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Strategic Management Dr. K. Rangarajan [email protected] INDIAN INSTITUTE OF FOREIGN TRADE (Deemed University) Course Book for the MBA(IB) Kolkata Programme. It is for the exclusive use of the students and academic purposes only.

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Strategic Management

Dr. K. Rangarajan [email protected]

INDIAN INSTITUTE OF FOREIGN TRADE (Deemed University)

Course Book for the MBA(IB) Kolkata Programme. It is for the exclusive use of the students and academic purposes only.

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“Tadrisi jayate budhirvyavasayo(a)pi tadrisah: Sahayastadrisa eva yodrisi bhavitavyata «

(So turns the mind of a person, Likewise turns his business;

It is that, the helpers, too, do a good turn as ordained by providence)

-(Chanakya Neeti, 2.25)

Introduction

The environment that the business organisation faces is increasingly becoming

complex and turbulent, so the need for management sensitivity to change is

growing. A bag full of management techniques alone cannot help the managers

to cope up with such an environment in steering the organisation to success. In

this context the course in Business strategy exposes the students to various

strategic management tools and their effective mix in the organisational functions

so as to evolve business strategies to meet the environmental challenges. It

provides knowledge of operational options, methods and strategies available to

corporate managers operating in a dynamic environment.

Course Objectives

• To provide a comprehensive overview of the concepts widely employed in

strategy literature.

• To equip students with sufficient appreciation of the various models and

techniques developed to facilitate understanding and relating to business

strategy

• To help students recognize the contingent and emergent nature of strategy

formulation at various levels and its implementation.

Course Requirements

This course demands Four P’s from the students: Preparation; Participation; Presence and Pragmatism

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The workload will be heavy. Required readings will consist of cases, selected

articles taken from leading journals and chapters of suggested reference books.

Students are expected to read the cases and other materials provided so as to

participate actively in the classroom discussions which will also be used for

grading the individual performance.

Teaching Method

There is a strong emphasis on dialogue and student participation in discussions.

To get the most out of this course, you need to participate actively in these

discussions. Participation requires preparation before class, attendance in class,

and presentation of your ideas to the class. The case analyses will help you to

develop your ability to think strategically and solve problems. Through applying

the conceptual material to the cases, you will learn how to recognize business

opportunities and problems, acquire and interpret information effectively, develop

creative alternatives, consider the relevant constituencies, and make decisions

that consider short- and long-term outcomes. In addition, the case analysis will

heighten your awareness of the differences across national settings and provide

you the opportunity to utilize a repertoire of practical and theoretical tools. You

will develop an appreciation (and hopefully a greater tolerance) for ambiguity and

alternative points of view, and you will develop a greater sensitivity to the real-

time demands for taking action in the absence of complete information.

The sessions will be a mixture of lectures and case analysis. There will be cases

to understand the applications of strategic management tools. Moreover, some

of the popular strategic tools are assigned to student groups for presentation to

the class with the help of the course coordinator. This will give opportunity to the

students to acquaint with the intricacies of such tools.

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Course Modules

Module I Strategic Management – Basics

• Strategic Management concept

• Crafting a Strategy & levels

• Strategic Mgt Process & Approaches

3 hrs

Module II External & Industry Environment

• Constituents of External Environment

• Framework for Environmental Scanning

• Industry Analysis

5 hrs

Module III Core Competency, Business Models and

B.Plans

• Resources & Competencies

• Allignment of Resources in Value Chain

• B.Models & Stgic Performance

• B.Models ( VS) B.Plans

4 hrs

Module IV Corporate & Business Level Strategies

• Integration & Diversification

• Organic & inorganic Growth strategies

• Cost & Differentiation Strategies

• Functional Strategies and alignment

6 hrs

Module V Tools for Analysis & Applications

• VRIO Framework

• SWOT & TOWS

• BCG & GE

• Strategic Groups & Strategy Clock

6 hrs

Module VI Strategy Implementation

• Organisation for implementation

• Strategy Execution & Control – BSC

• Blue Ocean Strategy

6 hrs

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Course Materials

1. Handouts

2. Selected Cases

3. Reading materials from journals

4. Text Book: Essentials of Strategic Management, Jones & Hill, CENGAGE

Learning, India Edition, 2009.

Recommended Books for Reading and Reference 1. Executing Your Strategy: Mark Morgan & others, HBS Press, US, 2007

2. Strategic Management – Logic & Action – Huff & others, Wiley, US, 2009

3. Strategic Logic; Jarillo, Carlos; Palgrave, New York, 2003

4. Strategic Management: Competitiveness and Globalisation; Hitt, Michael;

Ireland, R and Hoskisson, Robert; Thompson Learning, Singapore, 4th

Edn., 2001

5. Crafting and Executing Strategy: Text & Readings; Thomson, Arthur &

Strickland, A.J; McGraw Hill, 12th Edn., 2001

6. Strategic Management Concepts and Cases, Thompson, Arthur &

Strickland, AJ. TMH, 2001

7. Strategic Management, Saloner, Sheperd, Podolny. Willy, 2001

8. Strategic Management, Pitts & Lei. Thomson, 2002.

9. Wharton on Dynamic Competitive Strategy: George S. Day & David J.

Reibsteim; John Wiley & Sons, 1997

10. Competitive Strategy: Michal E. Porter;The Free press, 1998.

11. HBR on Corporate Strategy, HBSP, 1999.

12. “Strategy and the Business landscape”, Pankaj Ghemawat, Indian Reprint

2000, Person Education.

13. Strategic Management-Strategy formulation & implementation: Pearce, A.

John & Robinson, B.Richard, AITB.

14. Corporate Strategies: Banerjee, P, Bani: OXFORD

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15. Text Book: Strategic Management: Theory & Practice, John Parnell,

Atomicdog Publishing, US. 2003 ( Indian Reprint)

16. Strategic Management: An Integrated Approach; Hill, Charles & Jones,

Gareth; Houghton Mifflin, New York, 6th Edn., 2003

17. The Strategy Reader, Ed. Susan Segal-Horn, II Edn., Blackwell

Publishing, UK,2004.

Recommended Journals for Reading and Reference:

a. Strategic Management Journal

b. Journal of General Management

c. Harvard Business Review

d. Journal of Management Studies

e. Solan Management Review

f. European Management Journal

g. Academy of Management Journal

h. Business Strategy Review

i. IFTR

j. Vikalpa

k. Journal of Business Strategy

l. Business Horizons

Some useful Web-sites:

www.sookoo.com

www.strategyclub.com

www.strategy-business.com

www.strategic-p.com

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Detailed Course Outline

A: Theoretical and Conceptual Content:

Module I Strategic Management – Basics : This module introduces students to the key concepts that are relevant in strategic

management. It also exposes them to the debate of strategy as a process.

Vision, Mission and levels of crafting strategy will be dealt in the class with

analysis of few mission statements.

Topics:

• Start Up Case: The Nespresso Example

• Strategy – Concept & Challenges

• Levels of strategy

• Strategic Management Process - approaches

Learning Objectives:

• Understanding what is strategy and the current challenges facing firms

in strategy formulation and implementation.

• Where is strategy formulated in the organization? What is the role of

different hierarchical and functional levels in strategy formulation?

• Understanding the concept of vision & mission and critical analysis of

mission statements.

Readings:

Handout 1 – Review and Presentation of strategic management case

Start-up Case: The Nespresso Example

1. Strategy as Balance: From “Either-or” to “And”

2. Strategy as simple Rules

3. On the Origin of Strategies

4. It is time to redraft your Mission Statement

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Module I Exercise: Case & Web Analysis

1. Case of Yahoo

2. Visit the website of a company and analyze the mission statement in

terms of core purpose definition and Customer needs. Also examine

whether the organization’s philosophy and values are included in the

statement. Use the format for ranking the mission statement and

scope for improvement.

Module II: External & Industry Environment : This module introduces environmental scanning as a prelude to strategy

formulation. It defines the notion of a firm’s industry and its environment and

explains the manner in which the environment is scanned for potential threats

and opportunities.

Topics:

• Constituents of External Environment

• Framework for environmental scanning

• Industry analysis

Learning Objectives:

• Components of external environment – what are the different

segments of an industry’s environment? And how should strategist

scan the segments?

• Industry analysis – Understanding and applying Porter’s five forces

model of industry analysis.

Readings:

5. Size is not a strategy

6. Instinctive Strategy: Organic Organisations Rule

7. Bringing discipline to Strategy

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Module II Exercise: 1. Case Study of Airbus & Boeing

Visit the websites of Boeing and Airbus and perform the

exercises given in the course book.

2. Prepare a presentation on VRIO Framework

Module III: Core Competency, Business Models & B.Plans: The success of the firm depends upon its internal resources and capabilities.

This module details the concept and relationship between resources, capabilities,

competencies and the value delivered by the firm. It also deals with the

deployment of such resources in business models adopted by firms.

Topics:

• Resources & Competencies

• Alignment of Resources in Value Chain

• B.Models & Stgic Performance

• B.Models ( VS) B. Plans

Learning Objectives:

• Bringing out the relationship between resources, capabilities, core

competencies and competitive advantage

• Temporal nature of core competencies

• Using Value Chains for formulating strategies

• Understanding different business models and their relationship with

Value Chain

Readings:

Handout 3 – A note on SBU, Core Competence and Competitive

Advantage

8. Core Competence of the Corporation

9. Critical Thinking Fails at Dell

10. Strategic Innovation: A Conceptual Road Map

11. Concept and evolution of B.Models

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Module III Exercise:

1. Read the article, “The Core Competence of Corporation” by

C.K.Prahalad and Gary Hamel. Prepare a gist and submit for

discussion in the class.

2. Case Study of Asian Paints

Module IV: Business and Corporate Level Strategies: This module introduces students to the different kinds of business level and

corporate level strategies that can yield competitive advantage. It will be

illustrating as to how the levels and the implications of the strategic choices differ.

Topics:

• Integration & Diversification

• Organic & inorganic Growth strategies

• Cost & Differentiation Strategies

• Functional Strategies and alignment

Learning Objectives:

• Types of corporate level strategies and their features;

• Importance of generic strategies.

• How do organizations following different generic strategies differ in

practices that they adopt?

• What is the link at all the three level of strategy

Readings:

12. Why diversify? Four decades of management thinking

13. Turnaround Strategies

14. A review of Outsourcing from the RBV of the Firm

15. An exploratory study of Strategic Acq. Factors

16. The Choice among acquisition, alliances and divestitures

17. Divestiture: Strategy’s Missing Link

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Module IV Exercise: 1. Arvind Mills Limited 2. Prepare a presentation on Outsourcing (Vs) Integration

Module V: Tools for Analysis & Applications: Strategic management uses a plethora of tools in order to analyze and formulate

right strategies. In this module students will be exposed to some of the important

tools that are used and would be given exercises for the application of such tools.

Topics:

• VRIO Framework

• SWOT & TOWS

• BCG & GE

• Strategic Groups & Strategy Clock

Learning Objectives:

• Identifying the popular tools and techniques used in strategic

management field.

• Understanding the tools used to analyze corporate and competitive

strategies and their limitations

• Hands on applications

Module V Exercise:

1. Finding Strategy for a Restaurant 2. Case Study: Hero Honda

Module VI: Strategy Implementation: The advancements in strategy discipline have helped firms to formulate good

strategies, but successful strategies are the ones which are implemented

properly. Empirical studies suggest that most of the good strategies fail due to

poor implementation. This module focuses on implementation and monitoring

issues involved in strategic management.

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Topics:

• Organization for Implementation

• Balanced Score Card for implementation & Control

• Problems of functional integration as implementation issue.

• Blue Ocean Strategy

Learning Objectives:

• Understanding the structural issues involved in strategy execution

• Exposure to the different forms of flexible organizations

• Basic understanding of BSC as an implementation tool

Readings:

20. The genius is in the implementation

21. The Balanced Score Card

22. Blue Ocean Strategy

23. Blue Ocean Strategy: From Theory to Practice

Comprehensive Case TBA

Conceptual understanding of the modules will be tested through two

quizzes. No make-up assignments will be provided for absentees.

B. Experiential Content The experiential part of the course includes case review and analysis, peer group

discussion, classroom presentations and interactions with organizations. The

experiential content is administered in three dimensions:

I. Module Exercise

A list of strategic tools is given in the outline. In order to give exposure to the

students on such tools, group presentation will be made for each of the tool

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by assigned group with the help of the course coordinator. The presentation

will contain the background about the tool, its features, applications and

limitations. At the end of every module, exercises are given. This is also a

group-work. All the groups will work on these exercises and will submit the

same for evaluation. Any of the group member, at random will be called to

appraise the class about the exercises done when they are due.

II. Comprehensive Case Analysis:

At the end of the sixth module a comprehensive case will be given. All the

groups will work on this case with suitable tools and proper analysis. This is

not a run-of-the-mill analysis with colorful PPT and verbose. Each group is

supposed to use the financials also to justify some of the strategic decisions.

The members of the group will be randomly called to make presentation on a

scheduled date. The other groups will be participating in the discussion to

defend their ideas or views about the case. All the groups presenting the

case should mail the soft copy to the course coordinator. Refer to the

handout on case analysis and presentation for guidelines.

Assessment

The Performance of the Students will be assessed as follows:

Component Marks

Quizzes 2 : 20%

Module Exercises : 25%

Comprehensive Case : 15%

End-term (Open Book) : 40%

Cut-offs to remember

Quiz 1 - Week 3 (Individual)

Quiz 2 - Week 6 (Individual)

Comprehensive Case - Week 10 (Group)

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The Course Coordinator may be contacted for Out of the Classroom discussion

after prior appointment, as follows:

E-mail: [email protected]

[email protected]

How to Prepare for the presentation of strategic tools? Each group in your batch is given a strategic tool for presentation to the class.

The presentation should include the background regarding the tool, its features,

applications and limitations. You are free to illustrate the tool with your own

examples. The faculty will also be making interventions for better understanding

of the tools to the class.

Contact of Course Coordinator

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Start-Up Case:

Strategy in Practice: The Nespresso Example

In early 1988, Mr. Jean-Paul Gaillard had just taken over the Nespresso

subsidiary which, despite selling one of Nestle’s most innovative new products,

was facing serious financial problems. He therefore had to decide how to

rejuvenate the subsidiary’s financial fortunes by developing a new strategy.

The Nespresso product was a system, which allowed the consumer to produce a

fresh cup of espresso coffee at home. Though simple in appearance and use, it

took Nestle more than ten years to develop it. The system consisted of two

parts: a coffee capsule and a machine. The coffee capsule was hermetically

sealed in aluminum and contained 5g of roast and ground coffee. The machine

consisted of four parts-a handle, a water container, a pump and an electrical

heating system. These four parts were cast into a body and formed the machine.

