Case Game: The Case Of Business Reorganisation

CASE GAME
The Case Of Business Reorganisation

Will restructuring around its core competency help BT's fictional firm Total Industries boost its profitability? iitiim.com's P. Mittal, IIM Indore's S. Ghosh, and M&M's V. Venugopal analyse the issue.

By R. Chandrasekhar

It had just been an hour or so since his entourage had set off from Indore, but Abhinav Kumar couldn't wait for the bone-rattling ride to end. The CEO of Total Industries-a family-owned conglomerate with interests in consumer durables, switchgears, batteries, and soaps-and his top executives were headed for Mandu for a two-day brainstorming session.

Although Mandu was lush green this time of the year, and had plenty of history to boast of, it was an unlikely corporate retreat. But Kumar had picked the destination for a specific reason. Total's first quarter had just ended and profits had taken a severe beating. A locale fancier than Mandu, Kumar thought, would not do justice to the gravity of the situation.

Quarter to eight in the morning, the six cars laden with Total execs pulled into the historic town in Madhya Pradesh. Kumar's generals had 15 minutes to check in before the breakfast meeting began. By quarter past eight, the group had settled down with its bowls of cornflakes and plates of toast. Without much ado, Kumar got down to brasstacks.

''The long-held credo at Total,'' he began by way of introduction, ''that if you get volumes and marketshare, you automatically make profits, is no longer valid. Anybody who disagrees with me has only to look at our bottomline performance. In switchgears, one of our most profitable businesses, the net margins are down to 12 per cent from 13 per cent in the first quarter of 1999; in consumer durables it has halved to 6 per cent; the batteries business is under pressure too, and the ailing soaps division has just about started looking up, thanks to the tie-up with B&B.''

''If I may add,'' said Manoj Kohli, the 40-something President of the switchgear unit, ''the results would have been worse had we not started focusing on operational efficiencies. We have introduced total quality management, have strengthened the supply-chain of all our businesses, and cost-reduction has become the buzzword. However, I think the risk of becoming a high-cost, low-margin company persists.''

''Could it be that the source of the problem lies in our organisational structure?'' asked Srikant Suresh, Total's pointman for the durables business. ''Total has been organised for years along four divisions, which are independent profit centres. Except for hr and finance, all other functions are decentralised. The advantage is that each of the businesses has got a strong focus.''

''Agreed,'' butted in Kumar, ''but the downside is that we have pushed autonomy so far down the line that businesses are becoming insular and inward-looking. Command is getting dissected. And Total is unable to exploit the winning edge of size. For instance, each division has its own advertising budget-even separate ad agencies. Competitive pressures are forcing our sales force to look at short-term product promotions. Moving tonnage has become the over-riding goal, and moving the margin, a secondary objective. The cost of sales is rising much faster than the rate of growth in sales.''

''Should we disband our divisional set-up?'' asked Vinod Rao, the head of hr. ''Should we instead create a functional structure? That would be bucking the trend. Corporations typically move from functional to divisional set-up, and then to a full-fledged strategic business unit (SBU) stage, before the SBUs are spun off into separate companies.''

''A functional structure at Total,'' chipped in Ratika Sahai, the young President of the batteries unit, ''would create more problems than solve them. Instead, why don't we identify areas of excellence within the group and build a new structure around them.''

''But do we have any clarity and consensus on what Total's core processes are?'' questioned Rao. ''We have not yet formally spelt out what constitutes the single biggest core competence at Total. I am referring to core competence as an exclusive attribute that our existing competitors cannot duplicate.''

''It's an issue worth exploring,'' noted Kohli. ''But let me be the devil's advocate: Do we have a core competence?'' Kumar kept quiet, and let Sahai take the question, as he noticed that she was itching to answer it. ''Surely,'' Sahai opined, ''with over two decades of strong background in manufacturing and marketing a wide range of products, we must have pockets of excellence somewhere.''

''I agree,'' Kumar said. ''Let us first zero down on our core processes. From there, we can identify what our core competencies are. That, gentlemen, would be our topic for tomorrow. For now, enjoy your evening.''

Next morning, the meeting started sharp at half-past-eight. Suresh picked up the threads from the previous day's discussion. ''I think some of our core processes are obvious,'' he began. ''Over the years, Total has acquired considerable understanding of the profile of the consumer at all its divisions. Fine-tuning on a regular basis, and leveraging that knowledge to build consumer equity, is a major process. But that can't be defined as a core competency.''

''Product-design and development,'' said Guneen Roy, head of soaps, ''is a core process where we have a good track record. But I wonder if this could be a core competence because it's not enough for a brand to deliver customer-value; it should also meet our financial and strategic goals. It is only when these two objectives-which are by no means contradictory-are aligned that we can see the possibility of a core competence.''

''In which case, the same would be true of our distribution system,'' said Sahai. ''We have a network of 7,000 dealers, but it merely serves our internal requirements. I see little evidence to support the building of a business around our distribution chain even if we were to support it with the latest infotech systems.''

''Let's look at supply-chain, then,'' suggested Kumar. ''Sourcing, producing, and delivering the right combination of benefits to customers at the lowest possible cost is a major process for a company like Total. Over the year, we have built up extensive relationships with suppliers. Along with our quality initiatives, it has given us a firm grip over manufacturing costs. It is only in the post-manufacturing costs that we have flab.''

Kohli agreed: ''That explains the enquiries we keep getting for contract manufacturing. Supply-chain is one of core strengths."

''But can we restructure our organisation around it?'' asked Kumar. ''Can we create a common platform that can take responsibility for all activities up to the ex-factory costs for the whole organisation? True, our four divisions do not have a high level of synergy. But if we centralise all activities pertaining to supply-chain management, we could ensure that our competencies are not fragmented.''

Kumar paused to see the reaction of the group. He then continued: ''In fact, I would go as far as to suggest that we vest the responsibility for the supply-chain-which accounts for more than 80 per cent of the value-addition in our product-cycle-with a separate internal outfit called, say, Product Supply Organisation (PSO). The PSO would be headed by a president and oversee the range of activities up to delivery of finished goods. The PSO would help us increase margins in three ways: one, by delivering products to sales and marketing at a pre-determined price; two, by exercising a tight control on costs; and three, by developing and securing the profitability of all contract manufacturing business.''

The suggestion was radical. But that wasn't the only reason why the group of senior executives was silent. A PSO system would also mean loss of personal turfs. And the top team consisted of those who had risen through the ranks at the company.

Kohli broke the silence. ''A lot of Indian corporates, including Godrej Soaps, have used the PSO route to their advantage. The point to note is that all of them have been single-product category companies, and that's probably why it worked for them. The idea of a PSO is compelling. But the challenge lies in making it work for a diversified group like ours.''

''If cutting costs is our focus then why don't we look at post-manufacturing expenses?'' queried Singh. ''Let us centralise sales instead. There are companies that have a Central Sales Organisation (CSO).''

Rao intervened to air his apprehensions. ''No matter what the final change is, it must answer four basic questions: Does it build enough management depth? Does it help build and develop competencies? Does it allow cross learning? And, does it leverage the company's resources fully?''

Kumar nodded. ''It all boils down to the basic premise that what gets rewarded gets done. If rewards are linked to margins, and not sales, profitability will go up. But there should be an organisation-wide understanding of what delivers shareholder value. Is it value, volume, customer retention, or customer satisfaction? Without that understanding, any change in structure-however fundamental-will not work.''