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CASE – 1: Where Do We Go from Here?
As one of the many seminars held to discuss the corporate response of family-owned business to liberalisation and globalisation, the keynote Mr Gurcharan Das concluded his speech by saying, “In the end, I would say that the success of Indian economy would depend on how the Indian industry and business respond to the reform process.”
As the proceedings of the seminar progressed it became clear that there was a difference of opinion in the perception of participants. Those who were supporting the case for letting the family-owned businesses face competition opined that such businesses in India have exhibited financial acumen; its members have generally adopted an austere life style; they have demonstrated an ability to take calculated risks, and an ability to accumulate and manage capital. They have devised unique managerial style and led the creation of the equity cult among Indians. Several of them are low-cost producers.
The participants critical of the role of family business had this is to say: “There has been a tendency to mix up family’s intent with that of businesses managed by them. There is a lack of focus and business strategy. Family businesses have generally adopted a short-term approach to business causing less purposeful investments in specially critical areas such as employee development and product development. Customers and development of marketing skills have been neglected.”
The valedictory session of the Seminar attempted to bring out the issues clearly. It culminated in an agenda for reform by the family businesses. The points highlighted in the agenda are:
- Indian family-owned business organisations need to professionalise management,
- they need to curtail the diversified of their business groups and impart a sharper focus to their business activities, and
- they need to pay greater attention to the development of human capital.
Suppose you were an observer at the seminar. During tea and lunch breaks you had an occasion to meet several people who were skeptical and felt that the reform process was having only a superficial impact on the corporates. Express your opinion that you form about the issues at the seminar.
CASE – 2 A Healthy Dose of Success
Muhammad Majeed represents a typical Indian who has created success out of sheer hard work and commitment through his education and expertise. At the age of 23 years, Majeed, after graduating in pharmacy from Kerala University, went to pursue higher studies in the US. He completed his masters and PhD in industrial chemistry. Armed with high qualifications, he became a research pharmacist and eventually, as most expatriate Indians do, set up his own company, Sabinsa Corporation. Experiencing difficulties with the long-drawn drug approval process of the US Food and Drug Administration and his own dwindling savings, Majeed focussed on ayurvedic products based on natural extracts. He returned to India in 1991 (incidentally, the year when liberalisation started in India) and set up Sami Chemicals and Extracts Ltd, late renamed as Sami Labs Ltd (SLL), Bangalore.
SLL has over three dozen products, and seven US patents. There are 25 European and other country patents pending approval. SLL has four manufacturing units all based in Karnataka. The sales is Rs 44.5 crore and the profit-after-tax is Rs 5.89 crore. It has pioneered specialised products based on Indian herbal extracts relying on the principles of ayurveda. The major thrust is on remedies for cholesterol control, fat reduction, and weight management. As against several Indian companies exporting raw herbs, SLL specialises in value-addition through extractions. The result is encouraging: SLL’s products typically fetch an export price that is more than double the price of raw herbs.
SLL thinks of its business as “manufacturing and selling traditional standardized extracts and nutritional and pharmaceutical fine chemicals”. Sabinsa, its US-based company, secures contracts from the US companies to manufacture certain chemicals in India. Its business plans are quite ambitious. Setting up a product management team, assisting farmers in cultivation of pharmaceutically useful herbs, and international collaborations for developing research-based intellectual property and its commercialisation are some of the strategic actions on the anvil.
SLL looks forward to being a Rs 500-crore company by 2005 when the World Trade Organisation’s patenting regimes comes into force.
How will you define the business of SLL? Comment on the business of SLL and your opinion on the likelihood of its success.
CASE – 3 No Chain, No Gain
Textile industry is one of the oldest industries in India. Several business houses have their origin in this industry. In the mid-1980s, the powerloom sector in the unorganised sector started hurting badly the interests of the composite textile mills of the sector. Their cost structure, with lower overheads and no duties, was less than half of that of mills for equivalent production. While the powerlooms sold cloth as a commodity, the mills tried to establish their products as brands. The post-liberalisation period has seen a large number of foreign brands enter India. It is in this scenario that the Mayur brand of Rajasthan Spinning and Weaving Mills (RSWM) had to carve out a place for itself.
RSWM is the flagship company of the LNJ Bhilwara group. It has been the largest producer and trader of yarn in the country and caters to the large demands for blended yarns and grey cloth fabric used for children’s school uniform. In 1994, the yarn business faced a severe crunch owing to overcapacity. From 1995 onward, RSWM became a late follower of the industry trend as other competitors already moved up the value chain.
Textile manufacturing is basically constituted of the processes of spinning, weaving, processing, and marketing. More than 50 per cent of the value is concentrated in weaving and processing. Moving up the value chain from spinning involves large investments in machinery and labour. Graduating to marketing requires getting closer to the customers. This is the challenge that a traditional spinning mill like RSWM had to face if it was to sustain itself in a highly competitive market.
At another level, for RSWM, it was a matter of cultural transformation of the organisation long used to a conservative, trader mentality. Imagine a company whose main driving force, Shekhar Agarwal, Vice-Chairman and Managing Director having little interest in watching Hindi movies signing up Sharukh Khan at a considerable price for celebrity advertising. From the market side, it has long been troubled with its commitment to the loyal middle-class customers as it had to simultaneously pay attention to the upwardly mobile upper middle class customers. Then there was the dilemma of being too many things to a wide range of audience. RSWM wanted to have a stake in the export markets as well as keep its share in the rural markets. It perceived itself as an efficient producer and wished to become a flamboyant retailer. It excelled in basic textile processing yet dreamt of attaining sophistication in in-house production of readymade garments. And all this while it has been a late mover, losing out to early movers such as Raymonds. No wonder it virtually landed up on the fringes of the industry, far behind formidable competitors like Reliance, Grasim, and S. Kumar.
Suggest how should RSWM manage its value chain effectively. Should it try to imitate the market leaders? If yes, why? If no, why not? What alternatives routes to success do you propose?
CASE – 4 A Very Intriguing Package
It is not quite often that a positive product feature becomes an albatross around the neck of a company. VIP Industries had held sway for over two decades in the organised Indian luggage market on the basis of the durability of its moulded suitcases. Obviously, the customer perceives value-for-money in the long-lasting, reasonably-priced Alfa brand of VIP suitcases which sells 1.5 lakh pieces a month. But this means that having bought one suitcase the customer can do with it for several years. Market research by the company shows that an average Indian family pulls out the suitcase merely for outstation travel a few times a year. Hence, there is no pressing need for continual replacement of the old luggage.
The VIP products are made of virgin polymer as compared to the recycled grade I and II polymers used by the unorganised sector. They are subjected to stringent stress tests for quality control.
VIP has a presence in a wide range of the market segments within a price spectrum of Rs 295 to Rs 6,000 apiece. It is her that the competition from the unorganised sector hurts the company most. VIP’s economically-priced brand, Alfa is widely imitated and sold at much lower prices. This enables the unorganised sector to typically sell 20 times more than VIP can. The lower price threshold seems to be Rs 225 which in nearly impossible for VIP to achieve given its cost structure. In the Rs 1500 plus premium range, VIP has to contend with Samsonite which is a formidable competitor.
The obvious tactic for VIP has been to cut costs. Distribution and logistics is one area where valiant efforts have been made at cost reduction. VIP has four factories located in heart of India. The average distribution costs come to Rs 7 to Rs 8 apiece. Reduction in cost has been attempted through distributed manufacturing by having vendors making the product at different locations, thereby, avoiding transportation of high-volume suitcases across long distances and reducing inventory build-up in the channel.
Severe pressure on sales has resulted in VIP Industries offering discounts and unwittingly entering into a disastrous price war. Promotion of a high visibility product suffered and advertising expenditure has been ruthlessly curtailed from the earlier Rs 11 crore to Rs 2 crore now. Its lead advertising agency is HTA. Action on the promotion front has seen reorganisation of the brand portfolio. Incidentally, earlier its successful and popular Kal bhi aaj bhi campaign served to reinforce its durability theme.
There are several roadblocks that the company has to negotiate. Increase in population, rising propensity of Indian to travel, and the insatiable thirst of customers for state-of-the-art technological products with newer designs and innovation, all at an affordable price are the opportunities and challenges before the company. Introduction of new brands, Mantra and Skybags, product range of diversification to include children’s bags and ladies’ bags, strategic alliance with Europe’s leading luggage-maker—Delsey—are some of the steps taken by the company.
Yet, caught in its self spun web of past successes, VIP is today faced with an uncertain future.
How should the VIP Industries get out of the bind that it finds itself in? Outline the contours of the marketing plans and policies that VIP needs to formulate and implement?
CASE – 5 Let There be Light
Traditionally, power plants, being capital-intensive, have been set up by the public sector and state electricity boards (SEBs) in India. Everyone agrees today that the energy sector is the major infrastructure bottleneck holding up economic development. A critical aspect of economic reforms thus is the reform of the energy sector.
The Madhya Pradesh State Electricity Board (MPSEB) is not much different from its counterparts in other states. It faces similar problems and is opting for identical solutions. The common elements in the power sector reforms are: corporatisation by breaking the SEB into generation, transmission, and distribution; financial restructuring including debt and interest payment rescheduling; reduction of manpower; and improvements in operational efficiency.
Public utilities, like SEBS, have to be commercially viable in order to survive. Yet historically, this aspect of SEB as an organisation has been sacrificed at the altar of political expediency. The ruling party, irrespective of whether it is the Congress at present or the Bharatiya Janata Party earlier, have made pre-election promises of supplying free or heavily-subsidised power. Digvijay Singh, the present chief minister of Madhya Pradesh, a populist politician earlier, on longer sees electoral benefit in providing free electricity. “It pays to pay” is his refrain today, whether it is healthcare or electricity.
Bold steps—bold, as they still carry the risk of a political fallout with fiery BJP leader Uma Bharti breathing down Digvijay’s neck or the silent schemers of his own party working overtime behind the scenes—have been initiated to reform the energy sector in Madhya Pradesh. MPSEB is to be divided into generation, transmission, and distribution (T&D), and supply companies. Financial management and cash flow management is to be improved. The retirement age of MPSEB employees has been reduced from 60 to 58 years. Effective operational control is sought to be exercised by metering power supply at division / district level to fix responsibility for T & D losses and power thefts. A sustained drive is on to identify non-paying consumers, install meters, and make them pay their bills regularly.
MPSEB’s annual losses are to the tune of a massive Rs 1,600 crore; total liabilities are estimated to be Rs 20,000 crore. Undeniably, are parameters indicating the rot that has corroded the system.
At one level, the reform of the energy sector is a political action but at another, and perhaps, a more fundamental level, it is a question of managing an organisation strategically through strategic actions designed to turn around a vital public utility.
Analyse the problems of the MPSEB from the strategic management perspective. Do you feel that the actions taken or being contemplated are strategic in nature? Propose what else needs to be done to make the MPSEB a viable organisation.
Note: Solve any 4 Cases Study’s
CASE: I Enterprise Builds On People
When most people think of car-rental firms, the names of Hertz and Avis usually come to mind. But in the last few years, Enterprise Rent-A-Car has overtaken both of these industry giants, and today it stands as both the largest and the most profitable business in the car-rental industry. In 2001, for instance, the firm had sales in excess of $6.3 billion and employed over 50,000 people.
Jack Taylor started Enterprise in St. Louis in 1957. Taylor had a unique strategy in mind for Enterprise, and that strategy played a key role in the firm’s initial success. Most car-rental firms like Hertz and Avis base most of their locations in or near airports, train stations, and other transportation hubs. These firms see their customers as business travellers and people who fly for vacation and then need transportation at the end of their flight. But Enterprise went after a different customer. It sought to rent cars to individuals whose own cars are being repaired or who are taking a driving vacation.
The firm got its start by working with insurance companies. A standard feature in many automobile insurance policies is the provision of a rental car when one’s personal car has been in an accident or has been stolen. Firms like Hertz and Avis charge relatively high daily rates because their customers need the convenience of being near an airport and/or they are having their expenses paid by their employer. These rates are often higher than insurance companies are willing to pay, so customers who these firms end up paying part of the rental bills themselves. In addition, their locations are also often inconvenient for people seeking a replacement car while theirs is in the shop.
But Enterprise located stores in downtown and suburban areas, where local residents actually live. The firm also provides local pickup and delivery service in most areas. It also negotiates exclusive contract arrangements with local insurance agents. They get the agent’s referral business while guaranteeing lower rates that are more in line with what insurance covers.
In recent years, Enterprise has started to expand its market base by pursuing a two-pronged growth strategy. First, the firm has started opening airport locations to compete with Hertz and Avis more directly. But their target is still the occasional renter than the frequent business traveller. Second, the firm also began to expand into international markets and today has rental offices in the United Kingdom, Ireland and Germany.
Another key to Enterprise’s success has been its human resource strategy. The firm targets a certain kind of individual to hire; its preferred new employee is a college graduate from bottom half of graduating class, and preferably one who was an athlete or who was otherwise actively involved in campus social activities. The rationale for this unusual academic standard is actually quite simple. Enterprise managers do not believe that especially high levels of achievements are necessary to perform well in the car-rental industry, but having a college degree nevertheless demonstrates intelligence and motivation. In addition, since interpersonal relations are important to its business, Enterprise wants people who were social directors or high-ranking officers of social organisations such as fraternities or sororities. Athletes are also desirable because of their competitiveness.
Once hired, new employees at Enterprise are often shocked at the performance expectations placed on them by the firm. They generally work long, grueling hours for relatively low pay.
And all Enterprise managers are expected to jump in and help wash or vacuum cars when a rental agency gets backed up. All Enterprise managers must wear coordinated dress shirts and ties and can have facial hair only when “medically necessary”. And women must wear skirts no shorter than two inches above their knees or creased pants.
