Case Study: The Case Of Strategy Planning

Synopsis: Deep down inside, the bespectacled T.R. Jagmohan, the CEO of Coolex, the country's largest manufacturer of industrial air-conditioning systems, was bored. None of his domestic competitors could touch him, and his foreign rivals were keener on allying rather than fighting him. During both the post-liberalisation boom and the bust, Jagmohan had hoped that the changes in the marketplace would shock his colleagues out of their efficiency. When they didn't, he decided to adopt a different tack. Management consultant Rama Bijapurkar, Thermax's Anu Aga, Rabo India Finance's Rana Kapoor, and Business Consulting Group's K.A. Ramakrishnan debate the consequences. A BT Case Study.

Southern Comfort was the most-happening South Indian restaurant in town. Its teak-and-ersatz banana-plants decor was appealing; the food, authentically South Indian; and the service, excellent. Still, food was the last thing on the mind of T.R. Jagmohan, 46, the stubby, balding CEO of the Rs 620-crore Coolex, the country's No. 1 air-conditioner manufacturer.

However, it seemed to be the only thing that mattered to Jagmohan's tablemate, Ashish Mahapatra, 49. Yes, this was one of the foremost strategy thinkers in the world, a professor at the University of Southern California, who was in the country on a lecture-tour. The lunch was Jagmohan's idea, but he had warned his friend from B-school that it wasn't to talk about old times. He watched with growing impatience as Mahapatra polished off the last of his adai, a pancake made of pulses.

"Some exercise for the brain after a good meal, I guess," sighed Mahapatra. "You want to pick my brains about strategy-planning. Tell me."

Jagmohan was only too willing. "Coolex was founded in 1965 by a group of technocrats. Professionally managed since its inception, it went public quite early. When I joined the company as a management trainee 14 years ago, we had a 55 per cent share of the local central air-conditioning business. Today, it stands at 40 per cent. The rest of the market is fragmented, with our closest competitor, Airtemp, accounting for a 15 per cent share. Still, every day brings more competition. Airtemp itself is a new-comer, having launched its products only in 1994. And it isn't just competition, even our customers are becoming, increasingly, unpredictable"

THE CORE
COMPETENCE AUDIT

A. DOES THE COMPANY HAVE A CORE COMPETENCE?
Does the company possess one, or more, identifiable skills?
Are the skills embedded in one, or more, groups of people?
Do the skills lead to improvements in one, or more, processes?
Does the company benchmark these processes against global standards?
Do the results suggest that the processes are best-in-class?
B. DOES THE CORE COMPETENCE ADD VALUE?
Does the customer think that the company's skills are stronger than its rivals'?
Do the competencies lead to measurably superior results?
Do those results add value to the products?
Are those results central to the company's value proposition?
Are those results boosting marketshares and profits?
C. IS THE CORE COMPETENCE SUSTAINABLE?
Does the core competence steer the corporate power-structure?
Has it been ratified by the CEO?
Are there continuing efforts to develop the competence?
Has the competence been developed through a focused effort?
Has it been transferred across the organisation?
D. IS THE COMPANY NURTURING ITS CORE COMPETENCIES?
Is the company retaining people with the core skills?
Is it ensuring that too many decentralised initiatives are not taken?
Is it continuously measuring the results of key processes?
Is it setting rising targets for results from these processes?
Is it trying to impart these core skills to new people?

"And that worries you even more," Mahapatra finished for Jagmohan. "But what is your vision for Coolex? Have you defined it ever?"

"To become a one-stop national shop offering air-conditioning products, systems, and services. We have set ourselves the goal of achieving a turnover of Rs 1,000 crore by 2002 by growing all our businesses: central air-conditioning, unitary air-conditioners, and ducted systems."

"How much do each of these businesses contribute to your sales?" queried Mahapatra.

"We recorded a turnover of Rs 620 crore in the year ended March 31, 1997. Seventy per cent of this came from central air-conditioning, 15 per cent from unitary air-conditioners, and 15 per cent from our trading operations."

"A 60 per cent growth-rate over 4 years is a fairly conservative target," said Mahapatra. "Do you wish to discuss with me the strategy that can help you achieve this?"

"In part, yes," conceded Jagmohan. "What should our business-mix be? Can we achieve our goals faster by focusing on one or two businesses? Those are the questions our strategy needs to address. But I didn't come to you for the answers; I wanted to reassure myself that we have the strategy-formulation processes to address this as well as any other issue we may later face."

"Every year, in January, I get my senior management team--the functional heads of Finance, Marketing, hr, and Operations, and the 3 heads of our business units--for a week-long discussion on the company's future course. We ask ourselves the kind of questions you'd encounter in any strategy-development process. Where are we today? Where do we want to be 3 years from now? How do we bridge the gap between our resources and our goals? Who are our competitors today? What is the competitive framework in which we operate? What are the strategies being adopted by our competitors? The answers form the basis of our strategy-formulation."

"Good," said Mahapatra, "you took the caramel-custard route. Just ask the questions every company has been asking itself since the time of Fredrick Winslow Taylor, and you have a strategy. I hope you realise that the only reasons this approach worked over the years are your historical advantage, and familiarity with a regulated environment. And both are under threat now."

"I realise that," said Jagmohan. "What we need to now look at the developments in electronics and energy-management, and incorporate them into our strategy-planning. But how?"