The use of the Nespresso system was straightforward. The coffee capsule was

placed in the handle which was then inserted into the machine. The act of

inserting the handle into the machine pierced the coffee capsule at the top. At

the press of a button, pressurized, streamed water was passed through the

capsule. The result was a creamy, foamy and high-quality cup of espresso

coffee,

The new product was introduced in 1986. The original strategy adopted by

Nestle was to set up a joint venture with a Swiss-based distributor called Sobal to

sell the new product. This joint venture (named Sobal-Nespresso) was supposed

to purchase the machines from another Swiss Company (called Turmix), the

coffee capsules from Nestle and then distribute and sell everything as a system-

one product, one price. Offices and restaurants were targeted as the customers

and a separate unit called Nespresso SA was set up within Nestle to support the

joint venture and to service and maintain the machines.

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By 1988, it was clear that the new product was not living up to its promise. Sales

were well below budget and quality problems were driving costs through the roof.

Nestle headquarters was considering freezing the operation when Jean-Paul

Gaillard took over. He had to decide whether and how to strategically reposition

the subsidiary.

But which way should he go? At the top of his “to-do” list were questions such

as: “Should we continue targeting offices and restaurants as our customer or

should we focus on upper-income households and individuals?” “Should we

continue focusing our activities in Switzerland or should we expand in other

espresso-friendly countries?” “Should we stick to our current strategy of selling

both the coffee and the machines as a system or should we just concentrate on

coffee?” “Does our current distribution policy make sense or should we choose

an alternative distribution method such as the Internet or mail order?”

These were not easy questions and the answers were not immediately obvious.

Yet, these questions had to be asked, possible alternatives identified and specific

choices made. In fact, going through the process of asking these questions and

then making difficult choices (which may turn out to be wrong) is what strategy is

all about.

As it turned out, Jean-Paul Gaillard chose correctly for Nespresso. He changed

the targeted customer from offices to high-income households and the

distribution of the coffee capsules from the joint venture to mail order (through

the “Nespresso Club”). As a result of these choices and other strategic

decisions, Nespresso grew tremendously in the next five years. *

* Adapted from Business Strategy Review, 2001, Volume 12 issue 3 P3

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Module I Exercise

Exercise - 1

THE EVOLUTION OF STRATEGY AT YAHOO

In 1993, Jerry Yang and David Filo were two graduate engineering students at Stanford University. Instead of writing their dissertations (which they probably should have been), the two were spending a lot of time surfing the Web and building lists of their favorite sites. On a whim, they decided to post their list on ther Web, which they dubbed “Jerry’s Guide to the World Wide Web.” Almost by accident, they had created one of the first web directories and in the process had solved a pressing need: how to find things on the Web. In 1994, they changed the name of the directory to Yahoo (http://www.yahoo.com), which is supposed to stand for “Yet Another Hierarchical Officious Oracle,” although Filo and Yang insist they selected the name because they considered themselves yahoos.

By late 1994, Yahoo was drawing over 100,000 people a day. The directory had outgrown the limited capacity of the Stanford site, and Yahoo was borrowing server space from nearby Netscape. Yang and Filo had decided to put their graduate studies on hold while they turned their attention to building Yahoo into a business. One of their first employees, Srinija Srinivasan, or “ontological yahoo” as she became known within the company, refined and developed the classification scheme that has become the hallmark of Yahoo’s web directory. Yang and Filo’s business model was to derive revenues from renting adveritising space on the pages of the fast-growing directory.

To develop the business, they needed capital to fund investments in servers, software development, and classification personnel. A solution came in the form of an I vestment from Sequoia Capital, a Silicon Valley venture capital firm. As part of the investment package, Sequoia required Yang and Filo to hire an experienced CEO. The man chosen for the job was Andrew Koogle, a forty-five-year-old engineer with fifteen years of experience in the management of high-technology firms, including a stint as president of InterMec, a Seattle-based manufacturer of bar code scanning equipment.

By mid-1996, Koogle was heading a publicly traded company that listed 200,000 web sites under 20,000 different categories and was being used by 800,000 people daily. This was just the beginning. In conjunction with Yang, Filo, and another “gray-haired” hire, chief operating officer Jeffrey Mallett, Koogle crafted a vision of Yahoo as a global media company whose principal asset would be a major Internet gateway, or portal, that would enable anyone to connect with anything or anybody. Koogle’s ambition was to transform Yahoo’s simple directory service into a conduit for bringing together buyers and sellers, thereby facilitating commercial transactions over the Web (e-commerce). In this vision, Yahoo would continue to generate revenues from the sale of advertising space on its directory pages, and it would also garner significant revenues from e-commerce

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transactions by taking a small slice of each transaction executed over its service. The service, Yahoo! Store (http://store.yahoo.com), enables businesses to quickly create, publish, and manage secure online stores to market and sell goods and services. After launching their store, merchants are included in searches on Yahoo! Shopping ((http://shopping.yahoo.com), Yahoo’s Internet shopping service.

To make this vision a reality, Yahoo had to become one of the most useful and well-known locations on the Web – in short, it had to become a mega-brand. A directory alone would not suffice, no matter how useful. In order to increase traffic, Yahoo began to add features that increased its appeal to users. One was to supplement the directory with compelling content. Another was to allow registered users to customize Yahoo pages to match their needs. For example, registered Yahoo users can customize a page in Yahoo’s financial area so that they can track the value of their personal stock portfolio. The page provides links to message boards, where individual investors can discuss a company’s prospects. Other links connect investors to valuable content pertaining to the companies in their stock portfolio, including news reports and commentary, research reports, detailed financial data, and each company’s web site.

To build brand awareness, Yahoo spent heavily on advertising, using radio and television ads targeted at mainstream America. To expand the reach of the service, Yahoo embarked on a strategy of opening up Yahoo services around the world. It also began to work with content providers and merchants to build their online presence and, by extension, to increase the value of Yahoo’s site to users who could access the content and merchants through Yahoo. Yahoo increased its value to advertisers by enabling them to target their advertising message to certain demographics better. For example, the online broker E*Trade advertises heavily on Yahoo’s financial pages. Such targeted advertising increases the conversion rate or yield associated with advertisements.

By many measures, the results of this strategy were spectacular. In 2000, the company generated revenues of almost $900 million. By September 2001, Yahoo had more than 210 million unique users worldwide, up from 166 million in September 2000 and just 50 million in 1998. Traffic increased to a record 1.25 billion page views per day on average during September 2001, up from 167 million page views per day in December 1998. According to Nielsen//Net Ratings, worldwide consumers spent an average of 147 minutes on the Yahoo network, up from 119 minutes in the previous quarter. Some 80 million active registered users logged onto one or more personalized Yahoo services during September 2001, up from 55 million in September 2000.

However, in the first nine months of 2001, sales slumped by 34 percent and the company registered a loss of $84 million versus a profit of $169 million in the previous period. The revenue and profit declines reflected slumping advertising revenues, which accounted for close to 80 percent of Yahoo’s revenues in 2000. The problem, in the wake of a slowdown in business activity in the United States, had resulted in declining advertising revenues across the board. Moreover, many of the best advertisers on Yahoo had been other dot-com companies, and a large number of these had gone bankrupt in 2001.

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In the wake of slumping revenues, CEO Koogle resigned and was replaced by Terry Semel, a former Warner Brothers executive. Semel’s strategic goal for Yahoo was twofold: to reduce the company’s dependence on advertising revenues and to increase the quality of advertising revenues by targeting well-established companies as opposed to dot-com enterprises. Semel’s strategy for boosting non-advertising revenues was to introduce a range of subscription-based value-added or premium services, such as online music that would be broadcast by the Net to a subscriber’s computer or digital device. In addition, Semel wanted the company to push more aggressively into the co-marketing business, helping established companies to sell their merchandise on the Web, and taking a cut of their revenues.

Sources: S.G. Steinberg, “Seek and Ye Shall Find (Maybe),” Wired (May 1996). L. Himelstein, H. Green, and R. Siklos, “Yahoo! The Company, the Strategy, the Stock,” Business Week, September 7, 1998, p. 66. S. Moran, “For Yahoo, Geo Cities May Only Be the Start,” Internet World, March 15, 1999. Yahoo 1998 and 2000 Annual Reports and www.yahoo.com. K. Swisher, “Time Runs Short for Terry Semel to Save Yahoo,” Wall Street Journal, October 15, 2001, p. B1. N. Wingfield, “Yahoo Restructuring to Slash 400 Jobs,” Wall Street Journal, November 16, 2001, p. B10.

Discussion Questions:

1. To what extent was the evolution of strategy at Yahoo planned?

To what extent was it an emergent response to unforeseen

events?

2. Could Yahoo have done a better job of anticipating the slowdown

in advertising revenue that occurred in 2000 – 2001 and

positioning itself for that slowdown? How? What might it have

done differently from a strategic planning perspective?

3. Does Yahoo have a source of potential long-term competitive

advantage? Where does this come from?

4. What does Koogle’s resignation in May 2001 tell you about the

role of a CEO in a public company?

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Exercise 2

MISSION STATEMENT REVISION Group No.___ Name of the Organisation: __________________________________________ Web site Address: _________________________________________________ Mission Statement of the Organisation: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Team member’s ratings of the Mission Statement:

Team Member

Core Purpose

Philosophy and Values

No Core purpose Discussed

Defines core purpose in terms of Product/Service Provided

Defines core purpose very well in terms of customer needs

No statements of Philosophies/Values

Statements are vague

Clear Expression

1.

2.

3.

4.

5.

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Discuss the above individual ratings. Through consensus, develop a new team ranking of a 1, 2, or 3 for the mission statement.

Core Purpose Philosophy and Values

1 2 3 1 2 3

3. Rewrite the company statement to incorporate an improved definition of the

core purpose according to the customer needs criteria. ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________

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4. Pick the company statement that could include more information regarding philosophy and values. Give examples of what might be included.

________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ 5. What other characteristics of the statements did your team notice/discuss? ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________

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Module II:

1. Case Study: Visiting Boeing and Airbus

Visit the web sites of the Boeing Corporation (http:/www.boeing.com) and

Airbus Industries (http:/www.airbus.com). Go to the news features of both sites,

and read through the press releases issued by both companies. Also look at the

annual reports and company profile (or history features) contained on both sites.

With this material as your guide:

1. Use Porter’s five forces model to analyze the nature of competition

in the global commercial jet aircraft market.

2. Assess the likely outlook for competition over the next ten years in

this market. Try to establish whether new entry into this industry

is likely, whether demand will grow or shrink, how powerful

buyers are likely to become, and what the implications of all this

are for the nature of competition ten years out.

2. Exercise:

Prepare a presentation on VRIO Framework highlighting the concept,

features and applications.

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Handout – 3

A NOTE ON SBU, CORE COMPETENCE AND COMPETITIVE ADVANTAGE

Strategic Business Unit: An SBU is a unit within the overall organization for which there is an external market for goods or services distinct from another SBU. (In PSUs a corresponding definition of an SBU might be a part of the organization or service for which there is a distinct client group). Hence, the customer needs and competitors for an SBU can be identified separately and strategies may be made SBU specific in a firm. Similarly functional strategies may also be designed specific to the SBUs in tandem with the Business Strategy.

Core Competence: A competence is a bundle of skills and technologies rather than a single discrete skill or technology. A core competence represents the sum of learning across individual skill sets and individual organizational units. The core competence Federal Express possesses in package routing and delivery rests on the integration of bar-code technology, wireless communications, network management, and linear programming, to name a few. It is this integration that is the hallmark of a core competence. Thus, a core competence is very unlikely to reside in its entirety in a single individual or a small team. The hierarchy of competencies for Federal Express may be –

• Logistics – Meta competencies • Package Tracking – Core competencies • Bar Coding – Constituent Skill

To be considered, a core competence, a skill must meet these three tests: Test 1 – Customer Value A core competence must make a disproportionate contribution to customer perceived value. Core competencies are the skills that enable a firm to deliver a fundamental customer benefit. The distinction between core and non-core competencies rests, in part, on a distinction between core and non-core benefits. (E.g.: Honda’s know-how in engines). Similarly, any bundle of skills that yields a significant cost advantage in the delivery of a particular customer benefit may also be termed a core competence. Test 2 – Competitor Differentiation: To qualify as a core competence, a capability must also be competitively unique. This does not mean that to qualify as core, a single firm must uniquely hold a

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competence, but it does mean that any capability that is ubiquitous across an industry should not be defined as core unless, of course, the company’s level of competence is substantially superior to others. Test 3 – Extendibility: In defining core competency, it should be examined that the competency is not embedded only with a particular product configuration. In fact the competence should be able to extend to new product arenas. For example, SKF, the world’s leading manufacturer of roller bearings, should not see its core competence as bearings but ion antifriction ideas, precision engineering etc which would help them avoiding product-centric view of the firm’s capabilities.

Example of core competence

Sony has a core competence in miniaturization: it can make any product tiny. 3M has a core competence in making substrates, coatings and adhesives and in combining them in multiple ways. Honda has a core competence in engines, which gives it an advantage in diverse products like cars, motorcycles, lawn-mowers and generators. DuPont has a core competence in chemical technology. ITT in electronics. NEC in telecom, semi-conductors and computing. Canon in optics, imaging and microprocessor controls; they together lend Canon advantage in products as diverse as copiers, laser printers, cameras and image scanners. JVC has a core competence in video recording/videotape technology, which has given JVC many unique and novel products in these fields.

One Core Competence can lead to many and Products/Business:

Firm Core Competence End Products/Businesses

NEC Semiconductor Digital technology/VLSI Systems Integration skill

Telecom; Mobile phones, fax machines, computers, main frames consumer electronics

Canon Optics, imaging, microprocessor controls

Fax machines, cameras, desk-top laser printers Semiconductor

30

manufacturing equipment Personal photocopiers Image scanners

Sony Miniaturisation Microprocessor design Ultra-thin precision-casing

Miniature card calculators Pocket TVs, digital watches Videotape recorders, Cam-coders, Entertainment electronics in general

3M Substrates, coatings adhesives Magnetic tape Photographic film Coated abrasives Post-it notes Sticker products of many kinds

Honda Design and manufacturing of engines & power trains

Cars, motorcycles Generators Lawn movers, etc.