So what are the incentives for working at Enterprise? For one thing, it’s an unfortunate fact of life that college graduates with low grades often struggle to find work. Thus, a job at Enterprise is still better than no job at all. The firm does not hire outsiders—every position is filled by promoting someone already inside the company. Thus, Enterprise employees know that if they work hard and do their best, they may very well succeed in moving higher up the corporate ladder at a growing and successful firm.
- Would Enterprise’s approach human resource management work in other industries?
- Does Enterprise face any risks from its human resource strategy?
- Would you want to work for Enterprise? Why or why not?
CASE: II Doing The Dirty Work
Business magazines and newspapers regularly publish articles about the changing nature of work in the United States and about how many jobs are being changed. Indeed, because so much has been made of the shift toward service-sector and professional jobs, many people assumed that the number of unpleasant an undesirable jobs has declined.
In fact, nothing could be further from the truth. Millions of Americans work in gleaming air-conditioned facilities, but many others work in dirty, grimy, and unsafe settings. For example, many jobs in the recycling industry require workers to sort through moving conveyors of trash, pulling out those items that can be recycled. Other relatively unattractive jobs include cleaning hospital restrooms, washing dishes in a restaurant, and handling toxic waste.
Consider the jobs in a chicken-processing facility. Much like a manufacturing assembly line, a chicken-processing facility is organised around a moving conveyor system. Workers call it the chain. In reality, it’s a steel cable with large clips that carries dead chickens down what might be called a “disassembly line.” Standing along this line are dozens of workers who do, in fact, take the birds apart as they pass.
Even the titles of the jobs are unsavory. Among the first set of jobs along the chain is the skinner. Skinners use sharp instruments to cut and pull the skin off the dead chicken. Towards the middle of the line are the gut pullers. These workers reach inside the chicken carcasses and remove the intestines and other organs. At the end of the line are the gizzard cutters, who tackle the more difficult organs attached to the inside of the chicken’s carcass. These organs have to be individually cut and removed for disposal.
The work is obviously distasteful, and the pace of the work is unrelenting. On a good day the chain moves an average of ninety chickens a minute for nine hours. And the workers are essentially held captive by the moving chain. For example, no one can vacate a post to use the bathroom or for other reasons without the permission of the supervisor. In some plants, taking an unauthorised bathroom break can result in suspension without pay. But the noise in a typical chicken-processing plant is so loud that the supervisor can’t hear someone calling for relief unless the person happens to be standing close by.
Jobs such as these on the chicken-processing line are actually becoming increasingly common. Fuelled by Americans’ growing appetites for lean, easy-to-cook meat, the number of poultry workers has almost doubled since 1980, and today they constitute a work force of around a quarter of a million people. Indeed, the chicken-processing industry has become a major component of the state economies of Georgia, North Carolina, Mississippi, Arkansas, and Alabama.
Besides being unpleasant and dirty, many jobs in a chicken-processing plant are dangerous and unhealthy. Some workers, for example, have to fight the live birds when they are first hung on the chains. These workers are routinely scratched and pecked by the chickens. And the air inside a typical chicken-processing plant is difficult to breathe. Workers are usually supplied with paper masks, but most don’t use them because they are hot and confining.
And the work space itself is so tight that the workers often cut themselves—and sometimes their coworkers—with the knives, scissors, and other instruments they use to perform their jobs. Indeed, poultry processing ranks third among industries in the United States for cumulative trauma injuries such as carpet tunnel syndrome. The inevitable chicken feathers, faeces, and blood also contribute to the hazardous and unpleasant work environment.
- How relevant are the concepts of competencies to the jobs in a chicken-processing plant?
- How might you try to improve the jobs in a chicken-processing plant?
- Are dirty, dangerous, and unpleasant jobs an inevitable part of any economy?
CASE: III On Pegging Pay to Performance
“As you are aware, the Government of India has removed the capping on salaries of directors and has left the matter of their compensation to be decided by shareholders. This is indeed a welcome step,” said Samuel Menezes, president Abhayankar, Ltd., opening the meeting of the managing committee convened to discuss the elements of the company’s new plan for middle managers.
Abhayankar was am engineering firm with a turnover of Rs 600 crore last year and an employee strength of 18,00. Two years ago, as a sequel to liberalisation at the macroeconomic level, the company had restructured its operations from functional teams to product teams. The change had helped speed up transactional times and reduce systemic inefficiencies, leading to a healthy drive towards performance.
“I think it is only logical that performance should hereafter be linked to pay,” continued Menezes. “A scheme in which over 40 per cent of salary will be related to annual profits has been evolved for executives above the vice-president’s level and it will be implemented after getting shareholders approval. As far as the shopfloor staff is concerned, a system of incentive-linked monthly productivity bonus has been in place for years and it serves the purpose of rewarding good work at the assembly line. In any case, a bulk of its salary will have to continue to be governed by good old values like hierarchy, rank, seniority and attendance. But it is the middle management which poses a real dilemma. How does one evaluate its performance? More importantly, how can one ensure that managers are not shortchanged but get what they truly deserve?”
“Our vice-president (HRD), Ravi Narayanan, has now a plan ready in this regard. He has had personal discussions with all the 125 middle managers individually over the last few weeks and the plan is based on their feedback. If there are no major disagreements on the plan, we can put it into effect from next month. Ravi, may I now ask you to take the floor and make your presentation?”
The lights in the conference room dimmed and the screen on the podium lit up. “The plan I am going to unfold,” said Narayanan, pointing to the data that surfaced on the screen, “is designed to enhance team-work and provide incentives for constant improvement and excellence among middle-level managers. Briefly, the pay will be split into two components. The first consists of 75 per cent of the original salary and will be determined, as before, by factors of internal equity comprising what Sam referred to as good old values. It will be a fixed component.”
“The second component of 25 per cent,” he went on, “will be flexible. It will depend on the ability of each product team as a whole to show a minimum of 5 per cent improvement in five areas every month—product quality, cost control, speed of delivery, financial performance of the division to which the product belongs and, finally, compliance with safety and environmental norms. The five areas will have rating of 30, 25, 20, 15, and 10 per cent respectively.
“This, gentlemen, is the broad premise. The rest is a matter of detail which will be worked out after some finetuning. Any questions?”
As the lights reappeared, Gautam Ghosh, vice-president (R&D), said, “I don’t like it. And I will tell you why. Teamwork as a criterion is okay but it also has its pitfalls. The people I take on and develop are good at what they do. Their research skills are individualistic. Why should their pay depend on the performance of other members of the product team? The new pay plan makes them team players first and scientists next. It does not seem right.”
“That is a good one, Gautam,” said Narayanan. “Any other questions? I think I will take them all together.”
“I have no problems with the scheme and I think it is fine. But just for the sake of argument, let me take Gautam’s point further without meaning to pick holes in the plan,” said Avinash Sarin, vice-president (sales). “Look at my dispatch division. My people there have reduced the shipping time from four hours to one over the last six months. But what have they got? Nothing. Why? Because the other members of the team are not measuring up.”
“I think that is a situation which is bound to prevail until everyone falls in line,” intervened Vipul Desai, vice president (finance). “There would always be temporary problems in implementing anything new. The question is whether our long term objectives is right. To the extend that we are trying to promote teamwork, I think we are on the right track. However, I wish to raise a point. There are many external factors which impinge on both individual and collective performance. For instance, the cost of a raw material may suddenly go up in the market affecting product profitability. Why should the concerned product team be penalised for something beyond its control?”
“I have an observation to make too, Ravi,” said Menezes, “You would recall the survey conducted by a business fortnightly on ‘The ten companies Indian managers fancy most as a working place’. Abhayankar got top billings there. We have been the trendsetters in executive compensation in Indian industry. We have been paying the best. Will your plan ensure that it remains that way?”
As he took the floor again, the dominant thought in Narayanan’s mind was that if his plan were to be put into place, Abhayankar would set another new trend in executive compensation.
But how should he see it through?
CASE: IV Crisis Blown Over
November 30, 1997 goes down in the history of a Bangalore-based electric company as the day nobody wanting it to recur but everyone recollecting it with sense of pride.
It was a festive day for all the 700-plus employees. Festoons were strung all over, banners were put up; banana trunks and leaves adorned the factory gate, instead of the usual red flags; and loud speakers were blaring Kannada songs. It was day the employees chose to celebrate Kannada Rajyothsava, annual feature of all Karnataka-based organisations. The function was to start at 4 p.m. and everybody was eagerly waiting for the big event to take place.
But the event, budgeted at Rs 1,00,000 did not take place. At around 2 p.m., there was a ghastly accident in the machine shop. Murthy was caught in the vertical turret lathe and was wounded fatally. His end came in the ambulance on the way to hospital.
The management sought union help, and the union leaders did respond with a positive attitude. They did not want to fish in troubled waters.
Series of meetings were held between the union leaders and the management. The discussions centred around two major issues—(i) restoring normalcy, and (ii) determining the amount of compensation to be paid to the dependants of Murthy.
Luckily for the management, the accident took place on a Saturday. The next day was a weekly holiday and this helped the tension to diffuse to a large extent. The funeral of the deceased took place on Sunday without any hitch. The management hoped that things would be normal on Monday morning.
But the hope was belied. The workers refused to resume work. Again the management approached the union for help. Union leaders advised the workers to resume work in al departments except in the machine shop, and the suggestions was accepted by all.
Two weeks went by, nobody entered the machine shop, though work in other places resumed. Union leaders came with a new idea to the management—to perform a pooja to ward off any evil that had befallen on the lathe. The management accepted the idea and homa was performed in the machine shop for about five hours commencing early in the morning. This helped to some extent. The workers started operations on all other machines in the machine shop except on the fateful lathe. It took two full months and a lot of persuasion from the union leaders for the workers to switch on the lathe.
The crisis was blown over, thanks to the responsible role played by the union leaders and their fellow workers. Neither the management nor the workers wish that such an incident should recur.
As the wages of the deceased grossed Rs 6,500 per month, Murthy was not covered under the ESI Act. Management had to pay compensation. Age and experience of the victim were taken into account to arrive at Rs 1,87,000 which was the amount to be payable to the wife of the deceased. To this was added Rs 2,50,000 at the intervention of the union leaders. In addition, the widow was paid a gratuity and a monthly pension of Rs 4,300. And nobody’s wages were cut for the days not worked.
Murthy’s death witnessed an unusual behavior on the part of the workers and their leaders, and magnanimous gesture from the management. It is a pride moment in the life of the factory.
- Do you think that the Bangalore-based company had practised participative management?
- If your answer is yes, with what method of participation (you have read in this chapter) do you relate the above case?
- If you were the union leader, would your behaviour have been different? If yes, what would it be?
CASE: V A Case of Burnout
When Mahesh joined XYZ Bank (private sector) in 1985, he had one clear goal—to prove his mettle. He did prove himself and has been promoted five times since his entry into the bank. Compared to others, his progress has been fastest. Currently, his job demands that Mahesh should work 10 hours a day with practically no holidays. At least two day in a week, Mahesh is required to travel.
Peers and subordinates at the bank have appreciation for Mahesh. They don’t grudge the ascension achieved by Mahesh, though there are some who wish they too had been promoted as well.
The post of General Manager fell vacant. One should work as GM for a couple of years if he were to climb up to the top of the ladder, Mahesh applied for the post along with others in the bank. The Chairman assured Mahesh that the post would be his.
A sudden development took place which almost wrecked Mahesh’s chances. The bank has the practice of subjecting all its executives to medical check-up once in a year. The medical reports go straight to the Chairman who would initiate remedials where necessary. Though Mahesh was only 35, he too, was required to undergo the test.
The Chairman of the bank received a copy of Mahesh’s physical examination results, along with a note from the doctor. The note explained that Mahesh was seriously overworked, and recommended that he be given an immediate four-week vacation. The doctor also recommended that Mahesh’s workload must be reduced and he must take physical exercise every day. The note warned that if Mahesh did not care for advice, he would be in for heart trouble in another six months.
After reading the doctor’s note, the Chairman sat back in his chair, and started brooding over. Three issues were uppermost in his mind—(i) How would Mahesh take this news? (ii) How many others do have similar fitness problems? (iii) Since the environment in the bank helps create the problem, what could he do to alleviate it? The idea of holding a stress-management programme flashed in his mind and suddenly he instructed his secretary to set up a meeting with the doctor and some key staff members, at the earliest.
- If the news is broken to Mahesh, how would he react?
- If you were giving advice to the Chairman on this matter, what would you recommend?
CASE: VI “Whose Side are you on, Anyway?”
It was past 4 pm and Purushottam Mahesh was still at his shopfloor office. The small but elegant office was a perk he was entitled to after he had been nominated to the board of Horizon Industries (P) Ltd., as workman-director six months ago. His shift generally ended at 3 pm and he would be home by late evening. But that day, he still had long hours ahead of him.
Kshirsagar had been with Horizon for over twenty years. Starting off as a substitute mill-hand in the paint shop at one of the company’s manufacturing facilities, he had been made permanent on the job five years later. He had no formal education. He felt this was a handicap, but he made up for it with a willingness to learn and a certain enthusiasm on the job. He was soon marked by the works manager as someone to watch out for. Simultaneously, Kshirsagar also came to the attention of the president of the Horizon Employees’ Union who drafted him into union activities.
Even while he got promoted twice during the period to become the head colour mixer last year, Kshirsagar had gradually moved up the union hierarchy and had been thrice elected secretary of the union. Labour-management relations at Horizon were not always cordial. This was largely because the company had not been recording a consistently good performance. There were frequent cuts in production every year because of go-slows and strikes by workmen—most of them related to wage hikes and bonus payments. With a view to ensuring a better understanding on the part of labour, the problems of company management, the Horizon board, led by chairman and managing director Aninash Chaturvedi, began to toy with idea of taking on a workman on the board. What started off as a hesitant move snowballed, after a series of brainstorming sessions with executives and meetings with the union leaders, into a situation in which Kshirsagar found himself catapulted to the Horizon board as work-man-director.
