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CASE STUDY The Local Dynamics of a Global Strategy ''He wants us to go global... To become South Asia's biggest manufacturer of radials. To acquire plants in South America and East Asia. To market our Solus brand all over the developing world... But he doesn't seem to recognise the threat we face in our home market at this juncture. From transnationals, like the American Tyre Company, which are all set to sweep in. From our domestic rivals, who offer better dealer-incentives and longer credit-terms. From the industrial slowdown, which is slowly turning into a recession... How can we take over the world if we ourselves get overtaken locally? Where do we have the finances to invest continuously in R&D? Are we capable of successfully assimilating companies, nationally and internationally?... The way I see it, we should focus our attention only on retaining our leadership of the domestic market. Even that may prove to be impossible if we don't increase our investments in building our brands and distribution channels right away. How is it that he and I see things so differently despite working for the same company?..." fretted and fumed Sharat Kumar, the 44-year-old Marketing Director of the Rs 1,696-crore Tyres India, as he mentally prepared himself for the Management Committee Meeting. PricewaterhouseCoopers' Ambarish Dasgupta and Eureka Forbes' S.K. Palekar evaluate his assesment, and draw up a strategy for Tyres India. A BT Case Study. Management Committee Meeting, Tyres India Saturday, 9.00 a.m.: It was the routine monthly meeting of the management committee of the Rs 1,696-crore Tyres India Ltd (TIL). But all the 7 members present were well aware of its not-so-ordinary agenda: the imminent entry of the $30-billion Atlanta-based American Tyres Co. (ATC), the global tyre-giant, into the domestic market. Worryingly, that morning's newspapers had coincidentally confirmed their worst suspicions about a slowdown in the automobile industry, with the Rs 8,500-crore truck-manufacturer, Auto Engineering, recording, for the first time in its 100-year history, losses in the previous financial year. After five years of record growth, virtually all the segments of the automobile market appeared to be moving into reverse gear. No wonder Sharat Kumar, 44, TIL's Director (Marketing), was a worried man. As he gathered together his papers, V. Ramachandran, 42, TIL's General Manager (Sales), came into his office, carrying a copy of the top priority e-mail that he had just received from Ashok Joshi, TIL's Zonal Manager (North), asking for liberal dealer-credit terms. The message read: ''Urgent: Our dealers are willing to place orders with us only if we provide them with credit for at least 90 days against our present policy of 21 days. Our competitors are willing to offer them more credit than even that. With the imminent entry of ATC, they are trying to increase their marketshares through additional customer- and dealer-incentives. As you know, our dealers are also complaining about the liquidity-crunch that they are facing. I fear we may be the most affected company in the tyre industry if we do not act now. Please advise...'' Immediately, Kumar asked about the costs TIL had incurred to finance its sales in the last financial year. ''Directly, it was about 2.50 per cent of sales, and if we include all our other marketing expenses, it would have been around 7 per cent,'' said Ramachandran. ''This year, we may have to increase it to 10 per cent to build strong barriers around our brand...,'' he continued. ''Yes, we need to protect our turf, and build strong entry-barriers into the business. But I don't know whether we will be able to get the necessary finances. You know the chairman is more keen on going global. He is interested in buying up companies in South America. We have just invested money in radial capacities in Western India. Who will support our case for additional finances?'' muttered Kumar, almost to himself, as they walked to the boardroom for the meeting. Just as they took their seats, TIL's Managing Director, Abhay Singh, 45, walked in along with the Chairman, Mohan Biswas, 65. The latter started the meeting on a cheerful note by enthusiastically stating that the financial institutions had agreed to fund the company's expansion plans, which would make TIL the largest producer of radial tyres in South Asia in the next five years. He also mentioned that the company's plans to buy out tyre-manufacturing capacities in Brazil and Mexico had reached an advanced stage, and would be finalised in the next 4 weeks. ''This will help us take the war into the enemy's territory,'' intervened Singh. ''I am really excited about it. This will give us a chance to be a truly global company, and showcase our home-grown brand, Solus, to the world. How do you feel about it, Kumar?'' ''I feel good,'' replied Kumar. ''But I believe that we have to protect our home turf too. My worry is that we may be in