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Table of contents :
Cover
Half Title
Title
Copyright
Preface
Contents
Chapter 1: Decision Making
Chapter 2: Guidelines for Case Analysis
Case Studies
1. H.R. Dilemma
2. Avinash Appliances
3. Green Industrial Products Ltd.
4. Role Conflict
5. Sri Krishna Paper Mill
6. Communication
7. HDFC Bank
8. Retrenchment
9. Fake Currency
10. Smartphone Vs. MP3 Player
11. LCD TV
12. Ice cream War
13. Telecom Services
14. LPG Companies
15. ACT-II
16. Tata Tea
17. Nokia-Collective Emotion
18. SEL
19. Seagull Thermowares
20. Coral Engineers
21. Jhelum Metals and Engineering Corporation
22. Crystal Milk Products Private Limited
23. Telerama Company
24. Starbucks
25. Bajaj Pulsar: Origin of the ‘MALE’ Species in
26. Short-lived Interest
27. Poona Coffee House
28. Diesel Marketing Mix
29. Innovation at Procter and Gamble
30. Marketing Research in Product Development:KELLOGG’S
31. Maruti 800
32. Nirma: Brand Values
33. Samsung: How they Did It?
34. Shell Inc.
35. The Tata Titans
36. General Motors
37. Nestle India Ltd.
38. Serial Entrepreneur
39. David Bruce: An Entrepreneur
40. Philip Green
41. Synergy
42. ASDA
43. General Electric
44. Overseas Packaging Ltd.
45. Air France, British Airways and the Concorde Disaster
46. Jollibee
47. Southgate Mall
48. Ford Motors
49. Maturing Metros
50. Retail Sourcing Hub
51. Pantaloon: ERP in Retail
52. Tata Docomo
53. Dell Computer Corporation
54. Promotion
55. Lifebuoy
56. Pepsodent Vs. Colgate
57. Sensodyne
58. Consumer Perception
59.Celebrity Vs. Utility
60. Parle-G
61. Deodorant Market in India
62. First Flight Couriers
63. DTDC
64. IndiGo Airlines
65. The Water War
66. AirAsia India
67. Mahindra & Mahindra Ltd.
68. Amul
69. Ajanta Biscuits Ltd.
70. Frito Lays
References
Backcover
Second Edition This book presents practical understanding of the management problems. Broadly, it is meant for the students who have basic training in management or commerce and also for those with little or no formal management background like MCA and Engineering. For management professionals, essential principles and concepts of management that are particularly relevant for understanding the problems of management are highlighted through issues for discussion. Thus, the book is of special value for undergraduate and postgraduate courses, like BBA, MBA, MHRD, MIB as well as for B. Tech. and MCA. The case material is sufficiently broad in scope and rigorous in coverage to satisfy any undergraduate and postgraduate courses in the field of management. Each case study provides a descriptive analysis of the critical problems faced by leading organisations. Furthermore, each case study is chosen to reflect and illustrate a specific problem. Each case study contains one relatively successful and the other less so in dealing with one or more of the critical issues or problems. All case studies have been updated to reflect the latest available information about the corporate world. Issues for discussion in each case are an attempt to explore various facets of management principles involved in solving the problem.
978-93-89307-51-1
CASE STUDIES IN MANAGEMENT
Dr. Akhilesh Chandra Pandey
Dr. Akhilesh Chandra Pandey is senior faculty in Department of Business Management, HNB Garhwal University (a Central University), Srinagar, Garhwal, Uttarakhand, having more than 17 years of experience in teaching, research and training. He is an expert member of Technical Evaluation Committee of BSNL. He is PhD, MBA, and LL.B from University of Allahabad. He is also an Associate Member of AIMA, New Delhi. His areas of interests are Organisational Behaviour and Consumer Behaviour. He has published more than 45 research papers in national and international refereed journals and presented 42 papers in various conferences. He is chief editor, Gumbad Business Review and member of Editorial Board for Vedang, Acme and Academy of Business & Retail Management Research, London. He is member of ISA; Society for Management Education, India; Strategic Management Forum, India; and Circle for Child and Youth Research Cooperation in India. He was invited to present his research paper in International Sociological Association, Goteborg, Sweden and International Trade and Academic Conference, London in 2010. He had visited University of Goteborg, Sweden; University of Sri Jayewardenepura, Sri Lanka; University of Wollongong in Dubai, Dubai; and Zayad University, Abu Dhabi.
TM
CASE STUDIES IN MANAGEMENT
CASE STUDIES IN MANAGEMENT
Dr. Akhilesh Chandra Pandey
` 485/-
Distributed by: 9 789389 307511 TM
Case Studies in Management A Practical Approach to Management Problems
Case Studies in Management A Practical Approach to Management Problems
Akhilesh Chandra Pandey Assistant Professor Department of Business Management H.N.B. Garhwal University (A Central University) Srinagar-Garhwal, Uttarakhand, India
©Copyright 2019 I.K. International Pvt. Ltd., New Delhi-110002. This book may not be duplicated in any way without the express written consent of the publisher, except in the form of brief excerpts or quotations for the purposes of review. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software without written consent of the publisher. Making copies of this book or any portion for any purpose other than your own is a violation of copyright laws. Limits of Liability/disclaimer of Warranty: The author and publisher have used their best efforts in preparing this book. The author make no representation or warranties with respect to the accuracy or completeness of the contents of this book, and specifically disclaim any implied warranties of merchantability or fitness of any particular purpose. There are no warranties which extend beyond the descriptions contained in this paragraph. No warranty may be created or extended by sales representatives or written sales materials. The accuracy and completeness of the information provided herein and the opinions stated herein are not guaranteed or warranted to produce any particulars results, and the advice and strategies contained herein may not be suitable for every individual. Neither Dreamtech Press nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Trademarks: All brand names and product names used in this book are trademarks, registered trademarks, or trade names of their respective holders. Dreamtech Press is not associated with any product or vendor mentioned in this book. ISBN: 978-93-89307-51-1 EISBN: 978-93-89795-48-6
Edition: 2019
Dedicated to My Respected Parents Sri Krishna Pratap Pande Smt. Shanti Pande
Preface
This book is designed for the use of practical understanding of the management problems. It is structured and written both for students who have had some basic training in management or commerce and also for those with little or no formal management background like MCA and Engineering. For management professionals, essential principles and concepts of management that are particularly relevant for understanding the problems of management are highlighted through issues for discussion. Thus, the book should be of special value in undergraduate and postgraduate courses of management like BBA, MBA, MHRD, MIB as well as from various related disciplines like B.Tech. and MCA that attract students from a variety of disciplines. The case material is sufficiently broad in scope and rigorous in coverage to satisfy any undergraduate and postgraduate courses requirements in the field of management.
Approach This 2nd edition of Case Studies in Management, is a book that is unique in approach, organisation and pedagogy. The significant innovations are as follows: 1. It teaches management within the context of major set of problems, like strategic planning, organising, controlling, coordination, communication and leadership. Formal, abstract problems and concepts are used to elucidate real-world corporate problems rather than being presented in isolation from case study illustrations. 2. It adopts a problem- and policy-oriented approach to the teaching of management on the assumption that a central objective of any course should be the fostering of a student’s ability to understand contemporary management problems and to reach independent and informed judgments and rational solutions of the problems. 3. It approaches the management related problems systematically by following a standard pedagogic procedure with regard to their analysis and exposition. Each case study begins by stating introduction about the organisation, its principal issues, and how it is manifested in various situations.The case then presents main goals and possible objectives, the role of its analysis in illuminating the problem, and some possible policy alternatives and their
viii PREFACE
4.
5.
6.
7.
likely consequences. This approach not only helps students to think systematically about major issues but, even more important, provides them with a methodology and an operating procedure for analyzing and reaching various rational conclusions about the contemporary management problems. It starts from the premise that it is possible to design and structure a broadly based case study book that uses the best available crosssectional information about problems. Although these problems differ in both scope and magnitude but dealing with such diverse situations in management, the fact remains that most face problems related to applications of theories of management. It recognises the necessity of treating the problems of organisations and their management from an institutional and structural as well as an economic perspective. It thus attempts to combine relevant theory with realistic organisational SWOT analysis. It focuses on management of organisations in both domestic and international contexts, stressing the increasing interdependence of the world economy in all areas. It considers many strategic aspects of marketing, financial and human resource problems of management closely interrelated and requiring simultaneous and coordinated approaches to their solutions.
Organization and Orientation The book is organised into three parts. Part One focuses on how to solve the case study and second part contains simple cases related to management and ascertaining the degree to which it is relevant to contemporary management of organisations. Part third reviews the possibilities and prospects for long cases with their development. In order to provide students with up-to-date case study materials, there are 70 case studies. Each case study provides a descriptive analysis of the critical problems faced by leading organisations.The purpose of each organisational profile is to introduce the students with its history and thus provide them with the kind of applied approach which may be often absent from texts. Furthermore, each case study is chosen to reflect and illustrate the specific problem faced by the companies. Each case study contains one relatively successful and the other less so in dealing with one or more of the critical issues or problems. All of the case studies have been updated to reflect the latest available information of the corporate world. Issues for discussion in each case are an attempt to explore the various facets of management principles involved to solve
PREFACE
ix
the problem. The book in next edition shall also contain material for the teachers, including Power Point slides for each case study. My indebtedness and gratitude to all who helped to shape this first edition cannot be conveyed in few sentences. However, I must record my immense indebtedness to our Hon’ble Vice Chancellor Prof. Jawahar Lal Kaul Singh, whose vision and intellect has successfully lead the path of the University to face the challenges of “Transition” and has shown a practical example of transformational leadership. I am also indebted to a number of my senior faculties especially Prof. J. S. Bisht — Coordinator, Prof. S.K. Gupta, Dean — School of Management who have directly or indirectly provided much of the inspiration to shape the idea about publication of this book. My thanks also go to all the faculty and staff at Department of Business Management, H. N. B. Garhwal University particularly Vishal Soodan, Research Associate for providing their support and assistance. I am grateful to my wife Kiran for her eternal devotion to me for always being with me to help and maintain a proper perspective on life and living, and through her own creative and artistic talents, to inspire me to think in original and sometimes unconventional ways in facing the problems. I would like to thank my loving son Prajwal and daughter Aditi, for putting up with the many hours in nights that went into the revision of this text and hope that when the text is published it will prove to be worth the wait to get me free time to be with them back. Any constructive comments for improving the contents will be warmly appreciated. Akhilesh Chandra Pandey
Contents
Preface
vii
1. Decision Making
1
2. Guidelines for Case Analysis
5
Case Studies 1. H.R. Dilemma
13
2. Avinash Appliances
15
3. Green Industrial Products Ltd.
17
4. Role Conflict
19
5. Sri Krishna Paper Mill
20
6. Communication
22
7. HDFC Bank
23
8. Retrenchment
24
9. Fake Currency
25
10. Smartphone Vs. MP3 Player
27
11. LCD TV
29
12. Ice cream War
31
13. Telecom Services
35
14. LPG Companies
37
15. ACT-II
39
16. Tata Tea
41
17. Nokia-Collective Emotion
42
18. SEL
46
19. Seagull Thermowares
48
20. Coral Engineers
50
21. Jhelum Metals and Engineering Corporation
52
22. Crystal Milk Products Private Limited
54
23. Telerama Company
56
xii CONTENTS 24. Starbucks
58
25. Bajaj Pulsar: Origin of the ‘MALE’ Species in Indian Bike Industry
63
26. Short-lived Interest
66
27. Poona Coffee House
68
28. Diesel Marketing Mix
70
29. Innovation at Procter and Gamble
77
30. Marketing Research in Product Development: KELLOGG’S
84
31. Maruti 800
89
32. Nirma: Brand Values
91
33. Samsung: How they Did It?
96
34. Shell Inc.
100
35. The Tata Titans
105
36. General Motors
109
37. Nestle India Ltd.
117
38. Serial Entrepreneur
121
39. David Bruce: An Entrepreneur
127
40. Philip Green
130
41. Synergy
132
42. ASDA
136
43. General Electric
140
44. Overseas Packaging Ltd.
143
45. Air France, British Airways and the Concorde Disaster
145
46. Jollibee
149
47. Southgate Mall
151
48. Ford Motors
153
49. Maturing Metros
157
50. Retail Sourcing Hub
159
51. Pantaloon: ERP in Retail
162
52. Tata Docomo
165
53. Dell Computer Corporation
167
54. Promotion
194
CONTENTS xiii
55. Lifebuoy
195
56. Pepsodent Vs. Colgate
197
57. Sensodyne
201
58. Consumer Perception
203
59. Celebrity Vs. Utility
204
60. Parle-G
205
61. Deodorant Market in India
207
62. First Flight Couriers
209
63. DTDC
211
64. IndiGo Airlines
214
65. The Water War
218
66. AirAsia India
222
67. Mahindra & Mahindra Ltd.
224
68. Amul
227
69. Ajanta Biscuits Ltd.
230
70. Frito Lays
232
References
241
1 Decision Making
Decision making is considered an integral part of the management process. For managers, decision making is one of the most crucial functions to be carried out by them. This is so because they are always in search of appropriate solutions to various problems which they come across during the process from the beginning to the end. Some of these problems are as follows: what is to be done? Who is to do? How when and where to do? No matter how complex and controversial in other issues of management they may be, the authorities generally share with the view that one cannot be successful manager unless one has full authority and complete freedom to plan, organize direct and control. Besides playing an important role in all types of management functions, decision making constitutes the very basis of planning because during the process of planning major decision in an integral part of authority rights upon which the entire concept of management rests. Thus, the decision making supersedes all other managerial functions and is contained in the process of management to such an extent that management can be regarded as almost equivalent to decision making.
ELEMENTS OF EFFECTIVE DECISION MAKING There are many factors which are considered for effective decision making. While making a decision it is not important to take an ideal decision rather the conditions of external and internal environment are also taken into consideration. Sometimes, not taking any decision may also be termed decision. The timing of the decision or the context of decisions is also of prime importance in decision- making process. The efficiency of the people can be termed doing things rightly but for proper management of organizations, it is more important to do the right things. Here it means that the personnel may be efficient enough to do the work properly but when, by whom and at what time are also factors to be taken into consideration, which is decided by management.
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There are following elements which are very important for effective decision making: 1. Objective: The decisions for any action are predetermined with a set of objectives. The basic aim of any action is set by the organization or the individual but the impact of that action is really going to achieve that objective or not, is of prime importance. 2. Rationality: The implementation of any decision should be rational. The decision is not taken on the basis of some intuition or hunches rather it is important and pertinent to see its basis. The decisions are taken on the basis of information and the feedback but at the same time the reliability of information and feedback should also be checked. 3. Consideration of limitations: The decisions are not taken in isolation rather than many factors which are taken into consideration that is why the effective decisions are contingent upon the context of the event. There is difference between ideal decision and effective decision. Ideal decision may not be beneficial for a corporate house. For example, retrenchment of employees may be required to recover the company from huge losses but the political environment is not allowing for the company to take this harsh decision. The limiting factors are always taken into account by an effective decision maker. 4. Actionable: The effective decisions are those decisions which can be put into action and can deliver the expected results. Sometimes many decisions are taken by a company in its meetings but when it comes to implementation part, decisions do not seem to be implemented. Therefore, the implementation of decision is also essential element in effective decision-making process. 5. Clearly defined: An effective decision must be clearly defined and categorically interpreted. The decision should contain the directions and it implementation part so that it can be practically viable and possible to attain the very objective of the situation. 6. Considering others experience and opinion: While taking decision the experience and opinion of others can be helpful up to some extent but it may not help in the differing contexts. Considering and analysing others opinions and experiences may sometimes help to conclude significantly but may not work in all situations. Considering these elements, it is very important to understand the bounded rationality of the situation and the present factors. Case study
DECISION MAKING 3
method gives a student a situation in which he/she has to consider various factors and take an appropriate and effective solution. In every case study, it is always important to understand the history and background of the company because many activities that are happening in present are based on the company’s background and past history.
METHODS TO SOLVE CASE STUDIES The use of case studies is a widely accepted means of bringing theoretical concepts and practical situations together. It is not possible to take a class into an organisation and observe the subject matter of management or organisational behaviour in real life, hence a written case study outlining a real, or realistic situation is the best available alternative. When reading and studying a case study, it is possible to take two different approaches.
Analytical Approach The first of these is the ‘analytical’ approach where a case structure is examined to try to understand what has happened, and why. In this approach, you do not identify problems or attempt to develop solutions.
Problem-Oriented Method The second approach is the problem-oriented method. In this approach a case is analysed to identify the major problems that exist, the causes of and possible solutions to the problems, and finally, a recommendation as to the best solution to implement. This specific approach describes the problem solving case study method. As with many tasks in business, there is no ‘one best way’ to analyse or write up a case report. Everyone develops their own methods of sorting and analysing through the information and presenting their findings. However, in this chapter you will find a format which may be useful when presenting your case reports. This format is outlined briefly below.
SOME GENERAL ISSUES In a case study, it is crucial that you integrate relevant theory from the course and evidence from the case. Failure to attempt to integrate theory will lead to severe mark reduction or failure. Referencing of all nonoriginal material is essential. You will lose marks for poor referencing.
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Check your completed work for internal consistency. For example, make sure that you attempt to solve the key issues you have identified. Do not say ‘X’ is the major problem, and then recommend a solution to ‘Y’. Try not to be overly descriptive. Remember that you are trying to identify, analyse and solve the problems of the case using the relevant theories from the course, not just repeating what the textbook, or case information, has stated.
2 Guidelines for Case Analysis
How a given Case should be analysed and solved? This question is usually asked by students of management. There is no hard and fast rule for the same but there are some methods to solve a case study. 1. Problem identification and analysis: In this section, you should identify all the major problems contained in the case. Try to identify the underlying causes of problems, not just the symptoms. You should link each problem identified to relevant theory and also to actual evidence from the case. Remember, you must integrate theory and reference all non-original work. 2. Statement of major problems: In most case studies, you will identify a number of problems. Most likely, there will be too many to actually ‘solve’ in the number of words allowed. Hence, it is crucial to state very clearly which are the major two or three problems, or key issues, that must be solved first. Therefore, this section is just a short concise statement of what problems you are going to solve in the remainder of the case. Having once identified the key problems you can continually check back to ensure that you are actually attempting to solve them, and not some other minor problems you identified. This section is crucial to a good case report. 3. Generation and evaluation of alternative solutions: While most problems will have a very large number of possible solutions, it is your task to identify and evaluate a number of the more appropriate (at least 2–3 for each major problem identified). Each alternative solution should be briefly outlined and then evaluated in terms of its advantages and disadvantages (strong and weak points). It is not necessary to make a statement in this section as to which alternative is considered best – this occurs in the next section. Do not integrate theory in this section and do not recommend theory. Practical solutions to the problems are required. 4. Recommendations: This section should state which of the alternative solutions (either singularly or in combination) identified
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in Section 6 are recommended for implementation. You should briefly justify your choice, explaining how it will solve the major problems identified in the case. Integration of relevant theory is essential here. 5. Implementation: In this section, you should specifically explain how you will implement the recommended solutions. Theory cannot be implemented; you must translate it into actions. This includes explaining what should be done, by whom, when, in what sequence, what will it cost (rough estimates only), and other such issues. Remember, if a recommended solution cannot be realistically implemented, then it is no solution at all. Appendices (if any): This section will contain the list or tables of the analysis done on which you have recommended a solution. A case study is a collection of facts and databased on a real or hypothetical business situation. The goal of a case study is to enhance your ability to solve business problems, using a logical framework. The issues in a case are generally not unique to a specific person, firm, or industry, and they often deal with more than one retail strategy element. Sometimes, the material presented in a case may be in conflict. For example, two managers may disagree about a strategy or there may be several interpretations of the same facts.
ALTERNATIVE METHOD TO SOLVE A CASE In all case studies, you must analyse what is presented and state which specific actions best resolve major issues. These actions must reflect the information in the case and the environment facing the firm.
Steps in Solving a Case Study Case Analysis should include these sequential steps: 1. Presentation of the facts surrounding the case. 2. Identification of the key issues. 3. Listing of alternative courses of action that could be taken. 4. Evaluation of alternative courses of action. 5. Recommendation of the best course of action.
PRESENTATION OF THE FACTS SURROUNDING THE CASE It is helpful to read a case until you are comfortable with the information in it. Re-readings often are an aid to comprehending facts, possible strategies, or questions that need clarification and were not apparent
GUIDELINES FOR CASE ANALYSIS 7
earlier. In studying a case, assume you are a consultant hired by the firm. While facts should be accepted as true, statements, judgments, and decisions made by the individuals in a case should be questioned, especially if not supported by facts—or when one individual disagrees with another. During your reading of the case, you should underline crucial facts, interpret figures and charts, critically review the comments made by individuals, judge the rationality of past and current decisions, and prepare questions whose answers would be useful in addressing the key issue(s).
IDENTIFICATION OF THE KEY ISSUES The facts stated in a case often point to the key issue(s) facing by the company, such as new opportunities, a changing environment, a decline in competitive position, or excess inventories. Identify the characteristics and ramifications of the issue(s) and examine them, using the material in the case and the text. Sometimes, you must delve deeply because the key issue(s) and their characteristics may not be immediately obvious.
LISTING ALTERNATIVE COURSES OF ACTION THAT COULD BE TAKEN The alternative actions related to the key issue(s) in the case should be listed. The courses of action should be based on its suitability to the firm and situation. For example, the promotion strategy for a small neighbourhood stationery store would not be proper for a large gift store located in a regional shopping centre. Proposed courses of action should take into account such factors as the business category, goals, market segment, overall strategy, product assortment, competition, legal restrictions, economic trends, marketplace trends, financial capabilities, personnel capabilities, and sources of supply.
EVALUATION OF ALTERNATIVE COURSES OF ACTION Evaluate each potential option, according to case data, the key issue(s), the strategic concepts in the text, and the firm’s environment. Specific criteria should be used and each option analysed on the basis of them. The ramifications and risks associated with each alternative should be considered. Important data not included in the case should be mentioned.
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RECOMMENDATION OF THE BEST COURSE OF ACTION Be sure your analysis is not just a case summary. You may be critiqued on the basis of how well you identify key issues or problems, outline and assess alternative course of action, and reach realistic conclusions (like the firm’s size, competition, image, etc.) after taking into consideration. There is need to show a good understanding of both the principles of management and the case. Be precise about which alternative is more desirable for the company in its current context. Your goal is to apply a logical reasoning process to solution. A written report must demonstrate this process. The cases in management have questions to guide you. However, your analysis may not be limited by them.
Other Method to Solve the Case Study (1) Collect the facts and analyze them: While reading the case, underline the main factual statements, decisions made by the firm and key points which will highlight the main problems of the case and then analyse the facts by interpreting and reviewing the decisions of the individuals and the firm. (2) Identify the main problems/key issues and analyse: Problems in the case are mostly hidden. So read the case again and again to identify the key issues. Facts may help you in identifying the problem. Analyse the characteristics and reasons of the issues involved in the case. Examine them with your knowledge of the concepts related to the subject. (3) SWOT analysis of the case: Find out the strengths, weakness, opportunities and threats of the company/case which will help you to find the possible solutions to the problems. (4) List alternative course of action and evaluate them and then recommend the best course of action: Be precise about the best alternative and make realistic recommendations that reveals about the understanding of the context and content of the case.
LIMITATIONS OF THE CASE STUDY METHOD While teaching various facets of management to students like BBA, MBA, MIB, MHRD, B.Tech and MCM, there is a problem to explain and solve the problems of management through case study may not be feasible to complete in the class. There are some methods cited in this book which can be help to solve the case studies within a limited time of one hour.
GUIDELINES FOR CASE ANALYSIS 9
Method to Solve the Case in a Group within Limited Time-period 1. Divide the whole class into a group of equal number of students (preferably 4-5) 2. Distribute the Case Study to all the groups. 3. Allocate 15-20 minutes time to study the case thoroughly. This time is called reviewing time. 4. After finishing reviewing time, call each group randomly to present the case and the issues for discussion. 5. Each member of the group has to answer at least one issue asked in the case. This will help to give equal opportunity and to ensure the participation of all the members of the group. (Presentation time) 6. After finishing the presentation of solutions of the case study, other group members apart from presenting group should be encouraged to ask or debate on the merit of the solutions. 7. After discussion by the groups, the evaluation can be done on the basis of clarity and the quality of solutions. (Appraisal time) 8. The evaluation can be done on the basis of below mentioned parameters: S.No.
Parameters
Rating (1–5)
1.
Communication skills
1
2
3
4
5
2.
Time management
1
2
3
4
5
3.
Presentation skills
1
2
3
4
5
4.
Logic and reasons behind answers
1
2
3
4
5
5.
Effectiveness of recommendations
1
2
3
4
5
6.
Applicability of solutions
1
2
3
4
5
7.
Group behaviour
1
2
3
4
5
8.
Ability to defend the answer
1
2
3
4
5
Total score
Case Studies
1 H.R. Dilemma
Kailash Rawat Electricals & Co. was a small size firm engaged in agency direct sales of electrical goods, like electric iron, geyser, electric heater, ovens, etc. This firm was established in year 1995. The company owned by the family of four brothers. Two of them were engineers and one was graduate only. Considering the new excise duty reduction and special tax holidays for establishing small-scale industries by the government, they decided to set up their own manufacturing unit of electrical equipment in their native city of Srinagar in the year 2010. The engineer brothers were well qualified in their field but they had no knowledge about appropriate recruitment process to hire the suitable personnel for their company. Earlier, they used to recruit their sales and other staff through relatives, friends and some familiar people. They had taken people both technical and non-technical through the interview or conventional methods. Moreover, they believed that experienced person without requisite technical background can run the factory and they do not want to invite any problem to the production or losses with regard to sales their own electrical products. They recruited 55 employees considering their technical experience and 40 employees as support staff. Avanish who was the youngest one argued that the staff should be experienced but the eldest brother Amresh was of the opinion that technical knowledge of the candidate is more important for the production. Till the year 2012, the firm continued to do its business very well but due to lack of specific human resource policy for the employees regarding welfare, wages and compensation, the resentment among the employees increased. To address the resentment of the employees, the management of the company decided to give 15% hike in the wages to the technical staff and 10% hike to non-technical staff. Six months later, the quarterly report of the company showed a dip in the total sales by 35% and rise in stocks 20%. The directors of the company started thinking as to what have happened, even after giving them a hike.
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QUESTIONS 1. 2. 3. 4.
What was the main problem of the case? What were the reasons for the emergence of this problem? Draw the road map to solve the problem? What would have been done by you if you have to take a decision?
2 Avinash Appliances
Avinash Appliances Ltd. was in the business of trading of various home appliances. The company was doing business quite well. Because of the various activities, the company was facing the problem of integrated information system. Whatever information system was developed, it was based on the needs rather than on planning. To develop MIS, the company decided to recruit an MIS Manager and advertisement was put in a leading national newspaper. After receiving the applications, the company appointed a selection committee consisting of five members—managing director of the company, manager of the agency, chief accounts manager and general manager of sales and an outside consultant. The company interviewed the candidates and selected Mr. Sabyasachi Gupta, a software engineer, as MIS Manager. Sabyasachi decided to meet the senior managers personally to understand their information need and information that could be generated from different departments for the smooth functioning of the organization. For having an interaction to the concerned, he met with Mr. Sanjeev Sharma, the manager looking after electrical appliances division. He was a diploma holder in electrical engineering and an experience of more than 15 years. When he met Mr. Gupta, the following conversation took place: Gupta: “Good morning, Sir.” Sanjeev: “Good morning, how do you do? Gupta: “I am fine sir; I want to know what information your department needs.” Sanjeev: “If you want to enjoy a cup of coffee with me, you are welcome. But if you want to ask me such silly questions, I am really very sorry.”
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At this, Mr. Gupta looked visibly upset and left the factory office after saying, “Sir, I will meet you later.” He was not able to understand the behaviour of such a senior person of the company. He did not try to meet with other managers perceiving the same attitude of others. Meanwhile he received a letter from head office to tell about total sales and trade from various firms. QUESTIONS 1. Discuss the nature of problems involved in this case? 2. What kind of perception was formed by Sabyasachi about the role of MIS manager? What would have been probable reasons for this? 3. Advise Sabyasachi about how he should initiate the change? 4. What methods should be adopted to overcome the problem?
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3 Green Industrial Products Ltd.
MANAGEMENT OF CHANGE Mr. Vishal Soodan joined as GM (HR), Green Industrial Products Ltd., Mumbai after coming back from USA from where he got his MBA degree with specialisation in HRM. He was young, energetic and believed in results. Before proceeding to USA, he had several years of experience in India in various capacities. When Mr. Soodan joined Green Industrial Products Ltd., its office time was 10:30 a.m. to 5:30 p.m. He thought that the office time should be changed to 10 a.m. to 5 p.m. because he knew that office personnel in USA did not work after 5 p.m. He thought this to be true for India also and to ensure more availability of effective time for office. He decided to change it to 10 a.m. to 5 p.m. He announced the change officially. No one reacted initially but after two days, Mr. Soodan received a written memorandum by all office personnel that earlier office time be restored. He did not accept this demand. However, he was convinced that there was need to build a confidence in the employees for the change. He prepared a plan to organise monthly dinner party termed ‘Carousal’ for all the employees of the office. In the party, all members were to bring their homemade dishes. Their wives and children were to be encouraged to attend this dinner party. The plan was announced through placing it on the notice board of the factory. To make the scheme successful, the suggestions were invited. Even after 2 weeks, no suggestion received. On one occasion when two employees came for some work, he asked about their plan for the first dinner meeting. They told that it may not be possible for them to attend with their own problems. After leaving his office, he overheard the following conversation among some of his office members. I employee: “Would you like to see the family of our managers? If interested, what are you bringing for the party? As for myself, I shall bring only egg curry.” II employee: “I shall bring only myself if required.” (Both laughed)
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III employee: “I am not interested in these types of fashionable events. I am happy with my family at my house.” IV employee: I am scared about the amount which we have to pay for it later. Mr. Vishal felt that nobody seemed to be concerned in his scheme and his plans about the better interaction for effective functioning of the organisation.
QUESTIONS 1. Explain the main problem of this case? 2. How do you find it a case of management of change in the organisation? 3. What were the reasons for not supporting the actions of Mr. Soodan by his employees? 4. Advise Mr. Vishal Soodan, how he should proceed in the matter. 5. How can the attitude of employees be changed? 6. Do you think that these types of initiatives may enhance the productivity of the organisation?
4 Role Conflict
Mr. Rahul Sharma has been working since 1986 in National Bank of India. Presently, he has been posted as the regional manager of Lucknow region. Mr. Raman Dayal is the personnel manager at Lucknow regional office. Mr. Satish Sharma was the Chief Personnel Manager at the central office, Mumbai. Earlier the central office used to select candidates for different jobs and placed them to different regions. In year 2011, the bank adopted a new policy to decentralise the recruitment process and sent office circular to all the regional managers to initiate the recruitment process as per their specific requirements. Mr. Rahul Sharma asked various departmental head at regional office and branch managers to rewrite job description, job specification, estimate manpower needs and send them directly to him. Mr. Raman Dayal has received a letter to this effect in the capacity of head of personnel department in the regional office. Immediately he met with Mr. Rahul Sharma and told him that his job was to prepare job description, job specification, estimate manpower for the entire region and as such, he would be authorized to do all those functions instead of department heads at regional office and branch manager. But regional manager did not accept his request and told Mr. Raman Dayal that things would go according to his instructions. Mr. Raman Dayal told the regional manager not to discount his request and restore his organisational authority.
QUESTIONS 1. Do you think that decentralisation has been done considering the organisational restructuring? 2. What was the main problem in this case? 3. How do you find a role-conflict in the organisation? 4. How you will solve the main problem of this case? What are the steps required to be taken to avoid such kind of conflict?
5 Sri Krishna Paper Mill
Sri Krishna Paper Mill was established at Karnataka in 1952. The company was located there due to availability of raw material. But the company was facing a problem of security of workers. The company recruits the supervisory staff from outside and labour and technical staff from the local people because the local people were illiterate. Mr. Kunal Desai was appointed as the HR Manager of the company. He possessed the qualities of a good leader and motivator. He worked in a dedicated way and always took suggestions from co-workers too in all subject matters. So, the management and workers both were satisfied with his performance. Since there was no other competitor the company earned a lot of profit and shared it with its employees and provided them various benefits so the employees were very happy and satisfied. Till 1959 the company earned huge profits. But in 1960 one more paper mill Rama Paper Mill was established there. The company already had two branches in other states. The Rama Paper Mill also faced the problem of security of employees. The company began to create dissatisfaction among the employees of Sri Krishna Paper Mill. They announced high wages and more benefits for their employees for the same job as compared to Krishna Mill and they were ready to take local people in higher posts too. So, it started creating greater dissatisfaction in the employees of Sri Krishna Paper Mill. They also started demanding higher benefits and increment in wages. Sri Krishna Paper Mill suffered huge losses that year due to job dissatisfaction, high absenteeism, tardiness, low employee performance, etc. Now there are only two options for the Management either they fulfil the
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workers’ demands and incur the huge losses or let the employees go and stop working in the company. QUESTIONS 1. What is the main problem in this case? 2. What are the human resource problems involved in this case? 3. Do you find the industrial relations problem in this case? Explain. 4. What is the responsibility of the HR Manager in this case and how he can solve the problem?
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6 Communication
Mrs. Rita Goel worked for 10 years in the Sunfast Biscuits Ltd. She joined very recently the Parley Biscuits Ltd., as the Production Manager. She was supposed to attend a routine department heads meeting last Friday at 4:30 p.m., which was presided over by the Managing Director of the company. She did not attend the meeting, as there was no formal or informal communication to her. The Managing Director did not like absence, as there were many important items to be discussed regarding production department. Mrs. Rita Goel was called by the Managing Director the next day and asked explanation for not attending the meeting. Mrs. Rita Goel replied that there was no information. The personal secretary said that it was a routine meeting and such as information was not sent to any department head. But all other heads, except Mrs. Rita Goel, attended the meeting. Then the managing director spent a lot of time to find out the man, who is responsible for this incident. But he could not succeed. QUESTIONS 1. 2. 3. 4.
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Do you find it a communication gap problem? What is the main problem in this case? Who is responsible for the occurrence of such mistake? How you will solve the main problem of this case and what step will you take for better management?
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7 HDFC Bank
Mr. Suresh and Ms Neha Agarwal are working as marketing executives in the HDFC Bank located in Srinagar, Garhwal. Mr. Right Vir is working as a HR manager in the Bank. Recently, a scheme was launched by the Bank to their employees that if they would achieve the target of Rs. 50 lakh by investment from the customers in two months would get promotion. Mr. Suresh has achieved the target by contacting 25 people and make them customers of the Bank, But Ms Neha having contact with an Industrialist Mr. Rakesh Juyal, insisted him to be the customer of the bank which was the target. He agreed to the proposal and made his company’s investment to the bank. Mr. Raghuvir promoted Mr. Suresh for the higher post by evaluating his hard work. Ms. Neha was disappointed from the decision and she wrote a letter to the chief executive, showing her dissatisfaction from the decision made by HR manager. The point was that there was no any condition mention there regarding the number of consumers but only the sum of the investment for achieving the target. So she was also eligible for the promotion. QUESTIONS 1. If you were the HR manager to whom have you selected for the promotion and why? 2. Give your suggestions for the chief executive to solve the problem?
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8 Retrenchment
Mr. Vinod Nautiyal is the president of the Nautiyal Chemicals Ltd. The employees strength of the company is 795 workers and 80 executives. Mr. Sachin Dave, GM (HR) and Mr. Abhinav, Manager (HR) were having experience of more than 15 years in HR field. Mr. Sachin Dave reviewed the performance of various sections of the plant and sent a detail performance report to VP (HR). The production analysis of the year 2011-12 and 2012-13 revealed that company was capable to produce the same output only with the help of 610 workers. The company did not require this large number of staff. The report suggested that the staff was productive but we could earn more if we reduce our staff. The company had a contract of 4 years with one MNC to produce chemicals but at the same time is trying to get more business from UK, South Africa, and Australia. There are around 30 employees who are retiring in next two years. As per the report of production analysis and management, there is an overstaffing of 145 workers in the plant. The present trade union in the plant is very strong and they always try to put pressure for various types of demands. The president decided to remove these extra employees in the plant. The order for retrenchment on the basis of their performance has been sent to HR department. But Manager (HR) is in trouble as he knew that trade union will never accept this decision and may go on strike and if he will not follow the order then he will have to suffer.
QUESTIONS 1. 2. 3. 4.
Analyze the main problem in this case? Do you think that retrenchment is the only solution in this case? If you are the H.R. manager, how would you defuse the problem? Do you think this problem as a problem or opportunity?
9 Fake Currency
The Reserve Bank of India, the only makers of currency in India is constantly upgrading technology to make counterfeiting difficult; a case in point is the use of the anti-photocopying technology that prevents even colour photocopiers from reproducing notes worth Rs. 50 or more. But officials lay more stress on the end user always being on guard by following some guidelines. A few of these — like reading the security thread carefully for inscriptions (“Bharat” in Hindi and “RBI”) are relatively simple to follow and a few, like seeing the micro-letters to distinguish genuine currency from the false, are more difficult. But knowing these techniques may save a lot of money and grief as the people, too, are liable to be prosecuted because even possessing fake currency is itself a crime. Police officials in June 2005, logged cases against 6 big firms after banking major accused them of depositing fake currency. Officials say the very fact that even a bank of repute can be swamped with fake notes is worrying and shows the difficulty of the task that law enforcing agencies are up against. Regulators around the world are struggling with the menace posed by counterfeit notes and the RBI is not an exception in this case. But the value of counterfeit notes detected in the year 2004-05 fell marginally from the figure of the year before (2003-04). Exactly 181,928 pieces of counterfeit notes “valued” over Rs. 24.3 million crore was found in the system in 2004-05; the 2003-04 figures were 205,266 pieces valued at Rs. 27.6 million crore. According to RBI, reporting and detection of counterfeit notes has not improved on its expected lines. RBI said although 90% of the currency chests are with the public sector banks, they account for reporting of a mere 10% of counterfeit notes, while private sector banks with less than 10% of currency chests are reporting 90% of such cases. The central bank also warned that it would penalize banks that do
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not report counterfeit notes in its branch or currency chest. Banks would be penalised if found holding counterfeit notes in its branch or currency chest without reporting it to RBI or police, during an inspection by the RBI. “It will be construed as wilful involvement of the bank concerned in circulating counterfeit notes, and appropriate penalty strict regulatory measures against the bank including stringent disciplinary action will be imposed by RBI,” the circular said. Guided by the RBI, commercial banks have now installed note sorting machines capable of detecting counterfeit notes in the currency chest. Various branches also have machines capable of detecting fake currency. It also observed that despite the measures and after rationalising the procedure of filing first information reports (FIRs), the detection and subsequent reporting of counterfeit notes by banks continue to be inadequate. This has serious repercussions in that the RBI is not in a position to assess the number of counterfeit notes in circulation and its ramifications for the economy.
QUESTIONS 1. Discuss the main problem in this case. 2. Give your suggestions to solve the problem. 3. What were the recommendations given by RBI to tackle counterfeiters?
10 Smartphone Vs. MP3 Player
The MP3 generation in India has nothing to cheer about. Entry-level prices of MP3 players in the organised retail sector have collapsed to Rs. 1000 price point. While similar low priced MP3 players were available in the black markets in India, now some of these small time brands have found a ready buyer in the emerging organised retail chains fuelling growth in overall demand. Large brands were available at price points starting at about Rs. 4000 at the entry level in 2006. According to research firm Mintel, sales of MP3 players have dramatically decreased in 2012 due to the emergence of smartphones. Sales of MP3 players dropped by almost $177 million, or 22%, to $613 million this year when compared to figures from 2011. Mintel believes that sales will halve again by 2017. In its “worst case” scenario, it foresees that sales of MP3 players could decrease to $40 million within five years. The popularity of smartphones, which performs the same functions and also offers the ability to make telephone calls, connect to the Internet and access apps, in recent years (especially during 2012) has diminished the need for MP3 player functionality, which makes owning an iPod unnecessary. By the autumn of 2010, around 275 million iPods had been sold globally. However, Samuel Gee, a technology analyst at Mintel, said that the decline in MP3 sales is “unlikely to reverse”. It is impossible to talk about the current PMP market without extensive reference to Smartphone. The devices have directly contributed to the sharp decline in the value of PMP sales. MP3 players are being “steadily outshone” by affordable new technologies including smartphones. Ian Fogg, a technology analyst at research company IHS, added that smartphones are becoming as popular as the iPod once was. Apple recently confirmed that it had sold 5.3 million iPods globally within its most recent financial quarter, representing a decrease of 19% when compared to the same period in 2011. The convenience of a smartphone is greater than an MP3 player because it is always with someone. It also provides more choice of mobile
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music because someone can play back their own music, as they can on a MP3 player, but they can also access other music services like Last FM or Spotify. Therefore, there is a greater choice of music available. According to figures released in October 2012, more than one billion smartphones have been purchased globally. Consulting firm Strategy Analytics said that increasing demand for smartphones is likely to increase that figure to over two billion within the next three years. Stuart Dredge pointed out that the falling sales figures of devices like the MP3 player clearly indicate how people are now using their Smartphone’s for everything rather than having multiple gadgets stuffed into their pockets or purses. He said, “We used to have three or even four separate devices before. Now music players, cameras, watches and so much more are all encompassed in one device — the Smartphone.” Recent research done by Deloitte suggests that applications are the main reason for the reduced usage of multiple devices. The results show that 42% of mobile application users have either reduced or completely eliminated their usage of the MP3 players. They also show that application users are also more likely to have left their GPS systems and personal gaming consoles as well because you can get the complete experience on your Smartphone. Spotify, Rdio and Pandora radio are some of the most popular music applications available for Smartphone’s. They save you the hassle of having to build your own music library as long as you have a decent Internet connection. The only reason a few people are still using MP3 players is because they’re smaller, lighter and cheaper while giving you greater storage just for your music with considerably longer battery life. For example, the SanDisk Sansa Clip + MP3 player with 4 GB of storage costs a mere $30 on Amazon. If you want to go a step further and get a waterproof MP3 player, you can still get one for under $45 on Amazon. But the future of this product seems to be bleak.
QUESTIONS 1. Discuss the role of technology in this case. 2. How do the Smartphone pose threat to MP3 players? 3. How do you find the pricing and quality strategy in competing with Smartphone brands? 4. How do you see this situation as an opportunity for the organised sector firms producing Smartphone?
11 LCD TV
After the buoyant growth in the LCD TV market in India, it’s the turn of the LCD monitor industry to capture the growth figures. As the LCD monitor industry registers over 100% growth, the Rs. 440 crore market is bolstering the market in a big way to lure consumers. Promotional campaigns and price cuts are other incentives being doled out by companies to help consumers adopt the LCD technology. Prominent players in the market such as Samsung, LG, Philips and Acer are reviving up to capture the increasing demand because they expect the industry worth Rs. 1260 crore—a 200% jump in value terms by the year end. With the display market in India changing rapidly, there is a visible tilt being seen towards TFT LCD monitors, which is far outpacing the growth of the conventional CDT monitors. In 2005, the CDT monitors had around 90% share of the overall monitor business, whereas in 2006 the conventional monitors were expected to only have a 75% market share. Besides, there is also a shift away from 15 inch to 17 inch within the LCD category. “The LCD phenomenon seems to be extending beyond TV to monitors and our TFT LCD monitor business is expected to contribute 20% by volume and 35% by value to our total colour monitor business this year. LCDs are expected to garner 25% share of the overall monitor market” says VP, Samsung India. For Samsung, while retail contributes 70% of the monitor business, OEMs take up 30% of the share. Earlier this year, Samsung had launched a promotional campaign, “Awesome Twosome” wherein, consumers could upgrade to 17 inch screen size and would receive a printer worth Rs. 8490 free with every purchase. LG, on the other hand gave away Reebok gift
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vouchers and multi-function printers to woo consumers, primarily targeted at household buyers. Despite the home segment contributing a fair chunk of the LCD monitor business, the corporate business is also adding volumes. The likes of BPOs, financial institutions and SMBs are the core groups. Due to price cuts the household buying and upgradation has taken off in a big way but the volume growth is still coming from the service industry and also from SOHO (small office home office) says GM of LG Electronics India Ltd. Philips does not consider the business to be very big as it only has a market share of 7.5%. In terms of pecking order in the first quarter of 2006, Samsung with 41% had the largest share of the market. LG was next with a share of 24%. QUESTIONS 1. What are the opportunities present in this case? 2. Explain the SWOT analysis of LCD monitors? 3. How do you see this situation as an opportunity for the organized sector firms? 4. What are the growth drivers of the LCD monitors as per the case details?