JVC Videotape recording technologies Miniature cam-corders VCRs

Competitive Advantage: A competitive Advantage is essentially a position of superiority on the part of the firm in some function/factor/activity in relation to its competition. It is through this superiority that the firm attempts to carve out a comfortable position for itself in the relevant industry. The superiority can be in any one of the multitude of functions/activities performed by the firm. Examples:

1. The flexible manufacturing system is a competitive advantage for Toshiba of Japan

2. Sony enjoys competitive advantage through low cost and high quality in personal stereo players

3. Caterpillar has built competitive advantage in its business of earth moving equipments through after-sales service.

31

Distinction between competitive advantage and core competence

A competitive advantage does not necessarily imply a core competence while a core competence does imply a competitive advantage, perhaps a number of competitive advantages. The touchstone of core competence is that it will provide a lasting competitive superiority to the company. A competitive advantage does not constitute a sure success formula for a firm; a core competence usually does. While a competitive advantage accrues from the functional strength in any of the manifold activities of a firm, a core competence does not normally accrue from functional strength. The strength has to be at the root of businesses and products; it has to be core strength like excellence in technology/process. Competitive advantage helps a firm in a specific and limited way; core competence helps it in a far-reaching and multifaceted manned. A competitive advantage provides competitive strength to the firm to play in a variety of businesses/products. A competitive advantage can be easily imitated; competitors do catch up fast with a firm in competitive advantage. A core competence is an exclusive and inimitable preserve of a firm. It is long lasting; competitors cannot easily catch up with the firm in core competence. A core competence is fundamental and unique to a firm; competitive advantages are not unique to any firm over the long-term. SBU and Core Competence:

Basis SBU Core Competence Basis for Competition Corporate Structure Status of the business unit Resource allocation

Competitiveness of today’s products Portfolio of businesses related in product market terms Autonomy is sacrosanct: the SBU owns all resources other than cash Discrete businesses are the unit of analysis; capital is allocated business by business

Inter-firm competition to build competencies Portfolio of competencies, core products, and businesses SBU is a potential reservoir of core competencies Business and competencies are the units of analysis; top

32

Value added of top management

Optimising corporate returns through capital allocation trade-offs among businesses

management allocates capital and talent Enunciating strategic architecture and building competencies to secure the future.

Competitive advantage factors (sources of competitive advantage)

In Marketing • Market standing • Market share • Innovation in marketing • Customer satisfaction level • Customer service level • New product leadership • Price leadership • Channel strength • Marketing communications strength • Advertising effectiveness • Strength of personal selling/sales force productivity • Market research capability • Marketing organisaiton • Marketing costs • Product-mix & product lines • Product-wise position in

- Profitability - Product quality - Stage of the product in the life cycle - Product design - Product’s sophistication/technological strength - Differentiation - Positioning - Brand power - Quality of the marketing capability in toto

In Finance

• Assets • Liquidity • Leverage • Gearing • Cash flow • Cost of capital • Profitability

33

• Costs • Quality of financial management • Knowledge and dynamism in tax planning

In manufacturing/Operations

• Size or capacity of production • Locational advantage • Production facilities • Capacity utilitarian • Raw materials-their cost, quality and delivery • Maintenance • Cost of production • Break-even position • Productivity • Inventory management • Value engineering capability • Experience curve benefit • Flexibility • Automation

In R & D

• Nature, depth and quality of R & D capability • Resource allocation to R & D • Quality, Expertise and experience of R & D personnel • Speed of R & D • Engineering capability for pursuing R & D suggestions • Record of patents generated • Comparisons of R & D investment vs new product launched

In Human Resources

• Quality, knowledge, expertise and experience of personnel • Morale and motivation of personnel • Personnel turnover • Labour costs • Industrial relations

In Corporate factors and overall resources • Company size • Corporate image • Quality of management in general • The CEO • Board of Directors: dummies or policy makers?

34

• Innovation record • Quality of strategic planning • Organizational culture • Organizational structure • Use of information technology-extent of use and degree of sophistication

DETAILED CHECKLIST FOR ANALYSING INDUSTRY AND COMPETITION A. INDUSTRY ANALYSIS I. General features/basic conditions of the industry

Demand details

Demand of the industry (overall market size) Market growth rate Nature of demand: derived or direct demand? Regular or seasonal Demand trends Price elasticity of demand Substitutes Who are the real consumers? Purchase method of consumers

Product details Products and their characteristics Product missions Trends in product-market structure

Technology details Basic technologies Technology level Trends in technology History of innovations Technological trends-threat and opportunities Role of technology in success How energy-intensive is the technology

Investment details Cost of entry and exit Typical asset patterns in firms Rate and type of obsolescence of assets Role of capital/investment in success

35

Other general points Public policies relating to the industry Raw materials position Environmental impact (social, political, legal) Energy requirements Key ingredients in success

II. Industry environment Fragmented industry? Emerging industry? Industry undergoing a transition to maturity? Declining industry? Global industry? III. Industry structure Number of players

Total market and relative shares of the players Nature of competition: monopoly, oligopoly, perfect competition or a mixture? Differentiation practiced by the various players in the industry

Barriers in the industry

Entry and mobility barriers Technology barriers Investment barriers Size barriers Gestation barriers Exit and shrinkage barriers

Source of entry barriers

Economies of scale Relating to production, technology, marketing, channels, R & D, etc. Product differentiation Capital requirements Absolute cost advantage of the players (Independent of size) Access to distribution channels Government policy Cost structure of the players Experience curve of the players Vertical integration Global reach

36

IV. Industry attractiveness

Industry potential The prospects of the industry as a whole. Industry growth and profitability

History Forecasts Averages and norms typical of the industry Life cycle stage Basic determinants of demand

Likely future pattern of the industry Barriers in the industry Forces shaping competition in the industry Firm’s competitive position within the industry

V. Industry performance

Production Sales Profitability Technological advancement

VI. Industry practices

Pricing policy Product policy Promotion policy Distribution policy R & D Legal tactics Marketing policy

Means and methods of selling Role of service and field support Role and means of advertising and sales promotion What makes a product competitive Role of marketing in success

VII. Emerging trends in the industry

Predicting the likely future fortune pattern of the industry B. COMPETITION ANALYSIS I. Nature intensity of the five forces shaping competition in the industry

Threat of new entrants

37

Bargaining power of suppliers Bargaining power of customers Rivalry and jockeying for position among existing players Threat from substitutes The history of the competition in the industry

II Analysis of competitors proper (existing players) Analysing each individual competitor

Drawing up profiles of each competitor their size, capacity, and territory of operation Their products and services Their sales in each market segment/product their objectives, strategies and programmes Their strengths and weaknesses-in products, costs, logistics Channel, sales force, promotion, marketing organization, etc. Their market share, concentration and dominance Their CAs & CCs Their reaction patterns Changes in their products/prices Product differentiation practised by them Their experience curves Their entry and mobility barriers Their exit and shrinkage barriers Their cost structures and extent of vertical integration The extent of their global reach Their value chain Their conduct/behaviour in pricing, product, strategy Promotion, research and innovation, new products Characteristics of outstanding firms, of poor firms

III Firm’s competitive position within the industry Functions/areas in which strengths-weaknesses have to be assessed

Marketing

• Market standing • Market share • Innovation in marketing • Customer satisfaction level • Customer service level • New product capability • Pricing • Channel position • Marketing communications on the whole

38

• Advertising • Sales promotion • Personal selling • Market research capability • Marketing orgainsation • Marketing costs • Product-mix and product lines

Product-wise position with respect to

• Profitability • Product quality • Stage of the product life cycle • Product design • Product’s sophistication/technological strength • Differentiation • Positioning • Brand power • Quality of the marketing capability in toto

Finance • Assets • Liquidity • Leverage • Gearing • Cash flow • Cost of capital • Profitability • Costs • Quality of financial management • Knowledge and dynamism in tax planning

Manufacturing/operations • Size or capacity of product • Locational advantage • Production facilities • Prost-production facilities • Capacity utilization raw materials-their cost, quality and delivery • Maintenance • Cost of production • Brea-even position • Productivity

39

• Inventory management • Value engineering capability • Experience curve benefit • Flexibility • Automation

R & D

• nature, depth and quality of R & D capability • Resource allocation to R & D • Quality, expertise and experience of R & D personnel • Speed of R & D • Capability for engineering products based on R & D • Record of patents generated • Comparisons of R & D investment vs new products launched

Human resources

• Quality, knowledge, expertise and experience of personnel • Morale and motivation of personnel • Personnel turnover • Labour costs • Industrial relations

Corporate factors and overall resources

• Company size • Corporate image • Quality of management in general • The CEO • Corporate performance record • Innovation record • Quality of strategic planning • Board of directors: dummies or policy makers? • Organisational culture • Organisational structure • Adequacy of orgainisation for current and future strategies • Resources at disposal in terms of money, people, materials, technology and

facilities • Adequacy of resources • Utilization of resources; pattern of allocation to different businesses/activities • Use of information technology-extent of use and degree of sophistication

40

Module III Exercise:

1. Read the given article,” The core competence of Corporation” by

C.K.Prahalad and Gary Hamel. Prepare a gist and submit for

discussion in the class.

2. Case Study

Asian Paints

The company has literally put on a fresh coat of paint. Post-1997, Asian Paints

has undergone many little changes to present itself as a ‘customer oriented

company’. This may sound like just another banality, but to Asian Paints, these

words mean serious business.

This is the company that sparked a consumer-choice revolution with its historic

‘mera wala cream’ (my kind of cream) campaign. Since then, its leadership of

the decorative paints segment has gone unquestioned in India. And today, Asian

Paints is going all the way. It has re-engineering all its systems from raw

material sourcing and bulk manufacturing all the way down the chain to the retail

end, with one well-defined aim: to put the company in synchrony with market

demand. The proposition to the consumer is simple: pick any colour at all. Or

any kind of paint. Asian Paints will have it.

It’s where business is headed: mass customization. That’s right. The economies

of mass-production combined with the flexibility of customization. The Asian

Paints customer now has around 1,100 different shades of paint to choose from,

in any paint type, be it emulsions distempers or enamels, in the decorative paints

segment. “People do not get into specifics about materials that go into building

41

the house, such as steel,” says Ashwin Dani, vice-chairman and managing

director, Asian Paints India Ltd, “but when it comes to colour, they are specific,

as it is the cosmetic of the house.”

The Primer

The concept of mass customization is not new. But for years, India was a market

where every wall was painted white. It’s only now that the consumer seems

ready for new concepts, after exposure to satellite-TV and other cross-cultural

influences. The expression of individuality (particularly through the medium of

interior décor) is a trend that has only just begun to emerge.

In fact, Asian Paints tried out a form of mass customization as far back as 1968,

but withdrew it. Says Dani, “With the concept of mass customization, or for any

such concept that we introduce, we have to realize one thing, that this country is

terribly short of capital.” Any new concept must first appear affordable to the

consumer.

It was a good idea, though. Called Magic Touch, if offered the consumer a

choice of 150-200 shades, just by squeezing 25-ml tubes of colourant into a litre

of base paint. “We were looking at bringing costs under control and also to make

sure that the concept of mass customization was well understood by the

consumer,” recalls Dani. However, the concept was way ahead of its time.

Many painters felt that their contribution was getting curbed by this. (they have

always prided their ability to whisk up shades of their own). This system was

discontinued after about five years.

Even today, painters like to keep consumers at their mercy; paint being a

relatively low involvement product doesn’t help. Yet, the 1968 experiment did

have a lasting impact of sorts. Says Dani, “What happened was that a lot of

people started developing special shades and some people even started

charging a premium for the shade.”

In the 1980s, Asian Paints had another go at widening choice. This time, the

decision was spurred by the emerging competition from Berger, ICI, Good lass

42

Nerolac, Shalimar and Jenson & Nicholson (J &N). It introduced a simple version

of its present colour-tinting machine that offered another 150 shades. The

machines were installed not at the paint factory, but at the stockist points (about

45 of them, then). By decentralizing the tinting process (effectively taking it

closer to the consumer), Asian Paints was better able to respond to colour trends

in the market. The stockists could quickly deliver whatever dealers wanted.

Ideally, the machines should have been at the dealer points. However, the

technology was expensive back then, and the company felt that dealers were not

ready to invest so heavily in them, as the market was not mature enough.

What Asian Paints did not do in the 1980s, J & N did in the 1990s: it took the

shade-tinting process as close to the customer as imaginably possible. J&N

started installing computer-controlled tinting machines (worth around Rs. 9 lakh

apiece) on the premises of its dealers. Suddenly, technology had put a vast

array of choice at the consumer’s fingertips. She could choose the precise

colour she wanted, just by pushing a few keys-and looking at a computer screen.

Paint shopping had reached a new plane.

Asian Paints’s response? Says Dani, “We decided to wait and see how

successful they would be with it, first.” Soon, even Berger joined the bandwagon,

with its Colourbank tinting systems. That’s when Asian Paints sat up. Observes

Dani “Of course, we had to protect out turf. We, however, had a distinct

advantage. While both Berger and J&N were importing the colourants, we had

the technology to produce it in-house. And our tinting machines were less

expensive to the dealer.”

Asian Paints was able to offer a similar tinting system, at a cost of about Rs. 5.5

lakh to the dealer, payable over a few years. And the consumer got to choose

from around 1,100 shades. This was the launch of its Colourworld concept.

“Another distinction that we have,” points out K.B.S. Anand, Vice-president, sales

and marketing, “is that we offer all our existing brands under the tinting system,

as well as all the shades on the system, off the shelf as well.”

43

Also, since only existing brands were on offer, the company did not have to

spend too much on brand building exercises. It only had to spend on promoting

the concept of Colourworlds. These machines have the ability to create virtually

any colour, as they are equipped with a spectrophotometer that can scan any

colour and provide the mixture to get an exact shade match. Competitors,

meanwhile, were offering different brands on the tinting system at a premium.

“This is what I call true mass customization,” says Dani, adding, “Cost is a very

important factor, as after all, the consumer is not willing to pay more.” The entire

exercise took about 12 months, but seems to have paid off, since.

The base coat

So where does that leave Asian Paints today? With a 44 percent share, by

value, of the decorative paints segment (estimated at Rs. 1,665 crore in 1999-

2000), and a 27 per cent share of the organized paint market overall, it is clearly

the category leader in India. It also has the best reach, with 14,500 dealers

throughout India, 35 per cent of whom are exclusive dealers, with 67 stock points

to supply them.

Asian Paints has been showing a very steady topline growth year-on-year of

about 16.5 percent CAGR (compound annual growth rate), with total sales

touching Rs. 1,341.6 crore in 1999-2000. Profit-after-tax too stands at a healthy

Rs. 97.3 crore. Where it does need to strengthen itself, however, is in the

automotive and industrial paints segment, where Nerolac is the leader with a

segment share of nearly 43 percent.

Says A.V.S. Murthy, vice-president, accounts and taxation, “Though, we have

maintained consistent topline growth, we have had our share of ups and downs.

But since the market is continuously expanding, we can focus on areas where we

really need to sell. Also, we continuously invest in new products and expand our

reach. And we continue to grow as we constantly invest in innovation.”

