Case 2: Rediscovering Competitive Edge – An Indo-European Company

Client:  The mid-sized, highly profitable Indo-European venture is a leading manufacturer of industrial consumable products for the engineering industry. The European parentage has brought world leading technology and the Indian partner sound management practices. The company has been the leader in the Indian industry with over 36% market share and export revenue about 30% of turnover.

Background: Domestic revenue growth had yo-yoed in the preceding five years. Exports had been stagnant in the previous two years. Profit before tax, although attractive, had dropped by five percentage points in the preceding two years. Asset turn ratio of the company was low, partly owing to heavy investments in plant and machinery in the previous three years (05-06, 06-07 & 07-08), but also because of high sundry debtors and inventory. The company enjoyed good cash flow, low attrition and strong relationships with top 10% of its customers.

A number of small players had begun to make inroads in the price conscious segment of users on the back of low-priced products. Larger, sophisticated buyers were squeezing vendors’ prices.

The core business of the company involved selling directly to customers. In their desire to serve small customers, improve market reach and reduce marketing costs the client had begun to sell through trade channels. Channel sales had, however, failed to generate significant revenues or profits. At various times over the previous three years the Company had entered a few unrelated businesses in pursuit of top line growth. They did not produce sustainable revenue growth.

A promising new business was now on the horizon. One of its biggest customers wanted to outsource manufacture of certain precision components. It would generate significant revenue over time. Being dependent on a single large customer appeared to entail significant risk, especially since the Client would have to invest substantially in a new facility.

The European parent wanted the company to remain focused on high-performance, high margin products. The Indian parent wanted faster top line growth. The CEO was keen to resolve this dilemma and employ the right strategies to strengthen leadership in the market.

Task:  The principal consulting task was to enable the company to become competitive.

The client had enormous strengths that they were not leveraging enough. In their desire to grow the top line they were dabbling in products where their technology and engineering knowledge made little difference. It was necessary to convince the leadership that their future lay in products that were functionally superior to those offered by competition. Revenue growth and superior profitability would inevitably follow.

Two secondary objectives were also evident.

• Formulate a comprehensive competitive strategy that would outline how the Company would create compelling value for their core customers and deepen engagement with them. Deeper engagement – selling more product lines to existing customers – would raise customers’ exit barrier in an industry where new players had low entry barriers.

• Guide and assist in the execution of Client’s business strategy.

Conceptual Foundations and Methodology:

Two workshops were conducted for the entire leadership of the company. The first focused on how to build competitive advantage. Value Maps (W. Chan Kim & Renee Mauborgne, 1997) and Activity Systems View (Porter 1996) formed the theoretical underpinnings

The second aimed at identification of growth opportunities. Strategic Intent (Prahalad & Hamel 1989) and Broadening the Pond (Charan & Tichy 1998) were the conceptual frameworks for this workshop.

In the workshops participants carried out a number of exercises in cross-functional groups. Each exercise was carefully designed to focus their attention on key issues facing the organisation. For example, participants rated the top 50 products of the company on their competitive edge. They identified those that were distinctly ahead of competition, those on par, and others that were at competitive disadvantage. It helped them pick products whose quality and performance needed improvement.

The two intensive sessions were the vehicle for teaching the concepts and helping managers learn how to apply them. They lent rigour to the strategy formulation exercises that followed. Managers spoke the common language of competitive advantage across the company and leveraged collective insights.

Strategy:

The Company’s strategy evolved out of a number of discussions among various groups comprising the leadership and several levels of managers and supervisors below them. They decided that the long-term future of the company lay not in fighting small players with me-too products, but in making products comparable in performance to that of their European parent at Indian prices. Such products would create unbeatable value for Indian and global customers. The strategy would pave the way for sustainable long-term growth and superior profitability.

The second plank of their strategy would to penetrate deeper in top hundred accounts. They would do so by carefully mapping customers’ manufacturing practices and offering them existing and new products. Deeper engagement would raise customers’ cost of switching to new vendors.

The client also decided to enter the outsourced manufacturing of precision mechanical parts for a select segment of customers but avoid conflict with them. They would enter such segments where they would leverage their deep knowledge of applications and would use products and machines of their own manufacture. This new line of business would ensure profitable growth for many years to come.

Operational Effectiveness: Astutely, the Client recognised a number of areas needed improvement. They resolved to dramatically reduce working capital – inventory and sundry debtors. They also determined to reduce delivery time to customers, raise productivity and improve quality all-round.

Execution: Flowing from the business strategy of the Company, a number of programmes were initiated. They included new product development, improvement of select products and commencing the outsourced manufacturing business. Induction of new technologies from the European parent, customer account penetration, reduction of inventory and sundry debtors were some of the other key programmes.

Cross functional teams were formed to lead, enable and track the execution of each programme. Some of the top managers of the company were appointed sponsors of teams. They would guide and provide resources. Teams discussed and debated each issue, obtained funding, initiated and tracked action in various parts of the organisation. They reported progress to the CEO and select top managers of the Company once every month.

Programme management continued for a period of eight months after the strategy was formulated and the business plan was approved by the Board. It is being carried on as an embedded process in the organisation even as executed programmes give way to new initiatives.

Results: The year long engagement yielded tangible and significant outcomes.

• Allowing for lagged effect of the intervention, contribution in the second quarter of FY 08-09 rose by 4 percentage (400 basis) points over plan and 3.7 percentage points over the same period previous year.
• A series of new, improved and higher margin products were expected to generate additional revenue roughly equal to 4% of domestic sales.
• Outsourced manufacturing – a diversification project – was estimated to clock 6% of FY 08-09 sales of the Company at a substantially higher margin than the company average.
• At the end of Q2 FY 08-09, domestic sales and exports were growing faster than they had in the previous fiscal.
• Working capital at the end of FY 07-08 declined by Rs.109 million, lower by 14% compared to a year ago.
• As a result of the many projects, managers frequently work in cross-functional teams. Sharing of insight and debate has enabled development of successful new products, penetration of customer accounts and a number of other gains.
• The CEO and a select group of top managers were spending more time together on operational reviews. It has led to more involved discussions and greater rigour in planning and execution of key programmes and projects.