"What's wrong with the conventional approach," started Mahapatra, "is that it relies on a static picture of the competition, underplays the role of innovation, exaggerates the role of the environment, and does not account for the varying resource- and competence-levels across companies. My experience with companies in several parts of the world indicates that your problems are not exclusive to Coolex. This malaise can, partly, be attributed to the fact that the planning process itself has become--as in your case--a mundane, annual ritual. Managers view it with no enthusiasm. It takes too much time without, often, leading anywhere, and it is a waste to contemplate long-term strategy in an uncertain atmosphere, where even the next day may bring far-reaching changes. Traditional strategy-planning tools, like the Portfolio Models, have not really worked, and synergy across business units remain elusive."

"No way. But you should try looking at it from a different perspective. Don't try to find the most advantageous strategic position in relation to the environment and your competitors. Instead, move towards building and exploiting your resources. Why don't you base your strategy on your core competencies instead of the environment and the industry? Let me elaborate on the deficiencies of the latter. If you adopt the industry-structure approach to quality, your strategy-planning process becomes reactive. You look at your competitors, suppliers, or customers--and react. This approach can work as long as the going is good. But it does have its limitations; it is, after all, derived from a theory that sought to explain industry-dynamics, not company-competitiveness. However, if you adopt the competence-based approach, you will look within your organisation, find your core strengths, and understand how you can leverage them to gain a competitive edge. It will help you realise which strategy is good for Coolex without blindly following every move that your competitors make. After all, you may not be able to emulate your competitors simply because you do not have the expertise to do whatever they are doing. Do what you do well; the rest will just fall into place."

There the luncheon ended. A satiated Mahapatra left to address a group of managers at a seminar organised by the Bombay Management Association. And a disturbed Jagmohan returned to work.

Spurred by his discussion with Mahapatra, Jagmohan convened a meeting of his brains-trust the next morning. "I have decided that we need to take a different approach to our strategy-planning," he told the 7 senior executives who assembled in the conference-room. "Let us find out what our internal strengths are. I think there are 3 characteristics of a strength. One, it needs to be unique to Coolex. Two, it should be difficult to emulate. And three, it should be internally sustainable over a period of time. For the next 30 minutes, we will not speak. Instead, we will put down our thoughts on paper. Then, we will take turns to speak. And, hopefully, we will have a clear idea of our strengths."

Thirty minutes passed. Avinash Vaidya, 38, Director (Finance), was the first to speak about, expectedly, finance: "Our working-capital requirements are met by client-funds rather than bank finance. Loans constitute less than 5 per cent of our total working-capital requirements. We have always ensured an optimal level of liquidity in our operations: by setting a modular schedule for each project, completing each module on time, and collecting a part-payment at the end of each module. This sets us apart from our competitors. Their emphasis on unitary air-conditioners and ducted systems makes it difficult for them to emulate us."

A.V. Raman, 45, Director (Operations), was next: "Our core strength is our project-management skills. We ensure the best deliverables, in terms of service and adherence to schedules." Raju Rastogi, the Head of the Ducting Systems business unit, agreed: "Our competitors do not have the capabilities that Coolex has in terms of engineering, procurement, and construction."

Sanjeev Nanda, 43, Director (HR), predictably, picked people: "At Coolex, we have a disproportionately large share of the talent in the air-conditioning industry. With 650 qualified engineers and 1,200 trained technicians, we can boast of the largest concentration of specialists in the country. Their competence has contributed to our monopoly in central air-conditioning. That, in turn, enables us to attract talent."

Girish Wadhwa, 49, the Head of the Central Air-Conditioning business unit, picked relationship-management: "We have built, over a period of time, excellent relationships with architects, interior designers, construction firms, and suppliers. This network functions as an entry-barrier to competition."

Debashish Rana, 35, the Head of Trading Operations, stuck to his business unit: "We have the finest logistics support for our trading operations. Over the years, we have not only built and nurtured our distribution-channels, but also diversified the range of products on offer. We have 200 dealers marketing products we source from 65 companies today."

"And," continued Gopal Menon, 41, Director (Marketing), "our strategy of going in for margins instead of volumes seems to have worked in our trading division. We choose products based on emerging technologies, and develop the brands over a period of time. Several technology-intensive products that we distribute have benefited from this. Given the number of inquiries we generate, we seem to be among the most sought-after distributors for any company manufacturing such products."

Jagmohan spoke last, and he picked an unlikely strength: "Our major internal strength is our structure. We have just 4 layers of management, and this has made decision-making flexible in contrast to our competitors. Given that pace is the fifth P, I think our structure gives us competitive advantage."

"But which of these is a core competence?" Jagmohan continued. "I believe that a company cannot have more than two or three core competencies. Going by that logic, our core competence is our turnkey abilities. Should we divest our interests in manufacturing and trading, and focus on just this?"

"That wouldn't make sense," countered Menon. "In most parts of the world, companies in our industry focus their efforts on manufacturing and marketing, and outsource project-management expertise. And the market for air-conditioners of less than 3-tonne capacity is set to grow at 30 per cent a year, where Airtemp, with a marketshare of 30 per cent, is the leader. Should we not aim for a larger slice of that market "

Even as Jagmohan tried to think of an answer, Nanda spoke: "What is new in our perspective of strategy? I think we have looked at our internal strengths in our previous attempts at strategy-formulation. Only, we combined this with an analysis of the external environment which was, and is, critical. Even if we want to carry this approach to its logical conclusion, which should we focus on? After all, between the 7 of us, we have listed 6 core competencies!"

How should Coolex evolve its strategy? Should it continue with the conventional approach, with its focus on the external environment, in the face of potential competition? Is it feasible to link strategy-planning at Coolex to its core competencies? Or is the competencies-based approach to strategy-development old wine in a new bottle? Has Coolex got a grip on its core competencies at all? Is there an alternative to the traditional approach to strategy-formulation? Are the managers of Coolex asking the right questions? What should the road-map for Jagmohan and his team be?