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CASE STUDY Managing in a Mature Market Continued.. SOLUTION A
Remarkably, in about 15 years, the company has built up a 120-million-metre capacity in denim output. It has also established a formidable global marketing network. Little wonder, then, that it has become the world's third-biggest denim company. Evidently, both these steps were taken on the assumption that the denim market would continue to grow. It was an assumption that has gone wrong. What was considered a strength has now become a liability. Denim is losing its grip on the markets of the developed world, such as the US and Europe. There is every chance that even the Asian markets will follow suit. I can understand CEO Asheem Chowdhury's concern over the volatility of cotton prices. But I do not see backward integration into cotton cultivation as a solution. Although it would provide the denim business a cost-advantage, backward integration is risky for a company which lacks upstream skills. For, the future of denim is bleak due to changes sweeping the fashion world. The company's cost-leadership is under attack now. What was once a core strength is no longer so today. Unless remedial measures are taken, there is a possibility that the cash-cow could turn into a dog. He should, therefore, tread carefully since the growth prospects for denim--Surya Mills' core business--are no longer bright. Leadership in the denim business has little meaning unless some core segments--which are not vulnerable to the vagaries of fashion--are identified. Until then, all efforts to strengthen leadership must be put on the back-burner. Any business can be easily fine-tuned by increasing the returns on capital employed. It means increasing machine-productivity and modernising manufacturing-facilities. It is likely that the globocorp has overlooked this issue in the pursuit of growth and marketshare. The second step is to critically examine the company's R&D capability. Surya Mills should make use of external r&d facilities, which are available in the textile industry. Such facilities can also help the company develop alternative product-development methods. It is important that Surya Mills bolsters relationship marketing, which the CEO has referred to in his diary. The objective of such an exercise is to ensure that the areas in which the company has been doing well continue to strengthen the bottomline. Surya Mills should quickly identify loyal customers and assiduously cultivate new relationships with them. Brands are always crucial to the success of marketing. Surya Mills should, therefore, work on the flagship brand. As an interim measure, it should generate brand-related loyalty in the youth segment. Incidentally, there is a vast untapped demand for denim in the rural market, especially small towns. Denim is easy to maintain and economical; hence, it is popular in the countryside. Rural demand could have gone unnoticed at Surya Mills, which has relentlessly pursued the global customer. In the long run, the rural sector should generate enough volumes to neutralise the company's present setbacks. For a manufacturer like Surya Mills, fashion-shows are important as well. They get the necessary mindshare by highlighting the use of denim. Unlike the older generation, youth does not mind paying for value-added products. So, customers under 30 should be Surya Mills' new target customer-group. The company should leverage its global position in building a brand image. Such a step would force the competition to follow suit, increasing the size of the market. Although denim-producers in the developing world have enough resources at their command, they have weak sales and marketing infrastructures. Both logistics management and competitive intelligence are essential to forge ahead of the competition. Surya Mills should emphasise value-added marketing, where brands deliver what they promise. So, the company must make new promises--and ensure that they are met. Advertisements that build the brand image should be put out in both the print and the electronic media even as cost-management exercises are set in motion on the shop-floor. In fact, Surya Mills should perceive the present situation as a golden opportunity to spruce up its downstream strategy. There is, of course, the risk of organisational complacency. The company should, simultaneously, consider related diversifications, particularly into downstream products. The idea is to ensure that whenever there is a downturn in one product segment, other product-lines will subsidise the operations. This means that Surya Mills should develop a basket of products and services in different segments. Readymade jeans are a good example. This process would also help kill those products which, even while doing well in the past, are losing propositions today. The company should also develop a trading and merchandising division, which could market the products of other manufacturers. But such products must complement Surya Mills' denim brands. The company should also explore the possibility of these buyers using its denim in their product-offerings. And the denim manufacturer must not ignore the Afro-Asian market, where the commodity still has strong demand. Only by making these efforts can Chowdhury transform a potential dog into a cash-cow. SOLUTION B
