"Denim was a dream in the 1980s. It was growing even as our strategy was working. We had, in 1986, taken a conscious decision to concentrate on denim to insulate ourselves against the shifts in fashion that value-added products are vulnerable to. Simultaneously, we went in for huge capacities to bolster our economies of scale. That helped us in 2 ways: it assured us good margins, and gave us an opportunity to become a globocorp. I remember the business magazine, Biz Tomorrow, talking about our strategy in glowing terms. I was even mentioned in their article on The Globogiants as Asia's most innovative entrepreneur. But, sometimes, the past is too much to handle. Today, we seem to have lost our rhythm. We keep on asking ourselves whether globalisation is the best response to a shrinking denim market; whether we must reverse our cost strategy and opt for product differentiation; whether we should build retail muscle in the domestic market to offset our global shortcomings. We are at the crossroads" Asheem Chowdhury, the 54-year-old Chairman and Managing Director of the Rs 1,040-crore Surya Mills, was a worried man. GSL India's R.C. Bagrodia and Bharti-BT's K. Ganesh examine the denim-manufacturer's upstream and downstream options, and suggest what it must do to survive in a saturated market. A BT Case Study.

Excerpts From A Personal Review Of Surya Mills by Asheem Chowdhury, Chairman & Managing Director

October 5, 1997

Fifteen years is a long time in any business. It makes you nostalgic. I remember those days in the mid-1980s, when we were fighting for our survival. Ever since then, it has been a rousing ride for the company. Thanks to some early initiatives--which the management magazine, Leadership, credited to me--we have achieved extraordinary growth in volumes over the years. I know that that growth would not have been possible if we hadn't worked as a team. It took the $20-billion Hexagon Denim of the US a century to build a capacity of 140 million metres. It has taken Surya Mills a little over a decade to build a capacity of 120 million metres--beginning with 3 million metres in 1986-- and to join the global league by becoming the world's third-largest denim manufacturer.

We are truly a global company. We have 5 marketing arms: in Boston (catering to the US, Canada, and South America), London (catering to the UK and Europe), the Philippines (catering to the Far East), Mauritius (catering to Africa), and Mumbai (catering to the CIS and West Asia). We have 4 sprawling manufacturing facilities in Hosur, Mumbai, Noida, and Port Louis (Mauritius) besides 7 warehouses: 2 in the US, 2 in Europe, and 1 each in Hong Kong, Dubai, and Port Louis. The logistics that such a global operation entails is efficiently handled by a 7-member team based in Mumbai.

Three years ago, we were excited about occupying the top slot in global denim production. Today, we are compelled to stagger our expansion-plans. The excitement of yesteryear has waned. The pace of growth is beginning to slow down. I am a little concerned, bombarded as I am by my memories of the heady go-go years of the 1980s.

October 7, 1997

I had lunch today with Peter Williams, who taught me Business Strategy at Wharton Business School (Wharton), and is on a lecture-tour of the country. We spoke about the Boston Consulting Group's (BCG) product matrix, which classifies a business portfolio into dogs, question-marks, stars, and cash-cows. "Can there be a progressive movement of a company from a dog (low marketshare in a low-growth segment) to a question-mark (low marketshare in a high-growth market) to a star (high marketshare in a high-growth segment), and, finally, to a cash-cow (high marketshare in a low-growth segment)?" I asked him. Peter said that the BCG classification is a diagnostic tool, designed to help ceos decide which businesses to retain and which to exit from. But it is entirely possible for a business to move from a dog to a cash-cow. The question is: is there life after a cash-cow?

As an industry matures, profitability matters more. And other objectives--such as improving your competitive position and increasing marketshare--recede in importance. Profitability becomes more important because you start expecting returns on investments made during the growth-stage. Marketshare becomes less important because demand tends, by definition, to stagnate in a mature industry even while relative competitive positions become stable. Surya Mills is in a similar situation with its denim business, which has become our cash-cow--and has made the company extremely vulnerable.

