B.H.A.G

Well, friends, don't be misled by the title, its definitely not a typo error that you are seeing. I am talking about BHAG - Big, Hairy, Audacious Goals.
           Lets do a quick look around of history to search for the origins of this queer term. The term Big Hairy Audacious Goal ("BHAG") was proposed by James Collins and Jerry Porras in their 1996 article entitled Building Your Company's Vision. A BHAG encourages companies to define visionary goals that are more strategic and emotionally compelling. In the article, the authors define a BHAG (pronounced BEE-hag) as a form of vision statement "...an audacious 10-to-30-year goal to progress towards an envisioned future."A true BHAG is clear and compelling, serves as unifying focal point of effort, and acts as a clear catalyst for team spirit. It has a clear finish line, so the organization can know when it has achieved the goal; people like to shoot for finish lines - so say the authors in that landmark article.
          Ok, now that we are clear about history, why are we talking about it in the first place? Is it that important? Many businesses often set goals that they hope to accomplish over the coming days, months or years. These goals are different from the standard mission and vision statements in that they are action-oriented, clear (who, what, where, by when), compelling and gripping and also bold enough so as to border on the unattainable. It is such bold visions that motivate employees and organizations to chart new steps in corporate landscape. Because a BHAG is not only a statement of where we want to be, its compelling nature introduces such a zeal within the organizational structure to achieve what has been proclaimed, that ideas and innovations start flowing freely. That entire 7S framework, that Mckinsey gave us, changes itself to align with the major initiatives that are being taken to reach that goal. Plus what organizations have is a set of motivated staff who may not currently possess the desired skill set, but who are ready to take on the world to make their organization the numero uno in that particular business. Strategies are designed with a single focus of attaining the BHAG and systems put in place to that effect. What actually happens is that BHAG's present in front of organizations a dream so powerful, a vision so gripping that it catches the fancy of the entire setup. It may appear unattainable to those outside its grip, but to those who are part of it, it becomes a part of the organization's DNA. And, that is when we have miraculous innovations in the corporate milieu.
                 Now, let us look at some BHAG's adopted by organizations around the globe. Well, Porras and Collins identified four types of BHAG's centred on the following motives - Target, Common Foe, Internal Transformation, Role Model. We will look at examples of BHAG's belonging to each of these four groups.

• Target: The BHAG represents some sort of a target or goal that the company hopes to achieve in the near future. Examples include Ford's BHAG in the early 1900's - Democratize the automobile or Sony's BHAG in the 1950's - Become the company that changes the reputation of Japanese products of being poor quality.

• Common Foe: The BHAG is centred around how to tackle and overpower the biggest competitor and gain, in most cases, a leadership position in the industry. Examples include the BHAG adopted by Phillip Morris in the 1950's - Knock off R.J. Reynolds as the number one tobacco company in the world or Nike's BHAG in the 1960's - Crush Adidas

• Role Model: The BHAG focuses on a target company which is like the benchmark in terms of reputation and brand equity and then aim to be a company of similar reputation in its respective industry. Examples include Giro Sport Design which adopted in 1986 as its BHAG to - Become the Nike of the cycling industry or Watkins-Johnson's BHAG in 1996 - Become as respected in 20 years as Hewlett-Packard is today

• Internal Transformation: This is also a kind of Target BHAG, but its aim is inward and not outward. The BHAG aims to introduce some long term changes within the organization which it believes will give it a source of sustainable competitive advantage. Examples include Rockwell in 1995 - Transform this company from a defense contractor into the best diversified high-technology company in the world or General Electric in the 1980s - Become number one or two in every market we serve and revolutionize this company to have the strengths of a big company combined with the leanness and agility of a small company

In the end, we need to not only speak out and form a BHAG but also internalize it and take concrete steps to turn it into reality. It should be like -

"Keep in mind that there is a big difference between being an organization with a vision

statement and becoming a truly visionary organization. When you have superb alignment, a
visitor could drop into your organization from another planet and infer the vision without
having to read it on paper”

Well, that's all for today. Until next time.

Cheers!!!
Signing off,
Shauvik.