It was an untested ground for the company. But the novelty of it all excited both the management and the labour force. The board members—all functional heads went out of their way to make Kshirsagar comfortable and the latter also responded quite well. He got used to the ambience of the boardroom and the sense of power it conveyed. Significantly, he was soon at home with the perspectives of top management and began to see each issue from both sides.
It was smooth going until the union presented a week before the monthly board meeting, its charter of demands, one of which was a 30 per cent across-the board hike in wages. The matter was taken up at the board meeting as part of a special agenda.
“Look at what your people are asking for,” said Chaturvedi, addressing Kshirsagar with a sarcasm that no one in the board missed. “You know the precarious finances of the company. How could you be a party to a demand that can’t be met? You better explain to them how ridiculous the demands are,” he said.
“I don’t think they can all be dismissed as ridiculous,” said Kshirsagar. “And the board can surely consider the alternatives. We owe at least that much to the union.” But Chaturvedi adjourned the meeting in a huff, mentioning, once to Kshirsagar that he should “advise the union properly”.
When Kshirsagar told the executive committee members of the union that the board was simply not prepared to even consider the demands, he immediately sensed the hostility in the room. “You are a sell out,” one of them said. “Who do you really represent—us or them?” asked another.
“Here comes the crunch,” thought Kshirsagar. And however hard he tried to explain, he felt he was talking to a wall.
A victim of divided loyalities, he himself was unable to understand whose side he was on. Perhaps the best course would be to resign from the board. Perhaps he should resign both from the board and the union. Or may be resign from Horizon itself and seek a job elsewhere. But, he felt, sitting in his office a little later, “none of it could solve the problem.”
- What should he do?
Note: Solve any 4 Cases Study’s
CASE: I ARROW AND THE APPAREL INDUSTRY
Ten years ago, Arvind Clothing Ltd., a subsidiary of Arvind Brands Ltd., a member of the Ahmedabad based Lalbhai Group, signed up with the 150- year old Arrow Company, a division of Cluett Peabody & Co. Inc., US, for licensed manufacture of Arrow shirts in India. What this brought to India was not just another premium dress shirt brand but a new manufacturing philosophy to its garment industry which combined high productivity, stringent in-line quality control, and a conducive factory ambience.
Arrow’s first plant, with a 55,000 sq. ft. area and capacity to make 3,000 to 4,000 shirts a day, was established at Bangalore in 1993 with an investment of Rs 18 crore. The conditions inside—with good lighting on the workbenches, high ceilings, ample elbow room for each worker, and plenty of ventilation, were a decided contrast to the poky, crowded, and confined sweatshops characterising the usual Indian apparel factory in those days. It employed a computer system for translating the designed shirt’s dimensions to automatically mark the master pattern for initial cutting of the fabric layers. This was installed, not to save labour but to ensure cutting accuracy and low wastage of cloth.
The over two-dozen quality checkpoints during the conversion of fabric to finished shirt was unique to the industry. It is among the very few plants in the world that makes shirts with 2 ply 140s and 3 ply 100s cotton fabrics using 16 to 18 stitches per inch. In March 2003, the Bangalore plant could produce stain-repellant shirts based on nanotechnology.
The reputation of this plant has spread far and wide and now it is loaded mostly with export orders from renowned global brands such as GAP, Next, Espiri, and the like. Recently the plant was identified by Tommy Hilfiger to make its brand of shirts for the Indian market. As a result, Arvind Brands has had to take over four other factories in Bangalore on wet lease to make the Arrow brand of garments for the domestic market.
In fact, the demand pressure from global brands which want to outsource form Arvind Brands is so great that the company has had to set up another large factory for export jobs on the outskirts of Bangalore. The new unit of 75,000 sq. ft. has cost Rs 16 crore and can turn out 8,000 to 9,000 shirts per day. The technical collaborators are the renowned C&F Italia of Italy.
Among the cutting edge technologies deployed here are a Gerber make CNC fabric cutting machine, automatic collar and cuff stitching machines, pneumatic holding for tasks like shoulder joining, threat trimming and bottom hemming, a special machine to attach and edge stitch the back yoke, foam finishers which use air and steam to remove creases in the finished garment, and many others. The stitching machines in this plant can deliver up to 25 stitches per inch. A continuous monitoring of the production process in the entire factory is done through a computerised apparel production management system, which is hooked to every machine. Because of the use of such technology, this plant will need only 800 persons for a capacity which is three times that of the first plant which employs 580 persons.
Exports of garments made for global brands fetched Arvind Brands over Rs 60 crore in 2002, and this can double in the next few years, when the new factory goes on full stream. In fact, with the lifting of the country-wise quota regime in 2005, there will be surge in demand for high quality garments from India and Arvind is already considering setting up two more such high tech export-oriented factories.
It is not just in the area of manufacture but also retailing that the Arrow brand brought a wind of change on the Indian scene. Prior to its coming, the usual Indian shirt shop used to be a clutter of racks with little by way of display. What Arvind Brands did was to set up exclusive showrooms for Arrow shirts in which the functional was combined with aesthetic. Stuffed racks and clutter eschewed. The product were displayed in such a manner the customer could spot their qualities from a distance. Of course, today this has become standard practice with many other brands in the country, but Arrow showed the way. Arrow today has the largest network of 64 exclusive outlets across India. It is also present in 30 retail chains. It branched into multi-brand outlets in 2001, and is present in over 200 select outlets.
From just formal dress shirts in the beginning, the product range of Arvind Brands has expanded in the last ten years to include casual shirts, T-shirts, and trousers. In the pipeline are light jackets and jeans engineered for the middle-aged paunch. Arrow also tied up with the renowned Italian designer, Renato Grande, who has worked with names like Versace and Marlboro, to design its Spring / Summer Collection 2003. The company has also announced its intention to license the Arrow brand for other lifestyle accessories like footwear, watches, undergarments, fragrances, and leather goods. According to Darshan Mehta, President, Arvind Brands Ltd., the current turnover at retail prices of the Arrow brand in India is about Rs 85 crore. He expects the turnover to cross Rs 100 crore in the next few years, of which about 15 per cent will be from the licensed non-clothing products.
In 2005, Arvind Brands launched a major retail initiative for all its brands. Arvind Brands licensed brands (Arrow, Lee and Wrangler) had grown at a healthy 35 per cent rate in 2004 and the company planned to sustain the growth by increasing their retail presence. Arvind Brands also widened the geographical presence of its home-grown brands, such as Newport and Ruf-n Tuf, targeting small towns across India. The company planned to increase the number of outlets where its domestic brands would be available, and draw in new customers for readymades. To improve its presence in the high-end market, the firm started negotiating with an international brand and is likely to launch the brand.
The company has plans to expand its retail presence of Newport Jeans, from 1200 outlets across 480 towns to 3000 outlets covering 800 towns.
For a company ranked as one of the world’s largest manufactures of denim cloth and owners of world famous brands, the future looks bright and certain for Arvind Brands Ltd.
Name of the Company : Arvind Mills
Year of Establishment : 1931
Promoters : Three brothers–Katurbhai, Narottam Bhai, and Chimnabhai
Divisions : Arvind Mills was split in 1993 into
Units—textiles, telecom and garments. Arvind Ltd. (textile unit) is 100 per cent subsidiary of Arvind Mills.
Growth Strategy : Arvind Mills has grown through buying-up of sick units, going global and acquisition of German and US brand names.
- Why did Arvind Mills choose globalization as the major route to achieve growth when the domestic market was huge?
- How does lifting of ‘Country-wise quota regime’ help Arvind Mills?
- What lessons can other Indian businesses learn form the experience of Arvind Mills?
CASE: II THE ECONOMY OF KENYA
Kenya’ economy has been beset by high rates of unemployment and underemployment for many years. But at no time has it been more significant and more politically dangerous than in the late 1990s as an authoritarian beset by corruption, cronyism and economic plunder threatened the economic stability of this once proud nation. Yet Kenya still has great potential. Located in East Africa, it has a diverse geographic and climatic endowment. Three-fifths of the nation is semiarid desert (mostly in the north), and the resulting infertility of this land has dictated the location of 85 per cent of the population (30 million in 2000) and almost all economic activity in the southern two-fifths of the country. Kenya’s rapidly growing population is composed of many tribes and is extremely heterogeneous (including traditional herders, subsistence and commercial farmers, Arab Muslims, and cosmopolitan residents of Nairobi). The standard of living at least in major cities, is relatively high compared to the average of other sub-Saharan African countries.
However, widespread poverty (per capita US$360), high unemployment, and growing income inequality make Kenya a country of economic as well as geographic diversity. Agriculture is the most important economic activity. About three quarters of the population still lives in rural areas and about 7 million workers are employed in agriculture, accounting for over two-thirds of the total workforce.
Despite many changes in the democratic system, including the switch from a federal to a republican government, the conversion of the prime ministerial system into a presidential one, the transition to a unicameral legislature, and the creation of a one-party state, Kenya has displayed relatively high political stability (by African standards) since gaining independence from Britain in 1963. Since independence, there have been only two presidents. However, this once stable and prosperous capitalist nation has witnessed widespread ethnic violence and political upheavals since 1992 as a deteriorating economy, unpopular one-party rule, and charges of government corruption create a tense situation.
An expansionary economic policy characterised by large public investments, support of small agricultural production units, and incentives for private (domestic and foreign) industrial investment played an important role in the early 7 per cent rate of GDP growth in the first decade after independence. In the following seven years (1973-80), the oil crisis let to a lower GDP growth to an annual rate of 5 per cent. Along with the oil price shock, lack of adequate domestic saving and investment slowed the growth of the economy. Various economic policies designed to promote industrial growth led to a neglect of agriculture and a consequent decline in farm prices, farm production, and farmer incomes. As peasant farmers became poorer, more migrated to Nairobi, swelling an already overcrowded city and pushing up an existing high rate of urban unemployment. Very high birthrates along with a steady decline in death rates (mainly through lower infant mortality) led Kenya’s population growth to become the highest in the world (4.1 per cent per year) in 1988. Population growth fell to a still high rate of 2.4 per cent for the period 1990-2000.
The slowdown in GDP growth persisted in the following five years (1980-85), when the annual average was 2.6 per cent. It was a period of stabilization in which political shakiness of 1982 and the severe drought in 1984 contributed to a slowdown in industrial growth. Interest rates rose and wages fell in the public and private sectors. An improvement in the budget deficit and current account trade deficit, obtained through cuts in development expenditures and recessive policies aimed at reducing imports, contributed to lower economic growth. By 1990, Kenya’s per capita income was 9 per cent lower than it was in 1980–$370 compared to $410. It continued to decline in the 1990s. In fact, GDP per capita fell at an annual average rate of 0.3 per cent throughout the decade. At the same time, the urban unemployment rate rose to 30 per cent.
Comprising 23 per cent of 2000 GDP AND 77 per cent of merchandise exports, agricultural production is the backbone of the Kenyan economy. Because of its importance, the Kenyan government has implemented several policies to nourish the agricultural sector. Two such policies include fixing attractive producer prices and making available increasing amounts of fertilizer. Kenya’s chief agricultural exports are coffee, tea, sisal, cashew nuts, pyrethrum, and horticultural products. Traditionally, coffee has been Kenya’s chief earner in foreign exchange.
Although Kenya is chiefly agrarian, it is still the most industrialised country in eastern Africa. Public and private industry accounted for 16 per cent of GDP in 2000. Kenya’s chief manufacturing activities are food processing and the production of beverages, tobacco, footwear, textiles, cement, metal products, paper, and chemicals.
Kenya currently faces a multitude of problems. These include a stagnating economy, growing political unrest, a huge budget deficit, high unemployment, a substantial balance of payments problem, and a stubbornly high population growth rate.
With the unemployment rate already at 30 per cent and its population growing, Kenya faces the major task of employing its burgeoning labour force. Yet only 10-15 per cent of seekers land jobs in the modern industrial sector. The remainder must find jobs in the self-employment sector; in the agricultural sector, where wages are low and opportunities are scarce; or join the masses of the unemployed.
In addition to the unemployment problem, Kenya must always be concerned with how to feed its growing population. An increase in population means an increasing demand for food. Yet only 20 per cent of Kenya’s land is arable. This implies that the land must become increasingly productive. Unfortunately, several factors work to constrain Kenya’s food output, among them fragmented landholdings, increasing environmental degradation, the high cost of agricultural inputs, and burdensome governmental involvement in the purchase, sale, and pricing of agricultural output.
For the fiscal year 1995, the Kenyan budget deficit was $362 million, well above the government’s target rate. Dealing with a high budget deficit is a second problem Kenya currently faces. Following the collapse of the East African Common Market, Kenya’s industrial growth rate has declined; as a result the government’s tax base has diminished. To supplement domestic savings, Kenya has had to turn to external sources of finance, including foreign aid grants from Western governments. Its highly protected public enterprises have been turning in a poor performance, thus absorbing a large chunk of the government budget. To pay for its expenses, Kenya has had to borrow from international banks in addition to foreign aid. In recent years, government borrowing from the international banking system rose dramatically and contributed to a rapid growth in money supply. This translated into high inflation and pinched availability of credit.
Kenya has also had a chronic international balance of payments problem. Decreasing prices for its exports, combined with increasing prices for its imports, left Kenya importing almost twice as much as it exported in 2000, at $3,200 million in imports and only $1,650 million in exports. World demand for coffee, Kenya‘s predominant exports, remains below supply. In 2001-01, a dramatic surge in coffee exports from Vietnam hurt Kenya further. Hence Kenya cannot make full use of its comparative advantage in coffee production, and its stock of coffee has been increasing. Tea, another main export, has also had difficulties. In 1987, Pakistan, the second largest importer of Kenyan tea, slashed its purchases. Combined with a general oversupply in the world market, this fall in demand drove the price of tea downward. Hence Kenya experienced both a lower dollar value and quantity demanded for one of its principal exports.
