Strategic management and policy framework for achieving business excellence--case studies of Indian companies.
Steel industry (Case studies)
Strategic planning (Business) (Case studies)
Jha, Vidhu Shekhar
Name: Journal of Academy of Business and Economics Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business; Business, general; Economics; Government Copyright: COPYRIGHT 2005 International Academy of Business and Economics ISSN: 1542-8710
Date: Jan, 2005 Source Volume: 5 Source Issue: 1
SIC Code: 3312 Blast furnaces and steel mills
Company Name: Tata Steel Ltd.
Geographic Scope: India Geographic Code: 9INDI India
This paper explains the importance of Strategic Management and Policy Management in the framework of the Japanese Model for Business Excellence, the Deming Prize. It also highlights how the two auto component companies, Sona Koyo Steerings Limited and Sundaram Clayton have become globally competitive by wining the Deming Prize in India. This paper also discusses Tata Business Excellence model based on Malcolm Baldrige (American) model for Business Excellence applied by a major steel company, Tata Steel in India, which has made this company as one of the best steel companies in the world.
Many Indian Auto companies in India have been doing exceptionally well since early 1990's by learning from each other and following the philosophy of Total Quality Management (TQM) as a way for their corporate strategy to achieve Business Excellence. Many Indian companies especially in the automobile-component sector have been applying the principles of TQM or Business Excellence for competing in this very competitive market. With help from Prof. Osada of Japanese Union of Scientist and Engineers (JUSE) and the Confederation of Indian Industry (CII), these companies have been applying the Deming Model for TQM Implementation in their companies for achieving competitive advantage.
Many of the companies like Sundaram Clayton, Sundram -Brakelining, Sundaram Fasteners, TVS Lucas of the TVS group and Sona Koyo Steering Limited have been applying the principles of TQM and Business Excellence by applying the Guidelines for the Deming Prize instituted by the Japanese Union of Scientists and Engineers (JUSE).
1.1 The Deming Prize (Japanese Model for Excellence)
This best known prize with the longest history was first awarded by the Japanese Union of Scientist and Engineers (JVSE) in 1951 to a Japanese company which excelled in Total Quality Management. This prize is given for an overall performance of a company. Till 1991 this prize was given to only Japanese Companies but from 1992, any company outside Japan could apply for Japanese--Deming Prize.
1.2 The 10-Point Content of the Deming Prize Comprehensively Covers Issues for Any Organization as Given below:
5. Human Resource Development and Utilization
6. Quality Assurance Activities
7. Maintenance and Control Activities
8. Improvement Activities
9. Effects including Tangible and Intangible effects, Methods for measuring and grasping effects, customer satisfaction and employee satisfaction, Influence on associated companies and local and international communities.
10. Future Plans for the organization for improving problems, changes in social and customer environment and future plans, relationship between management philosophy, vision and long term plans.
2. STRATEGIC MANAGEMENT BY BUSINESS POLICY (SMBP) FOR TQM IMPLEMENTATION
Prof. Osada, the Japanese Guru for JUSE emphasizes the concept of Strategic Management by Business Policy (SMBP) for TQM Implementation.
Excellent companies in 21st century will have to focus on
(a) Sustainable growth
* Looking at all stakeholders' satisfaction, which implies value for customer, employee, society, business partner and shareholders and be
(b) Able to face the mega competition and win the competitive advantage by
* Differentiation strategies
* Tapping of creativity and innovation from all its employees for coming out with creative and innovative products.
* And having optimum resource allocation.
View points needed for strategic planning, as per Osada should certain the following:
(a) Innovation: strategic & future orientation
(b) Improvement in processes: problem solving
(c) Forecasting business environment clearly & comprehensively
(d) Product business lifecycle
(e) Positioning, benchmarking
(f) And focus on optimum resource allocation
(g) Concentrate on key success factors / failure factors
(h) Practical strategy looking at product, market & strategic elements
(i) Participatory type of strategic planning
(j) And finally strategic planning implementation.
By applying this framework and the concerns for the Deming prize, companies in the TVS Group like, Sundram Clayton, Sundram Brakelining, TVS Motors, have achieved excellence. Other auto- component manufacturers like Jay Bharat Maruti, a subsidiary of Maruti Udyog Limited, Sona Koyo Steering, and Minda Huf Ltd. in India have established a level of excellence by which they are able to supply their products to the top automobile manufactures of the world based in India. They are also able to export to foreign countries facing the challenges of global competition successfully. Two examples of Indian auto component companies would be highlighted in the next part of the paper:
3. CASE STUDIES FOR DEMING PRIZE WINNERS IN AUTO-COMPONENT COMPANIES
A) Sona Koyo Steering Systems Ltd., India
In Jan. 1985, Sona Group had technical collaboration agreement with Koyo Seiko Co. Ltd., Japan for manufacture of manual steering, gear assemblies and steering column assemblies. From October 1987 this company started its production. In 1992 equity participation of 8% by Koyo and it was increased to equity participation to 20.5%. In 1998, Sona Steering systems changed to Sona Koyo Steering Systems Ltd. Since 1994 Koyo certified Sona as an approved vendor for export of steering parts to Japan.
