Wharton Term 5

December 20, 2012

Credits Course ID Course Title
1.0 FNCE-731-701 Internatl Corp Finance
1.0 FNCE-899-756 Independent Study Project in Finance
1.0 MGMT-671-701 Executive Leadership: Total Leadership
0.5 MGMT-701-751 Strat & Compet Advantage
0.5 MGMT-773-751 Managing Org Change
0.5 MGMT-802-701 Innov, Chg and Ent
0.5 OPIM-654-701 Product Design&Devel

Strategy And Competitive Advantage Paper

Thomson Reuters – Strategy Overview

Overview of Thomson Reuters

Thomson Reuters Corporation (Thomson Reuters) is one of the leading providers of information for businesses and professionals across the world. Thomson Reuters is organized in the following four key business units, Financial & Risk, Legal, Tax & Accounting, and Intellectual Property & Science.  Financial & Risk division provides news, information and analytics for financial professionals, Legal division provides decision support tools such as software and services for legal professionals, Tax & Accounting division provides tax compliance and accounting information, software and services for professionals and Intellectual Property & Science division is a provider of intellectual property and scientific resources.

Thomson Reuters shares are listed on the New York Stock Exchange (NYSE: TRI) and the Toronto Stock Exchange (TSX: TRI).  Headquartered in New York, Thomson Reuters in 2011 had revenues of US $12.9 Billion and over 60,000 employees in more than 100 countries.  Of the US $12.9 Billion revenue Financial & Risk’s revenue was US $7.49 Billion, Legal’s revenue was US $3.43 Billion, Tax & Accounting’s revenue was US $1.149 Billion, and Intellectual Property & Science’s gross revenue was US $0.852 Billion.

In this paper we will discuss high level strategy for Thomson Reuters but our focus will be on its revenue leading business division Financial & Risk.  For the fiscal year ending December 2011, Financial and Risks (Markets) division increased its revenue by 4.5% over revenue in 2010.  In the Financial & Risk division, Sales and Trading unit accounted for 49.6%, Investment & Advisory for 29.5%, Enterprise for 16.5% and Media for 4.5% of the division’s revenue.  Financial and Risks division accounted for 58% of total Thomson Reuters` revenue.

Industry Analysis

Financial & Risk business segment provides news, financial products and analytics to business and Government professionals worldwide.  We will analyze the industry Financial & Risk business segment operates in by reviewing buyer power, substitution threats, supplier power, new entrants/entry barriers, complementors and industry competitors (intensity of rivalry).

Buyer Power:  Biggest customers of financials products are large financial institutions i.e large banks and investment banks.  Overall financial industry is going through tremendous amount of consolidation which is increasing buyer concentration.  Switching costs of financial terminals, a high margin product, for the customers is very low; many financials professionals are well versed with competitor’s products and can adopt different solution easily.  On the other hand switching costs of data feeds and other products which integrate with workflow of customers is relatively high.  Ability of the buyer to easily find a substitute product, buyer concentration and low switching costs indicates that the buyers have power over Thomson Reuters.

Substitution threats:  Data feeds and financial desktop/web based solutions are two main types of products Thomson Reuters provides.  Data provided by Thomson Reuters is integrated by customers in their databases and is critical in operations of business.  These data feeds are integrated with customer systems using some industry standard and few Thomson Reuters proprietary symbols.  Use of Thomson Reuters’ proprietary symbols and complex backend systems makes substitution of data feeds extremely difficult.  Financial desktop/web based solutions on the other hand are significantly easier to substitute.  Companies rarely have an exclusive contract with Thomson Reuters and customers using financial desktop/web based solutions are well versed with competitor’s products; These factors make substitution a serious threat.