Adds Dani, “Our investment in technology itself is quite high. For example, by

the end of the current financial year, we will have about 2,100 Colourworld

machines of Rs. 110 crore straight away. It’s as good as setting up a new plant

44

of 50,000-tonnes capacity.” Till September 2000, it had as many as 1,433

Colourworld units.

The investment in technology does not stop there. The company recently put in

a supply chain management system from i2 Technologies, as well as an

expensive SAP R3 system for Enterprise Resource Planing (ERP), all at a total

cost of Rs. 31 crore. What this system does is to help forecast sales along the

channel, and hence keep all supplies (all the way back to the most elementary

raw material) in ready shape to meet demand quickly. Earlier, the entire cycle,

from order placement to when a new batch of paints reaches a particular point,

used to take between 30 to 45 days. But with the new system, this takes less

than 15 days. As Murthy says “When we are in the business of paints, and being

a steadily growing company, it is very important to have information at our

fingertips.”

Information-rich operations. This is a philosophy that extends right down to the

shop floor. It currently has four plants located in India, at Bhandup (in

Maharashtra), Ankleshwar (Gujarat), Patancheru (Andhra Pradesh) and Kasna

(Uttar Pradesh), with a total installed capacity of 162,700 tonnes. Says R.B.

Tirodkar, vice-president, international, “Our strong point is that we are able to

maintain low costs and yet produce the best quality paints, as we have almost

every facility inhouse, including one of the largest libraries with over 3,000 titles

of books related to the paint industry.” The R & D facility boasts of about 30

management personnel and about 125 chemists.

Asian Paints’ overheads have been much lower in comparison to the other paint

manufacturers in India. The same goes for its management of working capital,

the requirement for which remains low despite the vast product range. An

efficient operation gets the credit. Inventory is kept at about 60 days, while debts

are cleared in about 30 days. Says Murthy, “Cost consciousness extends to

almost every aspect of the business. Most of our executives are very cost-

conscious. Our budgets too, are controlled. We review costs every month. And

every four months, we have a thorough review in the company.”

45

Staying alert on all fronts is all the more important, since the paint market is

beginning to show signs of change. The basics still hold. Says Anand, “Since

India continues to be a largely agrarian market, the demand for paints is linked

with the harvest of crops, and hence our sales also fluctuate accordingly.”

Market growth is directly related to economic growth, and the spikes in demand

are predictable-driven by festivals and special occasions. In general, Indian paint

sales usually peak in the month preceding the festival of diwali, where people

normally do an annual repaint of their house. “However’” adds Murthy, “we are

now seeing a shift toward other occasions for painting as well, such as weddings

in the family, or the arrival of a new child, and hence we have to be able to cater

to demand at any time.” What’s more, metro-raised yuppies, increasingly, are

looking at their interiors in much the same way as they see fashionable clothing.

Certain shades are “in”, some are “out’. What mass-customization does is help

Asian Paints cater to the exact colour choice of the customer, at very short

notice.

On speed, Asian Paints has reason to be proud. According to Tirodkar, while

competitors import their colourants, Asian Paints develops all of them inhouse.

Only a few raw materials such as rutile (titanium dioxide) are imported. The

company right here manufactures others such as phthalic anhydride and

pentaerythritol in India, chiefly for self-consumption. Some of it is sold too

(accounting for 4.6 per cent of total turnover). “This gives us a competitive

advantage, as we are able to bring out the right product, at the right price, and at

the right time,” says Tirodkar. Adds P.M. Murty, president, decorative business,

Asian Paints, “Also with our advanced tinting mechanism, it is possible to bring

efficiency to the system and postpone differentiation till the last moment.” In

other words, Asian Paints is geared to manufacture the paint bases in bulk, and

to add the tinting right at the end, through the Colourworld system (or at stockist

points).

It all adds up to the core proposition: choice, choice and more choice, Asian

Paints has been a consistently high advertising spender in India, and it has given

several new dimensions to the colour-choice theme that it is so well associated

46

with. Last year, it spent over Rs. 25 crore on advertising alone. Says Dani, “As

paint is low involvement product, we thought it best to educate the consumer, as

well as, popularize a few of our brands.”

In rural India, most of the job is done by Gattu (See the Box), a brand mascot

that has been going strong for years and years. “What Gattu did was for us to

gain a significant presence in rural markets where literacy is low,” says Dani, “but

the visual recall for the brand was high.” The popularity of the mascot led others

to follow suit, such as the tiger mascot, Goody, from Nerolac.

In fact, rural markets appear to be a focus area for growth for Asian Paints. A

key task here is upgrading users of chuna (white wash) to coatings that are

more durable such as distemper, but with not much of an increase in price.

Asian Paints therefore introduced a cost-effective distemper for the rural market,

called Utsav, in the early 1990s. This brand, claims the company, has

established itself very well in the last eight years. It recently launched Utsav

enamel to supplement this. “We took special pains to distribute this product to all

those segments that used to sell chuna, especially in the pre-diwali period, and

educate the rural consumer of its benefits,” says Anand.

The overcoat

Opportunities for paint choice are much stronger in developed overseas markets.

Especially those that like a dash a colour to make a statement. Hence, Asian

Paints’ focus on the international market as a growth area. Asian Paints already

commands a presence in about 10 countries, including the acquisition of

Delmege Forsyth Paints in Sri Lanka. Says Dani, “Actually our expansion into

international markets began with our entry into Fiji in 1978, where we were

looking at setting up a 51 per cent subsidiary.” Stringent capital controls and

export laws, however, called the effort off. The company found it impossible to

take money outside India to invest in its business.

47

So instead, it began exporting paint making machinery to Fiji, for about two

years, after which it gathered enough money to set up a plant there. “People say

that the large Indian population is a liability, but we’ve learnt to convert liabilities

into assets,” jokes Dani, elaborating on how Asian Paints tapped key individuals

in Fiji’s Gujarati community to help establish its brands there. Once established,

it started exporting paint to Tonga islands. From there, it went on to the Solomon

Islands. And then to Vanuatu, Australia, Nepal, Mauritius and Oman in West

Asia.

Everywhere, it’s been the same process. Says Murty, “All the international units

are doing well and have declared profits, except for Mauritius and Oman that are

relatively new.” In Australia, the company also recently acquired the entire paints

business of Pacific Paints Ltd, a family-owned business. The acquisition was

made through its subsidiary in Australia. The cost of the acquisition: AUS $

375,000 (Rs. 10.5 million). This is its second acquisition with in a year.

“We did this as paint itself is not really an export worthy commodity, except for

some specialized industrial paints, due to very high freight charges,” says Dani,

adding, “That’s why some automotive paints cost as must as Rs. 900 to Rs.

1,000 a litre, as many automobile manufacturers often import them.”

Though one would think that opportunities for mass customization would be

highest among automotive paints, Asian Paints is not a dominant player in this

segment, where it has a joint venture with PPG of US, Asian PPG Ltd. In India,

Goodlass Nerolac holds nearly 43 per cent of this market, primarily because of its

deal with India’s top car-maker, Maruti Udyog Ltd. Says T.R. Venkatesh,

managing director, Goodlass Nerolac India Ltd, “India sells around 600,000 cars

a year, so there is a huge opportunity for the automotive refinishes business, as

well as, OEM supply.” Nerolac also benefits from the fact that, Japan, its partner,

Kansai paints (that holds 65 percent equity in the company), is the OEM paint

supplier to Suzki (Maruti’s technology partner in India).

Another new market that has potential in India, but is not growing fast enough, is

the market for exterior paints. Consumers in developed markets are more finicky

48

in this segment, looking for personalized colours for their dwellings. In India,

cement paints dominate this market, the largest supplier of these being

Snowcem. Cement paints have limited colour choice but being bulk-purchase

products tend to prove economical. However, since cement paints are not

durable, there is a distinct shift in the market towards exterior emulsions. Asian

Pints came up with two brands in this segment recently, Apex and Ace. The

former is claimed to have a life of five years, and is more expensive, while the

latter is more economical, but slightly less durable. Nerolac also recently entered

this segment with its Suraksha brand. Snowcem too has got emulsions for

exteriors under the brands of Unigloss and Trump. Says Dani, “India is a country

with a lot of divergence. The rent control act is undergoing changes, and this

may help, as people begin to take an interest in the buildings in which they live.”

This is especially true for coastal areas, where buildings take a beating from the

elements.

Here too, colour is of utmost importance. In fact, now almost all the paints

manufacturers have clued into the concept of mass customization and are going

the route of colour tinting machines. Berger, for example, has branded its 500-

plus colour tinting machines as Colourbanks, through which it offers almost as

many shades as Asian Paints, but still needs to catch up on market share and

dealership network. According to Subir Bose, managing director, Berger Paints,

the instant tinting facility will be a direct cost saving for dealers in terms of lower

inventory carrying costs, since it involves just stocking the bases and basic

colournats. Agrees Venkatesh, “Colour dispensing machines allow us to give

customers a choice of nearly 3,000 shades. There is definitely a trend toward

mass customization in the paint industry.”

Concludes Murty, “Since the future will definitely be built around the consumer,

even choices of colour have to be left with the consumer.” Asian Paints is

planning to get more aggressive in the decorative paints business. With 70 per

cent of paint business still in the decorative segment, it is a fast growing

segment.

49

Rounds up Dani, “our vision is to be a Rs. 2,100-crore company, growing 18

percent year on year, by 2003.” That means extending its colourworld concept to

rural areas and to segments such as exteriors. This could involve a wider effort

at stimulating the demand for colour choice in India. For now, the typical village

home-owner is not particular about the colour of his walls. Clearly, mass

customization has a long way to go.

Imaginations need to be stirred. Why not move to homes with walls that reflect

different moods? Or change, photo-chromatically, in accordance with the light in

the room? For now, colour tinting is the first step in that direction.

GATTU, A creation of R.K. Laxman, dates back to 1957 and remains among India’s most popular brand mascots. Asian Paints came up with Gattu when it was targeting rural India. Gattu caught on well in rural areas, where literacy rates were low, and aided brand recognition. Folk often ask for the “ladkewala brand” (boy brand). Gattu appeared at a time when print was prominent, and created a visual relationship with Asian Paints. But once TV came, Gattu took a backseat. Says Anand, “Paint is a low-involvement product. Once you apply the paint, m you don’t really recall the brand. It’s also a low-frequency usage product.” In the 1950s, most companies used a mascot of some sort.

The communication strategy has since changed Now, beauty, warmth and so on are the drivers which Gattu cannot convey so easily. Also, as Anand says, “Today , most advertising that we do is predominantly television advertising.” However, Asian Paints uses Gattu to convey select messages. During the last general elections, for example, Gattu was used extensively to promote voting. Says Rajiv Garodia, advertising manager, Asian Paints, “Our advertising now is of two types, corporate centric and sub-brand centric.” However, even with sub-brands, the sign off links the sub-brand to the mother brand, which is Asian Paints. The company also uses the mnemonic of the drip as its visual recognition element. It is now extending this to the packaging too. Says Garodia, “It does not matter what the consumer takes out from the ad, as long he links it to Asian Paints.” The sub-brand-corporate-brand interplay is carefully managed. Building specific paint brands is a difficult task indeed, unlike garments. Or watches, for that matter.

50

Table-I

Market Share by Revenue(Figs. for 1999)

Organisation % Mkt. Share Dealer net work (Retail outlets)

Asian Paints 41 14500 Nerolac 21 10700 Berger 15 5000 ICI 13 4000 J & N 6 -N.A.- Shalimar 4 -N.A.-

Table 2

Financial Data of Asian Paints

(Fig. Rs. in crore)

Parameters 1995-96 1996-97 1997-98 1998-99 1999-00

1. Sales:

a. Gross

b. Net

883.5

704.6

937.8

737.2

1021.2

802.5

1128.0

894.7

1341.6

1066.2

2. Profits

a. PBT

b. PAT

80.4

53.4

85.4

55.4

100.5

67.5

100.9

76.9

143.1

97.3

3. Fixed Assets

a. Gross

b. Net

164.7

119.8

230.5

171.1

303.9

231.5

410.6

310.1

468.1

329.3

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Table-3

Comparison of the Major Players.

(Figs. Rs. In Crores)

Year Asian Paints Berger ICI Nerolac Sales Net

Profit Ad. Exp.

Sales Net Profit

Ad. Exp.

Sales Net Profit

Ad. Exp.

Sales Net Profit

Ad. Exp.

1996-97 937.8 55.4 96.9 311.5 14.3 17.6 665.7 42.1 13.4 447.0 24.3

19.2

1997-98 1021.2 67.5 121.4 348.6 18.2 20.3 713.6 50.5 20.6 472.4 31.2

20.0

1998-99 1128.0 76.9 31.0 426.0 23.6 25.4 833.3 61.4 21.9 527.0 25.5

22.4

1999-00 1341.6 97.3 39.0 505.0 23.7 31.1 873.1 64.2 22.5 604.9

30.0 22.8

The case is adapted from A&M, 15 January 2001 for class room discussion on Business Strategy

Discussion Questions:

1. SWOT Analysis of Asian Paints

2. Core competencies of Asian

3. Value chain of Asian

52

53

1. Case Study

“A Stich in Time.

…………..for Arvind Mills?”

On Friday, 3 March 2000, Sanjay Lalbhai chaired the most historic and, perhaps,

the most humiliating meeting of his life. Sixty-nine years earlier, his grandfather,

Kasturbhai Lalbhai, had founded Arvind Mills and, over the decades, built it up

into one of the country’s most respected business houses. Sanjay, too, had

played a significant part in that effort ever since he had been appointed inheritor

in 1979. By the mid-1990s, Arvind embodied the post-liberlisation dream, global

in size, global in markets and, of course, global in ambition. But, on that day

Arvind’s achievements seemed wispy and unreal, a figment of imagination. For

here was Sanjay, the third-generation heir of the proud Lalbhai legacy, admitting

to an assembled gathering of narrow-eyed offshore lenders at the Sofitel,

Ahmedabad, that his business was in ruins. Once the icon of Corporate India,

the company was losing close to Rs. 1 crore a day. The company, its mangers,

and above all, the Lalbhai family, had failed. It was now up to the lenders to

restructure Arvind’s debt, or else the show was over. For Sanjay, the mea culpa

wasn’t easy: “There was pain, there was humiliation.”

Some of the lenders already knew that the company was mere footsteps away

from a deep abyss. Earlier, in November 1999, a consortium of offshore lenders

that, along with ICICI, represented Rs. 800 crore of loans, had appointed

consultancy firm KSA Technopak to obtain a third-party account of the mess at

Arvind. By then, Sanjay and his managers were also clear that the only way out

was to restructure the massive debt stacked on the company’s balance sheet.

