Cubisms Issue 3 PDF

VOLUME 2
02
12
THESMARTCUBE.COM
STRATEGY & TECHNOLOGY
FINANCE & RISK
NO. 1
The iPadA Disruptive Technology and its
Real Option Analysis: A Multi-faceted Approach to
Impact on Business
Efficient Capital Budgeting
MARKETING & SOCIAL MEDIA
PROCUREMENT & SUPPLY CHAIN
The Premium Beauty Care Industry in
Social Media and Procurement: A High-Level
Emerging Markets
Perspective
CUBISMS (kybzms):
Departure from traditional, naturalistic
view of reality, emphasizing multifaceted,
simultaneous views of subject.
WELCOME TO CUBISMS 2012

We will open the book. Its pages are blank. We are going to put words on them ourselves. The book is called Opportunity and its first chapter
is New Years Day. In this spirit of optimism, we enter 2012 after what has been, economically, politically and otherwise, an incredible 2011.
This year is already shaping up to be one of potentially historic proportions, and it is against this backdrop that we welcome you to the 3rd
edition of Cubisms The Smart Cubes Executive Briefing on critical business issues ranging from Strategy and Supply Chain to Financial
Markets and Marketing.
In this issue, we tackle some of the most important topics on the minds of executives from social media and its implications for functions as
diverse as marketing and procurement, to growth opportunity areas both in terms of technology enablers, such as the iPad, as well as new
markets for traditional products, such as Beauty Care in the BRIC region. Along the way, we also tackle some fundamental questions around
shifting markets, from political change in the MENA markets, to new questions being asked of old models (LCC), to a recap of technological
convergence today. And, as always, we provide insights into alternative tools and techniques, such as Real Options Analysis.
We hope you enjoy this issue. As always, your feedback is welcome, so whether it is an idea for a future topic or for more insight into something
inthis issue, please contact us at info@thesmartcube.com.
FINANCE & RISK
The iPadA Disruptive Technology and
Real Option Analysis: A Multi-faceted Approach to
its Impact on Business ....................................................................................... p.4
Efficient Capital Budgeting....................................................................p. 36
On the Cover: By the end of 2010, the iPad had defined the tablet
On the Cover: So what is ROA? ROA is an active investment approach
market and captured approximately 95% share of the nascent
that captures the value of management flexibility in response to
category, with 15 million units sold.
changing market conditions such as changes in operating costs,

prices of goods produced, prices of raw materials, cost of capital for
Technological Convergence:
the firm, market competitiveness etc.
A Snapshot Perspective ................................................................................p. 41

Change In The Middle East And North Africa .............p. 32
The Premium Beauty Care Industry
Social Media and Procurement:
in Emerging Markets.......................................................................................p. 20
A High-Level Perspective ..........................................................................p. 24
On the Cover: The Smart Cube has identified beauty care markets
On the Cover: Within the Procurement space, in particular, there has
likely to exhibit accelerated growth over the next decade by
been significant emerging interest in social media as a potential
analyzing changes in GDP per capita and the current demographic
business tool.
makeup.
Is the Manufacturing Sourcing

How CMOs Perceive the Future of
Model Changing? ..................................................................................................p. 29
Social Media Marketing...............................................................................p. 10
CUBISMS
FEBRUARY 2012
VOLUME 1
COVER STORY: STRATEGY & TECHNOLOGY
The iPadA Disruptive

Technology and its
Impact on Business
pples iPad exploded on April
iPad had defined the tablet market and
environment. Pro enterprise enhancements,
3, 2010 with sales of 300,000
captured approximately 95% share of the
such as mobility device management
units in the first day and close
nascent category, with 15 million units sold.
(MDM) and over-the-air (OTA) deployments
to 4.19 million devices in the
But the devices potential has exceeded the
of in-house applications have furthered the
consumer market to reach into the corporate
image of the iPad as a business tool.
first three months. By the end of 2010, the
Level of Performance
High
EVOLUTION OF DISRUPTIVE TECHNOLOGY
Most Demanding Use
High Quality Use

Disruptive
Technology
Medium Quality Use
Low
Low Quality Use
Time
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92% of Fortune 500 companies were
The idea of tablet PCs is not new note,
not born out of an innovative idea. Rather
testing or deploying iPads.
for example, the opposition brief filed
the iPads disruptive nature results from
Tim Cook, Chief Executive Officer, Apple
by Samsung to Apples motion for a
the combination of the tablets portability,
(October 2011)
preliminary injunction against the rival
an intuitive touch-screen user experience,
Galaxy Tab. In one of the exhibits, Samsung
and unmatched performance to consume
Major corporations across industry sectors,
cites an example of prior art in Stanley
diverse sources of content.
such as financial services, professional
Kubricks 1968 classic 2001: A Space
services, pharma and health care, leverage
Odyssey in a brief scene, two astronauts
But how did the iPad bypass the usual
the iPads features not only to assist
appear to use devices very similar to
adoption lifecycle of new technology?
in-house employees but also to benefit
modern tablets, suggesting that the iPad
What led companies to integrate the iPad
customers in multiple ways.
concept, and its effect on the market, was
into business processes? While analysts
CUBISMS
FEBRUARY 2012
VOLUME 1
[Continued from p. 5]
IPAD NET ACTIVATIONS, BY INDUSTRY (%, 2011)
FINANCIAL SERVICES
understand the powerful pull of tablets in
The day the iPad was introduced, we had
the consumer market, what makes the iPad
some discussions about adding them in our
such a powerful force among corporations?
environment; 24 hours later, we had 500
The financial service industry is estimated
devices accessing e-mails. People expect
to account for 3540% of iPad deployment
their personal devicesiPads, iPhones, and
by enterprises as of September 2011. Over
EMERGENCE OF BYOD POLICY
the liketo be usable at work. They want to
a million financial advisers operating
An increasing number of firms are
be more productive; they want to do a better
worldwide relied primarily on paper in their
employing the bring your own device
job; and there is an expectation that they will
overall delivery processes.
policy, or BYOD as it has come to be
be able to integrate their consumer devices
popularly known, where employees are
with enterprise applications at the office.
The advent of the iPad has revolutionized
encouraged to bring their own smartphone/
It is a sensible and reasonable expectation,
the way financial analysts interact with
tablet devices tools to the workplace and
and we feel it is imperative to oblige them.
their customers by collating multiple
integrate them with their daily professional
Indeed, we see it as an opportunity. We are
sources of information (such as past
tasks. While some CIOs view this policy as
always plowing ahead, moving toward the
portfolio performance reports, asset
an opportunity to reduce IT expenditure and
next generation of technology because the
allocation charts, and other supporting
even enhance employee motivation levels,
next generation is almost always better,
documentation) on to a single platform. The
others oppose BYOD on account of security
faster, and cheaper.
device also allows auto-synchronization
management concerns. However, lack of
Frank Modruson, Chief Information Officer,
across other smartphone/digital devices
consensus on this front has failed to stifle
Accenture
and aids in regulatory compliance. The
the growing tide of iPad adoption among
world of finance has also witnessed the
enterprises.
emergence of specialized applications
THESMARTCUBE.COM
serving as tools for financial planning,
calculator (allowing consumers to keep
iPad differs significantly from other
portfolio analysis, order management,
track of key medical metrics), source of
devices handled by a traditional IT team
alerting, client reporting, debt management,
drug and disease information, platform for
of a company.
task management, and scheduling, etc.
maintenance of electronic medical records,

and for display of digital images.
BUSINESS AND PROFESSIONAL

SERVICES
Gartner predicts that companies will

eventually embrace the BYOD policy and
Moreover, patients and other end consumers
that 90% of the corporate world will support
have given way to the emergence of the
professional applications on personal
Business and professional services is
mobile health care market, whereby
mobile devices by 2014. Also, 80% of firms
estimated to contribute 47% of iPad
pharmaceutical and/or individual
are likely to roll out tablets (with the iPad
deployment by enterprises as of September
developers launch applications that help
holding a majority of the tablet market
2011. Corporations providing professional
users manage personal health and fitness
share) among their respective workforce by
servicesbusiness intelligence, IT
data, as well as serve as an informational
the same year.
outsourcing services, and even legal
and educational resource. Apple estimates
advisory serviceshave identified large-
that approximately 80% of the top hospitals
Industry professionals, experts, and CIOs
scale deployment of iPad as an effective
in the US are carrying out pilot programs
of large corporations state that enterprises
way to communicate with customers. The
for testing iPad applicability in their daily
need to be optimistic and forward
device has proved to serve as an ideal
operations.
thinking in their approach while adopting
platform to enhance interaction with clients

through intelligent use of rich multimedia
content.
iPads as the use of mobile devices and
CONSUMERIZATION OF THE
IPAD IN THE FUTURE
applications will play a significant role

in the way businesses function in future.
Consumerization of technologies, such as
LIFE SCIENCES AND

HEALTHCARE
Life sciences and health care (including
Consumerization of technology typically
iPad, is also believed to contribute toward
refers to the emergence of consumer-
improved recruitment and employee
oriented technology that eventually
retention. Many think businesses that
transforms and migrates into enterprises.
resist this trend will eventually be forced
the pharmaceutical space) are estimated
to fall in line. iPads and other tablets are
to account for 1113% of iPad deployment
One might be tempted to compare general
cost-effective, interactive, and highly
by enterprises as of September 2011. For
consumerization of IT with that of the
popular devices that hold the potential to
instance, the device is being used by
iPad. However, there are slight differences,
paralyze other existing IT technologies
pharmaceutical sales representatives
highlighted as follows:
(such as laptops, desktop PCs, and other
to spruce their pitch to health care

professionals (HCPs). The device supports
mobile devices) through widespread

Consider price variation between
applications offering functionalities such as
enterprise mobility devices such as the
customer relationship management (CRM),
iPad and other IT tools.
closed-loop marketing (CLM), e-detailing,

and presentation optimization. Physicians,
consumerization.
Besides this, one might argue that by not

participating in the iPad arms race, a
The versatility, ease of purchase and
company runs the risk of becoming less
on the other hand, have found iPads useful
installation of the diverse and growing
relevant and compromising on its brand
to serve as a medication tracker, disease
universe of applications possible on an
image.
CUBISMS
FEBRUARY 2012
VOLUME 1
SOME MAJOR DEPLOYMENT OF IPADS AMONG ENTERPRISES

