危 wēi  danger

As I outlined in a post last year the Indian agricultural market is tough.  Farm ownership tends to be heavily fragmented, the infrastructure is often poor and historically the supply chain has been clogged by middlemen. This makes life difficult for both farmers and the buyers.  For example, often farmers would have to travel for days to a market with no knowledge of current prices, once there the exploitative middlemen could pay below the market rate and refuse to pay any premium for quality.  It has been estimated that farmers were losing up to 60% of the value of their crop as a result.  This in turn disincentivised the farmers from improving their crop quality and made supply to the industry’s big buyers unpredictable.  Large food buyers, such as ITC Limited (an Indian conglomerate), would surely have to accept this status-quo?

机 jī opportunity

No, to the contrary ITC has harnessed technology to overcome these structural problems by investing in internet kiosks in rural villages.  The kiosks, named eChoupals, enable the farmers to sell direct to ITC at an agreed price, give access to best practices and enable them to place orders for agricultural inputs such as seeds and fertilizers.  In order to instill trust in the system ITC trains a local farmer to run the system and places it in their house – on average each serves 600 farmers in the surrounding ten villages.  To ensure that they remain incentivised the sanchalaks receive a small service fee.  Even after this service fee it is estimated that farmers’ profits have increased by more than a third and ITCs costs have reduced. The conglomerate plans to scale up to 20,000 eChoupals by 2012 (from 6,500 today) potentially servicing 15 million farmers.

How About…

• Harnessing technology to disintermediate inefficient value chains?
• Empowering local talent to assist in supporting your customers?

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危 wēi  danger

In September 2005 online auction house eBay paid over $3bn for Skype, which had been founded in 2003 by Niklas Zennstrom and Janus Friis.  In stark contrast to when it had bought PayPal (the internet-based payment company), industry commentators were quick to question the logic behind the deal, pointing out that there was little obvious fit between eBay and the internet phone company.  CEO Meg Whitman defended the deal vigorously, stating in a BusinessWeek article on the 12^th titled “Why eBay Is Buying Skype” that “Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.” But, within a year of the acquisition Ebay had written down the value of Skype to $1.2bn, suggesting that it too began to think that the company was not a strategic fit and it had overpaid. Perhaps the purchase of Skype was a case of what Warren Buffet calls “Institutional Imperative” – the “need” for managers to act and do like their peers no matter how irrational it may seem (in this case drive growth through technology company acquisition).  However, with eBay having sunk so much emotional energy and resource into Skype surely they’d sit on the investment indefinitely?

机 jī opportunity

Under eBay’s ownership, Skype continued to grow – the number of registered Skype users rose from 53 million to 405 million.  Even though this progress had been made, on September 1^st 2009 eBay sold 65% of Skype to a group of private investors in a deal that valued the firm at only $2.75bn – stating that ‘limited synergies exist’.  eBay was smart to realize that the companies might do better apart, to ignore sunk costs in the process and to retain 35% of a business that remains full of opportunity.

How About…

• Taking a breather before any strategic decision to remind yourself to ignore sunk costs (easy to say, tough to do)?
• Asking if your M&A will make your company better (rather than just delivering growth)?

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