But, even if the management was willing to come clean, there was another

problem. Over the years, the company had accumulated 85 lenders from around

the globe with a cumulative exposure of Rs. 2,700 crore. Getting all of them to

agree to restructure wouldn’t be easy. In fact, nothing on this scale had been

attempted in India ever. So, around the time ICICI was purling KSA on board,

Arvind chief financial officer Jayesh Shah got in touch with Jardine Fleming

54

Singapore Securities about the debt recast. Shah, who describes himself as a

pragmatist, was Sanjay’s staunchest ally on the restructuring issue. Also, for a

long time, besides Sanjay, he was the only man who knew the extent of Arvind’s

troubles. By January 2000, Jardine came aboard. Heading its team was Ahmad

Ayaz, head of debt advisory. He was vacationing in Lucknow with his wife when

he was asked to head off to Ahmedabad for the first meeting with Arvind. Along

with team members K.S. Sriram and Jeffrey Luo, Ayaz would play a pivotal role

in Arvind’s turnaround. Ayaz was the specialist: a former State Bank of India

hand, he had reworked balance sheets of plenty of companies in Indonesia,

Malaysia and the Philippines that had collapsed during the south-east Asian

crisis.

By February 2000, the three-member KSA team led by associate director

Prodipto Roy had submitted a 124-page document titled ‘Market Study And Due

Diligence of Business Plan’. The Document had studied in depth the global

denim and textiles business to find out exactly where Arvind stood and had made

a 10-year projection of the company’s operating cash flows.

The meeting on 3 March began at around 10 in the morning. Sanjay addressed

the gathering first; then came the KLSA presentation that lasted till lunch time.

After that, Jardine made its pitch, advocating why it made sense to recast

Arvind’s loans. “Had you driven through Indonesia after the crisis, you would

have seen scores of new factories, buildings and hotels lying unutilized because

lenders had deserted the companies. We did not want that to happen to Arvind,”

says Ayaz, who now heads the Distress Debt department of Singapore’s

Standard Merchant Bank. For the lenders, the news wasn’t heartening. Over the

next 10 years, Arvind would be able to service only 60% of its loans. That meant

that the rest of the debt would have to be written off. Only offshore lenders were

present on that day.

The following day, the exercise was repeated, this time with Arvind’s Indian

lenders. By the end of that day, a steering committee was formed that laid out

the framework for the reorganization. This committee represented 60% of

55

Arvind’s Total borrowings and comprised eight offshore lenders and four

domestic lenders. Getting all the lenders to agree on the restructuring and

putting the steering committee in place was the first breakthrough.

Between March 2000 and November 2000, the committee met five times in

Mumbai. The outcome of these meetings would decide Arvind’s fate. The

meetings got quite nasty at times, with everyone driving hard bargains. “Those

months were critical; the verdict could have gone either way,” says Kranti

Jaiswal, senior vice-president, ABN Amro, who represented his bank at the

meetings. By January 2001, the restructuring term sheet was ready. The

lenders, broadly had two options-either write off some of the dues and walk out

with the rest immediately, or stay with the company but on different terms. (See

‘Life After Debt”.)

To drive home the message that he was indeed sincere and resolute about the

whole process, Sanjay offered to quit. “I told the institutions that if you want me

out, I’m out; if you want to change the board, I’m okay; want to change the

auditors, that’s fine,” he says. In fact, a representative of a financial institution

associated with the process says that such talk from promoters was unheard of.

(it is, of course, another matter that the lenders made Sanjay’s remaining as the

managing director a condition to the restructuring process.)

However, not everybody was happy. Three lenders-Daiichi Bank, Commerzbank

and Bank of Nova Scotia-took Arvind to court over the restructuring process and

a transaction it had made with ICICI. This April, the Gujarat High Court

dismissed the petition, making it mandatory even for the dissenting banks to stick

with the restructuring plan.

And finally, last week, Arvind announced its financial results for the first three

months of 2002. It had earned a post-tax profit of Rs. 10 crore, its first in three

years. Sure, global denim prices had gone up and the company had become

operationally more efficient, however, had it not been for the debt restructuring,

the company wouldn’t have been back in the black.

56

Yet, the Arvind story is not just about cold numbers. It’s also the narrative of a

visionary company-brave, yet foolhardy-that, like Icarus, wanted to soar. And

soar it definitely did, until, like Icarus again, it flew too high for its own good. But

thanks to a sheer instinct for survival, frank confession’s brave decisions, and

snatches of good luck, the company managed to land on its feet, unlike Icarus,

who plunged to his death.

Meet Rohit Mishra, manager, manufacturing (knit garments). Mishra is busy

inside a large air-conditioned room at Arvind’s Santej (Gujarat) complex. Inside,

a Barudan embroidery machine is busy stitching ‘swooshes’ on the T-shirts

Arvind makes for Nike. Mishra, a National Institute of Fashion Technology

graduate, proudly claims that the machine can stitch 3,000 swooshes in two

eight-hour shifts. In the last one month, Arvind has made some 30,000 T-shirts

for Nike that have been slipped to the label’s central warehouse in Memphis in

the US. From there, they’ll be sent out to stores all over Europe and the US.

Mishra shows you around. In a huge hall, a few hundred workers are hunched

over modern stitching machines laid out in assembly-line sequence-someone

stitches the seams, then someone does the collars, and so on. Somewhere in

the middle of this hall is a shelf where Arvind displays T-shirts it makes for other

labels-Encyce (from Fila), or Fairway Sport. The price tags temp: the Encyce T-

shirt’s got a $ 46 tag to it, while Fairway Sport would set you back by$ 30.

This is the future of Arvind that its lenders are betting on. Anang Lalbhai,

Sanjay’s cousin and 10 years his junior, draws the big picture. In denim, the

company will increasingly move away from the commodity fabric towards value-

added styles, while in shirtings, trouser bottoms and knits, it will climb the value

chain by becoming a garment manufacturer. “We will make garments as a third-

party manufacturer for companies around the world,” he says. You notice the

pride in his voice and the enthusiasm in his gestures. At Arvind, the optimism is

back. And it’s a heady feeling.

57

It was like that not too long ago. Ganesh Shermon, former human resources

chief at Arvind and now with Arthur Andersen, tells you what it was like then.

“Thanks to Sanjaybhai’s leadership and vision, we were able to recruit top-notch

talent so easily. I’m not just talking of lateral moves, but also of the excitement in

B-schools.” In 1993, Arvind went to the B.K. School of Management in

Ahmedabad to recruit MBAs. “By 1998, we were either Day Zero or Day One at

IIM-Calcutta, IIM-Bangalore, XLRI and FMS-Delhi,” he says.

But that changed almost overnight. The pros Arvind recruited left one by one,

among them Vikram Rao head of the shirtings business, joined the Aditya Birla

group; Arun Pande, head of knits, left for Kinetic Honda; Pallav Chandra, Arvind’s

chief designer, joined the Aditya Birla group: and S. Padmanabhan, head of

Ruff’n’ Tuff, joined Raymonds.

Many, of course stayed back. Some felt personal loyalty toward Sanjay; others

felt indispensable. Shah, who Sanjay had personally recruited a decade earlier

after he had topped his CA exams, felt Arvind needed him. “I felt indispensable.

I do not feel that today, I never felt it earlier, but around 1999-2000 I felt I was. I

felt that the future of some 10,000 people was on my shoulders.” But it wasn’t

easy staying on as the bad news about the company spread. Shah gives a

unique insight of how the world thought of Arvind managers then. “The head-

hunters kept calling, but the quality of the jobs kept falling.” There were other

prices to pay. The stress raised Shah’s cholesterol levels significantly, while

Sanjay put on 10kgs. The constant worry was keeping him from his normal

exercise routine.

Arvind’s bold gambit and what followed is, today, a part of Corporate India’s

folklore. The company had bet, quite correctly, that scale of operations coupled

with low-cost of production would give it an edge in the global denim business. It

had also bet that since denim was a commodity, it needed to hedge its options by

getting into other areas that were less cyclical and fetched higher margins. So

the company put up a massive shirtings, trouser bottom and knits facility at

Santej, also in Ahmedabad and about an hour’s drive from Naroda, where the

58

company’s denim plant is located. This new project was supposed to ride the

cash flows of the denim business initially. Unfortunately, just as it was being

born, the global denim market collapsed. With denim in a tailspin, Arvind was

hard pressed to service the huge debt it had on its books.

Today, as Arvind’s managers analyse what went wrong and, more importantly,

draw lessons to ensure that it never happens again, no one (former employees

included) find fault with the big picture. “The assumption of India being clothiers

to the world wasn’t wrong then, isn’t wrong now,” says shah. But he does agree

that while the strategy was right, the execution had gone grossly wrong.

Sanjay sees the organisation’s inability to anticipate and manage risk as its

biggest failure. “Any strategy is always based on assumptions. But things are

changing so rapidly today that you have to accept volatility and build that into

your strategic plan. Perhaps, we never did enough of that,” he says.

So, could the Arvind team have known what went wrong? Here’s where the

argument gets interesting. Look at it this way. Between 1987 and 1997, Arvind

put up 110 million metres of denim capacity, becoming the world’s third-largest

players. It, therefore, had high levels of concentration risk, that is, all its eggs

were in one basket. (Given Arvind’s size, a Re 1 per metre fall in denim prices

shears Rs. 10 crore off the company’s bottomiline.) Also, denim was mostly a

commodity and driven by forces-fashion, demand supply imbalance, etc.,-over

which Arvind had no control. Again, given the highly-fragmented nature of the

industry-the top five players collectively account for only 10% of global capacity-

there was no way that Arvind’s size influenced global trends. Finally, by the mid-

90s denim had already been ruling high for over 20 years. So stacks of new

capacity had come up all over the globe, including in China and, like in all other

commodities, a disaster was waiting to happen. How come Arvind never saw

that?

Almost all Arvind executives say that while there were signs of things going

wrong, they could not anticipate that the fall would be so sudden. In fact,

international denim experts like Jil Lawrence, a London-based consultant

59

advising Arvind on denim, admits that the fall was so sudden. “We remained

hopeful for a while and it was six months into the decline before we realized what

was happening,” says shah.

Then fate conspired. While Arvind was coping with the denim downfall and its

own debt crisis, the prices of naphtha-feedstock for Arvind’s captive power

plants –more than doubled from Rs. 7 a kg to Rs. 15, wrecking the bottomline

further,

But even if you argue that Arvind could not accurately forecast some incidents,

there were other where Arvind should have read the signs better. Consider that

despite global presence and ambitions, Arvind had no clue about the implications

of the North Atlantic Free Trade Agreement (Nafta). Treasury head V. Sridhar

says: “We thought NAFTA’s presence would be felt over 10 years.” And how

wrong he was.

The treaty was signed on New Year’s day, 1996. According to its norms, any

fabric or garment could move across Mexico, Canada and US duty free. But

a17% duty would be charged on garments made with fabric manufactured

outside these countries. Mexico soon emerged as a new garment cluster with

US fabric companies sending their textiles there for garmenting. Until then, a lot

of jeans labels used to get the jeans stitched on Arvind fabric by garment makers

around the globe. For the buyer (a label, a wholesaler, etc.) the cost for a staple

pair of jeans was $ 6. But the duty meant another dollar more per pair. The new

trade bloc had made Arvind uncompetitive. And it happened within a year, not

10, as the company thought.

In some ways, success had also spoilt Arvind. With constant hurrahs from the

stock markets, the media and industry, it took its success for granted and felt it

could do no wrong. Shah, for example, admits that the company overspent on

the Santej project by almost 25% and there was a time over too. “We were too

lavish; our justification was, as Arvind, we deserved a campus where even the

toilets had to be of five-star quality.”

60

Meanwhile, Sanjay detached himself from the management of the company. He

saw himself more in the role of a strategist than a manager. “I distanced myself

between 1996 and 1998: therefore, the problems of managing what was, in any

case, an aggressive strategy was compounded by my distancing myself,” he

says.

In the final analysis, Arvind got caught in a maelstrom, partly of its own making

and partly a consequence of factors over which it had no control. As Shah

argues, in theory, managements are expected to foresee event, but in practice,

how well managers can pre-empt events is debatable.

So does that mean history could repeat itself at Ahmedabad? Sanjay does not

answer that question directly. “In an increasingly volatile environment, where

there are no guarantees, the trick is in derisking your balance sheet. You should

also be able to anticipate and manage risk.” Think of these as the new rules at

Arvind.

Consider denim. Today average denim prices are once again around RS. 95 per

meter, levels at which Arvind earned hefty profits in the mid-90s. Better still,

cotton prices are down and Arvind is operationally far more efficient than it ever

was. Despite that, the company is not taking any chances and differentiating

itself as a maker of value-added denim trade.

A few years ago, Arvind had set up a small research cell to create different kinds

of denim. Today, that cell is 15-members strong and worked with international

consultants like Lawrence to make different styles and textures of denim. In

1996, one of Arvind’s best years, it could make 10 different styles of denim a

month; today it makes 120. “We are redefining our core competency: its not size,

but its product innovation. We are now in a position to lead denim fashion.” Says

Millind Hardikar, head, denim business. In fact, he says that two years from now

the company will have moved so far into the differentiated denim business that

it’ll perhaps not even manufacture the basic 14.5-ounce cloth that had once

brought it fame. Already, 75% of Arvind’s Capacity is churning out differentiated

denim, up from 15% four year back. “That’ll mean that even if denim, the

61

commodity, fails, we’ll be safe,” says Hardikar. The realizations in differentiated

denim could be double that of the commodity fabric.

Of course, for Sanjay, who today speaks of having backups for backups,

differentiated denim is not the only way in which he is derisking the business.

The company is also dealing directly with denim apparel labels like, say, Levis

and Gap, the ‘nominated segment as it is called in the trade. So, if earlier Arvind

sold its fabric to a garment market who then sold the stitched stuff to some label

Arvind wasn’t even aware of, today it’s different. Now Arvind interacts directly

with a garment manufacturer nominated specifically by, say, Levis. Currently,

75% of Arvind’s business comes form the nominated segment-names such as

Tommy Hilfiger, Zara, Levis and Next-Up from 20% five years ago.

This also fits in seamlessly with the design cell’s ambition - work with designers

from these labels and, through them, dictate style. That means that, for the first

time, Arvind can move the market, in however limited a manner. In fact, buyers

have already sampled styles that Arvind thinks will work for the spring/summer

collections of 2003. Meanwhile, the design cell is currently working on styles to

be showcased in the autumn/winter collections of 2003.

In a way, Arvind may just be creating a new business model for itself-moving

away from being just a manufacturer with economies of scale to becoming a

service-oriented company that’s managing multiple relationships with key

customers, delivering on time, maintaining quality, etc. Looked at from that

perspective, manufacturing capability is just the back end.