People is what count

Well, strategisers and business gurus like to talk endlessly about mechanisms for an organization to reach the pinnacle of excellence - about how we should improve the processes in an organization, how we can design endless dashboards and knowledge respositories for smooth flow and sharing of information, how organizations need to be innovative, how companies like Dell through their supply chain marvels or Google through their technological innovations have mastered the paradigm of being in the category of "Learning Organizations" onroute their journey towards excellence, but often we forget one simple basic resource - that all these efforts are simply meaningless without the support of people.
         People, or Human Resources, or Human Capital, whatever we may - it is the people who constitute the most important and yet most vulnerable resource that has to be optimised and mobilized by any organization in its quest for success and adulation. And why so? I mean, if an organization has all its processes and systems and structures and knowledge in place, why is it that we accord the highest order of importance to people? Because, it is the people who implement processes in an organization, I mean, processes are only techniques to accomplish certain preordained goals. But who implements those processes? It is the employees. Who checks those processes to make sure that the outputs that they generate are of use to the company? Once again, it is the people. And before the era of large-scale automation of processes and systems, who was it who took pains to check each and every process and be sure of the significance of each one of them - It were the employees of the organization.
         We talk about the significance of strategy - but who develops this strategy? It is the CEO in conjunction with the CIO, CFO, CTO and the other directors. And who are they? They are some high profile "people" in the organization. How does strategy evolve? It is through harnessing the individual creative spurts in these individuals that we develop strategies designed to deliver a knock-out punch to competitors. So, strategies are also born out of people's brains. Well, we can argue that they have technologies to their aid, but then those technologies are being continuously improved and worked on by thousans of other people in same or different organizations. Can we imagine an organization like Google without Sergey Brin and Larry Page? The answer is No. Can we imagine Apple without the individual brilliance of Steve Jobs? No. I mean, look at what happened to Apple when they moved on from Steve Jobs. Its products floundered, its competitors marched ahead and it no longer could maintain that scorching pace of innovation and financial muscle. My intention is not to attribute its earlier success solely to Steve Jobs, but they were rudderless, without a leader. And then they brought Jobs back (Jobs, meanwhile had moved on to Pixar Animation, a household name thanks to movies like Finding Nemo). And the rest, as they say, is History. If we look at Google, they have instituted processes to harness and tap into their employees creative juices. And a lot of their products are the results of such innovation brought about by the minds of prolific Google guys.
                If we take a look into history, it is filled with examples of how the fate of entire nations has been shaped by people. Take the Roman Civilization for example. It had the best structure in terms of bureaucracy, the best roads and infrastructure and charismatic leaders in Julius and Augustus. But over time it degraded. Why? Because its people failed. Because the rulers neglected the commoners, they indulged in luxury and vices and fought long battles. So, while the cause of success can be people, they can also be the course of destruction.
                Lets take the case of Maruti. Recently, the workers at its Manesar plant went on a strike. People issue. Without going into a debate into the legitimacy of the demands of the workers, let us look at the result. What happened? Proudction stalled at the Manesar plant for 13 days, the company with world-class processes and systems in place clocked a production loss of 10,000 units and in value terms Rs. 400 crores, the company's stocks fell, and it neagively impacted not only the company but also the sales of the overall industry. And that is just a small example of what happens when we are not able to manage human resources to our advantage. There are bigger examples of how people have single-handedly led the world to war, think Hitler, Mussolini and on the other hand, who have single-handedly, brought peace, like Gandhi.
               And, what better way, to end this boring monologue with a picture - of Mckinsey's 7S principles of a successful organization.

Well, freinds what do we have here!!! Among the 7S's, two are "STAFF" and "SKILLS". So they also say that an organization needs to have structure, strategy and systems but the integration and amalgamation of all of these to lend value to the organization happens through people and people, with the right skills.

That's all for the day. Until next time.

Cheers!!!

Signing off,

Shauvik.