Company
Industry
iPad Deployment
JP Morgan
Chase
Financial
Services
Deployed iPad in its investment banking operations as part of a six-month pilot program allowing staff
members to access email, contacts, attachments, mark-up, annotate documents, etc.
Lloyd's of
London
Financial
Services
Issued about 30 iPads in its underwriting room to be tested by brokers employed by Marsh, Cooper Gay, and
RK Harrison
Union Bank
Financial
Services
Bought and deployed 20 iPads during Q1 2011 and set up another 100 employee-owned tablets
UBS Wealth
Management
Americas
Financial
Services
Rolled out iPads to assist 6,000 financial analysts in client engagement
Standard
Chartered
Financial
Services
After the successful adoption of iPhone by about 15,000 employees in May 2010, the company decided to
deploy iPads in 2011 to help personalize customer service and simplify daily business
SAP
Business and
Professional
Services
Rolled out 1,500 iPads among employees in 2010; further, announced plans to increase the number to 17,000
units in the subsequent 12 months
MicroStrategy
Business and
Professional
Services
Deployed about 1,100 iPads for staff with plans to add another 700
Medtronic
Pharmaceutical,
Life Sciences and
Health Care
Rolled out 4,500 iPads among its sales force in 2010; later in the year, launched several iPad applications to
enhance efficiency and productivity and to facilitate knowledge sharing
Abbott
Laboratories
Pharmaceutical,
Life Sciences and
Health Care
Implemented a pilot program in 2010 for the deployment of 1,000 iPads for its US sales representatives
Novartis
Pharmaceutical,
Life Sciences and
Health Care
Announced plans in October 2011 to replace PCs with iPads for 80% of its sales force by end 2012
Proctor &
Gamble
CPG / FMCG
Announced plans to use iPads at manufacturing plants to download data off the production line in real time
Lowe's
Retail
Announced plans to send out 42,000 handheld devices to its stores in the US and Canada
Kraft Foods
CPG / FMCG
Implemented the "bring your own device" program whereby employees were encouraged to bring their own
iPads and other smartphone devices to the workplace
UK House of
Commons
Government
Members of the administration committee have been provided with iPads in 2011
MercedesBenz Financial
Services
Automobile
Industry
Anticipated that there are plans to distribute iPads to all 355 dealerships in the US after a successful trial
program across 40 showrooms
Finnair
Aviation Industry
Offer passengers access to iPads in its Via Lounge and onboard selected flights
Hyatt Hotels
Hotel
Management
Deployed iPads to take staff-guest interaction to the next level and improve execution of business processes
in September 2010
Ashridge
Business School
Education
Provided iPads to all students enrolling in its full-time MBA program in 2011
Setton Hill
University
Education
Committed to provide each of its 2,100 students an iPad
THESMARTCUBE.COM
IPAD USAGE ACROSS ENTERPRISES, (%, 2011-2015)
About 70% of iPads deployed within the business world are used to perform professional activities, with personal use accounting
for the remaining 30%. One should keep in mind that the use of the tablet for conducting ancillary tasks contributes a large portion
towards that 70% figure. Based on the growing large-scale adoption of iPad among corporations, one can deduce this number to reach
approximately 90% by 2015. Among these, the proportion of users adopting iPad for core professional activities is anticipated to grow
substantially with increasing launch of industry-specific functionalities.
Data security concerns have been cited
regulating the adoption of this tool rather
use. Thus in 2012, even more companies
as the primary risk associated with the
than turning their backs to it. With Apple
either late adopters or previously
deployment of iPads. Lack of a clear
estimated to roll out the next generation
constrained from using a tablet device - are
business model with tangible metrics to
iPad in 2012, the stage has been set for
likely to start evaluating the possibilities
evaluate return on investment is another
various industries to deploy it across the
of deploying iPad technology across their
question that has eluded CIOs.
supply chain.
respective supply chain networks.
However, company executives firmly
Experts and industry professionals indicate
believe that the tide of consumerization
that developers have started focusing on
Sumat Mittal and Subash Chandar R,

Strategic Services Practice
Artwork, iStockphoto.com/ARTVEA
is too strong to be held back and that
customized applications to cater to the
businesses are better off streamlining and
needs for both personal and professional
CUBISMS
FEBRUARY 2012
VOLUME 1
How CMOs Perceive

the Future of Social
Media Marketing
ocial media marketing (SMM)
marketers remain uncomfortable with the
success should be measured. Even so, the
appeals to consumer companies
channel and uncertain of their own strategy.
marketing community has recognized
as a means to better anticipate
Their hesitancy is understandable: the data
the impact SMM can have on consumer
customer preferences,
generated by social media amounts to a wall
behavior and the superior credibility of
understand attitudes toward their brands,
of white noise; analytical tools seem more
brand advocates within a consumers online
and engage with consumers at a personal
complex every day; vendors and consultants
community.
level. Interacting with customers via social
sprout at every turn; and missteps are public
media allows companies to build brand
and embarrassing and can go viral as fast
Our social strategy is to take our current
loyalty, immerse consumers in brand
as an ingenious ad campaign. Even popular
products, get users to give us social
experiences, and incorporate brands into
social media campaigns present a challenge:
information, and make our current products
a customers lifestyle. Most brands see a
marketers struggle to quantify the revenue
better." Eric Schimdt, Executive Chairman,
need for social media marketing, yet many
generated by SMM or the metrics by which
Google
More than half of all CMOs think social media is a key channel for engaging with customers. However, engaging with customers is not just
about communicating with them. It is also about helping them enjoy the products and services they have bought, with the intention of building
customer loyalty. IBM, From Stretched to Strengthened (September 2011)
10
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WE JUST DONT KNOW WHICH

HALF.
social media is growing substantially as
uncovered effective examples and identified
illustrated by the statistics below.
trends across the major social media

channels. For marketers, the numbers below
Social media shares a fundamental challenge
It might be that your company is not being
can act as benchmarks. While allocating
with its predecessors in print, radio and
mentioned on social media at all, and if so,
budget, be it for a page on Google+, a corporate
television. Paraphrasing Henry Ford,
congratulations, because youve just found
blog or the companys Facebook profile,
many CMOs seem to know that only half
an opportunity. If you cant find information
decision-makers can weigh their investment
of their social media marketing efforts are
on the social Web about your company, go
against the broader trends in SMM. Further,
effective, they just dont know which half. In
in there and make some. Chris Brogan,
the examples and quotes from industry
IBMs September 2011 report, 68% of CMOs
President, New Marketing Labs LLC
leaders within our report will help marketers
surveyed felt unprepared for social media
thinking about their own SMM strategies.
and 71% said the same for data explosion a
To help alleviate this anxiety and guide SMM
result, in part, of social media itself. Despite
strategy and investment, The Smart Cube
this uncertainty, marketing investment in
has analyzed attitudes of CMOs toward SMM,
CUBISMS
FEBRUARY 2012
VOLUME 1
11
PROMINENT SOCIAL MEDIA CHANNELS LEVERAGED BY MARKETERS
ONLINE VIDEO SHARING (YOUTUBE)

Objective
Customer Care
Strengths
Interactive by leveraging audio-visual

content
information, customer reviews, products, FAQs, etc., in an interactive
Brand
Awareness
Examples
YouTube is one of the major landmark SM channel for sharing
manner, i.e. form of videos

Real time communication
In July 2010, Old Spice launched one of the fastest growing viral
Insights into advertising campaigns and
videos that attracted 6.7 million views within 24 hours; the three-day
feedback
campaign increased Old Spice sales 107 percent the month after it was
launched.
Ability to create pre-launch buzz
In December 2010, LOreal Luxury launched its first multibrand digital campaign on YouTube across five European
countries.
OTHER SOCIAL MEDIA CHANNELS - CORPORATE BLOGS

Objective
Customer Care
Strengths
Engage with a larger community
Examples
Blogging has evolved into an important marketing tool for many

companies including Fortune 500s and small businesses
Relationship building
Corporate blogging is being used for lead generation,

communication, customer service, branding, and marketing
Brand
Two way communication
Awareness
Starbucks introduced the concept of My Starbucks Idea

Starbucks own version of a social network where customers
are asked to share their ideas on anything related to Starbucks
By choosing YouTube during this critical period in the run up to Christmas, LOral Luxury is investing in the power, reach, and effectiveness of
online video. Shuvo Saha, FMCG Leader, Google UK
12
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US COMPANIES USING BLOGS FOR MARKETING (%, 20072012F)
Source: Corporate Blogging: Media and Marketing Firms Drive Growth - eMarketer (October 2010)
SOCIAL NETWORKS (FACEBOOK)

Objective
Strengths
Customer Care
Real time communication
Brand
Relationship building
Examples
In October 2011, Wal-Mart introduced a Christmas layaway program

inspired from customer comments on Facebook
Awareness
In October 2011, Heinz started a Get Well Soon Campaign that allowed
Sharing valuable content for members to
Promotions
share
customers to send personalized canned soup delivered to any of their

friends who are ill through Heinzs Facebook page
By placing several items from the toy vote online at Walmart.com for pre-order earlier this year, we could get a sense for the demand of these
items. Our online team shared this data with our stores so that Walmart could plan accordingly and ensure the seasons hot toys are in stock
and available to our shoppers. Sarah Spencer, National Media Relations Director, Wal-Mart
When people go to an e-commerce site from a Facebook page, they are twice as likely to buy something, than if they go there some other way.
We are obviously looking at the interaction between Facebook and our social media strategy, and how that ties into our e-commerce, which is
one way we can trigger sales. Stephen Quinn, Chief Marketing Officer, Wal-Mart
CUBISMS
FEBRUARY 2012
VOLUME 1
13
PROFESSIONAL NETWORKS (LINKEDIN)

Objective
Customer Care
Strengths
Insights into prospects and client

base profiles
Examples
Volkswagen became the first major auto brand to establish a presence on

LinkedIn Company Pages
Lead
Generation
Sharing information through

forums, groups
Philips created two custom groups (Innovations in Health and Innovations

in Light) on LinkedIn to increase brand affinity and to develop professional
relationships with experts in similar fields
More than half of all CMOs think social media is a key channel for engaging with customers. However, engaging with customers is not just
about communicating with them. It is also about helping them enjoy the products and services they have bought, with the intention of building
customer loyalty. IBM Survey From Stretched to Strengthened (September 2011)
In a world where people spend an increasing amount of time at work, thinking about work, and interacting with their work colleagues, we
believe it is important to foster discussion about Volkswagen products in a professional context. Our innovative partnership with LinkedIn lets
our customers learn about Volkswagen products and provides insights. Lutz Kothe, Head of Marketing, VW India
Combining our thought leadership with LinkedIns trusted environment and professional context has enabled us to create active communities
that have become online destinations for medical and lighting professionals worldwide. This has helped establish Philips as a partner in these
fields of expertise among our key target audience. Hans Notenboom, Global Director B2B Online, Philips
14
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TREND IN ADVERTISING SPENDING ACROSS SOCIAL MEDIA CHANNELS
Social Networks
Advertising
Spend
Facebook
Trend In Advertising Spend
Facebook continues to be the most popular social network with over 700 million users globally
Facebook is estimated to get nearly 7 out of every 10 dollars spent on social network advertising
worldwide in 2011
In the US, Facebook accounts for 71% of the total social network spending, and 7.7% of the total US
online ad spending
Twitter
Twitter at present sells its ads only in the US, and soon will be selling ads internationally
Twitter started its advertising business in early 2010, and is expected to hold a lot of growth potential
Twitter is expected to account for about US$150 million of ad spending in 2011, and about
US$250 million in 2012 globally
Google +
Google + attracted about 25 million visitors, when it was launched; and it is the fastest growth by
any social networking site
In the first month (JuneJuly 2011), Google+ had 6.4 million visitors in the US, and in the
following month, it had 3.6 million visitors
Due to it rising popularity Google + has the potential to attract a steady stream of ad spend during
the coming years
Playdom and Zynga
Online social gaming companies, such as Zynga or Playdom, will attract marketers due to the
large target audience they draw
Global advertising spend on social gaming networks is expected to be US$274 million in 2011,
and is expected to further grow to US$417 million in 2012
Myspace
MySpace is expected to continue recording a downfall in ad spending due to its losing popularity
MySpace is expected to record a decline in advertising spend to US$184 million in 2011, and
further decline to US$156 million in 2012 globally
CUBISMS
FEBRUARY 2012
VOLUME 1
15
MARKETERS CONTINUE TO
INCREASE INVESTMENTS IN
SOCIAL MEDIA
SOCIAL MEDIA NETWORKS

CAPTURING MORE AD REVENUE
The US will continue to remain the biggest

market, accounting for about 52% of the
total spending on social networks globally
The global advertising spend on social
at $3.08 billion, representing an increase of
As per a September 2011 report by IBM,
networks is expected to record a significant
about 55% over 2010. Further, the spending
global CMOs are highly optimistic about
jump of 72%, to reach $5.97 billion in 2011,
is expected to increase by about 28% in
social media, increasing their ad spend
accounting for about 9% of the total online
2012 to reach nearly $4 billion.
despite factors such as the contraction of
advertising spend.
the global economy.
TECHNOLOGY THAT CMOS GLOBALLY PLAN TO LEVERAGE OVER THE NEXT 35 YEARS
Source: CMOs: Plan Increase of Social Media Use Though 7 out of 10 Feel Unprepared, MarketingPilgrim, (November 2011)
Marketers will begin the transition from one-time placement and click of ads toward ongoing engagement with the Internet users and will,
therefore, allocate a higher percentage of their advertising budget to social networking sites. Neha Gupta, Senior Research Analyst, Gartner
16
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GLOBAL SOCIAL NETWORKS ADVERTISING SPEND
US SOCIAL NETWORK AD REVENUES
($ BILLIONS, 20092012)
($ BILLION, 20092012F)
Source: Global Social Networks Advertising Spend - eMarketer,
Source: US Social Network Ad Revenues to Reach $3.08 Billion This
(March 2011)
Year - eMarketer, (August 2011)
MEASURING THE EFFICACY OF