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12 Ice cream War
The battle in the ice cream market has begun with the emergence of two camps. After a recent spate of advertisements by Amul, the battle lines are drawn along the ingredients used by both. Around 60% of India’s Rs 3,000 crore ice cream market is accounted for by branded players. Amul turned on the offensive, starting the summer in 2012, when it went to town underlining its milk-fat-laden ice creams as the real deal, in contrast with products that used vegetable fat. But there could be mismatch in positioning, according to experts. Gujarat Co-operative Milk Marketing Federation (GCMMF) remains the market leader in both value and volume terms, followed by Hindustan Unilever’s Kwality Walls. MD of GCMMF, claims Amul’s market share is around 38-39% of the total ice cream market in volumes. With a turnover of Rs 500 crore, it accounts for around 28% in value share. There is no established retail panel to track market shares for ice creams. In its recent radio advertisements, Amul has promoted its ice creams as a healthy option, or as the ‘real ice cream’. The brand focus is on how health comes first, though taste is also of prime importance. Consumers will not compromise on taste,” Sodhi says. Players such as Amul and Mother Dairy have always underlined that milk-fat makes for real ice cream and also imparts a superior taste compared to those made out of vegetable fat, called frozen desserts and are not allowed to use the moniker ‘ice cream’ to sell. But the players who sell frozen desserts refute such claims. An HUL spokesperson says, “Neither frozen desserts nor ice creams can be made without milk. By definition, both must contain milk. However, to make an ice cream, in addition to milk, you need to have fat. The only difference is that frozen desserts use vegetable fat instead of dairy fat. Frozen dessert is an Indian classification. The definition covers products made from milk solids (skimmed milk), but containing non-dairy fat.”
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Vadilal, which is planning to increase its national presence, wants to operate in both ice creams and frozen desserts. It sells frozen desserts under the Ice Trooper and Bada Bite brands, and ice creams under its Gourmet brand, which is slightly more premium.” It is not that vegetable fat is unhealthy. However, there is a perception that in frozen desserts, vegetable oil is used in place of milk, and perceptions will take time to go” says Rajesh Gandhi, MD, Vadilal Industries. Amul is bent on reinforcing the difference, as it builds its campaign by spending 2-3% of its ice cream turnover. Usually, the parent dairy cooperative allocates one per cent of its turnover for marketing. Sodhi says, “We are doing both print as well as radio ads. However, there is no plan for a product-wise campaign.” Amul plans to take its turnover to Rs 700 crore in 2013-14. But competition, in the meantime, has reaped benefits off frozen desserts. Experts point out how they have managed to price frozen desserts lower than ice creams. Sodhi explains the cost of dairy fat is around “Rs. 300 per kg, while vegetable fat like palm oil, costs one-fourth the price”. If not play on lower prices, frozen dessert players divert the cost savings into aggressive marketing. For Amul, it will be a tough act to balance being ‘healthy’ and ‘value-for-money’ at the same time, as experts point out. While, the latter positioning has defined its presence so far, its current campaigning will set it up as a healthy brand in the space.” Whenever a product is positioned with a health-first message, the brand tends to lose. Amul is bound by the fact that it would always make ‘real ice creams’ and it would need to re-invent to talk in the language of fun that is associated with the category,” says brand strategy expert Harish Bijoor. Gandhi of Vadilal reminds that ice creams are after all, mostly impulse purchases. At the same time, making the premium positioning work for a brand like Amul will be a challenge. Market observers say that if Amul tries to raise prices to position itself as a premium brand, it might lose market share. “Amul has failed to come up with product innovations, and now if it tries to raise prices, it would stand to lose market share,” says one of the competitor. “Amul will find the transition into a premium brand difficult. It is seen mostly as value-for-money that offers wholesome products,” Bijoor says. Amul has also been guilty of a lack of innovation in the space. HUL, for example, has come up with concepts such as Fruttare “ice candy” and Vadilal with its Ice Trooper bars. However, Amul can mitigate high ingredient costs, as it is integrated with its parent’s dairy supply chain.
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An Euromonitor report on the segment says, “The availability of raw material is not a concern due to its close relationships with milk farmers. Moreover, the company already has a cold chain network, which is crucial for this business.” Amul’s cold chain covers its formidable footprint across India, ensuring that its ice creams don’t suffer from faulty storage. Whether Amul will choose to re-position itself as a premium player or continue to market itself as a ‘healthy’ mass brand is not clear. What is, is it will be some time before GCMMF with its inherent strengths, feels the heat. Ice cream sales in the country during summer time grew by 20% year-on-year. Apart from the impact of the feel-good factor, what has added to the growth of the Rs. 700 crore branded ice cream industry is a shift from colas to ice creams. It is believed that products such as ice creams respond very well to promotions. “The economy is doing well, which is a major reason why ice cream sales are growing. Indians eat ice creams only when they are happy”. Peeyush Sinha an expert of marketing explains that in India people also like to eat ice creams in groups and not when they are alone. That explains the not-too-dramatic growth in per capita ice cream consumption, but the massive growth in the number of consumers. India’s per capita consumption stands at 200 mL per annum against 20.8 litres per annum of the US. The global average is 2 litres per year. This clearly indicates that there is a huge scope for Indian market to match at least the global average” says Chief GM. That has forced the big players to add capacity in a big way. There is huge potential for local ice cream manufacturers but there is ample opportunity for these major players of this cold dish. The ice cream market in India is estimated to be around Rs. 3,000 crore, of which over 40% belongs to the organised sector growing at about 15% Y-o-Y. Amul leads the pack with about 36-38% market share (5% of its total revenues), followed by Kwality Walls & Vadilal with about 12-14% share each. These players not only have to fight the small local and cottage industry players, but also the fact that the Indian cuisine itself offers a large variety of desserts which are still preferred by most Indians. Due to this reason, the per capita consumption of ice creams in India is about 300 mL per annum, 1.4% of that in US, and 13% of the world average, which can be seen as a huge opportunity in this sector in India attracting new regional and national entrants. However, an issue is the seasonal nature of this industry in India, especially true for the northern parts of the country. Bulk of the sales happen during the summer months of April-July, while the sales witness a significant
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dip during winter months of November-February. Additionally, the seasonality of events like marriages affects sales in a big way, although institutional sales provide some cushion. But what makes the situation worse is low supply of electricity, especially during the high demand summer months that affects the ice cream stocks. Once the ice cream melts, it is non-saleable, and drives retailers not to carry enough stocks– not an optimal situation given the not so favourable situation of cold chain in India. With the latest mandate for HUL to increase its foods revenue, they might also be focussing on out-of-home footprint through ice cream parlours, ice creams being a high growth category for HUL growing at about 31% last year. On one hand where Amul is trying to increase its reach by adding retail outlets to the tune of 15 k to its base of 70 k outlets, on the other hand HUL is focussing on new product launches and TV campaigns for consumer activation. Half the market is driven by impulse purchase, and rest by family consumption at home and in-parlour sales. There are niche players in the parlour business, with Nirula’s being an established player in the north, and Naturals in the west; and then there are premium players like Baskin Robbins. Location is key here like in any retail business, to ensure enough footfalls and an optimal rental profile for sustained outlet level profitability. Brands are coming out with probiotic and low fat ice creams targeting the health conscious consumers, and also new manufacturing processes which reduce air content in ice creams giving more value for money to the consumers, but the acceptance for such products is still to be put to a proper test in the market. Overall, the ice cream market is heating up. What is to be seen is that for whom this heat helps in increasing revenues and profitability of players, or melts the aspirations in the sector.
QUESTIONS 1. 2. 3. 4.
Point out the growth drivers of the ice cream industry? What are the bottlenecks of major players of ice cream industry? Do the local brands pose a threat to major players in the market? How do you see this situation as an opportunity for the major players of this market?
13 Telecom Services
Wireless technology for basic telecom services has given birth to a new breed of vehicles: Telecom thelas, or STD-cum-PCO booths on omnipresent thelas [pushcarts]. More than the innovative positioning, it is also a thumbnail view of the bigger picture that is unfolding in the Indian telecom market, i.e., the revival of STD/PCO booths. Public telephones have had hit a lean patch following the cellular revolution. Falling mobile call charges meant more users for cellphones. This is turn, meant lower revenues for booth operators. But with new and innovative business models, private sector telecom operators are paving the way for a second revolution in public telephony, a decade after the first edition during mid-90s. Here’s how it works. The basic idea revolves around the wireless technology. Since the fixed telecom handset does not require a conventional telephone wire, it brings down the infrastructure cost and, by extension, the establishment cost. The wireless phones can be mounted on pushcarts, and voila, you have a telecom thela. Fixed wireless telephone services are being offered by booth private sector and PSU basic telecom operators. Apart from Reliance, Tata Teleservices, Bharti and MTNL, there is HFCL in Punjab and Shyam Telecom in Rajasthan. But as Sajive Kanwar, head of PCO business at Reliance Infocom, says, “it is a limited mobility business model. Mobility on fixed wireless PCO booth has been disallowed by the telecom regulator and so we have devised a system wherein a person operating in such a kiosk cannot move beyond the boundary of the immediate telecom tower. If he does, we disconnect his connection. So, it’s not a mobile PCO booth as such”.
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Though the pushcarts and rickshaw-mounted booths are more of a Delhi phenomenon, there are about 1,200 in Delhi and 600 in Andhra Pradesh. Reliance is planning to launch it in Maharashtra soon. The overall spread of fixed wireless technology has put back life into public telephony. Reliance numbers alone are enough to give the overall picture. It started its PCO service in April, 2004 and had 3.5 lakh booths in the country. It planned for 7-8 lakh by the end of 2005. Add to that numbers of some of the other private sector players and it crosses the 1 million mark. As against this, BSNL has a total of about a million public telephone lines across India. Cost factors are critical to the revival of STD booths. While in the 1980s the commission for STD/ISD operators was pegged at about 10%, it doubled in the mid-90s and stayed at that level for quite some time. The private sector players have increased it to 25-30% coupled with lower establishment cost, making it a lucrative business proposition. When the mobile charges started melting, dropping revenues at the franchise level forced many to shut shop. Those with money graduated into internet kiosks. Anticipating such stagnation the Prime Minister task force on Information Technology and Software suggested to recombine STD/ ISD public telephones all over the country, including those in the villages and upgrade them into internet kiosks. The proposal was accepted and the department of telecommunication was directed to accomplish this. Experts say the revival of PCO booths is very much a part of the overall development in the telecom sector. The argument being that even with galloping subscription for cellular services, their penetration level are still abysmal. QUESTIONS 1. What are the basic reasons for decline of PCO booths? 2. What are the strengths and weaknesses of PCO booths? 3. How do you see this situation as an opportunity for the PCO booths? 4. What were the factors due to which this “innovative positioning” could not take place in Indian telecom market?
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14 LPG Companies
For oil marketing companies selling LPG is a no–brainer. The more domestic cylinders the companies sell, the higher the losses are. Till November 2008, LPG sales were growing by 12-15% every month, of course the losses mounted in tandem with sales. As the losses began to pinch, the companies cracked down and started what they call demand management. Sales growth fell steeply over the past six months and was down by about 2% in a few months. The companies, Indian Oil, Hindustan Petroleum and Bharat Petroleum, currently lose about Rs. 96 on every domestic cylinder of LPG they sell. Part of the problem was diversion of these cylinders to hotels and commercial establishments and this was solved by stricter audits of the distributors and raids on the customers. Sales of non-domestic LPG 19 kilo cylinders have grown even as the cylinder sales have fallen. These cylinders are priced higher at international parity levels. Several industrial canteens, restaurants and commercial outfits earlier used to buy smaller cylinders, which were much cheaper. The non-domestic sales have grown by 30-40% even as domestic sales fell, the managers said. Another misuse is the use of domestic LPG cylinders as auto LPG. Oil companies are trying hard to reduce it. Supplies are monitored closely and refills are rationed. Customers that have a connection from one oil company are not given another connection by other companies, a practice that was prevalent in the past but now the consumers hide their earlier connections and get another one. About a year ago, the picture was different as companies competed fiercely for customers. Most had begun LPG branding exercises and were spending heavily on advertising and marketing efforts. All this has now been scrapped and the sales pitch in the
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rural and semi-urban markets is muted. The new schemes, including discounts on equipment being offered earlier stand withdrawn. Oil companies were earlier encouraged to hold LPG recruitment drives in slums and rural areas to sell more gas. The high losses have completely changed the picture. Refill bookings made before the 21day period are now being questioned by dealers. IOC which enjoys about 50% of the LPG market share, suffered huge losses of Rs. 6565 crore on kerosene and LPG sales during 2004-5. At the same time there is political pressure against the price hike. QUESTIONS 1. Discuss the main problem in this case? 2. What are the reasons to scrap the promotional campaigns by LPG companies? 3. What may be your marketing strategy to recover these companies from huge losses? 4. Describe the SWOT analysis of the case?
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15 ACT-II
Branding is the current mantra among food commodity players. Category leaders like Agrotech Foods, Satnam Overseas, and Ruchi Soya are trying to climb on to the FMCG brandwagon through forays into fast growing branded food categories as well as branding its traditional trading businesses. Agrotech Foods has made an encouraging entry into the snack food market with its brand ACT-II reporting 25% plus growth rate. ACT-II has pioneered the branding of popcorn in India and now the brand umbrella extends to the salted snack foods. The company has also planned a vending initiative under the brand name of “Just Fries”. The company targeted 10% domestic market share in the Rs. 600 crore western snack food market by 2009. The company has been moving out of bulk food processing businesses and focussing on its branded edible oil portfolio under the banner of Sundrop, its flagship brand. One of the managers of Agrotech Foods, Ashutosh Priya said that “Our experience has been that commodity businesses tend to have low margins that do not cover the risks when the market turns adverse. Going forward, we therefore see ourselves focussing increasingly on branded and value added business which takes more time to build, but once built has higher margins and is more sustainable.” Satnam Overseas, basmati rice major, also planned to phase out its commodity and unbranded business segments and move towards being a branded food company with a target of 90% revenue contribution from the branded product basket by 2009. It has ventured into the ready-to-eat (RTE) category which was expected to go up to Rs. 1,000 crore in domestic market by 2010. Chilled foods is the biggest RTE category followed by frozen and ambient foods. Satnam clocked net sales of Rs. 23 crore in the ambient category in 2006, 100% up
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from 2005. It has also recently set up a frozen food processing facility and plans into the chilled foods segment within two years. It expected to grow the branded food business to about Rs. 350 crore by 2009. “Moving up the value chain, we have focussed on branded foods in order to create an endowed and sustainable business with exciting opportunities. A globally acknowledged brand “Kohinoor” and a strong distribution network internationally, enabled us to serve authentic Indian food products to millions of customers across 57 countries in the world,” says Gurnam Arora, Jt Managing Director, Satnam Overseas Ltd. Ruchi Soya is also considering entry into ready-to-eat foods, snacks and beverages. The company sells oil and soy foods under its premium brand, Nutrela and has recently decided to bring its other edible oil products also under the Nutrela umbrella. The company is planning to strengthen its retail presence across the country and introduce new high value products in bakery fats and shortenings. It has also launched “RUCHI NO. 1” in toilet soap category as a further foothold into the FMCG domain. QUESTIONS 1. What are the opportunities available in RTE category? 2. How do you find ACT-II as a potential brand? 3. How do you see this situation as an opportunity for the organized sector firms? 4. How do you define this marketing strategy?
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16 Tata Tea
Tata tea, the largest branded tea company in the country, is firming up plans to acquire some regional brands to expand its presence in the domestic market. The company which had made some successful acquisitions in the Czech Republic and USA had also repositioned its popular Tata Tea Gold brand. The company appointed ad firm lowe to come up with a new campaign involving the youngsters to try to add futuristic flavour to Tata gold the campaign which hit the market in July 2006. The company had launched its flagship brand Tata Tea Premium with tennis sensation Sania Mirza as the brand ambassador. Dr. Sangeeta Adhikari, Executive Director (Marketing) said there are some strong regional tea brands in the Indian market. We may look at them if there is any opportunity. It’s on our agenda. There are a whole lot of regional tea brands like Society, Wagh Bakari, AVT, Lal Ghora, Kala Ghora and others in Indian market. Some of the regional brands are doing extremely well in certain pockets of the country. Some of them are even doing much better than the national brands and in certain markets; they have emerged as lead brands. Elaborating the growth plans of its packet tea business, Dr. Adhikari said ‘We also have plans to integrate our regional brands with the national brands. Tata Tea Premium, Tata Tea Gold, Tata Tea Agni, Tata Tetley are some of the national brands from the Tata tea stable. The regional brands are Kanan Devan, Gemini and Chakra. Nearly 87% of the company’s revenue comes from packet tea segment. The company’s packet tea business is growing at the rate of 8-10% as against a national average of 3%, Dr. Sangeeta added, in the last two years we have done extremely well in the packet tea business she said. Even though Tata Tea is present in all categories of tea, its presence in the Darjeeling tea is insignificant.
QUESTIONS 1. Why Dr. Sangeeta Adhikari is planning to integrate its regional brands with national brands? What will be the benefits for the company through this strategy? 2. What are the strengths of Tata tea? 3. Why did the company choose Sania Mirza as its Brand Ambassador? 4. What was the objective to reposition the company in this situation?
17 Nokia—Collective Emotion
Nokia lost the smartphone battle despite having half of the global market share in 2007. Some argue that it was down to software, others that it was complacency. It is argued that collective emotions within the company were a big part of the story. Leaders who are able to identify and manage patterns of emotions in a collective are better able to make their ambitious strategies a reality. Our argument centres around the idea that the emotions felt by a large number of people within an organisation can determine the success of strategy implementation even when these feelings go unexpressed. When CEO of Nokia had been asked to describe what it was like to face the competitive market of the mobile telecommunications industry during his tenure from 20062010, he responded that nowhere in business history has a competitive environment changed so much as it did with the converging of several industries – to the point that no-one knows what to call the industry anymore. Mobile telephony converged with the mobile computer, the Internet industry, the media industry and the applications industry-to mention a few… and today they’re all rolled into one. In such a fast-paced changing environment, it was unsurprising that Nokia’s top executives drew on the best practices of strategy implementation and Nokia’s famed strategic agility was certainly impressive in terms of acquisitions and mobile device development, but with the benefit of hindsight he would now acknowledge that the emotional climate within the organisation was overlooked during this turbulent period. Kallasvuo, who had been with Nokia since 1980 in various functions such as CFO and Executive Vice President and GM of Mobile Phones, replaced Jorma Ollila as CEO in 2006. Although a more integrative company was to be created to develop integrated software, hardware, and applications for the advanced smart phone, the keen entrepreneurial spirit for which Nokia had long been known, strongly prevailed and the key business units continued to compete for resources to develop products that would address various market needs. Kallasvuo now sees that the
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company did not pay sufficient attention to the emotional undercurrents caused by internal competition for resources to develop a vast array of phone models for various market segments worldwide. Optimising the interests of one department, when repeated across many different departments, inadvertently hurt the overall welfare of the company. The problem of Nokia, after all, seems frustratingly similar to those of many large companies such as Microsoft or Sony who could not develop high quality innovative products fast enough to match their rising competitors. As the companies grew larger and richer, each department became its own kingdom, each executive a little emperor, and people were more concerned about their status and internal promotion than cooperating actively with other departments to produce innovative products rapidly. This phenomenon is also known as silo politics, and spread naturally and quickly like bad weeds in the garden. In other words, the whole became less than the sum of the parts. Kallasvuo’s opinion corroborates with the qualitative research that we have conducted where we spoke with over 50 key Nokia managers multiple times to get their inside stories on what it was like working for the company during his management. Essentially, the overriding emotion felt by top managers and middle managers within the organisation was one of fear. And yet, it wasn’t necessarily a fear of being fired which pervaded; it was more about fear of losing social status in the organisation. Together, these fears shaped a collective emotional climate which influenced what information was shared [or rather not shared] in meetings. Middle managers were happy to allow senior managers to believe that deadlines, which were unrealistic, would be met for developing the Symbian software platform – and they did this because of a fear of losing social status. It was simply a case of them not wanting to upset others for fear of social retaliation and not wanting to show they had limitations or weaknesses both on a personal level and also at a company level with the product they were all investing their energies in. As a result, a kind of pluralistic silence endured where no-one would speak up about the limitations of the Symbian platform and the slow progress of development of other more advanced software platforms. As a result of optimistic reporting, Nokia top managers kept believing the company was progressing well in matching Apple’s iPhone while it was not. Nokia senior management had their own fears which came from what other companies like Apple and Google were planning to do— disrupt the industries – and they most certainly felt the pressure from
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shareholders to grow their quarterly earnings and sales revenues. Even though the top managers sometimes acknowledged the threats publicly, fear of losing internal momentum and external sales in the short term prompted them to emphasise the quality of Nokia’s products and internal developments and, thus, downplay somewhat, at least in relative terms, the competitive threats to larger internal and external audiences. As a consequence, middle managers’ fears toward the competitors and concern over Nokia’s future were reduced. However, to ensure that Nokia would both match the short-term financial goals and succeed in the long term against the rising competitors, top managers tended to put heavy pressure on subordinates to deliver more and faster, not accepting “no” for an answer, thereby increasing their subordinates’ fears of reporting honest feedback. The top managers also subconsciously alleviated their own fears of losing to rising competitors by accepting optimistic reports by middle managers and not questioning the validity of the good news. As a result, managers of various departments focused more on internal competition for resources and higher social status and were less fearful of competitors. CEO Kallasvuo noted that complacency had crept into the organisation and not enough importance was attached to what external competitors were doing; somehow the sense of urgency to innovate had waned and managers of the successful company were more intent on defending and preserving existing successes than attacking competitors by developing radically new products and incurring the risk of failure. He spoke of being present at a panel in New York in 2007 when Google announced the launch of their Android operating system and he realized immediately the significance of Google’s strategy that made what used to be called “smartphone” a mere “window to the cloud.” He realised that Nokia’s Symbian software platform would be outmatched if he did not take fast and urgent actions. But by increasing pressures to work faster and harder among various departments, he inadvertently created an unhealthy emotional climate of fear that led to optimistic reporting by managers of various departments, ultimately causing the fast decline of Nokia high end smartphones that relied on an increasingly constrained and underdeveloped platform. It is believed that more careful management of emotional processes would have allowed top managers to get more accurate information of Nokia’s software capabilities and development speed. Elements of better management of emotional processes might have included top managers sharing honestly their fear of losing against the new competitors to a limited set of key middle managers, and engaging these middle managers to work with top managers to counter the rising threats might have created
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healthy external fear and reduced maladaptive internal fears. Another way of amplifying healthy external fear might have been to require middle managers to use the new competitors’ products extensively, like Samsung did, to ensure that the middle managers developed a sufficiently deep understanding of their strengths over Nokia’s products along specific dimensions, such as usability. Top managers could also have been more mindful of their own fears and how the fears influenced both the way they set demands for R&D and interpreted the embellished reports that followed. We would argue that adopting a culture where “telling bad news is a good thing” would have overcome the collective fear that so seriously affected Nokia’s perception of their ability to develop new, leading products fast. Just telling the truth could have saved Nokia’s fortunes. Nokia’s unfortunate decline again validates our affirmation that companies grew to greatness because they did something better than others. But they declined because they forgot to do common sense things, such as managing collective emotions and building organisational emotional capital during disruptive times. Managing a large business can be humbling because increasing complexity crowds out simplicity in action; to keep things from deteriorating, one needs to maintain a culture of honesty, humility, and cooperation inside the organization. The lesson of Nokia applies to many successful and less successful organisations. The most important job for CEOs of successful firms is to inspire and mobilise various groups to honestly and genuinely cooperate with one another to do valuable and innovative things for their customers. Large and successful organisations tend to have many new ideas and resources, and can even afford to get cutting edge consulting advice and market intelligence. Often times, the strategic goal is clear, but how to make it happen is much more complex. It is often said that strategy is 5 per cent thinking, 95 per cent execution. We extend this by suggesting that strategy execution is 5 per cent technical, and 95 per cent peoplerelated and managing collective emotions is a critical success factor in strategy execution.
QUESTIONS 1. What do you understand by collective emotion? Explain. 2. Why do we say that telling bad news is a good thing for growth of a company? 3. What are the weaknesses of Nokia India? 4. What were the growth drivers of present mobile market in India? 5. What was the reason to build organisational emotional capital in Nokia?
18 SEL
Anil Grover is the Chief Managing Director of Southern Electronics Limited. The company is involved in manufacturing of microprocessor chips and circuit boards. Mr. Grover thinks that other companies can’t keep up with his firm. He is sure enough that he is gambling nearly a third of company’s revenues, Rs. 400 crores in 1994, that the company will dominate a slew of business in which it has no experience. Such aggressiveness has worked in the past. The so-called “Mad Indian” poured money into product development and factories to establish another company as the hardware companion of Bill Gate’s, Microsoft. Today, Hindustan Electronics supplies the microprocessor in about three quarters of all PCs sold. Its gross profit margin in 58% net earnings last year were Rs. 28 crore on sales of Rs. 90 crore making the company the most profitable company of its size in the world. Size being fluid, the company is growing so fast, it doubles in size roughly every two years. So Mr. Grover might ask what is the risk in his gamble? The firm faces growing competition from other chip makers, notably the RISC Chip; an inexpensive, ultrafast microprocessor developed by IBM, Motorola, and Apple and featured in Apple Power PC series. Asian clone makers have scored a crucial victory in a lawsuit affirming their right to copy Hindustan Electronics codes governing the behaviour of microprocessor. Mr. Grover thinks that his company can stay on top by flooding the market with ever faster, yet still inexpensive chips. Its newest chip the Pentium is proof how fast the company can move. The chip crunches date at almost twice the rate of the best selling chip today. The goal is simple to create chips to enable PC producer to double
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the performance of their machines at every price point every year. New more powerful chip should appear every year or two. Pushing down prices is a part of the objectives. Mr. Grover argues that what Hindustan Electronics loses in profit margins it can more than make up in volume. He says he does not care about margin percentages. I want to increase rupee profits and they are a product of margin times unit volume. Mr. Grover anticipates that the volume will grow not from corporate customers, but from the demand of consumers and home office users for convenience and novelty. The ultimate aim is to transform the PC powered by company chips into an all-purpose consumer device for heading down the information superhighway, controlling the TV, VCR telephone answering machine, and so on. Two lines, printed on fortune cookies slips, conveyed Grover’s strategy to the company’s 32,400 employees; 1. JobI 2. Make the PC “IT” Mr. Grover says the first line is a reminder to strengthen the company’s No. 1 position in the microprocessor faster than any before it. Line 2 refers to Mr. Grover’s desire to turn the PC into the cornerstone of 21st century information technology. Getting there, says Mr. Grover, is easier because there is competition. If it was not for the threat of Power PC and what he calls the mega battle the company would not be moving so quickly. We are making gustier moves investment-wise, pricing-wise, because we have got a competitive threat, he says the net result is we all get to advance to the next level of competition”. QUESTIONS 1. What is Grover’s vision for Hindustan Electronics Ltd.? What is company’s mission? 2. How well do Grover’s objectives for Hindustan Electronics Ltd. Contribute to the objective of profitability?
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19 Seagull Thermowares
PRODUCT DIFFERENTIATION One cannot establish a direct link between the sales of thermowares and the success and failure of a movie. For example, if Hindi movie like ‘Veer’ or ‘Apaharan’ flop, should the sales of flasks go down too, nobody can establish a relation between the flopping of a movie or between the sales. However, Seagull Thermowares, a company of Gujarat, dealing in thermowares and crockery items is facing such problem. As the leaders in this segment, they have a market share of above 55%. In their respective areas they operated like perfect manufacturers and achieved enormous growth within five decades of their establishment. In the year 1970, they set up a modern plant in Surat, equipped with state-of-the-art technology, with Korean collaboration. They entered into an agreement with their technology partners named, Shayong Plastowares Inc, for printing of images on the crockery items like plates, bowls and flasks. The agreement period ended in 1990, and in order to be in the market, the company has to develop new products through their home-grown R&D. In the beginning the company faced problems in technology aspects, but slowly they developed their full-fledged R&D which led them to come out with more than 200 models within a span of six years. With the advent of globalization, they started exporting their products overseas including more than twenty countries in Asia and Africa with America and Europe also having a share of more than 15% of their total exports. The company is facing problems with regard to product differentiation. The company is currently manufacturing more than fifty models of cups, bowls and plates in different sizes, designs, etc.
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The company has kept the price of these products very low keeping in mind the lower class of Indian customers. The price range starts from Rs. 45 to as high as 1045 per unit. Some of their models use the imprints of forthcoming Hindi movies. The company has to pay royalty to the producer for getting rights to print the movie images. The main motive of the company behind this is to catch the consumer’s attraction to boost their sales. They want to catch on with the popularity of the movie to boost their sales. But sometimes, this strategy doesn’t work and puts company in losses. Because, If the movie flops, they end up with a situation having a large inventory. Also the new movies sometimes reach to far places by almost three to four months. This is also the reason that particular brand fails to give the expected returns. QUESTIONS 1. What policy should the company adopt on differentiation of products? 2. What may be the basis for segmenting the market for thermowares? 3. In view of the company’s dominant position in the market, what other recommendations would you offers? 4. How the company can maximize its reach in order to its customers?
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20 Coral Engineers
POSITIONING AND DISTRIBUTION CHANNELS Rajesh Verma and Vivek Gupta are two brilliant mechanical engineers. After graduation in engineering, they decided to set up their own business of designing and manufacturing of high performance machines. During their college days, they were forerunners in practical approach to their studies. During their college years, both of them made at least a dozen machines for home and personal use. But for commercial use, the machines should perform better and have an ample scope for changes in it. After intense research, both Rajesh and Vivek found that the youngsters in India are inclined towards high performance cars which are meant for racing or for off-road rallies. Youngsters in Delhi and NCR region used to import these engines at high costs. There were no such high performance engine producers available in the market. Inspired by this, they decided to manufacture high performance car engines. Both of them, after making changes into the regular car engines, used to convert them into high powered and high performance engines. They started their business in the form of a small workshop. As both of them belong to middle class family, managing huge investments was always a problem for them. The market for high performance car engines was mostly dominated by the foreign players. In India, engine manufacturers who have a capability to produce such engines fear to enter into such market because of high uncertainty and a few number of buyers. Coral Engineers developed a prototype from a particular car engine. They decided to convert ordinary car engines into high performance ones, at much lower cost as compared to the imported
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ones. In the beginning, they offered it to three local workshops in Delhi. The engineers at the workshop found the performance of engines highly satisfactory. They asked the young engineers to make more engines which they offered to their clients. Coral Engineers found that they were converting around 5-10 engines per month. The only sources that were used for marketing were these automotive service stations and the word of mouth publicity amongst the youngsters. At this juncture, the two partners decided to expand their business in a big way. They found that the performance of their modified engines was at par with the imported ones and their prices almost 35% lower than the foreign makers. They were confident about the production of their own engines, but how would they do the distribution on all-India basis? And would they position their modified engines among youngsters? QUESTIONS 1. What strategy, Coral Engineers should adopt to popularize its engines amongst the youths? 2. How Coral Engineers could position its products? 3. How Coral Engineers should design distribution channels to make their countrywide presence? 4. What are the problems in initiating their own venture?
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21 Jhelum Metals and Engineering Corporation
Jhelum Metals and Engineering Corporation is located in Indore. The company deals with manufacturing of heavy machinery for various industries like cement, fertilizer and other heavy industries like locomotive, etc. The company also manufactures steel used for making railway tracks. The company is performing well in the country and has several technological tie-ups with some international firms from Japan, China and South Korea. Mr. Shashi Gupta, general sales manager of the company has quoted for machinery to be used in fertilizer plants with capacity of 2000 tonnes per day. Because of good reputation and having good technological knowhow, the company grabbed four orders from different corners of the country, i.e., one each from Bangalore, Aurangabad, Surat and Varanasi. The company is located at Mhow, near Indore. The company has an advanced manufacturing facility with automated machines. Production and testing is not a problem for the company. But a problem which stands before the company is the transportation of these heavy equipment at their respective places. The whole consignment at each plant site includes 40 bigger and around 130 smaller machine parts. Bigger parts have a diameter around 15-18 metres and weigh around 90 tonnes and the length of smaller machinery parts stands around 8-10 metres having weight around 50 tonnes. The customers are willing to pay for the transportation of the machinery. But the route, mode of transportation, delivery and cost associated with other costs like insurance has to be decided by the manufacturer. There are local agencies available in the markets which are in the business of transporting heavy machinery, but the problem is that they have not handled such a big
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consignment like this before. Outsourcing from foreign agencies would lead to increase in the cost of the machinery. To transport effectively, proper planning and scientific methods should be applied. Another option which is available before the company that it can analyze the previous situations where other companies have faced such problem in the past. QUESTIONS 1. Discuss the alternatives available for physical distribution before the company. 2. List out the operations to be performed in a systematic manner till the time the machinery reaches the site. 3. What may be the strategy of the company to deliver such consignments on regular basis? 4. What are the opportunities available to Jhelum Metals?
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22 Crystal Milk Products Private Limited
NEW CONCEPTS IN PRODUCT FORMULATION Crystal Milk Products Private Limited manufactures skimmed milk, baby foods, milk biscuits, chocolates and drinking chocolate. They started their business some forty years back with a few cows and some people to assist them. In the initial phase, the people at Crystal Dairy used to sell milk to other vendors either for direct consumption or to be used into various dairy products. Slowly and gradually, the company started taking its shape. It was immense hard work and dedication of the employees and the founders of dairy that led to the conversion of a small dairy into a major regional player in dairy products. The company has reached the present level of turnover at Rs. 4 crore. The company faces tough competition from major players like Parle, Britannia, IT, Cadbury and some local players like Cremica and Bonn. The prime consideration is given to the quality of the product. The company hasn’t adopted the concepts of professional management. Because of this, the company is unable to find the perfect markets for its products. Mr. Sohom Mahapatra, marketing manager of the company was planning to enter into the market of ‘malted food drinks’. In order to execute his plans, he started seeing advertisements on TV from other reputed malted food drink brands. After watching advertisements of many brands and analyzing them thoroughly, he came to the conclusion that differentiation of product and new formulations will create a platform for perfect launch of his own brand and will increase the chances of its success.
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Mr. Mahapatra, in order to differentiate his new product from others, thought of offering some new concepts into its product. He consulted his R&D manager Mr. Sachit Kumar in this regard. He assigned this task to him and asked him to report in 14 days. Mr. Sachit, after various consultations and meetings, reported to Mr. Mukul that their new product will be a malted food drink in a paste form. He clarified that the present brands in the market lack this idea which lead to the hardening of product in rainy days and also when a wet spoon is used. After finalizing it with R&D manager, Mr. Mukul, gave a nod for the production of the product in paste form packed in plastic tubes. QUESTIONS 1. How would you rate this concept for acceptance into the market? 2. How would you position this product in the market? 3. Do you think this new concept in product formulation will meet with consumer acceptance? 4. Explain the strengths and weaknesses of Crystal Milk Products Ltd.
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23 Telerama Company
COGNITIVE DISSONANCE Telerama Company were the pioneers in the field of TV in the country. Being the first to enter into the market, the company had enjoyed all the advantages over the competitors and consistently maintained almost 50% share of the market. The company’s products were of excellent quality and were attractive in appearance. The field of TV, however, was relatively easy to enter into and over a period of 5 years several new brands had made a successful entry into the market. Even though they all together shared the rest 50% of the market, day by day, the share of Telerama was eroding. Mr. Banerjee, the sales manager of Telerama was worried about the competition. Technically, he felt almost all the TVs in the market were of equally good quality. Telerama TV, however, being the leader, was greatly disadvantaged in one respect. While the company spent its energies in developing new attractive models and promoting them, the competitors were often able to come up with equally attractive and more often than not, improved versions of the same model in a matter of months. The reputation of ‘the best quality in the market’ in Mr. Banerjee’s opinion, no more held water since the consumers were becoming increasingly aware of the fact that quality-wise all TVs were the same. Brand loyalty of the customers had always been the backbone of the marketing success of Telerama TV. Even though, TV is a consumer durable and an item of almost one time purchase, the totally satisfied customers often strongly advocated for the brand and thus won over newer customers to the company. “Every satisfied customer is a salesman for the company” Mr. Banerjee often told his salesforce. Lately, however, he was getting increasingly worried that the
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advantage may get completely wiped away by the imitative competition he was facing. Cognitive dissonance, Mr. Banerjee felt, was the crux of the problem. And with the increasing competition, this would be a permanent problem which the company would have to tackle. This was especially so in the TV market with several manufacturers marketing equally good products, each attractive in its own way making it very difficult for the consumers to differentiate one from the other. Moreover, continued appearance of improved models created a serious negative post-purchase feelings in the mind of the buyers. Recently, he had noticed several buyers coming back to his dealers complaining that the dealers had not informed them properly and within months of their purchasing the TV, much better models had come into the market. In fact, several customers had enquired whether the dealers would take back the TV at a reduced price. Thus, in Mr. Banerjee’s opinion, this was one of the most serious trends and he was really at a loss how to tackle this problem. Such dissatisfied customers were never likely to recommend the company’s product to others. Mr. Banerjee wondered whether the company should offer a ‘trade in’ option on old TVs within 15 days or so. He also read somewhere that heavy advertising directed to the recent buyers was one of the ways of overcoming negative post-purchase feelings. The course of action the company decided to take would have serious effects on the long-term success of the company’s marketing efforts. QUESTIONS 1. How should Telerama tackle the problem imitative competition and cognitive dissonance? 2. Do you feel such problem exists in the case of practically every consumer product? If yes, what action should be taken by the manufacturers?
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24 Starbucks
Starbucks Coffee was founded in 1971, opening its first location in Seattle’s Pike Place Market. It was named after the first mate in Moby Dick, is the world’s leading retailer, roaster and brand of specialty coffee with coffee houses in North America, Europe, Middle East, Latin America and the Pacific Rim. Worldwide, approximately 35 million customers visit a Starbucks coffee house each week. Starbucks is all about purchases and boasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confectionery, and coffeerelated accessories and equipment–primarily through its companyoperated retail stores. In addition to sales through their companyoperated retail stores, Starbucks sells whole bean coffees through a special sales group and supermarkets. Furthermore, Starbucks produces and sells bottled Frappuccino coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company. The company’s objective is to establish Starbucks as the most recognized and respected brand in the world. In realizing and achieving this goal, the company plans to continue to rapidly expand its retail operations, grow its special sales and other operations, and selectively pursue opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. COMPANY BACKGROUND Starbucks began in 1971 when three academicians—English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon
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Bowker—opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The three partners shared a love of fine coffees and exotic teas and believed they could build a clientele in Seattle much like that which had already emerged in the San Francisco Bay area. Each invested $1,350 and borrowed another $5,000 from a bank to open the Pikes Place store. Baldwin, Siegel, and Bowker chose the name Starbucks in honour of Starbuck, the coffee-loving first mate in Herman Melville’s Moby Dick (so the company legend has it), and because they thought the name evoked the romance of the high seas and the seafaring tradition of the early coffee traders. The new company’s logo, designed by an artist friend, was a two-tailed mermaid encircled by the store’s name. The inspiration for the Starbucks enterprise was a Dutch immigrant, Alfred Peet, who had begun importing fine Arabica coffees into the United States during the 1950s. Peet viewed coffee as a fine winemaker views grapes, appraising it in terms of country of origin, estates, and harvests. Peet had opened a small store, Peet’s Coffee and Tea in Berkeley, California, in 1966 and had cultivated a loyal clientele. Peet’s store specialized in importing fine coffees and teas, dark-roasting its own beans the European way to bring out their full flavour, and teaching customers how to grind the beans and make freshly brewed coffee at home. Baldwin, Siegel, and Bowker were well acquainted with Peet’s expertise, having visited his store on numerous occasions and spent many hours listening to Peet expound on quality coffees and the importance of proper bean-roasting techniques. All three were devoted fans of Peet and his dark-roasted coffees, going so far as to order their personal coffee supplies by mail from Peet’s. The Pikes Place store featured modest, hand-built nautical fixtures. One wall was devoted to whole-bean coffees; another had shelves of coffee products. The store did not offer fresh-brewed coffee by the cup, but samples were sometimes available for tasting. Initially, Siegel was the only paid employee. He wore a grocer’s apron, scooped out beans for customers, extolled the virtues of fine, dark-roasted coffees, and functioned as the partnership’s retail expert. The other two partners kept their day jobs but came by at lunch or after work to help out. During the start-up period, Baldwin kept the books and developed a growing knowledge of coffee. Bowker served as the “magic, mystery, and romance man.” The store was an immediate success, with sales exceeding expectations, partly because of a favourable article in the Seattle Times. In the early months, each of the founders travelled to Berkeley to learn more about coffee roasting from their mentor, Alfred Peet, who urged them to keep deepening
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their knowledge of coffees and teas. For most of the first year, Starbucks ordered its coffee beans from Peet’s, but then the partners purchased a used roaster from Holland and set up roasting operations in a nearby ramshackle building. Baldwin and Bowker experimented with Alfred Peet’s roasting procedures and came up with their own blends and flavours. A second Starbucks store was opened in 1972. By the early 1980s, the company had four stores in the Seattle and could boast of having been profitable every year since its opening. But the roles and responsibilities of the cofounders underwent change. Zev Siegel experienced burnout and left the company to pursue other interests. Jerry Baldwin took over day-to-day management of the company and functioned as chief executive officer. Gordon Bowker remained involved as an owner but devoted most of his time to his advertising and design firm, a weekly newspaper he had founded, and a microbrewery he was launching (Redhook Ale Brewery). ORGANIZATIONAL STRUCTURE Starbucks used the design of a matrix configuration by combining divisional and functional structures. However, according to Starbucks Investor Relations, Starbucks does not have a formal organizational chart that is sent externally. In the case of Starbucks, the matrix structure is not employed for the entire organization. MARKETING POLICY Starbucks customers are people of diverse ethnic, income and age groups with varying tastes and interests. Starbucks embraces this diversity and strives to provide excellent customer service by offering products that are relevant to customer base and their varying interests and tastes, including some products which may appeal to young people. Starbucks is marketing on the youth and has long been supporting community activities and events important to customers. The following are the new reviewed policies in realizing the company’s consistency with their marketing principles. Campaign and Sensitivity Review: Starbucks’ marketing materials and promotional campaigns undergo a formal “sensitivity review” process prior to its approval and distribution. This process involves a panel of Starbucks employees from key parts of the organization—such as Customer Relations, Public Affairs, Corporate Social Responsibility, Diversity, Internal Communications, and Legal— who review marketing elements and provide input verbally and in
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writing. The purpose of this panel is to identify in advance and avoid distributing marketing materials that could be inadvertently appealing to youth, racially offensive, widely contentious or culturally insensitive. If consistent feedback is provided from members of the panel about a potential issue, the marketing team adjusts the materials or campaigns to alleviate the issue. Media Buying: Starbucks has instructed its advertising agency to select media vehicles whose audience composition is closely aligned with Starbucks adult customer base when it comes to planning and executing marketing campaigns in which paid advertising media is used. Diversification: Starbucks finds diversity as a guiding principle that is integral to everything they do. The company has a concept of diversity as people are all the ways different but are the same. This concept includes human differences with regard to race, ethnicity, gender, culture, and physical ability. Just as critical to the company’s success as a global company is the idea of inclusion, defined as a combination of differences and similarities in the pursuit of new ideas and individual relationships made every day. Starbucks creates a place for customers to feel welcome, providing equal opportunities and benefits to every one of their employees and working with minority or women owned businesses. While Starbucks offers coffee to the world and is globally connected, the company strives to meet and respect the interests of local communities. The partnership with Magic Johnson’s Urban Coffee Opportunities helps introduce Starbucks to ethnically diverse communities throughout the country, providing even more places for people to connect. Market Share and Profitability: As of 2006, Starbucks Corporation’s first fiscal quarter earnings rose up to 20% over last year, driven by strong holiday sales of eggnog lattes and other coffee drinks. The company boosted its earnings targets for the year, saying it expects earnings to be 68 cents to 70 cents a share. That would be 5 cents more than previously forecast. Starbucks shares surged nearly 6%, or $1.82, in late-session trading, after falling 34 cents, or 1.1%, to close at $31.36 1st of February on NASDAQ Stock Market. The company, whose stock has traded between $22.29 and $32.46 over the past 52 weeks, released its latest earnings after the markets closed (cited in 2006). For the 13 weeks ended January 1, Starbucks earned $174 million, or 22 cents per share, up from $145 million, or 17 cents per share, in the comparable period a year earlier. Revenue for the latest quarter increased 22% to $1.93 billion, up from $1.59 billion in the comparable period last year. The consensus
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forecast of analysts surveyed by Thomson Financial was 20 cents per share on revenue of $1.93 billion. Sales at Starbucks’ growing number of international stores posted a slightly bigger increase than sales at stores in the US. Total international net revenues increased by 25% to $314 million for the first fiscal quarter, compared to $251 million for the same period last year. In the United States, total net revenues rose 21% to $1.6 billion compared to $1.3 billion last year. According to Chief Financial Officer, Starbucks sees enormous growth potential in China, where 50 new stores opened over the past year, bringing the country’s total to 221. Casey said he expects China could one day have several thousand stores. Starbucks’ president and chief executive, said the company also has high hopes for Brazil, Russia, and India, three countries where it doesn’t yet have any stores (cited in 2006). Stores opened in at least a year also raised its earnings adding to the above-stated increase. At about 560 new stores were opened in the latest quarter, bringing the number of its stores to 10,801 in 37 countries. Starbucks expects to open approximately 1,800 new stores globally over the next year, about 1,300 of them in the United States and 500 internationally. According to Starbucks’ Chairman Howard Schultz in his conference with financial analysts that the company has never been more enthused or confident about the way in which it has been received and the ongoing profitability of the international business (cited in 2006). Starbucks is not threatened with its competitors like the McDonald’s Corporation which has been focussing more on premium roast coffee, and incorporated, a Canadian coffee chain that’s planning a bigger presence in the United States. Starbucks was called “a great global brand” by an analyst with New York-based Victory New Bridge Capital Management and added that the company appears to be expanding at a prudent pace, especially overseas. QUESTIONS 1. What is the core concept of marketing policy of Starbucks? 2. How did Starbucks position itself in the market? What is the strength of the company? 3. Does the organisational structure of Starbucks helpful in effective management of the company? 4. Explain the various factors of Starbucks with the help of Michael Porter’s five-force model. 5. How does the Starbucks differ from McDonald’s Corporation?