Value Chain: A source of competitive advantage

Strengths and weaknesses are mere words and competency is a petty consolation unless the organization can recognize for what it stands. Before strategy, an analysis of the capability of the firm is required once the external environment is aligned with the internal capacity. The Value Chain analysis is used to identify and measure the resources and capabilities of the firm. The prerogative of the firm is to amass profits by establishing itself based on its competitive advantage which emanates from its core competencies.
                 Competitive advantage emanates from the resources, competencies and capabilities and resources the firm has at its disposal. What are these resources? Simply put, they are the inputs required in the production function of the firm. Among the vast spectrum of resources are land, labour, capital, infrastructure, skill and knowledge which are essential for a firm to gain an advantage over its competitors. They can be tangible or intangible.
                 Capabilities emanate from these resources integrated to achieve a certain use and state. The base of these capabilities lies in the skill and knowledge that the firm possesses and the functional expertise that it gains over time. Core competency is a function of these resources and capabilities. A key aspect of core competency is the stability that it gives to the firm in terms of operations and stability. The focus of competitive advantage is to create a gap as wide as possible between the customer's willingness to pay and the cost of purchasing the product. To achieve it,

• Increase consumer willingness
• Reduce the cost of production

Hence, firms are faced with a choice of either increasing the willingness to pay substantially with a marginal increase in production costs (differentiation strategy) or decreasing the production costs substantially with a marginal fall in the willingness to pay (low cost strategy).
             Take the example of Accenture, Dell, Virgin Airlines or Future Retail, all of them were successes based on their differentiated strategies. Hence, what we need is an internal analysis of the firm to identify the sources of differentiation.

• Identification of the activities of the company
• Cost analysis of each activity vis-a-vis those of its competitors with reasons
• Identify scope of improvement in the activities and potential ways for change

Let us now look at the various ways we can analyse the internal value chain of an organization. Thankfully, we have Mr. Porter once again to our aid.

The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.
Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.
According to Porter (1985), the primary activities are:

1. Inbound Logistics - involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs.
2. Operations - are all the activities required to transform inputs into outputs (products and services).
3. Outbound Logistics - include all the activities required to collect, store, and distribute the output.
4. Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase.
5. Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.

Secondary activities are:

1. Procurement - is the acquisition of inputs, or resources, for the firm.
2. Human Resource management - consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
3. Technological Development - pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.
4. Infrastructure - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management

Once the chain of activities has been identified, we need to analyse the prevalent cost structures by determining the cost driving factors at each level of the activities. For e.g. the delivery cost depends upon the local consumption and the distance to market. Similarly, cost of outbound logistics increases if the variety of products is high. As we gauge the cost structure of competitors, we focus on the cost differential at each stage of the process. It is important to analyse those activities which have a higher impact on the overall cost of the firm and on parameters which are constant across the industry.

To analyse the customer's willingness to pay, we need to pay a heed to the actual value creation/addition that is happening through the activities of the firm. This can be measured through popular perception of the product - something which is a mixture of functional associations like price, features, packaging, performance or symbolic associations like aesthetics, aspirations etc.

• Identify the consumer of the product
• Understand the decision making process leading to the purchase
• Correlation between success in satisfying the consumer needs to value chain activities

The challenges in this measurement would originate from separate preferences of each buyer, product variety, heterogeneity of consumers, quantification of the various influences on purchase etc.

A value chain analysis would lead to a better cost management and enable it to emphasize on the fruitful activities while relinquishing control of the others.

To develop a competitive strategy,

• Giving the firm a unique positioning in the market
• Have a balance of forces in the industry to improve the firm's relative position in the market
• Including the aspect of change management within the competitive strategy

Well, that's all I had on offer at the present moment. Until next time,

Cheers!!!
Signing off,
Shauvik.

A look at some important MATRICES - II

THE GE/MCKINSEY 9-CELL MATRIX

Strategic Emphasis

This matrix was designed to overcome the shortfalls that companies were encountering with the BCG matrix and to fill the requirement to compare numerous and diverse businesses. The scope of application for this model extends from a corporate level to a business level incorporating the products making up the business.

Flexibility

The matrix can be described as a multifactor portfolio model and it has a greater flexibility compared to the BCG, in terms of the elements that can be included. The matrix allows a company to assess the fit between the organisational competencies and the business/product offerings. It also introduces the forecasted positioning of businesses/products on the matrix facilitating the strategic planning process. The matrix has nine cells compared to the BCG four cells and the scores on the axis can be rated low, medium, high compared to the BCG high and low.

The GE-McKinsey Matrix

This approach considers not only the objective factors such as sales, profit, ROI for example but also gives weight to the subjectively estimated factors such as volatility of market share, technology, employee loyalty, competitive stance and social need.