trouble if we do not alter our strategy soon. The profile of both the customer and the competitor in the domestic market has changed. There is a cash-crunch. Almost all the automobile manufacturers are reporting falls in sales for last year, and projecting that this year could be worse. We need to spend some time discussing our gameplan to fight the entry of ATC and retain our leadership of the home market. We can't win the world without staying a leader at home...'' ''Gentlemen, let's quickly finish with the Monthly Information Reports from the departments, and address Kumar's concerns,'' intervened Biswas, who suddenly sounded as apprehensive as Kumar. Actually, he had just returned from a meeting that a delegation of the Confederation of Indian Industry had had with the prime minister, where similar observations had been made by most of the CEOs. After rapidly going through the other items on the agenda, Singh turned to the Human Resources Review, which was the last issue on the agenda. And Biswas told Rakesh Mathur, 52, Director (Human Resources), to put all his recruitment plans on hold. ''Training must be confined only to absolutely critical areas. All other programmes must be deferred, '' he added. They all turned enquiringly to Kumar and Ramachandran. ''Sir, we received e-mail from our Delhi office this morning, informing us that ATC is all set to launch car radials as its first offering in this country,'' said Kumar. ''We have hardly 2 months to respond. While the other companies are trying to block ATC through better distribution and liberal dealer-credit terms, we have, so far, refused to deviate from our conventional strategy of strengthening the flagship brand. But even our dealers feel that we need to provide them with 90-day credit to counter the competition. I am personally against discounting the brand, but I do not know if that is the right approach in the present circumstances. ATC has a strong brand image at the top end of the market, which is, incidentally, not price-sensitive. We need to erect some protective barriers around Solus. Otherwise, we could end up with a crisis on our hands...'' ''Crisis? I thought Solus was truly a world-class brand. We have worked to create a zero-defect environment, there are no complaints from our sales representatives, and our customers are happy. So, why don't we stick to the present strategy?'' asked Suresh Mhatre, 54, Director (Manufacturing). ''Yes,'' added Narayan Pillai, 56, Director (Finance), ''We are well-entrenched in the market. A liberal credit policy will only be a knee-jerk reaction to the competition. Kumar, you should only escalate your brand-building efforts. Although there was a cash-crunch, the trade is overplaying it now. Remember: they buy on credit, and sell on cash. So, they can't complain...'' ''But the times are changing. What was good yesterday is not good enough today,'' replied Ramachandran, a trifle testily. ''All our dealers are holding huge inventories of cross-ply and radial tyres of all three kinds. There are no buyers for our products any more...'' ''You are forgetting,'' added Kumar, ''that the automobile industry is in the grip of a recession. Auto Engineering has reported losses. The sales of the largest car-maker, the Rs 8,000-crore Bharat Motor Wheels, are also slowing down. And so are those of all the automobile companies I have met in recent times. Moreover, customers are fickle, they are price-sensitive, and they want service. Specifically, they want every defective tyre replaced immediately. Since the OEMs want us to assume the responsibility for the products we supply, they are, therefore, demanding that we guarantee the tyres fitted by them on each car...'' ''To add to our problems,'' intervened Biswas, ''the auto finance companies are folding up. They have not been able to respond to customer needs. While the banks are moving into the segments vacated by them, I wonder if they will be as dynamic as the finance companies...'' Singh looked around, and sensing the urgency on each individual's face, asked Kumar to make a detailed presentation on the market and TIL's strategy options that afternoon. They decided to meet again at 2 p.m.. 2 p.m.: Began Kumar: ''Gentlemen, as you are aware, we are the market-leaders in the tyre industry. While we have grown consistently in the last five years, our competitors' marketshares have either declined, or remained unchanged in that period of time. Take the case of Alpha Tyres and Kane Rubber, which registered healthy growth-rates. But they grew only in the passenger-car segment. Both performed well in 1995-96, when their turnovers grew by more than 60 per cent over 1993-94. As a matter of fact, 1995-96 was the best year for most tyre companies: Omega Wheels' turnover increased by 57 per cent, and ours by 38 per cent. However, while Omega Wheels, Alpha Tyres, Kane Rubber, and Wheels India could not maintain their momentum, we did...'' ''Then why should we worry?'' interrupted Mhatre. ''We will