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25 Bajaj Pulsar: Origin of the ‘MALE’ Species in Indian Bike Industry
Funny, how grammar or rather, grammatical usage, can give birth to an advertising idea. That too, one that repositions the competition despite seeming to say the same thing that the category has always been saying subconsciously, albeit not in as many words. The case is about the communication for the Pulsar, Bajaj Auto’s most popular bike. And the brand’s slug, ‘Definitely male’. A LOOK AT THE AD OF PULSAR But first, let’s quickly run through the latest piece of communication for the brand, aired on television. The ad started off with a couple of nurses walking surreptitiously down a deserted hospital ward lined with beds. One by one, they stopped by each bed, stealthily lift the linen, inspect the ‘occupant’, shake their heads and move on. Till they came to something largish, draped in covers. They looked at one another in hushed anticipation. With a bit of egging from the other, one of the nurses reached out and pulls off the covers. Pupils dilate, and the two stare at one another for a moment, before excitedly screaming, ‘It’s a boy! It’s a boy!’ Cut to the shots of the Pulsar burning rubber on an expressway, as the voiceover talks about the power of the 180-cc engine. The commercial ends with the shot of the bike on its side stand. As the two nurses saunter past, the bike slowly but deliberately turns its ‘head’ to follow them sashaying down the road. ‘Definitely Male’. Looking at it, almost every Indian bike ad made to date, especially those that play on ‘performance’ and the pleasure of biking, has had strong ‘male’ undertones. One way or another, true-blue biking has
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always been equated with the Alpha male image. But that image has always been the rider. This is the first time that the bike itself has been endowed with a ‘sex’ (‘gender’ is too weak a word in this context). Here’s how it happened. “When the product first came to light, people at Bajaj immediately realized that there was something different that was calling out. But, the team tap danced around ideas for a while before arriving at final decision.” The first thing that occurred to the team was the Pulsar’s indigenous construct. “The challenge before Bajaj was to launch a product that Kawasaki had nothing to do with. (As Bajaj was producing bikes in technical collaboration with Kawasaki.) “So the first idea was to establish a brand that should be made in India. The idea was to leverage the emotional chord. But somehow Bajaj felt that following this track would be doing an injustice to a bike of this calibre.” The next idea that was conceived centred at the Pulsar’s 180-cc engine. “Bajaj thought of saying something like ‘The new order in biking’.” After all, here was a one-of-its-kind bike with a 180-cc engine. Then they realized that although this was a path-breaking bike in cc terms, the ‘new order’ idea itself was not future-proof. Tomorrow, a 180-cc engine might well become the norm, which will make the Pulsar very ‘current order’.” What eventually paved the way for the ‘definitely male’ idea was the look of the product itself. It is a great looker, yet has certain rawness to it. And its focal point is the brawny petrol tank — its ‘chest’. And it didn’t have fancy trimmings like fairings and decals and whatnot. That the Pulsar “didn’t have fancy trimmings” was a starting point. Add to this the fact here was an R&D-intensive product, and the idea began to take shape. In India, ‘the make-up job’ is symptomatic of the bike industry. “Almost every bike maker has routinely been taking some old model into the design studio, tinkering it a bit, snazzying it up with frills and relaunching it under a new name. Recycle, reinvent, re-launch has been the game, with very little invested in R&D. Now with the Pulsar, Bajaj had actually come up with an original, no-frills performer. It wasn’t a decked-up sissy.” From ‘no-frills performer’ to ‘definitely male’ was the result of grammar and usage. The first imagery that arises was of this macho guy… predictable stuff. Bajaj wanted to do more. One day two employees of Bajaj auto while discussing suddenly asked each other why do we say, ‘bike chalti hai’ and ‘she rides like a dream’? Why not ‘bike chalta hai’? Why isn’t a bike ever referred to in the masculine gender? That’s when they decided that this could
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well be the world’s first ‘He-bike’. This was the creative rendition of the ‘no-frills’ idea, and one that simply repositioned the competition. From there Bajaj moved to ‘definitely male’. One of the interesting things about the Pulsar ad is that unlike many bike ads—where the rider (the model) is as much a hero as is the bike—here, zero footage is dedicated to mug shots of the rider. The point is, Bajaj has made such a great product, and it has to be the hero of the ad. That’s why Bajaj focussed on some really phenomenal biking shots, and must be given the client credit for that. Even the soundtrack does not have any SFX, none of the usual heavy metal or rock stuff. Just sounds of the bike zipping past. The ad itself was aimed at incorporating three things: the fact that a new bike was being unveiled; the arrival of the ‘male’ of the species; and a typical male ‘naughtiness’ which is the Pulsar’s personality. QUESTIONS 1. Where do you find the importance of advertising in this case? 2. What is the differentiation created by Bajaj to make Pulsar a different product? 3. Do you find any impact of distinction on the sale of “Pulsar”? 4. Why did the advertisement pay attention towards the product only rather than a male celebrity using the product? 5. What do you understand by “Pulsar didn’t have fancy trimmings”? What is its implication in advertising?
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26 Short-lived Interest
Ajanta Biscuits, Bengaluru is in the field for little over six years. During this time, they have consistently increased their sales. This was possible mainly due to the good quality of the biscuits, a good distribution network and promotion policy. The company has shown innovative ability by bringing out variety of biscuits to cater to various tastes in the consumer market. A study done on the biscuit industry by the Indian Biscuit Manufacturers’ Association highlighted that out of total consumption of biscuits; almost 24% are consumed by the children below the age of 11. The management of Ajanta Biscuits decided to develop special biscuits to cater to this segment. After working out different possibilities, it was finally decided that biscuits made in different animal shapes would be introduced which would certainly appeal to the younger generation. As such, samples were prepared. The company carried out a small exercise in test marketing the biscuits in their home town. A sample size of 1000 was selected for this purpose. Majority of the sample consumers showed their interest and informed that the children have liked the products. With lot of publicity, the company introduced this range of biscuits in four metropolitan towns of Mumbai, Chennai, Kolkata and New Delhi besides Bengaluru. The results for the first six months were highly encouraging. However, from seventh month, the sales started declining. In the twelfth month, the total sales of this type of biscuits were reported only at 25% of the peak reached. The quality was maintained. The price right from the beginning was 10% higher than other types for same weight. The sales executives told about the competition and the retailer’s incentive should be increased by 5% but the GM Marketing was not ready for it. The product manager
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Mr. Rajan Pillai was not able to understand the reasons of the sales decline. QUESTIONS 1. Do you think that the price was the prime consideration in the sales decline? 2. What is the differentiation created by company to launch its products? 3. What is the main problem in this case? 4. Do you think that the advertisement towards the product should have been increased? Justify your logic. 5. Do you think that increase in retailer’s incentive will solve the sales problem?
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27 Poona Coffee House
It looks as if a miracle has taken place. Poona Coffee House stands at the same place, opposite Deccan Gymkhana bus stand, one of the busiest places of the town where it is operating for last 15 years. As against a morose outlook it used to give with hardly 15-20 customers at a time, perhaps more number of unshaven and unclean waiters in the waiting, now it’s a bustling place with at least 100-150 customers at any time of the day. These comprise college students, family groups and people from almost all walks of life. The reason is that the place has been bought over by a young entrepreneur and thus under new management. Poona coffee house was started by one Mr Bhave who has considerable experience in running restaurants. He has two more restaurants running in the town which are doing fairly good business. One of the two also offers lodging facilities. Surprisingly, Pune coffee house never could do well. No systematic efforts were made to improve the working. So when he was made a lucrative offer some four years ago by Mr. Nandkumar Shetty, he jumped at it. It is quite strange to note that Mr. Shetty has no previous experience in the line. He was in the Indian army and retired at the rank of a major. Neither his family has any experience in the catering line, though; the community is famous for the same. Mr. Shetty completely renovated the place with attractive interior decoration. The menu offered as also trebled thereby giving a wide choice to customers. Even though it was kept a vegetarian restaurant, south Indian, Gujarati and Punjabi delicacies were also offered. Some other entertainment items like stereophonic music were also added. The success has baffled Mr. Shetty himself. So much so, that, he even stopped borrowing from the banks for his working capital requirements within only six months of operation. Today, Pune Coffee House is the talk of the town.
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QUESTIONS 1. Discuss the various reasons as to why the restaurant could not function well under the earlier management? 2. In a service industry like hotel or any other, discuss the various operations that need to be carried out by the management in order to practice modern concept of marketing? 3. What were the problems with the organisational policies?
28 Diesel Marketing Mix
Diesel is a global clothing and lifestyle brand. With a history stretching back over 30 years, the company now employs some 2,200 people globally with a turnover of £1.3 billion and its products are available in more than 5,000 outlets. However, this list of numbers is far less interesting than the company, people and founder behind them. Diesel is a remarkable company with a unique mindset. A mindset which puts sales and profit second to building something special, something “cool” and something which can change the world through fashion. The story begins with a young Renzo Rosso passionate about the clothes he wears but disappointed in the options available to him in his home town Molvena, Italy. Acting on the impulse, he decided to use his passion to make the clothes he wanted to wear. Renzo was drawn to the rebellious fabric of the 1960s and rock & roll: denim. It inspired him to create jeans which would allow him and others to express themselves in ways other clothing simply could not. Proving popular, Renzo made more and more of his handcrafted creations, selling them around Italy from the back of his little van. The stillyoung Renzo is the proud owner and CEO of Diesel along with that impressive list of figures. That impulse and passion apparently paid off. Diesel sells nice jeans. Close, but no “A”. Actually, it is not that close. The reason Diesel has grown is because it knows it is about a lot more than selling nice jeans. Diesel is a lifestyle: if that lifestyle appeals to you, you might like to buy the products. Renzo describes this as an end of the “violence” towards the customers forcing them to buy and rather an involvement in the lifestyle.
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THE BRAND A brand may be termed a set of promises. Those promises form the basis of the customer’s relationship with that company. In the case of Diesel those promises are very personal, very passionate. The Diesel brand promises to entertain and to introduce customers to new, experimental experiences. Its product line now goes far beyond premium jeans and includes fragrances, sunglasses and even bike helmets. These products complement, convey and support the promises of passion and experience made by the Diesel brand. Being such a crucial element of its work, you might imagine the product design team at Diesel to “plot” in something akin to a war room, pushing little squadrons of well-dressed soldiers around with long sticks. Actually, this is where that elemental passion which created Diesel sets them apart from many others. The whole team at Diesel lives the brand. They are all incredibly passionate about their creations. So when it comes to expressing that passion, ideas come naturally. Living and breathing the set of promises, the Diesel brand communicates means employees can listen to their instincts, creating products straight from within. ‘Be Stupid’ Campaign With the launch of the recent marketing campaign around the phrase ‘Be Stupid’, Diesel took a look at what brought its current pipeline: it was Renzo Rosso, all those years ago, taking the ‘stupid’ move to make jeans he wanted to wear. Then he took the even more stupid move of trying to sell those jeans to others, believing he might not be the only fool in Molvena! As it turned out, there were quite a few more to be found and Renzo’s ‘stupid’ move ended up creating something which millions of people around the world now enjoy. Promotion and marketing at Diesel takes a very different route from many other companies. It is always about engaging with the customer as opposed to selling at them: creating an enjoyable two-way dialogue as opposed to a hollow one-way monologue. All elements of Diesel’s promotion aim to engage the customer with the lifestyle. If they like the lifestyle, they might like the products. For example, the Diesel team saw music as an inseparable part of that lifestyle and realised that exploring new music and new artists was all part of trying something different and experimenting with the unusual. Ten years later, ‘Diesel-U-Music’ is a global music support collaborative, giving unsigned bands a place where they can be heard and an opportunity
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to have their talent recognized. It’s not about selling, it’s about giving people something they will enjoy and interact with. Tied to Diesel: U-Music is an online radio station. It is another example of where Diesel unconventionality has created something which pushes conceptions and the usual ways of doing things. The radio station takes a rather unusual approach of not having a traditional playlist but rather gives the choice to the resident DJ. This freedom is reflected in the eccentric mix of music which is played on the station. Above and below-the-line: In promotion and marketing, we often talk about ‘above-the-line’ and ‘below-the-line’ methods of reaching consumers. Above-the-line marketing is aimed at a mass audience through media such as television or radio. Below-the-line marketing takes a more individual, targeted approach using incentives to purchase via various promotions. In this case passion again acts to blur and gel the boundaries between the two approaches. If we had to define this approach in terms of theory, we would call it ‘throughthe-line’, i.e., a blend of the two. The passion and energy embodied by the Diesel lifestyle is communicated through a mix of above-theline and below-the-line approaches. The balance and composition of that mix is what the Diesel team hands over to their passion and feel for the company and brand. That energy guides the way this abstract theory is realised in projects such as Diesel:U:Music and the ‘Be Stupid’ campaign, which entertain and interact with their potential customers. PLACE Another, drier, way of describing “place” in the marketing mix is “channel” or distribution channel. The way a business chooses to offer its products to its customers has a huge impact on its success. Only around 300 of the 5,000 global outlets which sell Diesel products are owned and managed by the company itself. The majority are large departmental stores offering many other brands or boutiques with a very specific style of their own. How do you maintain the quality of a product and its communication when dealing with so many different partners and distribution channels? CULTURE The strong culture within Diesel again holds the answer. Every employee is able to communicate the brand appropriately in their
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given role within the company. As such, the managers of the Dieselbranded stores know that their function is to act as a flagship. They focus on the core campaigns like “Be Stupid” giving a solid focus and image for the brand. Employees in each of the stores all know the campaigns intimately and are very aware of the image they should put across to customers entering the stores. Their retail partners such as the departmental stores are a crucial link in the chain. Diesel works closely with these partners to ensure they express the same level of passion when offering their products. This is done through separate and individual campaigns. These provide visitors with a unique experience which again encourages them to get involved with the Diesel lifestyle as opposed to forcing products on them. DISTRIBUTION This approach to distribution can be seen as a mix of exclusive and selective distribution over intensive distribution. Exclusive distribution involves limiting distribution to single outlets such as the Diesel flagship stores. Selective distribution involves using a small number of retail outlets and partners to maintain the quality of presentation to and communication with the customer. Intensive distribution, on the other hand, is commonly used to distribute low price or impulse goods such as sweets. PRICE The price of a product is so much more than a little, or rather big, number on a tag. The price of a product is the most direct and immediate tool a business can use to convey the quality of its product at the point of sale. If done rightly, the price reinforces the rest of the marketing, drawing in the target customers by conveying the appropriate quality. PRICING STRATEGIES Diesel uses a model based on premium pricing. Diesel is far more a lifestyle than a clothing brand. Through the vision and passion of Renzo Rosso, the company has created a whole new approach to engaging with its customers. The price of Diesel’s products needs to reflect the substance and value of that experience. A strategy such as
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penetration pricing used by businesses making high-volume, relatively low-margin products would be inappropriate as it would undermine the quality association thus devaluing the brand and experience. We do not pay a premium price for Diesel jeans because they are a premium quality, that is taken for granted. We pay a premium price because the jeans and the brand fit in with and even encourage a premium, dynamic lifestyle built “for successful living”, as Diesel would say. The team at Diesel must be intimately in tune with that lifestyle so they can see how their diverse range of products from jeans to fragrances and even bike helmets fits within that lifestyle. That feel for what Diesel is and how we, the potential customers, interact with it allows the company to price those products in a way which complements and neatly fits into that lifestyle. PEOPLE Besides the fact Renzo has done alright for himself, he has inspired thousands of people who proudly work to build the brand through a shared passion and contagious ambition. Looking at the structure within which all those people work can help us to understand just why they are so happy to be there. Renzo realised people and their ideas form the heart of the company. So that everyone’s voice can be heard and each person working for Diesel has an equal say, the company adopts a flat hierarchy. This means there are very few layers of management and everyone is encouraged to communicate with each other: sharing ideas, solving problems and trying to communicate that energy with people outside the company the customers. TEAMWORK When decisions are made in this flat hierarchy, they are made as a team. The team as a whole can then track the progress of that idea and monitor the results. Feedback is important because if everything has gone to plan, the achievement has to be acknowledged so that everyone can take pride in what they have done. If something has not gone to plan, group feedback allows an evaluation of why and the ability to learn for the future. MOTIVATION Importantly, this acknowledgement or learning happens equally across the company so everyone is kept up to speed on the ups
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and downs of business. This sense of belonging both to a team but also to a particular responsibility is very important for employee motivation. The better you understand your work and your environment, the happier you are likely to be with your job. The happier you are, the less likely you want to leave and so this open approach has the very positive company-wide effect of high employee satisfaction and a low staff turnover. Specifically in the fashion industry, this means that the people working for Diesel have a stronger sense of identity and a deeper understanding of the brand making them even better at what they do. CONCLUSION The marketing mix is all good and well but it doesn’t paint the full picture. To understand it, we must look at the “touchy, feely” elements of business which are less often discussed. Diesel has built its existence around that touchy, feely passion with every one of its 2,200 employees living the Diesel brand. Diesel is a perfect company to allow us to see how this dry theory actually works in real life: how the passion of a founder like Renzo Rosso can be communicated around a company and breathed into each and every one of its diverse products. Diesel grew into a global household name for premium clothing but it all started from that one man wanting to do something unusual, something “stupid”. Stubbornly, he stuck to his belief in doing the unusual and it has created a global company whose products are enjoyed by millions. More importantly, this has created a lifestyle a whole new approach to the way we see a brand. Diesel is an experience which interacts with and entertains its customers a far deeper relationship than most other brands. Being driven by passion and the desire to do something special naturally ties these elements together. Understanding theory like the marketing mix in a company like Diesel can be difficult if we expect the elements of price, place, product and promotion to be separate from each other. It becomes easier if, like a magic eye picture, we look beyond the dry theory and realise all of these elements are inseparably bound together by the passion of people like Renzo Rosso who have dedicated their lives to treating their work as an artistic expression of their feelings.
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QUESTIONS 1. Do you think that culture at Diesel has yielded fruitful results for the company? 2. “Diesel works closely with these partners to ensure they express the same level of passion when offering their products.” What is the practical implication of this type of distribution? 3. How does Diesel define their customers through above- and below-the-line? 4. Do you agree that passion and people with passion can be helpful to lead an organization? 5. Do you agree with the pricing strategy of Diesel? Will it be applicable to all the products of any company?
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29 Innovation at Procter and Gamble
Procter & Gamble, has capitalized on innovation and creativity to lead the consumer and household product industry. William Procter, a candle maker, and James Gamble, a soap maker, formed this global and Fortune 500 corporation in 1837. The headquarters of the Procter & Gamble (P&G) is located in Cincinnati, Ohio. These two entrepreneurs and inventors were immigrants from England and Ireland respectively; who have chosen for some reason to settle in the Cincinnati area. The company manufactures a wide variety of consumer goods including beauty, household, health and wellness products. According to CNNMoney.com “in the early part of 2007, P&G was the 25th largest US. company by revenue, 18th largest by profit, and 10th in Fortune’s Most Admired Companies list”. “Touching Lives, Improving Life” is the corporate motto which is exemplified in their 1,38,000 employees and loyal customers worldwide. The worldwide demand for P&G’s products and services has forced the management to focus on global marketing and innovation. This worldwide marketing and innovation success was achieved by making sure that what they produce is of highest quality and most importantly is what customers need. P&G is very adaptable to changing customer demands by carefully and clearly defining its innovative strategies; however, it almost lost its market dominance to competition in the mid-80s had it not been its aggressive play-towin strategy. Senior personnel of the company admitted that they had not had a breakthrough innovation since 1985, and the company’s continued market dominance in the years ahead was in question”. The play-to-win innovation strategy had helped P&G to regain its industry leadership. The management had planned to create a more nimble organization and to increase the speed and quality of
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innovation. They also focussed on improving the speed of commercialization of new products. In addition, they wanted to move the company’s focus to higher growth, higher margin businesses such as health care and personal care. Another innovative play-to-win strategy that P&G management had adopted was the acquisition of its domestic and foreign competitors. P&G acquired a number of other companies that helped diversify its product line and increased profits significantly. In order to foster this aggressive strategy, the management had integrated and reorganized all the manufacturing processes of the companies they acquired. Manufacturing processes of companies like Folgers Coffee, Norwich Eaton Pharmaceuticals, Richardson-Vicks, Noxell, Shulton’s Old Spice, and many others. The predominant leadership or management style in P&G is participatory, delegating, and empowerment. Management has decentralized decision-making process in such a manner that middle level management most at times do not have to wait for headquarters approval and funding; in order to embark on certain key innovative projects. Because of the empowerment given to mid- and senior-level management within this multinational corporation, it is much easier for the management to customize products and customer services internally. It is abundantly clear that, the success of this giant corporation can be closely tied to its management and leadership style. There is a clear customer focus leadership style of a CEO who was brought it within the corporation to strengthen employees’ morale and to refocus employees’ attention to providing the needs and wants of customers in this ever changing global market. P&G has demonstrated that its success depends on its customers, people, and innovation. Each and every employee is brought together by the company’s common culture, values, and goals. The company recognizes its diversity as a unique characteristic and strength and it’s been able to maximize the talents and creativity of these people. P&G has also demonstrated that it is not just in business to maximize shareholders’ wealth but it’s also a socially responsible company. This is apparent in its summer camp programmes which are open to community youth. P&G: AN INNOVATIVE ORGANIZATION Businesses innovate through unmet customer needs. Customers express their needs that have not been met and organizations innovate to meet those needs. This is why P&G is still leading the domestic
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product industry because, it listens to customers’ unmet needs and innovates aggressively to meet those needs. For instance, when babies were wearing cloth diapers, they were very leaky and labour-intensive to wash; at that time, mothers needed an innovative product on the market to help fix the labour-intensive part of washing the cloth diapers as well as the leakage. P&G answered this innovative call by introducing a revolutionary product called “Pampers” into the market. Pampers helped simplified the diapering process by resolving the leakage and the labour-intensive washing. Innovation means change and to change you must know why you are changing, that is to say you must understand the pros and cons of the change process. The organizations are going through change due to globalization, international competition and the spread of information technology. All these factors have escalated competition and the need to change in order to maintain competitive advantage. Organizations have to be faster, more responsive, and produce higher quality. The aforementioned are the primary features of change and P&G management has recognized that. Sometimes, what employees do not understand is the impact of change on their professional and family lives; and it is the responsibility of the management to communicate this impact to employees both positive and negative; but mostly, management overemphasizes on the positives and pays little attention on the negative impacts. This is a communication strategy that P&G has been successful in implementing corporatewide. The company ensures that the length and breadth of all its units understand the impact of any change mostly at the professional level. To begin with, anything that gives a corporation a competitive advantage over the other is a characteristic of innovation. Most companies are described as first movers into some specific industries and once they get in, they make it very difficult for others to get in due to a specified or unspecified characteristic of innovation. This could be innovation in technology, innovation in financial management (capital acquisition), innovation in customer service and what have you. One main innovation characteristic of P&G is to move innovation to commercialization faster than any other competitor in the industry. Secondly, anything that creates a situation that people had to deal with is a characteristic of innovation. When innovation is implemented, it changes people’s attitude towards the new process. It makes people think and act different from the way they used to. It creates different vision and mission that people have to focus on;
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and this gives rise to altering behaviours and attitudes. All this is because of innovation. Whenever P&G introduces a new product line, it alters situations and behaviours. Anything that creates a problem or resolves a problem is a characteristic of innovation. When Listerine mouthwash was introduced into the market, it solved the problem of bad breath but then people had to deal with the burning sensation. P&G: SWOT ANALYSIS One strategic management tool that P&G uses to stay ahead of its competition is the effective and efficient utilization of SWOT analysis. Because of the segmentation and size of the company, P&G faces a lot of domestic and foreign regulatory threats and distribution systems where foreign competition tries to imitate P&G’s brand names for the sake of misleading consumers for self profit. This threat of foreign brand imitation is due to weak foreign business laws and regulations. P&G’s strength includes: strong financial position both in the domestic and foreign markets. The company was the 25th largest U.S. company by revenue in the early part of 2007, and the 18th largest by profit. This is why the company is one of the most admired companies in the United States. Also, the company has the ability and capability to push innovation to commercialization faster than any other competitor in the industry; even though it faces competition from Johnson & Johnson, Kimberly Clark, and Unilever, it’s been able to move products and services from the innovation phase to commercialization faster. P&G has effective and efficient manufacturing processes which include total quality management as well as just-in-time inventory systems; this has enabled the company to save on inventory costs; and this cost saving is generously passed on to consumers in a form of high quality and lower price of goods and services. Another unique strength of P&G is its pool of skilled labour. P&G has 9,000 R&D associates including 1,100 PhDs. This clearly explains the tremendous success of the company. The company’s pool of highly skilled employees in the industry has given it the edge to lead in the innovation of over 40 product categories for which it holds more than 27,000 patents. Company’s research and development is fluent in a broad range of competencies including chemistry, engineering, materials science, biological sciences, medicine, and mathematics. P&G has a track record of producing high quality products which is very difficult to match or beat. Consumers want high quality
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products at reasonable and affordable prices, and this is the main reason why P&G is the driver of the consumer product industry worldwide. P&G’s innovative products and services have helped consumers save a lot of money on dental hygiene and on other health care products. Just about everyone wants a bright healthy smile, but not everyone can spend $600 for the dental visits needed to achieve whiter teeth. And unlike the stereotypical eureka moment, a lone P&G scientist didn’t accidentally stumble onto the Crest White Strips formula late one night at the lab. What we did do was work backward from the consumer need for a convenient, affordable solution to whiter teeth. We brought together a diverse team of experts across our technology centres that were at the leading edge of their fields from our flexible films group, adhesive group, dental experts from our oral care organization and bleaching experts from our laundry business. And through solution focussed R&D, P&G delivered Crest Whitestrips with a level of tooth whitening that surpasses anything else available in the retail market, and consumers pay only $35. Some weaknesses of P&G include: Lack of effective distribution system in some segments as well as poor location in some foreign countries and high cost of inputs. Another area of weakness is the employment of foreign based local management who doesn’t have any international business experience. This makes collaboration with headquarters a little difficult because of their inexperience in the global business arena. P&G’s opportunities include: Well-defined market niche, just-intime manufacturing technology, wide range of demography, and the removal of trade barriers in some foreign countries. The removal of trade barriers in some foreign countries has enabled the company to operate competitively without much government intervention. Trade barriers historically has been known to be one of the biggest threats for most multinational businesses because of hostile takeovers by some foreign governments, difficulty of entry, corruption among government officials and bribery, and unhealthy business environment. Threats include: New entry into the household product industry, use of substitute products, increased trade barriers in some developing nations, unfavourable business laws and political instability. Investors do not like uncertainty. They want to ensure that there is democracy and stable government in whatever country they invest and most importantly, they should be able to repatriate their profits without much restriction. This has been a threat to most businesses as well as P&G.
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A series of innovation systems that are now common practices in corporations across America including extensive market research, the brand-management system, and employee profit-sharing programmes, were first developed at P&G. It is important to analyze and contrast these two key innovation systems within P&G. In July of 2001, P&G acquired the second instalment of AskMe Enterprise from AskMe Corporation, one of the leading providers of enterprise knowledge sharing solutions in order to increase and strengthen its innovation net. AskMe Enterprise is one of the most important and the largest innovation systems in P&G. It is an intranet site that facilitates greater employee collaboration and enables more consumer-driven innovations. AskMe Enterprise reaches 18,000 key knowledge workers in P&G as well as in departments such as R&D, engineering, purchasing, consumer and market knowledge, and knowledge sharing. With AskMe Enterprise, employees can identify qualified individuals with relevant expertise, submit questions or business problems to individuals and receive solutions from colleagues in order to take appropriate and effective actions. Solutions transferred via AskMe Enterprise are captured in a knowledge database so other employees can reuse them in the future. The most interesting aspect of this innovation system is its inclusiveness. It takes into consideration all personality types within the corporation (introverts and extroverts). Introverts and extroverts can use the system effectively without any feelings of intimidation or alienation. The Ask Me Enterprise system brings the best out of individuals, leadership, and groups, because it challenges employees at all levels of the organization to be innovative and think creatively within and outside the organization. The leadership stimulates the minds of employees by putting them in the position of customers with real problems that need immediate solution. That is why the success of every organization or system depends on good leadership. The culture at P&G is totally different from the culture at Johnson & Johnson, and so on. Different cultures learn at different pace at a time and the leadership must not lose sight of this difference. Several challenges and factors confront the management when leading and managing innovative change processes in a multicultural and diverse organization like P&G. The diversity and multiculturalism of P&G needs leadership that will accept responsibility and move change throughout the organization by stressing on the importance of the change to individuals and groups; as well as the organization as a whole.
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The role of ethics and responsibilities in leading innovation and change in P&G cannot be overemphasized. This is due to the fact that unethical decision making in the innovation and change process may have a detrimental effect on innovation because, the innovation output may be rejected by consumers and the general public. The differences that normally divide people such as language, culture, race, gender and thinking and problem solving styles can be an obstacle to innovation. This is why P&G has a sensitivity training system to train all its leadership team and subject matter experts about cultural, language, and religious differences with the organization and how each of this can derail the implementation of innovation and change. QUESTIONS 1. 2. 3. 4.
How far, according to you innovation is essential for survival? Why “Pampers” are called a revolutionary product? What are the weaknesses of P&G? What is the role of the management in innovation within an organization? 5. How does play-to-win strategy help the organization in innovation?
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30 Marketing Research in Product Development: KELLOGG’S
Kellogg’s is the world’s leading producer of cereals. Its products are manufactured in 18 countries and sold in more than 180 countries. For more than 100 years, Kellogg’s has been a leader in health and nutrition through providing consumers with a wide variety of food products. These are designed to be part of a balanced diet and meet the different tastes of consumers. Kellogg’s focusses on sustainable growth. This involves constantly looking for ways to meet consumer needs by growing the cereal business and expanding its product portfolio. Market research is a specific area of marketing that informs businesses like Kellogg’s about the things consumers need, how best to design products to answer those needs and how to advertise those products to consumers. Market research goes beyond finding out what consumers are thinking today. It can identify what consumers might want in the future. This reduces the risk for any new product development (NPD). It also increases the likelihood that products will be well received by consumers when they are launched. Kellogg’s launched Crunchy Nut Cornflakes in the UK in 1980. Since then, it has become one of the most important brands for Kellogg’s with a sales value of £68 million. In 2003, the Crunchy Nut brand created a brand extension. This involved using the Crunchy Nut name to launch a new product called Crunchy Nut Clusters. This variant has two varieties, Milk Chocolate Curls and Honey and Nut. Both of them have enabled the brand to reach a wider group of consumers. This brand extension is now worth £21 million in annual value sales. This case study focusses on the importance of market research during the development and launch of Crunchy Nut Bites, a more
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recent extension to the Crunchy Nut brand. The objective of this innovation was to provide a new flavour and texture for consumers, helping Kellogg’s extend its share of the breakfast cereals market. Many organizations are described as product oriented. This means they develop a product and then look for a market to sell. Kellogg’s is market-oriented. This means that the whole organization focusses on the needs of its consumers. It is therefore essential that it identifies and anticipates changing consumer needs before the development of new products. PRIMARY RESEARCH To develop a new Crunchy Nut brand extension, Kellogg’s commissioned primary research. This is research gathered first hand to answer questions that are specific to the project. Although primary research is often time-consuming and expensive, it is considered a reliable source of information because it is directly from the consumer and is specifically designed to meet the objectives of a project. There are a number of different ways of collecting primary data. Sometimes agencies are employed to collect data using, for example, street interviews or a questionnaire. For the development of Crunchy Nut Bites, Kellogg’s used various methods of primary data collection. Primary market data may involve qualitative research or quantitative research. Both types of data are valuable in understanding what consumers want or need. Qualitative data is concerned more about opinions, feelings and attitudes. But the qualitative research establishes a conversation with consumers. Qualitative research may be obtained through focus groups, where a moderator captures feedback from a group of 6 or 7 consumers to the ideas shown to them. Moreover, quantitative research may use questionnaires administered to large number of respondents. This allows statistical analysis, such as the calculation of a mean score or percentages. It aims to give a representative picture of what consumers think of a new product idea or a new (real) food. In addition, Kellogg’s used secondary research data which has already been collected by other organizations. Sources of secondary data include books, journals, the Internet and the government statistics. The benefits of secondary research are that it is quicker and often less expensive than primary reasearch, although it may not always be completely related to the needs of a specific project. For Kellogg’s, the order in which the information is gathered is as important as the type of information. In order to develop the new
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Crunchy Nut Bites, Kellogg’s undertook four distinct stages of research. Stage 1 Discovery: Initial research aimed to identify a set of new food ideas that would be suitable for developing a new Crunchy Nut product. Secondary research from Mintel and Data monitor was used to find out about innovation trends in the cereal market. It was also used to find out about new products, flavours and foods from around the world. Food developers at Kellogg’s used this information to come up with a number of new food ideas. Focus groups: Focus groups were used to provide qualitative research. These were used to show consumers the new food ideas in the form of a number of different (real) food prototypes, including a mini crispy lattice product and a nutty triangle. The focus groups captured the attitudes and feelings of consumers towards the new foods. This primary research helped Kellogg’s to find out how new product suggestions could be developed and still fit in with the Crunchy Nut brand. It helped Kellogg’s to establish what consumers were looking for in terms of potential new flavours and textures. The results allowed Kellogg’s to discard some ideas. Other ideas were appealing for consumers but needed refining and further development. At the end of this stage, Kellogg’s had a number of new food ideas that all seemed to appeal to consumers. Stage 2 Selecting the best idea: This stage aimed to select the best idea arising from the stage 1 research. Kellogg’s put the ideas from the focus group on boards. The boards had pictures showing product ideas and a description of what the new product would be like. These boards were then shown to a large group of representative consumers in a quantitative survey. They were asked to rate those ideas against a number of scales, so Kellogg’s could identify which product ideas consumers liked best or disliked. The quantitative data created specific statistical information that indicated that a new Crunchy Nut Bites idea was perceived as the most appealing amongst all the ideas tested. It established what proportion of people liked the new product idea enough to buy it. It also identified those product ideas that had the best or least sales potential.
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INFORMATION GATHERING—DEVELOPMENT TO LAUNCH Stage 3 Crafting the idea into a complete new product: Once the best idea had been selected from the stage 2, Kellogg’s needed to make this idea become a real product. The Crunchy Nut Bites food prototype recipe was refined using the feedback from another qualitative and quantitative survey. The qualitative research helped Kellogg’s food technologists to explore the taste and texture of the new food idea in more detail. Kellogg’s needed to understand the “eating experience” of the consumer before a decision could be made about how to develop the recipe in more detail. Following this stage, four product recipes were developed and these prototypes were then tested with representative groups of consumers in a quantitative survey to see which product consumers preferred. This enabled Kellogg’s to select the best one. Also, at this stage, the pack design for the new Crunchy Nut Bites was developed. Several designs were developed aimed at giving the new product the same look and feel as the rest of the Crunchy Nut family. The packaging designs were tested with consumers, which enabled Kellogg’s to select the final packaging design for Crunchy Nut Bites. Stage 4 Forecasting sales for the new Crunchy Nut Bites: At Kellogg’s, every product has to undergo one final test prior to a new product launch. This is called the “In Home Usage Test”. The consumers are given the product to try for several days and this enables Kellogg’s to capture how consumers interact with the product for the first time. At the end of the trial, consumers complete a report on what they thought of the food in the form of a questionnaire. This final survey measures how appealing the new product is to consumers and how likely they would be to buy it in real life. The data collected also helped to calculate a sales forecast for the new product for the first and second year in market. The forecast was used by the finance department to set budgets, organize the supply chain and to schedule food production. Once the data was analyzed and the product concept tested, Kellogg’s was able to make the strategic decision to go ahead with the new product. Production could then take place.
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CONCLUSION Kellogg’s used market research throughout the whole development process for a new product for the Crunchy Nut range, from the initial idea to the planning of production and delivery. During the earlier stages of research, consumer responses helped Kellogg’s to explore lots of different ideas in an open way. It then crafted some ideas in more detail and screened those ideas with consumers to select the one which seemed to have the highest appeal. The idea became real by testing several recipes, refining the food prototype selected and developing the design for packaging. Once the food and packaging elements for the new product had been developed, the whole product was tested with consumers to ensure it met their needs. The data also provided a sales forecast to predict the first two years of sales of Crunchy Nut Bites. Crunchy Nut Bites has extended the Crunchy Nut family of products. In doing so it has brought new consumers to the brand and increased its consumption. Kellogg’s launched Crunchy Nut Bites in September 2008. Sales data shows it was one of the best performing brands to launch in the breakfast cereal category with a sales value of £6.9 million in its first year of sales. This illustrates that the detailed market research undertaken during the planning stages was valuable. It helped to ensure that the product extension hit the spot with consumers straightaway. QUESTIONS 1. What are basic outcomes of the research process at Kellogg’s? 2. Explain how Kellogg’s extended its brand with the help of marketing research. 3. How primary and secondary data proved useful for Kellogg’s in brand extension? 4. What is the objective of in-home-usage test at Kellogg’s?
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31 Maruti 800
Launched as a joint venture between the Indian government and leading Japanese automobile company, Suzuki Motor Co. The Government of India eventually sold its stake to Suzuki. Now, the flagship brand is Maruti Suzuki (India) Ltd. Status: Maruti 800 has a 4.5% share in India’s 1.5 million passenger car market and is no longer the car that sells the most in India. However, it was responsible for making its company India’s largest car maker. Brand story: Much before Ratan Tata unveiled the Nano in January 2009, India had its own unique people’s car—the Maruti 800. Introduced in 1983, it still zips across Indian roads, making it one of the longest surviving automobile brands here. Maruti 800 captured the imagination of a nation that had gotten used to expensive, fuel guzzling vehicles of World War II vintage. A small car that was within the reach of middle-class households, the Maruti 800, or “car” as it is still known within the company, introduced a whole generation of customers to four-wheelers. Within a couple of years of its launch, it became India’s largest selling car, a position it held for almost a decade-and-a-half before being overtaken by Alto, a larger, more spacious small car from the same company. Till date, around 2.5 million units of the car have been sold in India and 1,80,000 units exported. For any brand to survive for so long, expectation and product promise should match, Maruti Suzuki. This car came as a breath of fresh air and almost immediately became the first choice of its target consumers. It has evolved from an aspirational product to a common man’s car. While Maruti Suzuki India Ltd. has tweaked the positioning several times, the underlying theme remains unchanged—an affordable, fuel-efficient vehicle, easy to run and
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maintain. It was, and remains, a car for the first-time buyer though rising disposable incomes, cheaper loans and the introduction of other slightly aspirational brands have started eating into its market share. The car, however, still remains in the Top 10 list of automobile models sold every year. Introducing new variants and facelifts—four so far—and targeting new, first-time buyers have been the driving strategy behind this. The communication—especially the TV commercials—has been aimed at getting across the value proposition of an affordable and fuelefficient car. Maruti has targeted two-wheeler owners with promotional offers. Still profitable, it could be a key weapon for the company in the battle against the Tata Nano but with the launch of various small cars by other auto players in the market, it has become imperative for Maruti to rethink about its strategy to cater the lower middle level segment of the Indian consumers. QUESTIONS 1. What was the reason of success of Maruti 800 in the Indian market? 2. How did Maruti Suzuki manage to position its Maruti-800 as people’s car? 3. What is the need to redesign its strategy to cater to the same segment of Indian consumers? 4. The market situation has been changed and successful product may fail now. Why and how does this statement fit in with the Maruti?
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32 Nirma: Brand Values
Nirma is the brand which one’s grandmother can recall from her time and it is a generic name for her. From my grandmother’s time to present time Nirma is able to sustain its position in the market and its name never got washed away. Such a strong presence of a non-premium brand as well as its recall value has always been fascinating. The kind of impact that Nirma’s simple “dancing girl” advertisement managed to have on prospective buyers was phenomenal. It perhaps was the most famous audio-visual of its times. And it remained etched in the minds of people for a very long time. Advertisements of Nirma focus on the “performance” and “cost effective” features of the washing powder which has made it popular in most Indian households, who have been using it for many years now. This product is targeted for middle-class and lower middleclass population of India. Washing powders have undergone a number of changes in terms of composition, advertising, etc., ever since they were first introduced. And consumer preferences have also changed accordingly with people more comfortable with more sophisticated brands. Yet, Nirma with its distinct yellow colour (later which became blue) does crop up somewhere in the mind of consumers, even non-users. Nirma envisioned the vast fabric wash market segment and sensed a tremendous potential therein. This brand had been ranked as the “most widely distributed detergent powder brand in India”. Brand Nirma has always been able to demonstrate its mass market presence. Nirma as a brand has few variants. Four of the more popular ones are detergents, soaps, edible salt and scouring products. As a brand Nirma may be limited in its variants. But, its usages are plenty.
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BRAND PERFORMANCE Ratio of detergent to other constituent makes Nirma a unique product which is good in quality and reasonable in price. Nirma is also used as a cleaning agent for floors in many Indian families. Nirma is regarded as a strong cleaning agent that can be used in any condition which includes hard water, tough stains and sticky dirt. Owing to its unique environment-friendly, phosphate-free formulation, the consumers became loyal to this brand, helping it to overtake the decades’ old brands, in terms of volumes. Value-for-money: Deriving inspiration from its success in the detergent powder market, Nirma expanded its product portfolio by introducing the “Nirma Detergent Cake” in 1987. Here again, the excellent price-quality equation tempted the consumers to try the product. This blue soap has got substantial market share in the premium detergent segment and continues to perform well as its parent. Due to its unique formulation, this product offers benefits like less melting in water, better stability, and therefore lasts longer. In a country like India where majority of the population belongs to middle-class and lower middle-class Nirma is strongly positioned in this segment. Compared to other products, Nirma is quite affordable. A packet of Nirma lasts longer as compared to any other washing powder; kind of detergent used in it necessitates less quantity. Simple and non-sophisticated packaging contributes to reduced cost of Nirma. Nirma is never provided in paper box, customer buys it and stores it in some box already available in house. That way customer need not to pay extra money for packaging which is non-value addition for them. Its cover saves it from moisture and humidity. Brand Imagery: Nirma has always been embedded in consumer’s mind in some or other part of consumer’s life. Nirma is always willing to cater to its customers of every segment. (a) Jyada Shakti Nirma: Initially, Brand Nirma was targeted for low class and lower middle-class segment of the population. (b) Super Nirma: Exploding the myth that ‘better quality always demands higher price”, Nirma introduced a spray-dried blue colour washing powder in the premium segment, in 1996. Available in 25 gm, 500 gm and 1000 gm packs, this product out-classed its competitor brands. Though, priced almost 40% lesser, thus providing a very attractive ‘value-for-money’ proposition. This brand, within a short span of two years, had
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cornered substantial market share in the premium detergent segment and continues to perform well. (c) Nirma Popular: To cater to the needs of the specific target audience, Nirma launched a good quality product at a very affordable price. The objective is to convert the non-users of detergents into users and also prevent the competitors and local manufacturers to lure away the prospective Nirma consumers by sub-standard products. This product has created a loyal consumer base of its own and has established substantial amount of volumes. It is available in pack sizes of 500 gm and 1000 gm pack sizes. Nirma is available in any kirana stores in all parts of the country. Nirma is the most widely distributed brand of the country. Yellow colour of Nirma washing powder is still present in the minds of Indian consumers. Personality and values: Various dimensions of multipersonality brand Nirma are as follows: (a) Sincerity (b) Robust (c) Competence (d) Performer (e) Ruggedness (f) Powerful (Ab jyada shakti Nirma) Its advertisement focusses mainly housewives — a major chunk of Indian population. Nirma entered in the production of beauty bars also. Sangeeta Bijlani, Sonali Bendre, Deepti Bhatnagar were some of brand ambassadors of Nirma. Brand Judgments: Brand Nirma is always considered a nonsophisticated and high performing brand as compared to any other brand present in the market. Variety of washing powders like Surf Excel, Ariel, Tide are present in the market which can give tough competition to Nirma as they provide better performance. But brand Nirma is strategically positioned so well in its customer segment that it can sustain its position in the market, after being few of its customers switching to other products. If a lot of customers shift to premium product range another set of customer shift to Nirma. (a) Brand Quality: Nirma is famous for providing high quality in terms of money spent on the product or we can say high value for money proposition. It has an image of a performer in any odd situation.