Supplier power:  Top exchanges of the world such as NYSE, NASDAQ, Tokyo Stock Exchange, London Stock Exchange and government bodies such as SEC are main suppliers of data to Thomson Reuters and its competitor’s.  In many cases the suppliers are trying to compete with Thomson Reuters which makes negotiating with them for lower prices very difficult;  for example few weeks ago Thomson Reuters announced that it has reached an agreement to sell most of its corporate services businesses (from Financial & Risk division) to NASDAQ for $390 million in an all cash transaction.  Consistent feed of data from top suppliers is critical for any usable financial product which gives suppliers tremendous amount of power and little to no bargaining power to Thomson Reuters.  On the other hand Thomson Reuters is a high volume buyer for top technology hardware and software vendors.  These technology vendors (suppliers) don’t have much supplier power, and Thomson Reuters should be able to negotiate attractive discounts and payment terms.

Complementors:  Lack of complementors is one of the biggest weakness of Thomson Reuters’  products.  There are little to no suppliers or other products which are exclusively available in Thomson Reuters products.  Based on analysis of product portfolio and functionality offered in Thomson Reuters products it was difficult to find complementors due to which Thomson Reuters customers will value Thomson Reuters products more with these complementary products than when they have Thomson Reuters products or complementary product alone.

New entrants / entry barriers: Industry Financial & Risk division operates in is changing very quickly due to adoption of newer technologies and automation.  For example, a decade ago data feeds from SEC often required manual tagging to improve the quality of documents, providing these value added services required significant capital investment and it was difficult to enter this market but now most of the data coming from SEC is tagged and a new entrant can provide similar services with significantly with less than a tenth of past capital requirement.  Though it is easy to enter this industry by building new products, a large sales network and good brand equity of Thomson Reuters does give it an edge over new entrants with average products.

One key advantage new entrants have is that the product is information which distributed over internet and all new entrants have access to similar distribution (internet), in the last decade some new entrants have entered the market with good products and were able to take advantage of easy of distribution to successfully establish a niche.  As entry barriers continue to fall Thomson Reuters should keep a close eye on new entrants.

Industry competitors:  Thomson Reuters’ Financial and Risk division faces competition from companies such as Reed Elsevier, Bloomberg, FactSet, Standard & Poor, IDC, Broadridge Financial Solutions, Capital IQ, Morningstar, Dow Jones and many others.  These companies are big competitors in their niche and they have huge market shares in the segments they excel in.  There are high exit barriers for any company in this industry because in the current economic environment valuation will be low for assets related to companies providing services to financial industry.  As the customers consolidation causes the overall industry to shrink/stagnate, high fixed costs and high exit barriers will result in increased pressure from competitors as Financial & Risks division tries to grow.

Positioning Analysis

Different dimensions such as data timeliness, data quality, data types (different type of data – also known as data width), data depth (historic information – also known as data depth), production cost, sales cost/margins, and market cost position were analyzed.  For Financial and Risk division, the two dimensions they seem to differentiate on are content width & depth v/s cost position.  Please refer to Exhibit: 2. Positioning Chart.

Content width & depth:  For products providing financial data this is one of the very important dimensions.  Consolidating different types of data into a single product is very useful because it provides our end-user a single platform to perform all the tasks.  For example an associate performing analysis on a company could review company financials, estimates, deals, ownership, insider trades, analyst research reports and other financial information about a company in a single product.  Having this variety of data historically provides Thomson Reuters an edge and provides positioning advantage difficult to match.

Sales Cost / Margins:  One of the biggest competitors of Financial and Risks division is Bloomberg, a privately held company which is also a market leader in high margin terminal business.  When competing with Bloomberg, Thomson Reuters has lower sales price for products with similar functionality and comparable data coverage.

When you look at new entrants and most other competitors, content width & depth v/s sales cost position are very attractive dimensions because on one hand for a new entrant it is impossible to compete with Thomson Reuters on content width & depth and if they try to do that it will be impossible to match the price and still be profitable until they have a very high number of customers.  Though a new competitor could have a niche and could build a better product for a specific use case it is impossible to build something that could match Thomson Reuters’ content width & depth without significant investments for an extended period of time.

Over the last decade content width & depth has consistently been a key dimension for differentiation in the industry.  Thomson Reuters has benefited from this dimension but as advancing technology introduces disruptive changes in this industry, basic content with necessary depth and width will be a commodity and key dimension for future will be content insights (deep analytics of connected data) along with accuracy and timeliness of content.