SMM REMAINS A CHALLENGE
To address this gap, many CMOs combine
According to a survey by Chief Marketer,
a wide array of metrics, such as number
about 60% of the marketing professionals
of clicks, likes/dislikes, fans, and average
consider number of followers as the best
Even the most popular social marketing
time spent per page. However, each
way to measure social media success.
ads face a significant challenge: assessing
company uses a different set of metrics to
The next most significant metric being
the effectiveness of the campaign. CMOs
evaluate the effectiveness of social media
used was sharing, forwarding, re-
struggle with this fundamental dilemma
and many disagree as to the best or most
tweeting/posting of brand content.
knowing their peers and competitors are
reliable measures.
significantly investing in SMM yet lacking

a reliable metric on which to base decisions.
In short, there is no one method to calculate
the ROI on SMM.
In another related survey by Bazaarvoice
CMOS INCREASINGLY
SKEPTICAL ABOUT ROI METRICS
AND LACK CONSENSUS
and The CMO Club, CMOs for businessto-consumer companies considered

customer reviews or ratings, and other
The metrics that are easy to measure are the ones that end up getting measured, vs. the ones that really would be useful in understanding business
impact. Irfan Kamal Partner, Senior Vice President, Digital/Social Strategy, Ogilvy & Mather
CUBISMS
FEBRUARY 2012
VOLUME 1
17
community tools most important. While
and followers, and increased website
B2B companies found that customer
traffic. However, in 2011, they were found
reviews, community tools, and corporate
to be skeptical about these metrics, as
blogs had the biggest ROI.
they struggle to relate to sales.
INDUSTRY VETERANS WEIGH IN

ON SMM STRATEGY
Organizations both large and small are
embracing social media and attempting
In surveys by Bazaar Voice, many CMOs
No one solution to the challenge exists.
to develop a comprehensive marketing
in 2009 measured the success of their
Rather, marketers plan to leverage a host of
strategy including a social media element.
social media activities through tools such
tools simultaneously.
However, many marketers are skeptical
as website conversion, number of fans
toward social media channels and are
KPIS USED TO MEASURE VALUE OF SOCIAL MARKETING ACTIVITIES
Source: CMOs on Social Marketing Plans for 2011, BazaarVoice, (January 2011)
A blessing and a curse with social media is that its highly measurable, he says. The challenge is theres no industry standard that everyone should
follow. Rick Wion, Director of Social Media, McDonalds as told to Chicago Business
18
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GLOBAL ADVERTISING SPEND BY COMPANY

($ MILLION, 20102013F)
7,000.0
5,780.0
3,800.0
1,860.0
79.3
140.8
139.5
399.5
259.9 249.6
200.9
45.0
2010
2011
Twitter
2012
LinkedIn
2013
Facebook
Source: eMarketer (2011)
taking a wait and watch policy by relying
not be prudent.
on conventional media channels.
changing dynamics of social media given

the ongoing evolution of the channel.
Industry veterans also believe that an

Many marketers also feel that a
organization should devise its social
comprehensive marketing mix strategy will
media strategy bearing in mind the overall
be a combination of TV, print, and digital
marketing and organizational objectives.
spend, and focusing on a particular media
The strategy should be flexible and
with limited emphasis on other media will
dynamic, and should be able to adapt to the
Shikhar Bhatnagar and Yash Rai , Strategic Services

Practice
Artwork, veer.com/ImageZoo Illustration
The most important thing to remember when strategizing a social media campaign is to start with the basics, get a feel for where your customers
are, how they behave, what are their trigger points, and then modify the strategy. Tomer Garzberg, Director, Strongman Digital Media
CUBISMS
FEBRUARY 2012
VOLUME 1
19
COVER STORY: MARKETING & SOCIAL MEDIA
The Premium Beauty

Care Industry in
Emerging Markets
ost of the developed
The Smart Cube has identified beauty
emerging economies will grow by 8.7%.
economies worldwide
care markets likely to exhibit accelerated
Developed economies are likely to have a low
have been experiencing
growth over the next decade by analyzing
growth rate in the medium term as they deal
stagnant or declining
changes in GDP per capita and the current
with the onerous task of reducing public debt
economic growth. The US, Japan, and the EU
demographic makeup. GDP per capita and
and government budget deficit. By 2020, it
economies have been crawling, while Latin
its evolution indicate public disposable
is predicted that the economic balance of
American, Asian, and African countries are
income and variations. Meanwhile, the
power will shift decisively in the favor of
basking in impressive economic growth
demographic makeup, in terms of old age
emerging economies.
despite the depressed global business
dependency ratio and population change
conditions. Propelled by rising disposable
over the past five years, provides a good
To identify potentially lucrative beauty care
income and a growing young population,
estimate of the future consumer base.
markets over the next decade, The Smart
the CPG and service markets in emerging

economies are likely to provide enormous
opportunities. Therefore, global beauty
Cube focused on two indicators likely to
EMERGING MARKETS, A
METHODOLOGY
and cosmetics companies cannot ignore
signal growth in the beauty marketGDP per

capita at PPP (as an indicator for disposable
income) and old age dependency ratio (as
the imperative consumer base in emerging
The global recession of 20082009
an indicator of population below 65 years of
markets. A bulk of the market potential in
has highlighted the innate problems of
age), coupled with growth rate of population.
many of the emerging economies remains
developed economies and the dynamism of
The objective of the analysis is to identify
unrealized, evidenced by the very low
emerging economies. The IMF forecasts that
the top performers, in terms of economic
per capita spending on beauty products
emerging economies will drive the global
performance and demographic composition,
compared to developed economies.
economic recovery: in 2011, developed
which have not yet been noticed by
economies are likely to grow by 2.4% while
multinational beauty care companies.
20
Morgan Stanley Research
THESMARTCUBE.COM
COVER STORY: PROCUREMENT & SUPPLY CHAIN
Social media platforms were
Privacy
initially used by Dell as a tool to

distribute news and special offers.
integration of social media and business

(and certainly procurement) and with
Privacy is perceived to be one of the
major social media platforms adding
However, it gradually evolved
key issues limiting the functionality
business applications to their portfolio of
into a critical relationship builder,
of social media platforms. Corporate
services, issues such as those discussed
integrating into all business units
buyers or procurement professionals
in this paper will be resolved over time.
within Dell.
sign confidentiality agreements with
However, if these platforms are to be useful
their suppliers to restrict the latter from
tools for procurement and supply chain
disclosing information about clients
professionals, then the depth of integration
on any media platform and in any form.
would certainly need to support the process,
While the potential value of social
Thus, information available on social
protocols and values of the procurement
media within the procurement context
media platforms will lack key insights.
function. If so, they could aid procurement
is significant, clearly, there are a host of
Effective tools must find away to
professionals in efficiently monitoring and
issues still to be resolved. Indeed, the
overcome such issues and allow for the
closely coordinating at various levels in
functionality and usability of social media
protection of specific information as and
the supply chain and in remaining up-to-
platforms for procurement and other
when needed.
date with developments in the external
LIMITATIONS OF SOCIAL MEDIA
business applications need to be checked
environment and their respective category
against some of its major limitations.
Generalistic Nature of Information
domains.
Lack of Authenticity of Information
Information available on social media
Suvidh Vora and Puneeta Mathur, Strategic Services

Practice
Artwork, iStockphoto.com/VLADGRIN
Artwork, iStockphoto.com/Vertigo3d
platforms is typically generalist in

It is imperative that information is fully
nature and often touches on generic
authentic and coming from a credible
best practices and activities in the
source. Executive-level procurement
procurement domain. Therefore, insights
professionals believe that information
and analysis obtained from these
obtained through social media channels
platforms must be carefully studied
lack authenticity, limiting its usage to a
before their application in business or
strategic level of procurement. This is
procurement-related decision making.
both true and false and thus demanding

of vigilance.
In Summary
Clearly, we are at the early stages of the
28
THESMARTCUBE.COM
The countries have been segregated
further insights into the demographic
potential high growth markets for beauty
according to the IMFs segregation of
characteristic of countries exhibiting
care products.
countries in its World Economic Outlook
dependency ratio more than 11.6 (in 2010),
Database. As the average GDP (PPP) per
population change during 20052010 has
capita of advanced economies was $38,014
also been indicated.
(2010), middle-income countries lie
EXAMPLE OF AN EMERGING
BEAUTY CARE MARKET:
COMMONWEALTH OF
INDEPENDENT STATES
between 0.08 and 0.26 on the horizontal
Each of the charts that has been created,
axis. Low- and high-income countries have
shows GDP per capita in 2010 as a
range between 0.8 and more than 0.26,
proportion of that of advanced economies
These countries are former Soviet
respectively.
average (horizontal axis) and how that
Republics formed during the break-up of
proportion has changed over the last decade
the Soviet Union. Although Mongolia is
As there is no ideal old age dependency ratio
(vertical axis). Most of the countries in our
not a member of CIS, it has been included
(ratio of population aged 65 and above per
analysis were positioned above the zero
in the category. Based on our analysis,
100 population between 15 and 64 of age) in
line, indicating that they have closed the
Azerbaijan, Kazakhastan, Belarus, and
place, this report compares each countrys
gap with advanced economies. We present
Russia have been the top performers in
dependency ratio to the world average
below an example of the analysis conducted
terms of economic growth over the past
of 11.6 in 2010 as a basis. To provide
for each group of countries to identify
decade, along with having the highest GDP
CUBISMS
FEBRUARY 2012
VOLUME 1
Beauty Packaging Website
21
COVER STORY: MARKETING & SOCIAL MEDIA
WORKING AGE POPULATION (15 TO 64) PROJECTION
PROJECTED SHARE OF GLOBAL GDP
(MILLION, 1950-2050E)
(%, 1950-2020E)
Figure 1: Projected Working Age Population and Share of Global GDP
per capita in the region.
Both the countries have high GDP per capita,
Turkmenistans economic growth has been
are one of the fastest growing economies,
constricted by its authoritarian government
In Belarus, an authoritarian regime and
rank favorably in terms of human
and the mismanagement of the countrys
a state-controlled economy provides
development, and have low unemployment
resources.
significant roadblocks to the development
rates. According to industry news, the
of its beauty market, though it is one of
luxury market in Azerbaijan is still at a
The country faces high unemployment
the most industrialized nations in the
nascent stage and people typically prefer to
rates, ranks unfavorably in terms of quality
world with a highly skilled and educated
buy luxury items from a foreign location.
of life, has a history of human rights issues,
population. However, the recent creation
and rampant bureaucratic corruption.
of Customs union among Russia, Belarus,
However, Kazakhstans estimated luxury
Therefore, Turkmenistan consumer
and Kazakhstan is likely to create a more
market size was $800 million in 2010, with
spending is likely to remain low in the
favorable business environment for foreign
make-up and perfumery accounting for
foreseeable future.
cosmetic companies in Belarus.
15% to 20%. Many multinational cosmetic

companies, such as Kanebo and Shiseido,
On the other hand, Mongolia is likely to
Kazakhstan and Azerbaijan have displayed
have already entered the markets to
grow at an accelerated pace through the
robust economic growth, primarily through
leverage the expected growth in the beauty
development of its mineral resources and
the exploitation of mineral and oil reserves.
market.
crude oil reserves. Due to a democratic
22
JC Report (July 2010)
The New Frontier for Luxury Shopping, Wall Street Journal (June 2011)
THESMARTCUBE.COM
COVER STORY: Marketing & Social Media
commonwealth of independent staes
Figure 2: Demographic and Economic Comparison CIS
setup and socialist policies of the
with few companies, such as Oriflame and
Premium Beauty Care Industry: Emerging
government, GDP (PPP) per capita has
Shiseido, having presence.
Markets.
years. Mongolias current GDP of $7
Ukraine provides growth opportunity in
The Smart Cube would be pleased to provide
billion is expected to at least increase by
the medium term (for the next five years) as
a complimentary copy upon request. For
20% annually till 2020. Mongolias open
market potential remains unrealized with
questions, comments, or to request a
market structure is conducive to the entry
per capita consumption of beauty products
copy of the report, please contact: usa@
of foreign players, and it has been lately
at $56. But, due to the economic downturn,
thesmartcube.com
attracting high investor interest.
premium beauty care sales suffered and
increased drastically over the past five
consumers moved to mass beauty care

High end brands, such as Louis Vuitton,
products.
Mohammad Arshad, Strategic Services Practice