The GE-McKinsey model can be likened to the more generalised and well-known SWOT (strengths, weaknesses, opportunities, threats) analysis as it allows the addition of both internal and external factors in the matrix construction. The competitive position or business strength represent the internal capabilities which are controllable by the company while the external factors which are not controlled by the company (opportunities and threats) make up the industry attractiveness.

Value of the Model

This portfolio model also allows the business/product to be analysed in terms of dimensions of value to the organisation (Industry Attractiveness) and dimensions of value to the customer (Relative Business Strength). The GE McKinsey or Attractiveness-Strength matrix is important primarily for assigning priorities for investment in the various businesses of the firm, it is a guide for resource allocation and does not deal with cash flow balance, as does the BCG.

Model Use and Applicability

Generic Strategies

1.The three cells at the top left hand side of the matrix are the most attractive in which to operate and require a policy of investment for growth – these are usually coloured green.

2.The three cells running diagonally from left to right have a medium attractiveness, are coloured yellow and the management of businesses within this category should be more cautious and with a greater emphasis being placed on selective investment and earning retention.

3.The three cells at the bottom right hand side are the least attractive, therefore coloured red and management should follow a policy of harvesting and / or divesting unless the relative strengths can be improved.

Channon and McCosh devised a set of generic investment strategies for the GE McKinsey matrix as labelled in the previous diagram.

Grow / Penetrate – These businesses are a target for investment, they have strong business strengths, are in attractive markets and they should therefore have high returns on investment and competitive advantage. They should receive financial and managerial support to maintain their strong position and to continue contributing to long-term profitability.

Invest for Growth – Businesses here are in very attractive industries but have average business strength. They should be invested in to improve their long-term competitive position.

Selective Investment or Divestment - These businesses are in very attractive markets but their business strength is weak. Investment must be aimed at improving the business strengths. These businesses will probably have to be funded by other businesses in the group as they are not self-funding. Only businesses that can improve their strengths should be retained – if not they should be divested.

Selective Harvest or Investment – Businesses in this box have good business strength in an industry that is losing its attractiveness. They should be supported if necessary but they may be self-supporting in cash flow terms. Selective harvesting is an option to extract cash flow but this should be done with caution so as not to run down the business prematurely.

Segment and Selective Investment – Businesses with average business strengths and in average industries can improve their positions by creative segmentation to create profitable segments and by selective investment to support the segmentation strategy. The business needs to create superior returns by concentrating on building segment barriers to differentiate themselves.

Controlled Exit or Harvest – Businesses with weak business strengths in moderately attractive industries are candidates for a controlled exit or divestment. Attempts to gain market share by increasing business strengths could prove to be very expensive and must be done with caution.

Harvest for Cash Generation – Strong businesses in unattractive markets should be net cash generators and could provide funds for use throughout the rest of the portfolio. Investment should be aimed at keeping these businesses in a dominant position of strength but over investment can be disastrous especially in a mature market. Be aware of competitors trying to revitalise mature industries.

Controlled Harvest – They have average business strengths in an unattractive market and the strategy should be to harvest the business in a controlled way to prevent a defeat or the business could be used to upset a competitor.

Rapid Exit or Attack Business – These businesses have neither strengths nor an attractive industry and should be exited. Investments made should only be done to fund the exit.

Model weaknesses

This model has been criticised by some authors for its ’pseudo-scientific’ approach referring to the method of weighting the factors before assessing them. Some critics ascertain that the factors of business strength and some of the industry attractiveness factors cannot be measured.

It can also be difficult to impose a uniform standard among businesses so that the final portfolio matrix will be consistent in terms of the criteria. Some firms develop standard lists of internal and external factors but each business/product is different and factors will vary accordingly.

This portfolio model relies heavily on managerial judgement in identifying, weighting and assessing the relevant factors

Composite dimension matrices such as this one may mask important differences among products. (e.g. If business strength is made up of two factors weighted similarly, one product may be assessed as very low on the one factor and very high on the other one. Another product may score vice versa but both will be positioned on the same spot on the business strength axis.)

The simplicity of the BCG matrix has been criticised in the past but the more complex GE matrix has also been accused of being too complicated and taking too long to complete.

The GE McKinsey matrix pays too little attention to the business environment

Well then, lets call it a day. Until next time.

Cheers!!!

