Strategy Muse

Pick of the Week 8

INCOME BOOSTING STRATEGIES

InBev an aggressive Belgian brewer, the world's second-largest beer-maker behind SABMiller:
1. It will buy Anheuser-Busch Cos. Inc., largest brewer in the U.S., for $52 billion to create a stronger, more competitive global company with an unrivaled worldwide brand portfolio and distribution network, with great potential for growth all over the world.
2. It will use Anheuser-Busch to gain an effective presence in the U.S.
3. It will sell the iconic Anheuser-Busch beer brand, Budweiser, in emerging markets where it has already established a firm footprint.
4. It will use St. Louis as its North American headquarters
5. It will keep open all 12 of Anheuser-Busch's North American breweries.
6. It will finance the purchase with $45 billion of debt, including $7 billion of bridge financing for divestitures of non-core assets from both companies. It obtained commitments for $9.8 billion in bridge financing to provide it with flexibility on the timing of a stock sale after the purchase.

[Click here for story at Businessweek.com]

[Click here for story at Bloomberg.com]

Acquiring iconic brand = acquiring strong and steady income stream
Gaining effective presence in large market + Selling iconic brand in emerging markets = strong synergic income growth (but perhaps with a little cannibalization of some products)
Keeping all production units open = no production constraints to income growth
Divestiture of non-core assets to finance acquisition = increased focus on core businesses = higher quality income

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Starbucks, the coffee powerhouse, which dropped to the third spot in Brand Keys' annual customer loyalty index, below Dunkin' Donuts and McDonald's in 2008. Before 2007, Starbucks had held the top spot for four years:
1. It will launch a blended fruit drink called the Vivanno that will include banana, milk, and an orange-mango-blend juice, along with whey protein and fiber powder.
2. It will price the 16-ounce smoothie at $3.75 nationwide ($3.95 in New York), more expensive than Dunkin' Donuts' $3.39.
3. It will formulate its new drinks with no more than 270 calories and less than five grams of fat per drink while Dunkin' Donuts' smoothie contains 350

[Click here for full story at Businessweek.com]

Following the health food trend = more income likely from health foods.
But will that attract more customers or merely turn die-hard Starbucks coffee drinkers into Vivanno partisans?

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General Electric, giant engineering company:
1. It is unveiling a retro engine design for the business air travel market promoting a less glitzy technology, a propeller-driven engine as the turboprop market is enjoying a resurgence as an efficient alternative to fuel-thirsty jet engines.
2. It will modernize the engine designs of 85-year-old Czech manufacturer Walter Engines, which was not able to modernize before being acquired by GE.
3. It will attempt to innovate by applying cutting-edge tools to tried-and-tested designs in need of an update to deliver incremental results over a period of years.
4. It will broaden its line of offerings, creating a portfolio of engines ranging in power.
5. It will co-brand future engines in an attempt to merge the best associations of both.

[Click here for full story at Businessweek.com]

More (fuel) efficient product + Co-branding of iconic brands = more customer appeal = more income

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Steelmakers are stepping up overseas takeovers of coal and iron ore mines to combat record commodity prices and ensure that they have access to sufficient supplies:
1. PT Krakatau Steel, Indonesia's largest steelmaker will buy stakes in overseas iron ore producers, preferably in Australia, to secure supplies.
2. ArcelorMittal aims to control about 80 percent of the ore it uses and has also bought stakes in coalmines in the U.S. and Australia.
3. Jiangsu Shagang Group Co., China's biggest privately owned steelmaker is in talks to buy a stake in Brazilian rival Cia. Siderurgica Nacional SA's iron ore unit.
4. South Korea's Posco, the world's third-largest steelmaker plans to secure more than 20 percent of its own nickel to ensure a steadier supply.

[Click here for full story at Bloomberg.com]

Owning inflationary input sources = price gain for every cost rise + steady production by assured supplies = more income

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Sun Microsystems Inc., the world's fourth-largest maker of server computers:
1. It is adding new products to fight bigger competitors Hewlett-Packard Co., International Business Machines Corp. and Dell Inc.
2. It will expand beyond servers after losing market share last year.
3. It gave away Solaris and Java programs, to sell more services and hardware
4. It bought the software maker MySQL AB for $1 billion to enter the database market and gave it another way to make money on software support and maintenance.

[Click here for full story at Bloomberg.com]

New products + freebies = more scope for income

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Wells Fargo, the fifth-largest U.S. bank:
1. It used the sub-prime crisis conditions to add attractive assets and new customers and to increase its market share.
2. It avoided the mistakes of its competitors. Unlike Washington Mutual and Wachovia, it didn't make large bets on riskier mortgages. Unlike Citigroup and Merrill Lynch, it didn't lose big on trading of complex debt instruments.