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(b) Brand Credibility: (i) Perceived expertise: Nirma is a market leader. It always has been very successful in giving tough competition to its counterparts like Fena, More, Hepoline, etc. It always added innovation to its products and gave a specific product for specific customer segment, e.g., Super Nirma and Nirma Popular were introduced to cater to high quality demanding customers. (ii) Trustworthiness: It has always proved to be a dependable brand from decades. It has always been present in the mind of Indian customers including the non-users. (iii) Likeability: High “value for money “and high “quality to cost ratio” makes it an interesting, price-worthy and useful product. (c) Brand Consideration: Other than any brand Nirma is personally related to my grandmother and surprisingly high brand recall value and praise for brand motivates me to know the brand. Its presence from decades depicts its robustness. (d) Brand Superiority: Its presence and performance for so long makes customers to view the brand as unique and better than other brands. (e) Brand Feelings: Customers are emotionally attached to the brand. Brand Nirma being a prime mover in affordable washing powder range has a respectable place in Indian consumers’ mind. It gives an image of a strong and sturdy old man who has faced all the adversities calmly and courageously. Nirma always adopted captivating and unique advertising and marketing strategy. This product created a marketing miracle, when introduced in the domestic market. In 1960s, when the detergents were priced so exorbitantly that for most of the Indians, it was a luxury item. Nirma envisioned the vast fabric wash market segment and sensed a tremendous potential therein. This product was priced at almost one-third to that of the competitor brands, resulting into instant trial by the consumers. Time to time it kept on introducing its variants in the market like Super Nirma, Nirma Popular, Nirma Beauty Bar and other toiletry preparations. It took advantage of word of mouth advertisement. Especially the segment in which Nirma focusses; consumers are always ready to admire a brand which gives them performance. Nirma also delivered consistent performance matching to its customers’ need. Customers tend to use it because of its attachment to the brand in spite of
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presence of other similar performing brands. Brand Nirma was also notorious for its harmful effects on user’s hands but here also Nirma came up with Super Nirma and very well advertised this newly introduced feature. Brand Resonance: Brand Nirma is present in the minds of customers since long. Despite being a non-user customers respect this brand and share a good memory and experience with the brand from its child hood days or may be experience of parents. Like a person, Nirma has a glorious past which epitomizes its success and strong presence in the market even now. Sense of belonging to this brand is stronger today also. In washing powder stories Nirma is a protagonist which reaches to the apex by keeping small and steady steps. Its success is incremental and phenomenal. Active Engagement: Customers are willing to spend money on this product and use it. Brand Nirma is still present in middle-class and lower middle-class segment unaffected by any external competition and changes. QUESTIONS 1. Why do the consumers have brand feeling with Nirma? 2. How can you say that Nirma managed to retain its image as a popular brand even in today’s competitive market? 3. What were the key contributors to the success of Nirma? 4. How Nirma successfully associated its brand image with common masses?
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33 Samsung: How they Did It?
1969 – The beginning of Samsung Electronics Company (SEC.) The company itself was the low-cost manufacturer of black and white TV sets. 1970 –The turnaround phase of SEC. The primary milestone which decided the future of SEC. During this year, Samsung acquired semiconductor business. 1980 – SEC showed off their fangs. During this year, SEC was the supplier of commodity products (TV sets, microwave ovens and VCRs) in huge quantities to global market. This explains a lot why Samsung is sought for in electronic home appliances. The company also was an OEM company where they made brandless products and sold it to other companies which re-sell it again with its own brand name at higher price. Since SEC’s background was mainly in manufacturing, it’s not a surprise for the executives themselves to focus heavily on their manufacturing plants. Profits that SEC received were reinvested in R&D and manufacturing and supply chain activities. 1997 – The big crisis that hit Asia. SEC’s sales were $16 billion but with negative net profit. During this time, the executives conducted major restructuring efforts. SEC dismissed 29,000 workers and sold off $2 billion worth of corporate assets. However, SEC survived. The company’s debt of $15 billion in 1997 has been reduced to $4.6 billion by 2002 and the net margins rose from 3% to 13%. 2002 – In this year, the company recorded net profits of $5.9 billion on sales of $44.6 billion. 2003 – SEC was the most widely held stock among all emerging market companies.
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2010 – SEC launched its various models of smart phones. Vertical Integration: Unlike other companies who choose to outsource their manufacturing processes, SEC remains committed to its core competence, i.e., manufacturing. During 1998-2003, SEC invested $19 billion in new chip factories and $17 billion in June 2003 for manufacturing facilities for TFT-LCDs over the next 10 years. SEC’s policy to its sub-manufacturing groups is that they should remain competitive by forcing those groups to compete with outside companies for internal business just like happened with one of internal manufacturing groups that should compete with Sumitomo Chemical Company of Japan to supply the company with its colour filters. However, being focussed into manufacturing process didn’t make SEC as a rigid company. To cope with supply-chain demands, the company remains flexible by building 12 manufacturing plants in China during 2003 and setting up R&D facilities in India. Avoiding Commoditization Trap: There’s nothing more horrendous for a company other than being ‘commoditized’. That is, where your product is ‘just the same with many millions and trillions products out there.’ And electronic gadget products are so easy to become a commodity. In Indonesia, Nokia is the biggest player. They are the market leaders in terms of market share. In order to avoid that, SEC customized as much as production as possible. However, as a result of customization and reliable, timely supply of chips, SEC’s average prices were 17% above the industry levels. Going Basic: In hand phone market, Samsung decided not to develop proprietary software and content (music, movies and video games) unlike its rival: Apple, Sony, etc. SEC tends to focus on hardware and devices to collaborate with content providers when appropriate. This kind of approach is recognized by SEC’s executives as ‘Open Architecture’ where customers are able to access more software through its devices than its competitors’ products. Another reason why SEC is focussing on hardware only (and I believe that this would be the most reasonable reason) is that they want to protect proprietary content from piracy. You see, once they develop software, it could be pirated instantly and the legal cost would be such an amount. To save money, SEC chose not to walk the plank. To Innovate: With 17,000 scientists, engineers and designers this company has fast decision-making process with flatter hierarchy. The product development phase from the drawing board to its commercialization phase needs only five months. In this innovation phase, there is this thing called ‘pillar products’ that is, 4 or 5 products that would be the ‘main’ products that will be sold on that particular
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year/season. Pillar product is the Holy Grail for everybody inside R&D division because once their prototype made it to ‘Pillar Product’, every effort will be poured down over to support that product in the market. Sashimi Theory: This theory, unsurprisingly, is the foundation of electronics and gadgets market all over the world. Being implemented heavily by Nokia, ‘Sashimi Theory’ is taken from the fish market. Fish sells at high price on the first day when they are fresh, but prices decline dramatically thereafter. Ring a bell? Yes, that over-priced Nokia suddenly decreases its price after 3 months or so. Realizing that the market is tighter day by day, Samsung’s marketing team proposes three ‘requirements’ that every product should have: ‘Wow’, ‘Simple’ and ‘Inclusive’. The product should be ‘wow’ enough which means that it has groundbreaking innovations that intrigued consumers and the product should be ‘simple’ and ‘inclusive’ in terms of ease of use and accessibility along with ubiquity, availability and affordability of Samsung’s products to the consumer. THE MARKETING TEAM Samsung’s marketing team is divided in three layers, namely, Marketing Strategy team, Regional Strategy team and Product Strategy team. Marketing Strategy team’s main task is to develop global marketing strategy; that is, to develop marketing strategy in internationally. The core message that the company wanted to convey should be shown inside every promotional activity internationally. Regional Strategy team’s job is to continue the task of Marketing Strategy team and breaking it down to regional level. One effort that is applicable in United States doesn’t mean that it will reap the same success when implemented in Japan. It would be the Regional Strategy team’s task to develop strategy in terms of regional demographics. Product Strategy team is the frontline of the whole team. Conducting market research, gathering information and analyzing information about competitors are its daily task, i.e., the market intelligence. Market-driven Change: In the past, Samsung’s effort was promoting in its own way which resulted in cluttered information, unclear company and brand image and confused consumers. Several years after came along a blockbuster movie called ‘The Matrix’ and Samsung thought that it was the perfect time for them to get off the dust from their shoulder and going hip. Having the slogan ‘DigitAll
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– Everyone’s Invited’, Samsung focussed more on customer’s insights into new-product development process and cooperated with Warner Bros. for product replacement at ‘The Matrix’. QUESTIONS 1. Explain how Samsung marketed its products strategically. 2. How do you think that the vertical integration worked for SEC? 3. Do you think that it is good to adopt market-driven change? Justify your response with reasons. 4. Do you agree with ‘wow, simple and inclusive’ parameters of the products? Can this parameter be applicable in all the products?
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34 Shell Inc.
BALANCING SHAREHOLDERS’ NEEDS Balancing the needs of all stakeholders is particularly important for large energy companies like Shell, one of the world”s largest and most profitable MNC. Shell is a global group of energy and petrochemical companies. Its aim is to meet the energy needs of society in ways that are economically, socially and environmentally viable, now and in the future. Shell’s headquarters are in the Hague, the Netherlands, and the parent company of the Shell group is Royal Dutch Shell plc, which is incorporated in England and Wales. Shell provides 2% of the world’s oil and 3% of its natural gas. Shell’s fuel retail network has around 44,000 service stations and it sells transport fuel to some 10 million customers a day. Global challenges Oil and gas are non-renewable resources but remain essential for powering the world’s needs. Energy use is increasing due to a growing world population and higher standards of living. This means more demand not only for oil and gas but also for other energy sources. Shell is therefore faced with an enormous challenge to help meet the needs of the present and future generations, while creating as little negative impact as possible to the environment. Shell aims to provide energy safely and responsibly and serve all its stakeholders, customers and investors effectively. Two key aims of the Shell Group are: 1. To engage efficiently, responsibly and profitably in oil, gas, chemicals and other businesses. 2. To participate in the search for and development of other sources of energy to meet evolving customer needs and the world’s growing demand for energy.
Shareholders: Shell’s main internal stakeholders are its shareholders, employees and suppliers. Large businesses like Shell, Sainsbury”s, Virgin,
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and M&S are owned by shareholders. Shareholders play a crucial part in the life of the business. They provide a sizeable part of the capital required to set up and run the business. They take a reward from a share of the profits in the form of a dividend.
Employees: Another important internal stakeholder group is employees. Shell employs over 100,000 people worldwide. These include senior international managers specialising in finance, marketing, sales, oil and gas exploration and other aspects of the business. Other employees include geologists, market researchers, site engineers, oil platform workers, office administrators, business analysts and many more. As stakeholders, employees are influenced by Shell but also affect how Shell operates. The employees’ standard of work and commitment to health and safety and excellence is vital in order to keep Shell as a leader in the energy field. Mistakes can be costly in terms of reputation and the livelihood of other employees. A priority at Shell is to respect people. It seeks to provide its staff with good and safe working conditions and competitive terms of employment to keep them safe and motivated.
Suppliers: Suppliers are also internal stakeholders and are Shell”s partners in the chain of production, for example, in bringing petrol from the oil well to the petrol pump. Shell’s reputation depends on making sure that its business actions reflect these core values. Shell works with contractors and other partners in the supply chain who also must demonstrate these values. EXTERNAL STAKEHOLDERS—CUSTOMERS AND COMMUNITIES External stakeholders are not part of the business but have a keen interest in what it does and may influence Shell”s decision making. Shell is committed to satisfying the needs of its external stakeholders. Customers: Shell”s major objectives is:“To win and maintain customers by developing and providing products and services which offer value in terms of price, quality, safety and environmental impact, which are supported by technological, environmental and commercial expertise.” Achieving this objective is challenging. Customers want value for money which involves providing the highest quality fuels at competitive prices. Increasingly customers, concerned about pollution and environmental damage, require cleaner, more efficient fuels such as biofuel. There is global interest in liquid biofuels for transport as people travel more. Biofuels also offer the potential to slow the rate of growth in the world’s
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CO2 emissions. Shell responds to changes in customer views and seeks to anticipate future customer expectations. It aims to help customers use less energy and emit less CO2. Shell products include fuels and lubricants for all forms of transport such as cars, ships, aeroplanes and trains. Shell has a set of global environmental standards/expectations for all of its companies. These include: managing greenhouse gases, energy efficiency, control of waste and the impact on water. Local communities: Shell”s oil and gas operations aim to create economic and social development while minimising negative impacts. It seeks to invest in lasting benefits for the community. Local communities living close to oil refineries have raised concerns over their safety. Shell seeks to overcome these fears and earn the trust of people by taking all the necessary safety measures. This includes operating the plant safely and making people aware of plans and emergency procedures. Shell, in its commitment to improve the wellbeing of local communities, has created local partnerships. It has provided health facilities and supported the development of local schools and universities. One of Shell’s initiatives is “Shell LiveWire” — an online community for young entrepreneurs wanting to start a business.
EXTERNAL STAKEHOLDERS INTEREST GROUPS Shell needs to work with a range of interest groups. These are decision makers and opinion formers. People and organisations in positions of influence make decisions and form opinions that can affect Shell. These include academics, government, media, non-governmental organisations (NGOs), business leaders and the financial community. They interact with Shell in different ways: • Governments: Shell has operations in many countries across all regions of the globe. To gain approval to operate in these countries it has shown the host governments that it is operating in the right way. This includes creating jobs, paying taxes and providing important energy supplies. Shell is also working with governments to promote the need for more effective regulation on CO2 emissions. • The business community: Shell supplies to and buys from hundreds of other businesses. • Other oil companies: Shell works in partnership on projects with other international oil companies and partners, such as government-owned oil companies in the countries in which it operates. Partnership activities have included building new oil or gas supply lines and new refineries.
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• The media: It is essential for competitive companies like Shell to continue to operate in ways that receive positive press coverage from newspapers, television and magazines. This reinforces its position in the market and can help to attract new customers through a positive reputation. • NGOs are a diverse group of organisations, organised on a local, national or international level and often around specific issues, such as environment, human rights or health. They vary in their methods, ranging from providing services and expertise to lobbying and campaigning organisations. NGOs often seek to influence other actors, including major brands and big multinationals such as Shell. Shell engages and works with a wide variety of NGOs on a regular basis. For example, it works with and learns from more than 100 scientific and conservation organisations in 40 countries. Partnerships with global organisations help Shell to improve its approach to the environment. The 10-year relationship with the International Union for the Conservation of Nature has led to changes in its operations that have reduced the environmental impact. Shell is committed to respecting human rights and helping communities. The search for oil and gas can take energy companies to places with poor human rights records. Shell uses a variety of tools, often developed with NGO and think-tank input, to manage risks. If Shell chooses not to operate in these areas, this opens the door for less principled competitors to exploit workers in these countries. If it stays then it can become part of the solution. Shell will only operate in countries where it is able to follow its business principles. These principles set out what Shell stands for and define its behaviour. Shareholders and resolving conflicts: Shell’s main shareholders consist of large institutional stockholders, employees and the general public. Shell believes that it has a key responsibility to protect shareholders’ investment and provide a long-term return competitive with those of other leading companies in the industry. Shell’s profits have then been used to reward shareholders in the form of dividends and to plough back into research and investment in new products, new forms of energy for the future and better ways of managing fuel reserves. Shell believes that through stakeholder dialogue and balancing the needs of different stakeholders it can continue to grow and help meet the world’s energy needs. Shell employs three criteria in making such decisions. It assesses whether:
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1. The economic impact of the activity is likely to yield a good return for shareholders. 2. The social impact will be suitable for employees and communities. 3. The long-term effect of its activity will harm the environment. To avoid conflict, Shell sets minimum levels that must be met for all three areas before making a major decision or investment in any one. For example, when planning new activity on land that was previously used for other purposes such as timber or agriculture, Shell looks to strike a balance between the social opportunities or impact and financial return or risk. In order to balance the needs of stakeholders, Shell recognises five areas of responsibility: to shareholders, customers, employees, suppliers and society. Shell resolves and minimises conflicts between its activities and its stakeholders through its clear strategies and commitment to corporate values. Through balancing social, economic and environmental considerations, Shell seeks to make decisions that maximise value.
QUESTIONS 1. What are various challenges before Shell Inc.? 2. Explain the conflict resolving strategy of Shell Inc. 3. Do you agree that Interest groups influence opinions and decisions of an organisation? Explain with suitable logic fro Shell Inc.? 4. Can local communities play a role in shaping an organisation? Why and how?
35 The Tata Titans
The Tata Group, founded by Jamshetji Tata in 1868, the Tata group’s early years were inspired by the spirit of nationalism. The group pioneered several industries of national importance in India: steel, power, hospitality and airlines. In more recent times, the Tata group’s pioneering spirit has been showcased by companies like Tata Consultancy Services, India’s first software company, which pioneered the international delivery model, and Tata Motors, which made India’s first indigenously developed car, Indica, in 1998 and recently unveiled the world’s lowest-cost car, the Tata Nano, for commercial launch in 2008. This group has always believed in returning wealth to the society it serves. Two-thirds of the equity of Tata Sons, the Tata group’s promoter company, is held by philanthropic trusts which have created national institutions in science and technology, medical research, social studies and the performing arts. The trusts also provide aid and assistance to NGOs in the areas of education, health care and livelihoods. Tata companies also extend social welfare activities to communities around their industrial units. The combined development-related expenditure of the trusts and the companies amounts to around 4% of the group’s net profits. Going forward, the group is focussing on new technologies and innovation to drive its business in India and internationally. The Nano car is one example, as is the Eka supercomputer (developed by another Tata company), which in 2008 is ranked the world’s fourth fastest. The group aims to build a series of world-class, world-scale businesses in select sectors. Anchored in India and wedded to its traditional values and strong ethics, the group is building a multinational business which will achieve growth through excellence and innovation, while balancing the interests of its shareholders, its employees and the society.
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It is one of the oldest business groups in India. The group is largely operated through a holding company, namely, Tata Sons. Of the ventures that did bear fruit while Jamshetji was alive, the Taj Mahal Hotel in Bombay. JRD Tata was born in Paris in 1904, the year Jamshetji died. JRD’s education was constantly interrupted and at twenty-one when he came to settle in India, his father, a director of Tatas, took his son to the room of John Peterson, who was then director in-charge of Tata Steel. Thus, began JRD’s training and his tryst with business. At the age of 34, he was made chairman of Tata Sons. Right from the beginning JRD stamped his style of working on the organization. He started the process of devolution of power for the democratization of the Tatas. JRD handpicked many of the Tata company chairmen. He was also at the helm during the nationalization of many Indian businesses like Tata Airlines (1953) and the insurance arm of the Tatas, the New India Assurance Company (1971). Even as the Tata companies became legally independent under the dismantling of the managing agency system in 1970, a resemblance of unity was maintained by a network of intercorporate shareholdings, weekly cross-company directors’ meetings and JRD’s dynamic personality and moral force. RATAN TATA Ratan Tata was born in Mumbai (Bombay) on December 28, 1937, to Soonoo and Naval Hormusji Tata, both Gujarati-speaking Parsis. He was the grandson of Jamshetji Tata, founder of the Tata Group. Ratan Tata had a troubled childhood as his parents separated when he was only seven. When Ratan Tata took over as chairman, the Tata Group seemed on its way to disintegration, with powerful CEOs running some of the Group companies like their personal fiefdoms and challenging the core structure of the Group. Ratan Tata was instrumental in changing the Tata Group’s attitude toward risk. Earlier, the Group had been risk-averse, and had very few ambitious projects. By the mid-2000s, the Group companies had become more aggressive, with most of them entering new markets and developing new products. Ratan Tata believed that the biggest challenge for the Group was finding the right talent and retaining the Group’s value systems as it grew bigger and more diverse. He believed that the Group had to expand the managerial perspective while retaining the same ethical and moral standards.
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In tandem with the increasing international footprint of its companies, the group is also gaining international recognition. Brand Finance, a UK-based consultancy firm, recently valued the Tata brand at $11.4 billion and ranked it 57th amongst the Top 100 brands in the world. Business Week ranked the group sixth amongst the ‘World’s Most Innovative Companies’ and the Reputation Institute, USA, recently rated it as the ‘World’s Sixth Most Reputed Firm. Leadership with Trust: Tata is a rapidly growing business group based in India with significant international operations. Revenues in 2007-08 were estimated at $62.5 billion (around Rs. 251,543 crore), of which 61% is from business outside India. The group employs around 3,50,000 people worldwide. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics. The business operations of the Tata group currently encompass seven sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. The group’s 27 publicly listed enterprises have a combined market capitalization of some $60 billion, among the highest among Indian business houses, and a shareholder base of 3.2 million. The major companies operate in the group include Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Tea, Indian Hotels and Tata Communications. The group’s major companies are beginning to be counted globally. Tata Steel became the sixth largest steel maker in the world after it acquired Corus. Tata Motors is among the top five commercial vehicle manufacturers in the world and has recently acquired Jaguar and Land Rover. TCS is a leading global software company, with delivery centres in the US, UK, Hungary, Brazil, Uruguay and China, besides India. Tata Tea is the second largest branded tea company in the world, through its UK-based subsidiary Tetley. Tata Chemicals is the world’s second largest manufacturer of soda ash. Tata Communications is one of the world’s largest wholesale voice carriers. KEY VALUES AND PURPOSES Core values: The Tata Group has always been a value-driven organization. These values continue to direct the group’s growth and businesses. The five core Tata values underpinning the way they do business are: • Integrity: To conduct business fairly, with honesty and transparency. Everything must stand the test of public scrutiny.
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• Understanding: Must be caring, show respect, compassion and humanity for colleagues and customers around the world, and always work for the benefit of the communities. • Excellence: Must constantly strive to achieve the highest possible standards in day-to-day work and in the quality of the goods and services. • Unity: To work cohesively with colleagues across the group and with customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation. • Responsibility: Must continue to be responsible, sensitive to the countries, communities and environments and always ensuring that what comes from the people goes back to the people many times more. Purpose: At the Tata Group the purpose is to improve the quality of life of the communities. They do this through leadership in sectors of economic significance, to which the group brings a unique set of capabilities. This requires them to grow aggressively in focussed areas of business. The heritage of returning to society what they earn evokes trust among consumers, employees, shareholders and the community. This heritage is being continuously enriched by the formalization of the high standards of behaviour expected from employees and companies. The Tata name is a unique asset representing leadership with trust. Leveraging this asset to enhance group synergy and becoming globally competitive is the chosen route to sustained growth and longterm success. QUESTIONS 1. Elaborate the reasons behind the success of Tata as a big corporate house. 2. How Tata reflects trust with its leadership in Indian markets? 3. How Tata manages its various business sectors and companies?
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36 General Motors
THE AUTOMATION SOLUTION General Motors sat at or near the top of the Fortune 500 for decades. Populated by such legendary management figures as William Durant, who created GM by consolidating dozens of smaller car makers, and Alfred Sloan, the man responsible for GM’s modern decentralised structure and broad product line, GM dominated the automobile industry. Over time, in the face of competitive threats by foreign carmakers and changes in industry dynamics, the dominant company struggled. When Roger Smith became CEO, he set out to transform the company, shovelling billions of dollars into factory automation in an attempt to cut labour costs and catch up to the Japanese. When the dust settled, GM’s market share had slid from 48% to 36% during Smith’s tenure, a slide that has continued to the present day when GM’s share comes in under 30%. This is the story of GM’s quest for supremacy by replacing people with robotics, what gave rise to this strategy, and why it was ill conceived from the very start. While Roger Smith deserves criticism for embracing the automation solution without really understanding its limitations, the story is also one of ineffective organisational learning and failed corporate governance. The lessons that emerge from an analysis of a near-$45 billion investment strategy hold resonance today as much as they did in the 1980s. In 1892 a man named R. Olds invested his lifesavings to create the Olds Motor Vehicle Company to build horseless carriages, known as automobiles. Olds founded the first American factory in Detroit devoted to automobiles and was soon followed by several other companies making cars in the Detroit area. By 1903, the industry was consolidating and Olds merged with William Durant’s Buick Motor; the new entity was called General Motors. Under Durant’s leadership, a wave of acquisitions followed, including Cadillac and Oakland (renamed Pontiac) in 1909, and
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Chevrolet in 1918. When the deal making was done two years later, the modern GM had been created—a giant amalgamation of over 30 different companies. With infrastructure in place, GM took aim at the Ford empire created by Henry Ford and his Model T. Having pioneered the assembly line that enabled mass manufacturing, Ford was the dominant force in the early automotive era and the competitor to beat. It took another giant— legendary GM CEO Alfred Sloan—to make that happen. Considered the most influential CEO in GM’s history as well as a pillar in business history, his slogan, “A car for every purse and purpose,” became GM’s trademark. Sloan recognised that GM could not compete on price alone, so his strategy was to sell cars at the top of each price range, competing in quality against less-expensive cars and in price against higher-quality cars. With this came his theory of “planned obsolescence,” where the concept of annual models was rolled out. Sloan visualised an emerging market for repeat sales if a car could be perceived as out-of-date within four to five years. He also introduced a reorganisation philosophy, creating the famous GM Management System of decentralised operations and responsibilities with coordinated controls. Each division retained a high degree of autonomy while a central GM board set uniform policies and guidelines. The result: by the end of the 1920s, GM was overtaking Ford, and by the 1940s, a GM nameplate was on almost one out of every two cars sold in America. GM became the first corporation in the world by 1955 to generate $1 billion in revenue in a single year. After growing GM into one of the most successful corporations in American history, Sloan retired. Few organisations in American industry have had the long-term success that GM enjoyed. It was the industry’s low-cost producer, with powerful economies of scale and market share as high as 60%. For a long time only the threat of Justice Department action to shrink the company’s market dominance clouded the picture. While GM prospered for years, problems were beginning to brew under the surface. Although U.S. demand for cars increased after World War II, European manufacturers were beginning to make an impact. In 1956, for example, Ford and GM lost 15% in sales while imports doubled their market penetration, and even worse, the following year the U.S. actually imported more cars than it exported. By 1956, GM’s market share for new car sales fell to 42%. Over time, other pressures arose. The tumultuous 1960s brought growing urban poverty and riots in Detroit. The nascent environmental movement focused attention on pollution and, by 1974, GM was spending
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$2.25 billion to meet pollution regulations, with that figure doubling by the end of the decade. To top it off, the OPEC oil embargo drastically decreased demand for GM’s luxury, gas-guzzling cars. While GM introduced smaller cars, the market dwindled in the late 1970s as the U.S. plunged into recession. Into this environment—with GM recording only its second year of losses in its long history—Roger Smith became Chairman and CEO in 1981, bringing with him a confident vision to carry GM back to its glory days.
THE ROBOT REVOLUTION In the early 1980s another foreign competitor, the Japanese, exploded onto the US auto market, offering reliable, small, competitively priced cars. The Japanese approach, which emphasised such unusual (for GM) practices as JIT inventory, quality management, painstaking attention to production processes, extensive employee training and involvement, and close cooperation with suppliers, generated productivity rates far in excess of anything Detroit could muster and posed a real threat to the established order in automobiles. To deal with the growing global assault and re-establish its domestic leadership, GM unleashed a radical business plan to automate and modernise its factories as well as its car models. It was not a subtle strategy—the centrepiece of the plan was to substitute high-tech robotics for inefficient labour, relying on GM’s huge financial resources to make it all work. The estimated cost—$40-45 billion—was 14 times Ford’s annual pre-tax earnings at the time. Because Smith believed robots could “do anything,” the bulk of the capital expenditure was spent on factory automation, including the latest technology in advanced computer services, microelectronics, and systems engineering. The brand new, automated factories would, in theory, produce fuel-saving, smaller cars of the highest quality in greater volume and more cheaply than the competition. “In one masterstroke, GM would stop the import invasion cold and leave the competition years behind.” In line with the revolutionary transition to automation, GM also announced the most widespread reorganisation since the consolidation days of the 1920s. Two manufacturing fiefdoms—Fisher Body and the GM Assembly Division—were abolished and control of production was placed under two newly created operating divisions. To break down silos across functional areas, each division would control design, manufacturing, and sales. The changes at GM spearheaded by Roger Smith elevated him to the status of press darling in the first half of the 1980s. With 85% of the reorganisation efforts based in the U.S., Smith became a champion
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of U.S. manufacturing, catching the public’s imagination, and becoming a media hero. Described as an “innovator,” “visionary,” and “21st century futurist,” Smith was named Automotive Industries Man of the Year and Advertising Age’s Ad Man of the Year, honoured with the Financial World Gold Medal (best CEO in America), and designated by The Gallagher Report as one of the ten best executives in America. With such acclimation, it seems little wonder that “GM completed the 1980s in a state of arrogance.”
GM’S PROBLEM Though confidence remained high, productivity paybacks from GM’s factory automation spending seemed slower-than-expected right from the start. Costs were rising at an alarming rate while market share and operating income were starting to decline, a combination that might trigger warning bells in some organisations. Internal GM reports indicated that by 1985 the Japanese cost advantage had not changed after four years of intensive spending on automation. The company that was founded on the principle of cost savings and was once the prototype for efficiency had by 1986 become the auto industry’s high cost producer. The average number of autos produced by each GM employee stood at 11.7, while the same metric at Ford was 16.1 and as high as 57.7 at Toyota. GM also earned 38% less than Ford and 26% less than Toyota on each vehicle they made. Research by Marvin Lieberman and Rajeev Dhawan of UCLA, who studied productivity trends in the auto industry from the mid-1960s to the 1990s, confirm the story: GM’s plant productivity, which had lagged Toyota’s for years, actually declined further from 1984 to 1991, a period that should have reflected the gains from GM’s automation push. The new automated factories, which made over two-thirds of the parts used in GM cars, had become a high-cost problem, hardly more efficient than the old ones. Some plants were running at 50% capacity because of glitches in computer-integrated systems, while two major strikes in the U.S. and Canada in mid 1980s spoke to the state of labor relations during these changes. GM’s share of U.S. auto sales fell to 41% in 1986 , while the company’s stock price increased 35% from 1981 to 1987, a duration when Ford’s market value increased seven-fold.
AUTOMATING GM—THE KEY LESSONS The strategy to automate General Motors in the 1980s under Roger Smith was predicated on a false assumption—that replacing people with machines could turn back the Japanese attack and bring GM back to dominance in the global auto industry. Rather than adopt the lean
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manufacturing techniques that still define the Toyota production system today, a virtual obsession with robotics took over. In some ways this was no different than the companies today that jump on the latest fad without really understanding the underlying processes and interrelationships that make the whole thing work. That was certainly the case with GM and automation in the 1980s. By not understanding how people and machines could be effectively integrated, GM missed the essence of Toyota’s low-cost production success. Former Ford President Phil Benton put it this way: “Automation would not make the list of major problems facing the auto industry in the 1980s.” Consistency of manufacture must come before automation. Toyota is not as automated as Nissan, for example, but they are more successful. “Everything goes back to management. What you need to do is engineer the product to the skills of your workforce.” “The thought was if they can do a fully automated factory and get rid of all the labour, they would have plants that run day and night fully automatically. But with these totally automated facilities they could lose all flexibility and they are extremely capital intensive. The only way one can hope to make a return is to run pedal to the metal at all times. They were prisoners of the great North American manufacturing cost accounting system that says, as you eliminate labour, your costs goes down. But what they forgot was they were getting rid of direct labour but replacing it with indirect labour and huge capital costs. These costs were high because the technicians and other people needed in an automated plant were much more expensive than the hourly labour. You need to look at every worker. You look at his value added time versus his wait time and you arrange the production flow in such a way that you maximise the value-added time of each worker and reduce the waiting time. You concentrate on the worker not on the machinery. Use automation only where necessary”. At its core, the automation strategy drew its genesis from Roger Smith’s business and personal beliefs. Despite internal opposition, it was Smith—described by many as autocratic Ðwho defined GM’s problems in the 1980s in terms of labour costs. To his credit, Smith also understood that GM’s slow, bureaucratic culture was a hindrance to change, and his push for new organisational structures, the attempted infusion of EDS entrepreneurialism to GM, and investments in NUMMI (the joint venture with Toyota) and Saturn were all attempts to shake up that culture. But his focus on high-technology solutions to the labour cost problem underlined his belief that costs could be cut by replacing people with machines. He browbeat the UAW with statements like, “Every time you
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ask for another dollar in wages, a thousand more robots start looking more practical”, and was described by one insider as “fascinated with anything new and high-tech; he really doesn’t understand, or want to hear about, the limitations of technology.” To his critics, he was an “unusual man who just doesn’t understand people” Where was the GM board during this time, and do they deserve some of the responsibility for the automation debacle? Roger Smith became infatuated with robotics and began to see it as GM’s salvation right from the start. While there was internal opposition, particularly among people who understood that productivity is not just based on labour costs but on the entire production system, the board of directors appears to have had little problem with the strategy. Indeed, given the deteriorating state of GM labour relations and productivity at the beginning of the 1980s, turning to the automation solution may well have been considered reasonable. It didn’t take long, however, for problems to develop. Plant efficiency was down in many factories, productivity improvements relative to the Japanese did not materialise, and traditional metrics like stock price and market share reflected these problems. Further, when a company spends some $45 billion on automated factories, it does not write a single check for that amount and wait for delivery. Expenditures of this magnitude involve thousands of checks written to vendors over a long time period, with an opportunity to assess progress along the way. For example, in 1983 GM spent $6 billion for new technology and automation, increasing to $9 billion in 1984 and $10 billion in 1985. Even by 1985, when internal studies were indicating little change in the productivity gap between GM and Toyota, GM was still poised to spend more. Nevertheless, throughout this time the board of directors continued to approve Roger Smith’s plans and expenditures. Why? Much has been written about the classic warning signs in corporate governance, and all are in evidence here. Almost one-quarter of the board consisted of GM insiders in 1982, rising to as much as 41% by 1986. Outsiders did not have much of a personal stake in the company, with three out of five owning less than 1000 shares of GM stock. Along with the undoubted prestige that comes with being a GM director, the generally advanced age of outsiders on the board (8 outsiders were actually retired from their former corporate jobs), and the heavy time commitments of virtually all the outsiders on other corporate and nonprofit affiliations (averaging around 8 such commitments for each board member during this period), the odds were stacked against the GM board taking an activist stance in monitoring Roger Smith and his automation program.
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In addition to these traditional indicators of board independence, there is some evidence and inference that Roger Smith had significant control over the board. Board meetings were known as formal, with little open and honest discussion. Inside board members would not speak unless specifically charged with giving an informational report to the board. As one retired board member said, “unanimity on this board is assumed”. When Ross Perot was on the GM board for a few years in the mid-1980s following the acquisition of his EDS, he referred to Smith’s optimistic predictions as “gorilla dust”, designed to throw off criticism as much as anything else. Contributing to the unquestioning environment was the remarkable extent to which board members’ formal positions were intertwined. Whether by design or circumstance, virtually every single outside board member at GM had another formal appointment—whether on another corporate board or non-profit organisation—in common with a colleague on the GM board. In 1982, for example, (whose composition was not only representative of, but almost unchanged from, the GM board in subsequent years), two different GM directors also sat on the boards of US Steel, Dart & Kraft, Merck, and International Paper. Three different GM board members were also directors of AT & T, Nabisco Brands, Citicorp, and Kodak, and four GM directors were present or former board members of JP Morgan. Ten GM directors were on the Business Council, six on the Business Roundtable, four were directors of the United Negro College Fund (the Chairman of the Board was a GM insider), and two different GM board members were affiliated with governance of the Mayo Foundation, New York Hospital, and the Sloan-Kettering Cancer Center. Overall, the extent of overlapping affiliations and directorships is nothing short of spectacular, and may well have been a contributor to the non-critical culture in place at the GM board. Under this arrangement, in the event a member of the GM board chose to speak out or break the norm of “unanimity”, any potential retribution could not be easily contained within this one organisation. In sum, the robotics strategy that Roger Smith and General Motors adopted in the 1980s stands as a classic story of misreading the competitive landscape. For Smith, robotics represented the Holy Grail, the perfect strategy that could solve all of GM’s problems at once. When GM finally discovered that the Holy Grail didn’t exist, they could look back on an incredible waste of resources. Roger Smith was a very smart executive who failed, because of his own badly mistaken perception of the auto industry, a culture (that he helped engender) at GM that was afraid to ask questions, and a board of directors that watched billions of dollars go out the door with apparently little concern.
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QUESTIONS 1. What were the main contributors to the success of GM? 2. How GM emerged as an auto giant despite facing losses and threat from Japanese auto firms? 3. What are the reasons due to which GM recorded a slow growth even after the automation of its plants? 4. Where according to you, Roger Smith went wrong with his planning? 5. How will you tackle with such situation of misreading of competitive market? Also suggest measures to prevent such situation.
37 Nestle India Ltd.
BRAND EXTENSION AND REPOSITIONING Nestle India Ltd. is the market leader in Indian Noodle Market with its Maggi Brand which was pioneer brand launched in 1983 in the packaged food market of India. It took the challenge and established Maggi in Indian market considered to be conservative and typical about food consumption. It appropriate realisation of target segment, effective positioning and effective promotion and sales made Maggi to Noodles in India as Xerox it to photocopier. NIL had introduced sauces, ketchups and soups under Maggi brand to reap benefit of brand popularity and image and contribute to financial gains by 1990. Maggi also became successful in sauces, ketchups and soups Market in India. Though NIL tried to extend to other ready-to-eat products like pickles, cooking aids and paste, It was unsuccessful so dumped those products. Maggi Brand of products sustained recession in 2000 and 2001 in India by introducing economy packets. To fulfil novelty needs of customers and revitalise Maggi Noodles Brand NIL made different attempts by introducing new formulation to new taste but customers resisted change and Maggi had to reintroduce Maggi Noodles in same taste. Maggi Noodle had till 2005 five product line on noodles with four variant in Maggi 2 Minutes Noodle. In 2006 in compliance with NIL target to be “Health and Wellness Company” Maggi repositioned it as health and taste food products. NIL has also introduced with taste and product line in Sauces and Soup Market under Maggi to catch new segment, revitalise brand, compete with other producers and fulfil expectation of customers. In 2005, Maggi brand worth was 3.7 billion from 1.7 billion market worth in 1.7 billion in 2003. Maggi Noodle is market leader with around 80% market share in Noodles/Pasta and Maggi Sauce is market leader with almost 37% of market share in 2005 in 1.8 billion market of India. Knorr has taken over Maggi in soup market recently.
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In 2005, Maggi was the highest spender in the promotion and sales in the Indian market in the noodles category. Maggi is competing with Heinz sauces and Ketchup, Knorr soups, kissan Sauces and Ketchup, Top Ramen, Sunfeast Pasta Wai Wai and 2 PM in corresponding categories of products and variants.
BCG MATRIX (MAGGI BRAND PRODUCTS) 20% STAR
QUESTION?
Maggi Noodles Market Growth rate
Maggi soups
Maggi Sauces
10% CASH COW
DOG
0% 20x
1x
0.1x
Relative Market Share
STARS: Maggi Noodles is the market leader with 80% market share in noodles market and Maggi sauces and Ketchup is leader with 37% market share. The products are producing cash for the company consistently. The market is growing by 15% in the product category of noodles. QESTION Mark? Maggi soups is the category which is in question mark as the market is growing and the brand as less market share then market leader Knorr brand of Hindustan Unilever Limited. There are more chances for Maggi soups to go to dog. It does not stay competitive and increase market share in the category.
SWOT ANALYSIS OF MAGGI AS BRAND Strengths • Established Family Brand • Strong Global Corporate Brand (NIL)
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• Specialisation in food processing category marketing and distribution in Urban market • Presence of other product segments of food category: Dairy products, chocolate, infant foods • Pioneer and leader so 1st mover advantage in noodles, sauce, ketchups and soup market. • Nestle symbolization of warm, family and shelter. • Research and development division in India • New noodles plant in uttarakhand state
Weakness • • • •
Generic brand to noodles in India Low rural market presence constraints Uniform brand for all food category Brand proliferation
Opportunities • Growing package and canned food market in India by 15% annually. • High brand awareness of Indian consumer • Other product category like biscuits, chips and ready-to-eat market still unexplored. • Opportunity to be substitute to other snacks category of food products.
Threats • Competitors with long history in product category internationally like, Heinz Sauce and Ketchups of Heinz Indian, Top Ramen in Noodle. • Knorr Soups. • Single product focused competitors like Heinz Sauce & Wai Wai Noodles. • Less entry barriers in the market segment for product category. • ITC’s strong base in Indian market. • Substitute product to product segment.
QUESTIONS 1. How NIL extended it’s brand and line of products to leverage the brand and established Maggi as family brand?
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2. Discuss NIL capability to maintain Point of Difference ( POD) and Point of Parity (POP) while brand extension and repositioning. 3. Discuss NIL’s positioning and repositioning strategy to catch market and consumer expectation.
38 Serial Entrepreneur
Stelios Haji-Ioannou was born in Athens in 1967 – his business card describes him as a ‘serial entrepreneur’. His father was a successful businessman. After completing two degrees (in London), and work experience in his father’s shipping company, he used family money to start Stelmar Shipping in 1992. Three years later he established easyJet. Both the companies were very successful and continued to prosper, bringing out its rivalry with Ryanair in the quest to be Europe’s leading no-frills airlines. easyJet has a clear business model, borrowed in many respects from the pioneering Herb Kelleher and South West Air in America. Its growth has been supported by television exposure and the acquisition of Go after this spin-out from British Airways had itself been bought by its managers with substantial venture capital funding. In 1998, Stelios set up easyGroup as a holding company to facilitate the exploration of new venture opportunities through which the ‘easy’ brand could be extended. Licensing, franchising and alliances have all featured. Although there are clear differences of style and approach, in many respects this was the growth path trodden earlier by Richard Branson with his Virgin brand. Meanwhile easyJet was floated successfully as a public company (2000) and Ray Webster, an experienced airline executive from Air New Zealand who had joined easyJet in1996, was promoted to run the company for Stelios. Stelios himself began to withdraw from the management of the airline and in 2002 he left completely to concentrate on his new ventures. Because his name is associated with the founding of easyJet, and because he remains a major shareholder, many people would imagine he still runs it. Stelios argues he looks for business opportunities where ‘he can rip the frills out of the industry’.