Signing off,

Shauvik

A look at some famous MATRICES - I

Ansoff's product / market matrix

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:

Market penetration
Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets.
Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors
• Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market development
Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.
There are many possible ways of approaching this strategy, including:
• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels
• Different pricing policies to attract different customers or create new market segments

Product development
Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

Diversification
Diversification is the name given to the growth strategy where a business markets new products in new markets.
This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.


THE BCG MATRIX

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment.
According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share.
Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all the SBU’s are located in different industries, then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

10 x 1 x 0.1 x

Figure: BCG Matrix

1. Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as-

1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also involved with high market share.
4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.

There are some more important matrices like the GE-Mckinsey 9-cell matrix, but lets keep them away for the time being. Until next time,

Cheers!!!
Signing off,
Shauvik.



A look at India's Consumer Electronics Industry - II

Porter’s Five Forces Model
Although the Indian Consumer electronics market is highly competitive, the high growth rates that it promises make it a good industry to enter.

• Rivalry among existing firms: Moderate
• Bargaining power of Customers: Moderate to high
• Bargaining power of suppliers: Low
• Threat of new entrants: Low to Moderate
• Threat of substitutes: Low

Threat of New Entrants

Capital Requirements and Economies of Scale:

In the case of retail stores, there is lack of good distribution network and lack of knowledge of consumer buying patterns which calls for large investment in distribution channels and research to improve the reach.
Economies of scale is required in as there are large fixed costs associated with setting up a manufacturing plant as there are problems of under-developed infrastructure, erratic supply of water and electricity in many areas, a high cost of capital and continuous up gradation of technical and managerial skills.

Supply Chain Issues:

The existence of too many intermediaries in the supply chain coupled with issues in logistics, management of POS data, pilferage and distribution and inventory management, eats away the profits of the retailer, making it unattractive for new entrants.

Product Differentiation:

Though the awareness is increasing amongst the Indian consumers, retailers and manufacturers are unable to increase brand loyalty. The Indian consumer is very price sensitive and hence he keeps hoping from one place to another, hunting for good deals.
Switching costs vary amongst the electronic categories. For instance, the switching costs in mobile phones are high, as consumers who are used to one brand find it difficult to use another brand. However, for televisions, cameras, and even laptops, consumers are ready to try new brands based on price for features offered and service quality or reputation of the brand.

Government Policy:

By encouraging manufacturing zones and improving the infrastructure, the government is developing the entire manufacturing sector, which will help in boosting the electronics production in India, which has traditionally been a very small slice of the overall manufacturing segment. While the government is trying to encourage the growth of the retail and manufacturing industries in India, there are some policies which need to be looked at.

·         The duty structure for electronics adds up to 30% which is a significant amount. This is mainly due to the multiple tax structure which consists of 12% VAT, 8% excise, 4% Goods and Service Tax, 2% Central Sales Tax and Local taxes.

·         The FDI policy limits to 51% stake for foreign investors, which forces foreign retailers to use franchise arrangements, and in the manufacturing sector, the FDI is 100% favouring foreign investors.

·         Existence of the grey market due to poor government regulations to keep counterfeits at bay coupled with the lack of consumer knowledge and legal recourse encourages manufacturers to churn out spurious products which can lead to lost sales of the tune of 10-15%.

·         Red tapes and bribery in the Indian government system is also a stumbling block for new retailers or manufacturers.

Taking into consideration the positives and negatives, India still offers a good chance for new entrants and hence the threat is considered to be low to moderate.
Bargaining Power of Buyers

With the emergence of new channels like the internet, auction sites like rediff.com,  the general consumer (buyers) who usually purchase electronic goods from electronic retailers, hypermarts, music and book stores, can easily compare prices and go for the best deals in town. Though the better brands can command a higher price, buyers are constantly comparing prices, service quality and product features and hence commands a moderate to high power in this industry.

Large chain stores like Tata Croma, E-Zone have distinct advantage over the smaller stand alone stores as they can demand good discounts suppliers. As brands play an important role in the electronics market, the retailers find it difficult to integrate backwards to produce their own electronic goods as in the case of private food labels. Considering the market dynamics and the size of the market, the buyers have moderate to high power in the consumer electronics industry.