definitely be able to fight ATC...'' ''I don't think it will be easy,'' said Kumar. ''You all know that the Government of India is likely to reduce the import duties on tyres from 40 to 25 per cent next year. This will encourage the transnationals to sell imported radials at much lower prices than all us domestic manufacturers. According to our calculations, an imported car radial will cost about Rs 1,200 to import, brand, and sell. Our tyres are priced at least 30 per cent higher... ''Let me now focus on the industry structure, which may help us formulate a strategy for tomorrow. We are going through a bad patch largely due to an overestimation of demand. This has impacted all our sales, and inventories are clogging the distribution channels. Worse, demand in the after market has dropped: between 1993-94 and 1994-95, the rate of growth of replacement demand nosedived from 15 to 4 per cent per annum. Since OEM demand grew by 20 per cent in 1994-95, and by 22 per cent in 1995-96, we continued to be optimistic. All the players increased their scales despite the overcapacity. As a result, tyre-making capacity in the country is now far in excess of demand. This has led to price-wars... ''Our advertising costs have gone up too. Our nearest competitor, Omega Wheels, has increased its advertising and marketing outlay from Rs 20 crore in 1994 to Rs 60 crore in 1996. Our raw material costs have also gone up by almost 300 per cent. This, together with the restricted supply of short-term finance, eroded our margins. As we all know, the devaluation of the rupee and rising demand were responsible for sharp increases in the prices of our raw materials like natural rubber and carbon. This affected all of us, but the worst-hit were Omega Wheels and Wheels India. As a result, the interest burden of the tyre-majors-including us-went up to 25 per cent in 1995-96. All this has impacted the gross margins in the business, which declined sharply from 5 to 3 per cent. Also, the operating margins have declined by 2 percentage points. All this has created a financial crisis... ''All the tyre-manufacturers have unveiled aggressive strategies to grab marketshare. Omega Wheels has initiated a mass customer-contact programme. Like us, the company has also initiated efforts to link its brand to cricket, India's most popular sport. While special incentives are being provided by the company to its dealers, it has created a network of franchisees. That's not all. Omega Wheels is also trying to penetrate the rural areas through mobile promotions and demonstration-vans... ''Maker Stone, an American company, has also initiated a customer-contact programme, and expanded its distribution network by increasing dealer-margins by 5 per cent. Already, there is a shift from multi-brand stores to exclusive dealerships. And Maker Stone is all out to grab this opportunity. Recently, the company acquired some distribution outlets in North India. Alpha Tyres, another American company, has taken similar steps to grab the market in South India. It is sponsoring fm and TV soaps besides launching customer-loyalty programmes... There was now pin-drop silence. Continued Kumar: ''Our research shows that the new-generation dealers are market-savvy. They are investing in showrooms, they understand the importance of the ambience in attracting the customer, and they believe in creating customer loyalty. Naturally, they expect manufacturers like us to increase their marketing spends. Yesterday's tyre shops have become today's customer-care points. ATC, and the other new entrants, are trying to set up their own showrooms. We believe that the war will be fought on the basis of brand power. The last decade has already seen each of us flexing our muscle. However, in most cases, it turned out to be just an advertising gimmick... ''Radialisation now seems to be the cornerstone of every company's product strategy. So far, radialisation has been low: 40 per cent in the replacement segment, and 30 per cent in the OEM segment in the case of cars. In the HCV and LCV segments, radialisation is negligible. But since the new-generation cars insist on radials, all the tyre-companies have jumped onto the radial bandwagon. Although radials are costlier than cross-plys, they provide safety, lower fuel-consumption, and have a longer life. While Kane Rubber is cruising along on a safety platform, Alpha Tyres is emphasising durability. OEM-endorsement is another tool in the brand-positioning exercises undertaken by our competitors... ''So far, we have adopted the strategy of positioning our brands on the basis of their inherent strengths. We believe that we know the customer and the trade much better than the transnational. The trade respects TIL and prides its relationship with the company. We have mastered the art of tyre-making just as well as the transnationals. We believe we can even provide them with know-how in some categories. Our radials are positioned as quality products, which are technologically