“I’d say we are half manufacturing, half servicing,” says Anang, who heads the

business out of Santej. There, too, the model is similar-tie up with apparel

companies and deal directly with their garment makers. Already, shirtings from

Santej are sourced by labels such as Marks & Spencers, Gaps, and Saitt.

However, the difference is that whereas for denim Arvind has no intentions of

setting up apparel manufacturing, for shirtings and trouser bottoms, it plans

getting into the garment making business. “The future focus is on going up the

62

value chain into garments. Also, after 2005, quota restrictions will go, making

things easier for us,” says Anang.

Though putting up, say, factory that makes 50,000 shirts a month would cost

between RS. 60 and Rs. 70 crore, given the manpower intensity, Anang isn’t

keen on owning such sweatshops. He is looking at wet leases which will

dedicate their entire operations for Arvind as the model to opt for in garment

making. Also remember, today Arvind doesn’t want to own any more assets than

what it has.

Clearly, there is a new way of thinking and working at Arvind. And Arvind

managers are the first to admit that they have far from perfected it. For example,

deliveries still get delayed sometimes. But this time around, Sanjay is far more

hands-on. Of course, the responsibility he takes most seriously is that of being

an early-warning signal for the company. He keeps a very close watch over all

the variable (and volatile) factors that could wreak havoc-exchange rates, utility

costs, prices of cotton, etc. Already, he has signed forward contracts on cotton

and plans doing the same with naphtha, now with the administered price

mechanism on petro goods is abolished. The bottomline: He doesn’t want to be

blindsided again. He adds that his other big learning from this experience is to

be “conservative financially during volatile times.”

Yet, in him, there also lies a realist who knows that everything can’t be predicted.

During those dark days, Sanjay took comfort in the Bhagwad Gita, reading it

every morning. “The Gita says that all a man can do is wake up each day, go out

and do his best. That’s what I did. Do I have answers to all questions? I don’t.

But, at least this time, let us be happy that we asked ourselves the right

questions. Last time, we weren’t even prepared,” says Sanjay. That’s when you

realise what a long journey it must have been-to hell and back.

Case Adapted from Business World, 13-05-2002.

63

Life After Debt

What makes Arvind Mills’ debt-restructuring exercise unique was that it navigated what was extremely complex terrain. Arvind had 85 institutional lenders. For Example, two banks, ICICI and UBS, had an exposure higher than $ 50 million: 14 others had an exposure of between $ 10 and 25 million; and another 36 were holding debt of around $3-10 million. Besides, Arvind’s fixed\deposits had 30,00 retail investors, who collectively put Rs. 22 crore into the company. Of its debentures worth Rs. 100 core, 45% was owned by 85,000 individuals. The range, tenure, size and currency of loans, aggregating to about Rs. 2,700 crore, was staggering.

The Arvind management, particularly CFO Jayesh Shah, knew that to survive the company needed to reduce its debt burden substantially. But besides the sheer range of instruments in use, there were other issues that needed sorting out. It was the first full-scale financial restructuring in India for which there existed no legal framework outside of BIFR. More important, the investors had different expectations-for example, the secured lenders expected preferential treatment over those unsecured.

So Arvind, along with adviser Jardine Fleming, put down a few templates for restructuring, One, ensure parity among lenders. Two, keep the process transparent by keeping bilateral deals out. Three, make the process interactive by forming a lenders’ steering committee representing 60% of total debt; this would then be a forum for negotiating restructuring terms. Four keep servicing working capital interest and also repay retail debt to small investors. Five, make restructuring a priority by dedicating cash flows to debt servicing for the next 10 years.

With the working capital borrowings and the retail investors’ portion out, Arvind was left with Rs. 2,000 crore of debt that needed recasting. Then, based on a 10-year projection that KSA Technopak had made, the company arrived at a Rs. 1,200 crore net present value (NPV) of operating cash flows. That meant that Rs. 8000 crore (or 40%) of debt had to be written. Off. Those who wished to exit the company immediately would logically take the biggest write-off, 55% of principal. They would also not be paid any interest. Those who wished to exit after five years would be paid the full principal, and the interest at 4%. (Arvind’s average cost of borrowings was around 14%). IN NPV terms, that meant a 45% hit. Finally, those willing to stick around for 10 years, would repaid the principal and interest at 10%. In NPV terms, it meant a 20% hit.

With this now in place, the company’s leverage has reduced from a high of 5.14 (over 18 months) to 1.3 now. Says ABN Amro’s Kranti Jaiswal: “it was a fair restructuring.” It was also the first. And now, if industry watchers are to be believed, a few other companies in distress are about to go Arvind’s way.

64

Some Important Strategic Events in Arvind Mills

Leverage

1993-94

• Recruits 60 management trainees and engineers with future growth in mind

• Hires Vikram Rao, S. Krishnamurthy and others form Maura Coates

• Total denim capacity: 60 million metres

0.60

1996-97

• Global denim prices go through the roof: hit s. 93 per metre

• Denim capacity Increase continues

• Takes a $75-milion ECB from a Bank of Nova Scotla-led consortium

• Santej unit foundation stone laid

0.78

1997-98

• Launches Excalibur and Ruggers, relaunches Flying Machine

• Denim capacity at 110 million metres a year

• Issues a $125-million FRN

1.31

1998-99

• Denim market collapses; prices touch low of Rs. 78 per metre

• Nafta kicks in:

Arvind becomes uncompetitive in the US market

1.67

1999-2000

• Naphtha prices double from S. 7 per kg to Rs. 15

• KSA Technopak and Jardine Fleming came on board

• Steering committee for restructuring formed; first meeting takes place at the Orchid, Mumbai

2.23

2000-Sept 2001

• Financial year extended till September

• Steering committee meetings continue

5.94

65

Oct 2001 till date

• Restructuring plan approved

• Denim prices on the rise, hovers around Rs. 94 per metre

1.3

Financial Details of Arvind Mills Ltd.

Arvind Mills Ltd.(Non-Annulised) RS. Crore

Mar 1997 12 months

Mar 1998 12 months

Mar 1999 12 months

Mar 2000 12 months

Sep 2001 18 months

Gross Sales 878.02 914.86 940.29 1215.23 1856.90 Net sales 872.72 907.40 932.00 1199.39 1845.71 VOP 857.95 939.77 967.08 1158.82 1850.12 Other income 104.12 88.50 83.96 56.36 34.97 Cost of production 649.03 757.82 797.74 1080.64 1661.14 Selling cost 28.75 61.85 96.04 73.04 75.45 PBDIT (NNRT) 305.89 234.46 133.54 135.08 222.87 PBDT (NNRT) 202.98 160.09 42.01 -172.24 -277.42 PBT (NNRT) 145.20 87.36 -40.16 -337.39 -499.32 PAT (NNRT) 139.78 79.11 -40.16 -337.39 -499.32 Cash profit (NNRT) 197.56 151.84 74.03 -169.72 -276.97 Operating cash flow 250.92 0.72 213.58 230.67 143.85 Gross value added

349.08 285.10 182.39 246.00 404.19

Exports 358.05 350.55 458.79 488.71 887.44 Imports

119.57 139.40 334.39 148.90 267.69

Gross fixed assets (net of reval & WIP) 810.01 1017.04 1080.32 2445.80 2004.52 Current assets 1157.74 988.71 1104.73 827.00 827.51 Net worth 1064.32 1158.01 1162.85 891.01 391.53

Equity capital 100.55 100.55 100.55 100.55 100.55 Long term borrowings 845.81 841.68 880.70 810.76 802.22 Capital employed 1910.13 1999.69 2043.55 1701.77 1193.75 Current liabilities & provisions

398.80 907.63 1482.53 1580.00 1901.51

Total assets/liabilities (net of reval & misc. exp. n.w.o.)

2270.17 2858.72 3466.31 3208.50 3038.52

Break-even sales (%) 56.19 72.17 147.77 221.61 155.58 Margin of safety (%)

43.81 27.83 0.00 0.00 0.00

Growth (%)

Gross sales 19.23 4.20 2.78 29.24 52.80 Net sales 19.98 3.97 2.71 28.69 53.89 Cost of production 14.57 16.76 5.27 35.46 53.72 GFA 27.93 25.56 6.22 126.40 -18.04 Total assets

19.68 25.93 21.25 -7.44 -5.30

66

Margins (%)

PBDIT (NNRT)/Sales 34.84 25.63 14.20 11.12 12.00 PBDT (NNRT)/ Sales 23.12 17.50 4.47 -14.17 -14.94 PAT (NNRT)/ Sales 15.92 8.65 -4.27 -27.76 -26.89 PBDIT (NNRT)/Net Sales 35.05 25.84 14.33 11.26 12.08 PBDT (NNRT)/Net Sales 23.26 17.64 4.51 -14.36 -15.03 PAT (NNRT)/Net Sales 16.02 8.72 -4.31 -28.13 -27.05

Arvind Mills Ltd.(Non-Annulised) RS. Crore

Mar 1997 12 months

Mar 1998 12 months

Mar 1999 12 months

Mar 2000 12 months

Sep 2001 18 months

Return ratios (%)

PAT/Net worth 13.24 7.12 -3.46 -32.85 -77.86 PAT/Total assets 6.71 3.08 -1.27 -10.11 -15.99 PBDIT/Total assets 14.68 9.14 4.22 4.05 7.14 PBDIT/Capital employed

17.86 12.11 6.79 7.49 16.17

Liquidity ratios

Long term debt/equity (times) 0.79 0.73 0.76 0.91 2.05 Total debt/equity (times) 0.99 1.35 1.67 2.16 4.94 Current ratio (times) 2.90 1.09 0.75 0.52 0.44 Interest cover (times)

2.41 2.17 0.56 -0.10 0.00

Gross working capital cycle (days) 232 219 218 161 97 Net working capital cycle (days) 169 160 117 55 26

Avg. days of debtors (days) 87 83 108 78 40 Avg. days of creditors (days) 64 59 100 106 70

VOP/Total assets 0.412 0.366 0.306 0.347 0.592 VOP/GFA (times)

1.189 1.029 0.922 0.657 0.831

Total R & D expenditure 0.00 0.00 0.00 0.00 0.00 R & D capital 0.00 0.00 0.00 0.00 0.00 R & D current 0.00 0.00 0.00 0.00 0.00

Source: Compiled from Prowess CMIE data base

Discussion Questions:

1. What are the levels of strategy mismatch discussed in the case?

2. What environmental factors are influencing Arvind Mills? How do

these factors change in Post MFA Regime?

3. Identify the CSF for Arvind mills? In the light of the CSF, is it

proceeding in the right direction?

4. Examine the Integration/Diversification options for Arvind mills

67

2. Exercise

Prepare a presentation on Outsourcing (Vs) Integration strategies

highlighting the rationale for these strategies and their pitfalls.

68

69

Module 5

1. Exercise: Finding a strategy for a Restaurant

You are a group of partners contemplating opening a new restaurant in your city

and trying to decide what business-level strategy can provide your restaurant

with the best competitive advantage to make it as profitable as possible.

1. Create a strategic group of the restaurants in your city, and define

their generic strategies.

2. Identify which restaurants you think are the most profitable and

why.

3. On the basis of this analysis, decide what kind of restaurant you

want to open and why.

2. Case study of Hero Honda

“HERO NO.: 1”

Indian Automobile Industry (2-Wheelers and 3-Wheelers) 2-Wheelers

India is the second largest manufacturer and producer of two-wheelers in the

world. It stands next only to Japan and China in terms of the number of two-

wheelers produced and domestic sales respectively. This distinction was

achieved due to variety of reasons like restrictive policy followed by the

Government of India towards the passenger car industry, rising demand for

personal transport, inefficiency in the public transportation system etc.

The Indian two-wheeler industry made a small beginning in the early 50s when

Automobile Products of India (API) started manufacturing scooters in the country.

Until 1958, API and Enfield were the sole producers. In 1948, Bajaj Auto began

trading in imported Vespa scooters and three0wheelers. Finally, in 1960 it set up

70

a shop to manufacture them in technical collaboration with Piaggio of Italy.

Although various government and private enterprises entered the fray for

scooters, the only new player that has lasted till today is LML. Under the

regulated regime, foreign companies were not allowed to operate in India. It was

a complete sellers market with the waiting period for getting a scooter from Bajaj

auto being as high as 12 years.

The motorcycles segment was no different, with only three manufacturers viz

Enfield, Ideal Jawa and Escorts. While Enfield bullet was a four-stroke bike, Jawa

and the Rajdoot were two-stroke bikes. The motorcycle segment was initially

dominated by Enfield 350cc bikes and Escorts 174cc bike. The two-wheeler

market was opened to foreign competition in the mid 80s. Moreover the then

market leaders – Escorts and Enfield – were caught unaware by the onslaught of

the 100cc bikes of the four Indo-Japanese joint ventures. With the availability of

fuel-efficient low power bikes, demand swelled, resulting in Hero Honda – then

the only producer of four stroke bikes (100cc category), gaining a top slot. The

first Japanese motorcycles were introduced in the early eighties. TVS Suzuki and

hero Honda brought in the first two-stroke and four-stroke engine motorcycles

respectively. These two players initially started with assembly of CKD kits, and

later on progressed to indigenous manufacturing. In the 90s the major growth for

motorcycle segment was brought in by Japanese motorcycles, which grew at a

rate of nearly 25% CAGR in the last five years. The industry had a smooth ride in

the 50s, 60s and 70s when the Government prohibited new entries and strictly

controlled capacity expansion. The industry saw a sudden growth in the 80s. The

industry witnessed a steady growth of 14% leading to a peak volume of 1.9mn

vehicles in 1990. the entry of Kinetic Honda in mid-eighties with a variometric

scooter helped in providing ease of use to the scooter owners. This helped in

inducing youngsters and working women, towards buying scooters, who were

earlier inclined towards moped purchases. In the 90s, this trend was reversed

with the introduction of scooterettes. In line with this, the scooter segment has

consistently lost its part of the market share in the two-wheeler market.

71

In 1990, the entire automobile industry saw a drastic fall in demand. This resulted

in a decline of 15% in 1991 and 8% in 1992, resulting in a recession in FY93 and

FY94. Hero Honda showed a marginal decline in 1992. the reasons for recession

in the sector were the incessant rise in fuel prices, high input costs and reduced

purchasing power due to significant rise in general price level and credit crunch

in consumer financing. Factors like increased production in 1992, due to new

entrants coupled with the recession in the industry resulted in companies either

reporting losses or a fall in profits.

3-Wheelers

India is one of the very few countries manufacturing three-wheelers in the world.

It is the world’s largest manufacturer and seller of three-wheelers. Bajaj Auto

commands a monopoly in the domestic market with a market share of above

80%, the rest is shared by Bajaj Tempo, Greaves Ltd and Scooters India.