Artwork, iStockphoto.com/MightyIsland
Burberry, Zegna, and Hugo Boss, have

already opened shops. The beauty care
The remainder of the analysis is available
market remains untapped in Mongolia
within the full-length version of The
Cubisms
FEBRUARY 2012
Volume 1
23
Social Media and

Procurement: A HighLevel Perspective
ocial media has grown at a
of its implications and value becomes more
but a number of the more progressive
breakneck pace over the past
pronounced in the coming years.
professionals have begun asking the
few years, and has become
question: how can social media tools
firmly entrenched in our daily
Within the Procurement space, in particular,
effectively deployed help me meet my
lives in one form or another - whether it is
there has been significant emerging interest
organizations objectives?
Facebook, Twitter, LinkedIn or one of the
in social media as a potential business tool.
myriad other platforms.
While answers to this question are

A large number of corporate buyers have
emerging, it is far from a crystal clear.
According to Forrester Research, social
started to tap social media platforms in
media spend by companies will quadruple
the sourcing and category management
Indeed, in particular procurement
from $716 million in 2009 to around $3.1
process, albeit mostly on an informal/
activities, social media is proving to be
billion in 2014. Although social media
unstructured basis. The majority of these
an effective tool. This includes carrying
has proven to be an effective tool in B2C
buyers are operational-level professionals
out research such as identifying potential
marketing applications, its adoption for
who have been quick to adopt social media
suppliers for a specific category, tracking
B2B applications has progressed, relatively
as a vehicle to gain information about
recent market developments, and/or
speaking, at a slower pace. That said, it is
markets and suppliers. CPOs and other
identifying risks and warning signs of
clear that this trend will accelerate as both
top-level procurement professionals,
specific suppliers. It is also helping at the
the number and quality of B2B-driven social
on the other hand, have yet to show any
macro-economic level, identifying industry
media tools increase and also the awareness
significant interest in this trend, en masse,
trends and best practices within the
24
THESMARTCUBE.COM
procurement domain.
between suppliers and corporate buyers

pertaining to the non-disclosure of the name
1.
Identification and Management of

Suppliers
Clearly though, there are specific
of the buyer or buyer-related information
constraining factors: certain protocols
in any form, limit the availability of useful
Social media platforms can help
inherent to the function are proving to be
information on social media platforms to
procurement professionals in identifying
constraining factors certainly in the near
some extent as well. Today, there is also,
and managing suppliers of their category
term. One significant limiting factor, of
of course, a perceived (and in many cases
of products or services as well as helping to
course, is confidentiality, tying the hands
actual) lack of authenticity in terms of the
answer specific concerns or questions they
of buyers on what internal information can
type and quality of information available
may have
be shared. Social media is, by definition,
via social media platforms.
a public activity, where the use of social

networks makes information available to
the public and relies on a two way (multiway) free flow of information to maximize
Identification of Top Suppliers: Social
IMPLICATIONS AND BENEFITS

- SOCIAL MEDIA FOR THE
PROCUREMENT
its true value. However, companies bidding

Surveying the B2B social media landscape
bid list the list of all companies bidding
today, there are 6 key benefits that
something not commonly shared with
procurement professional can derive from
the supply base. Similarly, agreements
todays tools:
FEBRUARY 2012
VOLUME 1
to identify top suppliers within specific

categories based on the analysis of online
reviews and ratings on procurement-
via social networks can become aware of the
CUBISMS
media allows procurement professionals
based social media networks.
Evaluations of Suppliers: Recently

launched is the VendorRator website and
25
Twitter feed, an open online platform
as platforms for establishing a
LinkedIn is being used by
where procurement professionals can not
network of peer professionals.
executive-level procurement
only find but also review suppliers
professionals more than any other

Supplier Risk Management: This can
My Sourcing Team - a virtual
social media platform. The LinkedIn Group
business network of procurement
Discussion application helps in the exchange
be enhanced by tracking procurement-
and category managers
of useful insights among peer procurement
related platforms, such as My Sourcing
that facilitates peer-to-peer
professionals.
Team, for any recent developments and
connections, collaboration, and
risks associated with a supplier.
sharing of insights across common
Twitter is used as a micro-blogging
spend categories.
site to allow members to read
Supplier Collaboration: Social media tools

and communities, such as Google+ and
and write posts. Its popularity is

3.
Sharing of Best Practices
Ariba Discovery, are an apt forum to share
growing in the business world as suppliers

use it to keep their clients updated. However,
innovative techniques and collaborate
Social media allows for the sharing of best
Twitters adoption has been at a low level
with suppliers.
practices among organizations on blogs
among procurement professionals. With
such as supplymanagement.com and
new B2B procurement applications such as
Supply Chain Digest, as well as through
VendorRator expanding on Twitter, usage
other social media platforms.
is expected to increase rapidly within the
2.
Peer Engagement
Social media can help in developing a peer

network of procurement professionals
procurement space.
Discussions among like-minded
Blogs and other procurement platforms
across organizations that can be tapped for
professionals and blogs written by
relevant insights on any given category or
procurement professionals on a variety
issue.
of supply chain topics serve as a basis
Procurement-related blogs, such as Ariba
for identifying standard practices and
Exchange, Supplymanagement.com, etc.,
Procurement professionals have a choice
policies in the procurement domain. A
are becoming increasingly popular. These
in establishing peer networks through
host of informative vendor driven sites
blogs are followed by executive-level
social media:
exist, including ICG Comerces The
procurement professionals to gain market
Source as well as Iastas E-Sourcing
and category understanding. However, these
Forum
professionals do not write their own blogs.
LinkedIn - there are hundreds of

procurement-focused networking
groups and professional
Globally, Facebook is the leading social
hot issue discussions are covered
media platform. However, due to the current
members.
through forums such as SpendMatters.
lack of B2B applications, its B2B impact is
com as well as newer sites such as
limited. Going forward, Facebook is looking
MyPurchasingCenter
to develop business applications targeting
Procurement-specific communities
such as Ariba Exchange serve
26
Topical news items and emerging
organizations, with 250,000+
B2B users.
THESMARTCUBE.COM
4.
Early Identification of Risks and
The Institute for Supply Management
professionals can scan through key
(ISM) has a member-only database
information about suppliers such as
Warnings
and discussion forum that covers
products and services, capacities, and
Social media platforms can help in
manufacturing trends and discusses
recent developments.
conducting external environmental
supplier issues. ISM is known as one of
analysis to help procurement professionals
the bulwarks of understanding current
in identifying risks and threats associated
economics with its Report on Business.
6.
Decentralized Procurement
Management
with their product category or any of their

5.
existing suppliers.
Market Intelligence
Management of a decentralized
procurement model requires strong
The International Federation of
Tracking blogs and forums can be an
coordination and fast communication
Purchasing and Supply Management
effective way of conducting market
among parties.
(IFPSM) is a union of 48 National and
intelligence.
Regional Purchasing Associations.

The federation serves as a social media
Social media, such as Twitter, can

Many suppliers host their own blogs,
help facilitate this communication by
platform for the procurement community.
providing valuable information on
allowing organizations to create Twitter
It maintains a knowledge bank
industry issues, upgrades in capacity and
feeds specific to programs, products, etc.
comprising the latest research, issues,
capabilities, market expansion plans,
and upcoming challenges in the field of
etc. Considering the source, however,
purchasing and supply, which is updated
information is likely to be filtered to
technology services company that
monthly, by taking contributions from
reflect the focus and perspectives of the
recently banned the use of internal
procurement professionals across the
respective suppliers.
email, requiring employees to use
globe. The knowledge bank is then made

available to all its members.
CUBISMS
FEBRUARY 2012
Atos is an international information
instant messaging and a Facebook RFI Process Support: Procurement
VOLUME 1
style interface.
27
Is the Manufacturing
Sourcing Model
Changing?
merging markets in Southeast
competitive products. In recent years,
The current business climate has arrived
Asia, South America, and
though, supply chain management has
at a stage where alternative supply chains
Eastern Europe have become
become increasingly difficult for companies
are essential in ensuring the success of
attractive manufacturing
for a myriad of reasons.
an organization. The old single-sourcing-
locations for many industries, primarily

because of their cheap labor and FDI-
from-the-cheapest-location model as a
The volatility and instability in distant
standalone approach is becoming risky
friendly environment. Additionally,
economies can now have significant
and, as the global economic environment
governments in these fast-growing markets
consequences on business functioning.
has become increasingly unpredictable,
have encouraged the emergence and growth

of a wide range of credible suppliers that
companies are moving to find ways

Currency fluctuations, wage inflation,
to mitigate the accompanying risk.
can now meet the quality and volume
geographic barriers, unstable fuel prices
Alternatives have already started to
requirements of global corporations.
are all contributing to the growing
emerge. In light of the recent economic
complexity of supply chains.
crisis, companies have started to adopt
The result has been an increasingly

interconnected global economy, in which
regional and location-focused supply chain

Add natural catastrophes affecting key
models. These models work on simple
western companies have grown their
suppliers for a range of industries (see
assumptionsthat a closer proximity
supply networks and distribution channels
the Japanese earthquake or the Thai
between suppliers and buyers is more
to take advantage of attractive emerging
and Australian floods) and the picture
efficient, that shipping over short distances
economies and develop more globally
becomes really complicated.
is cheaper than shipping over longer ones,
CUBISMS
FEBRUARY 2012
VOLUME 1
29

and that a regional, closely knit supply,
locations. This is particularly applicable
Environmental concerns are also
manufacturing, and distribution hub
for manufacturers sourcing high volume,
contributing to the increasing adoption of
provides higher financial benefits compared
time-sensitive, and critical components.
regional supply chains. Companies are now
with extensive global networks.
Sourcing from far-off locations may
learning to couple savings and efficiencies
also generate higher risks from a legal
with sustainable development. And when as
The cost argument of local and regional
perspective. In China and India for
much as 70% of a manufacturing companys
sourcing can be amplified by quality
instance the most attractive outsourcing
carbon footprint comes from transport and
gains and lower legal hurdles, as it can
locations out therethe legal system is
other costs in its supply chain, a shortening
prove much more effective to conduct
still relatively underdeveloped, adding
of supply and distribution channels is likely
regular compliance checks and meet
pressure on the local business climate and
to occur in many environment-conscious
regulatory requirements at nearby supplier
complicating supply chain management.
companies.
30
THESMARTCUBE.COM
In terms of transportation and labor costs,
tailwinds due to stretched supply chains.
the current macroeconomic structure of

most key regional markets around the globe
that global supply networks built over

the past two decades may not always be
Odlo, a Swiss manufacturer of functional
the most optimal manufacturing model
further favors a higher adoption of regional
sports clothing, plans to move its Asian
for all companies. The incorporation of
supply chains. Europe has the Balkans and
production back to Europe on account of
regional supply chainsin which suppliers,
the Eastern countries; Japan, the four Asian
rapid wage increases and delivery delays;
manufacturers, and clients are elements
tigers (and soon China) have the Southeast
the company is considering locations
of the same local or regional marketas
Asia economies; the US has Mexico, while
in Portugal and Romania for its new
part of a companys overall portfolio of
the Brazilian market can be easily supplied
production capacities.
manufacturing options may provide part of
by its smaller neighboring countries. There

are evident synergies and opportunities
the solution.
Samas, a Dutch furniture maker, and
between these groups, determined primarily
Zumtobel, an Austrian lighting group,
While low-cost country sourcing will
by their low cost--developed markets
have already made moves to relocate
continue to be a viable option for a range
pairing.
production back to Europe.
of companies, alternative near-sourcing

solutions will provide an interesting
According to Financial Times and other
This trend is also visible in the US. Efforts
news sources, in Europe, there are already
to reduce inventories, avoid rising labor
numerous examples of domestic companies
costs (according to The Economist, in China
bringing manufacturing back to their home
factory workers wages increased by 69%
or proximate markets. These include:
between 2005 and 2010), and reduce supply
complement to the mix.
Octavian Petre, Strategic Services Practice

Artwork, iStockphoto.com/Si-Gal
chain risks have encouraged companies like

Steiff, a German toy manufacturer
General Electric, Sauder, and Wham-O to
which has recently decided to move its
restore production from low-cost countries
production from China to Europe, citing
back to America.
problems with quality, high transport

costs, and long delivery times; these
were caused by costly personnel training,
SO HOW EXACTLY WILL THE

