An Ram An

How do M/A unlock value ? International Management Accounting Practice Statement 1 (IMAPS1) issued by IFAC states; that management accounting refers to that part of the management process which is focused on organization resource use. Thus, it refers to managerial processes and technologies that are focused on adding value to organizations by attaining the effective use of resources in dynamic and competitive context.

By creating the management process of M/A we unlock value

DIRECTION OF THE Management Accounting

WHAT IS A BUSINESS MODEL ? • A business model is the method of doing business by which a company can sustain itself or generate revenue. The business model spells out how a business unit can make money by specifying where it is positioned in the value chain. • If the business is through e-commerce then it is referred to as e-business.

Business Models 1950-1970/80 Products yesterday • Simple offerings • Lesser choices • Local markets • Goods inherited across generations • Willingness to wait

Producers yesterday • Vertically integrated • Functional models of command and control. • Economy of scale • Corporate established performance measures • No market driven processes • Permit Raj/Delhi links

Business environment of 21st century VALUE CREATING STRATEGIES/PROCESSES • Mass customization through a good design • Instant production driven by pull of customer demand and ability to build on customer ideas. • Network of producers through strategic alliances. • Supplier privy to strategy. BUSINESS MODELS • Delayered management hierarchies CREATE • Trust , Reliability and core competencies VALUE • Information technology as a major enabler • Global markets and world class practices

EVOLUTIONS OF NEW MODELS • BUSINESS MODELS ARE EMERGING FOR EXPLOITING DOWNSTREAM BUSINESS OPPORTUNITIES THROUGH Redefining Value Chain Building Customer allegiance Rethinking Vertical Integration

MISSION STATEMENT

COMPONENTS OF A BUSINESS MODEL

VISION STATEMENT

VALUES STAEMENT

OBJECTIVES

STRATEGIES PROCESS BASED ORGANISATION

IT ENABLED

A Battle on Two Fronts

ROI (1) Strategy choose the right ones …..

Val ue c rea ti

on

Strategic MA

… and align the cost structure (2) Efficiency & Utilization

Operational MA

take waste and unused capacity out of the organization

Management Accounting

STRATEGY DEFINITION METHODOLOGIES

TIME PROJECT

Expenses

ACCOUNTING,

General ledger

PROGRAM MANAGEMENT

$$s

CUSTOMERS, MARKETS

STRATEGY REALIZATION

SUPPLY / INVEST  STRATEGY

SUPPLY CHAIN MANAGEMENT MAXIMIZE Alignment of cost structure to strategy

PRODUCT & SERVICES

What­if Planning?

MINIMIZE

UNUSED (AVAILABLE) CAPACITY

hours

OPERATIONAL PERFORMANCE ­ PRODUCTIVITY & EFFICIENCY ­ BENCHMARKING  ­ UTILIZATION/YIELD ­ TOTAL QUALITY MANAGEMENT                     (Cost of Quality) 

RESOURCES

ACTIVITIES (ABC/M) ACTIVITY DRIVERS

DEMAND STRATEGY

Business Model FOR A MA ACCN

DEMAND VOLUME & MIX FORECAST

PRODUCTS,  CHANNELS &   CUSTOMERS REVENUES

PROCESS MANAGEMENT

Asset management

PROFITABILITY ANALYSIS

SHAREHOLDER WEALTH [VBM]

KEY PERFORMANCE INDICATORS (KPIs) versus ACTUALS

PERFORMANCE MEASUREMENT  SCORECARDS

MAXIMIZE

CASE OF TELECOM SECTOR MODEL AND THE MANAGEMENT ACCOUNTING • • • • • •

1990-2000 WAS THE PEAK OF TELECOM BOOM IN US DUE TO ADVENT OF INTERNET AND WIRELESS. RISING TIDE LIFTED ALL BOATS. SAME WAS IN HONGKONG. BY 2002 SHARE PRICES STARTED DECLINING . HEAVY DECLINE OF INVESTORS CONFIDENCE BUT BY 2004 SOME SERVICE PROVIDERS RECOVERED AND THE REMAINING STRUGGLED. WHAT DIFFERENTIATED THE WINNESR FROM LOSERS IS THE CASE OF NEW BUSINESS STARTEGIES AND MODELS. AN EVOLVING INDUSTRY MOVING INTO ANOTHER STAGE OF LIFE CYCLE.

CERTAIN COMMENTS

PRIOR TO THE TELECOM BUST 2001 • Capacity utilisation driven industry. • Possessing assets such as switching and transmission equipments, real estate, licence and what is called SPECTRUM availability was considered competitive advantage. • Expansion of customer base was to generate revenues through asset utilisation and customers were not assets. • Regulatory role to protect customers and new entrants become very important. • Cost per unit of usage computed through scale oriented allocation principles became important.

THE NEW BUSINESS CONTEXT • By 2002 market was not underserved. • Driving cost per minute down by driving up NETWORK usage was no longer working. • Subscribers could choose the service providers after evaluation. • Growth came only by enticing customers from the other service providers. • COMPETITIVE ADVANTAGE CAME FROM KNOWING THE CUSTOMERS WHO ARE REALLY PROFITABLE AND MAKING THE RIGHT OFFER AT THE RIGHT TIME . • The performance measurement systems were not having metrics relating to the new competitive advantage.