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STELIOS’ OTHER BUSINESSES The second ‘easy’ business was originally called easy everything, but it has since been renamed easy Internet café, which better describes its purpose. The first café was opened in central London in 1999, but others soon followed in other leading European cities. The idea was fast access to the Internet at any time, night or day, seven days a week. The business model was price-driven: basically £1 for 1 hour. Keyboards and screens were provided side-by-side in wide rows. Tutors were available if required, who also doubled as local managers and, when necessary, ‘porn patrollers’, charged with ‘ensuring that the stores remained a welcoming place for their millions of customers’. This did not prevent easyGroup losing a court case in 2003 when it was held liable for customers downloading copyright music illegally. Nowadays the company utilizes automated web filtering. Coffee and snacks could be bought and consumed on site. Easy Internet cafés turned out to have a high cash burn. There were interest charges on the debt capital required for the top-range computers, the sites were centrally located in high lease areas and salaries had to be paid. Customers may have been plentiful but they did not provide enough revenue to meet the costs. The business was unprofitable and Stelios has had to inject additional personal funding to support it. Moreover, the business model has been recrafted. Now Stelios focusses on smaller sites and rents space in other retail properties which are managed for him by franchisees. He is not concerned to be the leaseholder. In larger sites that he has retained, space has been sublet to other retailers and fast food providers. easyCar followed in 2000. This rental car company began by focussing on city centre locations and a single model of car – small A series Mercedes. The basic rental charges were way below those of leading names such as Avis and Hertz. Personal and car insurance premiums soon reduced the gap, but a clear gap remained. Customers who were alleged to have scratched their cars and who were charged a supplementary amount, complained to TV consumer programmes –which inevitably brought adverse publicity to the company. In response easyCar stopped charging anyone for any damage to the cars, but that proved prohibitively expensive! At that stage they introduced their £50/30 day automatically refundable deposit. This covered them for damage risks, but it also acted as insurance against unpaid parking tickets and other traffic infringements which tended to result from their concentration on urban sites. easyCar acknowledges that originally they mis- understood third party contingent liabilities. Initially, the
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cost base for easyCar proved too high for the income being generated and the business was unprofitable. In 2003, plans were being drawn up for a new strategy when the managing director left. The idea for a new rental business would be based on pools of cars which would be parked up in relatively quiet areas and unattended. Customers would book over the Internet and then make their own way to the pool, where they would contact a service centre by mobile phone. The car would be unlocked remotely by radio signal; the keys would already be inside. The idea has not been taken forward; instead easyCar has grown dramatically to 1000 sites worldwide with a brokerage strategy. easyCar provides sales and marketing support to locally based operators, who own their own rental cars. easyValue is an online price comparison service. It was initially an alliance with Kellkoo, but since that business was purchased by Yahoo, easyValue has been powered by Shopping.com. The original business model was based on advertising with the hope that it could be turned into a subscription service. In the beginning it was a struggle to raise funds but after some time it became profitable. easyMoney, begun in 2001, is a credit card that customers design to suit their own needs. It is operated by Lloyds TSB. Customer numbers were ‘disappointing’ but are now ‘encouraging’, so much so that easyMoney also generates a profit for the easyGroup in a very competitive industry. Other established businesses are easy Bus and easyCinema. Stelios launched easyBus in 2004, to provide short haul low fare services using orange (the traditional easy colour) minibuses. The starting fare is £1. At roughly the same time, Stagecoach, a leading bus and coach operator, launched a no frills cut price service on much longer routes and using double-deckers. Brian Souter, founder offstage coach, has expressed a doubt that Stelios has a profitable business model as his required revenue per seat mile (to cover costs) is way in excess of the Stagecoach model. However, they are not competing businesses and Stelios, unlike Stagecoach, avoids town and city centre main bus stations, where access charges can be expensive. easyBus argues they have started something really new and different, whilst Stagecoach is new, albeit powerful, competition on existing routes. There are also plans for a chain of easyPizza outlets, a pizza delivery service. Perhaps the nearest rival business model would be that of Domino’s Pizza, but Domino’s is not exclusively delivery as it has some walk-in trade. The delivery: collection ratio is in the order of 80:20. easyPizza will be exclusively delivered and the first unit is on an industrial estate near Milton
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Keynes. The idea for easyDorm was budget hotel rooms but this has been abandoned in favour of easy Hotel: affordable en-suite rooms. easy Cruise will provide a hop on hop-off cruise package calling at various Mediterranean ports. Customers pay for a cabin at a daily rate and then everything else on board is chargeable if consumed. Also being planned during 2004 were easy4Men male toiletries and easyMusic downloads. The toiletries were scheduled to be available in stores in time for Christmas. easyCinema: easyCinema may eventually grow into a chain, but at the moment it is a single multiplex cinema in Milton Keynes. Cinemas are attractive to Stelios because they are sometimes full and have rows of empty seats at other times. Popularity is affected by time of day, day of the week and certainly by the film itself. Some blockbusters play in several cinemas in a multi-screen at any one time and run for weeks if not months. Other films last just one week before they are dropped. Whilst there are discounted matinee prices (and, of course, concessions for children and pensioners), unlike the theatre, the prices tend to be standardized and do not vary between different films. Stelios believed there were wasted opportunities for price differentiation. As well as day and time, different film titles and the number of weeks since a film’s release are relevant – and naturally cheaper prices could be offered for booking a number of weeks in advance. However, if schedules are not available weeks in advance there could be an element of lottery in this. He believed low prices would stimulate high demand and he wanted 20 pence prices for Internet bookings one month in advance to be his baseline. The starting price is now 50 pence as Stelios has discovered customers do not discriminate when the charge is a single coin under a pound (sterling). Stelios – assisted by Stuart Niblock, a senior easyGroup executive, and, in effect, a project manager – set out to find a suitable venue to trial his business model. Once they found somewhere, they would ‘work out how to do it’. They came across The Point in Milton Keynes, which was closed but which had been a thriving UCI multiplex cinema after it opened in 1985 – it had lost out when competitors opened new complexes. They took it on in 2003 and in a matter of weeks it would be refurbished and open for business. There was to be no box-office and no ice-cream, soft drinks or popcorn for sale – but drinks and popcorn are now available at £1.00. People would be asked to carry out and deposit all their rubbish so the downtime between screenings could be minimized. Customers would book in advance on the Internet and once they had paid with their credit card they would be able to print off a bar code on a sheet of
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paper. When passed over a scanner at the entrance to the relevant cinema screen they would be allowed through a turnstile. Staff would be present to help anyone in difficulty and generally watch over things. All Stelios needed now was popular films at the time of their release. Six leading distributors control some 90% of film releases and every one of them appeared sceptical about the sustainability of the easy cinema business model. They all refused to supply him with films. Normally they receive a figure approximating to £1.30 per person viewing for the films they supply. Pathé, not one of the six, did agree to supply him with films so he could open his cinema, but they were not the latest mainstream titles. Would people be attracted by 20 p prices for films that had been around for a while and that had never been stunningly popular? Stelios offered the leading distributors up-front cash payments and when they refused this he argued they were acting as a cartel to exclude him from the industry. He realized he could sue them in America, where he would not have to pay their legal costs if he lost: there were other litigation possibilities in the European courts. In the end this did not prove necessary. Staff were recruited and trained in ‘easy’ procedures . Stelios himself was on hand and he walked around Milton Keynes – and in rival cinemas – with a sandwich board promoting the venture. (He had adopted a similar approach when the airline Go started up and challenged easyJet. He had bought tickets, organized photographers and turned up in an orange easyJet boiler suit and carrying a promotional banner.) One cinema threw him out –whereupon he complained to the police. The scanners did not work altogether smoothly on opening night, but plenty of customers turned up! To the amazement of some of them Stelios went around with a bucket and asked them for more money ‘to help him fight his campaign against the leading distributors’. Afterwards he said the money would be topped up by him and given to charity; he just wanted to draw people’s attention to the issue. From the beginning Stelios attracted a steady stream of customers with his very low prices for non-mainstream films, but the venture is not yet profitable. In spring 2004, the leading distributors had partly capitulated, but he was still only able to secure films a month after their initial release. He recruited Charles Wesoky to run easy cinema for him. Wesocky was a ‘veteran of the industry’; indeed he had opened The Point for UCI some 20 years earlier. His main role: improve relations with distributors. The situation with films on release has continued to improve. EasyCinema now gets a regular supply of first run films which are
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shown at prices some 30% lower than the local competition. Attendances continue to grow. easy-Cinema is on the look-out for a second site in the south of England. QUESTIONS 1. Picking up on the earlier comment, does Stelios generally ‘get the business model right in the beginning’? 2. How much is Stelios an entrepreneurial visionary? Is there sufficient planning of the right type? 3. If it was your decision, would you persist and expand the cinema chain, close the one in Milton Keynes or adopt a different business model?
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39 David Bruce: An Entrepreneur
David Bruce was in his late twenties when he opened his first pubbrewery in 1979. He had previously worked for a number of UK breweries, including Courage and Theakstons, and felt that there was a market opportunity for a pub that brewed its own beer on site. He bought the lease on a site at the Elephant and Castle in London, an existing pub which was being closed down, and renamed it the Goose and Firkin. The pub was completely remodelled with one large bar with wooden seats, bare floorboards and several decorations such as a stuffed goose. The aim was to recreate a traditional drinking house. Brewing took place in the cellar, which had a production capacity of 5000 pints per week. In addition, other real ales were sold. Lloyds Bank lent £10,000 for this new venture, but Bruce was turned down by others whom he approached. He had to take a second mortgage on his house to provide collateral for his overdraft and he borrowed some money from a friend of his wife. Three types of real ale were brewed and sold, all with individual brand names and varying in strength. These were Bruce’s Borough Bitter, Bruce’s Dog Bolter and Bruce’s Earth Stopper, which at o.g. 1075 was claimed to be the strongest draught beer in Britain. Traditional food of high quality supplemented the beer. Success came instantaneously and the turnover was into the thousands of pounds within weeks of opening. It quickly reached an annual quarter of a million pounds. A manager and a team of seven, including a brewer, were employed to run the pub. A second outlet was opened in 1980; by 1985 there were seven, with the total reaching 11 in 1987. All 11 were in the Greater London area, and nine of them had in-house breweries. The last two were called the Fuzzock and Firkin and the Flamingo and Firkin. By the mid-1980s Bruce was the fifth largest operator of breweries in the UK. All of the pubs had Firkin in the name, and by this time a number of new real-ale brands had been introduced, including Spook, brewed exclusively in the Phantom and Firkin. Bruce had also developed
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a reputation for promotional slogans for each pub. The Flounder and Firkin was a ‘place worth whitning home about’ and at the Phantom and Firkin you could ‘spectre good pint when you ghost to the Phantom’. Sales in 1986–87, with eight outlets operating, were £4 million. Bruce had sold 10 per cent of the equity to Investors in Industry for £100,000, and they also provided additional loan facilities. There had been difficulties, however. In 1982, Bruce had obtained a pub-brewery with additional warehouse capacity in Bristol. His aim was to distribute his real ales to West Country pubs. But the company was already experiencing problems from the rapid growth. Beer quality was in consistent, there were cashflow problems, and David Bruce’s own role was unclear. A microbiologist and an accountant were brought into the business, which relieved the first two of these. However, Bruce still faced the problem that, while there were managers in every outlet, he was personally responsible for ensuring that his original success formula at the Goose and Firkin was implemented and maintained in all of the pubs and at the same time was seeking new opportunities for growth and development. Once the company spread outside London, Bruce felt that he was no longer able to pay sufficient attention to detail throughout the organisation. Essentially the problem was one of managing growth and at the same time retaining the ‘personal touch’, a key success factor for this type of service business. The Bristol site was sold. Bruce had hoped to take the company to the Unlisted Securities Market in 1987, but this never happened. Further growth, he felt, was inhibited by a lack of equity capital and the problems of interest charges on loans. In March 1988, Midsummer Leisure, an expanding public house, snooker club and discotheque business with some 130 outlets, bought Bruce’s Brewery, comprising11 outlets and one site for development, from David Bruce for £6.6 million in cash. The business had a number of different owners in the 1990s, during which period it continued to expand to a chain of 179 pubs, not all of which brewed on site. It was sold again in 1999, this time by Allied Domecq to Punch Taverns, who plan to close some outlets and take on-site brewing out of all the others. Punch had little choice in this, because of legislation and their present mix of activities; but the brand will be preserved. Is it the end of an era? After paying off loans and capital gains tax, Bruce was left with £1 million in 1989, part of which he used to establish a charitable trust to provide canal holidays for disabled people. In 1990, David Bruce started brewing again. Two pubs, both named The Hedgehog and Hogshead, and offering beers such as Hogbolter and Prickletickler, were opened in Hove and Southampton. The conditions of sale of Bruce’s Brewery prevented
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Bruce from opening in Greater London. Key staff was recruited back from Midsummer Leisure, the sites were leased rather than freehold, and borrowing was kept to a minimum. Bruce personally invested £500,000. He later moved to other ventures before entering a joint venture with WH Brakspear in September 1999. Brakspear has brewed in Henley-onThames since 1779. One of his other ideas has been the Bertie Belcher brand, ‘pubs that brew the beer you’ll want to repeat’. The name for the new venture is Honey pot Inns; David Bruce is chief executive. Brakspear has put seven managed pubs into the venture (six more will be added every year) and they will be retained as independent pubs which reflect the character of the building and their local communities. They will be a loose chain, linked by a common brand name but they will all be individual. The new additions will be unusual sites rather than typical high streets. Brakspear believes that Bruce has ‘tremendous skills for identifying opportunities for the development of retail operations that catch the imagination of consumers’. He is certainly a master of the weak pun. Bruce asserts that ‘creating the right ambience is an innate skill – not something I can explain’. He fully intends to move on again when the venture is properly up and running …‘I put my all into these ventures for up to five years and then I have to do something else’.
QUESTIONS 1. Following the growth of the chain and its associated changes of ownership, can an individual ‘Firkin’ pub be the same as the original that David Bruce opened back in the1980s? 2. What was the problem with David Bruce strategy? 3. Why is necessary a personal touch with his industry? 4. How do you define David Bruce as a successful entrepreneur or a man of dreams?
40 Philip Green
Philip Green is ‘Britain’s biggest private retailer’, having completed a number of successful deals, using largely his own money. His business career began in 1973, when, at the age of 21, he took over the family property company. His move into retailing came in 1985, when he invested £65,000 to buy the Jean Jeanie chain of shops. He sold it five months later for £3 million. Three years later he invested in the Amber Day retail chain, a quoted company. After running the business for four years he resigned when he was under pressure following a profits decline. He later bought the Owen. Owen department store chain (1994) and Mark One discount clothing (1996), of which he still owns 50% of the shares. In 1997, he bought Shoe Express from Sears for £8.3 million, and followed this up by purchasing the whole Sears empire for £550 million in 1999. He set about splitting the Sears retail conglomerate and ended up with a profit of some £180 million. When Marks and Spencer was in difficulty in 1999/2000, Philip Green was clearly interested – but never made a formal bid. Instead, and using £50 million of his own money, he bought British Home Stores for £200 million. By 2002, BHS was estimated to be worth £1.2 billion – ‘the fastest billion pounds ever made in retailing’. In 2002, Philip Green bought Arcadia for £850 million. Arcadia had divested the Debenhams chain but it still comprised the Top Shop, Top Man, Miss Selfridge, Dorothy Perkins, Wallis, Evans and Burtons brands. Green was rebuffed by Marks and Spencer in 2000, but four years later he returned. This time he did make a formal proposition to the board and asked that they recommend it to their shareholders. He was not minded to enter a hostile takeover situation. They refused to support Green’s bid, although the largest institutional shareholder had agreed to sell to
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Green if the bid was recommended by the board. Green has been described as a ‘born trader’. He is clearly enthusiastic and energetic; and he believes businesses are built on relationships and as mall top team. As far as he can, he shuns the services of ‘so-called experts’. He is incredibly focussed and he understands customers and their expectations. Somewhat predictably he has strong self belief and (like Tom Farmer) is rumoured to be a hard man to work for. Very hands on, he is always likely to turn up unannounced at one of his stores. His leadership style involves tight control and centralization of key decisions. Each store group, such as Burtons, is a profit centre. It has its own Brand Director and Finance Director and these two are largely in control. Whilst the Brand Director will control styles, designs and ranges, he or she will be required to buy from approved suppliers wherever possible – and these suppliers will also supply other groups in the Green empire, thus enabling substantial discounts and scale economies. Information technology, human resources and financial services are all centralized. It is, of course, impossible to say what he might have done with Marks and Spencer had he been able to take it over. Some critics of M&S, who believed the company had lost its way, thought he should be given a chance. Others felt he was simply not ‘the right person’ for M&S; he was culturally inappropriate. QUESTIONS 1. Why Philip Green has been as successful as he has. How have the fortunes of all the businesses he has owned in recent years fared under his leadership? 2. Can you identify other retail chains that might benefit from the ‘Philip Green touch’?
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41 Synergy
This case charts the German company Daimler-Benz’s search for synergy in its quest to create an integrated transport company. Daimler-Benz has long been renowned for engineering excellence, product quality and marketing. At the beginning of the 1990s, it was Europe’s largest manufacturing group, and comprised: Mercedes-Benz – commercial vehicles and passenger cars AEG – electrical and electronic products Dasa – aerospace Debis – financial and information services. Vehicles were responsible for two-thirds of annual sales revenue; AEG and Dasa each generated approximately 15%. The majority of the non-vehicle businesses had been acquired systematically during the 1980s; the intention was to create an ‘integrated technology’ group. Daimler-Benz’s stated objectives for the acquisitions were, first, to offset stagnating vehicle sales by expanding into high-technology growth markets, and second, to strengthen the automotive businesses by applying advanced technologies from the new acquisitions. The challenge was always to achieve this potential synergy; the time-scale to realize the benefits was set at ten years, and the important institutional shareholders allegedly pledged their support for the strategy. Initially, vehicles had to subsidize the new businesses; but critics argued that the second of the two objectives did not require ownership and that in reality the synergy argument was being used as an afterthought to justify the diversification. Daimler-Benz’s strategic dilemma was that both AEG and Dasa required turning around at the same time that vehicles were under threat from Japanese car manufacturers, who were becoming
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increasingly competitive in the more upmarket sectors. Mercedes needed new, more competitive models to prevent being squeezed into too small a niche. An alliance with Mitsubishi was mooted as one suitable way forward. AEG, which Mercedes had rescued from near bankruptcy, was already diversified (it included white goods, typewriters and traffic control systems) and was itself searching for synergies. Some AEG business areas were losing money, and in 1994 AEG’s appliance business was sold to Electrolux. AEG’s railway equipment division became a 50:50 joint venture with ABB (Asia Brown Boveri). Daimler-Benz actually had to pay ABB as AEG’s division was currently losing money and its new partner was profitable. The two businesses complemented each other well: ABB focussed on heavy locomotives, high-speed trains and signalling; AEG was concentrated on light and urban railways and airport transit systems. Dasa (Deutsche Aerospace) comprised a number of separately acquired companies and there was some duplication of activities. Messerschmitt has always been a major supplier to the European Airbus project, but its contribution, rear fuselages, is technically less sophisticated than Aerospatiale’s forward fuselages and flight decks and British Aerospace’s wings. Further alliances with other members of the Airbus consortium, to develop commuter aircraft and helicopters, were discussed. In 1992, Daimler-Benz added to this division when it acquired a 78% shareholding in the Dutch aerospace company, Fokker. The Dutch government held the remaining shares but, again, the company was already in difficulty. The promised synergies simply did not materialize as Germany suffered its deepest recession in manufacturing since 1945. Mercedes-Benz began to trade at a loss in 1993, and this led to job reductions and investment in plants outside Germany (to avoid the difficulties of high domestic wage rates and a strong Deutschmark). Development work on new four-wheel drive vehicles and a micro car (eventually launched as the Smart car) were already under way, the latter in conjunction with SMH of Switzerland, best known as the manufacturer of Swatch watches. A new chairman was appointed in the summer of 1995 and later that year DaimlerBenz announced a trading loss equivalent to £2.7 billion, ‘the worst non-fraudulent result ever recorded by a German company’. A leading analyst commented that the company was ‘so bogged down with aerospace and AEG it had missed important opportunities in the automotive arena’. Drastic action was anticipated. In January 1996, further AEG divisions were sold to Alcatel Alstom (France); the remainder were to be fully absorbed into Mercedes-Benz. Daimler-
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Benz also announced the withdrawal of further financial support for Fokker, making its collapse inevitable unless a new buyer came forward. Daimler-Benz redefined itself as a ‘transportation group’ and restructured into 25 operating units in seven main divisions. All operating units had to fit the core strategy and achieve a target of 12% return on equity. Failure to achieve would result in sale or closure. The future of Dornier (manufacturer of regional aircraft) and MTU (Daimler aero engines) thus looked particularly precarious unless alliance partners could be found to help. In 1997, DaimlerBenz increased its already dominant presence in the global heavy trucks industry by acquiring Ford’s activities. In the same year Mercedes launched its first small car, the ‘A’ class hatchback. Almost immediately the car was withdrawn from sale when a motorist, admittedly driving in unusual and extreme conditions, had turned one over. The car was redesigned and re-launched. The launch of the even smaller Smart micro car was also delayed for safety reasons. As a consequence Mercedes bought out its partner in this venture to take total control. In 1998, Daimler-Benz announced a ‘merger of equals’ with America’s third largest, and most profitable car manufacturer, Chrysler. The new company would be called DaimlerChrysler, but ownership was split 57:43. It would be the fifth largest in the world, after General Motors, Ford, Toyota and Volkswagen. There was no product overlap, as Chrysler’s Dodge and Plymouth cars were less luxurious than Mercedes, which also had the monopoly on small cars. Chrysler was prominent in pick up trucks and fourwheel drive vehicles (the Jeep brand), which were new to Mercedes. However, it was arguable that together the two companies would have too many platforms and some rationalization would be required. The intention was to retain separate brands, plants and dealerships. The synergy would come from administration, shared skills and (later) common platforms. Chrysler, however, was less global than DaimlerBenz and the cultures of the two companies were very different. Daimler-Chrysler subsequently bought minority stakes in Mitsubishi and Hyundai. However, towards the end of 2000 it was clear that there were significant implementation problems with the DaimlerChrysler merger. Meanwhile, Dasa had been merged with British Aerospace, its partner in the Airbus project. In 2000, Kirk Kerkorian, a US billionaire who had been the largest individual shareholder in Chrysler and who remained the third largest shareholder in Daimler-Chrysler, began a legal action (still in court) against three Daimler-Benz executives. He is alleging fraud in the takeover – which he claims
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was not a merger of equals. A structure which reflected equality had been promised in the end the business was controlled from Germany. Meanwhile restructuring continued. Chrysler was being dramatically rationalized on the grounds that it had ageing product lines which had to be axed. Before the merger the company had been discounting heavily and investing significantly in new products at the same time. Financially it was weak. The intention was to replace 80% of its product range over five years. Jobs were lost and the ex-Chrysler shareholders had seen the value of their investments collapse. By 2002, it was clear that Chrysler were refocussing on saloon cars at the expense of light trucks and SUVs – sports utility vehicles. Both of these had been growing but competition, especially from Japan, had intensified. In 2003, BMW cars outsold Mercedes for the first time in six years. Customer complaints were increasing. Jeremy Clarkson even described a new Mercedes as ‘crap’ on a UK ‘Top Gear’ television programme. Why? The smaller car strategy had failed to meet hopes and expectations. The new BMW Mini was more popular than the Smart car. Sales of new Mercedes SUVs were also below target. By 2004, Mitsubishi Motors (in which Daimler-Chrysler retained a minority stake) was in trouble. Daimler-Chrysler declared they had no resources to invest to help it out. The company also decided to sell its stake in Hyundai. Mercedes were also to be assembled in China for the first time. QUESTIONS 1. Do you believe that the Daimler-Chrysler merger can eventually unlock the synergy which Daimler-Benz had earlier found elusive? 2. Where do you think the problems and difficulties might lie?
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42 ASDA
ASDA—presently owned by Wal-Mart—enjoys second position in the UK groceries market. Its large stores also sell a wide range of non-food products, including clothing and electrical goods. Its growth as the largest food retail chains began in the mid-1960s when it first recognized the potential for out-of-town sites with large car parks. ASDA is strongest in the north of England; the head office is in Leeds. ASDA’s other main retailing activity in the 1980s, was carpets and furnishings, which it entered with acquisitions. ASDA tried unsuccessfully to divest Allied Carpets in the mid-1980s, but then opted to support it by buying two-thirds of Waring & Gillow (furniture shops) and forming Allied Maples – again in 1989. Allied Maples was finally sold to Carpet Land in 1993. In 1985, with a welcome bid, ASDA acquired MFI, the nationwide retailer of self-assembly furniture. This represented concentric diversification as, although the products were different, the customer base was seen as essentially the same. Synergy was expected between the food superstores and MFI rather than through the furniture links as both were professional edge-of-town retailers in complementary businesses. Both were innovators and their management teams could learn from each other. There was an additional hidden motive. The Chairman of ASDA, Sir Noel Stockdale, was approaching retirement and there was no natural successor. Derek Hunt of MFI was thought to be an ideal replacement. Hunt became the Chief Executive of ASDA–MFI in 1986, but retained his working base in the south of England where MFI headquarters had been. The expected benefits and synergy did not accrue. In 1984, the return on net assets of ASDA was 43% and of MFI 38%. In the three years that the companies were merged the relevant figures for the group dropped from 40% in 1985 to
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27% in 1987. In 1987, MFI was sold in a management buy-out to a consortium led by Derek Hunt, but ASDA retained a 25% interest. Since the demerger MFI has acquired its main supplier of furniture packs, Hygena, and this backward vertical integration quickly brought some tangible financial benefits. However, the improvement was temporary – in the recession at the end of the 1980s/early 1990s MFI traded at a loss. Interest costs arising out of the buyback and a reputation for poor quality compounded their trading difficulties. At ASDA, John Hardman took over as chairman in 1987, but he resigned in 1991 when ASDA also started losing money. The losses continued in 1992. The company was trading profitably but exceptional charges were leading to pre-tax losses. ASDA had paid too much for 60 Gateway Stores in 1989 and still owned 25 & of the debt-ridden MFI. The MFI shares have since been sold, but the Gateway Stores were valued in the balance sheet at just two-thirds of their acquisition price. Moreover, ASDA lacked an effective competitive identity and was perceived to be a less successful retailer than its main rivals, who were also proving more successful in obtaining the premium sites for new stores. ASDA had centralized its distribution into a limited number of regional warehouses, but had been a follower rather than a leader in this key strategic development. In 1990, ASDA formed a joint venture with George Davies (ex-Next) in an attempt to revive its non-food activities with a range of designer clothes. The new chairman and ‘youthful’ chief executive (Archie Norman, then aged 37) embarked on a three-year programme which ‘would not produce significant results in the immediate future’. Their aim was to turn back the clock and return to ‘meeting the weekly shopping needs of ordinary working people and their families’. ASDA saw itself positioned and differentiated as ‘the store for ordinary working people who demand value’. The market was carefully segmented and prices made keener; ASDA set out to be some 5–7% below Sainsbury and Tesco to drive higher volumes. Productivity has been improved and service quality stressed; supplier arrangements have been strengthened; and there is an increased emphasis on fresh foods and clothing, where ASDA believes it has a relative strength. There are also regional variations in stocking policy. Norman perceived the increasing success of the discount-price food retailers to be a threat as ASDA has retained a number of small stores in less affluent areas. When Gillam and Norman took over, the Financial Times suggested that ASDA’s institutional investors ‘would be persistently whispering thoughts of mortality into the ears of
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ASDA’s new emperors’. In the event ASDA was successfully turned around. The culture also changed. ASDA now has a huge openplan head office and managers are asked to wear ASDA baseball caps at their desks if they do not want to be disturbed. In its attempt to strengthen its customer focus, ASDA has increasingly pushed head office managers out into the stores. Internal communications have been fostered. Archie Norman became non-executive chairman when he became a Conservative MP in 1997, but gave this up some time after the Wal-Mart acquisition. His previous deputy, Allan Leighton, took over for a period and consolidated ASDA’s strengthening position. APPLYING THE ACQUISITION TESTS TO ASDA-MFI The Attractiveness of the Kitchen Furniture Industry In the case of kitchens supplied direct to individual customers the actual suppliers of kitchen furniture did not enjoy as strong a market profile as did MFI, and buyers individually had very little power. En masse they are influential. Any competitor wanting to enter the market on the MFI scale would require massive investment; substitute products were often units which were already assembled, such as those sold by Magnet Southern. Increases in disposable income might make these more attractive. There was intense rivalry for market share, however, as sales of kitchen furniture were flat in the 1980s. On balance the industry was not unattractive, and MFI was a past ‘winner’. Profits had grown to 87% in real terms between 1980 and 1985. The Cost of Entry MFI cost ASDA £570 million, which represented 5.5 times net assets and 14 times 1984 pre-tax profits. It was a 31% premium on the current market capitalization, and it measured MFI on a price to earnings ratio of 22 rather than 18 that it had been before the bid. Debt and equity funding were both involved; and ASDA’s gearing increased from little more than zero to 40%. Both sets of shareholders were supportive, but with hindsight it seems a high price. Increased Competitive Advantage There was no real benefit to be gained from common purchasing, no site sharing, and the two companies enjoyed different
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geographical concentrations. ASDA was northern and MFI national. After the merger the companies were run autonomously with few activities shared. Prior to merging it had been argued that there would be intangible benefits from shared expertise. In the event, there was little cross-flow of managers, product innovation, marketing or operations skills. The cultures remained separate; and Derek Hunt, who became the chief executive, worked from London despite ASDA’s northern base. While ASDA did compete with Sainsbury’s, who at the time had a chain of home base DIY stores, this was not seen as a threat that MFI would address; and in any case MFI was very narrowly focussed within the DIY sector. While the industry was not unattractive the merger proved expensive for ASDA, and the potential synergy used to justify the merger to shareholders seemed not to be there in reality. QUESTIONS 1. Do you agree with the final assessment of the ASDA-MFI merger? Could this merger ever have been successful or was it always misguided strategically? 2. Why do you think that ASDA’s acquisition strategies typically failed whilst the acquisition of ASDA itself (by Wal-Mart) has been an outstanding success? 3. Since its demerger, has MFI also proved to be ‘better-off’?
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43 General Electric
General Electric (GE) is diversified into four ‘long cycle businesses’ – power systems, aircraft engines, defence electronics and medical systems (such as brain and body scanners) – four ‘short cycle businesses’ – plastics engineering, household consumer goods, lighting and NBC Television in the USA. GE also provides financial services (through the specialist GE Capital subsidiary) – which in terms of monetary assets is effectively the fourth largest bank in America. GE Capital has annual revenues of $60 billion (45% of GE’s total revenues) and profits of $5.6 billion (27% of the total). The company is truly global – it sells more in Europe than British Aerospace, one of the UK’s leading manufacturers and a direct competitor. GE, under the Chief Executive Jack Welch, proved that a business does not have to be ‘focussed on one or two related activities’ to be successful and profitable. Before he retired Welch: – Changed the culture – ‘Turned people on’ and – delivered results through carefully crafted incentives. Welch delayed his planned retirement by a year whilst he attempted to acquire Honeywell, only to be thwarted by the European Competition Commission – which feared there was a conflict of interests between GE Finance (which has a huge aircraft leasing arm) and Honeywell Engines. GE has sought to gain maximum value from its disparate activities by investing to provide a platform for growth. GE wants to be number one or number two in every market segment in which it competes. It seeks to exploit the breadth and diversity of its portfolio to find new ways for adding value and new customers. The company is decentralized and employees are encouraged to speak out and pursue ideas. External contacts and sources are constantly monitored for new leads and opportunities. ‘We’ll go anywhere for an idea.’ Welch always believed ‘the winners of the
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1990s would be those who could develop a culture that allowed them to move faster, communicate more clearly, and involve everyone in a focussed effort to serve ever more demanding customers’. GE has its own ‘university’ and brings managers of various levels in all the businesses together regularly to explain what they are doing and to share new ideas. Much of this is facilitated through Management Councils – comprising people from different businesses and divisions – who meet quarterly. Every member of a council must bring to every meeting at least one idea from which other managers could learn something valuable or useful. One notable example was the idea of ‘reverse mentoring ‘to deal with the demands of e-commerce. Older managers were encouraged to use younger and more aware managers as their mentors, even though they might be lower in the current hierarchy. Fortune declared Welch to be the manager of the century’ for his achievement in turning a ‘slumbering dinosaur’ into a ‘lean and dynamic company with a paradigm of a new management style’. Whereas Percy Barnevik redesigned the ABB structure, Welch transformed GE through management style. They both believed ‘small is beautiful’ and that innovation and entrepreneurship is critical. The decentralization at GE aims to ‘inject down the line the attitudes of a small fast-moving entrepreneurial business and thereby improve productivity continuously’. Integration strategies promote the sharing of ideas and best practices. There is a developed strategy of moving managers between businesses and countries to transfer ideas and create internal synergy, together with a reliance on employee training. It has been said that ‘if you sit next to any GE executive on a plane they will all tell the same story about where the company is going’. There is a shared and understood direction and philosophy, despite the diversity. Promotion is normally given to those managers who can prove they are ‘boundaryless’. Welch regularly attended training courses to collect opinion and feedback. ‘My job is to listen to, search for, think of and spread ideas, to expose people to good ideas and role models.’ GE’s workout programme involves senior managers presenting GE’s vision and ideas to other managers and employees, and then later reconvening to obtain responses and feedback on perceived issues and difficulties. All employees in a unit, regardless of level, are thus provided with an opportunity to review and comment upon the existing systems and procedures. GE also developed Six Sigma Quality Management which has been adopted by companies around the world. Managers are actively encouraged
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to work closely with suppliers and customers, and they have ‘360 degree evaluations’, with inputs from superiors, peers and subordinates. ‘People hear things about themselves they have never heard before.’ Products and businesses should be number one or number two in a market, and if they are not achieving this, their managers are expected to ask for the resources required to get there. It was inevitable that people would question whether GE could survive when Welch retired. There were some changes made – but only limited ones to the structure and style and the company continues to thrive and prosper. In 2003, GE acquired the UK health care group, Amersham, which has a number of important biotechnology activities. This was followed, in 2004, by a leading airport security scanning system business. QUESTIONS 1. Do you think Welch’s management style could be easily copied? 2. What was the vision behind the idea being boundaryless? 3. Where does GE fit in our framework of corporate management styles? 4. What are the initiatives taken by Welch as making the employees “turned on”?
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44 Overseas Packaging Ltd.
The Overseas Packaging Ltd. are the pioneers in India for providing different types of packaging materials, ready-made containers, etc. They offer a wide range of covering material, aluminium, thermocole, etc. suitable for a variety of packaging needs. Previously, packaging was considered only as a protective measure for variety of products. However, with the new trends in the marketing and especially with the changing tastes of consumers, packaging today performs various functions such as promotion, differentiation, economy, branding, etc. Realizing the growing importance of packaging, the company started its consultancy wing to advise their clients on complete packaging strategy. M/s Tulika Exports has asked for packaging advice for host of non-traditional items for which they are negotiating orders in different countries. The products are: (1) Seafood and prawns (2) Artecrafts (3) Delicate show glassware (4) Roses and other flowers (5) Spices and resins (6) Pottery items Since there is a variety of products and the packaging contract may lead to heavy profits as well as heavy losses too, hence the company has to decide either taking the packaging contract from this company or else only provide the packaging material and advice to the company as consultant. Now the Managing Director of the company Mr. Dileep Chandwani has to decide about the fate of the contract. He called a meeting of General Manager (Marketing) and
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Chief Manager (Packaging) and the financial advisor of the company to discuss the matter. After a long discussion only the General Manager (Marketing) and Chief Manager (Packaging) were of strong opinion that the company should go for taking the contract of packaging and this will lead to expand the potential of the company as well as increase reputation. At this the financial advisor did not agreed due to huge financial losses. QUESTIONS 1. Do you think that the GM (Marketing) opinion is acceptable? 2. Do you agree that the company should be away from this venture? 3. How can the risk may be avoided? 4. What would have been done by you if you were the MD of the company?
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45 Air France, British Airways and the Concorde Disaster
To understand the impact of a major accident with Concorde a number of background factors must be remembered. • Concorde became a symbol of pride for Britain and France. • Technologically it was a triumph. • People have always made efforts to see it, let alone wanted to fly in it. • The project helped to cement Anglo-French relations when the UK wanted to be seen to be European. It proved that the two countries could work together and challenge American dominance of the aerospace industry. In this respect, it was a forerunner to the Airbus consortium. • The project ran late and was heavily over budget. • The plane was barred from flying overland at supersonic speeds because of the noise factor. • Only two airlines ever flew it – when it began both were nationalized. British Airways (BA) has since been privatized. • The BA Concorde services paid their way operationally, but all of the development costs were absorbed by the British and French governments – in today’s money some £9 billion was absorbed. • The services were mainly London and Paris to New York, but there were some UK to West Indies flights and a wide range of charter opportunities. • In 1999, BA earned £140 million in revenues and Air France £70 million from Concorde. • BA’s services were marginally profitable; Air France lost money.
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The first crash of a Concorde plane happened on the last Tuesday of July 2000. The passengers on the Air France flight from Paris to New York were German tourists flying out to meet a cruise ship. The plane was seen to be on fire before it even left the ground at Charles de Gaulle airport, but once Concorde has reached a certain speed on the runway take-off cannot be aborted. Two minutes later it had crashed onto a hotel on the outskirts of Paris. Altogether 113 people, the bulk of them passengers and air crew, died. The whole sequence of events was filmed by two amateur video-makers and so the disaster was very high profile. Immediate speculation blamed an engine fire. There are two engines slung under each wing and those on one side had been clearly on fire. Moreover, the flight had been delayed in Paris while one of these engines was repaired. However, the landing gear was still down: in the little time he had the pilot had reported that the hydraulics had also failed. Why? In the event it was to transpire that a rogue strip of metal on the runway had punctured a tyre, and then tyre debris had punctured a fuel tank incorporated in the wing. It later became apparent that the metal strip had probably been jettisoned from a Continental Airlines DC10 a few minutes earlier. The escaping fuel was ignited by the heat of the adjacent engines. The engines, and in turn the engineers who had repaired one of them, were not to blame. But, of course, the fact the fuel container could be punctured in the way caused huge concern. THE AIR FRANCE RESPONSE • The chairman went to the crash site immediately, signalling a personal involvement. • All five remaining Concordes were grounded immediately, communicating that safety was the first priority. Later, the chairman attended a number of the family funerals and was available to talk to families of the victims. • Air France provided free flights for relatives to and from Germany. • Interim compensation payments were offered. BRITISH AIRWAYS BA opted to keep its seven Concordes flying, although flights were suspended for the first 24 hours. This determination continued even when one had to make an emergency landing in Newfoundland after
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the passengers complained that there was a smell of smoke in the cabin. BA’s pilots were happy about this – they had no fears for the aircraft’s safety. Their representatives, together with retired pilots, were all happy to be interviewed by television reporters to confirm this view. Passengers were generally undeterred as well. It transpired that in 24 years of flying there had been 70 previous incidents where tyres had burst but never with catastrophic consequences. As a result of this BA had made certain modifications to the wheels which Air France had not copied. In addition, BA used new tyres (Air France used remoulds) which it changed regularly, after a fixed (and limited) number of take-offs or landings. On 15 August, some three weeks after the crash, BA announced that it too was grounding its Concordes. This pre-empted the withdrawal of its Certificate of Air Worthiness by the Civil Aviation Authority (CAA) on 16 August. Air France commented that it was surprised that it had taken as long as it had. Senior BA pilots demanded an immediate reprieve and suggested that it could be a ploy by France to end Concorde flights altogether because they were afraid of the cost of possible modifications that might be necessary. THE UK CIVIL AVIATION AUTHORITY(CAA) The CAA duly withdrew the Certificate of Air Worthiness, in reality a very rare event. The only time this had happened before as the result of a civil accident was when McDonnell Douglas DC10s were grounded temporarily in 1979. This contributed to the failure of Laker Airways. The CAA was asked why it had not acted earlier. The reply was that there had been speculation but no concrete evidence. Only now was the cause of the accident clear. The CAA emphasized its belief that Concorde remained a safe aircraft but that (as yet unspecified) modifications would be required. There was, however, a real concern that a tyre burst had been able to trigger the catastrophic chain of events that followed. Some commentators believed that the reluctance of Air France to restore Concorde services implied that there was an unacceptable risk with the plane. FINAL OUTCOMES Ways to protect the fuel containers were devised – based on a Kevlar protective lining – and modifications were made by British Airways. Concorde was allowed to fly again – and did. Services to New York
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were restored. But in the mean time 9/11 had happened, affecting demand for air transportation. And passengers had become more accustomed to (cheaper) first class travel in ‘ordinary’ aircraft. Transatlantic flights might take longer, but the new first class cabins had private sleeping areas and completely flat beds. One downside to Concorde was the relative lack of seating space – it was not a large aircraft. Ticket sales did not reach the levels enjoyed before the crash. BA decided that maintenance and other costs did not justify keeping Concorde in the air and its final flight was in October 2003. The remaining aircraft are grounded museum pieces. QUESTIONS 1. Regardless of the actual facts and motives, whose reputation do you think might be most enhanced (or at least protected) by its reaction and behaviour? 2. Did BA do the right thing in the circumstances or should it have reacted differently? 3. Did this disaster merely accelerate the inevitable ? Had it not happened, would Concorde still be flying today?
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46 Jollibee
Jollibee, based in the Philippines, became the most rapidly expanding fast-food chain in Asia. It was established in 1978 by five ChineseFilipino brothers, the Tan Caktiong family, since when it has acquired well over half of the fast-food market in the Philippines. At the beginning of the 21st century, there were over 400 branches worldwide, with half of these in the Philippines – of which onethird of this 200 are in Manila. McDonald’s had 84 outlets; Wendy’s and Kentucky Fried are also active competitors. Boosted by a relaxation of laws concerning the extent of foreign investment in Filipino companies, Jollibee expanded abroad. An Australian, Tony Kitchener, was appointed to spearhead international developments. The early concentration was in South-East Asia and the Arab Gulf states, targeting especially Filipinos living in Indonesia, Malaysia, Brunei, Bahrain and Dubai. The number of overseas branches soon began to expand at a rate of 30 each year, with Hong Kong, China, Los Angeles and Rome high on the list of later priorities. Vietnam would follow. Increasingly, non-Filipinos are being attracted by the chain’s individual products, which have been designed for low- to middle-income families with a sweet tooth, and for children’s parties. Prices are kept slightly below those of McDonald’s. The main product is an Asian-style hamburger, distinctive because it is cooked with the spices rather than them being placed on top afterwards –McDonald’s has countered this with its local McDough brand. In addition, there are Spaghetti Fiesta (a Chinese-type mixed chow), salads and mango pie (a locally popular dish). While the hamburger tends to be ubiquitous, different countries have separate menus. Chicken Masala is the most popular product in Malaysia and the Gulf. The bulk of the beef is imported from Australia and Jollibee makes all its own
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bread. Jollibee waited for critical mass before announcing that ‘its burgers are the Asian fast food’. The company has also diversified, beginning with the acquisition of a pizza chain in the Philippines in 1993. Expansion is now with joint ventures and franchising such that capital for growth is not a big problem. Some 50% of the outlets are now franchised. It also takes some account of the fact that Jollibee’s first independent overseas development in Taiwan (1988) was not altogether successful. The chosen location was wrong. In 1997, Jollibee had to overcome one interesting setback. After the company opened a branch in Port Moresby in Papua New Guinea someone, possibly a competitor, placed the following advertisement in a newspaper: ‘Wanted urgently, dogs and cats, any breed. Will pay 40 toea (equivalent to 24 US cents) per kilo live weight. Apply to the Jollibee …’. The company described this as a criminal attempt to try and sabotage their business, but failed to track down the instigator. In 1998 and 1999 Jollibee, like many Asian businesses, had to deal with what might have been a far bigger potential crisis – the uncertainty caused by high domestic inflation and drastic falls in the value of local currencies. In the event this turned into a wonderful opportunity for Jollibee–whose growth continued unabated. Redundant, experienced executives were keen to buy franchises in part because the demand for fast food grew. In a part of the world where eating out is normal, the lower-priced fast food outlets took business away from the more expensive restaurants. QUESTIONS 1. Can anything sensible be done to prevent an incident such as the rogue advertisement, or does it always come down to effective reaction? 2. Do you think this amounts to anything more than bad luck?
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47 Southgate Mall
The Southgate Mall was built in 1983 and is located in the Sutherland Shire nearby south of Sydney, Australia. This retail property has a total built-up area of 2,50,000 sq ft. It comprises 58 specialty stores and is anchored by major local departmental store such as Coles Supermarket, Kmart and Woolworths. During 1999– 2000, Southgate embarked on a bold refurbishment and repositioning programme worth AUD 13 million, aimed at increasing mall traffic, sales and rental value. The refurbishment programme, led by a professional mall management company, was a complete makeover of the premises. The mall management firm advised and implemented the change in management including repositioning of tenants, addition of a food court, correction of poor sight lines and access, addition of fresh supermarket, new shop fit-outs for all tenants, refurbishment of common areas and ceilings and reevaluation and redirection of the marketing function. In 2006, an additional 20,000 sq ft. of retail space was added to the shopping centre. The mall management firm provided the leasing support to place tenants in the mall. This led to an additional income of AUD 6,20,000 per annum for the property and potential additional sales of AUD 20 million. The mall management firm also initiated a strategic marketing plan aimed at further strengthening the Southgate brand and reinforcing the mall’s retail mix, with strong emphasis on fresh food offer. As part of the plan, it launched Freshworld, which helped to increase customer traffic per week by 12.5% compared with the same week a year ago and by 19.7% on the previous week. The increase in foot traffic due to the addition of this store exceeded all expectations, with significant growth being experienced across individual specialty
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stores. The total centre average unit spend rose 5.4% and reported a moving annual turnover (MAT) increase of 3.8%. Furthermore to this development, the mall management firm implemented a sustainability initiative to reduce water consumption across the property. After adopting this measure, savings of AUD 12,000 per annum was generated, reducing overall property outgoings. After these successful implementations, the mall management firm extended its services to advice on the master planning of the mall. Further acting on the mall management firm’s advice, the adjoining building of about 19,500 sq ft. was acquired, with the objective of further expanding Southgate’s retail mix and enhancing the mall’s food court. Since the completion of the original development, Southgate has witnessed high levels of occupancy, ensuring continued growth in the income revenue. This portrays how a professional mall management company can deliver continued growth and performance through quality management services. After 4 years of these developments, Southgate had started a movie theatre due to which the customer traffic had increased significantly. Recently after this the mall management has started facing the problem of huge customer traffic and the study revealed that number of footprints is not converted into the same proportion of sales in the mall as earlier. QUESTIONS 1. What were the weaknesses of Southgate earlier? 2. Explain the strength and weaknesses of Southgate? 3. What were the reasons for increment in foot traffic in the South Hall? 4. What may the steps to be taken by the management of Southgate to face the recent problem in the same professional way as earlier? 5. Do you agree that there is no relationship between the number of footprints and the sales of the store?
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48 Ford Motors
Ford Motors, one of the world’s largest automobile manufacturer, owns and produces automobiles under several major brands: Ford, Lincoln, Mercury, Mazda, Land Rover, Aston Martin and Volvo. They maintain one of the automotive industry’s most complex manufacturing, transportation and distribution networks. Penske Logistics began its relationship with Ford as lead logistics provider (LLP) for Ford’s assembly plant in Norfolk. At the time, each of Ford’s 20 North American assembly plants managed its own logistics operations. A decentralized approach provided total control of logistics at the plant level, but presented costly redundancies in materials handling and transportation. Ford conducted studies to determine the benefits of transitioning the company’s decentralized logistic operations to a centralized approach. The decision was quickly apparent—centralization of the company’s logistics operations would increase both velocity and visibility throughout the network, as well as reduce supply chain costs. Shortly thereafter, Ford selected Penske as its North American LLP. Under the contract, Penske would centralize and manage all inbound materials handling for 19 assembly plants and seven stamping plants. CONSOLIDATING LOGISTICS OPERATIONS Penske immediately developed an aggressive logistics transition programme with Ford. Penske would provide Ford with a single point of contact for all logistics operations.