Policy management is the process of formulating, deploying and implementing the company policy of the year related to high priority to lower levels in the organization. Policy Deployment starts from the Top Management and goes down to Plant Manager, Departmental Manager and to the Section Manager level. The process has been improved over the years based on the learning during implementation using the Plan, Do, Check, Act (PDCA) Cycle as propagated by Guru's like Shewart and Deming.
Typical Deployment of objectives in the company is shown in figure 1 & 2.
[FIGURES 1-2 OMITTED]
Implementation of Objectives & Action Plans At Sona Koyo Steering Systems Ltd. the implementation of objectives and action plans is briefly highlighted as:
* Weekly review of action plan in Managing Committee meetings
* Monthly review of Divisional Objectives
* Quarterly review of Chief Level Objectives
* Half yearly review of Company Objectives
* Daily, weekly and monthly gap analysis of Checking Points, and
* Monthly review of Managing Points
This has given better results in terms of reducing the manufacturing expenses as % of net sales from 2000 year onwards. Fuel consumption per unit of power has gone down since year 2000.
Inventory Turnover ratio has improved; In-house rejection have declined customer returns Per Part Million (PPM) has decreased since year 2000. After implementing the concept of policy management in the company. Some highlights of the company from the primary source are given which gives us an idea how this company has achieved competitive advantage in the field of auto component business.
New competitions will be coming through supplier power and price level sensitivity in the market. New opportunity for the company will be in Western Europe and North America as well as new challenges in Indian market.
Some of the aspect of the competitive advantage in this company is:
* Shared costs between several products
* Quality & knowledge of work force
* Experience and knowledge of business & organizational learning culture
* Production technology upgradation
* Strategic outsourcing
* Standardization of product and pricing policy
* Good relationship with suppliers computerized management of information flows and material flows
* Quick response to unscheduled production demand
* Just-in-Time (JIT) concept of manufacturing
* Customer service contract
* After sales service and availability of spare parts
* Regular assessment of customer satisfaction
* Product purchased from the company vs. competition, services required from time-to-time by the customers
* Trends or future possible change in customer requirement for product and services monitoring
* Good financial management systems
* Good policy management systems in the company
New strategic goals of the company are:
* Development of new knowledge and technologies
* Increase of the sales turnover
* To be present in the global market
* Research and development reinforcement & development of unique capabilities within the company for innovation
The company won the prestigious Deming Application Prize for Business Excellence awarded by Japanese Union of Scientists and Engineers (JUSE) in 2003. This company has become globally competitive by applying the principles of Total Quality and Excellence.
B) Sundaram--Clayton Limited Brakes Division (Chennai), India This company was established in 1962 as a joint venture with Clayton Devandre, UK (Now WABCO Automotive UK). WABCO Automotive is part of American Standard Inc.--a fortune 500 company. Sundaram Clayton--Brakes Division is located at Chennai and is part of the TVS group, which was established in India in 1911.
* Air brake systems for medium and heavy commercial vehicles
* Vacuum brake products for light commercial vehicles.
* Anti-lock braking systems (ABS) and Anti-spin Regulation Systems.
In 1983-87 there was a recession in the Automobile Industry and Emergence of Competition in Sundaram Clayton Business. There was a drop in market share and profitability. Thus in 1987-88 there was a wakeup call for the company to gear up and faced competition. Sundaram Clayton embraced the TQM philosophy and the Deming model for improving performance and manufacturing excellence.
1987-90 phase the Introduction phase
The first issues was to be tackled in this phase was bringing about a cultural change in the organization by having common uniform for all employees, open offices, total employee involvement, where quality circles and suggestion schemes were encouraged among the employees.
Restructuring Manufacturing process was done to have product layout, self-contained units, and operator's ownership of Quality.
1990-1994: The Promotion phase
The Policy Management philosophy was employed to have goal congruence among all the levels of management. Measures and targets were fixed and monitored / reviewed and achieved. The audit reviews were carried out throughout the organization.
The concept of cellular manufacturing--emphasizing Productivity Improvements, Lead--Time Reduction, settings up of operation standards for all key processes were done.
