[MUSIC] In the last session, we talked about the motivation for designing information capabilities, and how these can be a source of competitive advantage. In this session, we will work through the design of these capabilities in the context of reliance industries. Remember, I said that the first thing you need to focus on in the design of your capability is the business objective. If you are on top of your game related to the competition and there is no business problem to solve, there is really no need for the design of the information capabilities. Your value chain as-is, is perfect. So let's start by examining the business problem that Reliance was facing. Actually even before we look at the business problem that Reliance was facing, let's take a closer look at the sector in which the company was operating, to better understand the context for the business problem. Reliance was operating in the Indian power sector, a sector with tight government control on both the downstream and upstream value chain. Just look at this value chain, we have power generation, we have power transmission and we have power distribution. Generation and distribution are privatized while transmission remains largely under the control of the state electricity boards. Who supplies raw materials to the sector? The government, the government has a monopoly introducing coal with over 90% of the production coming from government controlled mines however companies coal India mine enough coal to meet the power sector's needs. A 2012 PWC report highlighted that of the total demand supply gap which stands at about 98 million tons, India imports about 85 million tons of coal. In fact to reduce this reliance on imported coal and boost the domestic supply, the government amended the Coal Mines Nationalization Act of 1973, to allot captive coal blocks to companies that were engaged in specific end uses of coal, including power, steam, cement, etc. The rationale behind this policy was to allocate a specific coal block to a specific end-user company, thus ensuring that the companies receive a regular supply of cheap coal for their requirements. Something that the government was responsible for but could not deliver. How do you think that went? Remember the Colgate scam? Out of the 200 allocated blocks, only 30 mines commenced production. Instead of auctioning off the captive coal blocks, the Indian government chose to hand them out through a discretionary process involving a screening committee. Who did that coal go to? Likely their cronies. At least that's what the Controller and Auditor General of India alleged in its report. The CIG estimated loss of revenues to the [INAUDIBLE] in this process as INR 10000 billion. This was the control the government exercised in the upstream value chain. Is it unimaginable that a government which exercises so much control upstream would exercise equal control, downstream as well? Indeed the government controls areas of operation on distribution, it specifies status, it imposes subsidies, and it imposes environmental norms. The National Tariff Policy lays down the guidelines for providing electricity to consumers at reasonable and competitive prices. Therefore, power distribution companies are unable to charge consumers the right price for the electricity that they consume, leading to heavy losses. So a company that operates in this beleaguered power sector has none of the levers typically available to a company in other sectors to improve growth and profits. Procurement, prices, marketing, none of these levers that the company can play with. Given the profile of this sector, constrained at both ends of the value chain, operating amid high levels of government dominance, bureaucratic control and regulation What do you expect of companies that operate in this sector in terms of profitability? It would be reasonable and safe for you to say not much. In fact, apart from public sector organisations, companies that operated in the Indian power sector largely included. Conglomerates, and large companies with government ties and the financial wherewithal to cross subsidize the cross businesses. It was this sector that Reliance sought to enter through its acquisition of Bombay Suburban Electricity Services in 2003. Keep this context in mind as we now begin to evaluate the business performance and pain points of Reliance. At the time Reliance Energy acquired BSES, BSES had achieved a total income of INR 28 billion. With a profit after tax of INR 1.62 billion in 2003. As I just remarked, it was no mean feat to be profitable in this sector. And BSES was not just profitable. Your case tells you that it was ranked amongst India's top 25 listed private sector companies on all major financial parameters. Then what were the competitive imperatives for Reliance Energy? For this, you need to take a closer look in the case at Reliance's closest competitor, Tata Power Company. Tata Power distributed electricity in the same geography as Reliance. Tata Power with 80% of its power generation concentrated in Mumbai and its vicinity, was the largest private player in the power sector. And although the BSES's numbers looked good, they were no better than Tata. In 2003, Tata had a net profit margin of 10.4% with revenues of 50 billion and profit of to tax to 5.2 billion. For the same year BSES achieved a net profit margin of 5.8%. Additionally, Tata Power's transmission and distribution loses of 2.4% were known to be amongst the lowest in the country. Much better than those of Reliance. So the operational performance of Reliance was lower than that of Tata's. Another major constraint for Reliance Energy at the time of the acquisition was that BSES did not generate enough electricity to meet its demands. Tata's generation capacity was nearly thrice that of BSES, and accounted for nearly 52% of the total power generation capacity of the private sector at the time. And since BSES did not generate enough power, it bought 41% of its power from Tata Power. Higher costs of power acquisition in turn led to higher consumer tariffs with Reliance Energy having the highest average tariff in Mumbai. The consumer mix at Reliance further exacerbated this problem of high tariffs. Around 70% of Reliance Energy's consumers were low-end consumers who used up to 300 units per month. And Reliance also had far fewer commercial consumers than Tata Power. These nearly two million low-end consumers were subsidized by the 0.6 million remaining consumers. As a result, Reliance Energy's high-end consumers paid higher tariffs than Tata Power's equally valid consumers, and were vulnerable to competitive offers from Tata. In order to prevent the migration of these customers, it was imperative for Reliance to either lower tariffs for this segment through improved operational efficiency. Remember, they couldn't play around with their cost of acquisition. That was fixed. So to reduce the total cost, they could only play around with cost of operations, or operational efficiency. The other option was to provide more value added services to justify the higher status. These where the business objectives of Reliance. To summarize, Reliance was not in any crisis. However there are certain competitive imperatives operating in the company that deserves attention. Like I said, if you assume that their cost of raw material was fixed, if you assume they were operating in a sector where they had few levers to play around with, they had to improve their operational efficiency. Both to reduce their cost of operations and lower tariffs as well as to provide better service for high paying customers. In this case, Reliance was looking to address problems of both revenue growth and profitability. But often firms find that they need to only focus on one objective. So when you asses your performance relative to competition, keep your eye on what is the bigger problem and focus on that, instead of trying to solve growth and profitability goals simultaneously. There is a need to increase operational efficiency that is the stated business goal of Reliance. But what was the reason behind the operational inefficiency at Reliance? The operational efficiency of an organization directly correlates with the informational efficiency of the organization. In the case of Reliance, ask yourself, was information flowing very efficiently to all stakeholders? Not really. For instance, the case cites an example of billing and operations not talking to each other. So let's suppose a bill was generated based on a faulty meter reading. It would often happen that the operations and maintenance department responded to customer complaints and fixed the faulty meter. But the billing department would not be updated about this in real time, with the result that the customer received no communication apart from a faulty bill. This information asymmetry across departments was an outcome of a lack of or delayed coordination and integration between these departments. And this information asymmetry resulted in many dissatisfied customers not to mention significant operational efficiency drains. Further, each business segment, example customer retail etc., had developed its own systems and processes. Network outage, for instance, will be managed differently for the customer segment than it was for retail, although both these segments drew on common resources. In turn, there were many stand-alone legacy systems locally developed applications that just did not talk to each other. The lack of process standardization and data integration created a fragmented organization with several redundancies. And to reiterate, this is the business objective of any IT investment at this point in the lines. And therefore if I have to break down the business objective of improving operational efficiency into sub-objectives, it will be to resolve this information asymmetry and fragmentation within the firm. Resolving this information asymmetry would increase operational efficiency and customer service, ultimately improving profitability. [MUSIC]
