COST is a Strategy

Post financial crisis of 2008, followed by fear of sustained recession, most of the players across various industries have realized the importance of four letter word COST. I define COST as a strategy which has emerged out of recession. The startegic definition of COST is explained below.

C : Collaborative Operations

O : Optimization of Resources

S : System Thinking

T : Termination

Collaborative operations: Beyond manufacturing and integration of information, beyond outsourcing, I foresee the impact of globalization will give opportunity to collaborative operations in all areas of business like sourcing, logistics and services. We have examples of airline industry where companies made a cluster through code sharing. They did it after a lot of bleeding and at the time when they were at verge of survival and death. Functions like procurements, ticketing and operations, not only simplified with a significant reduction in cost but also given an opportunity to focus on brand building and consumer experience. The other industries need not to wait for situation to be worsened to consider collaboration. They should move proactively to chart out collaborative global sourcing, logistics and customer services.

Collaborative logistics: In India a big opportunity in on the way to shake all the industries is the implementation of GST by 2010. This can open the doors of collaborative transport, warehousing and distribution. All third party logistic companies have an opportunity to expand their services. Now few companies already started planning out such options. See the following quote of Mr Pradipta Mukherjee, GCPL Vice Chairman, in one of the interview given to business standard recently:

“We would be looking at re-doing our supply chain and logistics costs once the goods and services tax (GST) is implemented from April 2010, and CST is phased out from 4 per cent to nil. We also intend to consolidate the FMCG companies in the Godrej Group, and so, post-GST implementation, we would be looking at how the group FMCG companies can get together to use common depots and supply chain. This would not only reduce cost of operations but also enable reduction of inventory levels”

Optimization of Resources: There is no end to the upper end of required resources for any task. All we need is adequate resource planning. Optimization of resources is nothing but defining just adequate numbers to all the direct cost like manpower and infrastructure. Remember all the adequate numbers can also be optimized. So it’s a continuous process. I say optimum and not the minimum as its not a cost reduction strategy, but its an strategy which will give maximum of all your manpower and infrastructure by challenging their capacity or output on a continuous basis.

System Thinking: I am a fan of Deming philosophy. So I believe that both success and failure are the outcome of good or bad systems and not the manpower. Investment in system actually reduces cost by enhancing the outcomes and efficiencies. The challenge here is not only implementation of world class practices but also how philosophy and strategy of a company can be inculcated in system itself.

Termination: This is law of nature that end of everything is certain. I suggest just deciding the end before nature does. So it will be a wise decision to get rid of not performing assets, business, and manpower as early as possible. This will reduce negative energy of the organization significantly to focus on performance and new opportunities.

Though ‘COST’ seems to be a strategy of recession manager, I feel its reliability even in better times.

Efficient Rural Marketing

Take an off road from the highway to any village in India, you will find a different world. When you see a defined, natural and unconstructed narrow path, the village road, field with crop or in crop in waiting, small corner with panwala, chaiwala where people in small group discussing local and national issues, natural gardens with few dense trees where children are playing their own manufactured games and the ladies working on something around their home, you are in real India where more than 60% population is based. The people here do not experiment much with their traditions. They use their tacit knowledge for all professional and non professional decisions. Professional decision like when to cultivate, when to harvest, what to produce, how to sell, and other non farm decisions along with personal decision are taken based on their knowledge, they earned in centuries. Television media has reached this population but continuous electricity is still on the way. The other communication tools are radio, local news paper, and their interaction in panchayat (a frequent gathering to discuss issues related with village). Given all these the effective rural marketing is the latest concern of many organizations today. In ‘RURAL CONSUMPTION AND GROWTH’ I’ve discussed the role of government and corporate to strengthen rural consumption by investing and participating in rural India value chain. In this post I want to discuss following strategies which I feel can make rural marketing more efficient:

1. Rural Value Chain comprise of the producer (farmer), the processor, the retailer and the consumer. The organizations need to think where they are adding value. I feel vertical integration of companies dealing with agricultural product will increase the efficiency of every one in the value chain. Companies who are not dealing with agricultural output directly should participate in the development of rural infrastructure, which can be used to increase efficiency of their own distribution.