There is no doubt that denim has become a low-growth business. The global market has become saturated; denim consumption is not growing in the developed countries of the world, such as the US. Now, the global growth of denim hovers between 4 and 5 per cent per annum, down from 20 per cent in the beginning of the 1990s. Not surprisingly, there has been a gradual deceleration in the growth of global capacity. Europe has had no capacity-expansions in the last 2 years, and has, in fact, been hobbled by the under-utilisation of existing capacities. Business strategies are shifting there; mills are switching over to high-value products. Surya Mills has been catering to global demand by exporting over 70 per cent of its output for years. Suddenly, those export markets are beginning to shrink. Uncertainty threatens the future of our core business.

October 10, 1997

The origins of Surya Mills' success in denim can, in fact, be traced to 1982-83. That was the period when the domestic textiles business was going through a lean patch. I had just returned home, after graduating from Wharton, to take over the family business set up by my grandfather over 4 decades ago. Surya Mills had been a profitable composite mill, manufacturing a wide range of textile goods, like dhotis, suitings, shirtings, sarees, bedspreads, and towels, for the homemarket. But the powerloom sector was gradually cutting into our business. It had no entry-barriers. It enjoyed excise concessions. And its impact on the composite mills was crippling.

But, unlike our contemporaries who were struggling to find ways and means of fighting the powerlooms, we decided we had to wriggle out of the stranglehold that these new entrants were beginning to gain over us. Our step was bold and innovative. We opted to move out of our traditional businesses, and look for one with high entry-barriers. Denim fitted the bill. The barriers were high. Very few Indian firms had access to world-class process-technology, which entailed dyeing cotton-fibre with indigo to get denim. Capital costs were high too: a 10-million metres per annum denim-making capacity, for instance, entailed an investment of Rs 70 crore.

The global demand for denim was high in those days; the annual rate of growth of production was more than 25 per cent. We thought that that would take care of domestic market fluctuations. A glut in domestic capacity, or a shortage in local demand could be overcome through exports. Besides, denim was a product with low fashion-content, which would eliminate any cyclical patterns in demand. The choice of denim as a vehicle of growth made eminent sense. Today, the situation has reversed itself. Denim demand is shrinking internationally. And, although domestic demand is rising, it is bad news for a global company like Surya Mills, which has always sold no more than 25-30 per cent of its output in the domestic market.

October 15, 1997

Over the years, we have built up strengths on several parameters. Take cost leadership, for instance. Unlike a majority of the textile mills--which use the conventional method of absorption costing, where overheads are allocated to products on a pre-determined basis to determine the cost per metre--Surya Mills uses marginal costing to determine the contribution of each activity-centre towards amortising its fixed costs. Through marginal costing, a company can discover which products are contributing to fixed costs--and, therefore, are worthy of retention in the product portfolio--and which products are making a negative contribution and, therefore, should be purged. The technique has enabled us to keep a tight control over cost and pricing.

It is actually our efficient usage of cotton that has provided us the cost advantage. Cotton accounts for only 57 per cent of our raw material costs compared to over 65 per cent worldwide. We have been using superior processes to reduce the intensity of cotton in denim and improve its utilisation ratio. The cost of cotton is 50 per cent of the total cost of production in most foreign companies; it is 39 per cent at Surya Mills. Our aim is to lower it to 32 per cent by 2000. That would give us a big advantage over our global rivals.

October 17, 1997

One of the keys to Surya Mills' leadership in denim lies in its efforts at regularly tracking developments in textile technology worldwide. We worked with a Japanese jet loom-maker in 1991 to make air-jet looms that cut our capital costs by 50 per cent. We introduced the Slasher Dyeing Technology--a single-stage operation unlike the conventional 4-stage, rope-dyeing know-how--which not only reduced costs, but offers better colours too. To get a high quality finish in a shorter time, we went in for foam technology instead of the traditional wet-and-dry process. It was obvious that all these steps provided Surya Mills a cutting-edge over even its biggest global competitors.

October 20, 1997

Success has a way of wearing down. Most of our workmen have been with Surya Mills since its inception in 1960. I know a number of workmen on the shopfloor by their first names. We keep talking about the future of the mill, and I often see a sense of weariness in them. They are frank enough to tell me that everything about their daily routine here has become predictable over the years. The systems have been set, there is a great deal of standardisation, but there is little novelty.