FUTURE SUPPLY CHAIN LOOK?
significant wage hikes, growing shipping

costs as a result of volatile fuel prices,
As the global economy becomes more
and difficulties to react to market
dynamic and interconnected, it is clear
CUBISMS
FEBRUARY 2012
VOLUME 1
31
FINANCE & RISK
Change In The Middle

East And North Africa
Implications For Business
he recent civil unrest in the
Overview:
accounted for 3.7% of the worlds GDP.
Middle East and North Africa
(Figure 1)
(MENA) region has, for obvious
To provide a basis for understanding the
reasons, attracted significant
importance of the region, it is imperative to
It accounts for about 59% of the global
attention globally. With countries across
look at several specific economic indicators
proven oil reserves and 35.3% of the daily
the globe still working to recover in the
to understand the importance of the MENA
global oil production. (Please refer to
aftermath of the 200809 global economic
region in the global economy.
figures 2 and 3)
crisis, the turmoil in the MENA region has

raised concerns that the unrest might have
a further exacerbating effect on global
The region produced $2.3 trillion in Gross

Domestic Product (GDP) in 2010, which
Crude oil and natural gas imports from

the region account for a major portion of
trade.
FIGURE 1: MENA REGION GDP ($ BILLION, 20062012F)

Furthermore, MENA countries are home to
a majority of the worlds oil resources, and
there has been growing speculation that the
unrest in the region will result in continued
volatility in oil prices, which may derail the
economic recovery process that started in
mid-2010.
32
THESMARTCUBE.COM
energy consumption in the US, Western
and textile businesses, and consumer
The figure 4 reflects the MENA economies
Europe, and Asia.
goods producers in China and other Asian
risk exposure to the prevalent political
economies, have been impacted most
instability:
In addition to oil, other industries of
severely.
significance in the MENA region include
Based on the political crisis and recent
petrochemicals, chemicals, textiles
In addition, supply chain disruptions and
developments, MENA countries can be
and garments, construction, education,
an increase in payment risks are adversely
categorized into three risk zones as follows::
tourism, finance and telecommunications
affecting companies globally.

High Risk Zone: This includes Libya, Yemen,
Risk:
In the long term, lenders and insurers are
Bahrain, Syria, Iran, Lebanon, and Iraq.
likely to reassess political risks in several

Given the importance of the MENA
emerging markets that are threatened
As the Libyan civil war ended with the
economies to the global economy, the
by political unrest, which could result in
killing of its former dictator Moammar
political crisis that has engulfed the region
higher credit and insurance costs for foreign
Gadhafi, the country is making progress
since the beginning of the last year is being
and local companies. The crisis in this
towards peace. The interim government
watched all the more closely.
region is likely to exert upward pressure on
has scheduled elections next year and
hydrocarbon prices and associated business
oil production is expected to reach pre-
costs.
war capacity by June 2012. However, the
Companies that have a significant exposure

to this region, such as European agri-food
CUBISMS
FEBRUARY 2012
VOLUME 1
political and security situation remains
33
Finance & Risk
FIGURE 2: World Proven Oil Reserves (%, 2010)
FIGURE 3: World Global Oil Production (%, 2010)
100% = 1,383 billion barrels
100% = 82.1 million barrels per day
fragile as the government tries to deal with
key concern for Iraq. The insurgents are
In Egypt, the initial euphoria at the ousting
armed militias, hided weapons, and urban
increasingly becoming more violent and
of former President Hosni Mubarak has
areas contaminated by still active mines.
are staging large-scale attacks on the
gradually eroded and factions have
Syria continues to remain a battlefield
government facilities. Iran still reels under
emerged: Secularists, Islamists and
between anti-government protestors and
the UN Security Councils sanctions for
Christians, leading to frequent clashes. Pro-
government forces. UN estimates that about
its alleged nuclear weapons program. The
democracy rallies and sharp government
3,500 people have been killed so far in
call for stricter sanctions is expected to be
crackdown is underway in Bahrain.
the government crackdown on opposition
renewed as the recent International Atomic
However, the intensity of protests has
forces. Even after the Syrian government
Energy Agency (IAEA) report indicts Iran in
decreased overtime. The political situation
accepted a peace plan brokered by the Arab
trying to pursue nuclear weapons.
in Jordan and Oman is currently stable after
League to halt violence and convene talks
crackdown on protestors by government
with the opposition, the ground situation
All these factors put business and
forces and introduction of reforms. However,
remains grim. Condition in Yemen has
investments in these countries at high risk.
peace and stability remains fragile. Tunisia,
reached a stalemate as pro-democracy
Investors are likely to avoid any further
from where the Arab Spring started in
protesters are joined by armed tribals and
deals in these countries in the near future.
early 2011, is largely stable after elections
Al-Qaida affiliated terrorist organizations
were held in October. The country has not
in their struggle against Presidents Ali
Medium Risk Zone: This includes Egypt,
reflected any further signs of major political
Abdullah Salehs 33-year old rule. Local
Algeria, Jordan, Tunisia, and Oman.
unrest. Political situation in Lebanon
terrorist networks remain a matter of
34
has stabilized after the formation of the
thesmartcube.com
Finance & Risk
FIGURE 4: Political Instability Risk in the Middle East and North Africa
Hezbollah-backed government. Investors
The UAE, Qatar, Israel, and Kuwait have
other economies, this is a testing time as
are likely to adopt wait-and-watch strategy
been largely immune to protests; however,
prolonged political inertia, coupled with a
with these economies.
growing unrest in the neighborhood has
lack of economic development, is likely to
negatively impacted business confidence in
add fuel to the fire.
Low Risk Zone: This includes Saudi Arabia,
these countries.
the UAE, Qatar, Israel, and Kuwait.
The MENA region will remain an important

Local consumer spending and investments
economic hotspot to watch as we go
Protests in Algeria subsided after President
remain strong and are driving growth in the
forward.
Abdelaziz Bouteflika introduced a few
region.
reformative measures and imposed a harsh

crackdown on pro-democracy protestors.
Implications:
Prakhar Baghmar and Raghav Maheshwari , Strategic

Services Practice
Artwork, veer.com/ ImageZoo Illustration
After initial demonstrations, protests

in Saudi Arabia fizzled out due to tight
With the growing public support for
government controls and an economic
democracy, the MENA region is witnessing
reforms package announced by the
one of the most turbulent times in recent
government. Morocco remained relatively
history. While some countries with
unaffected by the Arab Spring after the
strong financial muscle look to stave off
king introduced economic and political
political unrest by announcing public-
reforms as soon as the protests began.
friendly economic stimulus packages, for
Cubisms
FEBRUARY 2012
Volume 1
35
COVER STORY: FINANCE & RISK
Real Option Analysis

A Multi-faceted Approach to Efficient Capital Budgeting
raditionally, managers have
instruments).
used a range of tools and
In addition to its application in financial

and economic research, the Real Options
techniques in the process of
(Indeed, financial managers often overrule
approach is being applied in virtually all
making the most efficient
NPV results by accepting projects with
business disciplines including operational
project evaluation decisions i.e. whether
negative NPVs for strategic reasons. Their
research, strategy, management science,
to invest in a given project or not. These
intuition tells them that they cant afford
information systems, accounting and
have included approaches such as Payback,
to miss the opportunity and, in essence,
marketing. It is an inter-disciplinary
NPV, IRR and beyond, with the most popular
theyre intuiting the flexibility of the
approach, with immense potential to
being the NPV (Net Present Value) approach.
projects real options.)
improve management decision making
While these methods provide easily
while providing deeper insight into the role
understandable and quantitative figures
Many of the limitations of such traditional
of uncertainty of investment activities, and
that managers can base their budgeting
methods can be partially remedied by the
serves as a tool for strategic planning and
decisions on, they have reasonably
use of the Real Options Approach (ROA).
framing of decision problems.
significant limitations as well.
This approach caters to the valuation

of managerial flexibility in uncertain
A study of 39 companies conducted by Alex
For example, the NPV approach does not
scenarios and determines the project value
Triantis, Associate Professor of Finance
allow for flexibilities that managers might
accordingly. The name Real Options
at the University of Marylands Robert H.
want to incorporate (depending on future
links to the fact that these pertain to
Smith School of Business, found that most
market scenarios). The method only uses
non-financial (or real) assets, rather than
businesses using real options valuation
information that is present at the time of
financial instruments. In many ways, ROA
use it in three key ways: as a mode of
valuation and does not incorporate options
provides an advanced, realistic and more
thinking, as an analytical tool and as an
such as delaying the investment or any
structured way of undertaking strategic
organizational process. Also, in their 2001
other flexibility, per se. Thus, NPV is a
capital budgeting decisions.
survey of the CFOs of 400 Fortune 1000
now-or-never approach without allowing

for any other options and is considered to
companies, John Graham and Campbell
OVERVIEW
be a passive investment analysis tool. They
Harvey reported that about a third of the

CFOs surveyed said that they always
work best for the scenarios where cashflows
The idea of evaluating corporate investment
or almost always use real options when
can be determined with a high level of
opportunities from a Real Options
evaluating new investments.
certainty (as in the case of fixed income
perspective dates back more than 30 years.
36
THESMARTCUBE.COM
So what is ROA? ROA is an active investment
payoff that attributes to the options value.
be an electronics company evaluating the
approach that captures the value of
From a corporate finance perspective,
marginal profit vis--vis the inclusion
management flexibility in response to
undertaking an action is to take a project-
of an additional functionality (option to
changing market conditions such as
specific decision, based on the flexibilities
expand) in its newly launched gadget, given
changes in operating costs, prices of goods
associated with the project being considered
a good demand for the product in the future.
produced, prices of raw materials, cost of
by the management.
Technically, an option to expand is similar
capital for the firm, market competitiveness
to American call option.
etc. Think of real options as the right, but
In general, the flexibilities associated with
not the obligation, to undertake an action.
the project can take many forms, including:
The approach deals with uncertainty (risk)
ii) Option to switch: An option to switch

from one input/output mix to another,
and generates an additional value through
i) Option to expand: This refers to an option
depending on the market scenario during
the flexibility involved in the projects.
to scale up the magnitude of operations,
the projects life, in order to capitalize on
Alternatively, it is the asymmetry (limited
in response to specific market conditions
prospective profits. Consider a mechanical
downside & unlimited upside) of the
during the project life. An example could
product-based company evaluating the
CUBISMS
FEBRUARY 2012
VOLUME 1
37
reduction in cost in changing the fuel-
to abandon) and exiting by selling off its
must value a large set of mutually exclusive
type (option to switch) used to run their
equipment, etc., if at any time during the
alternatives, and then choose the one with
machines. This reduction is compared to the
project life it foresees the overall present
the highest NPV. Real Options analysis,
cost incurred during switching, to check if
value of all future cashflows to be negative,
however, looks at the problem by using a
the switching strategy is profitable.
thus avoiding the prospective losses in
decision tree approach and then calculating
future.
the overall present value of the project.
iii) Option to Contract: An option to scale
In ROA, there are no mutually exclusive
down operations. For example, consider a
v) Option to Delay: An option to wait for
alternatives, only the present value and
manufacturing firm curtailing operations
some time before taking an action so as to
the decision rule. Example: An illustration
(option to contract) in the event of current
reduce uncertainty.
of a specific business case will provide
losses, but retaining the possibility of
better clarity on the mechanics of the ROA
recovering such operations in future when
Real Options analysis eliminates the need
the market is good. This is a way to reduce
for the multiple comparisons that the NPV
approach.
point-in-time losses thereby increasing
approach can require. Consider, for example,
Consider a mining company that is
total value over the life of the project.
the right to defer the start of a project a
evaluating the extraction of iron ore from
deferral option. If we use the NPV method,
a mine, such that the total project life is
iv) Option to Abandon: An option to stop
we must consider different scenarios
expected to be 2 years. A sample study
operations and exit. An example could
of expansion as mutually exclusive
on the mine, conducted by its geological
be a firm ceasing its operations (option
alternatives. Thus, to solve the problem, we
surveyors, suggests that the mine contains
38
THESMARTCUBE.COM
a total of 2 million Mt-tons of iron ore, of
previous page.
which the concentration of pure iron in the
as undertaking this project would generate

an overall profit, the present value of which
ore is 50%. Thus, the total amount of pure
Assume then that the weighted average cost
is $8.92 per Mt-ton of pure iron produced.
iron in the mine is expected to be 50% x 2
of capital (WACC) over the life of the project
Note the difference between the two
million Mt-tons = 1 million Mt-tons.
is 10% - this is the average cost at which the
methods. The analysis above shows that
company raises the funds primarily through
management might have evaluated the
stock and debt markets.
flexibility to abandon while accepting the
At Year 0, there is an 80% chance of

market prices for iron to be higher and a
20% chance for prices to be lower.
project, which seemed to be a prospective