[Click here for full story at Businessweek.com]

Making hay when it rains indicates the strength to sustain steady income with good business practices

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Microsoft Corp., largest software maker whose profit growth may be stunted this year by a resurgence of software piracy in China:
1. It has increased offices and staff in emerging markets as a way to combat illegal software
2. It is working with local officials, encouraging PC makers to sell computers with legal software already installed, and letting illegal software users exchange their copies for genuine ones at no charge.
3. It helped the U.S. Federal Bureau of Investigation and the Chinese government expose a counterfeiting ring that had distributed more than $2 billion in illegally copied Microsoft software.

[Click here for full story at Bloomberg.com]

Preventing piracy = gaining income (benefits may exceed costs in the long run)

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Raytheon, defense electronics giant:
1. It is trying to win over UAV manufacturers such as Northrop Grumman, as well as the Air Force, by using video game technology.
2. It is borrowing techniques from the video game industry to make it easier for pilots on the ground to fly from afar remote-controlled planes or unmanned aerial vehicles (UAVs) that are taking on larger military roles.
3. It has augmented onboard camera with digital images similar to Google Earth that give the operator an almost 180-degree view allowing an overlay of other data, such as where troops are located, on top of the enhanced view in the same way video games offer players extra on-screen information.

[1. It can reduce costs for the U.S. Air Force by decreasing the frequency of UAV crashes, cutting the time spent training pilots, and shrinking the number of operators required to fly unmanned aircraft.
2. The system has already been used to pilot unmanned boats and submarines.
3. Mining and oil companies also have shown interest installing the product on drilling equipment to reduce the risk for humans working in mines or on offshore platforms.

[Click here for full story at Businessweek.com]

Open mind -> creativity
Creativity -> Innovation
Innovation -> better product
Better product -> more income
Therefore, Open mind -> more income.
QED?

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SK Telecom, Korea's No. 1 mobile-phone operator:
1. Its emphasis is on developing data services and expanding overseas as the South Korean market is saturated.
2. It will continue to buy or forge alliances with local partners to expand its content and mobile financial-services business in the U.S., China, and Vietnam where it has stakes in local mobile operators.
3. It is seeking an acquisition to become a big player in the lucrative U.S. and use its expertise to roll out advanced mobile applications
4. It established a $110 million U.S. holding company last year.
5. It has attempted to strike a deal with Sprint Nextel the struggling U.S. carrier, which has been losing customers and in need of a capital injection. Both companies have invested in the same technology standards, a cellular network using CDMA, and both are investing in wireless technologies such as WiMax.

[Click here for full story at Businessweek.com]

When the home market is saturated, foreign markets may offer additional income streams

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Ebay, the world's largest Internet auctioneer, losing market share to rivals such as Amazon.com, seeks to improve its fixed-price online retail business, grow PayPal and bolster customer safety and trust:
1. It made major changes to its business - a new fee structure based on a percentage of the sale price of items, system of rating sellers, and improved search technology.
2. Its PayPal payments system will soon be reimbursing shoppers for items purchased on eBay's site that turn out to be fraudulent.

[Click here for full story at Businessweek.com]

3. It removed most upfront fees to boost listings and encourage bargain-hunting
4. It is trying to stimulate activity in low-priced items on the site through promotions because they convert at a higher rate.
5. It shifted car advertising onto local classified sites.
6. It is expanding insurance for buyers and sellers using PayPal across the 190 countries
7. It is offering discounts to some big sellers.
8. Its PayPal unit signed agreements with Delta Air Lines Inc. and Blockbuster Inc.

[Click here for full story at Bloomberg.com]

Percentage based fee system = transparent and considerate income stream
Improved customer experiences = more income likely
More targeted advertising = more income
Discounts = more income if it induces volume growth adequately
Partnerships with big customers = more income

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Google Inc., the world's most-used Internet search engine:
1. It will buy 100 percent of ZAO Begun a Russian advertising company controlled by Rambler Media Ltd. for $140 million to tap growth in the country's online ad sales.
2. It has signed an agreement with Rambler to display Google ads next to search results using Google's contextual and search advertising technology on Rambler's Web site to benefit from growing ad sales on Russian-language sites.

[Click here for full story at Bloomberg.com]

Expanding in growing markets = quicker income growth

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Mattel Inc., the world's biggest toymaker:
It may ask a jury for hundreds of millions of dollars in damages for copyright infringement after the panel found drawings for MGA Entertainment Inc.'s Bratz dolls were made while the designer worked at Mattel as it is construed that MGA and its CEO were liable for intentional interference with the designer's Mattel contract as well as aiding and abiding Bryant's breach of fiduciary duty and his duty of loyalty to Mattel.

[The popularity of Bratz, first introduced in 2001, has contributed to a slide in Mattel's Barbie sales.]

[Click here for full story at Bloomberg.com]

Compensation for breach of contract = income to assuage the cost of the breach.
[Creators henceforth beware of what you think up when and where.]