Kenya faces major challenges in the years ahead as the economy tries to recover. Current is expected to be no more than 1 to 2 per cent annually. Heavy rains have spoiled crops and washed away roads, bridges, and telephone lines. Foreign exchange earnings from tourism, once promising, dropped by 40 per cent in the mid-1990s, then suffered again after the August 7, 1998, terrorist bombing of the US embassy in Nairobi. Even more frightening, however, is the prospect of growing hunger as Kenya’s maize (corn) crop has failed to meet rising internal demand and dwindling foreign exchange reserves have to be spent to import food. Corruption is perceived to be so widespread that the International Monetary Fund and World Bank suspended $292 million in loans to Kenyan in the summer of 1997 while insisting on tough new austerity measures to control public spending and weed out economic cronyism. As a result, the economy went into a tailspin, foreign investors fled the country, and inflation accelerated markedly.
Unfortunately, needed structural adjustments resulting form the World Bank—and IMF—induced austerity demands usually take a long time. Whether the Kenyan political and economic system can withstand any further deterioration in living conditions is a major question. Public protests for greater democracy and a growing incidence of ethnic violence may be harbingers of things to come.
Fig 1 Continuum of Economic Systems
Pure Market Pure Centrally Planned Economy
The US France India China
Canada Brazil Cuba
UK North Korea
- Is the economic environment of Kenya favourable to international business? Yes or no—substantiate.
- In the continuum of economic systems (see Fig 1), where do you place Kenya and why?
Case III: LATE MOVER ADVANTAGE?
Though a late entrant, Toyota is planning to conquer the Indian car market. The Japanese auto major wants to dispel the notion that the first mover enjoys an edge over the rivals who arrive late into a market.
Toyota entered the Indian market through the joint venture route, the partner being the Bangalore based Kirloskar Electric Co. Know as Toyota Kirloskar Motor (TKM), the plant was set up in 1998 at Bidadi near Bangalore.
To start with, TKM released its maiden offer—Qualis. Qualis is not a newly conceived, designed, and brought out vehicle. Rather it is the new avatar of Kijang under which brand the vehicle was sold in markets like Indonesia.
Qualis virtually had no competition. Telco’s Sumo was not a multi-utility vehicle like Qualis. Rather, it was mini-truck converted into a rugged all-purpose van. More importantly, Toyota proved that even its old offering, but decked up for India, could offer better quality than its competitor. Backed by a carefully thought out advertising campaign that communicated Toyota’s formidable global reputation, Qualis went on a roll and overtook Tata Sumo within two years of launch.
Sumo sold 25,706 vehicles during 2000-2001, compared to a 3 per cent growth over the previous year, compared to 25,373 of Qualis. But during 2001-2002, it was a different story. Qualis had been clocking more than 40 per cent share of the market. At the end of Sept 2001, Qualis had sold over 25,000 units, compared to Sumo’s 18000 plus.
The heady initial success has made TKM think of the future with robust confidence. By 2010, TKM wants to make and sell one million vehicles per year and garner one-third share of the Indian market.
The firm is planning to introduce a wide range of vehicle—a sub-compact, a sedan, a luxury car and a new multi-utility vehicle to replace Qualis. A significant percentage of the vehicles will be exported.
But Toyota is not as lucky in China. Its strategy of ‘late entry’ in China seems to have back fired. In 2005, it sold just 1,83,000 cars in China, the fastest growing auto market in the world. Toyota ranks ninth in the market, far behind Volkswagen, General Motors, Hyundai and Honda.
Toyota delayed producing cars in China until 2002, when it entered a joint venture with a local company, the First Auto Works Group (FAW). The first car manufactured by Toyota-FAW, the Vios, failed to attract much of a market, as, despite its unremarkable design, it was three times as expensive as most cars sold in China.
Late start was not the only problem. There were other lapses too. Toyota assumed the Chinese market would be similar to the Japanese market. But Chinese market, in reality, resembled the American market.
Sales personnel in Japan are paid salaries. They succeeded in building a loyal clientele for Toyota by providing first-class service to them. Likewise, most Japanese auto dealers sell a single brand, thereby ensuring their loyalty to it. Japan is a relatively a well-knit country with an ethnically homogeneous population. Accordingly, Toyota used nationwide advertising to market its products in its home country.
But China is different. Sales people are paid commissions and most dealers sell multiple brands. Obviously, loyalty plays little role in motivating either the sales staff or the dealers, who will ignore a slow selling product should a more profitable one turn up. Besides, China is a large, diverse country. A standardised ad campaign will not do. Luckily, Toyota is learning its lessons.
Competition in the Chinese market is tough, and Toyota’s success in reaching its goal of selling a million cars a year, by 2010, is uncertain. But, its chances are brighter as the company is able to transfer lessons learned in the American market to its operations in China.
- Why has the ‘late corner’s strategy’ of Toyota failed in China, though it succeeded in India?
- Why has Toyota failed to capture the Chinese market? Why is it trailing behind its rivals?
CASE: IV DELVING DEEP INTO USER’S MIND
Whirlpool is an American brand alright, but has succeeded in empowering the Indian housewife with just the tools she would have designed for herself. A washing machine that doesn’t expect her to get ‘ready for the show’ (Videocon’s old jingle), nor adapt her plumbing, power supply, dress sense, values, attitudes and lifestyle to suit American standards.
That, in short, is the reason that Whirlpool White Magic, in just three years since its launch in 1999, has become the choice of the discerning Indian housewife. Also worth noting is how quickly the brand’s sound mnemonic, ‘Whirlpool, Whirlpool’, has established itself.
As a company, the US-based white goods major Whirlpool had entered India in 1989, in a joint venture with the TVS group. Videocon, which had pioneered washing machines in India, was the market leader with its range of low-priced ‘washers’ (spinning tubs) and semi-automatic machines, which required manual supervision and some labour. The brand’s TV commercial, created by Pune-based SJ Advertising, has evoked considerable interest with its jingle (‘It washes, it rinses, it even dries your clothes, in just a few minutes…and you’re ready for the show’). IFB-Bosch’s front-loading, fully automatic machines, which could be programmed and left to do their job, were the labour-free option. But they were considered expensive and unsuited to Indian conditions. So Videocon faced competition from me-too machines such as BPL-Sanyo’s. TVS Whirlpool was something of an also-ran.
The market’s sophistication started rising in the 1990s and there was a growing opportunity in the price-performance gap between expensive automatics and laborious semi-automatics. In 1995, Whirlpool gained a majority control of TVS Whirlpool, which was then renamed Whirlpool Washing Machines Ltd (WMML). Meanwhile, the parent bought Kelvinator of India, and merged the refrigerator business in 1996 with WMML to create Whirlpool of India (WOI), to market both fridges and washing machines. Whirlpool’s ‘Flexigerator’ fridge hit the market in 1997. Two years later, WOI launched its star White Magic range of washing machines.
Whitemagic was late to the market, but WOI converted this to a ‘knowledge advantage’ by using the 1990s to study the Indian market intensely, through qualitative and quantitative market research (MR) tools, with the help of IMRB and MBL India. The research team delved deep into the psyche of the Indian housewife, her habits, her attitude towards life, her schedule, her every day concerns and most importantly, her innate ‘laundry wisdom’.
If Ashok Bhasin, vice-president marketing, WOI, was keen on understanding the psychodynamics of Indian clothes washing, it was because of his belief that people’s attitudes and perceptions of categories and brands are formed against the backdrop of their bigger attitudes in life, which could be shaped by broader trends. It was intuitive, to begin with, that the housewife wanted to gain direct control over crucial household operations. It was found that clothes washing was the daily activity for the Indian housewife, whether it was done personally, by a maid, or by a machine.
The key finding, however, was the pride in self-done washing. To the CEO of the Indian household, there was no displacing the hand wash as the best on quality. And quality was to be judged in terms of ‘whiteness’. Other issues concerned water consumption, quantity of detergent used, and fabric care—also something optimized best by herself. A thorough wash, done with gentle agility, was what the magic was all about.
That was the break-through insight used by Whirlpool for the design of all its washing machines, which adopted a ‘1-2, 1-2 Hand Wash Agitator System’ to mimic the preferred handwash technique. With a consumer so particular about washing, one could expect her to be value-conscious on other aspects too. Sure enough, WOI found the housewife willing to pay a premium for a product designed the way she wanted it. Even for a fully automatic, she wanted a top-loader; this way, she doesn’t fear clothes getting trapped in if the power fails, and retains the ability to lift the shutter to take clothes out (or add to the wash) even while the machine is in the midst of its job.
The target consumer, defined psychographically as the Turning Modernist (TM), was decided upon only after the initial MR exercise was concluded. This was also the stage at which the unique selling proposition (USP)—‘whitest white’—was thrashed out.
WOI first launched a fully automatic machine, with the hand-wash agitator. Then came the deluxe model with a ‘hot wash’ function. The product took off well, but WOI felt that a large chunk of the TM segment was also budget-bound. And was quite okay with having to supervise the machine. This consumer’s identity as a ‘home-maker’ was important to her, an insight that Whirlpool was using for the brand overall, in every product category.
So WOI launched a semi-automatic washing machine, with ‘Agisoak’ as a catchword to justify a 10—15 per cent premium over other brand’s semi-automatics available in India.
The advertising, WOI was clear, had to flow from the same stream of reasoning. It had to be responsive, caring, modern, stylish, and warm, and had to portray the victory of the Homemaker. FCB-Ulka, which had bagged Whirlpool’s account in March 1997 from contract (in a global alignment shift), worked with WOI to coin the sub-brand Whitemagic, to break into consumer mindspace with the whiteness proposition.
The launch commercial on TV, in August 1999, scored a big success with its ‘Whirlpool, Whirlpool’ jingle…and a mother’s fantasy of her daughter’s clothes wowing others. A product demonstration sequence took the ‘1-2, 1-2’ message home, reassuring the consumer that the wash would be just as good as that of her own hand. The net benefit, of course, was an unharried home life.
Sadly, the Indian market for washing machines has been in recession for the past two years, with overall volumes declining. This makes it a fight for market share, with the odds stacked against premium players.
Even though Whirlpool has sought to nudge the market’s value perception upwards, Videocon remains the largest selling brand in volume terms with its competitively priced machines. Washers have been displaced by semi-automatics, which are now the market’s mainstay (in the Rs 7,000-12,000 price range). In fact, these account for three-fourths of the 1.2 million units the Indian market sold in 2000. With a share of 17 per cent, Whirlpool is No. 2 in this voluminous segment.
Whirlpool’s bigger success has been in the fully automatic segment (Rs 12,000-36,000 range). This is smaller with sales of 177,600 units in 2000, but is predicted to become the dominant one as Indian GDP per head reaches for the $1,000 mark. With a 26 per cent share, Whirlpool has attained leadership of this segment.
That places WOI at the appropriate juncture to plot the value curve to be ascended over the new decade.
According to IMRB data, Whirlpool finds itself in the consideration set of 54 per cent of all prospective washing machine buyers, and has an ad recall of close to 85 per cent. This indicates the medium-term potential of Whitemagic, a Rs20.5 crore on a turnover of Rs1,042.8 crore, one-fifth of which was on account of washing machines.
The innovations continue. Recently, Whirlpool has launched semi-automatic machines with ‘hot wash’. The brand’s ‘magic’ isn’t showing signs of wearing off either. The current ‘mummy’s magic’ campaign on TV is trying to sell Whitemagic as a competent machine even for heavy duty washing such as ketchup stains on a white tablecloth.
The Homemaker, of course, remains the focus of attention. And she remains as vivacious, unruffled, and in control as ever. The attitude: you can sling the muckiest of stuff on to white cloth, but sparkling white is what it remains for its her hand that’ll work the magic, with a little help from some friends… such as Whirlpool.
- What product strategy did WOI adopt? And why? Global standardisation? Local customisaton?
- What pricing strategy did WOI follow? What, according to you, could have been the appropriate strategy?
- What lessons can other white goods manufacturers learn from WOI?
CASE V: CONSCIENCE OR COMPETITIVE EDGE
The plane touched down at Mumbai airport precisely on time. Olivia Jones made her way through the usual immigration bureaucracy without incident and was finally ushered into a waiting limousine, complete with uniformed chauffeur and soft black leather seats. Her already considerable excitement at being in India for the first time was mounting. As she cruised the dark city streets, she asked her chauffeur why so few cars had their headlights on at night. The driver responded that most drivers believed that headlights use too much petrol! Finally, she arrived at her hotel, a black marble monolith, grandiose and decadent in its splendour, towering above the bay.
The goal of her four-day trip was to sample and select swatches of woven cotton from the mills in and around Mumbai, to be used in the following season’s youth-wear collection of shirts, trousers, and underwear. She was thus treated with the utmost deference by her hosts, who were invariably Indian factory owners or British agents for Indian mills. For three days she was ferried from one air-conditioned office to another, sipping iced tea or chilled lemonade, poring over leather-bound swatch catalogues, which featured every type of stripe and design possible. On the fourth day, Jones made a request that she knew would cause some anxiety in the camp. “I want to see a factory,” she declared.
After much consultation and several attempts at dissuasion, she was once again ushered into a limousine and driven through a part of the city she had not previously seen. Gradually, the hotel and the Western shops dissolved into the background and Jones entered downtown Mumbai. All around was a sprawling shantytown, constructed from sheets of corrugated iron and panels of cardboard boxes. Dust flew in spirals everywhere among the dirt roads and open drains. The car crawled along the unsealed roads behind carts hauled by man and beast alike, laden to overflowing with straw or city refuse—the treasure of the ghetto. More than once the limousine had to halt and wait while a lumbering white bull crossed the road.