2. Share of non farm income of rural India is increasing. More than 20% of rural population earns equal to urban middle class. The rural consumption potential is big but it is not geographically concentrated. Also the taste and preferences of rural consumer are different from the urban consumers. The buying decision of rural consumer depends on following parameters:
a. Their cultural upbringing.
b. Cyclical farm and non farm earnings.
c. Trust on the product and seller.
d. Local availability.
In view of above companies focusing on rural market need to reassess their strategies on following parameter:
a. Robust product design focusing performance to build trust among rural consumer.
b. Innovative and cost efficient supply chain by involving local retailers.
c. Brand communication in local language.

3. For long term sustainable consumption of rural consumers, the corporate and government must invest in farmer’s business education. The objectives of such education should focus on following parameters:
a. What to produce? What market wants?
b. How to improve crop yield?
c. How to reduce cost of production?

In order to achieve sustainable penetration in Indian rural market, companies need to strategies’ hard from understanding rural consumers, their product related requirements, robust design and offering, right and localized communication, localized distribution and participating in rural value chain by investing in infrastructure and education for mutual gain.

Correlation between new product introduction and share of market

Lot of companies use new product introduction as their key strategy to increase there market share. Recently two companies LG and SONY announced same strategy. (You may refer following links from Economic Times for the news: LG and SONY) . Though the strategy is commonly use by various companies, I tried to validate the hypothesis that new product introductions boost market share and found following parameters (related with new product introduction only ) determine correlation between new product introduction and market share growth:

1. New product introduction helps in companies top line growth as product realization increases with speed of introduction. It is simply correlated with the differentiation till the point when the new variant becomes commodity in market. Companies with strong R&D leverage it with new products all time. Because of differentiation they fetch better price too. However, competition catches very fast especially in consumer durable industry and so the price advantage of innovation starts eroding. New product introduction should be a continuous process for the companies having strong R&D.

2. Even though top line grows in revenue term in point no. 1 above, it does not guarantee growth in market share in terms of volume of turnover. Two factors determine change in market share. One the selling capability of the channel which could be measured by working capital of sellers which in totality remains constant. If working capital of a dealer is constant it will cannibalize existing product in very first stage itself. Two is the cannibalization, which if planned properly, can help to reduce competitors’ shelf share in multi franchise sellers’ network. To increase working capital of selling network, companies should focus on wider distribution by exploring new markets through efficient supply chain management.

3. Whether the new product is introduced in one of the existing categories in which company is present or in a new category itself. If it is in existing categories it should be targeted for better profit than market share. Introduction in new category can give incremental revenue subject to capability of selling network including the organization itself in terms of knowledge, experience, working capital, coverage and branding.

4. It’s not only quantity of new introduction which matters but also the speed at which it is introduced to end consumer. Assuming if the period required by competition to replicate the product after announcement of launch is fixed, a better speed of sampling, consumer awareness activities and distribution will uplift the revenue in launch to uptake period of product life before maturity, the point at which competitor enters with similar product.

There could me many more strategies to define growth in market share, however; the above argument is only limited to issues related with new product introduction only.

NANO, IPL and Politics

This month various news covered three different takes showing successful business strategies, government intelligence and fizzled opportunism. Nano, IPL and political fuzz summarize this week’s headline.

Nano was launched with not a real product but a promissory trust by Tata, which will be delivered from July this year to common people of India. The launch looked more like a financial strategy. By the way of advance booking Tata’s not only assessing their financial and supply chain requirement but also raising funds which could ease their financial hitch which is global in nature now. It makes good business sense. Nano is a real innovation which has demonstrated Indian capability in both manufacturing and strategy. Though, the people of India should be proud of it, a lot of anti Nano SMS campaign started rolling by some people I don’t know whom. But I know it is by those who lost the opportunity which was always there to explore but they did not dare to innovate. Tata’s should not worry about this negative propaganda as their target customers are those, most of whom are not very technology savvy. This is the case of lost opportunity but our political leaders do not lose many. Post IPL shifting news of political reactions, lot of leaders politicized this issue by criticizing government on the grounds of security and national pride. My personal views are in favor of government as they took a stand which seems to be hard and conservative but it is in favor of countries biggest event, the general elections. More than that I am sure it is based on some intelligence information. If it’s true, it’s good to hear that intelligence is in place and government has courage to keep national interest above their own political interests. BCCI, too, demonstrated a business innovation by making IPL, which is truly Indian domestic sport, a global brand. Except viewer’s turnover at the matches, all the business interests are saved. What a week with good show of business strategy, intelligence and opportunism.