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By working with individual plants and corporate management, Penske established a baseline of current operations and outlined the proposed solutions. The new logistics programme would establish a Penske Logistics Center that included the following core functions: • Network Design Optimization—implement a more efficient inbound materials strategy through order dispatching centres (ODC). • Carrier and Premium Freight Management—manage all carriers and logistics companies, while reducing premium freight costs. • Information Technology System Integration—achieve real-time visibility of supply chain shipments, schedules and orders. • Finance Management—improve freight bill payment, claim processing and resolution throughout the supply chain. Upon development of this new plan, the Penske/Ford team began evaluating Ford’s existing network design. Under the plant-centric approach, suppliers would make multiple deliveries of the same parts to different plants. A supplier would pick up a small load, deliver it to one plant, pick up another small load of the same part and deliver it to another plant. Carriers with half-empty trucks would often cross routes with each other en route to the same plant. Aside from being highly inefficient, this design allowed for excessive inventory and storage costs at the plant level. To centralize transportation and distribution operations, Penske implemented a new network design consisting of 10 new ODCs. The ODCs would be a central delivery point for suppliers. Different supplier shipments going to the same plant would now be crossdocked into trailers at the ODC. Loads would be consolidated and delivered on a scheduled basis to reduce the amount of milkruns, less than truckload shipments (LTL) and premium freight charges. To meet Penske’s new transportation and distribution standards, more than 1,500 suppliers were trained on new uniform procedures. For carrier and premium freight management, Penske’s goal was simply stated: “maximize carrier service, minimize carrier costs”. Penske refined Ford’s carrier bidding process by placing more stringent requirements on carrier partners. Carriers were now required to meet specific safety, equipment and technological specifications; provide experienced and certified drivers; and show proven experience of on-time delivery/pick-ups. Penske’s new procedures required carriers to meet established route pick-up and delivery windows within 15 minutes of the scheduled time. Additionally, carriers would supervise loading and
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unloading operations to verify order accuracy, adequate packaging and labelling, and freight damage. With new stringent carrier requirements in place, Penske closed the accountability loop by implementing a Carrier Rating System. All incidents would be recorded and reported. Carriers would issue corrective action reports for actions that negatively impacted Ford’s operations. If a carrier accumulated an excessive amount of incidents on their “scorecard”, Penske would issue a low carrier rating, thus jeopardizing the carrier’s ability to participate in future bids. Penske also implemented several information technology solutions throughout the logistics network, including its proprietary Logistics Management System and Route Assist, an advanced routing tool. Other programs included a Web-based metric reporting system and order tracking software. Drivers were provided with PDA scanners and an electronic driver log. Carriers were now required to have satellite communications and engine monitoring systems on all trucks for load tracking. ODCs were provided with integrated RF cross-dock scanners that tracked the delivery of individual parts. Prior to implementing a centralized approach, Ford was unable to gain a clear view of the financial status of logistics operations. With approximately 1,500 suppliers handling more than 20,000 shipments per week, freight billing was complicated. As part of its carrier management system, Penske would now provide drivers with a single set of paperwork procedures to ensure delivery documentation was collected and submitted to accounting. Penske developed a new freight billing system that would capture freight costs and allocate those costs by plant. As a result, Ford could see which plants had the highest and lowest freight costs and which carriers were most cost effective. Penske and Ford: Entering a New Century of Automotive Achievement Within 18 months, Penske completed transitioned Ford’s logistics operations to a centralized network design. More than 700 inbound and 500 outbound trailers now move to and from Ford’s ODCs per day, with most loads carrying at 95% capacity. Shipments were consolidated at the ODC and previously unused cross-docking space was now in high demand. 15 million pounds of freight were crossdocked each day, resulting in an inventory reduction of 12%. Suppliers and carriers currently operate under a single set of transportation and distribution procedures, enabling better service throughout the
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supply chain. The level of accountability established with Penske’s Carrier Rating System enabled Ford to get rid of its distribution network of costly, ineffective carriers. With uniform technologies, ODCs were able to monitor shipments, identify inefficiencies and address materials handling issues in a realtime environment. Furthermore, logistics costs entered the supply chain immediately. This allowed Ford to see overall supply chain costs and per plant allocations at any given point in time. Penske met its logistics program objectives six months ahead of schedule—a testament to the joint-team approach established between Penske and Ford. More importantly, as Ford continues to evolve, the Penske Logistics Center provides Ford with a single point of contact for all logistics operations. “Having a single point of contact delivers more than cost benefits. Penske allowed Ford to clearly understand how the logistics operations impact the entire company. From the assembly line to the end-consumer, the efficiencies provided by Penske are realized at virtually every level throughout Ford.” Grant Belanger, director of material planning and logistics, Ford Motor Company. Penske continues to deliver significant cost savings to Ford by continuous process improvement and, to keep pace with assembly plant requirements, Penske closed 6 of its ODCs due to a change in shipping frequency strategy. With four ODCs operating at full capacity, Penske once again streamlined its logistics strategy to reduce costs for Ford. Ford has honoured Penske with several awards, including the Q1 award, its highest recognition of superior supplier quality. Today, with a century of automotive achievement behind them, Ford and Penske continue to redefine the highest standards for logistics and operational efficiency. QUESTIONS 1. What are the focus areas of modifications done by Penske in Ford logistic operations? 2. “Having a single point of contact delivers more than cost benefits,” how can the Penske justify this statement? 3. Suppose you have to provide Ford with real-time supply chain and financial visibility, how will you do that? 4. What are the benefits made available to Ford by single centre for all logistic operations? 5. Explain the cost saving strategy of Penske for the logistic operation to Ford?
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49 Maturing Metros
Delhi and Mumbai offer an attractive market for luxury and lifestyle retailing with these cities being home to the highest number of households belonging to the affluent category. Retail revenues contributed by the affluent category accounted for over 30% of total revenues in 2005-6. The number of affluent households is expected to double by 2011-12, projected to trigger high growth in the luxury retailing segment. The luxury-retail segment is presently concentrated in the five-star hotels and is slowly drifting into the specialty malls and one-stop outlets. With the steady rise predicted in the percentage of middle-class households and their affordability, the scope for the neighbourhood malls and hypermarkets will be pronounced in the residential suburbs. However, the lack of space and the strict bringing down of law on illegal constructions will reinforce the migration towards organized retailing. INDIAN METRO CITIES ON THE GROWTH LANE The increasing disposable incomes, the consuming class and the increasing standard of living across these cities translate to opportunities across all the retailing formats and verticals. The mushrooming lifestyle formats in these cities is stimulated by the increasing exposure of consumer base to international brands and willingness to spend for quality. These cities most often also serve as the test beds for any innovative store formats. METROS-IN-THE-MAKING Many metro retailers are expected to open outlets in these cities to benefit from the “First-Mover” advantage, and gain a foothold in
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these cities. These cities provide ample opportunities, especially for the food and grocery formats, with lower lease rentals and high availability of retail space, access to farms and agricultural produce. Consuming class accounts for over 60% of the total households, offering potential in the food and grocery, consumer goods and apparel verticals. The capital and tourist destination also add value to these cities. QUESTIONS 1. Why do the retailers in Metro cities benefit as first mover advantage? 2. How do you find the lifestyle change in the metro cities affect the retail formats? 3. What are the reasons for supporting the growth of retail with consuming class? 4. Why do these cities often serve as the test beds for any innovative store format? 5. What are the significant features of these metro cities which make them maturing Metros?
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50 Retail Sourcing Hub
After the liberalization of Indian economy and having pace with the globalization process, India is fast emerging as an important global sourcing hub for top international brands with the strength of its strong manufacturing industry. India has had a continued presence in the global scenario as one of the leading exporters of apparels and textiles. The expiry of the Multi Fibre Arrangement has further widened the global markets for apparel. Many international brands have identified India as one of the important supply centres for procurement of textiles and apparels. Wal-Mart’s sourcing operations was estimated at US$ 1 billion, Tesco’s around US$ 100 million and Marks & Spencer around US$ 145 million from India for the year 2005-6. Unilever sources major portion of their FMCGs from its wholly owned Indian subsidiary, Hindustan Unilever Limited. Adidas, Next and Calvin Klein are expected to follow suit, with Adidas opening its office in Bangalore. ONLINE RETAILING The ‘click-to-buy’ phenomenon is fast catching up in India, with increase in the number of broadband and dial-up Internet connections, limited personal time for shopping, increase in working women, increased use of plastic money and large base of young population that spends a considerable time online. The stated factors are facilitating rapid growth of online shopping with the industry players scaling up to meet the consumer requirements. Most retailers are developing and maintaining their own online sale portals for easy consumer access, facilitating online purchase of merchandise. Tata Indicom’s i-choose.in and G&B’s godrejlifespace.com are good
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examples of this trend. Players like Rediff.com, eBay.in, Indiatimes.com were some of the early entrants in the Indian online retail space, clocking impressive revenues through online transactions. Some of the more recent players to enter this niche market include Pantaloons Retail India Ltd., through its Futurebazaar.com venture. Many smaller retail portals are also thriving on the Internet, meeting the niche Indian consumer requirements such as ethnic apparel, handicrafts and jewellery. Demand for these portals, which has been primarily driven by the non-resident Indians, is gaining popularity on the Indian soil as well, with the young urban Indian consumer’s increasing exposure to the virtual world of Internet. With value-added services like cash-on-delivery to facilitate online transactions by consumers without credit/debit card, unique bidding schemes, etc., e-commerce is fast gaining acceptance in India. RURAL RETAILING Rural retailing constitutes more than 95% of total retail revenues, with more than 70% of India’s population concentrated in the rural areas. Rural hypermarkets are growing at a blistering pace meeting the unique requirements of the rural consumer. The range of services provided by the rural retailers extends from creating a platform to buy and sell farm produce, to banking services, to restaurants, etc. One of the key players in the rural retail segment is ITC with its Choupal Saagar initiative. ITC has 14 outlets in operation presently and plans to increase the number to 700 over the next 7-10 years. ITC’s Choupal Saagar retails products and also acts as a procurement hub for ITC’s e-choupals where farmers are offered better rates for their agriculture produce, compared with the prevalent market rates for the same. Other examples of players and their services in the rural retail segment are DSCL’s Hariyali Kisan Bazaar and Indian Oil Corporation’s Kisan Seva Kendra. DSCL’s Hariyali Kisan Bazaar has more than 70 outlets presently and the company proposes to operate a total of 200 outlets over the next 12 months. The outlets provide a spectrum of offerings including agronomist-consultations, agri-inputs, and financial services, apart from the conventional retailing services. Indian Oil Corporation’s Kisan Seva Kendra offerings extend over fuel, agri-produce, fast moving consumer goods and other valueadded services. The company has a network of over 1400 outlets presently. Reliance Retail and Pantaloon Retail India Ltd. are expected to undertake more ventures to capture the vast untapped potential
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in the rural retail segment. But this is not the whole story of the picture. QUESTIONS 1. Do you suggest all the companies to start their sale through their web portal? If no, then give justification of you answer? 2. Why does the ‘click-to-buy’ phenomenon catching up in India? 3. Why do we call that rural retail has abundance potential ? Give your logic to justify it? 4. Suggest the reasons to justify India as a manufacturing hub?
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51 Pantaloon: ERP in Retail
Pantaloon Retail is the flagship enterprise of the Future Group. It has its presence with its multiple lines of business. The company owns and manages multiple retail formats that cater to a wide crosssection of Indian society. Its headquarters is in Mumbai and it operates through four million square feet of retail space, has over 140 stores across more than 40 cities in India and employs over 14,000 people. The company registered a turnover of Rs. 2,019 crore for the financial year 2005-6. Pantaloon was regularly opening stores in the metros and there was an urgent need for a reliable enterprise wide application to help run its business effectively. The basic need was to have a robust transaction management system and an enterprise wide platform to run the operations. The company was looking for a solution that would bring all of its businesses and processes together. After a comprehensive evaluation of different options and software companies, the management at Pantaloon decided to go in for SAP. THE SOLUTION Some of the qualities of SAP retail solutions are that it supports product development, which includes ideation, trend analysis, and collaboration with partners in the supply chain; sourcing and procurement, which involves working with manufacturers to fulfil orders according to strategic merchandising plans and optimize cost, quality, and speed variables that must be weighted differently as business needs, buying plans, and market demand patterns change; managing the supply chain, which involves handling the logistics of moving finished goods from the source into stores and overseeing
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global trade and procurement requirements; selling goods across a variety of channels to customers, which requires marketing and brand management; managing mark-downs and capturing customer reactions, analyzing data, and using it to optimize the next phase of the design process. THE IMPLEMENTATION The implementation was outsourced to a third party. The implementation was done by the SAP team with help of Novasoft which is based out of Singapore. Some people from Pantaloon also assisted in the project. About 24 qualified people worked on this SAP implementation. SAP was chosen as the outsourcing party on a turnkey basis. This project was headed by Pantaloon’s Chief Information Technology Officer. Three Phases: SAP implementation is not a single phase process. The project was divided into three phases. First Phase: It involved blueprinting existing processes and mapping them to the desired state. In this phase, the entire project team worked on current processes within the structure of the organization, analyzed and drafted them. This blueprint was later used in the formation of new states of the solution. Since the SAP would combine all the processes, each and every one of these had to be evaluated. Second Phase: In the second phase, the SAP platform was developed with the help of Novasoft’s template which was predefined by SAP after evaluation of Pantaloon’s needs and expertise in retail solutions. Third Phase: The last phase in this project was for stores to switch over to the new system and for current data to be ported. Before the SAP implementation, all the data was unorganized. This data had to be migrated to the new SAP application. The project was flagged off on 15th June 2005 and took about six months to finish. It went live at the head office on 1st January 2006. The stores went live on SAP from 1st January 2006 to 30th June 2006. BENEFITS AND CHALLENGES The key challenges in this project were not in the implementation. Rather, the difficulties were faced during the data migration and in managing the interim period when the project was underway for
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about six months. Migrating unorganized data to an organized format was a challenging task. Pantaloon has not been able to see immediate benefits from this implementation. This application certainly has long-term benefits which will be seen when the performance of various aspects will be analyzed. “It is too early to calculate return on investment (RoI). We have already started working on MAP (Merchandise Assortment Planning), Auto-Replenishment and Purchase Orders. We hope to use these systems to optimize our inventory and cut it by about two to four weeks (depending on the line of business),” says Biyani. MAINTENANCE & HARDWARE This application is currently being used by around 1,200 employees across the organization. For maintaining this implementation and its related applications, Pantaloon has an in-house team and it has outsourced ABAP resources. They are also in the process of setting up a SAP Competency Centre. The system runs on a HP Superdome server on HP UNIX 11i and the database is from Oracle. The cost of this project was about $10 million. FUTURE PROJECTS After the successful implementation of SAP for its retail chain, Pantaloon has started planning to go ahead with IT projects such as implementation of WMS with RFID, Customer Intelligence and CRM. The company has also considered initiating the Inventory and Promotions Optimization in its forthcoming plans. The visionary management of the company has set its eyes to the new policy of the government to open the FDI in retail sector too. QUESTIONS 1. What are the implications of MAP on the return on investment? 2. How do you find it a case of management of change in the organization? 3. What was the basic idea behind adoption of SAP in Pantaloon? 4. Point out the challenges before Pantaloon in the present context. 5. How can RFID technology help the company in demand management? 6. What are the basic principles of management helped the company in the effective implementation of the technology?
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52 Tata Docomo
Tata Docomo, one of India’s largest telecom operator with a overall 11.5% market share in the wireless domestic market (source : TRAI report, April-June 2010) emerged as an umbrella brand which offers all telecom services provided by Tata Teleservices. The company is rising up further in the charts, with its youthful, simple communication and timely usage of technological voice and data platforms. The company is passing through a repositioning phase, and in the month of October 2011, all Tata Indicom customers were migrated to Tata Docomo. This move to shift customers from one brand to another was a well thought one by the management of the company. As far as the brands are concerned, Tata Docomo has managed to establish its identity by connecting well with the customers. There it was thought by the management to collate and unify all the brands under one. So the company uplifted and upgraded the Tata Indicom customers to Tata Docomo, where the quality improved and range of services offered varies. Also the vision of the company with the Docomo brand was much bigger than what they had with the Indicom brand. The main motive of the company was to delight the Indicom clients, while achieving the dual goal of making Docomo a larger brand. But despite the move, the other brands like Airtel and Vodafone are still leading the Indian telecom market and still docomo is known in the customers as a brand with limited market span. Company has already invested billions in the 2G, two and half years ago. And within a year of its huge investments, the company had to invest again in 3G services, and now the changeover of the brand from Indicom to Docomo again is a cost on the part of the company. The problem which stands in front of the management is the
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investment which has to be made in order to shift the customers and to change the marketing practices like advertising and sales promotion. The company has already invested millions of dollars in advertising its 2G and 3G services and is again investing into the market in order to changeover its brand. The company has planned to garner its volumes and profits in order to compete with the market leaders and also to avoid the threat of new entrants. With the huge investments to be made in repositioning of its brand, this target of company seems to be fading and looks diverted from its line. QUESTIONS 1. What are the investment? 2. How do you find it a case of management of change in the organization? 3. What was the basic idea behind adoption of SAP in Pantaloon?
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53 Dell Computer Corporation
In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business had two advantages: (1) Bypassing distributors and retail dealers eliminated the markups of resellers. (2) Building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. While the company sometimes struggled during its early years trying to refine its strategy, build an adequate infrastructure, and establish market credibility against the better-known rivals, Dell’s build-to-order, sell-direct approach proved appealing to growing number of customers worldwide during the 1990s as global PC sales rose to record levels. And, as Michael Dell had envisioned, the directto-the-customer strategy gave the company a substantial cost and profit margin advantage over the rivals that manufactured various PC models in volume and kept their distributors and retailers stocked with ample inventories. DELL COMPUTER’S MARKET POSITION IN EARLY 2000 Going into 2000, Dell Computer was the US leader in PC sales, with nearly a 17% market share, about 1 percentage point ahead of secondplace Compaq. Gateway was the third with 8.9%, followed by Hewlett-Packard with 8.8% and IBM with 7.2%. Dell overtook Compaq as the US sales leader in the third quarter of 1999, and it
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had moved ahead of IBM to second place during 1998. Worldwide, Dell Computer ranked second in market share (10.5%) behind Compaq (14%). IBM ranked third worldwide, with an 8.2% share, but this share was eroding. Since 1996, Dell had been gaining market share quickly in all of the world’s markets, growing at a rate more than triple the 18% average annual increase in global PC sales. Even though Asia’s economic woes in 1997–98 and part of 1999 dampened the market for PCs, Dell’s PC sales across Asia in 1999 were up a strong 87%. Dell was also enjoying strong sales growth in Europe. Dell’s sales at its website (www.dell.com) surpassed $35 million a day in early 2000, up from $5 million daily in early 1998 and $15 million daily in early 1999. In its fiscal year ending January 31, 2000, Dell Computer posted revenues of $25.3 billion, up from $3.4 billion in the year ending January 29, 1995—a compound average growth rate of 49.4%. Over the same time period, profits were up from $140 million to $1.67 billion—a 64.1% compound average growth rate. Since its initial public offering of common stock in June 1988 at $8.50 per share, the company had seen its stock price split seven times and increase 45,000%. Dell Computer was one of the top 10 bestperforming stocks on the NYSE and the NASDAQ during the 1990s. In recent years, Dell’s annual return on invested capital had exceeded 175%. Dell’s principal products included desktop PCs, notebook computers, workstations, servers, and storage devices. It also marketed a number of products made by other manufacturers, including CDROM drives, modems, monitors, networking hardware, memory cards, speakers, and printers. The company received nearly 3 million visits weekly at its website, where it maintained 50 country-specific sites. It was a world leader in migrating its business relationships with both customers and suppliers to the Internet. In 1998, the company expanded its Internet presence with the launch of www.gigabuys.com an online source for more than 30,000 competitively priced computer-related products. Sales of desktop PCs accounted for about 65% of Dell’s total systems revenue; sales of notebook computers generated 20–25% of revenues, and servers and workstations accounted for 10–15% of revenues. Dell products were sold in more than 170 countries. In early 2000, the company had 33,200 employees in 34 countries, up from 16,000 at year-end 1997; approximately one-third of Dell’s employees were located in countries outside the United States, and this percentage was growing.
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COMPANY BACKGROUND When Michael Dell was in the third grade, he responded to a magazine ad with the headline “Earn Your High School Diploma by Passing One Simple Test”. At that age, he was impatient and curious—always willing to try ways to get something done more quickly and easily. Early on, he became fascinated by what he saw as “commercial opportunities”. At 12, Michael Dell was running a mail-order stamp-trading business, complete with a national catalogue, and grossing $2,000 per month. At 16, he was selling subscriptions to then Houston Post, and at 17 he bought his first BMW with the more than $18,000 he had earned. He enrolled at the University of Texas in 1983 as a pre-Med student (his parents wanted him to become a doctor) but soon became immersed in the commercial opportunities he saw in computer retailing and started selling PC components out of his college dormitory room. He bought randomaccess memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who often had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads (and later through ads in national computer magazines) at 10–15% below the regular retail price. By April 1984 sales were running about $80,000 per month. Michael Dell at age 18 dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand PCs Limited. He obtained his PCs by buying retailers’ surplus stocks at cost, then powering them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail mark-up, Dell’s new company was able to sell IBM clones (machines that copied the functioning of IBM PCs using the same or similar components) at about 40% below the price of an IBM PC. The price-discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 1985, with a few people working on six-feet tables, the company was assembling its own PC designs. The company had 40 employees, and Michael Dell worked 18-hour days, often sleeping on a cot in his office. By the end of fiscal year 1986, sales had reached $33 million. During the next several years, however, PCs Limited was hampered by growing pains—a lack of money, people, and resources. Michael Dell sought to refine the company’s business model; add needed production capacity; and build a bigger, deeper management staff and corporate infrastructure while at the same time keeping costs low. The company was renamed Dell Computer in 1987, and the
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first international offices were opened that same year. In 1988, Dell added a sales force to serve large customers, began selling to government agencies, and became a public company—raising $34.2 million in its first offering of common stock. Sales to large customers quickly became the dominant part of Dell’s business. By 1990, Dell Computer had sales of $388 million, a market share of 2 to 3%, and an R&D staff of over 150 people. Michael Dell’s vision was for Dell Computer to become one of the world’s top three PC companies. Thinking its direct-sales business would not grow fast enough, in 1990–93, the company began distributing its computer products through Soft Warehouse Superstores (now CompUSA), Staples (a leading office products chain), Wal-Mart Stores, Sam’s Club, and Price Club (now Price/Costco). Dell also sold PCs through Best Buy stores in 16 states and through Xerox in 19 Latin American countries. But when the company learned how thin its margins were in selling through such distribution channels, it realized it had made a mistake and withdrew from selling to retailers and other intermediaries in 1994 to refocus on direct sales. At the time, sales through retailers accounted for only about 2% of Dell’s revenues. Further problems emerged in 1993, when Dell reportedly lost $38 million in the second quarter from engaging in a risky foreign-currency hedging strategy; had quality difficulties with certain PC lines made by the company’s contract manufacturers; and saw its profit margins decline. Also that year, buyers were turned off by the company’s laptop PC models. To get laptop sales back on track, the company took a charge of $40 million to write off its laptop line and suspended sales of those products until it could get redesigned models into the marketplace. The problems resulted in losses of $36 million for the company’s fiscal year ending January 30, 1994. Because of higher costs and unacceptably low profit margins in selling to individuals and households, Dell Computer did not pursue the consumer market aggressively until sales on the company’s Internet site took off in 1996 and 1997. The management noticed that while the industry’s average selling price to individuals was going down, Dell’s was going up—second and third-time computer buyers who wanted powerful computers with multiple features and did not need much technical support were choosing Dell. It became clear that PC-savvy individuals liked the convenience of buying direct from Dell, ordering exactly what they wanted, and having it delivered to their door within a matter of days. In early 1997, Dell created an internal sales and marketing group dedicated to serving the individual consumer
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segment and introduced a product line designed especially for individual users. By late 1997, Dell had become a global industry leader in keeping costs down and wringing efficiency out of its direct-sales, build-toorder business model. Going into 2000, Dell Computer had made further efficiency improvements and was widely regarded as having the most efficient procurement, manufacturing, and distribution process in the global PC industry. The company was a pioneer and acknowledged world leader in incorporating e-commerce technology and use of the Internet into its everyday business practices. The goal was to achieve what Michael Dell called “virtual integration”—a stitching together of Dell’s business with its supply partners and customers in real time such that all three appeared to be part of the same organizational team. (1) The company’s mission was “to be the most successful computer company in the world at delivering the best customer experience in the markets, we serve”. (2) Michael Dell was widely considered one of the mythic heroes of the PC industry, and was labelled “the quintessential American entrepreneur” and “the most innovative guy for marketing computers in this decade”. In 1992, at the age of 27, Michael Dell became the youngest CEO ever to head a Fortune 500 company; he was a billionaire at the age of 31. Once pudgy and bespectacled, Michael Dell at the age of 35 was physically fit, considered good-looking, wore contact lenses, ate only health foods, and lived in a three-story 33,000 square-foot home on a 60-acre estate in the Austin, Texas, metropolitan area. In early 2000, Michael Dell owned about 14% of Dell Computer’s common stock, worth about $12 billion. The company’s glassand-steel headquarters building in Round Rock, Texas (an Austin suburb), had unassuming, utilitarian furniture, abstract art, framed accolades to Michael Dell, laudatory magazine covers, industry awards plaques, bronze copies of the company’s patents, and a history wall that contained the hand-soldered guts of the company’s first personal computer. (3) In the company’s early days, Michael spent a lot of his time with engineers. He was said to be shy, but those who worked with him closely described him as a likable young man who was slow to warm up to people. (4) Michael described his experience in getting the company launched as follows:
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There were obviously no classes on learning how to start and run a business in my high school, so I clearly had a lot to learn. And learn I did, mostly by experimenting and making a bunch of mistakes. One of the first things I learned, though, was that there was a relationship between screwing up and learning: The more mistakes I made, the faster I learned. I tried to surround myself with smart advisors, and I tried not to make the same mistake twice.... Since we were growing so quickly, everything was constantly changing. We’d say, “What’s the best way to do this?” and come up with an answer. The resulting process would work for a while, then it would stop working and we’d have to adjust it and try something else.... The whole thing was one big experiment. From the beginning, we tended to come at things in a very practical way. I was always asking, “What’s the most efficient way to accomplish this?” Consequently, we eliminated the possibility for bureaucracy before it ever cropped up, and that provided opportunities for learning as well. Constantly questioning conventional thinking became part of our company mentality. And our explosive growth helped to foster a great sense of camaraderie and a real “can-do” attitude among our employees. We challenged ourselves constantly, to grow more or to provide better service to our customers; and each time we set a new goal, we would make it. Then we would stop for a moment, give each other a few high fives, and get started on tackling the next goal. (5) In 1986, to provide the company with much-needed managerial and financial experience, Michael Dell brought in Lee Walker, a 51-year-old venture capitalist, as president and chief operating officer. Walker had a fatherly image, came to know company employees by name, and proved to be a very effective internal force in implementing Michael Dell’s ideas for growing the company. Walker became Michael Dell’s mentor, built up his confidence and managerial skills, helped him learn how to translate his fertile entrepreneurial instincts into effective business plans and actions, and played an active role in grooming him into an able and polished executive. (6) Under Walker’s tutelage, Michael Dell became intimately familiar with all parts of the business, overcame his shyness, learned the ins and outs of managing a fast-growing enterprise, and turned into a charismatic executive with an instinct for motivating people and winning their loyalty and respect. Walker
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also proved instrumental in helping Michael Dell recruit distinguished and able people to serve on the board of directors when the company went public in 1988. When Walker had to leave the company in 1990 because of health reasons, Dell turned for advice to Morton Meyerson, former CEO and president of Electronic Data Systems. Meyerson provided guidance on how to transform Dell Computer from a fast-growing medium-sized company into a billion-dollar enterprise. Though sometimes given to displays of impatience, Michael Dell usually spoke in a quiet, reflective manner and came across as a person with maturity and seasoned judgment far beyond his age. His prowess was based more on having a pragmatic combination of astute entrepreneurial instincts, good technical knowledge, and marketing savvy rather than on being a pioneering techno-wizard. By the late 1990s, he was a muchsought-after speaker at industry and company conferences. (He received 100 requests to speak in 1997, 800 in 1998, and over 1,200 in 1999.) He was considered an accomplished public speaker and his views and opinions about the future of PCs, the Internet, and e-commerce practices carried considerable weight both in the PC industry and among executives worldwide. His speeches were usually full of usable information about the nuts and bolts of Dell Computer’s business model and the compelling advantages of incorporating e-commerce technology and practices into a company’s operations. An USA Today article labelled him “the guru of choice on e-commerce” because top executives across the world were so anxious to get his take on the business potential of the Internet and possible efficiency gains from integrating ecommerce into daily business operations. (7) Michael Dell was considered a very accessible CEO and a role model for young executives because he had done what many of them were trying to do. He delegated authority to subordinates, believing that the best results came from “[turning] loose talented people who can be relied upon to do what they’re supposed to do.” Business associates viewed Michael Dell as an aggressive personality and an extremely competitive risktaker who had always played close to the edge. Moreover, the people Dell hired had similar traits, which translated into an aggressive, competitive, intense corporate culture with a strong sense of mission and dedication. Inside Dell, Michael was noted for his obsessive, untiring attention to detail—a trait which employees termed “Michael managing”.
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Michael Dell’s Business Philosophy. In the 15 years since the company’s founding, Michael Dell understands of what it took to build and operate a successful company in a fast changing, highvelocity marketplace had matured considerably. His experience at Dell Computer and in working with both customers and suppliers had taught him a number of valuable lessons and shaped his leadership style. The following quotes provide insight into his business philosophy and practices: Believe in what you are doing. If you’ve got an idea that’s really powerful, you’ve just got to ignore the people who tell you it won’t work, and hire people who embrace your vision. It is as important to figure out what you’re not going to do as it is to know what you are going to do. We instituted the practice of strong profit and loss management. By demanding a detailed P&L for each business unit, we learned the incredible value of facts and data in managing a complex business. As we have grown, Dell has become a highly data- and P&L-driven company, values that have since become core to almost everything we do. For us, growing up meant figuring out a way to combine our signature, informal style and “want to” attitude with the “can do” capabilities that would allow us to develop as a company. It meant incorporating into our everyday structure, the valuable lessons we’d begun to learn using P&Ls. It meant focussing our employees to think in terms of shareholder value. It meant respecting the three golden rules at Dell: (1) Disdain inventory, (2) Always listen to the customer, and (3) Never sell indirect. I’ve always tried to surround myself with the best talent I could find. When you’re the leader of a company, be it large or small, you can’t do everything yourself. The more talented people you have to help you, the better off you and the company will be. A company’s success should always be defined by its strategy and its ideas—and it should not be limited by the abilities of the people running it.... When you are trying to grow a new business, you really need the experience of others who have been there and can help you anticipate and plan for things you might have never thought of. For any company to succeed, it’s critical for top management to share power successfully. You have to be focussed on achieving goals for the organization, not on accumulating power for yourself. Hoarding power does not translate into success for shareholders and customers; pursuing the goals of the company does. You also need to respect one another, and communicate so constantly that you’re practically
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of one mind on the most important topics and issues that face the company. I have segmented my own job twice. Back in 1993–1994, it was becoming very clear to me that there was far too much to be done and far more opportunities than I could pursue myself.... That was one of the reasons I asked Mort Topfer to join the company (as vice chairman). As the company continued to grow, we again segmented the job. In 1997, we promoted Kevin Rollins, who had been a key member of our executive team since 1996, to what we now call the office of the chairman. The three of us together run the company. Beyond winning and satisfying your customer, the objective must be to delight your customer—not just once but again and again. I spend about 40% of my time with customers. When you delight your customers—consistently—by offering better products and better services, you create strong loyalty. When you go beyond that to build a meaningful, memorable total experience, you win customers for life. Our goal, at the end of the day, is for our customers to say, “Dell is the smarter way to buy a computer.” The pace of decisions moves too quickly these days to waste time noodling over a decision. And while we strive to always make the right choice, I believe it’s better to be first at the risk of being wrong than it is to be 100% perfect two years too late. You can’t possibly make the quickest or best decisions without data. Information is the key to any competitive advantage. But data doesn’t just drop by your office to pay you a visit. You’ve got to go out and gather it. I do this by roaming around. I don’t want my interactions planned; I want anecdotal feedback. I want to hear spontaneous remarks... I want to happen upon someone who is stumped by a customer’s question— and help answer it if I can... I show up at the factory to talk to people unannounced, to talk to people on the shop floor and to see what’s really going on. I go to brown-bag lunches two or three times a month, and meet with a cross-section of people from all across the company. (8) Developments at Dell in early 2000 Dell’s unit shipments in the fourth quarter of 1999 were 3.36 million units, compared to 2.3 million units in the fourth quarter of 1998. In laptop PCs, Dell moved into second place in US sales and fourth place worldwide in 1999. In higher-margin products like servers and workstations running on Windows NT, Windows 2000, and Linux, Dell ranked number two in market share in the United States and number three worldwide. In Europe, Dell ranked first in the
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market share in Great Britain, third in market share in France, and second overall behind Compaq Computer. In Asia, Dell’s sales were up 87% over 1998, despite sluggishness in the economies of several important Asian countries. In 1999, about half of the industry’s PC sales consisted of computers selling for less than $1,000. Dell’s average selling price was $2,000 per unit in 1999, down from $2,500 in the first quarter of 1998. The company had recently introduced a line of Web PCs that was intended mainly for browsing the Internet. To counter the decline in the average selling prices of PCs, the company was placing increased emphasis on its line of Power Edge servers and its precision line of workstations, where average selling prices were $4,000 and higher, depending on the model. Market conditions in the PC industry in 2000 There were an estimated 350 million PCs in use worldwide in 2000. Annual sales of PCs were approaching 130 million units annually. About 50 million of the world’s 350 million PCs were believed to have Intel 486 or older microprocessors with speeds of 75 megahertz or less. The world’s population was over 6 billion. Many industry experts foresaw a time when the installed base of PCs would exceed 1 billion units, and some believed the total would eventually reach 1.5 billion—a ratio of one PC for each four people. Forecasters also predicted that there would be a strong built-in replacement demand as microprocessor speeds continued to escalate past 1,000 megahertz. A microprocessor operating at 450 megahertz could process 600 million instructions per second (MIPS); Intel had forecasted that it would be able to produce microprocessors capable of 1,00,000 MIPS by 2011. Such speeds were expected to spawn massive increases in computing functionality and altogether new uses and applications for PCs and computing devices of all types. At the same time, forecasters expected demand for high-end servers carrying price tags of $5,000 to over $1,00,000 to continue to be especially strong because of the rush of companies all across the world to expand their Internet and e-commerce presence. Full global build-out of the Internet was expected to entail installing millions of high-speed servers. DECLINING PC PRICES AND INTENSE COMPETITION Sharp drops in the prices of a number of PC components (chiefly, disk drives, memory chips, and microprocessors) starting in late 1997
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had allowed PC makers to dramatically lower PC prices—sales of PCs priced under $1,500 were booming by early 1998. Compaq, IBM, Hewlett-Packard, and several other PC makers began marketing sub$1,000 PCs in late 1997. In December 1997, the average purchase price of a desktop computer fell below $1,300 for the first time. It was estimated that about half of all PCs sold in 1998 were computers carrying price tags under $1,500; by 1999, close to half of all PCs sold were units under $1,000. Growth in unit volume was being driven largely by sub-$1,000 PCs. The low prices were attracting first-time buyers into the market and were also causing second-hand thirdtime PC buyers looking to upgrade to more powerful PCs to forgo top-of-the-line machines priced in the traditional $2,000–3,500 range in favour of lower-priced PCs that were almost as powerful and wellequipped. Powerful, multi-featured notebook computers that had formerly sold for $4,000 to 6,500 in November 1997 were selling for $1,500 to 3,500 in December 1999. The profits at Compaq, IBM, and several other PC makers began sliding in early 1998 and continued under pressure in 1999. Declining PC prices and mounting losses in PCs prompted IBM to withdraw from selling desktop PCs in 1999. However, unexpected shortages of certain key components (namely, memory chips and screens for notebook computers) drove up prices for these items in late 1999 and moderated the decline in PC prices somewhat. But the shortages were expected to last only until suppliers could gear up production levels. CONTINUING ECONOMIC PROBLEMS IN PARTS OF ASIA Economic woes in a number of Asian countries (most notably, Japan, South Korea, Thailand, Indonesia, and to some extent, China) had put a damper on PC sales in Asia starting in 1997 and continuing through much of 1999. Asian sales of PCs in 1998 grew minimally (though sales were fairly robust in China); sales improved in 1999 but remained depressed in Thailand, Indonesia, and several other countries. China began experiencing some economic problems in 1999. In addition, sharp appreciation of the US dollar against Asian currencies had made US-produced PCs more expensive in terms of local currency to Asian buyers. In contrast, sales growth in the United States and Europe in 1999 remained strong, despite all the Y2K fears, mainly because of lower PC prices. Disk-drive manufacturers and the makers of printed circuit boards, many of which were in Asia, were feeling the pressure of declining prices and skimpy profit margins. Industry observers were predicting that competitive
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conditions in the Asia-Pacific PC market favoured growing market shares by the top four or five players and the likely exit of PC makers that could not compete profitably. UNCERTAIN NEAR-TERM OUTLOOK FOR PC INDUSTRY GROWTH While few industry observers doubted the long-term market potential for PC sales, there were several troubling signs on the near-term horizon, along with differences of opinion about just how fast the market for PCs would grow. A number of industry observers were warning of a global slowdown in the sales of PCs in 2000 and beyond, partly due to the economic difficulties in several Asian countries and partly due to approaching market maturity for PCs in the United States, Japan, and parts of Europe. Consequently, some analysts were forecasting gradual slowing of the industry growth rates from the 20–25% levels that characterized the 1990s down to the 10–12% range by 2005. However, US shipments of PCs in the 1997–99 period had grown 20–25% annually, a much higher rate than most industry analysts had expected. Some 45 million new PCs were sold in the United States alone in 1999. Sales of servers, along with low-end PCs and workstations, were the fastest-growing segments of the PC industry in 1999 and were expected to be the segment growth leaders in 2000 and beyond. On the positive side, some analysts expected that worldwide computer hardware sales in 2000–2003 period would grow at a compound annual rate of 15 to 20%, following cautious corporate buying in the second half of 1999 in preparation for meeting Y2K deadlines. Their expectations for 15–20% growth were based on (1) The introduction of Windows 2000 and Intel’s new 64-bit Itanium microprocessors. (2) Rapidly widening corporate use of the Internet and e-commerce technologies. (3) Wider availability of high-speed Internet access. (4) Growing home use of PCs—as first-time purchasers succumbed to the lure of reasonably equipped sub-$1,000 PCs and as more parents purchased additional computers for use by their children. The three most influential factors in home ownership of PCs were education, income, and the presence of children in the household.
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COMPETING VALUE CHAIN MODELS IN THE GLOBAL PC INDUSTRY When the personal computer industry first began to take shape in the early 1980s, the founding companies manufactured many of the components themselves—disk drives, memory chips, graphics chips, microprocessors, motherboards, and software. Subscribing to a philosophy of “We have to develop key components in-house,” they built expertise in a variety of PC-related technologies and created organizational units to produce components as well as to handle final assembly. While certain “non-critical” items were typically outsourced, if a computer maker was not at least partially vertically integrated and an assembler of some components, then it was not taken seriously as a manufacturer. But as the industry grew, technology advanced quickly in so many directions on so many parts and components that the early personal computer manufacturers could not keep pace as experts on all fronts. There were too many technological innovations in the components to pursue and too many manufacturing intricacies to master for a vertically integrated manufacturer to keep its products on the cutting edge. As a consequence, companies emerged that specialized in making particular components. Specialists could marshal enough R&D capability and resources to either lead the technological developments in their area of specialization or else quickly match the advances made by their competitors. Moreover, specialist firms could mass-produce a component and supply it to several computer manufacturers far cheaper than any one manufacturer could fund the needed component R&D and then make only whatever smaller volume of components it needed for assembling its own brand of PCs. Thus, in recent years, computer makers had begun to abandon vertical integration in favour of a strategy of outsourcing most all components from specialists and concentrating on efficient assembly and marketing their brand of computers However, Dell, Gateway, and Micron Electronics employed a shorter value chain model, selling direct to customers and eliminating the time and costs associated with distributing through independent resellers. Building to order avoided: 1. having to keep many differently equipped models on retailers’ shelves to fill buyer requests for one or another configuration of options and components; and 2. having to clear out slow-selling models at a discount before introducing new generations of PCs. Selling direct eliminated
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retailer costs and mark-ups. (Retail dealer margins were typically in the 4 to 10% range.) Dell Computer was the world’s largest direct seller to large companies and government institutions, while Gateway was the largest direct seller to individuals and small businesses. Micron Electronics was the only other PC maker that relied on the direct-sales, build-toorder approach for the big majority of its sales. Dell Computer’s strategy management believed it had the industry’s most efficient business model. The company’s strategy was built around a number of core elements: build-to-order manufacturing, partnerships with suppliers, just-in-time components inventories, direct sales to customers, award-winning customer service and technical support, and pioneering use of the Internet and e-commerce technology. The Management believed that a strong first mover advantage accrued to the company from its lead over rivals in making e-commerce a centrepiece in its strategy. BUILD-TO-ORDER MANUFACTURING Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custombuilt servers and workstations based on the needs of their applications. Desktop and laptop customers ordered whatever configuration of microprocessor speed, random access memory (RAM), hard disk capacity, CD-ROM drive, fax/modem, monitor size, speakers, and other accessories they preferred. The orders were directed to the nearest factory. In 2000, Dell had PC assembly plants in Austin, Texas; Nashville/Lebanon, Tennessee; Limerick, Ireland; Xiamen, China; Penang, Malaysia; and El Dorado do Sul, Brazil. All six plants manufactured the company’s entire line of products. Until 1997, Dell operated its assembly lines in traditional fashion, with each worker performing a single operation. Order forms accompanied each metal chassis across the production floor; drives, chips, and ancillary items were installed to match customer specifications. As a partly assembled PC arrived at a new workstation, the operator, standing beside a tall steel rack with drawers full of components, was instructed what to do by little red and green lights flashing beside the drawers containing the components the operator needed to install. When the operator was finished, the drawers containing the used components were automatically replenished from the other side, and the PC chassis glided down the line to the next workstation. However,
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Dell had reorganized its plants in 1997, shifting to “cell manufacturing” techniques whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications. The shift to cell manufacturing reduced Dell’s assembly times by 75% and doubled productivity per square foot of assembly space. Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the order placement. Dell’s build-to-order, selldirect strategy meant, of course, that Dell had no in-house stock of finished goods inventories and that, unlike competitors using the traditional value chain model, it did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace—resellers typically operated with 60 to 70 days’ inventory. Equally important was the fact that customers who bought from Dell got the satisfaction of having their computers customized to their particular liking and pocketbook. QUALITY CONTROL PROGRAMMES All assembly plants had the capability to run testing and quality control processes on components, parts, and subassemblies obtained from suppliers, as well as for the finished products Dell assembled. Suppliers were urged to participate in a quality certification programme that committed them to achieving defined quality specifications. Quality control activities were undertaken at various stages in the assembly process. In addition, Dell’s quality control programme included testing of completed units after assembly, ongoing production reliability audits, failure tracking for early identification of problems associated with new models shipped to customers, and information obtained from customers through its service and technical support programmes. All of the company’s plants had been certified as meeting ISO 9002 quality standards. Partnerships with Suppliers and Just-in-Time Inventory Practices. Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than integrate backward and get into parts and components manufacturing on its own. He explained why: If you’ve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of 20 and pick the best one?