Finally, in the very heart of the ghetto, the car came to a stop. “Are you sure you want to do this?” asked her host. Determined not be faint-hearted, Jones got out the car.
White-skinned, blue-eyed, and blond, clad in a city suit and stiletto-heeled shoes, and carrying a briefcase, Jones was indeed conspicuous. It was hardly surprising that the inhabitants of the area found her an interesting and amusing subject, as she teetered along the dusty street and stepped gingerly over the open sewers.
Her host led her down an alley, between the shacks and open doors and inky black interiors. Some shelters, Jones was told, were restaurants, where at lunchtime people would gather on the rush mat floors and eat rice together. In the doorway of one shack there was a table that served as a counter, laden with ancient cans of baked beans, sardines, and rusted tins of fluorescent green substance that might have been peas. The eyes of the young man behind the counter were smiling and proud as he beckoned her forward to view his wares.
As Jones turned another corner, she saw an old man in the middle of the street, clad in a waist cloth, sitting in a large bucket. He had a tin can in his hand with which he poured water from the bucket over his head and shoulders. Beside him two little girls played in brilliant white nylon dresses, bedecked with ribbons and lace. They posed for her with smiling faces, delighted at having their photograph taken in their best frocks. The men and women around her with great dignity and grace, Jones thought.
Finally, her host led her up a precarious wooden ladder to a floor above the street. At the top Jones was warned not to stand straight, as the ceiling was just five feet high. There, in a room not 20 feet by 40 feet, 20 men were sitting at treadle sewing machines, bent over yards of white cloth. Between them on the floor were rush mats, some occupied by sleeping workers awaiting their next shift. Jones learned that these men were on a 24-hour rotation, 12 hours on and 12 hours off, every day for six months of the year. For the remaining six months they returned to their families in the countryside to work the land, planting and building with the money they had earned in the city. The shirts they were working on were for an order she had placed four weeks earlier in London, an order of which she had been particularly proud because of the low price she had succeeded in negotiating. Jones reflected that this sight was the most humbling experience of her life. When she questioned her host about these conditions, she was told that they were typical for her industry—and most of the Third World, as well.
Eventually, she left the heat, dust and din to the little shirt factory and returned to the protected, air-conditioned world of the limousine.
“What I’ve experienced today and the role I’ve played in creating that living hell will stay with me forever,” she thought. Later in the day, she asked herself whether what she had seen was an inevitable consequence of pricing policies that enabled the British customer to purchase shirts at £12.99 instead of £13.99 and at the same time allowed the company to make its mandatory 56 percent profit margin. Were her negotiating skills—the result of many years of training—an indirect cause of the terrible conditions she has seen?
Once Jones returned to the United Kingdom, she considered her position and the options open to her as a buyer for a large, publicly traded, retail chain operating in a highly competitive environment. Her dilemma was twofold: Can an ambitious employee afford to exercise a social conscience in his or her career? And can career-minded individuals truly make a difference without jeopardising their future? Answer her.
Note: Solve any 4 Cases Study’s
CASE: I Managing the Guinness brand in the face of consumers’ changing tastes
1997 saw the US$19 billion merger of Guinness and GrandMet to form Diageo, the world’s largest drinks company. Guinness was the group’s top-selling beverage after Smirnoff vodka, and the group’s third most profitable brand, with an estimated global value of US$1.2 billion. More than 10 million glasses of the popular stout were sold every day, predominantly in Guinness’s top markets: respectively, the UK, Ireland, Nigeria, the USA and Cameroon.
However, the famous dark stout with the white, creamy head was causing some strategic concerns for Diageo. In 1999, for the first time in the 241-year of Guinness, sales fell. In early 2002 Diageo CEO Paul Walsh announced to the group’s concerned shareholders that global volume growth of Guinness was down 4 per cent in the last six months of 2001 and, more alarmingly, sales were also down 4 per cent in its home market, Ireland. How should Diageo address falling sales in the centuries-old brand shrouded in Irish mystique and tradition?
The changing face of the Irish beer market
The Irish were very fond of beer and even fonder of Guinness. With close to 200 litres per capita drunk each year—the equivalent of one pint per person per day—Ireland ranked top in worldwide per capita beer consumption, ahead of the Czech Republic and Germany.
Beer accounted for two-thirds of all alcohol bought in Ireland in 2001. Stout led the way in volume sales and accounted for 40 per cent of all beer value sales. Guinness, first brewed in 1759 in Dublin by Arthur Guinness, enjoyed legendary status in Ireland, a national symbol as respected as the green, white and gold flag. It was by far the most popular alcoholic drink in Ireland, accounting for nearly one of every two pints of beer sold. Its nearest competitors were Budweiser and Heineken, which held 13 per cent and 12 per cent of the market respectively.
However, the spectacular economic growth of the Irish economy since the mid-1990s had opened up the traditional drinking market to new cultures and influences, and encouraged the travel-friendly Irish to try other drinks. Beer and in particular stout were losing popularity compared with wine or the recently launched RTDs (ready-to-drinks) or FABs (flavoured alcoholic beverages), which the younger generation of drinkers considered trendier and ‘healthier’. As a Euromonitor report explained: Younger consumers consider dark beers and stout to be old fashioned drinks, with the perceived stout or ale drinker being an old, slightly overweight man and thus not in tune with image conscious youth culture.
Beer sales, which once accounted for 75 per cent of all alcohol bought in Ireland, were expected to drop to close to 50 per cent by 2006, while stout sales were forecast to decrease by 12 per cent between 2002 and 2006.
Giving Guinness a boost in its home market
With Guinness alone accounting for 37 per cent of Diageo’s volume in the market, Guinness/UDV Ireland was one of the first to feel the pain caused by the declining popularity of beer and in particular stout. A Euromonitor report in February 2002 explained how the profile of the Guinness drinker, typically men aged 21-plus, was affected: The average age of Guinness drinkers is rising and this is bringing about the worrying fact that the size of the Guinness target audience is falling. The rate of decline is likely to quicken as the number of less brand loyal, non-stout drinking younger consumers increases.
The report continued:
In Ireland, in particular, the consumer base for Guinness is shrinking as the majority of 18 to 24 year olds consistently reject stout as a product relevant to their generation, opting instead to consume lager or spirits.
Effectively, one-third of young Irish men and half of young Irish women had reportedly never tried Guinness. A Guinness employee provided another explanation. Guinness is similar to coffee in that when you’re young you drink it [coffee] with sugar, but when you’re older you drink it without. It’s got a similar acquired taste and once you’re over the initial hurdle, you’ll fall in love with it.
In an attempt to lure young drinkers to the somewhat ‘acquired’ Guinness taste (40 per cent of the Irish population was under the age of 24) Diageo had invested millions in developing product innovations and brand building in Ireland’s 10,000 pubs, clubs and supermarkets.
Until the mid-1990s most Guinness in Ireland was drunk in a pint glass in the local pub. The launch of product innovations in the form of a new cooling mechanism for draft Guinness and the ‘widget’ technology applied to cans and bottles attempted to modernize the brand’s image and respond to increasing competition from other local and imported stouts and lagers.
‘A perfect head’ for canned Guinness
In 1989, and at a cost of more than £10 million, Guinness developed an ingenious ‘widget’ device for its canned draft stout sold in ‘off-trade’ outlets such as supermarkets and off-licences. The widget, placed in the bottom of the can, released a gas that replicated the draft effect.
Although over 90 per cent of beer in Ireland was sold in ‘on-trade’ pubs and bars, sale of beer in the cheaper ‘off-trade’ channel were slowly gaining in importance. The Guinness brand manager at the time, John O’Keeffe, explained how home drinkers could now enjoy a smoother, creamier head similar to the one obtained in a pub thanks to the new widget technology:
When the can is opened, the pressure causes the nitrogen to be released as the widget moves through the beer, creating the classic draft Guinness surge.
Nearly 10 years later, in 1997, the ‘floating widget’ was introduced, which improved the effectiveness of the device.
A colder pint
In 1997 Guinness Draft Extra Cold was launched in Ireland. An additional chilled tap system could be added to the standard barrel in pubs, allowing the Guinness to be served at 4ºC rather than the normal 6ºC. By serving Guinness at a cooler temperature, Guinness/UDV hoped to mute the bitter taste of the stout and make it more palatable for younger adults, who were increasingly accustomed to drinking chilled lager, particularly in the summer
A cooler image for Guinness
In October 1999 the widget technology was applied to long-stemmed bottles of Guinness. The launch was supported by a US$2 million TV and outdoor board campaign. The packaging—with a clear, shiny plastic wrap, designed to look like a pint complete with creamy head—was quite a departure from the traditional Guinness look.
The objective was to reposition Guinness alongside certain similarly packaged lagers and RTDs and offer younger adults a more fashionable way to drink Guinness: straight from the bottle. It also gave Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness, which could be kept for only six to eight weeks and took two minutes to pour. The RTDs, by contrast, had a shelf-life of more than a year and were drunk straight from the bottle.
However, financial analyst remained sceptical about the Guinness product innovations, which had no significant positive impact on sales or profitability:
The last news about the success of the recently introduced innovations suggests that they have not had a notably material impact on Guinness brand performance.
Euromonitor estimates that, in 2000, Diageo invested between US$230 and US$250 million worldwide in Guinness advertising and promotions. However, with a cost-cutting objective, the company reduced marketing expenses in both Ireland and the UK up to 10 per cent in 2001 and the number of global Guinness agencies from six to two.
Nevertheless, Guinness remained one of the most advertised brands in Ireland. It was the leading cinema advertiser and, in terms of advertising, was second only to the national telecoms provider, Eircom. Guinness was also heavily promoted at leading sporting and music events, in particular those that were popular with the younger age groups.
The ultimate tribute to the brand was the opening of the new Guinness Storehouse in Dublin in late 2000, a sort of Mecca for all Guinness fans. The Storehouse was also a fashionable visitor centre with an art gallery and restaurants, and regularly hosted evening events. The company’s design brief highlighted another key objective:
To use an ultramodern facility to breathe life into an ageing brand, to reconnect an old company with young (sceptical) customers.
As the Storehouse’s design firm’s director, Ralph Ardill, explained:
Guinness Storehouse had become the top tourist destination in Ireland, attracting more than half a million people and hosting 45,000 people for special events and training.
The Storehouse also had training facilities for Guinness’s bartenders and 3000 Irish employees. The quality of the Guinness pint remained a high priority for the company, which not only developed pub-like classrooms at the Storehouse but also employed teams of draft technicians to teach barmen how to pour a proper pint. The process involved two steps—the pour and the top-up—and took a total of 119.5 seconds. Barmen also needed to learn how to check that the pressure gauges were properly set and that the proportion of nitrogen to carbon dioxide in the gas was correct.
The uncertain future of the Guinness brand in Ireland
Despite Guinness/DUV’s attempt to appeal to the younger generation of drinkers and boost its fading image, rumours persisted in Ireland about the brand future. The country’s leading and respected newspaper, the Irish times, reported in an article in July 2001:
The uncertainty over its future all adds to the air of crisis that is building around Guinness Ireland Group four months ago…The review is not complete and the assumption is that there is more bad news to come.
In the pubs across Ireland, the traditional Guinness drinkers looked on anxiously as the younger generation drank Bacardi Breezers, Smirnoff Ices or Californian wines. Could the goliath Guinness survive another two centuries? Was the preference for these new drinks just a fad or fashion, or did Diageo need to seriously reconsider how it marketed Guinness?
A quick solution?
In late February 2002, Diageo CEO Paul Walsh revealed that the company was testing technology to cut the waiting time for a pint of Guinness from 1 minute 59 seconds to 15-25 seconds. Ultrasound could release bubbles in the stout and form the head instantly, making a pint of Guinness that would be indistinguishable from one produced by the slower, traditional method.
‘A two-minute pour is not relevant to our customers today,’ Walsh said. A Guinness spokeswoman continued, ‘We have got to move with the times and the brand must evolve. We must take all the opportunities that we can. In outlets where it is really busy, if you walk in after nine o’clock in the evening there will be a cloth over the Guinness pump because it takes longer to pour than other drinks. Aware that some consumers might not be attracted by the innovation, she added ‘It wouldn’t be put everywhere—only where people want a quick pint with no effect on the quality.’
Although still being tested, the ‘quick-pour pint’ was a popular topic of conversation in Dublin pubs, among barmen and customers alike. There were rumours that it would be introduced in Britain only; others thought it would be released worldwide.
Some market commentators viewed the quick-pour pint as an innovative way to appeal to the younger, less patient segment in which Guinness had under-performed. Others feared that the young would be unconvinced by the introduction, and loyal customers would be turned off by what they characterized as a ‘marketing u-turn’.
- From a marketing perspective, what has Guinness done to ensure its longevity?
- How would you characterize the Guinness brand?
- What could Guinness do to attract younger drinkers? And to retain its older loyal customer base? Can both be done at the same time?
CASE: II The grey market
The over-50s market has long been ignored by advertising and marketing firms in favour of the market. The complexity of how to appeal to today’s mature customers, without targeting their age, has proved just too challenging for many companies. But this preoccupation with youth runs counter to demo-graphic changes. The over-50s represent the largest segment of the population, across western developed countries, due largely to the post-Second World War baby boom. The sheer size of this grey market, which will continue to grow as birth and mortality rates fall, coupled with its phenomenal spending power, presents enormous opportunities for business. However, successfully unleashing its potential will depend on companies truly understanding the attitudes, lifestyles and purchasing interests of this post-war generation.
Following the Second World War many countries experienced a baby boom phenomenon as returning soldiers began families. This, coupled with a more positive outlook on the future, resulted in the baby boom generation, born between 1946 and 1964. Now beginning to enter retirement, this affluent group globally numbers approximately 532 million. In Western Europe they account for the largest proportion of the total population at 14.9%, followed closely by 14.2% in North America and 13.5 % in Australia.