The value of the project using the NPV
candidate for rejection by the NPV approach.
technique then would be (formula below):

At the end of the first year, a further
investment of $40 million (or $40 per
Mt-ton of pure iron) would be required
to fund those costs incurred over the
second year as (Node B, C). At this point, it
is expected that the uncertainties in the
In this case, the project should be discarded
Also, the project value after including the
price of the iron would be less than what
as undertaking a project would incur an
option to abandon increases by $13.71
it is currently.
overall loss, the present value of which
[8.92-(-4.79)] per Mt-ton of pure iron., and
is $4.79 per Mt-ton of pure iron produced.
the total value of the project from the Real
Consider the case where firm has an option
options valuation is $8.92 Million.
Specifically, after 1 year, it is assumed

that the chance of prices to increase
to abandon the project after first year.
further would have a probability of 90%
In this case, the project would be carried
It should be noted that the above calculation
and that of prices being lower to be 10%, if
further if the prices go high in the first year
does not include the salvage value that
the price at the end of the first year itself
(at Node B). If the prices go low in the first
is received by exiting and selling-off the
is high.
year (at node C), then the project would be
project. The significance of the value of
abandoned (i.e. the option is exercised), as it
the project calculated above could be very
would generate future losses whose present
helpful during the bidding phase .If the
value at C is $ -39 (0.1*60+0.9*(-50)).
bid price of the project in the above case is
If the price at the end of first year is low,

then the probability of high is 10% and
that of a further low is 90%.
above $ 8.92 million, then it is overvalued

When the option is considered so that the
and should not be undertaken. If it is less
expected losses at C are reduced to 0, the
than $ 8.92 million, it is undervalued and
$60 and -$50 at nodes D, E, F and G are
value of the project (including the value of
should be undertaken. For a bid price equal
the expected net revenues generated by
option to abandon) using the Real Options
to $8.92, the project is fairly valued.
selling the manufactured goods at the end
technique would be (formula below):
Based on above, cash flows of $120, $100,
of second year.
The net cash-flows per Mt-ton of pure iron,

along with the associated probabilities
at each node, are shown in the exhibit on
CUBISMS
FEBRUARY 2012
VOLUME 1
In this case, the project should be accepted
This is how real options explore the
39
intrinsic value of projects which might have
ROA ignores the psychological and
consider managerial flexibilities, and are
been discarded by NPV or other traditional
political realities of capital investments
methods as a result of their not valuing the
since the assumption is that the company
associated flexibility of abandonment.
will be able to abandon/scale up etc as
A real options approach helps explore these
required which may not be practically
intangible values. Valuing real options uses
feasible in a very short time
complex methods but they dont obscure
Thus, diligent pre-valuation assessment is

required to identify all possible flexibilities
and value them correctly.
simple intuition where appropriate, real

Data availability issues could hinder the
ability to generate accurate price forecast
The above mentioned illustration was
production output figures that drive
a simple case of valuing the optionality
revenues.
embedded in the project though there could

be much more complex scenarios where
passive approaches.
options can certainly help make intelligent

and informed capital budgeting decisions.
Nikhil Agarwal, Quantitative Services Practice

Artwork, veer.com/ ImageZoo Illustration
Other issues could arise due to the model
use of standard financial option valuation
bias. The assumptions used by the model
methodologies like Black-Scholes (with
in the valuation might not be realistic;
certain modifications), Binomial Cox-Ross
and this could lead it underestimation
Rubinstein, Monte Carlo, etc. are required.
or overestimation of correct values

for the project. An example for these
CHALLENGES TO THE
APPROACH:
assumptions could be the constant

volatility of the underlying prices
While the ROA approach has significant
That said, valuing investment opportunities
advantages, there are certain challenges to
under situations of uncertainty using
it as well:
traditional methods does not adequately
Important Notice: This Communication has been prepared by The Smart Cube (TSC) on an independent basis and the insights included
are based on its own research and from sources believed to be reliable. The views mentioned in this communication do not in any way
constitute investment advice and should not be construed as an offer to sell, a solicitation to buy, or an endorsement or recommendation
of any company, security or commodity. TSC disclaims all responsibility for investment decisions based on the content of this
Communication or the dissemination or distribution of this Communication to a third party. Also, any conclusions, calculations or
determinations reached constitute TSCs views as at the date of this Communication and are subject to change without notice.
This Communication may not be reproduced or distributed (in whole or in part) to any third party under the name of or using the
trademarks, trade names or service marks of TSC without the express prior permission of TSC.
40
THESMARTCUBE.COM
Technological
Convergence
A Snapshot Perspective
he last decade has seen the
to transmit voice and data between two
next phase of evolution in consumer
advent of technological
users.
electronics.
convergence across different

platforms, products, and
Consumers growing up during the 1970s
Today, we are seeing Technological
capabilities reducing the gap between
and 80s will remember the emergence
Convergence occurring at a most
consumer electronics, telecom, and
of gaming consoles and its popularity
accelerated rate. This article presents a
computing industry. Historically, the
surge in the 1990s with the launch of
snapshot introduction into the concept of
emphasis had been on stand-alone products
PlayStation by Sony. The early consoles
technological convergence what it is and
focused on a single activity:
were only dedicated to playing games and
its impact.
did not provide additional features.
DEFINITION
In 1956, the worlds first automatic

mobile phone system was launched,
Similarly, it was during the 1950s that
known as MTA (Mobile Telephone System
TV gained prominence as a popular
Technological Convergence can be defined
A), which was developed by Ericsson and
source of entertainment. In 1952, the
as the interlinking of various computing,
weighed 40 kilograms. Since then, and
first three-dimensional (3D) movie was
information, media, and communication
for several decades, the primary purpose
produced. About 60 years later, 3D
technologies. The following graphic depicts
of mobile telecommunications had been
television was introduced signaling the
the core elements at play:
CUBISMS
FEBRUARY 2012
VOLUME 1
41
IN PRACTICE
wireless) are examples of multi-play
oriented devices with an aim to serve
services.)
multiple purposes. The most prominent
In line with this, there has been an

emergence of multi-play services, which
is a combination of various services in one
examples include:
THE EMERGENCE OF
TECHNOLOGY GIANTS
device.
Apple, which started its journey in

the computing industry and started
Behind these technological developments,
producing phones, music players, tablets,
(Triple play (voice, video, and data) or
we have seen the rise of technological
and TV
quadruple play (voice, video, data, and
giants that offer a multitude of consumer-
42
THESMARTCUBE.COM
TECHNOLOGICAL CONVERGENCE IN PRACTICE

Mobile Operating
The launch of mobile operating system (MOS) ushered a new era in consumer technology, wherein, the same operating
System
system (OS) is employed in multiple devices
Apples MOS, known as iOS is used in Apples tablets, phones, music player, and set-top player. Also, all these devices
have similar external functionalities and internal features
Similarly, Android, a MOS launched by Google is now being used for smartphones, netbooks, tablet computers, Google
TV, and other devices. Recently, Google launched Androids Ice Cream Sandwich, which serves as a standard platform
across all devices, with the user interface changing with each particular device
Gaming
Gaming consoles have evolved into multifunctional entertainment centers that can be connected to the internet, and
high-definition video can be played with HiFi sound. An example is the PlayStation Network, an online multiplayer
gaming and digital media delivery, provided by Sony for use with its PlayStation 3, PlayStation Portable, and
PlayStation Vita gaming consoles.
Microsofts Xbox console was the first game console to have a built-in hard disk drive, which allowed users to store
games and download content from Xbox Live. Microsoft also launched Kinect, a motion sensing input device for their
game console, which allows users to interact and control the console using gestures and spoken commands!
Smart TV
Smart TV is currently being offered by Samsung, LG, Toshiba, Philips, Sharp, and Panasonic. It is a combination of
internet and web-based features that have been enabled into television sets and set-top boxes. In addition to offering
services of a regular television set, they allow consumers to search and find videos, movies, photos, and other content
on the web, TV channels, and hard drive. Viewers can also install and run applications or plus-ins based on a specific
platform
Google has also significantly expanded

its product offerings beyond its core
mobile operating system, search engine,
Further, the landscape continues to evolve
and music players in the market.
with new technologies and up-gradations,
web search engine to the mobile and

television industry
apart from industry consolidation to break

These organizations have driven the shift
independent silos.
in the utility of devices from single-use/

Microsoft, which has been slow to catch
technology which existed in independent
this bandwagon, is now looking to move
silos to multi-purpose devices that blur the
beyond their cash cow productsWindows
gap between industry verticals.
and Office. They have also launched their
CUBISMS
FEBRUARY 2012
VOLUME 1
THE WAY FORWARD

As this article goes to press, it is being
speculated that Apple will launch its
43
Event
Google-Motorola
Deal
Description
Impact
In August 2011, Google acquired Motorola

Mobility for about $12.5 billion. The
Google has entered the mobile handset business and it is also

expanding its set-top box offerings.
primary reason for the acquisition was

17,000 patents held by Motorola
It is being speculated that Microsoft may acquire RIM to challenge

Apple and Google and establish itself in the mobile handset business.
Newer versions
Apple is planning to launch iPhone 5 in
and continuous
2012, which would be the fifth version of
updation
the popular smartphone in the last five

years
Companies are launching newer versions of their operating systems/

software due to the intense competition.
In the near future, evolution in technology would occur at an even more

rapid pace, with each company wanting to outperform their competitor
Since its launch in 2007, Google has

released several versions of Android, with
the latest version to be launched across
several devices in 2012
In September 2011, Microsoft launched

Windows 8, its newest version of its
operating system, which can be used on
both tablets and PCs
Samsung to
Samsung is planning to launch a
launch 2 Ghz
smartphone in 2012, which will have a 2
smartphone
GHz dual core CPU, which will provide the
It will make the smartphone twice as fast and provide it the power of a
regular PC
handset with data processing capabilities

of a regular PC
first TV soon, which would bundle cable
can be downloaded to multiple Apple
However, the speed and breadth of evolution
television, game consoles, 3D viewing, and
devices, such as iPhones, iPods, iPads, and
is, as it has been so far, quite unpredictable.
also allow viewers to share what they are
PCs. Microsoft has also launched its cloud
watching and playing on the television.
computing service, SkyDrive, which can be
Kartik Puri and Yash Rai , Strategic Services Practice
integrated on their Windows Phone.