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General Electric, the $173 billion conglomerate:
1. It has bought $88 billion of assets in high-tech growth areas like alternative energy and bioscience
2. It has overpaid for some acquisitions in water, security, and some media properties, such as iVillage.
3. It purchased Weather Channel with its highly trafficked Web site for $3.5 billion financed with the help of private equity firms Bain Capital and Blackstone Group.
4. It has kept executives in the same position longer than the traditional one or two years to enhance industry expertise, customer focus, and innovation.

[Click here for full story at Businessweek.com]

Acquisitions in high-growth areas + trying to enhance team expertise, customer focus and innovation = more income likely
Overpaying for acquisitions may indicate earnestness that may help recover the overpayment, or it may be imprudence.

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Food Companies caught between rising costs and customers with leaner wallets:
1. They are raising prices on only the least price-sensitive items instead of whole product lines
2. They are tailoring prices to various levels of demand in local markets
3. They are tweaking product presentation and packaging in an effort to boost sales volumes.
4. They are backing up price hikes with a higher-quality product that stands apart from its broader food category, such as cereals or packaged cheese - a product that warrants a premium price in consumers' eyes.
5. They are adding value (that can command higher prices) to commodity products.
6. They are focusing more on organic food that allows a bigger profit margin and appeals to the Gen Y market, which has shown a bigger appetite for specialty, ethnic, and natural foods
7. They are using more complex price optimization programs like the on-demand software technology developed by SignalDemand that take not only demand but also supply and product mix into account and can sharply reduce price volatility, and help sell through all the parts when some are more popular than others and cut the price on whatever is in oversupply to bring the business back into alignment with demand.

[Click here for full story at Businessweek.com]

More intelligent pricing and product mix = more income
(Why wait for hard times to resort to more intelligence? Human nature?)

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McDonald's in Europe is upgrading the customer experience:
1. It refurbished the chain's outlets there
2. It created a McDonald's design studio outside Paris to come up with a range of eight design packages from which franchisees can choose.
3. It has replaced the bold red-and-yellow plastic signage with muted facades in dark olive and yellow, and the 1970s-style interiors have given way to more elegant spaces. Retro plastic and Formica fittings are gone, supplanted by wood, leather, and stainless steel. Many outlets are even kitted out with wireless Internet connections and "egg" chairs designed by Danish architect Arne Jacobsen.
4. It will invest $800 million on opening 150 restaurants (up from 80 in 2007) and remodeling existing company-owned outlets.
5. It has redesigned Ronald McDonald play areas into Ronald Gym Clubs to get kids fit.
6. It may import the redesigns to the U.S.
7. It is making the products and entire experience more localized - from management and staffing to menus.
8. Its food innovation lab in Munich is continually tinkering with new recipes to test out in various European markets.
9. It has rapidly rolled out of McCafés - coffee-bars-within-a-store that offer cappuccino and espresso and a range of familiar pastries.
10. It began using kiosks in France where customers can order and pay for their food, because a majority of transactions there are made using debit cards.

[Click here for full story at Businessweek.com]

Pertinent Innovation = more income

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COST SAVING STRATEGIES

Allco Finance Group Ltd., the Sydney-based manager of ships, aircraft and wind farms, which lost more than 95 percent of its market value over the past 12 months as investors shunned indebted companies with complex financial structures
1. It will reduce its long-term debt to A$400 million by June 2009 from A$830 million.
2. It will sell its Tehachapi wind power development in California to cut long-term debt to A$691 million.
3. It will sell its 17.7 percent stake in Allco Commercial REIT and wholly-owned Allco (Singapore) Ltd. for more than A$90 million to cut borrowings.
4. It also strips bankers of the right to recall loans early if Allco's shares fall.

[Click here for full story at Bloomberg.com]

Selling less productive resources + paying off debt = multi-level cost savings

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InBev NV, an aggressive Belgian brewer, the world's second-largest beer-maker behind SABMiller:
1. It will save costs of $1.5 billion annually by 2010 by using its combined size of more than $36 billion in annual sales and 12 billion gallons of shipments to negotiate better terms from suppliers as expenses soar for barley, hops, electricity and metal for beer cans.
2. It will get Anheuser-Busch out of peripheral businesses, and pay off a part of the $45 billion debt taken to purchase Anheuser-Busch Co. by selling off assets
3. It may sell Anheuser-Busch Cos.' theme park for $2.9 billion
4. It may sell divisions that recycle beer containers and make aluminum cans and glass bottles for $1.7 billion

[Click here for story at Businessweek.com]

[Click here for story at Bloomberg.com]

[Click here for another story at Bloomberg.com]

Synergic cost benefits are the minimum that a merger MUST provide
Getting out of peripheral businesses to focus on core businesses = cost savings
Paying off debt = financial cost savings

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Western companies, plagued by rising costs of moving work to their own units in India for the labor-cost reductions are seeking more predictable costs in a time of volatile currency and salary shifts:
1. They are increasingly outsourcing their offshore operations to Indian tech-services specialists. More than 150 companies have shifted in the past few years from running captive operations to using a mix of internally run and outsourced operations.
2. They seek gains in productivity through process improvements and innovation that the top Indian outsourcing companies have mastered.

