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CASE GAME The Case Of Competitive Response Faced with the entry of new players, Total Industries is scrambling to erect entry barriers. Is it on the right track? M. Venkateshwarlu of Nitie, Rajesh Kaushik of Renaissance, and M.N. Gopalakrishnan of Business Consulting Group debate. By R. Chandrasekhar
On the face of it, Abhinav Kumar had no reason to be losing sleep. As the only heir to a Rs 6,500-crore conglomerate, Kumar had everything going for him. His company, Total Industries, was the market leader in its three core businesses of consumer durables, switchgears, and batteries. Even soaps, a legacy business, had turned around following a contract manufacturing agreement with an industry major. Yet, in the past six months, Kumar had found his sleep getting disturbed. He knew exactly why. Ironically, it was a fallout of Total's success in the marketplace. The company had reached critical mass in some of its divisions, particularly in terms of production capacity and marketshare. For instance, in switchgears it had a 23 per cent share and in refrigerators nearly a quarter of the market. In colour televisions (CTVs), Total was No. 2, and the batteries division was close to acquiring a small, but niche, rival player. But overall, Total was at risk. It was moving closer to a situation where the more it produced, the less profits it earned. As Ratika Sahai, Total's young batteries head, had been saying of late: ''No single brand in a competitive market can get more than 20 per cent share without compromising on margins.'' Kumar too believed that beyond, say, a 25 per cent share, a phase of diminishing returns sets in. It was in this context that Kumar and his A-team had been debating stepping up exports and acquiring plants in key global markets. ''Now that I am awake, let me put some thoughts down on the issue,'' Kumar said to himself. ''That way I'll have more firepower for the 9:30 am meeting.'' Cheese sandwiches and assorted beverages were doing busy rounds when Kumar walked into the conference room, five minutes early. Pouring himself some black coffee, Kumar got down to brasstacks. ''I've been thinking about our export push, and I think there are some key issues we need to address before we decide one way or another. The single-most critical question is this: are we really strong on the home turf?'' ''As on today, yes,'' said Srikant Suresh, president of the durables business. ''But our hold on the market may well be tenuous. Once the market equations change for whatever reason, our competitive position will weaken.'' ''I agree,'' said Kumar. ''Despite our impressive marketshares, we haven't yet reached a stage where we dictate terms, as a true market leader would. We simply are unable to influence the market and grow it even in categories that we lead from the front. The switchgears market is growing at a paltry 11 per cent, that of refrigerators at 10 per cent, and CTVs' is growing even slower. What I am concerned about is the entry of new players in most of our businesses. I think we are vulnerable, and signs of it are already visible.'' ''To fend off new players,'' noted Manoj Kohli, head of the switchgear business, ''we need to reinforce our defences. Dealer loyalty has been our main defence. Thanks to the brand equity we have built up over the years on the value-for-money platform and assured volumes, our dealers have stood by us. In fact, they have stuck with us even as we have been enforcing strict credit limits for the last few years.'' ''Not too many companies would dare to ask their dealers for 20-day post-dated cheques against delivery of goods,'' pointed out Suresh. ''But that very defence is now becoming our Achilles' heel,'' rued Kumar. ''In a way, yes,'' admitted Suresh. ''Dealers are now insisting on more liberal credit terms. They are willing to place orders only if we give credit of at least 75 days, effective next financial year.'' That's a hefty demand,'' quipped Kohli. ''It's happening because of Coolit,'' explained Suresh. ''The new Korean manufacturer is promising 90-day credit. But they don't start manufacturing until early next year. As is obvious, Coolit is targeting Total and wants to force us to toe its line. But I feel that giving in at this point will weaken our position in the trade.'' ''How will a 90-day credit period affect our bottomline, Vikas?'' Kumar asked Total's CFO, Vikas Singh. ''Our marketing expenses-comprising advertising, promotion, and the cost of credit, but excluding salaries-are 9 per cent of sales. If we relax our credit terms, the figure should jump to 11.5 per cent.'' ''But, Abhinav,'' Suresh pleaded, ''this might be a small price to pay to build entry barriers around us.'' ''But how can yielding to a competitor be a way of strengthening the entry barriers?'' asked