Based on industry trends one should expect all competitors to implement advanced analytics on their data and the new entrants will collaborate with other smaller players to provide offerings which can plug and play with each other to provide content width they lack when they try to compete alone.

As industry shifts in this direction any company which has better intellectual property (patents etc) will benefit the most and should be able to consolidate its market position.

Activities Implementing Positioning

Two key factors impact positioning of Financial and Risk business:  1. High fixed cost to produce base content and financial systems for first customer; 2. Very low variable cost for new customers.   High fixed costs are associated with thousands of analysts collecting variety of content and large technology staff building IT systems and products, but once the content is collected and systems are built incremental costs as we add more customers is negligible.  Please refer to Exhibit: 3. Activity System for Financial and Risk business, different activities the group performs help implement the positioning of high content width and depth and low sales costs.  Following is description of key activity systems.

Collect wide variety of content (Content with width and depth):  Financial and Risks division has thousands of employees collecting data manually and they are actively looking for additional data sources – i.e. third party data feed providers.  This is a key activity which helps Thomson Reuters differentiate itself in marketplace and provides a key competitive edge.

Content Quality:  Focus on content quality is starting to increase, dedicated quality staff reviews all the content produced by different teams, separate quality staff reviews the products and other offerings to ensure that they are producing best quality content and financial systems.  (Thomson Reuters’ industry reputation is not very strong when it comes to content and financial systems quality and consistency – this should be the focus to drive future growth)

Content Timeliness:  Financial data is almost considered as commodity with little to no value if it is not accurate and provided in timely fashion.  Content Timeliness is a key goal and there are various SLA Thomson Reuters products maintain timely deliver data in timely fashion.

Cost Controls:  Collection of large amount of content and development of complex financial systems has high fixed costs.  To manage fixed costs various cost controls are implemented, such as in senior management, managers bonus is tied to margins maintained and on the other hand content analysts bonuses are based on quantity and quality of data collected.  With its global locations travel is a necessary activity but by adopting various technologies such as audio/video conferences the travel frequency is reduced and for necessary travel employees even sr managers don’t travel in first class.  (Only in a limited number of international flights allow for economy plus or business class travel)

Sales and Support Teams:  With low variable costs for adding new customers there is a large incentive in targeting new customers to increase sales.  There is a large sales and support team working with customers across the world trying to upgrade existing customers to newer products and finding new customers who currently use competitors’ products.  Often Sales and Support teams are dedicated to large customers to provide better customer experience and dedicated staff helps with cross selling other products.

Direct Distribution:  To maintain healthy margins Thomson Reuters provides data and products directly to end users (customers).  This strategy helps with not only maintaining low distribution cost and high margins but it also helps with branding.

Targeted Marketing Expense:  Thomson Reuters has a large customer base across the world but only a certain segment of general population uses Thomson Reuters products so marketing and sales expense needs to be managed very carefully to ensure that they are targeting the right segment and that investment are providing the required ROI.  This activity interacts with cost controls and with the large sales, marketing and customer support teams.

Global Location:  Thomson Reuters collects data for companies across the world from financial documents in different languages and also has customers in all countries with well-established financial markets.  Sales staff is based in all these regions.

Innovation:  Financial data analytics and information system design are key innovation activities necessary in this segment.  Generally Thomson Reuters website and other new releases talk about innovative new products etc though overall marketplace perspective of Thomson Reuters products is that the products are not very innovative and to generate any useful insights customers implement their own analytics and often refer to other products.

Branding:  Thomson Reuters is a big brand name with professionals in its target industry and is very important for the sales of its product. Directly distributing the products via terminal improves brand awareness and content quality, width and depth helps improve the brand value of Thomson Reuters and Financial and Risk division’s products.

Activities Reinforcing Each Other

Automation:  This is a critical activity and is related to different activities and re-enforces other key activities within the company.  Assuming that team automates tasks which were currently done by staff or activities which will be required to be done in near future, implementation of automated systems directly reduces the costs – Automation is key driver of fixed cost reduction.