AN INDUSTRY LEVEL COST METRIC PRACTICED IN US

SERVICE PROVIDER

COST/NEW CUSTOMER

NEXTEL VERIZON WIRELESS SPRINT US CELLULAR T-MOBILE CINGULAR AT&T WIRELESS

$ 567 $ 383 $ 280 $ 410 $ 356 $ 315 $ 350

AN INDUSTRY LEVEL REVENUE METRIC PRACTICED

SERVICE PROVIDER NEXTEL VERIZON WIRELESS SPRINT US CELLULAR T-MOBILE CINGULAR AT&T WIRELESS

RPU/NEW CUSTOMER $ 72 $ 51 $ 62 $ 48 $ 54 $ 51 $ 59

CRITICAL INDICATIONS COULD BE • Nextel spends high on customer acquisition and must be justified by a better RPU. In fact it is so. • But the damage is from US Cellular. • Low revenue customer base with a lower RPU coupled with high cost of acquisition is not a sustainable strategy. • Customer churn rate also need to be taken into consideration.

CUSTOMER CHURN AND LIFETIME CONCEPT

SERVICE PROVIDER Nextel Verizon Sprint US Cell T-Mobile Cingular AT & T

CHURN 1.6% 1.5% 2.3% 1.6% 3.0% 2.7% 3.4%

AVERAGE LIFE in Mth 62 69 44 62 33 37 30

COULD BE CONCLUSIONS • Higher marketing spend at Nextel is justified by higher revenues and longer customer lifetime. • Sprint’s lower marketing spend does not look appealing with dissatisfied customers. • US Cellular should reexamine their customer retention policies to ensure that retention offers are cost effective. • At & T has the third highest RPU but the lowest customer satisfaction trend. • As the industry structure starts changing we need new ways of measuring performances by relating to new strategies. • This is an universal truth and not applicable only to the West.

CHANGING TELECOM INDUSTRY SRUCTURE – UNIVERSAL PHENOMENON • • • • •

CUSTOMER ACQUISITION TO CUSTOMER RETENTION. US REGULATORS REMOVING BARRIERS BY REMOVING NUMBER PORTABILITY. CUSTOMER RELATIONSHIP AND NOT PRODUCT DIFFERENTIATION IS THE SOURCE OF COMPETITIVE ADVANTAGE. ONE TO ONE MARKETING BY IDENTIFYING CUSTOMER SEGMENTS AND TAILORING MARKETING OFFERS AND SERVICE PROPOSITIONS TO INDIVIDUAL CUSTOMERS. EXPANDED PROUDCT DIVERSITY AND CUSTOMISATION NEEDS CAPTURING OF COSTS OF PROCESSES WHICH RELATE TO THAT. DEREGULATION IS SHIFTING POWER TO CUSTOMERS.

IMPLICATIONS OF THE FIVE FORCES • PROFIT GROWTH FOR SERVICE PROVIDERS WILL COME FROM BUILDING INTIMATE RELATIONSHIPS WITH CUSTOMERS AND BY PROVIDING MORE PRODUCTS AND SERVICES TO THE EXISTING CUSTOMER BASE. • HOW MUCH TO SPEND ON WHICH CUSTOMER TO RETAIN AND THEM AND STILL MAKE PROFIT IS AN IMPORTANT MEASUREMENT ISSUE. • ACTIVITY BASED COSTING SYSTEMS MEASURING CUSTOMER PROFITABILITY AND RELATING TO LIFE TIME VALUE FROM THEM BECOMES IMPORTANT.

HOW CAN EXCESS CAPACITY IN NETWORK AND UNPROFITABLE CUSTOMER CAN COEXIST. • FUNDAMENTALLY A CUSTOMER WHO DOES NOT PAY THE BILL. • DOMINATING THE CALL CENTRES WITH A HIGHER LEVEL OF TECHNICAL SUPPORT. • CHURN REDUCTION PROGRAMS TARGETED AT CUSTOMERS UNIVERSALLY WITHOUT LOOKING AT LOW PROFIT ZONES. • EXPENSIVE SEVICE CENTRES OR TELESHOPS AT UPMARKET PLACES MORE USED UP IN SETTLING COMPLAINTS AND COMMERCIAL DISPUTES.

WHY THESE COMPANIES WANTED TO MEASURE CUSTOMER COSTS ? • • • • • • • •

Manage each customer’s costs to a lower level. Establish a surcharge for or re-price expensive cost to serve activities. Reduce services Introduce new products and service lines. Raise prices. Abandon products or service lines. Improve the business process. Offer the customer profit positive service level options with varying prices. • Increase investments in activities that customer shows a preference for • Up-sell or cross-sell the customer’s purchase mix toward richer ,highermargin products and service lines. • Discount prices to gain more business with low cost to serve customers.

Users

Users

Users

Is this going to be relevant in India or we say these are only for west • • • •

Call rates coming down consistently. RPUs are falling down for many companies. Customer acquisition becoming a mad race. Markets getting saturated in metros and expansion going the rural way. • Business magazines articles on telecom calling for customer profit measurement. • The sector is adopting global practices. • Hence we need the new business models and practices.