The excitement of building a world-class business, which fired their imagination during the mid-1980s, appears to have waned. How do I bring back the excitement? How do I shake people out of their complacency? I would hate to see our leadership, built up painstakingly in several areas, slipping away from our hands just because people are no longer excited about what they are doing. Sometimes, I think we need a crisis at Surya Mills to whip up some drive and enthusiasm in all our people.

October 22, 1997

We have worked hard to make Surya Mills a global enterprise. We have made impressive strides on various parameters: assets, reserves, profits, and dividend payouts. It is time to think in terms of our return on investments. Our Return On Capital Employed (ROCE) was 11.10 per cent in 1990-91. It has been gradually coming down; it was 9.70 per cent last year. My managers tell me that the decline reflects the vulnerability of our operations to fluctuations in the price of cotton. Two years ago, the price of cotton shot up from Rs 34 per kg to Rs 54 per kg, reducing our operating margins from 21.80 per cent in 1993-94 to 14.60 per cent in 1995-96.

Should we integrate backwards to grow our own cotton? Will that give us the necessary control over cotton-prices? I must find out. Of course, I am not aware of any domestic textile mill integrating backwards. But several of our global competitors have done so. We could explore this upstream opportunity. If cotton is our Achilles' Heel, it is time we addressed the issue squarely, and as speedily as possible.

October 25, 1997

I brought up the issue at the Management Committee Meeting this morning. I understand that the law does not allow corporates to buy land for agricultural purposes. But, as part of liberalisation, things are going to change, sooner or later. My managers tell me that the government is keen on amending the Urban Land Ceiling and Regulation Act (1976). Meanwhile, it would make sense for us to scout for technology in cotton-cultivation. Australian technology, I understand, is good, and may suit our agricultural conditions. I must send a team to Sydney to explore this possibility.

I wonder whether I was right in focusing solely on denim. We purged several products from our portfolio in 1984, when we decided to move out of the powerloom orbit. Most denim-makers worldwide are moving into high-value garments and readymades to increase their profitability. I have asked my managers to examine this downstream opportunity as well. There is one risk we must avoid. In our pursuit of different product-lines, we must ensure that our competencies are not fragmented.

October 28, 1997

Diversification need not be the only route to profitability. Many companies increase their margins simply by adopting a different pricing strategy. But, in a mature market, we will not be able to increase our prices without losing volumes. Nor will we be able to increase volumes without reducing prices. That's because the overall demand is stagnant. Nevertheless, a price- increase can improve profitability even with a loss of volume. The effect of an increase in price will feed the bottomline. In fact, the effect of a volume loss will be partially offset by a decrease in variable costs. A price decrease can improve profitability if it is accompanied by a large volume increase, especially if the company is not operating near full capacity.

Vikram Sahi, my President (Marketing), who has spent 12 years with us since he graduated from the Indian Institute of Management, Ahmedabad, has done some generic calculations on how far product-prices can be modified over different time-periods, and their likely effect on volumes. He has worked out a schedule of percentage changes in volume for given percentage changes in price for each product-line. What we should consider is the likelihood of such an action triggering off a price-war in denim, both locally and globally, and the ability of our competitors to win such a war.

I have a feeling that small companies in the domestic sector--our nearest domestic competitor, incidentally, has a capacity of 40 million metres per annum--might win a price-war, but only in the short term. If we are willing to sacrifice profitability in the short term, we could win a long-drawn-out contest because of the greater scale of our operations and our financial resources. Another option that came up during our discussions was product rationalisation. Surya Mills has continually introduced new denim products during the growth stage but has, in my view, failed to phase out products which are no longer in demand. I have a feeling that we have a far wider product-range than is necessary from the point of view of profitability.

The product-range can be reduced without reducing volumes. We can give customers the choice of either accepting high-volume, standardised products, or paying a higher price for low-volume, tailor-made products, where the price will reflect the latter's higher production costs. This kind of rationalisation has another advantage: it will substantially reduce our stock-levels, and cut our manufacturing costs by achieving longer production-runs for standardised products. It is noteworthy that denim, per se, is undifferentiated. But it is in value-added product-offerings--such as ring denim, over-dyed denim, and stretch denim--that Surya Mills should seek to distance itself from the competition. Sahi tells me that these variants also offer higher yields because they are price-inelastic. I agree with him. We should explore this possibility in the near future.