Automated systems are not only efficient but when implemented correctly also significantly reduces the errors – thus improving the content quality.  Automated systems run on computers and can perform with high efficiency 24 hours a day thus improving the timeliness of content.

Automation activity can be sub divided into different types:

Content Collection Automation:  Data is usually collected by analysts by reviewing financial documents and public websites of companies, government agencies and exchanges.  In this type of automation activity the core task of collecting data is automated.  This can be done by either downloading data from external feeds or by parsing data out of documents automatically.  Recent advancements in technology have enabled both possibility and industry is experiencing significant amount of progress in automation of content collection.

Content Quality Check Automation:  Content quality checks until recently took hours and were largely manual tasks but these can be automated very easily by developing algorithms running on computers in few seconds.  Content quality checks can happen at run-time as analysts enter data to see if they made mistake in data entry, for example if a company had revenue of US $10 Million last years and revenue growth has been 5% – 10% in the previous few years and today if analysts enters US $111 Million as new revenue, an algorithm should be able to quickly check the past revenue, past revenue growth rate and project expected revenue range for next year and if the number entered by analyst is significantly different it can ask analyst to verify the numbers.  These types of error checks will not only help with improving quality of that one data item (revenue) but will also improve quality of other data items which are derived using this underlying data.

This type of automation also improves customer service calls received – thus further reducing operating costs.

Large Content Teams & Low Cost Content Collection Centers:  Providing a variety of data (width) with full historic information is often very manual and expensive task.  Moreover financial data is often very cyclical, i.e. it has very clear peaks and valleys; for example over 90% of annual reports filed by companies are with a week when mandated by SEC.  Quickly collecting all this data is critical to provide data to customers and to manage the various product SLAs.  Large content teams are critical to collect this variety of data in timely fashion.

Managing large teams is critical and it re-enforces other activities such as collection of width & depth of data, collect data in timely fashion and to collect data with high quality.

Large content teams will not only be very expensive in New York city or other part of US but it will also be very difficult to hire all resources with necessary language skills within US.  Having large content teams distributed in different countries reinforces other activities such as:

Content Timeliness:  Global teams allows content collection operations 24 hour hours a day without needing multiple shifts.  Ramp up and ramp down is also easier and cost effective in other countries.

Content Quality:  When collecting data from documents in different languages, having native speakers in different country collect data helps with increasing the accuracy of data collected, thus improving content quality.

Cost Control:  Having large content staff in countries such as India, China and Indonesia significantly reduces the operating (fixed) costs associated with collecting and managing this data.

Competitive Advantage Source

Thomson Reuters is a large organization and key source for competitive advantage is their sales staff and the current depth and width of data.  Current access to customer and existing contracts with customers is a significant competitive advantage because this makes it very difficult for new entrants to replace Thomson Reuters products especially when new entrants don’t have the data coverage to match Thomson Reuters products.

Thomson Reuters brand is also a huge competitive advantage.

Sustainability Assessment

Thomson Reuters announced that it has reached an agreement to sell most of its corporate services businesses (from Financial & Risk division) to NASDAQ for $390 million.  As key suppliers of data to Thomson Reuters enter the market with competing products one should expect Thomson Reuters to exit those markets.  Trying to compete with our suppliers would not only impact other lines of business but as competitive products from suppliers gain critical mass of customers the value of (purchasing) our business which own these products reduces.

Based on current market condition (ongoing consolidation) of financial industry one should expect Thomson Reuters to be conservative with investing more in Financial & Risk division in the year 2013 and 2014.  One should expect Thomson Reuters to have a net divesture in Financial & Risk over the next couple of years while it will continue to invest in targeted/strategic products in Financial & Risk division.

Healthy year-over-year revenue and gross margins in past and consistent growth rate (excluding financial crises) will make Financial & Risk division an attractive target for a Private Equity buyout.

Restructured Financial & Risk division with a leaner operations and faster adoption of newer innovative technologies to deliver content insights (deep analytics of connected data) along with accuracy and timeliness of content will help sustain growth in future and will help Financial & Risk division compete on dimensions important for future growth.


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