Bargaining power of suppliers
The biggest threat is the trend of large suppliers integrating forward as in the case of Dell, Apple, Nokia, by setting up their own retail outlets. However, in the Indian electronic context, there are a large number of suppliers in the market who face overcapacities, poor distribution, large duties, and declining margins and hence the bargaining power for suppliers is less and competitive pricing comes into play. With more companies setting up the manufacturing plants in India, like Nokia in the south, the bargaining power of suppliers is definitely low to medium. Product differentiation is more and more difficult in the consumer electronics industry and the existence of cheap Chinese suppliers also adds woes to the suppliers.
Intensity of Rivalry amongst existing players

There are few key players in the consumer electronic market, but as they are part of big Indian business groups, they have a lot of muscle power and hence the intensity of rivalry can be placed at a mid level. Though factors such as high transport and storage costs, lack of differentiation, large investments, and low switching costs tend to intensify the rivalry, the fact that the market is only at the nascent stage with promises of high growth rates of 16% coupled with the diverse needs of customer groups, and an untapped rural market; the existing players seem to be enjoying a relatively low rivalry.

Threat of Substitutes
The threat of substitutes for the manufacturers of these electronic goods is medium to high unlike the case of white goods. As new technology enters the market at increasing pace, the manufacturers and retailers need to understand the consumer needs. For instance the VCR was replaced by the DVD player which will soon be replaced by a Blue Ray Player. The incorporation of camera in the mobile phones is definitely a threat to the camera market. Hence product innovations in this segment are very high and players in this industry need to mindful of this.

               Now let us look at the key growth drivers and challenges of the industry.
Key Drivers:

·         Young Population with rising incomes

45% of the Indian population is below 25 years which accounts to close to 500 million consumers (18+) of which 230 million are in Urban India. With the rising incomes and education levels, the discretionary expenditure is increasing.

·         Availability of Easy Credit Options

With all the major players offering easy EMI schemes and with the increased penetration of Credit cards,  the Indian consumers now have an easier access to consumer electronics

·         Changing Consumption Patterns

Gone are the times when people bought electronics with the intension of using it for years together. With increasing speed of innovations and as new technologies come in, the Indian consumer wants the latest and the best. Now mobile phones are changed every year, laptops once in 2 years ,etc. People want to be trendy and are becoming gizmo frenzy.

·         Falling Prices of Consumer Electronics

With new models, products and more competition, prices are being driven even further down. Especially in the mobile phone segment, prices fall as much 20% after 6 months after introduction.

Challenges

·         Price Wars

With the increase in price wars due to the entry of new players in the market and increase in manufacturing capacity by some original manufacturers, the profitability and margins of the companies are adversely affected. Hence companies need to increase focus on product / store differentiation to address various segmental specific needs

·         Lack of Distribution Networks and Logistics Management

Getting stock into a store in India is a massive challenge given the poor city roads and complex intra city transportation regulations , high cost of moving goods between starts, inefficient storage ( e.g. small store backrooms owing to expensive real estate). It is of utmost importance to design an efficient network. Transportation, including railway systems, highways has to meet global standards. Airport capacities, power supply, warehouse facilities and timely distribution are other areas which need to be enhanced.  The distribution network is also highly fragmented and is very poor in semi-urban and rural areas.

·         Presence of Gray Market in Consumer Electronics

Presence of gray market in consumer electronics products, especially in DVD player, music players is definitely eating into the sales of the retailers. Counterfeit products are present across a wide range of products.

·         Increasing Awareness of the Indian Consumers

 With the increase in access to Internet information, and availability of wide range of choices, consumers have become quite smart. They want the product that is easy-to-handle, good in quality and low in price. Most importantly, consumers want some guarantee for the product that they are buying. The role of electronic companies doesn't end on the sale of the product, but continues till the end of guarantee period.

·         Trained manpower shortage in India

There is lack of talent in consumer electronics retailing. Retailers need to spend heavily on training its sales force to match the expectations of the Indian consumers both in terms of technical knowledge and soft skills.


Well, that was the consumer electronics industry in the Indian context. Until next time.

Cheers!!!
Signing off,
Shauvik.