I would not recommend additional investments in increasing denim-capacity at this stage. Nor do I favour backward integration into cotton-cultivation. These measures would have worked only if the market was growing rapidly. Surya Mills already enjoys a cost-advantage because it is able to utilise cotton efficiently. Cotton-cultivation is an entirely new business, which needs new technological skills and partners. It is a different game. The company's foreign competitors might have undertaken backward integration while the market was growing at 20 per cent. But, clearly, at this juncture, Surya Mills should refrain from investing managerial and financial resources in this area. Since it is a bulk buyer of cotton, it would be worthwhile for it to enter into long-term pricing-agreements with cotton-producers. To be sure, a healthy buyer-supplier relationship will minimise the impact of input-price fluctuations on the company's denim business. Significant investments have been made over the years to erect entry-barriers. Now, Surya Mills must try to maximise the returns on those investments. The company's plants and technology can be used for other product-lines, which will generate returns without big investments. Such a step would increase the productivity of the company's workforce which, in turn, will push up the Return On Capital Employed. I am not sure whether this will be feasible in the long run. But the possibility definitely needs to be explored by CEO Asheem Chowdhury. The company is clearly focused on the world market, with the domestic market accounting for a small share of its sales. Its closest competitors must also be facing the pressures of market-saturation and low growth. It is, therefore, possible to explore other avenues of competition, where some tasks of its rivals are undertaken by Surya Mills, and the benefits of efficiency, capital cost management, and superior processes are shared by both Surya Mills and its competitors. In the current scenario, there is clearly a need to focus on attractive segments. One of the main weaknesses of Surya Mills is that it does not have a diversified portfolio. A key message from the Boston Consulting Group model is that it is dangerous for any company to have all its products in only one sector, however attractive it may be. With only one cash-cow, Surya Mills is in danger of becoming a dog. In fact, it does not have stars or question-marks to lend its portfolio balance and stability. Several options for products have been discussed. These, I feel, should be the management's focus areas. Value-added products, which have high growth potential, are excellent question-marks. Product-lines like shirtings need to be ventured into so as to provide the portfolio a balanced look. Care must be taken to ensure that the question-marks have the potential to graduate into stars and cash-cows. It calls for a risk analysis since Surya Mill's investments could be large. A tried-and-tested strategy in the cash-cow stage is to milk a product for profits, which can be ploughed into other areas. But there is a need to push down the costs as much as possible to reap the benefits. This can be done through activity-based costing, and scrutinising the areas where costs can be easily shaved. In fact, product- and customer-rationalisation are good ideas to lower costs and increase customer satisfaction. Niche-marketing is a good option, but I am not sure that it will solve Surya Mills' present problems. While profitable niches need to be identified and addressed consistently, the size of the current operation is too large for successes in niche businesses. They cannot, by themselves, neutralise low market growth and declining returns on investment. Since market growth is stagnating, one possibility is to explore the opportunity of consolidation. Are other large producers exiting from the denim business? Given the cost-advantages associated with manufacturing in this country, would a merger with a large player benefit both parties? M&A may also give ready access to new markets, even raw material supplies. The pims (Profit Impact of Marketing Strategies) model states that higher marketshare leads to increased profitability. This will also give Surya Mills more room to control prices. If Surya Mills is unable to increase its cash-flows in the denim business, it could be sold. This is an option that Chowdhury must examine. Clearly, the cash-cow stage is ideal to generate cash for investments. So, theoretically, it is best to hold on, cut costs, avoid any fresh investments, and postpone a sale to a later date when marketshare is falling, or the product is in the decline stage. Although the price realised from a sale would be lower, the company would have reaped its rewards by that time. Retailing is a specialised and different activity, where Surya Mills has no core competence. This should be analysed in isolation rather than as a solution to the current problem. The company does not possess the critical skills that the retailing business requires. That option can be considered only if the denim business is sold. Until then, Chowdhury should focus on the immediate task at hand. ADDITIONAL READING |
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To maintain its leadership position in a business
that has become mature, Surya Mills should examine the situation in the light of 4
factors: scale economies, cost leadership, intensity of globalisation, and entry barriers.
On all 4, the company ranks well ahead of most of its competitors in the denim business. 
Surya Mills represents the classic case of a business that has done well in
times of growth. Over the years, it has built substantial core strengths and raised
entry-barriers. Today, it is caught in the pincers of a slowdown because of external
conditions: stagnating growth, and rising input prices. Simply put, Surya Mills does not
know what strategic direction to take. Should it continue to follow a cost-based strategy
or should it focus on product differentiation? 