The integration of cloud computing with
consumer electronics could be the next
In the near future, we can expect to witness
phenomena, with the launch of Apples
greater compression and integration of
iCloud allowing users to store data that
online services and hardware capabilities.
44
THESMARTCUBE.COM
info@thesmartcube.com.
CUBISMS
FEBRUARY 2012
VOLUME 1
45
The Key to Establishing Procurements

Credibility within the Organization
The last two decades have seen a sea
force, in this context, is information,
professional has to have been able to
change in the Procurement functions
or more specifically, intelligence. Not
speak the language of Finance, coupled
(and the Procurement executives)
to be confused with data or technology
with that of Strategy to be able to
standing within the organization. No
(though both are contributing elements),
analyze and assess not only the value
longer the proverbial back water
intelligence in this context means data
chain and associated inherent risk
department, Procurement now occupies
translated into insight, at the right place
factors (geopolitical, social, regulatory,
an important seat at the executive table
and at the right time.
economic, etc.) of their products but
a development that has been driven
also the business and financial viability
Consider the following, not uncommon
by two interrelated factors. The first is
of their strategic suppliers. Is your team
scenarios (and ask yourself if this is the
the clear realization of the value that the
effectively equipped to do this?
case in your enterprise):
function can deliver to an organization
The traditional approach to intelligence
Marketing
services
accounts
for
and by value, we dont simply mean
has been for executives to rely on
a sizable portion of spend in many
cost savings and thereby direct profit
experience to inform their decisioncorporations,
is typically
controlled,
The last 24 (which
monthsishas
undoubtedly
gressive organizations are thinking more
A key reason yet
for itthis
is that this
improvement
certainly
the
making. Some others go one step further
andsimply
managed
outside
Japanese
ofOverview
Japanese Crisis Impact on Chemical Industry
been
the most turbulent
typenegotiated
risk is not
a problem
forof broadly, asking themselves a host of key
case)
butone
alsoofProcurements
abilityperito Crisis
and arm their category leaders with
procurement
function the
ods in economic
with
indus- the the
supply
chain or procurement
execexeccorequestions:
contribute
to growth,history,
through
innovation,
information databases useful addargument
being
that
procurement
new
product
development
more. The utiveit is an issue for senior mantries
(and their
constituentand
companies)
Do we understand the risk profiles of
man
ons,
to
be
sure,
but
still
only
part
of
Japanese economy is likely to slow down in near future
driven
by
low
industrial
output
Supply
of
PVC,
styrene
monomer,
and
paraxylene
tightened,
especially to Asian
doesnt
the complexities
and
second
the flip
side of thislevels
coin agement
acrossfactor
the is
globe
experiencing
as understand
a whole. Consider
Auto
our top 50
thesuppliers?
solution. While this may have been
ofworld
the function.
Is this the
the
marked improvement
in the caliber Partsrequirements
and weakened demand
of uncertainty
that were unfathomable
producers the
over, markets
whose
If so, is acceptable
this an active
program
thatadvent of a
in the
past, the
in youris enterprise?
Have you
of mere
the function
its resulting
ability to verycase
months and
earlier.
In many respects,
existence
being threatened
by (theis beingrange
periodically
updated
and
of forces such as globalization,
Japanese Crisis and Impact on Keydeliver
Industries
professional)
a
Chemical Industry
to thecritical
value skill
creation
remit.
the most
of management
the procurement
problems of organizations
alldeveloped
along
refreshed?
market consolidation, greater
critical understanding
the market Are we supply
recent
timesnot
has
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been the
abilchain, who areofextending
integrating
both qualitative
In in
other
words,
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it be
cleartheiritsvalue
market
complexity,
increased
size,
structure,
dynamics,
On March 11, 2011, Japan was struck by a strong earthquake and a tsunami,
ityprocurement
to deliver superior
performance,
but it payment
terms
on
payquantitative
considerations
when
pay
emerging
Chemicaland
production
has been
severely
disrupted
Epicenter
of or defaulting
Key Affected Chemical Plants
that
can
deliver
value,
but
competitiveness
in
most
industries
as
bringing down ports, airports, manufacturing facilities, nuclear power stations,
developments
trends,
pricing models
the
rather
theaffected
ability
altogether;
or and
the raft
of manufacassessing
risk?as the
manufac
A majority
of oil refineries
andemerging
petrochemical
producers
shut
Most
clearly
must
be abletotoensure
deliverpredictable
that value. ment
well
interplay
withhave
other
and other basic infrastructure (such as roads, railways, and water supply)
earthquake;
at play, the supplier landscape,down
and their
performance.
This
Areplants
we corporate
looking
atfunctions
risk damages
not (be
onlyor
due to reported
as a precautionary
region is home
to has been especially turers (from any number of industries)
it atwith
Finance,
magnitudeIs this to a level where you can
This
ability
to
deliver
value
is
itself
a
beyond?
The affected regions account for about 8% of Japans GDP and are a major
major
industrial
measure
relevant in not only public enterprises in 9.0
Asiaon who
are unable to secure the
a company
specific
level but
Richter
Legal,
Marketing,
HRrather
or otherwise)
manufacturing hub for chemical, automobile, and electronics equipment
zones
in
Kanto,
function
ofpredictability
two
intertwined
the
engage
in discussion
and debate
with across the
Chiba, Fukushima, and Ibaraki
(where
of forces
earnings
is required
credit
to fund working
entire value
chain?
capi
scale
capiFive refineries,
accounting
for
22%
ofrigorous
Japan's refining
capacity, have
demands
a more
and disciplined
industries
Kinki,
andindividuals
Tokai
prefectures (the most affected
caliber
of the
within
the
your marketing
about
the
been shut,
a tightening
polymer feedstock supply
paramount)
but in private
organizatal requirements
and counterparts
thus stay in busi Is indicating
the process
of risk of
management
busi
approach.
regions) are major chemical Power shortage and damaged production facilities are likely to reduce annual
function and their ability to effectively
merits and demerits of working with a
Stability in an
Age of Turbulence
Managing Supply Chain Risk as a Means

to Ensuring Consistent Performance
tions as well, where cash flow consider-
ness; or even the OEMs and Electronic

integrated
withabout
our 2-3
ongoing
Damage repair
will take
monthssupply
considering the extent of
producing areas of Japan
specific setservices
of vendors,
technologies,
The
implication
is simple procurement
damage to
the and
plants
Manufacturing
providers,
who
chain
sourcing
activities?
solutions?
intelligence
is a keyinformaenabler to the
Chiba has five major ethylene
operate
in global, virtual, outsourced
Clearly,
getting
The chemical
industry
is likelyquality
to continue
suffering from closures,
success
of
the
function,
and
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plants while Ibaraki has
performance models
supplierand
outages,
answer
questions
cannot
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chaintoissues,
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lack of
power supply
in the near term
slow
From aWhile
caliberpredictable
of the individual
In where
many direct
indirectslowspend
The wound will be deepened as economies worldwide are banning the import of
Japan's biggest ethylene plant
force
in being able
to achieve an
perspective,
thebylast
two decades
have downs
categories
from IT could
applications
is influenced
a multitude
of factors,
and bankruptcies
threatpointimporter
solutionmost
markets
Japan be
is aamajor
of naphtha
and an are
exporter of propylene,

Japanese food from radiation-affected areas
(operated by Mitsubishi
Mitsubishi Chemical,
organizations
operational
goals.
seen
of the
progressive
to specialty
chemicals
the basis
onethe
of emergence
the most critical
and
visible over en their
ability to
deliver to their
end
simplyand
toostyrene
dynamic
to allow
for disruption
this.
paraxylene,
monomer
in Asia;
in these plants is
Chemical)
Kashima
However,
integrating
such
intelligence
The country will need considerable funds to import steel-making material
expected
to hit exports
to
Asian
markets
procurement
executive
an
individual
for
evaluating
market
and
pricing
the
last
year
has
been
the
area
of
Supply
customers.
While
these
arent
all
issues
Instead,
quality
information
must
be
(primarily iron ore and coal), construction
ion equipment for rebuilding, and coal
into
everyday
category
management
Mitsui Chemical,
who
is driven
by several
success
is to have
fundamental
Chain
Risk. Our
global, key
interdependent
thatmovements
the Procurement
teama alone
part ofwill
a structured
frame-demand for suppliers
can
Closedobtained
chemical as
facilities
result in sluggish
and crude oil to meet lost nuclear power capacity
operations
requires
a
diligent,
structured
Ichihara
feedstock
(such
as are
naphtha)
to Japan,
traits:
strongenvironmentwith
leadership skills, aits
clear
bias resolve
understanding
the economics
economic
comon its own, of
Procurement
is,exporting
asbehind
work
of activities
that
embedded
into resulting in declining
Rebuilding is estimated to cost about $300 billion (about 6% of GDP)
approach involving a host of factors,

prices
forplex
action,
objective
andand
dispassionate
the category itself. Is this the case
inof feedstock
web an
of
relationships
dispersed
operational processes.
Impact
on Availability
and Prices the British like to say, at the sharp end an organizations
Maruzen Petrochemical,
The need for exorbitant funding, couple
coupled with restricted exports, will push
from having the right information
view
of their
remit (inmade
this case,
your
enterprise? Do you understandSuch
the a framework
value
chainshas
this aspend
criti- of the
game.
must be multi-tiered,
dismal (-) 0.4% to 0.3% in 2011
national GDP estimates to a di
Major Restraints to Industrial Recovery
Japanese Crisis Impact on Application Industries Goi
sources to acquiring the right skillsets
andcalthe
related supplier
makeup
cost drivers
for, say,
specific
challenge
over the relationships),
last
decade. The
ItPrice
is noofsurprise,
therefore,
that
and look
acrossonthe
entirety of
thePrice
catIndustry
Affected
Availability
Chemicals
Impact
Availability
and
to
partnering
with
the
right
external
andrecent
an underlying,
unrelenting
classes
of legal
services,
impact
Idemitsu Kosan, Chiba
economic turbulence
hasadherence
simply supply
chain
executives
are the
becomegory or commodity
in questionfrom
Tonen
Chemical
Availability
Price
vendors,
and
beyond.
Only
then
can
the
Steel network
to raised
the principle
of lowest
total cost. to
ofmuch
labormore
ratesKey
acrosselectronic
different
states,
the stakes.
ingrecovery
aggressive
in tackthecomponents
value chain level through
to the
indi- to see
Power outages and a damaged supply chai
chain
an
impediment
are
likely
ee a price increase driven by reduced
supply
Chemical,
Procurement function
realize and
deliver
Propylene
Paraxylene and Styrene
Sumitomo Chemical,
Kawasaki
across
regions,
Its no
this issue.practices
The starting
point,
very and
vidual supplier level. In addition, a clear
Reduced exports will impact the pr
prices and availability of steel,
However,
the surprise,
ability oftherefore
such an that, as lingworking
on its full potential.
Monomer, the most
Automobile
Anegasaki Sodegaura
Paraxylene
the
distribution
of
activity
by
work
type
hot
topics
go,
Supply
Chain
Risk
is
one
clearly,
is
quality
information,
and
while
understanding
of
the
types
of
questions
chemicals, automobile, and electronics components globally
Mitsui Chemical,
individual to capitalize on the
exported chemicals in
differentrecognize
levels ofthis,
aStyrene
law
firm?
Forasked
a free
our Impact
upcoming
white
Monomer
ofComponents
thetohottest
in management
today.
mostacross
professionals
prothat must be
tocopy
truly of
understand
Osaka
JX Nippon Oil &
Mitsubishi
Japan, are expected
to
opportunity
at hand
depends
on
how
Japan Crisis MajorElectronic
Restraints
Industrial
Recovery
on Application
Industries
industrial production by a whopping 15%
deploy
tools
at precedence
their disposal
ationsthe
have
taken
overtomany
deliver
other results.
priorities.
Japan is a major exporter of steel, chemicals, automobile, and electronicsthis

tragedy will take a toll on export income
5
2
paper on this topic, please contact

Energy, Kawasaki
Chemical,
be impacted
Ethylene
well he/she can effectively deploy the
One of the most prominent
operations/
Yokkaichi
significantly
Port facilities have been disrupted, with about 13 Chemicals
tools available to them to enable action
procurement issues
over the
last rely
24 heavily on sales@thesmartcube.com.
Naphtha
Global industries
Japanese manufacturers for the supply of production
uction components; as a result, besides steel, au
automobile, electronics, and
1
ports reporting damages; these ports account for
Refineries affected
and realize results. InSevere
other words,
it
months has been that of Supplier
Riskindustries will feel the heat
many other
power shortage as the country had to chemical,PVC
7% of industrial output trading
isnt simply the availability
theseveral
tools
and
its Major
resultant
(potentially
2011
The
Smartnuclear
Cube.Analytics
All power
Rights Reserved.
shut of
down
plants
application
industries Steel: Hot Rolled Heavy Plate is used in shipbuilding and Galvanized Sheet is used in automobile and construction;
Chemical:
These ports typically handle crude oil, coal, rubber,
2011 The Smart Cube. All Rights Reserved.
5
but the ability to knowafter
howthe
to quake;
use nuclear power
debilitating
impact)
on the
supply
accounts
for Paraxylene
is used in textile and packaging and Styrene Monomer is used in construction and packaging; PCB and Silicon Wafer: Silicon Wafer is used in NAND
paper, machinery, and sugar
30% of power chain.
supply The progressive
Flash, DRAM
and semiconductors and PCB is extensively used in a majority of electronic equipments
them and to what end. The galvanizing
procurement
wi lead to congestion and
Damaged port facilities will
Power cuts will in turn hit the countrys
restrict access to export markets
Impact on Steel, Chemical and Component Industries
industrial output as several plants will have
Some of the ports are severely damaged and are
to be idled or operated below capacity to
likely to remain non-operational for several months
www.thesmartcube.com
sales@thesmartcube.com
save power
Key Steel Users
Impact
Key Chemical Users
Impact
Key Components Users
Impact
Ravaged
Ports
Power
outages
4
Disruption in logistic networks has
restricted the movement of supplies within
Japan, along with limiting access to ports
for imports and exports
Broken
Roads and
Railways
The Japanese
Crisis
1040 % of power supplies will remain

affected for about six months
Shipbuilding
Textile
NAND Flash
Automobile
Packaging
DRAM
Construction
Construction
Semiconductor
The Key to Establishing Procurements