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(9) A central element of Dell Computer’s strategy, therefore, was to evaluate the various makers of each component, pick the best one or two as suppliers, and partner with them for as long as they remained leaders in their specialty. Management believed long-term partnerships with reputable suppliers yielded several advantages. First, using name-brand processors, disk drives, modems, speakers, and multimedia components enhanced the quality and performance of Dell’s PCs. Because of varying performance of different brands of components, the brand of the components was as important or more important to some end users than the brand of the overall system. Dell’s strategy was to partner with as few outside vendors as possible and to stay with them as long as they maintained their leadership in technology, performance, and quality. Second, because Dell’s partnership with a supplier was long term and because it committed to purchase a specified percentage of its requirements from that supplier, Dell was assured of getting the volume of components it needed on a timely basis even when overall market demand for a particular component temporarily exceeded the overall market supply. Third, Dell’s formal partnerships with key suppliers made it feasible to have some of their engineers assigned to Dell’s product design teams and for them to be treated as part of Dell. When new products were launched, suppliers’ engineers were stationed in Dell’s plant, and if early buyers called with a problem related to design, further assembly and shipments were halted while the supplier’s engineers and Dell personnel corrected the flaw on the spot. (10) Fourth, Dell’s long run commitment to its suppliers laid the basis for just-in-time delivery of suppliers’ products to Dell’s assembly plants. Many of Dell’s vendors had plants or distribution centres within a few miles of Dell assembly plants and could deliver daily or even hourly basis if needed. To help suppliers meet its just-in-time delivery expectations, Dell openly shared its daily production schedules, sales forecasts, and new model introduction plans with vendors. Using online communications technology, Dell communicated inventory levels and replenishment needs to vendors on a daily or even hourly basis. Michael Dell explained what delivery capabilities the company expected of its suppliers: We tell our suppliers exactly what our daily production requirements are. So it’s not, “Well, every two weeks deliver 5,000 to this warehouse, and we’ll put them on the shelf, and then we’ll take them off the shelf.” It’s,
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“Tomorrow morning we need 8,562, and deliver them to door number seven by 7 am.” (11) Dell also did a three-year plan with each of its key suppliers and worked with suppliers to minimize the number of different stock-keeping units of parts and components in designing its products. Current initiatives included using the Internet to further improve supply chain management and achieve still greater manufacturing and assembly efficiencies. WHY DELL WAS COMMITTED TO JUST-IN-TIME INVENTORY PRACTICES Dell’s just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace. New advances were coming so fast in certain computer parts and components (particularly microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a matter of months, sometimes even quicker. Having a couple of months of component inventories meant getting caught in the transition from one generation of components to the next. Moreover, it was not unusual for there to be rapid-fire reductions in the prices of components—in 1997 and early 1998, prices for some components fell as much as 50% (an average of 1% a week). Intel, for example, regularly cut the prices on its older chips when it introduced newer chips, and it introduced new chip generations about every three months. The prices of hard disk drives with greater and greater memory capacity had dropped sharply in recent years as disk drive makers incorporated new technology that allowed them to add more gigabytes of hard disk memory very inexpensively. The economics of minimal component inventories were dramatic. Michael Dell explained: If I’ve got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450-megahertz chip, that means I’m going to get to market 69 days sooner. In the computer industry, inventory can be a pretty massive risk because if the cost of materials is going down 50% a year and you have two or three months of inventory versus 11 days, you’ve got a big cost disadvantage. And you’re vulnerable to product transitions, when you can get stuck with obsolete inventory. (12) Collaboration with suppliers was close enough to allow Dell to operate with only a few days of inventory for some components
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and a few hours of inventory for others. Dell supplied data on inventories and replenishment needs to its suppliers at least once a day—hourly in the case of components being delivered several times daily from nearby sources. In a couple of instances, Dell’s close partnership with vendors allowed it to operate with no inventories. Dell’s supplier of monitors was Sony. Because the monitors Sony supplied with the Dell name already imprinted were of dependably high quality (a defect rate of fewer than 1,000 per million), Dell didn’t even open up the monitor boxes to test them. (13) Nor did it bother to have them shipped to Dell’s assembly plants to be warehoused for shipment to customers. Instead, using sophisticated data exchange systems, Dell arranged for its shippers (Airborne Express and UPS) to pick up computers at its Austin plant, then pick up the accompanying monitors at the Sony plant in Mexico, match up the customer’s computer order with the customer’s monitor order, and deliver both to the customer simultaneously. The savings in time, energy, and cost were significant. The company had, over the years, refined and improved its inventory tracking capabilities, its working relationships with suppliers, and its procedures for operating with smaller inventories. In fiscal year 1995, Dell averaged an inventory turn ratio of 32 days. By the end of fiscal 1997 (January 1997), the average was down to 13 days. The following year, it was 7 days, which compared very favourably with Gateway’s 14-day average, Compaq’s 23-day average, and the estimated industry-wide average of over 50 days. In fiscal year 1999, Dell operated with an average of 6 days’ supply in inventory. The company’s long-term goal was to get its inventories down to a 3-day average supply. DIRECT SALES Selling direct to customers gave Dell first-hand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches. With thousands of phone and fax orders daily, $35 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. If the company got more than a few of the same complaints, the information was relayed immediately to design engineers, who
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checked out the problem. When design flaws or components defects were found, the factory was notified and the problem corrected within a matter of days. The Management believed Dell’s ability to respond quickly gave it a significant advantage over rivals, particularly PC makers in Asia, that operated on the basis of large production runs of standardized products and sold them through retail channels. Dell saw its direct-sales approach as a totally customer driven system, with the flexibility to change quickly to new generations of components and PC models. Despite Dell’s emphasis on direct sales, industry analysts noted that the company sold perhaps 10% of its PCs through a small, select group of resellers. (14) Most of these resellers were systems integrators. It was standard for Dell not to allow returns on orders from resellers or to provide price protection in the event of subsequent decline in market prices. From time to time, Dell offered its resellers incentive promotions at up to a 20% discount from its advertised prices on end-of-life models. Dell was said to have no plans to expand its reseller network, which consisted of 50 to 60 dealers. DELL’S USE OF MARKET SEGMENTATION To make sure that each type of computer user was well served, Dell had made a special effort to segment the buyers of its computers into relevant groups and to place managers in charge of developing sales and service programmes appropriate to the needs and expectations of each market segment. Until the early 1990s, Dell had operated with sales and service programmes aimed at just two market segments: 1. corporate and governmental buyers who purchased in large volumes; and 2. small buyers(individuals and small businesses). But as sales took off in 1995–97, these segments were subdivided into finer, more homogeneous categories. In 1999, 65% of Dell’s sales were to large corporations, government agencies, and educational institutions. Many of these large customers typically ordered thousands of units at a time and bought at least $1 million in PCs annually. Dell had hundreds of sales representatives calling on large corporate and institutional accounts. Its customer list included Shell Oil, Sony, Exxon-Mobil, MCI, Ford Motor, Toyota, Eastman Chemical,
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Boeing, Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets), Michelin, Unilever, Deutsche Bank, WalMart, and First Union (one of the 10 largest US banks). However, no one customer represented more than 2% of total sales. Dell’s sales to individuals and small businesses were made by telephone, fax, and the Internet. It had a call centre in the United States with toll-free phone lines; customers could talk with a sales representative about specific models, get information faxed or mailed to them, place an order, and pay by credit card. Internationally, Dell had set up tollfree call centres in Europe and Asia. (15) The call centres were equipped with technology that routed calls from a particular country to a particular call centre. Thus, for example, a customer calling from Lisbon, Portugal, was automatically directed to the call centre in Montpelier, France, and connected to a Portuguese-speaking sales rep. Dell began Internet sales at its Website (www.dell.com) in 1995, almost overnight achieving sales of $1 million per day. In 1997, sales reached an average of $3 million daily, hitting $6 million on some days during the Christmas shopping period. Dell’s Internet sales averaged nearly $4 million daily in the first quarter of 1997, reached $14 million daily by year-end 1998, and climbed sharply to $35 million daily at the close of 1999. In early 2000, visits to Dell’s website for information and order placement were approaching 2.5 million weekly, about 20 times more that the number of phone calls to sales representatives. In early 2000, about 43% of Dell’s sales were Web-enabled and the percentage was increasing. DELL IN EUROPE In fiscal year 1999, $6.6 billion of Dell’s $18.2 billion in sales came from foreign customers. Europe, where resellers were strongly entrenched and Dell’s direct sales approach was novel, was Dell’s biggest foreign market, accounting for sales of $4.7 billion, up from $3.0 billion the prior year. Dell’s European revenues were growing over 50 % annually, and unit volume was increasing at nearly a 35 % annual rate. Sales of PCs in Europe were 19.7 million units in 1997, 25.4 million units in 1998, and 29.9 million units in 1999. Expectations were for continued growth of 18 to 22% for the next several years. Europe’s population and economy were roughly the same as those of the United States, but computer usage was only
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half that of the United States in 1999. Germany led Europe in sales of PCs, with 6.6 million units in 1999 (up 21.6% over 1998); Great Britain was second, with unit sales of 5.5 million (up 25.2% over 1998); and France was third, with 1999 unit sales of 4.4 million (up 26.7% over 1998). According to Dataquest, the top five market leaders in PCs in Europe were as follows: Fujitsu and Siemens had merged their PC operations in 1999 to move ahead of Dell in the ratings in Europe during 1999 (based on the combined market shares of the two brands); based on individual brand, however, Dell ranked second in Europe, ahead of both the Fujitsu brand and the Siemens brand. DELL IN CHINA Dell Computer entered China in 1998 and by 2000 had achieved a market share close to 2%. China was the fifth largest market for PCs in the world, behind the United States, Japan, Germany, and Britain. But with unit volume expanding 30% annually and a population of 1.2 billion people, the Chinese market for PCs was expected to become the second largest in the world by 2005 (with annual sales of $25 billion) and to become the world’s largest PC market sometime thereafter. The market leader in China was Legend, a local company; other major local PC producers were Founder (ranked fourth) and Great Wall (ranked sixth). IBM, Hewlett-Packard, and Compaq were among the top five market share leaders in China—all three relied on resellers to handle sales and service. Other companies among the top 10 in market share in China included Toshiba, NEC Japan, and Acer (a Taiwan-based company). Dell, ranked eighth in market share in 1999, was the only market contender that employed a direct-sales business model. Dell’s sales in China in 1999 were up 87% over 1998 levels. Dell management believed that in China, as in other countries around the world, the company could be very price-competitive by cutting out middlemen and selling direct via the Internet, telephone, and a sales force that called on large customers. Dell’s primary market target in China was large corporate accounts. The Management believed that many Chinese companies would find the savings from direct sales appealing, that they would like the idea of having Dell build PCs to their requirements and specifications, and that—once they became Dell customers—they would like the convenience of Internet purchases and telephone orders. Dell recognized that its direct-sales approach would temporarily put it at a disadvantage in
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appealing to small-business customers and individual consumers. According to an executive from rival Legend, “It takes two years of a person’s savings to buy a PC in China. And when two years of savings is at stake, the whole family wants to come out to a store to touch and try the machine.” (16) But Dell believed that over time, as Chinese consumers became more familiar with PCs and more comfortable with making online purchases, it would be able to attract growing numbers of small-business customers and consumers through Internet and telephone sales. IBM was the market leader in 1999 in the entire Asia-Pacific region, with an estimated 8.4% share, up from 8.1% in 1998. (17) Compaq had a second place 7.3% share but was the market leader in a number of individual countries within the region. China-based Legend had a 7.1% share, most all of which came from sales in China. Samsung had the fourth largest market share, followed by Hewlett-Packard. DELL IN LATIN AMERICA In 2000, PC sales in Latin America were approaching 5 million units annually. Latin America had a population of 450 million people. Dell management believed that in the next few years use of PCs in Latin America would reach 1 for every 30 people (one-tenth the penetration in the United States), pushing annual sales up to 15 million units. The company’s new plant in Brazil, the largest market in Latin America, was opened to produce, sell, and provide service and technical support for customers in Brazil, Argentina, Chile, Uruguay, and Paraguay. CUSTOMER SERVICE AND TECHNICAL SUPPORT Service became a feature of Dell’s strategy in 1986 when the company began providing a year’s free on-site service with most of its PCs after users complained about having to ship their PCs back to Austin for repairs. Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a nextday basis. Dell also provided its customers with technical support via a toll-free phone number, fax, or e-mail.
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Dell received close to 40,000 e-mail messages monthly requesting service and support and had 25 technicians to process the requests. Bundled service policies were a major selling point for winning corporate accounts. If a customer preferred to work with its own service provider, Dell supplied that provider with the training and spare parts needed to service the customer’s equipment. VALUE-ADDED SERVICES Selling direct allowed Dell to keep close track of the purchases of its large global customers, country by country and department by department—information that customers found valuable. And its close customer relationships resulted in Dell being quite knowledgeable about what each customer needed and how its PC network functioned. Aside from using this information to help customers plan their PC needs and configure their PC networks, Dell used it to add to the value it delivered to its customers. For example, Dell could load a customer’s software at the factory, thereby eliminating the need for the customer’s PC personnel to unpack the PC, deliver it to an employee’s desk, hook it up, place asset tags on the PC, then load the needed software from an assortment of CD-ROMs and diskettes— a process that could take several hours and cost $200 to $300. (18) Dell’s solution was to load the customer’s software onto large Dell servers at the factory and, when a particular version of a customer’s PC came off the assembly line, to use its high-speed server network to load whatever software the customer had specified onto the PC’s hard disk in a few seconds. If the customer so desired, Dell would place the customer’s asset tags on the PC at the factory. Dell charged customers only $15 or $20 for the software-loading and asset-tagging services—the savings to customers were thus considerable. One large customer reported savings of $500,000 annually from having Dell load its software and place asset tags on its PCs at the factory. (19) In 1997, about 2 million of the 7 million PCs Dell sold were shipped with customer-specific software already loaded on the PCs. In late 1997, in another effort to add value for its customers, Dell, following Compaq’s lead, created a financial services group to assist customers with financing their PC networks. Premier Pages Dell had developed customized, password-protected Websites (called Premier Pages) for 40,000 corporate, governmental, and institutional customers worldwide. Premier Page sites gave
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customer personnel online access to information about all Dell products and configurations the company had purchased or that were currently authorized for purchase. Employees of Dell’s large customers could use Premier Pages to (1) obtain customer-specific pricing for whatever machines and options they wanted to consider; (2) place an order online that would be electronically routed to higher-level managers for approval and then on to Dell for assembly and delivery; and (3) seek advanced help desk support. Customers could also search and sort all invoices and obtain purchase histories. These features eliminated paper invoices, cut ordering time, and reduced the internal labour. A customer’s Premier Pages also contained all of the elements of its relationship with Dell, including who the Dell sales and support contacts were in every country where the customer had operations, what software Dell loaded on each of the various types of PCs the customer purchased, and service and warranty records for each machine. So far, customer use of Premier Pages had boosted the productivity of Dell salespeople assigned to these accounts by 50%. Dell was providing Premier Page service to thousands of additional customers annually and adding more features to further improve functionality. www.dell.com At the company’s Website, which underwent a global redesign in late 1999 and had 50 country-specific sites in local languages and currencies, prospective buyers could review Dell’s entire product line in detail, configure and price customized PCs, place orders, and track those orders from manufacturing through shipping. The closing rate on sales coming through www.dell.com were 20% higher than sales inquiries received via telephone or fax. The company was adding Web-based customer service and support tools to make a customer’s online experience pleasant and satisfying. Already the company had implemented a series of online technical support tools: • Support.Dell.com —This Web-based feature allowed customers to create a customized support home page; review technical specifications for Dell systems; obtain information and answers from an extensive database collected by Dell technicians, service providers, and customers; click on online links to Dell’s primary suppliers; and take three online courses on PC usage at no charge. The site enabled customers to select how they received online help, based on their comfort and experience with PC technology. The information available at this part of Dell’s Web-
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site was particularly helpful to the internal help-desk groups at large companies. In late 1999, customer visits to support.Dell.com were running at a rate of 19 million per year. • E-Support: Dell had developed advanced technology called “ESupport—Direct from Dell” that helped Dell systems detect, diagnose, and resolve most of their own problems without the need for users to interact with Dell’s support personnel. The goal of Dell’s E-Support technology was to create computing environments where a PC would be able to maintain itself, thus moving support from a reactive process to a preventive one. Michael Dell saw E-Support as “the beginning of what we call self-healing systems that we think will be the future of online support.” Dell expected that by the end of 2000 more than 50% of the customers needing technical help would use E-Support— Direct from Dell. The Management believed the service would shorten the time it took to fix glitches and problems, reduce the need for service calls, cut customer downtimes, and lower Dell’s tech-support costs. • Dell Talk: An online discussion group with 1,00,000 registered users, Dell Talk brought users and information technology (IT) professionals together to discuss common IT problems and issues. • Ask Dudley: The Ask Dudley tool gave customers instant answers to technical service and support questions. Customers typed in the question in their native language and clicked on “ask”. In February 2000, 40 to 45% of Dell’s technical support activities were being conducted via the Internet. Dell was aggressively pursuing initiatives to enhance its online technical support tools. Its top priority was the development of tools (as described in the above list) that could tap into a user’s computer, make a diagnosis, and if the problem was software related, perform an online fix. Dell expected that such tools would not only make it easier and quicker for customers to resolve technical problems but would also help it reduce the costs of technical support calls (currently running at 8 million calls a year). The company estimated that its online technical support tools had resulted in 25% fewer support calls from users, generating savings of between $5 and $10 per call. The Management believed that the enhancements it was making to www.dell.com made it easier and faster for customers to do business with Dell by shrinking transaction and order fulfilment times, increasing accuracy, and providing more
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personalized content. According to the Management, a positive Website experience was a bigger driver of “e-loyalty” than traditional attributes like price and product selection. ON-SITE SERVICE Corporate customers paid Dell fees to provide support and on-site service. Dell generally contracted with third-party providers to make the necessary on-site service calls. Customers notified Dell when they had PC problems; such notices triggered two electronic dispatches— one to ship replacement parts from Dell’s factory to the customer sites and one to notify the contract service provider to prepare to make the needed repairs as soon as the parts arrived. Bad parts were returned to Dell for diagnosis of what went wrong and what could be done to see that the problems wouldn’t happen again. Problems relating to faulty components or flawed components design were promptly passed along to the relevant supplier, who was expected to improve quality control procedures or redesign the component. Dell’s strategy was to manage the flow of information gleaned from customer service activities to improve product quality and reliability. ON-SITE DELL SUPPORT A number of Dell’s corporate accounts were large enough to justify dedicated on-site teams of Dell employees. Customers usually welcomed such teams, preferring to focus their time and energy on the core business rather than being distracted by PC purchasing and servicing issues. For example, Boeing, which had 1,00,000 Dell PCs, was served by a staff of 30 Dell employees who resided on-site at Boeing facilities and were intimately involved in planning Boeing’s PC needs and configuring Boeing’s network. While Boeing had its own people working on what the company’s best answers for using PCs were, there was close collaboration between Dell and Boeing personnel to understand Boeing’s needs in depth and to figure out the best solutions. MIGRATION TO NEW TECHNOLOGY Dell had opened facilities in both Europe and North America to assist its customers and independent software providers in migrating their systems and applications to Windows 2000, Intel’s new 64-bit Itanium
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computer chip technology, and other next-generation computing and Internet technologies. Dell was partnering with Intel, Microsoft, Computer Associates, and other prominent PC technology providers to help customers make more effective use of the Internet and the latest computing technologies. Dell, which used Intel microprocessors exclusively in its computers, had been a consistent proponent of standardized Intel-based platforms because it believed those platforms provided customers with the best total value and performance. Dell management considered both Intel and Microsoft as long-term strategic partners in mapping out its future. QUESTIONS 1. Outline the strategies of Dell computers which differentiated it from others. 2. How according to you, a true leader can change the whole organization? 3. Suggest Dell, how to deal with its customers with a difference from other players? 4. How Dell could succeed in the near future? Give some futuristic strategies to meet with the growing competition.
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54 Promotion
Mr. Suresh Negi and Ms. Neha Agarwal were working as a marketing executive in the HDFC Bank at Srinagar, Garhwal. Mr. Raghuveer is working as a manager (HR) in the bank. Recently, a scheme was launched by the bank to their employees that if they would achieve the investment target of Rs. 20 lakh in two months would get promotion. Mr. Suresh achieved the target by contacting more than 80 customers and made them to invest in various schemes of the bank in the stipulated time. But Ms. Neha having contact with an industrialist Mr. Rakesh Juyal, insisted him to invest the targeted amount in two schemes of the bank which was the proposed target. He agreed to the proposal and made his company’s investment in the bank. Mr. Raghuveer recommended the promotion to Suresh for the higher post by evaluating his hard work. Ms. Neha was disappointed from the decision and she represented her grievance to the chief executive, showing her dissatisfaction from the decision made by HR manager. She pointed out that there was no any condition mentioned about the number of customers but only the sum of the investment to achieve the target. So she was also equally qualified for the promotion to the higher post.
QUESTIONS 1. If you were the HR manager to whom have you selected for the promotion and why? 2. Give your suggestions for the chief executive to resolve the issue? 3. Suggest a justified and suitable incentive plan for the employees in such cases? 4. What was the problem with this incentive plan as per your opinion? 5. Explain this problem with organisational perspective?
55 Lifebuoy
BRAND STORY “When you go to a doctor, there are some very strict, disciplinarian ones and there are some who make light of the illness. Lifebuoy is the second kind of doctor”, says Amer Jaleel, NCD, Lowe Lintas. Lifebuoy, for long, has been associated with a big, red, chunky bar of soap that keeps one healthy. The heritage brand, which has been around for more than a 100 years now (the first container with Lifebuoy soaps landed on Indian shores in 1895 at Bombay Harbour), was once touted to be the soap that was everything male and sporty. It has now become a family brand. One of the market leaders — Nielsen data for the last quarter (2011) pegs Lifebuoy at 14.5% market share, a close second to Lux’s 14.6% — the name of the brand came from the life-saving buoy thrown out to people at sea to prevent them from drowning, literally meaning that the brand saves lives. A global brand, it lost its original moorings in the 50s and the 60s in many markets, except in India. “It was first targeted at men and masculine health. The promise of Lifebuoy was ‘You will remain healthy if you use Lifebuoy. You will be able to play hockey or football well’. It was sporty”, says Sudhir Sitapati, category head-personal wash, HUL. Agrees Jaleel: “When it started, the focus was on men as the role of the man was prime. The symbolism of health, at the time, was the huge, sporty, macho man.” The jingle, ‘Lifebuoy hai jahan tandurusti hai wahan’ was catchy and did the trick. Now, the brand targets women, especially mothers. “In the late 90s and early 2000s we realised that the consumer had changed from what he or she was in the 50s to the 70s. Women were the decision makers, when it came to shopping, be it urban or rural. We had to communicate to women and focus on the woman’s role in the family”, says Sitapati. The proposition of the brand didn’t change — health was still the focus — but the advertising did.” We changed our communication from ‘You
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will be healthy if you use Lifebuoy’ to ‘You will not fall ill if you use Lifebuoy’.” The appearance of the soap too underwent a change. Though the red bar remains, it is now more perfumed and less carbolic. At this point, commercials directed at mothers came on screen, a very popular one being how kids could get full attendance, thanks to Lifebuoy. Hand wash, an extension of the parent brand, is one of their fastest growing categories. “We’re planning to do small films on ‘hand-health’, we are one of the sponsors of ‘Global Handwashing Day’. In Kerala, we have now started unbranded education in schools, saying that “You must wash your hands five times a day”, says Sitapati. The brand now, wants to adopt a friendlier tone. “There are two ways to make people aware of health. One is to scaremonger and the other is to empower. This is the only brand that can converse with you about health in such a manner that it won’t scare you”, says Jaleel. The most recent commercial for Lifebuoy was one where it was pitched as the ‘fastest soap’. “It was treated in a very friendly voice. The way to go about this is that we know that health is a serious concern, but we try not to treat it so seriously”, he adds.
QUESTIONS 1. What is the role of product differentiation in this health campaign? 2. What are the strength and weaknesses of Lifebuoy brand? 3. How do you see present situation as an opportunity for the Lifebuoy? 4. What are the factors due to which this “positioning” help ‘Lifebuoy’ against other competitors in soap market?
56 Pepsodent vs. Colgate
BRAND WAR The August of 2013 saw the beginning of another war in the toothpaste market. Pepsodent, the challenger brand from HUL directly attacked the market leader Colgate with a high profile comparative advertisement. The ads directly compared Pepsodent Germicheck with Colgate Strong Teeth with claim that Pepsodent Germicheck is 130% better in fighting germs than Colgate Strong Teeth. While this is not the first time that Pepsodent has frontally attacked Colgate. Pepsodent is a small brand compared to Colgate. According to ET, Pepsodent Germicheck has a market share of 6.4% while Colgate strong teeth has a market share of over 29.4%. For a challenger brand like Pepsodent, fighting the leader directly certainly puts the brand in limelight. In India, brands do engage in such direct attacks. Law does allow certain level of comparative advertising provided it does not disparage the other brands. Usually, the challenged brands take the matter to either ASCI or to the court. But since these take time to settle, the comparative ads may have achieved its objectives. Most of the time, the challenger brand uses research evidence to support their claims of superiority. In this case, Pepsodent claims that it has 130% more germ attack power than Colgate. The fine print says that Colgate is indexed to 100%. So is Pepsodent in a sense puffed up the numbers to make it seem extraordinarily superior to Colgate. It is interesting to note that Pepsodent Germicheck chose to attack Colgate Strong Teeth rather than Colgate Total. Colgate Strong Teeth is the largest brand in the Colgate portfolio but this brand is not claiming any germ killing attribute. Colgate Total is the brand which claims the germ killing attribute. So rather than fighting the Colgate Total, Pepsodent Germicheck decided to launch the attack on Colgate Strong Teeth.
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Direct comparative ads, that too against an established market leader most often works for the challenger brand. It has the shock value and the ensuing marketing war gets the challenger brand eyeballs and media spaces especially in social media. Frontal attack using such tactics has its fair share of risks. The market leader often will react with full might which may destroy the challenger brand. In this case, it is the fight between the titans and if there is a war, both will bleed. Colgate rules the toothpaste market with 57% share. Today’s business standard has an interesting report on Colgate which despite facing tough competition from major brands was able to hold on to the market share. In fact, the brand was able to improve upon the market share. According to the report, the Indian toothpaste market is around Rs 5000 crore and Colgate has around 57% volume share. Even in the Rs 2000 crore toothbrush market, Colgate commands over 42% share. This is despite the fact that there is an increased competition in the market and the competitors are the likes of HUL, P&G, etc. Some of the lessons of marketing is outlined in this report. • Consumer Awareness • Innovation in plugging product gaps • Rural penetration through distribution augmentation Life has barely been smooth for Colgate in the last few quarters with the competitive intensity in oral care only going up with every passing day. Almost all key players including Hindustan Unilever, Dabur, Procter & Gamble and GlaxoSmithKline Consumer have mounted pressure on the giant with new products and aggressive marketing. Yet, the Mumbaibased market leader has hardly ceded ground. If anything, it has only gained in market share. Sparkly Growth Colgate’s market share has steadily grown despite competition’s ad spends and decreased consumer spending Jan-Dec, 2012 54.5%
Jan-Dec, 2013 56%
Jan-April, 2014 57.1%
Source: Market estimates; percentage of volume share in toothpaste
It has steadily gained volume share in the Rs. 5,000 crore toothpaste market, despite its lead of over 50 per cent, gaining 170 basis points in January-April, 2014 over the corresponding period last year and 150 basis points in Jan-Dec, 2013 over the year before. In the Rs 3,000-crore toothbrush market, Colgate’s volume share increased by 100 basis points to 42.3 per cent over the same period last year. In
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Jan-Dec, 2013, it had 41.5 per cent share in toothbrushes while in JanDec, 2012, it had 39.8 per cent. The share gains have also occurred against the backdrop of a consumer slowdown. After months of almost 9-10 per cent volume growth in toothpaste, Colgate’s volume sales for the three months ending in March, 2014, came down to about 7%. Abneesh Roy, associate director, research, Institutional Equities, Edelweiss, “Colgate has done a combination of things — from consumer awareness, innovation to plugging product gaps. It has also pushed the product aggressively in rural areas through outreach programmes, as well as expanded distribution. These are helping it to gain share.” Colgate’s marketing spends as a percentage of sales in the last few quarters has hovered around 11-13 per cent. In the fourth quarter of FY-14, Colgate’s ad spends as a percentage of sales came down to about 10.8 per cent (almost 300 basis points lower than spends seen in Q3 of FY-14) as the company attempted to bring down the pressure on operating margins. Despite the slightly muted quarter advertising-wise, the company has grown its volumes. Amnish Aggarwal and Gaurav Jogani, research analysts at brokerage Prabhudas Liladhar in a recent report, say that new launches such as its Visible White and Active White Salt have enabled Colgate to sustain momentum in the crucial toothpaste category. Analysts such as V. Srinivasan of Angel Broking say that Colgate’s market share gain has been the result of growth seen across Colgate’s toothpaste brands, pointing to the brand being chosen over others despite the competitive intensity. Analysts say that it might be some bumps ahead. Colgate will have to contend with heightened competition in the next quarters, too, as P&G digs its heels deeper with its Oral-B toothpaste. The latter has articulated in the past that it remains committed to India and is expected to set up a manufacturing facility in India for toothpastes, to bring down its dependence on imports and the resultant costs. The company has also raised its ad spends on Oral-B, endorsed by actor Madhuri Dixit. Dabur, which has seen a 17.3 per cent growth in its oral care portfolio in the quarter ended March, 2014, is expected to continue mounting pressure as sales traction for products such as its Meswak and Dabur Red toothpaste grows. That leaves Hindustan Unilever, which is now offering a toothbrush worth Rs 40 with its high-end Pepsodent Expert Protection, in a bid to arrest share loss. While HUL does not share market share details of any of its categories, persons in the know say that HUL has a share of
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about 25-26 per cent in oral care, and is positioned as a strong runnerup. That has come under threat from Colgate’s efforts on one hand and Dabur’s on the other. But with the company continuing to increase its promotional spends on Pepsodent, Colgate will have to watch out.
QUESTIONS 1. 2. 3. 4.
What is the strategy of challenger brand in the case? Explain the strength and weaknesses of Colgate brand? Why did Pepsodent put a strategic campaign against Colgate total? What are the factors which favour Colgate against competitors in oral care market? 5. Elaborate various threats present for Colgate in oral care market?
57 Sensodyne
SENSITIVITY MARKET A mother takes her daughter to the dentist, clutching an apple in her hands. The apple, half-eaten, has blood stains on it, which the dentist says is because of bleeding gums. Oral care giant Colgate is doing everything it can to draw the attention of consumers to the problem of bleeding gums, common in India. One in every three Indians suffer from gum problems. But few consult a dentist, let alone use a product for it. Colgate is targeting these people. But it isn’t the only. GlaxoSmithKline Consumer’s Parodontax also targets the same problem. After sparring with Hindustan Unilever and Procter & Gamble, Colgate is now training its guns at GSK Consumer. The two have been in battle before for a share of the sensitivity toothpaste segment, 9% of the overall Rs 6,000 crore a year toothpaste market. GSK Consumer, according to its MD Zubair Ahmed, is contemplating new launches in oral care after introducing brands such as Sensodyne and Parodontax in the last two to three years. The new launches, Ahmed has said, are expected to help the company keep the momentum going, following success seen in segments such as sensitivity. Market experts say that Sensodyne is already a Rs 150 crore brand in three years and is expected to touch Rs 200 crore in the next few quarters. GSK has 26% share of the Rs 540 crore sensitivity market, ahead of Colgate, says Jayant Singh, executive vice president (marketing). Colgate did not specifically indicate its market share in the sensitivity segment. But sector analysts say Colgate Sensitive Pro-Relief, the company’s answer to GSK’s Sensodyne, lags the latter. “According to Colgate estimates, the overall premium segment is growing at 21.8%, with teeth whitening taking the lead at 42%, followed by multi-benefit at 23.6% and lastly, sensitivity at 18.2%,” a Colgate spokesperson said.In gum care, the latest emerging oral care category,
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both Colgate and GSK have focused on raising awareness as well as pushing their products largely through modern trade and pharmacies. GSK’s Singh says the specialised nature of the category lends itself to the retail format. Price points are also steep, he says. A 150 gm pack of Colgate Total Pro Gum Health comes for Rs 92. GSK’s Parodontax costs Rs 100 for an 80 gm pack, its largest stockkeeping unit in the category. A regular 150 gm Colgate white toothpaste, on the other hand, costs Rs 75-80. Some marketing experts feel that the Colgate brand’s consistency in communicating and its aggressive media communication has helped the brand in good stead. The brand was quick to respond to competition although in the case of Sensodyne, the brand was outsmarted. The launch of Active Salt, Visible White also helped the brand to keep itself in the top of the mind of consumer.
QUESTIONS 1. Discuss the marketing strategy of sensitivity toothpaste segment in the case. 2. Explain the comparative strength and weaknesses of Colgate Total pro gum health in this case. 3. What was the strategy of Sensodyne in its campaign? 4. What are the factors which favour Sensodyne against its competitors? 5. Elaborate various opportunities present for sensitivity toothpaste segment in the market.
58 Consumer Perception
What Drives Brand Trust? Last sunday, Mohit went to buy a small appliance as a gift, there were two brands — one was an in-store brand and another a very well-known brand. The in-store brand product looked very good with more features than the national branded product. At the similar price point, the instore brand looked a very good buy. When his wife asked his “expert” opinion, he suggested her to go for the national brand despite the fact that he knew that the private label brand would have been a better choice. On introspection, Mohit found that what he was doing by choosing the national brand was risk-reduction. That is what branding is all about. The national brand offered a much less featured product so on a value calculation, the private label offered more value.But as a consumer, the national brand offered less perceived risk. So why did he as a consumer felt that the national brand offered less risk compared to the private label? Firstly, the brand was reputed (familiar) and its legacy gave him comfort that it would not fail him in terms of performance. Secondly, as a consumer, he had a positive experience with the brand which made him trust the brand more than the private label. Thirdly, since the product was an electrical appliance, the perceived risk is more compared to another product category. So for marketers, creating trust for a new brand is not easy especially in product categories have high perceived risk and brand’s role is that of risk-reduction. And as a consumer, he can say that for him a brand would be trusted if it is familiar and has perceived product expertise.
QUESTIONS 1. What do you think are the drivers for brand trust as a consumer? 2. Are you satisfied with the perception of Mr. Mohit ? 3. How do you see present situation as an opportunity for local brands? 4. Suggest the strategies to help the building trust for a local brand?
59 Celebrity vs. Utility
SPRAY FIGHTS In the cluttered Indian Deo Market, brands are keeping no options unused. Denver, has roped in Saif Ali Khan to endorse while Envy — another deo brand has roped in Irfan Khan as the celebrity endorser. The 2100 crore Indian deo market is cluttered with local brands upsetting the majors like HUL and gaining market share. The competition is getting more intense with brands like Provogue, Park Avenue entering the deo market with their own variants. Recently ads were splashed across the media for Provogue Deo being endorsed by Fardeen Khan. Having said that, the positioning of all the deos has remained almost the same attracting girls. The exception was Fogg which became India’s largest selling deo brand which was positioned differently. The Fogg’s proposition of “No Gas” was liked by the consumers and Fogg dethroned Axe to become the market leader. Envy, another deo brand, was quick to imitate Fogg. While Fogg claimed to give 800 sprays for a bottle of deo, Envy claimed to give 1000 sprays. The fight still goes on. Now these brands are banking on the celebrities to create some space of itself. But as commonsense speaks, celebrities themselves have become commodities, so what kind of value that they can bring in? However, these smaller brand will gain immediate brand-recall through the celebrity endorsement which may bring in results in the short-term. In this era of “Quarterly Performance Focus” who is interested in long-term!
QUESTIONS 1. What was the distinction in positioning the product by Fogg? 2. Do you think that celebrities help in establishing the deo brands? 3. How do you see present situation as an opportunity for more creativity? 4. What are the factors which help to “position” brands in deo market?
60 Parle-G
LAUNCH OF NEW CAMPAIGN Parle Products is in the business of manufacturing and marketing biscuits and confectioneries since 1929. Parle Products recently rolled out its new TV campaign ‘Pehle waali baat’ for its iconic brand Parle-G. Parle-G since its launch has been growing consistently over the years and this new TVC conceptualised by Everest Brand Solutions tries to highlight the fact that this biscuit brand is like what it was before and has not changed. The campaign consists of eight TVCs which are designed and conceptualized by Everest Solutions. Following are some of the comments from the top officials of Parle about the launch of the new campaign. Mayank Shah, Group Product Manager, Parle Products, was quoted as saying, “Research points out that even the idea of slightest change in Parle-G is strongly resisted by our customers. Although our packaging has evolved over the years, but the core product is still the same.” Pravin Kulkarnii, General Manager, Parle Products, was quoted as saying, “The TVCs capture the simple human insight of comparison. It is a natural tendency to compare the current with the past. Everest has harnessed this simple insight through various ‘slice of life’ situations to point out the consistent quality of Parle-G.” The eight new TVCs by Parle show people from various walks of life who are unhappy. In the advertisement people are shown grumbling about various issues that they face in their life. They are shown complaining about how no longer that same ‘baat’ or like what was before is not there. The ads cover issues like politicians, fabrics, newspapers, festivals, and so on. At the end of all these ads a person is shown handing over a pack of Parle-G and saying that it has “woh pehli waali baat”. All these advertisements highlight that quality is at the core of the product and it is seen as an attempt by the brand to connect to the millions of loyal customers who have given it a cult status in the market. Parle tries to convey the message that as times change so does the charm
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but there is only one brand Parle-G which has not lost its charm and survived the test of time. This new TVC is surely going to give some nostalgic feelings to people who have grown with this brand over a time period.
QUESTIONS 1. What was the distinction in positioning the product by Fogg? 2. Do you think that celebrities help in establishing the deo brands? 3. How do you see present situation as an opportunity for more creativity? 4. What are the factors which help to “position” brands in deo market?
61 Deodorant Market in India
When we think about personal care products, the image of a woman comes into our minds immediately. However, in the deodorant segment in India, men have overtaken the women with a significant lead. In fact, of the Rs 1,400 crore deodorant market, the male segment contributes Rs 1,000 crore, pegging the male to female ratio at 70:30. Greater usage of deodorants among Indians can be attributed to greater awareness of hygienic practices and affluence. Deodorants are used by both men and women in the middle and upper classes and with greater disposable income in these families, more and more people are able to afford personal care products that are not considered a necessity. HUL is the market leader in deodorants, with 31.5% market share. Its flagship product, Axe, is highly sought after by both middle and upper classes. Other brands under Hindustan Unilever are Rexona and Dove, whose deodorants are popular in the Indian market too. After HUL, Paras Pharmaceuticals and McNroe Chemicals are the biggest industry players in the deodorant segment. Hindustan Unilever’s Axe is the leading product in this segment, garnering 25% of the market value, followed by Paras Pharmaceuticals’ Set Wet, with 10% market value, and McNroe Chemicals’ Wild Stone garnering 9% market value. Deodorants come in various forms, including roll-ons, sticks, and sprays. There are a number of deodorants for males but there are very few deodorants for females. This is because deodorants and antiperspirants have recently been introduced to the Indian market. For decades, the Indian market has been relying on perfumes to enhance the scent of the body and females in the country continue to use perfumes instead of deodorants and antiperspirants. Moreover, deodorants are used by those who are constantly outdoors, and this is dominated by males.
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It is only in the last few decades that there has been an increase in the number of Indian women spending ample amount of time outdoors, that is why the deodorant market for females is still in the infant stage. Some of the deodorant brands that cater to the females are Nike, Fa, Dove, and Nivea. Experts predict that the deodorant industry will grow in the next few years. In fact, the deodorant market is projected to grow at 25% CAGR (compound annual growth rate) over the next 5 years. As net household income increases and with more disposable income, there is ample scope for the growth of the deodorant market in India. An increase in the usage of deodorants can also be attributed to the Indian climate, which is hot humid, especially between the months of March and September, forcing consumers to purchase antiperspirants and deodorants to keep their bodies fresh and cool. Deodorants were introduced to the market to help people eliminate body odour. However, some of these products contain toxic chemicals, many of which are carcinogenic in nature, which can be harmful to one’s body. Not many consumers are aware of the dangers of prolonged usage of deodorants; however, manufacturers are constantly experimenting with the ingredients in deodorants to ensure minimal risk to consumers. But it is a challenge for the industry that health and personal care may go hand in hand.
QUESTIONS 1. What are the key factors for growth of deodorants in India? 2. How can the consumption by female share be increased? 3. How do you see present situation as an opportunity for Deo market in India? 4. Discuss the risk factors which may hamper the use of Deo brands?
62 First Flight Couriers
NURTURING EMOTIONAL BOND First Flight Couriers came into being on Monday, 17th November 1986, setting up of 3 offices at Kolkata, Mumbai and Delhi. The overwhelming response from customers, was not just a dream come true, but the fruits of an early realisation and recognition of the tremendous potential that the Indian subcontinent offered in terms of market size. It was the foresight and dynamism of the founder Chairman and MD, O. P. Saboo which created a spring board for the organisation to catapult into what it is today–India’s largest domestic courier company having 1200 offices, 2300 authorized collection centres, 452 franchisee locations and 6700 pin code destinations across India. It has dedicated workforce of over 17000 plus employess and strategically located 10 own international offices serving 220 countries globally. The fast paced growth and widening network is the outcome of four basic beliefs: Speed, Safety, Reliability and economy. As a natural corollary to its growth endeavour, First Flight is in the process of setting up a large-scale integrated Logistics Division to offer an entire gamut of Warehousing, Inventory Management, Supply Chain Services and Distribution Channels, thereby providing total end-to-end solutions to customers. In keeping with times, First Flight continues to invest substantial effort in building a State-of-the-Art Super Information Technology highway. First Flight’s commitment to corporate excellence and its yearning for making it a common household name opens floodgates of opportunities and challenges and to meet it head on, shall be the cornerstone of its philosophy. Considering the scope of caring relation of its customers, it started with an idea to strengthen its CRM initiative. First Flight provides the customers a simple yet innovative way of maintaining relationships with their dear ones in this fast-paced age — Emotional Bond. Emotional Bond
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delivers everything from greeting cards, sweets, cakes or dry fruits on their behalf to any part of the country. ‘All you need to do is provide information of the people you want to greet by indicating the special occasion and you can be rest assured that your consignment will reach your loved ones on time’ Arvind, Channel head (North) added.
QUESTIONS 1. What are the strategic concerns which led the growth of First flight? 2. Point out the strength of First Flight courier? 3. How do you see present situation as an opportunity for the First Flight? 4. Can this strategy of emotional bond help the company for increase in its sales against its competitors? Explain.
63 DTDC
STRATEGIC INTENT DTDC’s current strategy in keeping with its Mission 1000 and Vision 2020 is to consolidate its current position and constantly introduce new services and products that are relevant to the needs of our consumers. DTDC is not satisfied with just being the largest delivery network in the country but wishes to go deeper and triple its network within the country. To face competition, DTDC is heavily investing in technology, infrastructure, brand development and network expansion. A 3 year programme that started 2013, involves an investment of over Rs. 25 crore in brand building and a complete upgrade and standardisation of all DTDC outlets. In the last 22 years, DTDC has seen an exponential growth in its Express business and has become a leading brand and a household name in the country. DTDC’s road map for growth aspires toward a Rs. 5000 crore company from the present level by 2020. To achieve this, different SBUs have been formed with clear focus on their respective functions. Every SBU will add more value-added products for the growing needs of the Indian corporate and retail consumers. • The Domestic Division as an SBU will remain as the mainstay with all its value-added products. More innovative products will be launched periodically. In addition to our current formidable reach, expansion of branches and franchisee network in all districts and talukas (administrative division in some South Asian countries, including India and applicable to the suburbs or rural areas) of ‘B’ and ‘C’ category cities is a strategic direction. The plan is being systematically executed to reach the targeted figure of 10,000 franchiees in India in the next 3 years. • DTDC understands that in the next ten years the lives of people are going to be different with more access to money but less time to spare for themselves and their family. Consumers will, therefore, look for service providers who can help them do more in life in the same amount of time. Only the organised sector can
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•
•
• •
provide all such inclusive services under one roof backed up by an extensive and dependable network coupled with speed of delivery – that is where DTDC with its unique strengths provides reliable solutions. DTDC, through its Retail Division SBU is opening Service Super Malls through which various services and products will be extended to customers to help them save and make time for their families and themselves. Our vision is to make life easy for people in the years to come. Consequently, retail outlets are being expanded aggressively and over 60 Multi Service Stores have been opened so far under the brand name ‘DTDC New World’. DTDC plans to open over 500 such stores in strategic locations in the next 3-4 years in different parts of the country. International Division as an SBU will strategically focus on inbound shipments from all over the world through DTDC’s own offices abroad, international franchises, JVs and associates and effectively distribute through its own network in India. For this purpose, new international franchisees are being aggressively appointed in major countries of the world. DTDC has plans of major acquisitions for inorganic growth. The company has set up 50:50 JV in Singapore and Hong Kong with Donald Tay, ex CEO and President of DPEX, a subsidiary of Qantas Airlines, and a JV in Dubai. Supply Chain Solutions has been identified as another SBU and a growth driver. Plans are underway to expand new routes through continuous research. A large number of SCS offices have already been opened across India. This SBU is being run by experienced people and continuous training is being imparted to improve their efficiency. Freight Forwarding SBU is another area of growth. Key people from the industry have been recruited to spearhead this vertical. DTDC Institute of Supply Chain Management (DISCM) concentrates on Training and Development of not only internal staff but also anyone who would like to be trained in the Supply Chain and Logistics space.
DTDC aims to create strong relationships with all its stakeholders, by abiding to its values of: • Transparency in all transactions • Understanding that our service efficiency is a part of customers’ balance sheet • Protecting the environment by minimizing pollution and reducing national wastage
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QUESTIONS 1. 2. 3. 4.
What is the role of service differentiation in DTDC strategy? What are the strength and weaknesses of DTDC couriers? How do you see present situation as an opportunity for the DTDC? What are the factors emerging as a challenge for the company?
64 IndiGo Airlines
FARE WARS IN THE AIR With over 50% of the market under its belt, IndiGo Airlines has no doubt been the king of low-cost carriers in India. But the good times now seem to be under threat. Soon, IndiGo will have to defend its market from AirAsia, which has entered India in collaboration with the Tatas, on the one side, and fend off competition on international routes, especially to West Asia after Jet Airways’s alliance with Etihad, on the other. Experts say while AirAsia will kick off a price war by dropping fares, an oft-repeated strategy that it is known for globally, the Jet-Etihad partnership will stir up competition on routes between India and West Asia by offering more connectivity to woo passengers. But IndiGo is no sitting duck. The low-cost carrier, which has successfully kept its costs down and has built up efficiencies which are comparable to global lowcost carriers, is putting together a “stick to the knitting” strategy to take on the twin challenges. To put things into perspective, based on new aircraft delivery schedules, IndiGo will continue to have a lion’s share of over 45% of the capacity of all low-cost carriers put together (including AirAsia) by 2016-17 (currently it is 49%). In the same period, AirAsia will acquire 36 new aircraft, a fleet that will be a little over a third of IndiGo’s 120 aircraft. If aircraft capacity is an indication of market share, AirAsia will not have more than 15% of the market. Even that, analysts say, will be carved out from smaller low-cost carriers, not IndiGo. In fact, AirAsia’s fleet size would be smaller than even GoAir, if trends based on its orders are anything to go by, and it will remain the smallest low-cost carrier in terms of fleet. Also, in terms of fleet choice, AirAsia will not have any special edge as both AirAsia and IndiGo will
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be flying the same aircraft. IndiGo will get delivery of the A-320 Neos by the end of 2015, more or less the same time as AirAsia. These planes claim to save up to 15% in fuel costs, which is a key edge in a business where cost management is essential to stay afloat. IndiGo, which has ordered 150 of them, is slated to replace its entire fleet with Neos by 2021-22. This means it will not be at a disadvantage against AirAsia in terms of plane technology. Those in the know also say IndiGo will stick to its existing plan of having just one type of aircraft rather than go the SpiceJet way and introduce smaller aircraft. SpiceJet has added Q-400 Bombardiers to its fleet so that it can fly to regional airports and smaller cities where even narrow-bodied aircraft cannot land. The reason is simple: two set of plane models with different pilots, spare parts, ground maintenance and coordination of schedules only increase costs of operations which could be suicidal for a low-cost carrier. IndiGo is instead expected to use the 18 new aircraft that it will get in the 2016 to fly to new routes where narrow-bodied aircraft can land. “There are about 12-13 cities where IndiGo does not fly now; it will do so in the next phase” says a vendor close to the company. The idea is to increase the number of cities to which the airline flies from 28 currently to around 40 by 2016-17. For instance, it does not fly to cities like Surat, Bhavnagar, Tirupati, Amritsar, Leh and Bhopal. So far, AirAsia only has plans to fly to 10 or 12 cities with Chennai and Kolkata as the base. Surely, there will be common cities where IndiGo and AirAsia will come in headlong collision, or where they may even have the same time slots. But what will give IndiGo an edge is that by 2016-17, AirAsia will be flying to fewer cities, only a fourth of the number of cities connected by IndiGo.