Table 1: Global population aged 45-54 by region: baby boomers as a % of the total population 1990/2002
|Baby boomers as a % total population||1990||2002||% point change|
The grey market is big and getting bigger. Between 1990 and 2002 the global baby boomer population increased by 41%. The rate of growth is predicted to decrease to 35% between 2002 and 2015. Particularly noteworthy is the predicted increase in the proportion of baby boomers in many Western European countries, such as Austria, Spain, Germany, Italy, and the UK. In developed countries, according to the United Nations, the percentage of elderly people (60+) is forecast to rise from one-fifth of the population to one-third by 2050. The growth in the elderly population is exacerbated by falling fertility rates in many developed countries, coupled with a rise in human longevity.
The influences and buyer behaviour patterns of baby boomers
The members of the baby boomer generation are quite unlike their more conservative parents’ generation. They are the children of the rebellious ‘swinging sixties’, growing up on the sounds of the Beatles and the Rolling Stones. Better educated than their parents, in a time of greater prosperity, they indulged in more hedonistic lifestyle. It has been said that they were the first ‘me generation’. Now, in later life, they have retained their liberal, adventurous and youthful attitude to life. Aptly termed ‘younger older people’ they abhor antiquated stereotypes of elderly people, preferring to be defined by their attitude rather than their age.
Baby boomers are also tend to be very wealthy. Many are property owners and may have gained an inheritance from parents or other relatives. They have higher than average incomes or have retired with private pension plans. With their children having flown the nest they have greater financial freedom and more time to indulge themselves. Having worked all their lives, and educated their children, many baby boomers do not believe it is their responsibility to safeguard the financial future of their children by carefully protecting their children’s inheritance. They are instead liquidating their assets, intent on enjoying their later life to full, often through conspicuous consumption.
Based on research conducted by Euromonitor, the main areas of expenditure in the baby boomer market are financial services, tourism, food and drink, luxury cars, electrical/electronic goods, clothing, health products, and DIY and gardening.
Table 2: Global population aged 45-54 in thousands by country: developed countries 2002-2015
Figure 1 Global Baby boomer market: % analysis by broad sector 2002 (% value)
Note: sectors valued on the basis of estimates by senior managers in major companies in each sector, consumer expenditure and industry sector data.
Unsurprisingly the financial sector is the largest in this market. Baby boomers are concerned with being financially secure in their retirement. An ageing population, coupled with a rise in human longevity, is giving rise to a pensions crisis across Western Europe. Baby boomers are therefore right to be preoccupied with how they will maintain their lifestyle over the long term. They are actively engaging in financial planning, both before and after retirement. Popular financial service products include endowments, life insurance, personal pensions, PEPs and ISAs.
Baby boomers have adventurous attitudes with a desire to see the world. In their retirement foreign travel is a key expenditure. Given their greater levels of sophistication and education, baby boomers are much more demanding of holidays that suit their lifestyles. This group is very diverse, with holiday interests ranging from action-packed adventures to culturally rich experiences.
Baby boomers want to maintain a youthful appearance in line with their youthful way of living. Fear of becoming invisible is a genuine concern among older generations. This image conciousness is reflected in their spending on clothing, cosmetics and anti-ageing products. Luxury cars also a key status symbols for this group.
The home is another area of expenditure. Once children have flown the nest, many baby boomers redecorate the home to suit their needs. Electrical and electronic purchases are key indulgences among these technologically savvy consumers. Gardening is another pastime enjoyed by older generations. Health is also a priority. Baby boomers invest in private health insurance and over-the-counter pharmaceutical products to maintain their healthy lives.
The sheer size of the grey market, which is getting bigger in many countries—characterized by consumers with disposable income, ample free time, interest in travel, concern about financial security and health, awareness of youth culture and brands and desire for aspirational living—makes this market enormously attractive to many business sectors. Pharmaceuticals, health and beauty, technology, travel financial services, luxury cars, lavish food and entertainment are key growth sectors for the grey market. However, successfully tapping into this market will depend on companies truly understanding the attitudes, lifestyles and purchasing interests of this post-war generation. Communicating with this group is a tricky business, but, done right, it can be hugely rewarding.
When targeting the older consumer it is important to target their lifestyle and not their age. Older people do not want to be reminded, in a patronizing way, of their age or what they should be doing now they are a certain stage in life. With an interest in maintaining a youthful way of life these consumers are interested in similar brands to those that appeal to younger generations. The key for the companies is to find a way of making their brands also appeal to an older consumer without explicitly targeting their age. One tried-and tested method of targeting this group is to use nostalgia. Mercedes Benz used the Janis Joplin song ‘Oh Lord won’t you buy me a Mercedes Benz’ to great effect despite the obvious irony in that the song was written to highlight the dangers of materialism! Volkswagen’s new retro-style Beetle has also been popular among this group. In the tourism sector Saga Holidays, the leader in holidays for the over-50s, has changed its product offering to reflect changing trends among this group. In line with the more adventurous attitudes of many older consumers it now offers more action-packed adventure holidays to far-flung destinations.
More recently, Thomas Cook has rebranded it over-50s ‘Forever Young’ programme to reflect the diverse interest of its target customers. Its new primetime brochure targets five distinct groups with the following holiday types: ‘Discover’, ‘Learn’, ‘Relax’, ‘Active’ and ‘Enjoy Life’.
The over-50s represent the largest segment of the population across Western developed countries. This affluent market is big and getting bigger. Having ignored it for so long marketers are finally beginning to see the enormous opportunities presented by the grey market. But conquering this market will not be easy. The baby boomer generation is quite unlike its predecessors. With a youthful and adventuresome spirit these ‘younger older people’ want to be defined by their attitude and not by their age. Only time will tell whether today’s marketers are up to the challenge.
- Why is the grey market so attractive to business?
- Identify the influences on the purchasing behaviour of the over-50s consumer.
- Discuss the challenges involved in targeting the grey market.
CASE: III Nivea: managing an umbrella brand
‘In many countries consumer are convinced that Nivea is a local brand, a mistake which Beiersdoft, the German makers, take as a compliment.’
(Quoted on leading brand consultancy Wolff-Olins’ website, www.wolff-olins.com)
An ode to Nivea’s success
In May 2003, a survey of ‘Global Mega Brand Franchises’ revealed that the Nivea Cosmetics brand had presence in the maximum number of product categories and countries. The survey, conducted by US-based ACNielsen, aimed at identifying those brands that had ‘successfully evolved beyond their original product categories’. A key parameter was the presence of these brands in multiple product categories as well as countries.
Nivea’s performance in this study prompted a yahoo.com news article to name it the ‘Queen of Mega Brands’. This title was appropriate since the brand was present in over 14 product categories and was available in more than 150 countries. Nivea was the market leader in skin creams and lotions in 28 countries, in facial cleansing in 23 countries, in facial skin care in 18 countries, and in suntan products in 15 countries. In many of those countries, it was reportedly believed to be a brand of local origin—having been present in them for many decades. This fact went a long way in helping the brand attain leadership status in many categories and countries (see Table 3).
Table 3 Nivea: market positions
|CATEGORY||Skin care||Baby care||Sun protection||Men’s care|
The study covered 200 consumer packaged goods brands from over 50 global manufacturers. The brands had to be available in at least 15 of the countries studied; the same name had to be used in at least three product categories and meet franchise in at least three of the five geographical regions.
In its home country Germany, too, many of Nivea’s products were the market leaders in their segments. This market leadership status translated into superior financial performance. Between 1991 and 2001, Nivea posted double-digit growth rates every year. For 2001, the brand generated revenues of €2.5 billion, amounting to 55 per cent of the parent company’s (Beiersdoft) total revenue for the year. The 120-year-old, Hamburg-based Beiersdoft has often been credited with meticulously building the Nivea brand into the world’s number one personal care brand. According to a survey conducted by ACNielsen in the late 1990s, the brand had a 15 per cent share in the global skin care products market. While Nivea had always been the company’s star performer, the 1990s were a period of phenomenal growth for the brand. By successfully extending what was essentially a ‘one-product wonder’ into many different product categories, Beiersdoft had silenced many critics of its umbrella branding decision.
The marketing game for Nivea
Millions of customers across the world have been familiar with the Nivea brand since their childhood. The visual (colour and packaging) and physical attributes (feel, smell) of the product stayed on in their minds. According to analysts, this led to the formation of a complex emotional bond between customers and the brand, a bond that had strong positive under-tones. According to a superbrands.com. my article, Nivea’s blue colour denoted sympathy, harmony, friendship and loyalty. The white colour suggested external cleanliness as well as inner purity. Together, these colours gave Nivea the aura of an honest brand.
To customers, Nivea was more than a skin care product. They associated Nivea with good health, graceful ageing and better living. The company’s association Nivea with many sporting events, fashion events and other lifestyle-related events gave the brand a long-lasting appeal. In 2001, Franziska Schmiedebach, Beiersdoft’s Corporate Vice President (Face Care and Cosmetics), commented that Nivea’s success over the decades was built on the following pillars: innovation, brand extension and globalization (see Table 4 for the brand’s sales growth from 1995-2002)
Table 4 Nivea: worldwide sales growth (%)
|In Million €||1040||1166||1340||1542||1812||2101||2458||2628|
|In per cent||9.8||12.1||14.9||15.1||17.5||16.0||17.0||6.9|
Innovation and brand extensions
Innovation and brand extensions went hand in hand for Nivea. Extensions had been made back in the 1930s and had continued in the 1960s when the face care range Nivea Visage was launched. However, the first major initiative to extend the brand to other products came in the 1970s. Naturally, the idea was to cash in on Nivea’s strong brand equity. The first major extension was launch of ‘Nivea For Men’ aftershave in the 1970s. Unlike the other aftershaves available in market, which caused the skin to burn on application, Nivea For Men soothed the skin. As a result, the product became a runaway success.
The positive experience with the aftershave extension inspired the company to further explore the possibilities of brand extensions. Moreover, Beiersdoft felt that Nivea’s unique identity, the values it represented (trustworthiness, simplicity, consistency, caring) could easily be used to make the transition to being an umbrella brand. The decision to diversify its product range was also believed to have influenced by intensifying competitive pressures. L’Oreal’s Plenitude range, Procter & Gamble’s Oil of Olay range, Unilever’s Pond’s range, and Johnson & Johnson’s Neutrogena range posed stiff competition to Nivea.
Though Nivea was the undisputed market leader in the mass-market face cream segment worldwide, its share was below Oil of Olay’s, Pond’s and Plenitude’s in the US market. While most of the competing brands had a wide product portfolio, the Nivea range was rather limited. To position Nivea as a competitor in a larger number of segments, the decision to offer a wider range inevitable.
Beiersdoft’s research centre—employing over 150 dermatological and cosmetics researchers, pharmacists and chemists—supported its thrust on innovations and brand extensions. During the 1990s, Beiersdoft launched many extensions, including men’s care products, deodorants (1991), Nivea Body (1995), and Nivea Soft (1997). Most of these brand extension decisions could be credited to Rolf Kunisch, who became Beiersdoft’s CEO in the early 1990s. Rolf Kunisch firmly believed in the company’s ‘twin strategy’ of extension and globalization.
By the beginning of the twenty-first century, the Nivea umbrella brand offered over 300 products in 14 separate segments of the health and beauty market (see Table 5 and Figure 2 for information on Nivea’s brand extensions). Commenting on Beiersdoft’s belief in umbrella branding, Schmiedebach said, ‘Focusing your energy and investment on one umbrella brand has strong synergetic effects and helps build leading market positions across categories.’ A noteworthy aspect of the brand extension strategy was the company’s ability to successfully translate the ‘skin care’ attributes of the original Nivea cream to the entire gamut of products.
Table 5 Nivea: brand portfolio
|Nivea Bath Care||Shower gels, shower specialists, bath foams, bath specialists, soaps, kids’ products, intimate care|
|Nivea Sun (sun care)||Sun protection lotion, anti-ageing sun cream, sensitive sun lotion, sun-spray, children’s sun protection, deep tan, after tan, self –tan, Nivea baby sun protection|
|Nivea Beaute (colour cosmetics)||Face, eyes, lips, nails|
|Nivea For Men (men’s care)||Shaving, after shaving, face care, face cleansing|
|Nivea Baby (baby care)||Bottom cleansing, nappy rash protection, general cleansing, moisturizing, sun protection|
|Nivea Body (body care)||Essential line, performance line, pleasure line|
|Nivea Crème||Nivea crème|
|Nivea Deodorants||Roll-ons, sprays, pump sprays, sticks, creams, wipes, compact|
|Nivea Hand (hand care)||Hand care lotions and creams|
|Nivea Lip Care||Basic care, special care, cosmetic care, extra protection care|
|Nivea Visage (face care)||Daily cleaning, deep cleaning, facial masks (cleaning/care), make-up remover, active moisture care, advanced repair care, special care|
|Nivea Vital (mature skin care)||Basic face care, specific face care, face cleansing products, body care|
|Nivea Soft||Nivea soft moisturizing cream|
|Nivea Hair Care||Hair care (shampoos, rinse, treatment, sun); hair styling (hairspray and lacquer, styling foams and specials, gels and specials)|
Figure 2 Nivea Universe
The company ensured that each of its products addressed a specific need of consumers. Products in all the 14 categories were developed after being evaluated on two parameters with respect to the Nivea mother brand. First, the new product had to be based on the qualities that the mother brand stood for and, second, it ha to offer benefits that were consistent with those that the mother brand offered. Once a new product cleared the above test, it was evaluated for its ability to meet consumer needs and its scope for proving itself to be a leader in the future. For instance, a Nivea shampoo not only had to clean hair, it also had to be milder and gentler than other shampoos in the same range.