Kumar. ''Shouldn't we be examining ways of taking the war into the enemy camp?'' ''We could relax credit terms for a short period,'' suggested Guneen Roy, the soaps President, ''as a tactical move. I worry that we may be hit if we do not change our strategy. After all, we must acknowledge the fact that the profile of the customer, the competitor, and the dealer is changing. There is indeed a cash crunch in the market.'' ''In my opinion, our response should not be tactical,'' argued Suresh. ''Coolit is all set to launch its entire range of durables, including CTVs, by the middle of next year. We, therefore, need to take a strategic, long-term view of the threat.'' ''I agree,'' said Kohli. ''Total has the potential to build its leading brands to world-class standards. Thanks to our TQM initiatives, we have achieved zero customer returns and customer satisfaction is rising.'' ''If there is sufficient consumer pull,'' Singh proposed, ''then we should continue with our existing strategy. And invest money in brand building.'' ''I think there is merit in taking the advertising route,'' seconded Roy. ''Enhancing dealer and customer incentives would only take care of the topline growth. There is no guarantee that it will help increase margins, brand loyalty or equity, or reinforce the entry barriers we have built.'' ''Taking a lateral view,'' said Singh, ''may be we should provide credit to customers instead of the top dealers. We could tie up with finance companies for three-year zero-interest loans.'' ''How are the other players reacting to Koolit's entry?'' Kumar asked Suresh. ''There is evidence of panic reaction. Suddenly, there is more happening on the market front. There are more new products and prices; distribution and customer services are being beefed up. For instance, CPL-the second-largest player-is examining the possibility of building a network of its own franchised outlets. Videotone is thinking of acquiring major distribution outlets in parts north India on an experimental basis. And Worldpool is diverting all its adspend this year towards promotion schemes.'' Sahai had other ideas. ''None of our competitors, including Koolit, can match our tool-room capabilities that are central to reducing the time and money required to launch new products,'' argued Sahai. ''We make much of the plastic parts required for CTVs and refrigerators. Second, our design studio is state-of-the-art. We can programme any digital features the consumer wants because we are good at programming micro-controllers-the chip that is the brain of all modern appliances.'' ''Besides,'' Suresh butted in, ''our chassis design skills help us order components from any vendor unlike our competitors who depend on a dedicated Japanese or Korean supplier for the entire range of components. I think our barriers should be built around these competencies.'' Kohli, then, came up with the argument that Koolit would try to wean away Total's vendors, thus diluting its supplier base. ''We should quickly take steps to strengthen our vendor confidence in Total,'' he said. Kumar found it hard to disagree with his senior executives. It was a fact that over the years, Total had built up considerable skills in sourcing, producing, and delivering the right combination of benefits to customers at the lowest possible cost. Total had made investments, in terms of managerial time and resources, in nurturing relationship with vendors. Together with its ongoing vendor development programmes, it had given Total a firm grip over its manufacturing costs. In fact, the company had been receiving enquiries from competitors for contract manufacturing in all four divisions. Rao made an additional point. ''Many entrants, including Koolit, are likely to target Total's managers to reinforce their manpower. We need to be on our guard.'' Among the existing players, there was an unwritten rule against poaching each others managers. But Koolit was unlikely to follow that rule. ''I think we should review the compensation package of all the 125 managers who have been identified as double high performance-high potential category.'' ''In addition,'' Kohli said, ''we should take all our employees into confidence by declaring our new focus of going global. Growth can be a big motivator, since it opens up new career opportunities for managers.'' ''I think our entry barriers must be built on each of these strengths,'' Kumar opined. . |
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The
digital clock by his bedside said 4:15 am. ''Looks like this is all the
sleep I am going get for tonight,'' thought the athletic, 30-something
man, softly lifting his legs off the bed so as not to disturb his wife of
four years sleeping beside him. Slipping into a collarless t-shirt, he
padded softly out of the room into the next-his study room.