GLOBAL CHALLENGE On the international routes too, IndiGo’s strategy remains the same. Unlike SpiceJet, which has preferred to fly uncharted routes like Kabul and Guanzhou, IndiGo operates international flights only to the traditionally safe markets where passenger numbers are ensured but competition is also cut-throat. These include Dubai, Muscat, Bangkok and Singapore. The airline, those in the know say, has no plans to expand to too many new cities. Instead, it might, however, look at increasing its frequency to the existing destination. For instance, it has already asked for 5,000 more seats a week on the India-Dubai route. It is also planning to increase its frequency to Muscat.
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Cost, of course, is the guiding principle of its strategy. Increasing frequency will help IndiGo in reducing operational costs as it will be utilising the infrastructure that it has already created for handling more flights. So, the costs can be spread over more aircraft. The strategy also sits well with the existing dynamics of the IndiaWest Asia sector. Emirates, which has dominated this market, currently prefers to keep its fare on the India-Dubai sector much higher than lowcost carriers as it is primarily interested in passengers who are going onwards to the US and Europe. But with the Ethiad-Jet partnership providing an alternative to passengers going to the US and Europe via West Asia, experts say Emirates will lose some business. “With so much capacity being created by Jet Airways and Etihad, fares in the sector offered by these airlines are bound to fall. The pricing gap between low-cost carriers like IndiGo and full-service airlines will also reduce, creating a challenge for all airlines,” says a senior executive of an airline which flies to West Asia. IndiGo, those in the know say, can do two things: it can drop prices further to maintain the gap and squeeze its margins, or it can fight the big boys by increasing the number of flights, making it unviable for them to drop fares. In other words, based on the current scenario, in order to woo low-cost customers, Emirates will have to slash prices in two flights which have time slots close to that of IndiGo. But if IndiGo increases the frequencies, Emirates will have to slash prices across all flights which would impact its profit margins. Surely, AirAsia could shake the market. But no matter what shape the industry takes in the months to come, IndiGo is not going to yield its predominant position easily.
INDIGO’S GAME PLAN • IndiGo will have over 45% of capacity of all low-cost carriers in 2016-17 • It will get delivery of fuel-efficient A-320 Neos from end 2015 • 12-13 new cities will be added in two years, taking the total destinations to 40 by 2016-17 • It plans to increase frequency on the India-Dubai and India-Muscat routes.
Source: Companies & industry estimates
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QUESTIONS 1. What is effect of Jet-Etihad partnership on the other airlines? 2. Discuss the SWOT analysis of IndiGo airlines in the present context. 3. How do you see present situation as an opportunity for the Air Asia? 4. What are the factors against Indigo in the present price war? 5. What are the factors in favour of AirAsia in the present aviation industry?
65 The Water War
Hema Malini dominates the corporate headquarters of Kent RO Systems in Noida. The walls, stairwells, alcoves and offices are adorned with posters and photographs of the Bollywood actress, either endorsing the company’s range of water purifiers or launching new products. Aggressive advertising has been the hallmark of Kent’s success. It is what has helped it rise from obscurity to become the second-largest water purifier company in India; from a Rs 25 crore firm in 2005 to a Rs 600 crore giant by 2014. The origin of Kent RO can be traced to Chairman Mahesh Gupta’s tinkering with reverse osmosis in his south Delhi house. This was in the mid-1990s when the water purification market was dominated by ultraviolet purifiers, and reverse osmosis (RO) was relatively unknown. It was still an untapped market when Gupta launched his company 14 years ago; Eureka Forbes was—and remains—the market leader. Today, Kent has a 30 per cent market share in the RO space. (Eureka Forbes has 36%.) The undeniable growth notwithstanding, Gupta faces his toughest challenge yet. In the last 2-3 years, heavyweights such as Tata Chemicals, Panasonic, LG and HUL have entered the RO water purifier market, posing a threat to Kent’s dominance. Sitting in his office, surrounded by new prototypes of RO water purifiers, Gupta, a mechanical engineer from IIT Kanpur, appears unperturbed by the growing competition. He argues that the industry’s full potential is yet to be tapped. “The penetration of water purifiers is 4%, of which RO water purifier penetration must be about 1%, which leaves room for all of us to grow.” According to management consultancy Technopak Advisors, the organised water purifier market is pegged at about Rs 3,500 crore, and is growing at 20% every year. With a compounded annual growth rate of 30% since 2005, Kent has been expanding faster than the market. But other companies that have entered the space have brand recall and high marketing as well as the R&D heft to displace Kent from the number two spot.
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While Kent is looking to enter the Rs 1,000 crore club in two years— Gupta’s deadline—it will have to work harder at retaining the second spot in the market. The advantage that a Tata or a Panasonic has over it is brand recall. “There is a generic trust attached to the Tata name,” says Parag Gadre, head, water purifier business at Tata Chemicals. Tata launched RO purifiers in Kolkata and Bangalore in January 2014, and aims to have a presence in 25 cities over the next quarter. “Over the next 6-9 months, we will launch products at both lower and higher price points,” he says. Thus, keeping Kent ahead of the pack will be Gupta’s first challenge. The 60-year old began his career with Indian Oil in 1978, but left 10 years later to launch Kent Oil Meters. “We made oil meters that helped people monitor the quantity of oil they consumed,” he says. Then, in 1998, his children Surbhi and Varun contracted jaundice, a water-borne disease that claims many lives even today. “It forced me to think of installing a water purifier at my south Delhi home,” he says. But Gupta couldn’t find a good purifier in the market. “The only purifiers back then were the UV ones, which didn’t remove dissolved impurities. I had heard about the reverse osmosis technology, which removed soluble matter, so I imported parts from Taiwan and made a purifier for my home.” (At that time, market leader Eureka Forbes wasn’t into RO purifiers.) The home-made purifier worked well. “It struck me that there must be a market for it,” says Gupta, who started manufacturing purifiers at his oil meter factory, with a seed capital of Rs 5 lakh. The first RO purifier he made for his family cost about Rs 50,000. But after he started Kent, he sold the purifiers for Rs 20,000. “I made some 25 purifiers in the first batch. Very few people bought it, because this was in 1999 and Rs 20,000 was a big amount,” says Gupta. Today, the company manufactures 4.5 lakh purifiers in the Rs 16,000-18,000 range. The manufacturing happens at a factory in Roorkee, Uttarakhand. To keep pace with its growth, the company is building a new plant in Noida, which will be operational in two years. Kent got its big break in 2006 when it signed on Hema Malini as a brand ambassador Gupta knew that if the company had to grow it would have to build brand equity and educate customers about RO technology. “We have become synonymous with RO purifiers. Even today, my biggest challenge is educating customers about the importance of an RO purifier. The government doesn’t want to educate customers because if they do so, it will be seen as their failure to provide good drinking water,” says Gupta. The company spends 15% of its revenues on marketing. Pragya Singh, Associate VP (Retail & Consumer Products) at
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Technopak, says, “Kent will have to constantly upgrade to be relevant, and continue with brand building,” she says. Gupta is counting on Kent’s technical superiority and innovation to stay ahead in the water war. Since he launched his first RO purifier, the company has introduced 20 different models. “We have filed five patents in the last five years or so, and three have been granted. Our products have been certified by the National Sanitation Foundation and the Water Quality Association (WQA), which have a very stringent certification process,” he says. Gupta’s son Varun, who joined the family business in 2006 as a director, argues that Kent is better placed than its competitors when it comes to identifying consumer needs. “Every year we come up with a new technology, which creates an entry barrier for new players,” he says. The patents are related to newer processes for water filtration, more technologies that retain essential natural minerals, and purifiers that store and recycle water. Varun believes that Kent’s pace of innovation will make it difficult for other companies to catch up. “A lot of multinationals such as Philips and Whirlpool entered the RO market in the past but wound up their operations because they couldn’t connect with the customers.” He, however, might be underestimating the longevity of some competitors who aren’t lagging behind in innovation. Panasonic, for instance, entered the RO water purifier market two years ago, and introduced a new alkaline technology that removes the water’s acidic content. Kent’s competitors dismiss claims of technical superiority. Eureka Forbes, which has a 54% share in the overall water purifier market, says it has filed for 45 patents, not all are RO in the last five years. “We have over 110 certifications from leading laboratories including an endorsement from Indian Medical Association. Globally, we received WQA’s certification 10 years before Kent got it,” says Marzin R. Shroff, CEO, direct sales and senior vice president, marketing, Eureka Forbes. Another new entrant is Luminous Water Technologies, which launched Livpure RO in February, 2013, with two models ‘touch’ and ‘touch plus’ and claims to have captured a 10% market share already. Rakesh Malhotra, its founder-chairman of SAR group, argues that no company is technically superior. “There is no product differentiation that Kent can lay claim to because the core components of an RO purifier such as membrane and pumps are available to everyone. The only real advantage it has is the momentum it has gained because of their head start,” he says.
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While companies such as Tata Chemicals and HUL have a brand legacy that’s entrenched in the Indian psyche, Kent is counting on its superior customer service to retain old customers and acquire new ones. According to Varun, one of the toughest challenges for any new player is after-sales service. “This is a product that if it breaks down, you really can’t live without. A quick turnaround time is a key factor in customer service and we have an established service network,” he says. Kent has 800 to 900 franchised service centres and about 5,000 to 6,000 technicians across the country. The average turnaround time for customer complaints is a day or two, he claims. While new entrants are beefing up their their after-sales units, Kent is looking to strengthen its presence in tier II cities. “The day customers start thinking of an RO water purifier as a necessary home appliance, they will stop thinking of it as an expensive product,” says Varun. Metros such as Delhi are already converting—the capital already has the highest water purifier penetration in the country at 35%. “Real growth will come from tier II and tier III cities,” says Varun. For instance, Bihar is Kent’s fastest growing market—this should give an indication of where the future growth lies for the company as well as its competitors.
QUESTIONS 1. 2. 3. 4.
What is the role of product differentiation in this water war ? What are the strength and weaknesses of Kent RO? How do you see this situation as an opportunity for the Kent? What were the factors due to which this “innovative positioning” could not take place in water market?
66 AirAsia India
FARE WARS BEGIN AirAsia India opened bookings on 30 May 2014 (Friday) night, and immediately set off a fare war with a dramatic Rs. 5 (excluding taxes) promotional fare for 15,000 seats on the Bangalore-Goa and Bangalore-Chennai sectors. Low-cost carrier IndiGo responded on same day with its own promotional offer of Rs. 1 tickets on the same sectors. Surprisingly this new airliner sold 25,000 seats within 10 minutes after opening the promotion online for its first flight out of Bangalore to Goa priced less than Rs. 1,000. We are very excited by the feedback we received from the market. Our motto has always been to make everyone fly and we have already begun to show that we are true to our promise,” said AirAsia India CEO, Mittu Chandilya. He reiterated the airlines’ aim to revolutionize the Indian aviation industry with its quality service. His airline’s goal is to provide every Indian an opportunity by making fares at least 35% cheaper than current market levels offered by other airlines. This move has prompted some industry watchers to forecast the price war among Indian airlines to intensify in the days ahead. LCCs currently operating in India include IndiGo, SpiceJet, JetKonnect and GoAir. AirAsia launched operations on June 12, 2014 with a Bangalore-Goa flight. Bangalore-Chennai flights began on June 19, 2014. Adding airport taxes and fees, its Bangalore-Goa ticket cost was Rs. 490, while a Goa-Bangalore ticket priced even cheaper at Rs. 291. A Bangalore-Chennai ticket cost was Rs. 490 with taxes while Chennai-Bangalore price was Rs. 339 under the promotional offer. The travel period validity for the promo fares were between June 12 and October 25,2014. “I promised that AirAsia India will make quality travel affordable to all and that we will revolutionise the Indian aviation sector,” said Mittu Chandilya, CEO, AirAsia India, whose international airline code will be i5. “The goal is to enable guests who have never flown to take this opportunity to come experience flying the AirAsia way.”
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Even without the promotional offer, the airline’s all-inclusive fare of Rs. 990 for Bangalore-Goa is way cheaper than competition.“We want everyone to fly and this is why we are pricing it around higher class train ticket fare,” said Chandilya. “I would love to have 100% load factor. But 60% will be reasonable,” said Chandilya adding that the airline would have its base in both Chennai and Bangalore. By March-end, AirAsia India plans to have a fleet of 10 aircraft and connect 10 cities in 2014-15. It will begin operations with a single Airbus A320 and add at least two more aircraft in the next couple of months. Chandilya said there would be “hot-seats” spread across the aircraft that offer more legroom and added comforts.“Yes it will be costing little bit more (than the regular fares),” he said.
QUESTIONS 1. What is effect of AirAsia operation in Indian airlines industry? 2. Discuss the present challenges for AirAsia by other players in the industry? 3. How do you perceive the situation as an opportunity for AirAsia? 4. What is the effect of the factors against Indigo in the present price war? 5. Discuss the strength of AirAsia as compared to its competitors in the present situation?
67 Mahindra & Mahindra Ltd.
Mahindra & Mahindra Ltd. is part of the Indian Industrial conglomerate of Mahindra Group based in Mumbai. The company was set up in 1945 in Ludhiana as Mahindra & Mohammed by brothers K.C. Mahindra and J.C. Mahindra along with Malik Ghulam Mohammed. After 1947, Malik Ghulam Mohammed went to Pakistan where he became the nation’s first finance minister. Now, with the Mahindra brothers as the whole sole of the company, its name was changed to Mahindra & Mahindra in 1948. Initially set up to manufacture general-purpose utility vehicles, Mahindra & Mahindra (M&M) was first known for assembly under licence of the iconic Willys Jeep in India. M&M introduced Jeeps to India and in no time they established themselves as the Jeep manufacturers of India. The company later branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors, rapidly growing from being a manufacturer of army vehicles and tractors to an automobile major with a growing global market presence. At present, M&M is the leader in the utility vehicle segment in India with its flagship UV Scorpio. In recent times the company is engaged in spreading its reach beyond its traditional markets. They entered into the two-wheeler segment by taking over the Kinetic Motors in India. M&M also has controlling stake in REVA Electric Car Company. M&M has also been selected as the preferred bidder for the acquisition of South Korea’s Ssang Yong Motor Company. Mahindra & Mahindra grew from being a maker of army vehicles to a major automobile and tractor manufacturer. It has acquired plants in China and UK and has three assembly plants in the USA. M&M has partnerships with international companies like Renault SA, France and International Truck and Engine Corporation, USA. M&M has a global presence and its products are exported to several countries. Its global subsidiaries include Mahindra Europe Srl. based in
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Italy, Mahindra USA Inc., Mahindra South Africa and Mahindra (China) Tractor Co. Ltd. M&M is one of the leading tractor brands in the world. It is also the largest manufacturer of tractors in India with sustained market leadership of over 25 years. In the past this company was facing stiff competition with leading brand of Escorts Ltd. and Eicher Tractors Ltd., but with its presence in all segments of tractors with better technology and service facilities shown its effective leadership in Indian market. It designs, develops, manufactures and markets tractors as well as farm implements. Mahindra Tractors (China) Co. Ltd. manufactures tractors for the growing Chinese market and is a hub for tractor exports to the USA and other nations. M&M has a 100% subsidiary, Mahindra USA, which assembles products for the American market. M&M made its entry into the passenger car segment with the Logan in April 2007 under the Mahindra Renault joint venture. M&M made its maiden entry into the heavy trucks segment with Mahindra Navistar, the joint venture with International Truck, USA. M&M’s automotive division makes a wide range of vehicles including MUVs, LCVs and three wheelers. It offers over 20 models including new generation multi-utility vehicles like the Scorpio and the Bolero. It formerly had a joint venture with Ford called Ford India Private Limited to build passenger cars. At the 2008 Delhi Auto Show, Mahindra executives said the company is pursuing an aggressive product expansion programme that would see the launch of several new platforms and vehicles over the next three years, including an entry-level SUV designed to seat five passengers and powered by a small turbo diesel engine. Mahindra & Mahindra launched the Mahindra Xylo in January 2009, and till June 2009, the Xylo had sold over 15000 units. Also in early 2008, Mahindra commenced its first overseas CKD operations with the launch of the Mahindra Scorpio in Egypt, in partnership with the Bavarian Auto Group. This was soon followed by assembly facilities in Brazil. Vehicles assembled at the plant in Bramont, Manaus, include Scorpio Pick Ups in single and double cab pick-up body styles as well as SUVs. M&M Ltd. has controlling stakes in Reva electric. Mahindra has started to sell the diesel SUVs and pickup trucks in North America, through an independent distributor, Global Vehicles USA, based in Alpharetta, Georgia. But the advent of many players in SUV market in India has made the company to rethink about its strategy whether it should go for core competence or diversification.
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QUESTIONS 1. What are the strategic concerns of Mahindra & Mahindra Ltd. in this case? 2. Do you think that joining hands with other companies are in the interest if the M&M? 3. Analyse the SWOT analysis of the company. 4. Suggest the right organisational strategy to the company to compete the present market situation?
68 Amul
The country’s largest food company, Amul, is the market leader in butter, whole milk, cheese, ice cream, dairy whitener, condensed milk, saturated fats and long life milk. Amul follows a unique business model, which aims at providing ‘value for money’ products to its consumers. Despite being a farmers’ co-operative, Amul has given multinationals a run for their money. In butter, cheese and saturated fats, Amul has remained the undisputed market leader since its inception in 1955, by offering quality products at competitive prices. In other categories, Amul has nullified its late mover disadvantage through aggressive pricing, better quality, innovative promotion, and superior distribution channel. Gujarat Cooperative Milk Marketing Federation (GCMMF), the largest food company in India, recorded a turnover of Rs. 2882 crore ($ 0.65 bn) in 2003-04. Its flagship brand ‘Amul’ is the market leader in butter, whole milk, cheese, ice cream and dairy whitener. GCMMF was the largest cooperative movement in India with 2.2 million milk producers of Gujarat organised in 10,552 cooperative societies. GCMMF collected 5 million litres of milk per day from its shareholders who owned 3.2 million buffaloes, one million cows and 0.3 million crossbreed cows. The Federation’s extensive marketing network comprised 3000 distributors and 500,000 retailers spread across the country. Amul’s genesis was linked to the freedom movement in India. Sardar Vallabhbhai Patel, an eminent Indian freedom fighter encouraged the dairy farmers from the Kaira district in Gujarat to form a cooperative to counter the ‘exploitatively’ low prices offered for their milk by the monopoly milk supplier of the area, Polson’s Dairy. The dairy farmers met in Samarkha (Kaira district, Gujarat) on the 4th of January 1946, and decided to set up a milk producers’ cooperative that would deal directly with the Bombay government, the final buyer of their milk. This was the origin of the Anand model. Initially, when the Bombay government refused to deal with the cooperative, the farmers called a
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strike. The government finally relented when Bombay went without milk for a fortnight. The successful union registered itself as the Kaira District Cooperative Milk Producers’ Union Ltd. (KCMPUL), Anand, in Gujarat in December 1946.
AMUL’S EVOLUTION OF MARKETING STRATEGY Under the chairmanship of Tribhuvandas Patel, the Kaira Union, headquartered in Anand, began with two milk societies, and a daily milk collection of 250 litres. When it started operations, the cooperative included two tiers. At the base was the primary village dairy cooperative society (DCS) of milk producers. Several such village cooperatives together formed the district milk producers’ union at the second level, which was entrusted with procurement and processing of milk. By appointing qualified technologists and professional managers, the cooperatives helped the farmers to leverage modern management practices and technology. Varghese Kurien’s association with KCMPUL began soon after the inception of the cooperative. He had obtained a master’s degree in Mechanical Engineering from Michigan State University in 1948 and subsequently completed an assignment at the Government’s Research Creamery in Anand when Patel met him. Patel named Kurien, KCMPUL’s General Manager in 1950. In 1954, when the Bombay Milk Scheme refused to take all the milk that KCMPUL had produced, the cooperative found itself saddled with surplus milk. Apart from marketing milk in and around Anand, KCMPUL embarked on a wide range of dairy processing activities. To differentiate its high quality products, KCMPUL decided to brand its produce.In 1955, KCMPUL adopted the brand name ‘Amul’ for its products. ‘Amul’, derived from the Sanskrit word ‘Amulya’, meaning priceless, also stood for ‘Anand Milk Union Limited’. Amul followed a unique business model, which aimed at providing ‘value for money’ products to its consumers, while protecting the interests of milk-producing farmers who were its suppliers as well as its owners. As milk was a perishable item, the farmer suffered a loss if it was not sold before the end of the day. Amul bought all the milk offered by the milk producer, made timely payment, and shared with the producers the profit generated from marketing the milk and milk products under the “Amul” brand name. The cooperative model pioneered by Amul — a union of primary village dairy cooperatives — came to be known as the “Anand pattern” cooperative system. It was a three-tier structure that comprised village societies, district level dairy unions and a state level federation. Each
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tier was economically independent of the others and comprised representatives elected from the tier below it. The organisations at each level were governed by their own by laws, and were managed by democratically elected boards.
PRODUCT DEVELOPMENT Amul’s product development was driven both by the spirit of the cooperative system and profitability. Being a cattle farmers’ cooperative, Amul was committed to buying all the milk offered by the farmer. The perishable nature of milk made it imperative for Amul to process the surplus milk and enter new product categories as production increased. Launched in 1955, butter was one of the first milk products offered by Amul. It was also the first time Amul successfully challenged the hegemony of an established brand. Amul’s earliest competitor, Polson had been the monopoly milk supplier to the Bombay milk scheme. Amul displaced Polson to emerge as the undisputed leader in the butter market. Amul’s philosophy had all along been to deliver value for money to its customers. Despite being priced economically; Amul maintained its product quality. GCMMF’s formidable distribution network comprised 300 stock keeping units, 46 sales offices, 3,000 distributors, 100,000 retailers with refrigerators, an 18,000 strong cold chain, and 500,000 nonrefrigerated retail outlets. Over the years, Amul’s advertising philosophy had been “to be simple, fresh and innovative”. The clean, emotion-based ads refrained from using hi-tech special effects, and aimed at maintaining the perfect balance between the traditional and the modern. The liberalisation of the dairy industry in 1991 had seen a number of multinational players like Britannia, Le Bon, Dabon and Hi-Life enter the sector. Analysts wondered whether a co-operative with limited financial means could stand up to the might of these MNCs, and if it’s low pricing strategy would continue to stay relevant. MNCs like Pizza Hut, Domino’s, Hindustan Unilever Ltd. and Cadbury had also become competitors. Amul proved its detractors wrong and firmed up ambitious growth plans.
QUESTIONS 1. What was the strength of “Anand model” as per organisational structure? 2. What were the issues expected as threat for the company? 3. Analyse the basic strength of the company? 4. What would have been done by you if you have to take a decision for the company’s better pricing strategy?
69 Ajanta Biscuits Ltd.
Ajanta Biscuits, Bengaluru are in the field for little over six years. During this time, they have consistently increased their sales. This was possible mainly due to good quality, distribution network and promotion policy. The company has shown innovative ability by bringing out variety of biscuits to cater various tastes of the consumers. A study by the Indian Biscuit manufacturers’ association highlighted that out of total consumption of biscuits; almost 28% are consumed by the children below the age of 11. The company decided to develop special biscuits to cater this segment. After working out different possibilities, it was finally decided that biscuits designed in different animal shapes would be introduced which would certainly appeal to the younger generation. The samples were prepared. The company carried out a small exercise in test marketing the biscuits in their home town. A sample size of 1000 was selected for this purpose. Majority of the sample consumers showed their interest and informed that the children liked it. With lots of publicity, the company introduced this range of biscuits in four metropolitan towns of Mumbai, Chennai, Kolkata and New Delhi besides Bengaluru. The results for the first six months were highly encouraging. However, from seventh month, the sales started declining. In the twelfth month, the total sales of this type of biscuits were reported only at 25% of the peak reached. The quality was maintained. The price right from the beginning was 10% higher than other types for same weight. The sales executives told about the competition and the retailer’s incentive should be increased by 5% but the GM–Marketing was not ready for it. The product manager Mr. Rajan Pillai was not able to understand the reasons of the sales decline.
QUESTIONS 1. Do you think that the price was the prime consideration in the sales decline? 2. What is the differentiation created by company to launch it as different product?
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3. What is the main problem in this case? 4. Do you think that the advertisement towards the product should have been increased? Justify your logic? 5. Do you think that retailer’s incentive increase will solve the sales problem? Explain with the reasons too.
70 Frito-Lay
In the midst of the Great Depression, two entrepreneurs set out on paths that decades later would result in the creation of the largest snack food company of the twentieth century. It is a safe bet that neither Elmer Doolin, who sold Fritos from the back of his Model T making just two dollars a day, nor Herman Lay, who made $23 a month selling potato chips, had any idea that they would be responsible for creating a company with annual profits of over three billion dollars. Today, Frito-Lay is the undeniable leader of the snack chip industry. Two mergers were responsible for the company that exists today. In September 1961, H. W. Lay and the Frito Company merged to form Frito-Lay, Incorporated. This merger was followed by a second merger a few years later in 1965 in which Frito-Lay and the Pepsi-Cola Company combined to form PepsiCo, Incorporated. At PepsiCo, Frito-Lay is operated as an independent division. From a young age, Herman Waden Lay demonstrated a knack for sales. When he was eleven years old, Lay set up a booth across from the local ballpark and sold Pepsi-Colas for a nickel a bottle while the ballpark sold them for a dime. This call to sales would serve him well in the years to come. At 24 years of age, Lay applied for a sales position at Barrett Potato Chip Company. Although he was offered the job, he turned it down initially, deciding there was no future in potato chips. A week later, he reconsidered and accepted the job that would start him down the path that would culminate in the creation of a multi-billion dollar corporation. Lay was granted a territory that included northern Tennessee and southern Kentucky. In this territory, he worked to sell and distribute his employer’s wares with a sense of enthusiasm that would become his trademark. He delivered to his clientele of road stands, grocery stores, service stations, soda shops, and anywhere else that people might buy chips out of the back of his Model-A Ford. By 1936, Lay had hired 25
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employees to help him. Three years later, a representative from Barrett contacted Lay and offered to sell him the company’s plants in Atlanta and Memphis for $60,000. Lay scrambled to gather the necessary funds and a month later he bought the plants with $5,000 in cash and a $30,000 bank loan. The balance was paid in preferred stock. On October 2, 1939 H. W. Lay and Company was formed. When the company went public in 1956, “it was the largest producer of potato chips and snack foods in the country with over 1000 employees, manufacturing plants in eight cities, and branches or warehouses in 13 others.” (South Carolina Business Hall of Fame, 2002) In the early 1930s, C. E. Doolin set out on a quest to expand the selection of goods that he sold as manager of the Highland Park Confectionary. As fate would have it, he found what he was looking for when he ordered a sandwich and a bag of corn chips from a small café in San Antonio. The producer of the chips was eager to return to Mexico and offered to sell the business to Doolin for one hundred dollars. Doolin purchased the recipe, the production equipment and the rights to sell to 39 retail accounts. Working with his parents and brother, Doolin would hand-roll, thin, and deep-fry maize dough which he would then package into five-cent bags. In an hour, the family could produce approximately ten pounds of Fritos. Rising demand soon forced the family to expand the business and by 1933, the family was able to produce almost one hundred pounds an hour. Soon the Frito Company opened the first research and development lab of the food industry and expanded their line of chips. The family’s hard work continued to pay off as they continually reinvested into the company. By 1940, C. E. Doolin’s one hundred dollar investment had grown to employ hundreds of people and was on its way to becoming one of the largest snack companies in the world. (Villalabos, n. d.) Throughout the remainder of his life, Doolin continued to add new brands to the Frito Company while moving his company toward national status. In 1945, he granted H. W. Lay & Company exclusive rights to manufacture and distribute Fritos in the Southeast. Three years later, the company introduced Cheetos brand Cheese Flavoured Snacks. 1958 marked the year that the company acquired the Ruffles brand. When Doolin died a year later, the company had reached its status as a major food maker and had revenues in excess of $51 million dollars. Within two years of Doolin’s death, the Frito Company would merge with H. W. Lay & Company to form Frito-Lay.
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Under the guidance of co-founder Herman Lay acting as CEO, FritoLay began its life cycle carrying five successful brands: Fritos, Lay’s, Ruffles, Cheetos, and Rold Gold. A desire to aggressively pursue overseas markets led Lay to consider a merger with Pepsi-Cola, the number two soft drink company in the USA. Such a merger would prove beneficial to Pepsi-Cola as well since it would allow the new company’s directors to hold a large proportion of stock shares, thereby eliminating the threat of a hostile takeover. A third consideration was the synergy between salty snacks and soft drinks. It was hoped that the two products could be marketed together to give PepsiCo an advantage over its competitors. The merger went through in June 1965. Over the years, Frito-Lay added a number of brands to their portfolio. A sixth brand called Doritos to the line-up in 1967. At its high point, sales from this new brand would account for one-third of the total Frito-Lay annual sales, second only to Lays potato chips. During this era, other brands were added such as Funyuns in 1969 and Munchos in 1971. The 1970s saw Frito-Lay faced with increased market competition. Not only were regional brands challenging Lays potato chips, but two consumer product giants, Procter & Gamble Company and General Mills Inc., had designed a new type of potato snack. Pringles and Chipos were made from mashed or dehydrated potatoes and were moulded into a uniform shape. Their design allowed them to be neatly packaged. In addition, they were less fragile and had a longer shelf life than Lays. Not only that, but they could also be produced in one location and shipped nationally rather than at regional plants such as Frito-Lay used. In addition to the problems posed to Lays potato chips by these two giants, Frito-Lay also faced competition in its pretzel line from Nabisco Incorporated. Standard Brands, maker of the Planters brand was also expanding into corn and potato chips, cheese curls, and pretzels. Under the guidance of D. Wayne Calloway, President and Chief Operating Officer, Frito-Lay responded to this increased competition by increasing production capacity by one-third by 1979. A new plant was opened in Charlotte, North Carolina and ten plants experienced expansion programmes. D. Wayne Calloway was a man of few words and much action who believed that “if you take care of your people, you’ll take care of your stakeholders”. It was under his leadership that Frito-Lay truly began to take off. Later he would move on to become PepsiCo’s Chief Executive Officer where he would enjoy the same success that he experienced at Frito-Lay (Dumaine, 1989). The 1980s saw numerous products added to Frito-Lay’s lineup. Some of these proved successful, many did not. In 1980, Frito-Lay acquired the
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Grandma’s brand of cookies for $25 million. This venture outside of the salty snack business resulted in a patent infringement lawsuit brought against Frito-Lay in which Proctor & Gamble claimed that Frito-Lay and two other cookie makers had infringed on its patent for Duncan Hines crispy-chewy cookies. Frito-Lay settled this lawsuit in 1989, agreeing to pay Procter & Gamble $19 million dollars. Today, Frito-Lay has grown Grandma’s to the number one single serve cookie brand, primarily through product placement. Frito-Lay racks are generally placed within ten feet of the check stand in any given convenience store with Grandma’s cookies given a prominent spot on the top shelf of the rack. Tostitos tortilla chips also made their debut at this time. About this time, Calloway transferred to become PepsiCo’s Chief Financial Officer. He was replaced by Michael Jordan who served as Frito-Lay’s president for just two years before he transferred to PepsiCo as well. This led to the term of Willard Korn who is most notable for the slew of failed product introductions during his tenure. These items included Toppels cheese-topped crackers, Rumbles crispy nuggets, and Stuffers dip-filled shells. Frito-Lay’s sales force was unable to handle this barrage of new products and failed to properly place or promote these items which led to these new brands quickly being killed. Korn resigned in November of 1986 and Jordan returned to the helm. Moving away from new brand development, Jordan focused on revitalising Frito-Lay’s existing brands. Cool Ranch was added to the Doritos line and a lower-fat version of Ruffles was formulated. A regional brand of cheddar-cheese popcorn, Smartfood, was also acquiredby FritoLay in 1989. These successes were not limited to the domestic market. Internationally, profits were increasing by 20 per cent per year. The year 1991 saw Frito-Lay with a new president. Roger Enrico, a former Frito-Lay marketing vice-president, had most recently served as the president of PepsiCo Worldwide Beverages. A charismatic individual, Enrico was touted as being agile and cunning and not afraid to take chances. These attributes would serve him well in his tenure as FritoLay’s president (Sellers, Barlyn, & McDonald, 1996). Assuming this role, Enrico was faced with a number of problems. There was still the competitive challenge posed by regional and national brands. Anheuser-Buschhad joined this group with its Eagle Snacks brand, a premium brand that it sold at prices that were up to 20 per cent lower than Frito-Lay. On top of these issues, Frito-Lay also suffered from a bloated corporate payroll, declining product quality, and prices that had increased faster than inflation. All of these factors contributed to declining profits.
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Enrico responded by eliminating about 60% of Frito-Lay’s administrative and managerial jobs. He closed four of the company’s 40 plants and the product portfolio was streamlined. Over a hundred package sizes and brands were eliminated. During this time, Frito-Lay also reduced pricing. Enrico also focused on revitalising the company’s tried and true brands. Packaging was redesigned for a number of products and the potato chip brands were reformulated. Listening to consumer concern over the health risks associated with snack chips, sodium content in these chips was reduced. Successful brands were also vertically expanded as demonstrated by the introduction of Wavy Lays and Baked Tostitos. Table 1 Frito-Lay Market Share (1988-2011) Year
1988
1996
1999
2010
2011
Share
38%
55%
60%
65%
69%
By 1996, Frito-Lay had emerged as the clear leader of the salty snack market. Market share had increased from 38 per cent in the late 1980s to 55% by 1996. Two of Frito-Lay’s main competitors had withdrawn from the battle field. Unable to find a buyer for its struggling Eagle snacks brand, Anheuser-Busch shut down this unit in 1996. Borden had previously sold most of its snack businesses when it had restructured earlier in the nineties. What followed was a period of growth and expansion for Frito-Lay. Under CEO Steven Reinemund who took over when Enrico moved up to the position of the CEO of PepsiCo, Frito-Lay purchased the Cracker Jack brand from Borden and reentered the sandwich cracker market. Further product development, advertising, and marketing efforts enabled Frito-Lay to grow their market share to 60% in 1999. Table 1 to the right, illustrates the phenomenal market growth that Frito-Lay experienced from 1988 on. By the late 1990s, Frito-Lay was generating half of PepsiCo’s revenues and two-thirds of its profits. The new millennium saw PepsiCo’s acquisition of the Quaker Oats Company. This added a number of brands to Frito-Lay’s arsenal that allowed it to diversify outside of the salty snack sector. A distribution agreement with the Oberto sausage company a year earlier was also proving to be a boom to the snack food giant. On top of this, Frito-Lay continued to develop new products. Some were aimed at tapping into the growing Hispanic market while others focused on addressing America’s growing desire for healthy snack foods. It was around this time that the Bakedline that had been introduced in the early nineties was expanded to
CASE STUDIES 237
include Cheetos, Doritos, and flavoured Lays. Trans fats were removed from all Frito-Lay products by 2004. A “Natural” lineup of products that were made with certified organic ingredients was also launched. In 2005, Frito-Lay CEO Rosenfield responded to the increasing trend of health-conscious consumers to avoid salty snacks by announcing that Frito-Lay would begin repositioning itself and its brands to compete within the broader “macrosnacks” category. In this category, which included cookies, crackers, yogurt, candy, and salty snacks, Frito-Lay held the leading share of 15%. It was hoped that through increasing the company’s advertising budget by 50 per cent and focusing on creating healthier snacks that the company could increase their share of this $75 billion dollar category. Frito-Lay continues to focus on creating healthier chips. In 2010, the company redesigned the Lays and Tostitos brands so that their ingredients would be 100% natural. This change, and the public relations campaign associated with it, has changed consumer perception of Frito-Lay products. It has also provided the company with the ability to compete more effectively against regional brands such as Tim’s and Kettle Brand Chips. This switch also paved the way for Frito-Lay to address food sensitivity issues. The majority of Frito-Lay chips are wheat-free and a few labels are certified gluten-free. When Pepsi-Cola and Frito-Lay had first merged, there had been talks of a cross merchandising campaign that would market Frito-Lay products next to Pepsi-Cola products. In the words of then Pepsi-Cola chief, “Potato chips make you thirsty, Pepsi satisfies thirst”. At the time these plans were stymied by the Federal Trade Commission ruling that such practices would violate antitrust laws since they would give PepsiCo an unfair competitive advantage over Coca-Cola. However, by the late 1990s the political climate had changed. PepsiCo Chief Executive Enrico successfully instituted the “Power of One” campaign in the late nineties. Enterprising salespeople persuaded grocery retailers to place soft drinks next to snacks to increase supermarket sales. This allowed PepsiCo to gain sales on both products while corporate rival Coca-Cola would only gain sales on the beverages. In 1999, this campaign was partially responsible for a two point market share increase. In the early 2010s, PepsiCo reached an agreement with AnheuserBusch to incorporate Budweiser displays into the “Power of One” campaign strategy. Coupons are available on joint displays that provide the consumer a discount when they buy Frito-Lay products in
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combination with Budweiser products. The benefit to Anheuser-Busch is the same that PepsiCo enjoys when Frito-Lay product is merchandised with Pepsi. While preliminary results are promising, it is still too early to judge the success of the partnership between the two companies. In recent years, Frito-Lay has placed an increasing focus on environmental sustainability. While this may be the result of a heightened sense of social responsibility, Frito-Lay uses their efforts along this line to appeal to the environmentally conscious consumer to lessen the economic impact of their sustainability drive. The SunChips marketing effort is a great example of Frito-Lay’s efforts to reach environmentally conscious consumers. In 2008, Frito-Lay converted its Modesto, California SunChips plant to utilize solar energy in the production of SunChips. The success of this first plant led to a second plant in Casa Grande, Arizona that made further use of newer renewable energy technology to produce SunChips (Frito-Lay, 2012). Through news stories and direct advertising, Frito-Lay uses the success at these plants to market to the environmentally conscious consumer. Not all of Frito-Lays efforts with SunChips have proven as successful as these two plants. In April 2009, Frito-Lay launched a SunChips bag that was 100% biodegradable. Initially, the bag decomposed within 12 weeks, however when consumers found the bags to be too noisy, Frito-Lay redesigned the bags. While the bags are still biodegradable, the process takes longer than the original twelve week period. Early in 2000, Frito-Lay began placing a “Smart Spot” symbol on products that were healthier than other snacks. The criteria for the symbol was that that products had to contain 150 calories or less, less than 35 per cent of these calories could come from fat, the product could not have any trans fats, and the product had to have less than 240 milligrams of sodium per one ounce serving. Health conscious consumers demonstrated their appreciation of Frito-Lays “sensible snacking” strategy. In 2003, sales of “Smart Spot” products grossed more than $1 billion out of Frito-Lays $9.09 billion sales. In recent years, Frito-Lay has made increasing use of interactive advertising campaigns. These campaigns allow consumers to take part in the ad campaign. For example, Lay’s “Do Us a Flavour” campaign allowed consumers to submit new flavor ideas for Lays potato chips. The winning submission received either one million dollars or 1% of that chip’s net sales for the first year of the chip’s production cycle, whichever is more.
CASE STUDIES 239
There are several benefits of interactive ad campaigns. By inviting consumers to make suggestions, a company engages the consumer and makes them feel special. In an era of social networking, participation in such a campaign provides “word-of-mouth” advertising to on-line friends. These strategies also take advantage of a global think-tank as a quick and low cost way to generate new ideas (MindJumpers, 2012). To what extent is a company responsible for the well-being of its consumers? Both First Corinthians and Romans warn against engaging in behaviour that can cause others to fail. Jesus tells us in Mathew that in all we do, we should let our light shine forth so that others may see our good works and give glory to the Father who is in heaven (5:15). More importantly is our call to treat each other with love and kindness. By these standards, Frito-Lay failed in their responsibility to their consumers when they failed to pull the Wow! line of products that were making people ill. The company placed financial gains over the welfare of its customers. One of the central themes of the Bible is that of stewardship. God entrusted the earth to Adam and Eve and their offspring in Genesis 1:26-28. Through our stewardship, we can fulfil the great commandments of loving God and loving our neighbor. By taking care of the resources with which God has provided us, we ensure that future generations will enjoy those same resources. Frito-Lay’s sustainability foci align with this biblical theme. In the mid-1980s, Frito-Lay launched a slew of products in an effort to expand into the non-salty sector. Unfortunately, the company neglected to develop an infrastructure capable of supporting these products prior to their launch. The 10,000 strong sales force of the time proved to be incapable of managing all of the new products and the brands were quickly killed. Sometimes it is best to focus on expanding current brands rather than creating new ones. An established brand has the trust of the consumer and a strong following. By expanding on that brand, a company can capitalise on this trust by providing the customer with new options. Consumers tend to prefer sampling new variations of preferred items over risking the purchase of a new item that they might not like. Much of Frito-Lay’s success lies in the competitive nature of its sales force. Having achieved a 55% market share in 1996, it must have been tempting to step back and maintain that position. Instead Frito-Lay challenged its sales force to eliminate Eagle Snacks from the market. To aid in this endeavour, Frito-Lay Inc. cut costs to keep retail prices low. They also increased the level of service that they provided their customers.
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The main focus of any business should be the customers. Through market studies, consumer surveys, and interactive marketing campaigns, Frito-Lay has demonstrated the important regard in which they hold the customer. These tools have allowed the company to develop and manufacture products that their customers want. They also allow the company to respond to the changing desires of their customer base fairly agilely. With that said, there is an inherent danger in focusing on meeting every customer’s desire. New product development can be expensive and it might not make sense to meet every passing trend with a new product.
QUESTIONS 1. Why did the “Power of One” marketing strategy prove so successful to PepsiCo? Can you think of any other companies that are in a position to replicate it? 2. Are there times that introducing new brands might prove more beneficial to a company than expanding current ones? Explain. 3. Frito-Lay’s market share growth from 2000 to 2010 was only 5%. This is a sharp contrast to the nearly 20% growth that they showed from 1988 to 1998. Discuss the reasons for this slower growth. 4. For many years Frito-Lay operated under the philosophy that they sold a premium brand for a premium price using premium service. What are the problems with this philosophy? 5. Should Frito-Lay consider adopt other strategy? Explain.
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Second Edition This book presents practical understanding of the management problems. Broadly, it is meant for the students who have basic training in management or commerce and also for those with little or no formal management background like MCA and Engineering. For management professionals, essential principles and concepts of management that are particularly relevant for understanding the problems of management are highlighted through issues for discussion. Thus, the book is of special value for undergraduate and postgraduate courses, like BBA, MBA, MHRD, MIB as well as for B. Tech. and MCA. The case material is sufficiently broad in scope and rigorous in coverage to satisfy any undergraduate and postgraduate courses in the field of management. Each case study provides a descriptive analysis of the critical problems faced by leading organisations. Furthermore, each case study is chosen to reflect and illustrate a specific problem. Each case study contains one relatively successful and the other less so in dealing with one or more of the critical issues or problems. All case studies have been updated to reflect the latest available information about the corporate world. Issues for discussion in each case are an attempt to explore various facets of management principles involved in solving the problem.
978-93-89307-51-1
CASE STUDIES IN MANAGEMENT
Dr. Akhilesh Chandra Pandey
Dr. Akhilesh Chandra Pandey is senior faculty in Department of Business Management, HNB Garhwal University (a Central University), Srinagar, Garhwal, Uttarakhand, having more than 17 years of experience in teaching, research and training. He is an expert member of Technical Evaluation Committee of BSNL. He is PhD, MBA, and LL.B from University of Allahabad. He is also an Associate Member of AIMA, New Delhi. His areas of interests are Organisational Behaviour and Consumer Behaviour. He has published more than 45 research papers in national and international refereed journals and presented 42 papers in various conferences. He is chief editor, Gumbad Business Review and member of Editorial Board for Vedang, Acme and Academy of Business & Retail Management Research, London. He is member of ISA; Society for Management Education, India; Strategic Management Forum, India; and Circle for Child and Youth Research Cooperation in India. He was invited to present his research paper in International Sociological Association, Goteborg, Sweden and International Trade and Academic Conference, London in 2010. He had visited University of Goteborg, Sweden; University of Sri Jayewardenepura, Sri Lanka; University of Wollongong in Dubai, Dubai; and Zayad University, Abu Dhabi.
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CASE STUDIES IN MANAGEMENT
CASE STUDIES IN MANAGEMENT
Dr. Akhilesh Chandra Pandey Distributed by: 9 789389 307511 TM