Beiersdoft developed a ‘Nivea Universe’ framework for streamlining and executing its brand extension efforts. This framework consisted of a central point, an inner circle of brands and an outer circle of brands (see Figure 2)
The centre of the model housed the ‘mother brand’, which represented the core values of trustworthiness, honesty and reliability. While the brands in the inner circle were closely related to the core values of the Nivea brand, the brands in the outer circle were seen as extensions of these core values. The inner-circle brands strengthened the existing beliefs and values associated with the Nivea brand. The outer circle brands, however, sought to add new dimensions to the brand’s personality, thereby opening up avenues, for future growth.
The ‘global-local’ strategy
The Nivea brand retained its strong German heritage and was treated as a global brand for many decades. In the early days, local managers believed that the needs of customers from their countries were significantly different from those of customers in other countries. As a result, Beiersdoft was forced to offer different product formulations an packaging, and different types of advertising support. Consequently, it incurred high costs.
It was only in the 1980s that Beiersdoft took a conscious decision to globalize the appeal of Nivea. The aim to achieve a common platform for the brand on a global scale and offer customers from different parts of the world a wider variety of product choices. This was radical departure from its earlier approach, in which product development and marketing efforts were largely focused on the German market. The new decision was not only expected to solve the problems of high costs, it was also expected to further build the core values of the brand.
To globalize the brand, the company formulated strategies with the help of a team of ‘international’ experts with ‘local expertise’. This team developed new products for all the markets. Their responsibilities included, among others, deciding about the way in which international advertising campaigns should be adapted at the local level. The idea was to leave the execution of strategic decisions to local partners. However, Beiersdoft monitored the execution to ensure that it remained in line with the global strategic plan.
This way, Beiersdoft ensured that the nuances of consumer behaviour at the local level understood and that their needs were addressed. Company sources claimed that by following the above approach, it was easy to transfer know-how between headquarters and the local offices. In addition, the motivation level of the local partners also remained on the higher side.
The company established a set of guidelines that regulated how the marketing mix of a new product/brand was to be developed. These guidelines stipulated norms with respect to product, pricing, promotion, packaging and other related issues. For instance, a guideline regarding advertising read, ‘Nivea advertising is about skin care. It should be present visually and verbally. Nivea advertising is simple, it is unpretentious and human.’
Thus all advertisements for any Nivea product depicted images related to ‘skin care’ and ‘unpretentious human life’ in one way or the other. The company consciously decided not to use supermodels to promote its products. The predominant colours in all campaigns remained blue and white. However, local issues were also kept in mind. For instance, in the Middle East, Nivea relied more on outdoor media as it worked out to be much more cost-effective. And since showing skin in the advertisements went against the region’s culture, the company devised ways of advertising skin without showing skin.
Many brand management experts have spoken of the perils of umbrella management, such as brand dilution and the lack of ‘change’ for consumers. However, the umbrella branding strategy worked for Beiersdoft. In fact, the company’s growth was the most dynamic since its inception during 1990s—the decade when the brand extension move picked up momentum. The strong yearly growth during the 1990s and the quadrupling of sales were attributed by company sources to the thrust on brand extension.
- Discuss the reasons for the success of the Nivea range of products across the world. Why did Beiersdoft decide to extend the brand to different product categories? In the light of Beiersdoft’s brand extension of Nivea, critically comment on the pros and cons of adopting an umbrella branding strategy. Compare the use of such a strategy with the use of an independent branding strategy.
- According to you, what are the core values of the Nivea brand? What type of brand extension framework did Beiersdoft develop to ensure that these core values id not get diluted? Do you think the company was able to protect these core values? Why/why not?
- What were the essential components of Beiersdoft’s global expansion strategy for Nivea? Under what circumstances would a ‘global-strategy-local execution’ approach be beneficial for a company? When and why should this approach be avoided?
CASE: IV Pret a Manger: passionate about food
Pret a Manger (French for ‘ready to eat’) is a chain of coffee shops that sells a range of upmarket, healthy sandwiches and desserts as well as a variety o coffees to an increasingly discerning set of lunchtime customers. Started in London, England, in 1986 by two university graduates, Pret a Manger has more than 120 stores across the UK. In 2002 it sold 25 million sandwiches and 14 million cups of coffee, and had a turnover of over £100 million. Buckingham Palace reportedly orders more than £1000 worth of sandwiches a week and British Prime Minister Tony Blair has had Pret sandwiches delivered to number 10 Downing Street for working lunches. The company also has ambitious plans to expand further—it already has stores in New York, Hong Kong and Tokyo, and has set its sights on further international growth.
Background and company history
In 1986, Pret a Manger was founded with one shop, in central London, and a £17,000 loan, by two property law graduates, Julian Metcalf and Sinclair Beecham, who had been students together at the University of Westminster in the early 1980s. At that time the choice of lunchtime eating in London and other British cities was more limited than it is today. Traditionally, some ate in restaurants while many favoured that well-known British institution, the pub, as a choice for lunchtime eating and drinking. There was, however, a growing awareness among many people of the benefits of healthy eating and a healthy lifestyle, and lunchtime habits were changing. There was a general trend towards taking shorter lunch brakes and, among office workers, to take lunch at their desks. For those who wanted food to take away, the choice in fast food was dominated by the large chains such as McDonald’s, Burger King and Kentucky Fried Chicken (now KFC) while other types of carry-out food, such as pizzas, were also available.
Sandwiches also played an important part in British lunchtime eating. Named after its eighteenth-century inventor, the Earl of Sandwich, the humble sandwich had long been a popular British lunch choice, especially for those with little time to spare. Prior to Pret’s arrival on the scene, sandwiches were sold mainly either pre-packed in supermarkets and high-street variety chain stores such as Marks and Spencer and Boots, or in the many small sandwich bars that were to be found in the business districts of large cities like London, Sandwich bars were usually small, independently owned or family run shops that made sandwiches to order for customers who waited in a queue, often out on to the pavement outside.
Dissatisfied with the quality of both the food and service from traditional sandwich bars, Metcalf and Beecham decided that Pret a Manger should offer something different. They wanted Pret’s food to be high quality and healthy, and preservative and additive free. In the beginning, they shopped for the food themselves at local markets and returned to the store where they made the sandwiches each morning. Pret’s offering was based around premium-quality sandwiches and other health-orientated lunches including salads, sushi and a range of desserts, priced higher than at traditional sandwich bars, and sold pre-packed in attractive and convenient packaging ready to go. There was also a choice of different coffees, as well as some healthy alternatives. Service aimed to be fast and friendly go give customers a minimum of queuing time.
Pret a Manger: ‘Passionate about What We do’
Pret a Manger strongly emphasizes the quality of its products. Its promotional material and website claims that it is:
‘passionate about food, rejecting the use of obscure chemicals, additives and preservatives common in so much of the prepared and fast food on the market today…it there’s a secret to our success so far we like to think its determination to focus continually on quality—not just our food, but in every aspect of what we do’.
Great importance is also placed on freshness. Unlike those sold in high-street shops or supermarkets, Pret’s sandwiches are all hand-made by staff in each shop starting at 6.30 every morning, rather than being prepared and delivered by a supplier or from a central location. Metcalf and Beecham believe this gives their sandwiches a freshness and distinctiveness. All food that hasn’t been sold in the shops by the end of the day is given away free to local charities.
Careful sourcing of supplies for quality has also always been important. Genetically modified ingredients are banned and the tuna Pret buys, for example, must be ‘dolphin friendly’. There is also a drive for constant product improvement and innovation—the company claims that its chocolate brownie dessert has been improved 33 times over the last few years—and, on average, a new product is tried out in the stores every four days. Aware that some of its customers are increasingly health conscious, Pret’s website menu carefully lists not only what is available, but also the ingredients and nutritional values in terms of energy, protein, fats and dietary fibre for each item.
The level and quality of service from staff in the shop is a critical factor. The stores are self-service, with customers helping themselves to sandwiches and other products form the supermarket-style refrigerated cabinets. Staff at the counter at the back of the store then serve customers coffee and take payment. Service is friendly, smiling and efficient, in contrast to many retail and restaurant outlets in Britain where, historically, service quality has not always been high. Prêt puts an emphasis on human resource management issues such as effective recruitment and training so as to have frontline staff who can show the necessary enthusiasm and also remain fast and courteous under the pressure of a busy lunchtime sales period. These staff are usually young and enthusiastic, some are students, many are international. The pay they receive is above the fast-food industry average and staff turnover is 98 per cent a year, which sounds high—however, this is against an industry norm of around 150 per cent. In 2001, Pret had 55,000 applications for 1500 advertised vacancies.
Recently, Fortune magazine voted Pret one of the top 10 companies to work for in Europe. According to its own promotional recruitment material, Pret is an attractive and fun place to work: ‘We don’t work nights, we wear jeans, we party!’ Service quality is checked regularly by the use of mystery shoppers: if a shop receives a good report, then the staff there receive a 75p an hour bonus in the week of the visit. Head office managers also visit stores on a regular basis and every three or four months every one of these managers works as a ‘buddy’, where they spend a day making sandwiches and working on the floor in one of the shops to help them keep in touch with what is going on. Store employees work in teams and are briefed daily, often on the basis of customer responses that come in from in-store reply cards, telephone calls and the company website. The website, which, lists the names and phone numbers of its senior executives, actively invites customers to comment or complain about their experience with Pret, and encourages them to contact the company. Great importance is placed on this customer feed-back, both positive and negative, which is discussed at weekly management meetings.
The design of the stores is also distinctive. Prominently featuring the company logo, they are fitted out in a high-tech with metal cladding and interiors in Pret’s own corporate dark red colour. Each store plays music, helping to create a stylish and lively atmosphere. Although the shops mainly sell carry out food and coffee in the morning and through the lunchtime period, many also have tables and seating where customers can drink coffee and eat inside the store or, weather permitting, on the pavement outside.
Growth and competition
Three years after the first Pret shop was launched another was opened and, after that, the chain began to grow so that, by 1998, there were 65 throughout London. In the late 1990s stores were also opened in other British cities such as Bristol, Cambridge and Manchester. Although growth in the UK has been rapid—between 2000 and 2002 the company opened 40 new outlets and there are over 120 throughout Britain—Pret’s policy has always been to own and manage all its own stores and not to franchise to other operators. In 2002, £1 million was spent in launching an Internet service that enables customers to order sandwiches online.
Plans for international growth have been more cautious. In 2000 the company made its first move overseas when it opened a shop near Wall Street in New York. However, there were problems on several fronts in moving into the USA. Metcalf is quoted saying, ‘As a private company its very difficult to set up abroad. We didn’t know where to begin in New York—we ended up having all the equipment for the shop made here and shipped over.’ There were also staffing and service quality difficulties—Pret reportedly found it difficult to recruit people in New York who had the required friendliness to serve in the stores and had to import British staff. Despite these problems, several other shops in New York have followed and, in 2001, Pret opened its first outlet in Hong Kong.
During the 1990s, coffee shops boomed as the British developed a growing taste for drinking coffee in pavement cafes, and competition for Pret grew as other chains entered the fray. Rivals like Coffee Republic, Caffè Nero, Costa Coffee (now owned by leisure group Whitbread) Aroma (owned by McDonald’s) and American worldwide operator Starbucks all came into the market, as well as a number of smaller independents. All these chains offer a wide range of coffees but with varying product offerings in terms of food, pricing and style (Starbucks, for example, offers comfortable arm-chairs around tables, which encourage people to linger or work in a laptop in the store). In a London shopping street it is not uncommon to see three or four rival outlets next door to or within a few yards of each other. However, it quickly became clear that the sector was overcrowded and, apart from Starbucks, some of the other chains reportedly struggled to make a profit. In 2002 Coffee Republic was taken over by Caffè Nero, which also eventually acquired the ailing Aroma chain from McDonald’s. Costa Coffee was the largest chain overall with over 300 shops throughout Britain, while Starbucks was expanding aggressively and aimed to have an eventual 4000 stores worldwide.
As work and lifestyles get busier, the demand for convenience and fast foods continues to grow. In 2000, some estimates put the total value of the fast-food market in Britain, excluding sandwiches, at over £6 billion and growing about £200-£300 million a year. While the growth in sales of some types of fast food, like burgers, was showing signs of slowing down, sandwiches continued to increase in popularity so that by 2002 sales wee an estimated £3 billion. Customers are also getting more health conscious and choosy about what they eat and, increasingly, want nutritional information about food from labelling and packaging.
In January 2001, in a surprise move, Pret’s two founders sold a 33 per cent stake in the company to fast-food giant McDonald’s for an estimated £25 million. They claim that McDonald’s will not have any influence over what Pret does or the products it sells, but that the investment by McDonald’s will help their plan for future development. According to Metcalf:
‘We’ll still be in charge—we’ll have the majority of shares. Pret will continue as it does… The deal wasn’t about money—we could have sold the shares for much more to other buyers but they wouldn’t have provided the support we need.’
After a long run of success, Pret has ambitious plans for the future. It hopes to open at least 20 new stores a year in the UK. In late 2002 it opened its first store in Tokyo, Japan, in partnership with McDonald’s. The menu there is described as being 75 per cent ‘classic Pret’ with the remaining 25 per cent designed more to please local tastes. In other international markets, the plan is to move cautiously—Pret’s first move will be to open more stores in New York and Hong Kong, where it has already been successful.
- How has Pret a Manger positioned its brand?
- Explain how the different elements of the services marketing mix support and contribute to the positioning of Pret a Manger.