[Click here for full story at Businessweek.com]

Outsourcing the offshore work = cost saving (but it is a sacrilege of the strategic doctrine of some strategy gurus of retaining strategic uniqueness by not outsourcing business processes)

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General Motors, the world's biggest carmaker, facing falling U.S. sales and Wall Street's demands for cutting some of its eight brands and more action to stem its losses:
HR cuts
1. It will slash white-collar salaried worker costs by 20% by cutting jobs and retiree health-care benefits. It will use mostly early retirement and attrition programs to thin the staff
2. It will eliminate health-care coverage for white-collar retirees over 65
3. It will cut executive bonuses.
Marketing budget cuts
4. It will cut marketing and advertising budgets even though it needs to reach consumers badly as it shifts with them to smaller, thriftier vehicles.
5. It will review sponsorship programs such as motor sports to see if they are still effective.
6. It will look at cutting traditional advertising initiatives like auto racing
Capex cuts
7. It will cut capital expenditures by $1.5 billion to $7 billion.
8. It close more than the four truck plants announced earlier.
9. It will cut an additional 150,000 trucks by the end of next year above the planned cut of 150,000 trucks a year.
10. It will eliminate or delay development of new trucks.
Asset disposals
11. It will sell more assets, perhaps even an equity stake in its profitable overseas operations.
12. It will sell its Hummer brand.
13. It will sell some shuttered factories.
14. It may sell some of its 49% stake in GMAC, the company's lending arm that is jointly owned with Cerberus Capital Management.
Dividend cut
15. It will cut its 25¢-per-share dividend, which should save some $800 million in cash between now and the end of 2009.

[Click here for full story at Businessweek.com]

HR cuts + marketing cuts + capex cuts + disposal of under-performing assets + dividend cuts = serious cost savings
But serious sales of smaller fuel efficient cars to serious customers must be its next big 'Mission Impossible' challenge as GM is not yet seen as proficient in small cars.

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UBS AG, Switzerland's largest bank,
1. It will buy back as much as $3.5 billion of auction-rate preferred shares after being sued in the U.S. for fraudulently selling the securities as low-risk alternatives to cash giving investors their money back in full
[Auction-rate securities were bought by individuals and corporations in auctions run by dealers.]
2. It will finance the repurchases by reissuing the preferred shares in a private placement through a trust that will be consolidated on the bank's balance sheet.

[Click here for full story at Bloomberg.com]

Making amends = lower cost of disrepute (litigation)

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Ebay, the world's largest Internet auctioneer, losing market share to rivals such as Amazon.com, seeks to improve its fixed-price online retail business, grow PayPal and bolster customer safety and trust:
1. It boosted its fraud detections and removed suspect items from its sites earlier
2. It bought Israeli software company Fraud Sciences Ltd. for $169 million to improve PayPal security.

[Click here for full story at Bloomberg.com]

3. Its PayPal unit's fraud detection methods will flag problem transactions before needing to dole out reimbursements, preventing losses from refunds

[Click here for full story at Businessweek.com]

Lower incidence of fraud = lower costs

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Host Hotels & Resorts Inc., the owner of about 130 properties in the U.S. and Europe:
1. It may accelerate share buybacks because of the drop in its stock price
2. It is reducing restaurant hours
3. It is reducing staff
4. It is scaling back discretionary spending
5. It does not expect to buy any U.S. hotels this year
6. It is trying to sell about $150 million of property this year

[Click here for full story at Bloomberg.com]

Share buybacks + reducing low customer hours + lower discretionary expenses + avoiding investment in slow economy + disposal of unprofitable properties = cost savings

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General Electric, the $173 billion conglomerate:
1. It will raise its cost-cutting targets by $1 billion to $3 billion for this year.
2. It has sold more than $55 billion of less attractive plays such as GE Plastics
3. It sold WMC Mortgage after it lost  $1 billion, when the subprime market imploded.
4. It will spin off the struggling Consumer & Industrial Div., which includes its iconic lighting and appliance businesses
5. It is also trying to auction off its $30 billion credit-card unit.
6. It may consolidate some financial services units to simplify GE's structure

[Click here for full story at Businessweek.com]

Disposing of under-performing assets + simplifying corporate structure = cost savings

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For more posts about "How they boost income" and "How they control cost" please visit the URL below:
http://blogs.livemint.com/members/Sourav%20Mitra.aspx