November 1, 1997

Apart from pricing strategy and product rationalisation, there is a third approach we should consider in our pursuit of profitability: customer rationalisation. I think we should pare down the number of buyers we do business with from the existing 60 to a more reasonable 10 or 12. That will yield us higher sales and bigger profits. Hexagon Denim is a classic instance. Over 80 per cent of its sales is routed to just 8 buyers worldwide. It chooses its customers very carefully and practises relationship-marketing with them.

It is not enough to produce high quality output any more. Customer delight is the new competitive weapon in the marketplace. I keep telling my managers at every available opportunity that product quality has ceased to be a competitive edge. It is a prerequisite for entry. Without it, a company is not even in the running. Customer satisfaction, too, has become passé. Instead, you should be able to delight the customer so that he looks to you for his entire requirements, and does not even consider switching over to your competitor. But delight means 2 things: building long-term relationships with a limited set of high-volume buyers, and delivering the appropriate price-quality-service bundle to them. We must learn to do both.

November 5, 1997

Although the domestic market for denim is expanding, there is a limit to the kind of growth that Surya Mills can expect from the domestic market. Afterall, we need some time to grow the market. We cannot afford to dilute our global aspirations. Simultaneously, it is unlikely that world denim demand will grow beyond single digits in the next century. As long as denim was a star business, giving us high marketshare in a high-growth segment, we had little to worry about. Now that it has become a cash-cow, Surya Mills has cause for concern. Having set up huge entry-barriers in denim, how do we consolidate our business?

At the Management Committee Meeting this afternoon, we were looking at what some of our global competitors are doing. They are either diversifying into value-added products, niche-marketing, or brand-building. All these activities pertain to forward integration. I am convinced that we will have to strengthen our high-end shirtings division, and use a two-pronged approach to improve our profitability: create brands, and focus on retailing. Apart from strengthening our existing denim brands--Time Machine, Oldport, Wild, and Ling--we will have to introduce new brands in shirtings, knits, and gabardines. But we need the retail muscle to make a splash downstream.

November 7, 1997

We were looking at possible investments in new product-lines in high-growth markets. Our shirting capacity can be hiked from the present 8 million metres per annum to 24 million metres at a cost of Rs 360 crore; a 10.50 tonne per day capacity of knitted fabrics would cost Rs 150 crore. These investments in capacity-creation, accompanied by brand-building, will enable Surya Mills to strengthen its market leadership by the turn of the century, I hope.

November 10, 1997

Retailing is emerging as the new growth area. We should get into this area both by becoming franchisees for global labels and by launching our own brands. It is not difficult to achieve a 20 per cent marketshare in the next 3 years. But should we have exclusive showrooms? Or opt for franchising? We could try both. Surya Mills should send goods on a consignment basis to our franchisees. This helps at both ends.
For the franchisee, it eliminates the risk of buying goods and getting stuck with unwanted stocks. For Surya Mills, it eliminates the risk of the franchisee not placing orders until the stocks are liquidated. Of course, it is we--not the franchisees--who will bear the inventory-carrying cost. As opposed to the normal practice of offering a 30 per cent margin to the retailer, Surya Mills could pay a 17.50 per cent commission to the franchisee. Assuming that the inventory carrying-cost is 4.50 per cent, and the distribution cost works out to 3 per cent, we will still have an effective saving of 5 per cent on the retail margin.

November 14, 1997

I remember what Williams had told me years ago at Wharton. He had said that strategy has to be flexible enough to accommodate changes in the business environment. Some of the changes in the future, he had said, would be cataclysmic. So, strategy had to be as flexible as possible. Surya Mills exercised the strategic option of cost leadership some years ago. I wonder whether we have the ability to acclimatise ourselves to a strategy of product differentiation in the future.

How can Surya Mills consolidate its leadership position in a business which has become mature and has little chances of registering double-digit growth? What are the growth options before the world's third-largest denim manufacturer? What are Chowdhury's immediate priorities? Does Surya Mills face a threat in its core denim business? Is the cash-cow on the verge of becoming a dog? Should Chowdhury focus on the domestic market or should he redouble his efforts in the global market? Should he take the plunge upstream into cotton-cultivation, or should he advance downstream into value-added products? Is divestiture an option for Chowdhury?

SOLUTION A    SOLUTION B

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