Case V ‘Fast Fashion’: exploring how retailers get affordable fashion on to the high street
The term ‘fast fashion’ has become very much de rigueur within the fashion retailing industry. Retailers have to react quickly to changes in the market, possess lean manufacturing operations, and utilize responsive supply chains in order to get the latest fashions to the mass market. Stores such as H&M, Zara, Mango, Top Shop and Benetton have been tremendously successful in being responsive to the fashion needs of the market. Excellent logistical and marketing information systems are seen as key to the implementation of the ‘fast fashion’ concept. ‘Fast fashion’ is the emphasis of putting fashionable and affordable design concepts, which match consumer demand, on to the high street as quickly as possible. These retailers get sought-after fashions into stores in a matter of weeks, rather than the previous industry norm, which relied on production lead times ranging from six months to a year. The concept of ‘fast fashion’ relies of a number of central components: excellent marketing information systems, flexible production and logistics operations, excellent communications within the supply chain, and leveraging advanced IT systems. These components allow stores to track consumer demand, and deliver a rapid response to changes in the marketplace. The results are invigorating for fashion retailers, with ‘fast fashion’ retailers’ sales growing by 11 per cent, compared with the industry norm of 2 per cent.
Within the fashion industry a number of different levels exist, the exclusive haute couture ranges (made to measure), the designer ready-to-wear collections, and then copycat designs by mass-market retailers. Fashion has now gone to the high street, becoming more democratic for the mass market.
The traditional fashion- retailing model was seasonal, whereby retailers would typically launch two seasons: spring and autumn collections. Fashion retailers would buy for these collections from their supplier network a year in advance, and allow for between 20-30 per cent of their purchasing budgets open to specific fashion changes in the market. Typically, retailers would have perennial offerings that rarely change as well as catering to the whims of fashion, such as basic T-shirts and jeans.
Now, through the ‘fast fashion’ philosophy, new items are being stocked in stores more frequently. These newer product ranges stimulate shoppers into frequenting these stores on a more regular basis, in some cases weekly to see new fashion items. Savvy brand-loyal shoppers know when new stock is being delivered to their favourite store. Through increased stock replenishment of new, fashionable items, consumers are increasing their footfall to these stores, and furthermore these stores are developing brand images as cutting edge, trendy, and fashionable. This increased footfall, where shoppers regularly visit a store, eliminates the need for major expenditure on advertising and promotion. Also the concept of ‘fast fashion’ is helping to improve sales, conversion ratios within these stores. Due to the limited supply of designs available, this creates an aura of exclusivity for these garments, further enhancing the brands of these ‘fast fashion retailers’ as leading fashion brands.
Famous for ABBA, Volvos and IKEA, now Sweden has another international success story: H&M. The basic business premise behind H&M is ‘fashion and quality at the best price’. The company now has over 1068 stores in 21 countries. H&M sources 50 per cent of its goods in Europe and the remainder in low-cost Asian countries. Sourcing decisions are dependent on cost, quality, lead times and export regulations. The lead times for items can vary from a minuscule two weeks to six months, dependent on the item itself. H&M believes that having very short lead times can be beneficial in terms of stock control, however it is not the most important criteria for all items. Basic clothing garments can have lead times running into months, due to consistent demand. However, items that are more trend- and fashion-conscious require very short lead times, to match demand. H&M is now also in the process of teaming up with prestigious designers like Karl Lagerfeld to create affordable fashion ranges.
The firm utilizes close relationships with its network of production offices and 700 suppliers. Unlike some other clothing retailers, H&M outsources all of its production to independent suppliers. The dyeing of garments is postponed until as late as possible in the production process to allow greater flexibility and adaptation to the whims of the fashion buyer. Items from around the world are shipped to a centralized transit warehouse in Hamburg, Germany, where quality checks are undertaken, and the items are allocated to individual stores or placed in centralized storage. Items that are placed in this ‘call-off warehouse’ are allocated to stores where there is more demand for the particular item. For example, if pairs of a particular style of jeans are selling well in London, more jeans are shipped from Hamburg to H&M’s London stores.
Table 6: Some of the key players in apparel industry
|Originated in Sweden||Originated in the UK||Originated in Italy|
|Chain has 1069 stores in 21 countries||Has 380 stores in the UK and Ireland and has 80 franchise stores overseas||Has a presence in 120 countries and uses a retail network o 5000 stores|
|Originally called Hennes & Mauritz, renamed as H&M. Sells women’s and men’s apparel. Doesn’t own any manufacturing resources. Motto—‘Fashion and quality at the best price’.||Sells women’s wear, men’s wear and homeware. The firm has a very successful catalogue business. Targets the top end of the mass market, focusing on fashionable moderately priced clothing||Sell under brand name such as Benetton, Playlife, Sisley and Killer Loop. Uses a network of franchises/partner stores. Established huge brand awareness through its infamous ad campaigns.|
|Originated in Spain||Originated in Spain||Originated in the UK|
|Chain has 729 Zara stores||Chain has 770 stores in 70 countries||Chain has over 2000 stores|
|Zara is the main part of the Spanish Inditex group and is valued at nearly €14 billion. Operates under the mantra of affordable fashion, and adopts the principle of market-driven supply.||Operates a successful franchise operation (more than half are franchises). The company specializes exclusively in targeting the young female mid-market.||Operates several different fascia, targeting different types of customer, with stores such as Burton, Dorothy Perkins, Evans, Wallis, Top Shop, Top Man, Miss Selfridge and Outfit. Owner Philip Green also owns BHS stores and Etam UK|
Sourcing low-cost garments with quick response times is a vital element of the concept. Many of the ‘fast fashion’ retailers utilize a vast network of suppliers, so that their stores are replenished with latest designs. Some firms are entirely vertically integrated, where the retailer owns and controls the entire supply chain. For example, Zara buys its fabric from a company owned by its parent, Inditex, and buys dyes from another company also within the group. Retailers source their goods from countries such as China, North Africa, Turkey and low-cost eastern European countries. If cost were the sole basis for supplier selection, then the vast majority of products would be sourced from the Far East. However, the lead times for delivery of goods are quite substantial in comparison to sourcing garments in Eastern Europe (e.g. shipping goods from China can take sex weeks, whereas from Hungary takes two days). As a result of this, retailers are using a hybrid approach, sourcing closer to markets for more fashion-orientated lines. The drive towards reduced lead times is allowing companies to be more responsive to market changes. The benefits of such a quick response to market changes are reduced costs, lean inventories, faster merchandise flow and closer collaborative supply chain relationships.
The concept of ‘postponement’ is a key strategy used within the fashion retailing industry. It is the delayed configuration of a garment’s final design until the final market destination and/or customer requirement is known and, once this is known, the garment is assembled or customized. The material and styles are kept generic for a long as possible, before final customization. A classic illustration of the concept of postponement is its usage by Benetton. Colours can come in and out of fashion. Benetton delays when its garments are finally product differentiated, so that this matches what is selling. For example, a Benetton sweater would be stitched and assembled from its original grey yarn and then, based on feedback from Benetton’s distribution network as to what colours were selling, the sweater would be dyed at the very final stage of production. The concept of postponement allows greater inventory cost saving, and increased flexibility in matching actual demand.
The production and logistics facilities for these ‘fast fashion’ retailers are colossal in that each design may have several colour variants, and the retailer needs to produce an array of garments in a number of different sizes. The number of stock keeping units (SKUs) is therefore staggering. As a result, companies require a very reliable and sophisticated information system—for example, Zara has to deal with over 300,000 new SKUs every year. Benetton has a fully automated sorting and shipping system, managing over 110 million items a year, with a staff of only 24 employees in its centralized distribution centres. Mango, another successful Spanish fashion chain, also utilizes a high-tech distribution system, which can sort and pack 12,000 folded items an hour and 7000 hanging garments an hour.
Many in the industry see Zara as the classic illustration of the concept of ‘fast fashion’ in operation. The company can get a garment from design, through production and ultimately on to the shelf in a mere 15 days. The norm for the industry has typically run to several months. The group’s basic business philosophy is to seduce customers with the latest fashion at attractive prices. It has grown rapidly as a fashion retail powerhouse by adopting four central strategies: creativity and innovation; having an international presence; utilizing a multi-format strategy; and through vertically integrating its entire supply chain. For the ‘fast fashion’ concept to be successful, it requires close relationships between suppliers and retailers, information sharing and utilization of technology. Information is utilized along the entire supply chain, according to the demand. It controls design, production and the logistics elements of the business. Real-time demand feeds the production systems.
Zara is part of the Inditex group of fashion retail brands. This group adopts a multi-format strategy with different store brands targeting different types of customers. Zara is its key fashion-retailing brand. Zara opened its first store in 1975 in Spain and has now become a fashion powerhouse, operating in four continents, with 729 stores, located in over 54 countries. It has become very hip all over the world, for its value for money and stylish designs. The chain is building large numbers of brand devotees because of its fashionable designs, which are in tune with the very latest trends, and a very convincing price-quality offering. Each of the different store brands (outlined in Table- 7) needs to be strongly differentiated in order for the strategy to work effectively.
Table 7 Number of Inditex stores by fascia
|Pull and Bear||373|
Figure 3 Zara’s market-led supply
Zara does not undertake any conventional advertising, except as a vehicle for announcing a new store opening, the start of sales of seasons. The company uses the stores themselves as its main promotional strategy, to convey its image. Zara tries to locate its stores in prime commercial areas. Deep inside the lairs of its corporate headquarters, 25 full-scale store windows are set up, whereby Zara window designers can experiment with design layouts and lighting. The approved design layouts are shipped out to all Zara’s stores, so that a Zara shop front in London will be the same as in Lisbon and throughout the entire chain. The store itself is the company’s main promotional vehicle.
One of Zara’s key philosophies was the realization that fashion, much like food, has a ‘best before’ date: that fashion trends change rapidly. What style consumers want this month may not be same in two months’ time. Fashion retailers have to adapt to what the marketplace wants for the here and now. The company is guilty of under-stocking garments, as it does not want to be left with obsolete or out-of-fashion items. The key driving force behind its success is to minimize inventory levels, getting product out on to the retail floor space, and by being responsive to the needs of the market. Zara uses its stores to find out what consumers really want, designs are selling, what colours are in demand, which items are hot sellers and which are complete flops. It uses a sophisticated marketing information system to provide feedback to headquarters and allow it to respond to what the marketplace wants. Similarly, Mango uses a computerized logistical system that allows the matching of clothes designs to particular stores based on personality traits and even climate variances (i.e. ‘It this garment suitable for the Mediterranean Summer?). This sophisticated IT infrastructure allows for more responsive market-led retailing, matching suitable clothing lines to compatible stores.
At the end of each day, Zara sales assistants report to the store manager using wireless headsets, to communicate inventory levels. The stores then report back to Zara’s design and distribution departments on what consumers are buying, asking for or avoiding. Both hard sales data and soft data (i.e. customer feedback on the latest designs) are communicated directly back to the company’s headquarters, through open channels of communication. Zara’s 250 designers use market feedback for their next creations. Designers work hand in hand with market analyst, in cross-functional teams, to pick up on the latest trends. Garments are produced in comparatively small production runs, so as not to be over-exposed if a particular item is a very poor seller. If a product is a poor seller, it is removed after as little as two weeks. Roughly 10 per cent of stock falls into this unsold category, in direct contrast to industry norms of between 17 and 20 per cent. Zara produces nearly 11,000 designs a year. Stock items are seen as assets that are extremely perishable and, if they are sitting on shelves or racks in a warehouse, they are simply not making money for the organization.
In the course of one year alone, Zara has been able to launch 24 different collections into its network of stores. After designs have been approved, fabrics are dyed and cut by highly automated production lines. These pre-cut pieces are then sent out of nearly 350 workshops in northern Spain and Portugal. These workshops employ nearly 11,000 ‘grey economy’ workers mainly women, who may want to supplement their income. Seamstresses stitch the pre-cut pieces into garments using easy-to-follow instructions supplied by Zara. The typical seamstress’s wage in Zara’s workshop network is extremely competitive when compared with those in ‘third world’ countries where other fashion retailers mainly outsource their production. Furthermore, the proximity of these workshops allows for greater flexibility and control, Zara achieves greater control over its supply chain through having a high degree of integration within the supply chain. By owning suppliers, Zara has greater control production capacities, quality and scheduling. This is in stark contrast to Benetton, which is close to being a virtual organization, outsourcing production to third-party suppliers and directly owning only a handful of its stores, the majority being franchises or partner stores.
The finished garments are then sent back to Zara’s colossal state-of-the-art logistics centre. Here they are electronically tagged, quality control double-checks them, and then they are sorted into distribution lots, ensuring the items arrive at their ultimate destinations. Each item is tagged with pricing information. There is no pan-European pricing for Zara’s products: prices are different in each national market. Zara believes each national market has its own particular nuances, such as higher salaries or higher taxation, therefore it has to adjust the price of each garment to make it suitable in each country and to reflect these differences. Shipments leave La Coruňa bound for every one of the Zara stores in over 54 countries twice a week, every week. The company’s average turnaround time from designing to delivery of a new garment takes on average 10 to 15 days, and delivery of goods takes a maximum of 21 days, which is unparalleled in an industry where lead times are usually months, not days. Zara’s business model tries to fulfil real-time fashion retailing and not second-guessing what consumers’ needs are for next season, which may be six months away. As a result of Zara utilizing this ultra-responsive supply chain, 85 per cent of its entire product range obtains full ticket price, whereas the industry norm is between 60 and 70 per cent.
The successful adoption of the ‘fast fashion’ concept by these international retailers has drastically altered the competitive landscape in apparel retailing. Consumers’ expectations are also rising with these improved retail offerings. Clothes shoppers are seeking out the latest fashions at value-for-money prices in enticing store environments. Now other well-established high-street fashion retailers have to adapt to these challenges, by being more responsive, cost efficient, speedy and flexible in their operations. The rag trade is churning out the latest value-for-money fashions at breakneck speed. ‘Fast fashion’ is what the marketplace is demanding.
- Discuss how supply chain management can contribute to the marketing success of these retailers.
- Discuss the central components necessary for the fast fashion concept to work effectively.
- Critically evaluate the concept of ‘market-driven supply’, discussing the merits and pitfalls of its implementation in fashion retailing.