In the mid-sixties, Rahul Bajaj packed his bags and moved the headquarters of

Bajaj Auto Limited from Mumbai to Akrudi, an obscure village on the outskirts of

Pune city. These days, it isn’t too difficult to catch the 63-year-old Chairman &

Managing Director-he has now handed over the day-to-day operations to an

eight-member A team, headed by elder son Rajiv-in a nostalgic mood. “I insisted

that my children study with the workers’ children in a village school, rather than

sending them to one of those fancy ones in Pune,” recollects Bajaj.

Some 35 years after Bajaj made the move to Pune, it was the turn of one of his

illustrious competitors-Hero Honda Motors-to train its sights on the city. No, its

78-year-old Chairman & Managing Director, Brij Mohan Lall Munjal hasn’t

decided to shift base from the capital to Bajaj territory. Rather, the Munjals

zeroed in on Pune for a celebration-Hrithik Roshan in tow-to which 3,000 Hero

Honda motorcycle owners were invited. There was adequate reason to party. In

the first four months of 2001-2002, Hero Honda’s sales had raced ahead of those

of Bajaj Auto, plus subsidiary Maharashtra Scooters, by almost 40,000 vehicles.

What this means is that for the first time in 45 years, Bajaj has lost pole position

in two-wheelers in the April-July period. Last year, the Munjals succeeded in

72

pipping Bajaj at the post, but if you included Maharashtra Scooters’ sales the

Pune major was still ahead by 30,000 vehicles. However, if only motorbikes are

considered, Hero Honda sold almost two bikes for every one Bajaj did last year.

The War’s Begun

Four months may not make a summer, but indications are that by March 31,

2002, Hero Honda should at best do 1.4 million bikes. Bajaj, if all goes well,

should end the year at 1.2 million. What this also means is that Hero Honda’s

motorcycle sales (including a step-through) will be more than all the scooters

(geared and ungeared), step-through and motorcycles that Bajaj is able to sell.

“This year’s been lost,” concedes R. L. Ravichandran, Vice-President (Business

Development & Marketing), Bajaj Auto. Rahul Bajaj, ever the fighter-he’s quick to

remind you that he was a champion southpaw in his younger days-admits that

“there is a distinct possibility that Hero Honda will be No. 1 by the year-end, but

there are no guarantees.”

It’s a war out there, as both giants slug it out for the top slot. There may be many

others in the fray like TVS Suzuki, Yamaha, LML, and Kinetic, who all have plans

of their own. But clearly it’s a two-horse race today, with Hero Honda and Bajaj

between them lording over three fourths of the market. Munjal tries to downplay

the achievement by pointing out that his company was just chasing a goal fixed

by it. “We respect Bajaj Auto and are nowhere in comparison. They have

reserves of Rs. 1,700 crore (the Bajaj annual report shows over Rs. 2,500 crore)!

What do I have?” asks Munjal. The modesty notwithstanding, by popping the

champagne in Bajaj territory the Munjals would surely have enjoyed driving home

a point: that the lion had been bearded in its den.

Yesterday’s King of the Road has been dethroned, and Hamara Bajaj has made

way for Hero Honda’s Suhana Safar. Bajaj Auto may still be king in scooters, but

that’s a pie that’s shrinking fast, by almost 15 per cent a year. In the market

that’s growing-motorcycles, at 25 per cent-Hero Honda rules the roost with a 50

per cent share, and Bajaj commands just about half of that. Motorcycles today

make up 60 per cent of the 3.2 lakh a month two-wheeler market, and will count

73

for two-thirds in three years. Bajaj may still be dominant in 50 per cent of the two

wheeler market, but it is losing out completely in one-third of it, which Rajiv Bajaj

calls the “executive segment,” where Hero Honda calls the shots.

All these figures clearly queer the pitch in favour of the Munjals. Hero Honda

CEO Pawan Kant Munjal says his biggest challenge isn’t to maintain the lead but

to “increase it further.” But it would be foolish to assume that Bajaj has

reconciled itself to the No. 2 slot, which probably explains why Munjal is playing

down the current victory. “We’re not used to being No. 2,” says Rajiv Bajaj.

“Emotionally, I’ll say that I want to be No. 1 yesterday. But practically, I’ll tell you

that we have a huge opportunity till 2004. The next two years will be the

decider.” Ravinchandran might admit that the current year is “lost,” but he says:

“Wait and see what happens after that.”

If you’re wondering what’s sacrosanct about 2004, well that’s when Honda’s joint

venture with the Munjals comes up for review, and the Bajas don’t rule out an

onslaught from the Japanese major, with the Hero prefix or without it. “Till 2004,

Honda Motorcycle & Scooter Limited. (the wholly-owned subsidiary Honda

flagged off two years ago) will make scooters. After that it will diversify into other

two-wheeler categories, including motorcycles,” warns Haruo Takiguchi,

President and CEO of Honda Motorcycle.

Rajiv will remind you-and himself-about how serious the Honda threat is by

recollecting what the Japanese numero uno did to Yamaha in the Japanese

market in 1982. When Yamaha publicly announced its intention of grabbing pole

position, Honda responded by launching 113 bikes in 18 months! The war ended

when Yamahas, which by then had 1 million of stock lying unsold, called off the

war and accepted Honda as numero uno. And you can’t rule out the Japanese

giant displaying similar aggression in India, which after all is the second largest

market (after China) in the world for two-wheelers, with some 2 lakh motorcycles

being sold every month.

74

The Threat Across The Border

Don’t also rule out the threat from the Chinese manufacturers-there are some

400 of them producing 10 million two-wheelers annually, or close to half of the

world market. Quingqui is the largest with an annual capacity of 1.6 million,

followed by Jailing, and the Bajajs feel that there are at lest three more Chinese

producers capable of turning out a price-competitive, quality product in India.

That’s why the Bajajs are keen to take on Hero Honda before the Japanese

number one and the Chinese unleash their might. They’re doing so with a series

of products that flank Munjal’s current bread-winners-the Splendor and the

Passion, which account for a little over 80 per cent of Hero Honda’s sale-as well

as with a couple that are directly targeted at these bikes. Hamara Bajaj has gone

out the window. Today, the tag line is Planet Bajaj, to reflect the Pune major’s

presence at every point, be it in motorcycles or scooters. At the same time on

the operational front, Bajaj auto is frenetically cutting costs to ensure as the

company chases market share, its margins aren’t eroded in that endeavour.

You could easily ask: why did Bajaj Auto have to wait so long? Fact is, Bajaj was

slow in reading the shift from scooters to motorcycles. Hero Honda on the other

hand surveyed the market in 1998 via IMRB-the base of the survey was 25,000

samples. The results of those survey? Scooters are fast getting out of fashion.

“It’s thanks to that survey that today we sell over a million motorcycle in a year,”

says Atul Sobti, Senior Vice-president (Marketing & Sales), Hero Honda. Ravi

Sud, Vice-President (Finance), Hero Honda, attributes a part of his company’s

lead in motorcycles to the fact that it had set up a second plant in Gurgaon way

back in February 1997. “So, with additional capacity, we found it easier to cash

in on the trend in favour of motorcycles. Bajaj, on the other hand, remained

preoccupied with scooters,” says Sud.

A candid Rajiv agrees. “Until 1995 we were extremely focused on scooters and

three-wheelers.” Over the years, as Bajaj expanded its mobike range, customers

didn’t have any particular reason to to switch to Bajaj, as their bikes were looked

upon as me-toos. Yet, Bajaj has made ample progress in bikes since it launched

75

its first one in 1985. Till 1995 it was No 4. By 1997 it had shot ahead of Yamaha

to reach third position. And three years later, it dislodged TVS Suzuki from the

second slot.

Playing the Price Game

Of course, all this counts for nothing if Bajaj is losing its premier status in two-

wheelers. And that’s what the junior Bajajs-Rajiv, President, and Sanjiv, Vice-

President (Finance)-are aiming to avoid. At the root of the strategy is the belief

that Hero Honda’s bikes are too expensive.

So the first prong of the strategy is to flank the splendor and the Passion with two

different products: one that is cheaper but offers the same features and another

in the same price range that offers more. In the meantime, there will be a couple

of products to take the Hero Honda bikes head-on.

If Bajaj’s gambit is to attack with a flurry of launches and carve up the consumer

base, the Hero Honda tack is, well a bit different. ‘Our surveys tell us that the

customer will be happy with two products, if they are close to what he is looking

for,” says Hero Honda’s Sobti. So, after flagging off CBZ, Passion and Joy (in

that order) between 2000 and early 2001, the next new products-a100cc-plus

motorcycle-is coming only in mid-2002. While Joy was launched this year to

check the drop in sales for its low-end bikes-CD 100 and CDSS (both are more

than 15 year models)-Passion was introduced to protect splendor.

Back to Bajaj, which believes that a 100 cc bike for Rs. 45,000-which is the price

tag on the Splendor-is expensive by at least Rs. 5,000.

“Nowhere in the world does a reliable durable, quality 100 cc bike cost more than

Rs. 40,000,” says Rajiv, adding that this is what explains the high margins at

Hero Honda (an operating margin of 14.7 per cent last year).

Enter the Boxer range (AT and CT), in the sub-Rs. 40,000 range. Boxer AT is

the cheapest 100 cc motorcycle in the market, at Rs. 33,691 (ex-showroom,

Delhi). Hero Honda’s lowest-priced mobike-the CD 100-costs Rs. 5,000 more.

“We can’t launch a motorcycle at that price,” says Hero Honda’s Sobti. Since

76

launch two years ago, sales of the Boxer have spurted from 3,000 a month to

30,000, and the plan is to touch 40,000 by the year-end. So, one part of the

flanking game plan is clearly working. Or is it? Sales may be happening, but

competitors point out that at this price, Bajaj isn’t making any money, which is

reflected in the dip in operating margins (from 19 per cent in 1999-2000 to 9.8

per cent last year), and partly responsible for the huge dip in profits last year

(from Rs. 635 crore to Rs. 263 crore).

Whose Loss Is It Anyway?

So, has Bajaj been buying market share, at the cost of margins? Well, yes and

no. Yes, because that’s how the the Boxer was flagged off-at a discount of Rs.

1,500. There were only two ways that the Bajajs could compete with Hero

Honda: one, to launch an out-of-this-world product, which is near-impossible (for

Bajaj at least); or, two, to compete on price, which was the way it went. “When

you want to jumpstart volumes, the only thing that works is price,” explains Sanjiv

Bajaj; who estimates that the company would have taken a Rs. 30 crore hit

because of the discounts.

When Bajaj Auto first introduced the discounts last July, its operating margins

suffered heavily, dropping from 12.4 per cent to 7.1 per cent in the second

quarter. But thanks to the upsurge in volumes coupled with cost efficiencies, the

company has been able to bring the operating margins back into the 12 per cent

range.

The increase in motorcycle volumes via the Boxer also gave Bajaj the

opportunity to reduce costs at the vendor end. The vendor base itself has been

pruned from 1,000 to 800 and should reach 400 by April. “This assures that

those left get more business, and this increase in confidence serves as an

incentive for them to invest in technology and reduce costs,” adds Sanjiv. Aiding

in offsetting the discounts offered is a higher level of indigenisation. The entire

carburettor, the crankpin and the engine bearing of the Boxer will soon be made

locally.

77

All these measures should help Bajaj up its margins to close to 15 per cent by

the year-end. In the process, Bajaj has at last ensured that it makes money from

motorcycles: so it doesn’t matter what Bajaj sells today; a bike today is as

profitable as a scooter.

The Game’s Not Over Yet

The Boxer range might have opened up a new segment for Bajaj-and other two-

wheeler manufactures-but the biggest battle is to take on the Splendor and the

Passion. The Caliber Chroma and Aspire, essentially me-toos of the Splendor

and Passion, will play their role for Bajaj, but the company doesn’t expect these

products to be major breadwinners. Rajiv will be more than happy if the two tot

up sales of 25,000 by the year-end.

To hit Hero Honda where it really hurts, the Bajajs are pinning their hopes on the

Pulsar, to be launched in October. Priced at roughly Rs. 47,000 (which is what

Hero Honda’s passion will cost you), the Pulsar is, to use a car analogy, a step-

up from a Maruti 800 to a Zen-at the same price of the Maruti 800. Rs. 47,000

for a 100 cc bike is just too much, feel the Bajajs.

So they’re rolling out a 150 cc and 180 cc for around that price. But it’s not just a

bigger engine that the consumer gets: he’ll also get a five-speed gear box, a

longer wheel base, a tachometer, electric start and disc brakes.

Rajiv likes to compare the success of the splendor with, ironically, the supremacy

enjoyed by the Bajaj Chetak scooter for so long, but not any more. To ensure

that doesn’t happen is of course the task of Hero Honda CEO Pawan Kant

Munjal. Yet, relying on one or two horses to win the race might be a risky

strategy. What’s more, the Hero Honda product range is largely limited to 100 cc

bikes. Pawan Kant admits that the company has so far ignored the above 100 cc

segments

In fact, the 1998 IMRB survey had pointed out two lacunae in Hero Honda’s

strategy: one, it didn’t have a presence in the power bike segments; and, two, its

products lacked styling and design. The first gap was filled with the CBZ, and the

78

second with Passion. But the CBZ hasn’t exactly set the roads on fire. Although

it sold 6,000 units at the time of launch, monthly sales are now down to half that

figure.

As for the segments it has ignored, Pawan Kant says “We have been working on

both the below and above 100 cc ranges for some time now,” but that’s all he’s

willing to say as of today. By 2002, Hero Honda hopes to have a motorcycle in

the 100 cc-150 cc segment.

If Bajaj Auto believes that the path to the consumers is by providing them choice,

Hero Honda is pursuing good old customer satisfaction. The recently launched

passport programme-Suhana Safar-gives Hero Honda motorcycle owners points

each time they get their bikes serviced and every time they buy accessories and

spares. It already has 1,50,000 members.

Still, this is a war which won’t be decided in a hurry. Although Hero Honda and

Bajaj Auto may contest the big fight today, the equation could alter drastically in a

couple of years. How should Hero Honda strategise to be a Hero No. 1? Do you

expect drastic changes in the Industry Environment after 2004? There are no

easy answers. But over the next two years Bajaj Auto’s objective is clear: to

ensure that Hero Honda has fewer reasons to celebrate-in or outside Pune.