Credibility within the Organization
Nuclear
Radiation
Fear of nuclear radiation has forced

Broken roads and railways have made
companies to suspend production and
commuting a pain point for workers
evacuate workers from the region, with a
Damaged
temporary halt of operation till the actual
The country is a major exporter of steel
Japan primarily exports paraxylene and
Plants
impact of nuclear radiation is gauged to construction, shipbuilding, and
styrene monomer, which are used in the
3
automobile industries
textile and packaging industries; the
Canal
The lastand
twochemical
decadesThe
haveSuez
seen
a sea Strategic
force, inImportance
this context, is information,
professional
has to have been able to construction industry also uses styrene
Shipbuilding and
automobile
Several major automobile, electronics,
plants
have
manufacturers
largest
sustained major
damages
change
in the Procurement functions
or more specifically, intelligence.
Not are the
speak
the consumers
language of Finance, coupled
of technology
Japanese steel (by
volume)
will to be able to
The road ahead remains bleakthese
plants might
be
(and the Procurement
executives)
to be confused with data or
with
that ofand
Strategy
suffer from price
increases
discontinued or run standing
on lower within
capacities
the organization. No
(though both are contributing elements),
analyze
and assess not only the value
Impact of the Protests Across

Egypt & The Arab World on the
Global Economy
The NAND and semiconductor

markets will face supply shortage as
Japan is a leading supplier of these
The equipments
Suez Canal Strategic Importance
The global PCBs market will take a
hit amid the short supply of BT resin
from Japan
The Suez Canal is a strategically vital trade route as it connects the Middle East with
Even a small spike in oil prices, driven by an escalation of tension in Egypt, would have
longer the proverbial back water
intelligence in this context means data Europe
chain and
associated
and
Asiainherent risk
an inflationary impact, especially on large importers
suchProcurement
as China,
US, India
department,
now occupies
translated into insight, at the right place
factors (geopolitical, social, regulatory,
3
an important seat at the executive table

Potential
a development that
has been Outcomes
driven
Degree of Impact2 if the Suez Canal is blocked
Amount Transported (in terms of tonnage)
Electronic Products,
Toys & other
Finished Products
Importance of Suez Canal
Suez Canal
function can deliver to an organization

and by value, we dont simply mean
Crude Oil and

Derivatives
Agricultural
Commodities
Copper
Iron
Ore
Low
12,000 km
The traditional approach to intelligence

14 days
has been for executives to rely on
experience to inform their decisionimprovement
certainly
thefacing large inflationary
South America(which
to Asia is
are
currently
making.
Some
others
Around
Africa via
The Cape
of go one step further
negotiated
and
managed
outside
of
case)
but also
Procurements
ability
tobe very difficult to manage
pressures
and the
added burden
would
and arm
theirtocategory
leaders with
Good
Hope:
London
The
the procurement function the core
contribute
to growth,
through innovation,
without impacting
growth
Arabianinformation
Gulf
databases useful addargument being that procurement
new product development and more. The
ons,
to
be
sure,
but
still
only part of
Rise in crude oil prices could have an impact across
the
globe
20,900
km
doesnt understand the complexities and
second factor is the flip side of this coin
the
solution.
While
this
may have been
requirements
ofinthe function. Is this the 24 days
marked
Balance improvement
of trade and exchange
rates would
get affected
the
in the caliber
acceptable in the past, the advent of a
short and
termits
asresulting
a surge inability
crude to
prices case
would
inimpact
your enterprise? Have you (the
of the the
function
range
of
forces
such
as
globalization,
on remit.
account of higherprocurement
spending on oil
professional) developed a
delivergovernment
to the valuedeficits
creation
supply market consolidation, greater
critical
understanding
Cost of production of goods would increase,
placing
pressure of the market The Suez Canal reduces the
Inother
words, not only should it be clear its size,
market complexity, increased
structure, dynamics, emergingdistance
on producers to increase prices as they strive
to sustain
between London and
that procurement
can deliver value, but it
competitiveness
in most industries as
developments and trends, pricing models
margins
the Arabian Gulf sea by 43%;
clearly must be able to deliver that value.
as Suez
the emerging
interplay with other
closurewell
of the
Canal and
at
play,
the
supplier
landscape,
and
Monetary tightening by the governments, especially those
corporate
(be it with Finance,
SUMED
Pipelinefunctions
would add
This ability
to
deliver
value
is
itself
a
beyond?
Is
this
to
a
level
where
you
can
battling inflation currently
Legal,
Marketing,
of transit
aroundHR
theor otherwise)
function of two intertwined forces the
engage in discussion and debate with 8,900 km
demands
a more
and disciplined
Corporate
earnings, within
equity,the
and bond valuations
would also
of Africa
viarigorous
the
caliber
of the individuals
your marketing
counterparts about the continent
approach.
get affected following the rise in basic commodity prices
Cape
of Good Hope
function
and their ability to effectively
merits and demerits of working with a
The global economy would have to bear the brunt

of this oil services
price
Marketing
accounts for
increase with prices of related and essential commodities increasing

a sizable portion of spend in many
7 February 2011
cost
savingsupand
therebyprices;
direct profit
and driving
consumer
many emerging markets, from
corporations, yet it is typically controlled,
Liquefied
natural Gas
deploy the tools at their disposal to

deliver results.
Low
Impact on Prices of Products3
Note 1: The information in the above quadrant has been provided based on TSC analysis; crude oil and
its derivatives are likely to witness the highest price fluctuations if the Suez Canal is blocked;
electronic products, toys, and other finished products account for more than 50% of the
transacted volume via the Suez Canal
Note 2: The size of the circle represents the impact of these categories on the global economy
Note 3: Products include crude oil, electronic products & toys, iron ore, agricultural commodities
Source: TSC Analysis
Ocean Routes
economic,
etc.) of their products but
the business and financial viability
Consider the following, not uncommonVia thealso
Suez Canal: London to
8 All Rights Reserved.
2011
Theright
Smarttime.
Cube.
and
atthe
twooperations
interrelated
factors.
The first
is and thescenarios
of their
strategic suppliers. Is your team
by
If the
across
the Suez
Canal
SUMED Pipeline
areyourself if this is theThe Arabian
(and ask
Gulf
the
clear realization
of the
that the
effectively equipped to do this?
disrupted,
crude oil and
its value
derivatives
would be
impacted
most
case
in yourthe
enterprise):
High
High
specific set of vendors, technologies,

solutions?
Cape of Good
The implication is simple procurement
Hope
Arabian Gulf
The Suez Canal is located in Egypt and is controlled and

maintained by the Suez Canal Authority (SCA) of the Arab Republic
of Egypt
The Suez Canal facilitates transportation between Mediterranean
and the Red Sea
The SUMED Pipeline, or Suez-Mediterranean Pipeline, provides an
alternative to the Suez Canal for those crude oil cargos too large
to transit the Suez Canal

intelligence is a key enabler to the
success of the function, and a central
From a caliber of the individual
In many direct and indirect spend
force in being able to achieve an
perspective, the last two decades have
categories from IT applications
organizations operational goals.
seen the emergence of the progressive
to specialty chemicals the basis
However, integrating such intelligence
procurement executive an individual
for evaluating market and pricing
The
of going
aroundmanagement
the Cape of Good Hope is not just the extra fuel consumption but also the related increase in insurance premium
intocost
everyday
category
who is driven by several key success
movements is to have a fundamental
operations requires a diligent, structured
traits: strong leadership skills, a clear bias understanding of the economics behind
involving a host of factors,
for action, an objective and dispassionate
the category itself. Is this the case in Source: TSCapproach
Analysis
from
having
the
right
information
view of their remit (in this case, spend
your enterprise? Do you understand the
4
sources to acquiring the right skillsets
and the related supplier relationships),
makeup of cost drivers for, say, specific
to partnering with the right external
and an underlying, unrelenting adherence
classes of legal services, the impact
vendors, and beyond. Only then can the
to the principle of lowest total cost.
of labor rates across different states,
Procurement function realize and deliver
working practices across regions, and
However, the ability of such an
on its full potential.
the distribution of activity by work type
individual to capitalize on the
across different levels of a law firm?
For a free copy of our upcoming white
opportunity at hand depends on how
paper on this topic, please contact
well he/she can effectively deploy the
One of the most prominent operations/
sales@thesmartcube.com.
tools available to them to enable action
procurement issues over the last 24
and realize results. In other words, it
months has been that of Supplier Risk
isnt simply the availability of the tools
Analytics and its resultant (potentially
but the ability to know how to use
debilitating impact) on the supply
them and to what end. The galvanizing
chain. The progressive procurement
www.thesmartcube.com
sales@thesmartcube.com
To receive periodic reports, briefings and updates from

The Smart Cube, please email: info@thesmartcube.com
Visit our blog at www.thesmartcube.com/insights/blog/
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2010
ABOUT THE SMART CUBE

The Smart Cube is an international award winning global professional services firm that provides customized
Financial, Business & Market Research, as well as Analyst support. Our core goal is to deliver the insights that help our
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VOLUME 2

STRATEGY & TECHNOLOGY

FINANCE & RISK

The iPadA Disruptive Technology and its

Real Option Analysis: A Multi-faceted Approach to

Efficient Capital Budgeting

MARKETING & SOCIAL MEDIA

PROCUREMENT & SUPPLY CHAIN

The Premium Beauty Care Industry in

Social Media and Procurement: A High-Level

WELCOME TO CUBISMS 2012

STRATEGY & TECHNOLOGY

FINANCE & RISK

The iPadA Disruptive Technology and

Real Option Analysis: A Multi-faceted Approach to

its Impact on Business ....................................................................................... p.4

Efficient Capital Budgeting....................................................................p. 36

On the Cover: So what is ROA? ROA is an active investment approach

market and captured approximately 95% share of the nascent

that captures the value of management flexibility in response to

category, with 15 million units sold.

changing market conditions such as changes in operating costs,

the firm, market competitiveness etc.

A Snapshot Perspective ................................................................................p. 41

MARKETING & SOCIAL MEDIA

PROCUREMENT & SUPPLY CHAIN

The Premium Beauty Care Industry

Social Media and Procurement:

A High-Level Perspective ..........................................................................p. 24

On the Cover: Within the Procurement space, in particular, there has

likely to exhibit accelerated growth over the next decade by

been significant emerging interest in social media as a potential

analyzing changes in GDP per capita and the current demographic

Is the Manufacturing Sourcing

Model Changing? ..................................................................................................p. 29

Social Media Marketing...............................................................................p. 10

COVER STORY: STRATEGY & TECHNOLOGY

The iPadA Disruptive

pples iPad exploded on April

iPad had defined the tablet market and

environment. Pro enterprise enhancements,

3, 2010 with sales of 300,000

captured approximately 95% share of the

such as mobility device management

units in the first day and close

nascent category, with 15 million units sold.

(MDM) and over-the-air (OTA) deployments

to 4.19 million devices in the

But the devices potential has exceeded the

of in-house applications have furthered the

consumer market to reach into the corporate

image of the iPad as a business tool.

first three months. By the end of 2010, the

EVOLUTION OF DISRUPTIVE TECHNOLOGY

Most Demanding Use

High Quality Use

Low Quality Use

92% of Fortune 500 companies were

The idea of tablet PCs is not new note,

not born out of an innovative idea. Rather

testing or deploying iPads.

for example, the opposition brief filed