superior. We have showcased our delighted customers, enhancing customer value through our vast dealer and sales network. Dealer-education and customer-contact programmes are the key ingredients of our marketing strategy... ''A study recently conducted among car-users shows that Solus was the top-of-the-mind tyre-brand among 65 per cent of the would-be buyers. It is a label that all customers consider in their purchase-decisions. Unlike some of its competitors-like Maker Stone's Beta or Omega Wheels' Star-Solus is a brand that customers frequently ask for. Importantly, the research showed that the conversion-rate from potential to buyer is 60 per cent... ''Our dealerships are conspicuous in all the major markets. Most customers find them friendly. The range of services-such as tyre-checks and wheel alignments-offered by them are appreciated by our buyers. That research also showed that 70 per cent of our customers were likely to purchase Solus again. But their belief in TIL's quality and durability was moderate. When given a choice between Beta, Star, and Solus, customer preferences ran thus: Beta, Solus, and Star. That choice cuts across all market-segments... ''So, Kumar, your concern is how to protect our home turf against the transnationals,'' said Mhatre, who had always felt that TIL should have spent more on R&D. ''If you compare ATC's R&D budget of about 4 per cent with our less-than-1 per cent, and also consider the role of continuous product development in brand equity, you will appreciate my point of view about R&D...'' Conceding Mhatre's point of view, Biswas looked at his papers, and brought up another subject: M&A. ''Solus can be made stronger if we also take over, or ally with, Indian companies that are on weaker wickets. There are at least 2 targets that I have been able to identify. After all, wasn't M&A American industry's response to the Japanese assault on their markets?...'' ''Yes, we have a history of M&A in this country. We must get rid of our complacency, and become more aggressive. After all, our brand is valued at more than Rs 1,000 crore. As leaders, we must take technological and marketing leaps,'' admitted Biswas. ''The world has moved towards a tubeless tyre, and we are still talking about radials... ''We should increase our market presence. Let us think about using cheap, non-conventional channels as our communications media. Recently, when I was driving on the Mumbai-Pune highway, I was struck by the hoardings put up by the credit card companies, particularly Passport. Can't we do something of that kind?'' wondered Biswas. ''Incidentally, how is our Website doing? I understand that companies are using the Net to link their customers to manufacturing, and other activities. They are taking the company directly to the customer. I also understand that many companies have initiated customer- and dealer-loyalty plans, and have dedicated communications channels for their buyers. After all, ATC has been using these tools for brand-building worldwide...'' Ramachandran, who had been silent for a while, brought up the subject of customer loyalty. ''Unlike, say, the airlines, where customers are, generally, homogeneous, we have a diverse set of customers. A truck driver is illiterate, and is greatly influenced by his fellow-drivers. He is inflexible, price-conscious, and performance-sensitive. But if an LCV- or HCV-driver also happens to be an owner, he is, generally, more performance-oriented. So, while HCV- and LCV-drivers are price- and performance-sensitive, car drivers are brand-conscious. And the former replace tyres more frequently than the latter. So, whom do we target with a loyalty programme?'' he asked... Biswas retorted that he would target it at all the market segments by customising the benefits. ''We should consider setting up exclusive stores,'' he said sharply... ''Let me point out, gentlemen,'' summed up Singh, ''that our concerns are not just for today, but for tomorrow. The global tyre-majors are preferred suppliers to most of the world's car-manufacturers. It is only a matter of time before the foreign giants start sourcing their supplies from the tyre transnationals in this country. As of now, our brand has strong equity. We know our customers, our roads, and our networks. But our new rivals will not take much time to catch up with us. Will we be able to stay the market-leader in 2001?'' Should TIL offer more credit to its dealers, or should it stick to its brand-building tactics? Should it continue to focus on marketing, or should it increase R&D-spend to improve quality? Should it become a marketing conduit, or should it source technology from transnationals not keen on investing in the country? Can TIL afford to invest in product innovation when it does not have global scales to amortise its R&D costs? Should it first protect its home turf, or should it kick off its globalisation programme? How should TIL fight for its future? |
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