79

Annexure

Comparative Market Share of Motorcycles Category Premium/Life Style Computer / smart Economy Company 2002 2003* 2002 2003* 2002 2003*

Bajaj Auto 13 41.66 18.45 10 50 59.60 Hero Honda

45.25 29.16 64.80 56.16 21.71 32.95

TVS Motors

Nil Nil 9.34 17.44 28.30 17.44

* Projected (Source: Frost and Suillvan)

India’s Production Data (Two and Three Wheelers) 1999-2000 2000-01 2001-02 March

2002 Scooters 12,59,423 8,79,759 8,70,213 62,028 Bajaj Auto Ltd 5,94436 3,56,159 3,74,135 26,138 Honda Motorcycle & Scooter

- - 55,670 8,500

Kinetic Motor Company Ltd. 1,16,790 1,23,304 1,08,301 5,048 LML Limited 2,75,805 1,68,802 1,25,470 6,307 Maharashtra Scooters Ltd. 1,40,530 91,739 60,216 5,684 TVS Motor Company Ltd. 1,31,862 1,39,755 1,46,421 10,351 Motorcycles 17,94,078 21,83,785 29,61,906 2,93,358 Bajaj Auto Ltd. 4,31,837 5,48,326 7,24,397 70,346 Hero Honda Motors Ltd. 7,61,210 10,34,074 14,22,112 1,33,179 Kinetic Engg. Ltd - - 55,221 6,229 LML Limtied - 42,410 42,180 1,800 Royal Enfield Motor 23,278 21,432 24,136 2,141 TVS Motor India Ltd 3,25,319 3,58,024 4,55,224 56,073 Yamaha Motor India (p) Ltd 2,52,434 1,79,519 2,38,636 23,590 Mopeds 7,24,510 6,94,974 4,91,525 36,845 Bajaj Auto Ltd. 69,475 58,381 37,758 1,998 Kinetic Engg. Ltd. 1,62,475 1,59,424 1,00,987 4,381 Majestic Auto Ltd. 1,11,119 1,07,524 81,853 5,856 TVS Motor Company Ltd. 3,81,301 3,69,645 2,70,927 24,610 Three Wheelers 1,90,259 2,03,234 2,12,753 20,642 Bajaj Auto Ltd. 1,73,223 1,59,196 1,58,342 1,46,678 Bajaj Tempo Ltd. 16,963 17,439 18,899 2,114 Mahindra & Mahindra Ltd. 73 247 3,208 610 Piaggio Vehicles Pvt. Ltd. - 26,352 32,304 3,240 G. Total… 2&3 wheelers 48,43,449 47,59,392 53,70,468 5,05,189

Source: SIAM

80

India’s Sales Data (Two Wheelers)

1999-2000(A)

2000-01(B)

2001-02 (C)

% Change C/B

March 02

Scooters 12,33,781 8,76,224 8,53,330 -2.6 53,936 Bajaj Auto Ltd 5,70,702 3,56,512 3,65,087 2.4 25,298 Honda Motorcycle & Scooter

- - 54,216 - 8,140

Kinetic Motor Company Ltd.

1,12,676 1,19,663 1,08,627 -9.2 8,407

LML Limited 2,77,157 1,61,231 1,20,790 -25.0 5,642 Maharashtra Scooters Ltd.

1,46,671 96,755 61,456 -36.4 7,860

TVS – Suzuki Ltd. 1,26,575 1,42,063 1,43,154 0.7 8,589 Motorcycles 17,61,439 21,14,693 28,93,618 36.8 2,90,318 Bajaj Auto Ltd. 4,25,704 5,36,103 7,06,012 31.7 72,043 Hero Honda Motors Ltd.

7,51,639 10,19,267 14,12,279 38.5 1,34,274

Kinetic Engg. Ltd - - 44,309 - 4,029 LML Limtied - 36,160 44,723 23.6 2,608 Royal Enfield Motor 24,175 20,189 22,769 9.3 2,176 TVS – Suzuki Ltd 3,23,181 3,51,483 4,47,279 27.2 54,058 Yamaha Motor India (p) Ltd

2,36,740 1,50,861 2,16,247 43.3 21,130

Mopeds 6,98,321 6,43,461 4,67,902 -27.2 38,919 Bajaj Auto Ltd. 65,786 54,388 36,491 -32.9 2,627 Kinetic Engg. Ltd. 1,58,022 1,47,532 96,434 -34.6 7,801 Majestic Auto Ltd. 95,773 78,266 67,590 -13.6 4,352 TVS - Suzuki Ltd. 3,78,740 3,63,275 2,67,387 -26.4 24,139 Total 2 - Wheelers 36,93,541 36,34,378 42,14,850 15.9 3,93,173

Source: SIAM

81

Financial Statements of Hero Honda Ltd

Balance Sheet

( Rs. Cr. ) Mar 1999 Mar 2000 Mar 2001 Mar 2002 Mar 2003 12 mths 12 mths 12 mths 12 mths 12 mths Sources Of Funds Total Share Capital 39.94 39.94 39.94 39.94 39.94 Equity Share Capital 39.94 39.94 39.94 39.94 39.94 Preference Share Capital 0.00 0.00 0.00 0.00 0.00 Reserves 260.64 408.39 589.25 645.82 821.09 Revaluation Reserves 0.00 0.00 0.00 0.00 0.00 Networth 300.58 448.33 629.19 685.76 861.03 Secured Loans 65.97 19.74 0.00 0.00 0.00 Unsecured Loans 21.61 31.35 66.48 116.44 134.28 Total Debt 87.58 51.09 66.48 116.44 134.28 Total Liabilities 388.16 499.42 695.67 802.20 995.31 Application Of Funds Gross Block 373.05 501.98 614.66 704.52 770.06 Less: Accum. Depreciation 107.44 139.63 179.76 223.47 273.01 Net Block 265.61 362.35 434.90 481.05 497.05 Capital Work in Progress 43.02 10.48 18.95 9.69 9.19 Investments 89.41 167.74 288.16 725.77 1,193.00 Inventories 135.98 169.57 198.54 178.36 200.92 Sundry Debtors 26.55 32.19 42.29 99.72 141.49 Cash and Bank Balance 5.23 9.32 45.09 108.96 24.33 Total Current Assets 167.76 211.08 285.92 387.04 366.74 Loans and Advances 103.35 102.87 93.25 139.61 110.66 Total CA, Loans & Advances

271.11 313.95 379.17 526.65 477.40

Deffered Credit 0.00 0.00 0.00 0.00 0.00 Fixed Deposits 0.00 0.00 0.00 0.00 0.00 Current Liabilities 249.66 304.43 365.62 684.79 758.68 Provisions 39.36 55.43 80.09 266.39 434.17 Total CL & Provisions 289.02 359.86 445.71 951.18 1,192.85 Net Current Assets -17.91 -45.91 -66.54 -424.53 -715.45 Miscellaneous Expenses 8.03 4.76 20.20 10.22 11.52 Total Assets 388.16 499.42 695.67 802.20 995.31 Contingent Liabilities 7.08 2.86 2.86 8.41 0.00 Book Value (Rs) 75.26 112.25 31.51 34.34 43.12

Source: www.capitalmarket.com

82

Profit & Loss

( Rs. Cr ) Mar 1999 Mar 2000 Mar 2001 Mar 2002 Mar 2003 12 mths 12 mths 12 mths 12 mths 12 mths Income Sales Turnover 1,484.04 2,248.17 3,170.91 4,465.43 5,101.71 Excise Duty 2.88 1.75 2.26 2.78 4.15 Net Sales 1,481.16 2,246.42 3,168.65 4,462.65 5,097.56 Other Income 20.87 20.39 22.05 85.17 95.62 Stock Adjustments 9.04 0.96 18.17 -5.81 21.08 Total Income 1,511.07 2,267.77 3,208.87 4,542.01 5,214.26 Expenditure Raw Materials 1,046.37 1,585.33 2,285.92 3,092.62 3,491.85 Power & Fuel Cost 12.34 18.46 23.40 25.61 25.82 Employee Cost 57.86 78.01 101.56 168.94 201.63 Other Manufacturing Expenses

51.16 63.42 66.48 49.79 50.18

Selling and Admin Expenses

95.35 151.98 207.85 273.29 353.10

Miscellaneous Expenses

46.83 46.57 99.91 184.86 147.41

Preoperative Exp Capitalised

0.00 0.00 0.00 0.00 0.00

Total Expenses 1,309.91 1,943.77 2,785.12 3,795.11 4,269.99 Operating Profit 180.29 303.61 401.70 661.73 848.65 PBDIT 201.16 324.00 423.75 746.90 944.27 Interest 6.01 4.71 2.53 1.51 1.73 PBDT 195.15 319.29 421.22 745.39 942.54 Depreciation 22.42 34.67 44.27 51.01 57.98 Profit Before Tax 172.73 284.62 376.95 694.38 884.56 Extra-ordinary items 0.00 0.00 0.00 0.00 0.00 PBT (Post Extra-ord Items)

172.73 284.62 376.95 694.38 884.56

Tax 51.36 92.54 130.08 231.45 303.80 Net Profit 121.37 192.08 246.87 462.93 580.76 Total Value Addition 263.54 358.44 499.20 702.49 778.14 Preference Dividend 0.00 0.00 0.00 0.00 0.00 Equity Dividend 25.03 39.94 59.90 339.49 359.44 Source: www.capitalmarket.com

83

Financial Statements of Bajaj Auto

Results (Q4 FY 2002)

Number of Vehicles Sold

Type of Vehicle FY02 FY01 %yoy Motorcycles 656018 422016 55 Scooters – Geared 407670 435699 -6 Scooters – Ungeared 66603 75596 -12 Scooteretts 68005 120590 -44 Total two Wheelers 1198296 1053901 14 Three Wheelers 160684 155177 4 Total two & three wheelers

1358980 1209078 12

Balance Sheet Period to Mar-02 Mar-01 Growth Mar-02 Mar-01 Growth (Rs mn) (3) (3) % yoy (12) (12) % yoy Gross sales 11240.2 8781.1 28.0 42213.9 36900.1 14.4 Net sales 9859.4 7559.2 30.4 36958.0 31279.4 18.2 Other income 309.9 564.7 (45.1) 1813.1 2739.3 (33.8) Total income 10169.3 8123.9 25.2 38771.1 34018.7 14.0 Expenditure (7681.1) (6796.8) 13.0 (31062.7) (28476.9) 9.1 Operating profit 2488.2 1327.1 87.5 7708.4 5541.8 39.1 Interest (5.2) (22.8) (77.2) (33.8) (73.9) (54.3) Depreciation (456.7) (461.6) (1.1) (1796.9) (1772.9) 1.4 PBT 2026.3 842.7 140.5 5877.7 3695.0 59.1 Tax (541.8) 60.0 (1003.0) (1836.8) (270.0) 580.3 PAT 1484.5 902.7 64.5 4040.9 3425.0 18.0 Extraordinary/Prior period items

6.6 (447.6) (101.5) 1140.7 (925.5) (223.3)

PAT after Extraordinary items

1491.1 455.1 227.6 5181.6 2499.5 107.3

OPM (%) 22.1 10.1 - 16.0 9.0 - Equity capital 399.4 399.4 - 399.4 399.4 - EPS (on Face Value Rs2)

29.9 9.1 - 25.9 12.5 -

Source: www.bajajauto.com

84

Financial Statements of TVS Motors

Income Statement

(Rs. mn)

FY2000 FY2001 FY2002 FY2003E FY2004E Volume Sales (no.) Motorcycles 313,446 354,517 450,169* 670,000* 750,000 Scooters 122,947 142,458 144,021 151,222 151,222 Mopeds 364,598 366,471 271,395 227,972 216,573 Total 800,991 863,446 865,585 1,049194 1,117,795 EBITDA/Vehicle (Rs)

2,105 1,490 1,511 2,312 2,551

Net Profit/vehicle (Rs)

1,076 726 619 1,133 1,319

Net Sales 15,418 18,210 19,302 24,931 27,141 Expenditure Raw Materials 10,655 13,330 14,103 18,137 19,677 Change in stocks (132) (212) 6 - - % of Net Sales 68.3 72.0 73.1 72.8** 72.5** Personnel 516 643 747 800 875 % of Net Sales 3.3 3.5 3.9 3.2 3.2 Mfgr & Other Expenses

2,693 3,163 3,139 3,568 3,737

% of Net Sales 17.5 17.4 16.3 14.3*** 13.8*** Total Expenditure 13,732 16,924 17,994 22,505 24,289 EBITDA 1,686 1,286 1,308 2.426 2,852 EBITDA Margin (%) 10.9 7.1 6.8 9.7 10.5 Depreciation 406 437 496 600 650 EBIT 1,280 849 812 1,826 2,202 Net Interest 257 230 133 125 100 Non-operating income

160 198 141 150 150

PBT 1,183 818 820 1,851 2,252 Tax-Current 321 191 187 537 653 Tax – Deferred - - 97 125 125 Profit after tax 862 626 536 1,189 1,474 *The Victor effect **Impact of indigenization of components ***Spiralling R&D and Advertisement expenses will take some sheen away from cost reduction initiatives

85

Balance Sheet

(Rs.mn) FY2000 FY2001 FY2002 FY2003E FY2004E Sources of Funds Equity Share Capital 231 231 231 231 231 Reserves & Surplus 2,921 3,343 3,003 3,961 5,089 Networth 3,152 3,574 3,234 4,192 5,320 Secured Loans 1,553 1,585 1,575 1,575 1,575 Unsecured Loans 563 755 750 750 750 Total Debt 2,116 2,340 2,325 2,325 2,325 Total Funds Employed

5,268 5,914 5,559 6,517 7,645

Application of Funds Gross block 5,582 6,158 6,600 8,100 9,600 Less: Depreciation 1,620 2,049 2,545 3,145 3,795 Net Fixed Assets 3,962 4,109 4,055 4,955 5,805 Capital WIP 86 252 200 200 200 Investments 147 149 150 150 150 Current Assets 3,292 3,786 3,803 4,580 4,957 Inventory 1,188 1,520 1,586 2,049 2,231 Debtors 888 1,070 1,058 1,366 1,487 Other Current Assets

0 0 0 0 0

Cash 154 159 159 165 239 Loans & Advances 1,062 1,037 1,000 1,000 1,000 Current Liabilities/provisions

2,224 2,387 2,355 3,374 3,473

Creditors 1,939 2,121 2,380 3,074 3,123 Liabilities 0 0 0 0 0 Provisions 286 266 275 300 350 Net Current Assets 1,068 1,399 1,149 1,207 1,484 Miscellaneous Expenses

6 4 5 5 5

Total Assets 5,268 5,914 5,595 6,517 7,645 Source: plindia.com

Discussion Questions:

1. What is the generic strategic option pursued by Hero Honda?

2. Is there any deviation between the option & practice?

3. What kind of strategic timing you suggest for future moves of

Hero Honda to take on competition?

4. How should Hero Honda strategise to remain Hero No. 1?

86

87

Comprehensive Case Study