A look at India's Consumer Electronics Industry - I

India’s nominal GDP was US$1.17trn in 2008. Average annual GDP growth of 6.5% is predicted by
BMI to 2013. With the population forecast to increase from an estimated 1.19bn in 2008 to 1.27bn by
2013, GDP per capita is expected to expand by nearly 59% by the end of the forecast period, to reach a projected US$1,563. Consumer spending per capita is assumed for a rise from US$594 in 2008 to US$1,105 in 2013. The growth in the overall retail market will be driven, in large part, by the explosion in the organised retail market. Organised retail refers to the familiar Western concept of chain outlets, department stores, supermarkets, etc. According to Investment Commission of India (ICI) data, this segment accounted for US$12.1bn of sales in 2006, or 4.6% of the total retail segment. The forecast is that organised retail sales will reach US$76.2bn by 2013, representing 10.7% of the total and generating employment for some 2.5 million people in various retail operations and over 10 million additional work forces in retail support activities including contract production & processing, supply chain & logistics, retail real estate development & management etc.

                   The Organized Retail Penetration (ORP) is the highest in footwear with 22 per cent followed by clothing.  Organised consumer durables retail is very low at around 5 %. This shows a growing opportunity in this sector.

                  According to a McKinsey 2005 report, while Food and Grocery took the highest share of wallet, and electronics took only a mere 5%, the proportion of spending on electronics was definite bound to increase by 2015 and also the growth rate for the share of organised retail in the electronics segment was set to increase from 15% to a astounding 45% in 2015. Non - food categories will lead the shift to organized retail.

                   In general consumer electronics refers to a variety of electronic equipment used by private customers. This industry can be divided into many segments:

1. ‘Traditional’ Consumer Electronics: audio and video equipment

2. Computing Devices: Computers, Calculators, Laptops

3. White Goods: Household /Domestic Appliances such as washing machines, irons, vacuum cleaners, grinders, etc

4. Personal Care: Hair Dryers, shavers, electric toothbrushes.

In addition to this, the emergence of telecommunication has lead to the convergence of mobile technology into the consumer electronics industry and hence this paper will only deal with traditional consumer electronics, mobile phones and computing devices which can be termed as Brown Goods as per industry definitions.

                               Out of the electronics industry in India, the consumer electronics segment is one of the biggest markets. The consumer electronics industry comprises of communication devices, computing devices, audio, video and gaming products. Televisions, music players, digital players, cameras, laptops, PCs, mobile handsets and accessories, gaming consoles commonly fall into the consumer electronic category. In 2008, the market size was estimated to be $22 billion and growing. With the growing population in India, exceeding 1 billion, the consumer electronic Industry is all geared up for fast growth in the coming years.  The predicted figure for the consumer electronic market by 2013 is around $46 billion, growing at a compound annual growth rate (CAGR) of 16%. This astounding growth is due to many factors, the major ones including

·         Rising disposable incomes coupled with increasing consumer exposure

·         Increase in manufacturing in the local grounds

·         Credit/Financing schemes which make purchase easy

·         Growing competition , leading to better deals

·         Increased reach due to better distribution networks

Taking a look at the individual segments in the consumer electronics segment, we can broadly classify them as:

1. Computers: According to Business Monitor India Report, the computers (laptops, desktops and accessories) market took up a share of 33% of the consumer electronics wallet in 2008. It also states that with the prices of PCs coming down by nearly half, the sales went up from $5.8bn in 2008 to $6.0bn in 2009. It’s very interesting to note that the current PC penetration is only 2% and this leads to excellent growth opportunities with a predicted CAGR of 13% for the period 2009 to 2013.

2. Audio, Video and Gaming Devices: The audio, video and gaming devices take up close to one – third of the wallet share in the consumer electronics segment. This segment is set to grow at 22% CAGR from 2009 reaching US $15 in 2013. The main product in this group is Television, with new technology such as Plasma TVs entering the market and cricket being the main attraction for most Indians, the Indian Premier League, Common Wealth Games 2010 are all helping in boosting the drive for upgrades.

3. Mobile handsets: The largest chunk of the consumer electronic market goes to the mobile handsets and accessories with 37% of Indian spending in 2008.  With the telecommunication boom and lower call rates, the handset market is poised to grow at 19% compounded annually and reach a staggering figure of about 380 million units by 2013. The mobile penetration in the rural market is 15% and is the most as compared to other categories. In the future, most vendors will definitely target the 3 tier cities and rural customers.

Well, that was the industry overview. Coming up next, the Porters five forces analysis for this industry. Until then,

Cheers!!!

Signing off,

Shauvik.