does they will say that they are a company that works to benefit society. When asked what any other company does, you’ll get a myriad of answers summing up to “ they make :blank:” Society has created a dichotomy of benefit and maliciousness between profits and non-profits. This wouldn’t be so bad if non-profits hadn’t taken this sentiment to heart.

The idea of shared value is lost on many non-profits today. When I interviewed the executive director of Reading is Fundamental Pittsburgh she said, pointing to her heart, “Most non-profits are run from here...” Florri is the executive director of a non-profit. She came from a business background and sees some shared value in the work that she does. RIF has the organizational and creative power to put on “reading celebrations” for the students. Since they are a non-profit, you would guess that they do this for free. The answer is they do not. The schools are charged a small fee to have the program coordinators come to the school. Most non-profits wouldn’t dream of doing this. Especially in low-income neighborhoods because they are run on a bleeding heart principal. They will pour donor money into giving free services to people who need it most.

If you look at these companies you see that their program directors that are making a great community impact are paid so little. According to a Non-Profit HR survey, the turnover rate in nonprofits is 19%. This is, in part, due to the low wages and high expectations of its workers. A typical employee at the internal rescue committee has over 100 cases to keep track of. The company gets little to nothing back from its work and the employees have to sustain themselves on the good feelings associated with the work. The organizations that utilize them get a good will, tax breaks, and time that these companies have to offer. The non-profits then perpetuate the rhetoric that for-profit companies are bad and set themselves up as middlemen to adding to the community. Now for-profit companies are pouring money into them and not adding the community to their strategies because they can increase their brand image with little to no work.

Shared value gets created when there is a need in a business and a community. Non-profits may be watering down the system of doing good to build a community by providing for-profit companies a way out of thinking about it.

References

"Results Are In: 2016 Nonprofit Employment Practices Survey |." Nonprofit HR. 10 Jan. 2017. Web. 03 May 2017.

The Shared Value in Finance Industry

This week’s article “Creating Shared Value” makes me rethink the role of business in the entire society, especially the finance industry. The concept of “shared value” is very forward-thinking in term of creating mutual benefits for both the private companies and the society. Combing the public finance lecture I have attended recently and my past internship experience in asset management firm, I see the both worst and best practice from this shared-value perspective.

In the public finance lecture given by alumni Mark Melio on April 11th, he talked about the crazy mindset of Wall street bankers before the 2008 financial crisis. The description is very vivid that “During 1980s, bankers first evaluate if the deal is ethically, then if it is legally, but after 2000s, if the deal is legally, it automatically becomes ethically.” The vision of creating best service and values for clients is totally an illusion in IBD and Sales & Trading department. The capital just goes in an entirely negative way regarding shared-value approach. This ridiculous methodology of only creating inclusive value finally bear the disastrous consequences in 2008 crisis.

However, he also shared his thoughts and feelings in Goldman Sach’s public finance department, issuing the municipal bonds for hospitals. He was always happy to help the clients and in the meantime create some revenue for his firm (although much less than two main departments). He was pride of his work when showing the newly completed healthcare building in the community to his children. In my perspective, it is a way to still create some shared value in this industry driven by making money, which is still quite meaningful.

My boss in previous internship always said we should not be an elegant egoist. To achieve this goal, we should not only consider our clients’ interests but also the whole interests of society. This is an extremely strict regulation for herself and us to keep out of many investment opportunities, as the entire asset management industry is disordered in China. For example, once we gave up a very profitable deal in tobacco industry considering its negative shared values.


As for me, this concept goes beyond the simple business practice to necessarily be integrated into daily actions and my own future career path. I think it is very hard for business to actually evaluate how much shared value they create, but easy for individual to follow initially because of the good feeling associated with this approach.