Massive efforts towards Education and Training where problem solving skills were imparted to company wide employers at all levels.
1994-1998: Deployment Phase
Standardization was adopted for all processes and operating procedures were written for every activity specially all manufacturing activity & related activities. Poka-Yoke (Mistake Proofing) was implemented for various machines in the manufacturing process.
New Product Development was taken up very seriously applying a multidisciplinary task force full time and New Product Development (NPD) process was well defined and all the tools and techniques were applied for New Product Development.
Supplier Development was emphasized for the whole manufacturing function. Manufacturing cells were created at the suppliers' sites and training of suppliers or vendors of the company was done by the specialists.
In 1998 Sundaram Clayton--Brakes Division was awarded "Deming Application Price" for distinctive performance improvement through the application of Company-wide Quality Control. This company became the forth company outside Japan and the very first in India to receive this prestigious award.
Continuos Improvement phase (1998--Present)
Responding to the External changes and the Internal changes, the Deming examiner's feedback with TVS corporate values in mind, efforts began to own new products, sustain product quality and productivity with social responsibility for improved customer satisfaction and business results.
Concepts like Total Productivity Maintenance (TPM), Lean Manufacturing, Application of IT as enabling processes Productivity Improvement, Establishing Environmental Management Standards (EMS) as per ISO 14001 standard were taken up. Development work for electronic control system for air brakes was taken up during this period. Development of new customers has also being given importance. For sustaining profit, product mix optimization and cost management have been made very effective throughout the company. The Road map for competitiveness as applied by SCL is given below in Figure 3
[FIGURE 3 OMITTED]
With the above two case study, from the auto component industry in India, we have seen how policy management as part of the Deming way of implementing Total Quality Management (TQM) for achieving business excellence has been implemented in the two case studies.
4.0 TATA BUSINESS EXCELLENCE MODEL (TBEM) AT TATA STEEL:
Now we look at the genesis of the Tata Business Excellence Model (TBEM) applied by one of the largest diversified and admired private group in India the Tata Group. Based on the American Model, The Malcolm Baldrige Award for business Excellence, The TBEM is applied in one of the oldest companies of the group, Tata Steel, the first Steel Company in Asia, which started in 1907 in India. By applying this integrated model for excellence, has become one of the best steel companies of the world now.
Tata Business Excellence Model at Tata Steel: One of the largest business groups in India consists of 85 companies and 7 business sectors worth about Rs. 50, 000 crores i.e. about US $11. 213 billion in revenues. Tata Group of companies have taken upon themselves one of the largest strategic change initiatives in their companies through the Tata Business Excellence Model (TBEM) launched in 1998 to grapple with the challenges and transformation, the competitive environment was throwing upon the different companies in the Group. Post 1991--when the liberalization era had just begun in India, there was a change in the competitive scenario in India and companies had to adopt their strategies and philosophies which would make them more competitive in the market place.
Between December 1998 and early 2000, about 30 companies in the Tata Group signed up to implement the Tata Business Excellence Model (TBEM) and from July 2000, these companies are being annually evaluated on the 7 criteria that constitute the TBEM:
Origin of TBEM:
The genesis of the Tata Business Excellence Model (TBEM) lies in the JRD Quality Value (JRDQV) Award launched after the death of the group chairman Mr. J.R.D. Tata in 1994 in his memory for the Tata group companies. This model is based on Malcolm Baldrige National Quality Award that jump-started the Quality movement in USA in 1988. The TBEM, which was adopted in Tata Group, companies including Tata Steel, was adopted in 1998. It has all the same criteria as the Malcolm Baldrige Award criteria plus it also incorporates the Tata Brand equity promotion and Tata Code of conduct.
JRDQV Award Quest at Tata Steel:
Tata Steel, the oldest Integrated Steel Company India, which was, founded in 1907 at Jamshedpur in the Bihar State (Now called Jharkhand State) produces about 3 Million Tons/year of saleable steel. Tata Steel is Asia's first and country's largest private sector integrated steel plant. The company has played a pioneering role in integrating professional business practices with exemplary corporate citizenship programs in India. In mid of year 2000, the company has started operating a 1 Million-Ton Cold Rolling Plant with the collaboration with Nippon Steel, Japan. In 1999-2000, the company had a sales turnover of Rs. 6,943.33 Crores i.e. about $1.47 Billion and Profit after Taxes as Rs. 422.59 Crores i.e. about $8.93 Million. In the year 2000-2001, the sales turnover was Rs.7814.58 Crores i.e. about $1.65 Billion with a net profit of Rs.553.44 Crores i.e. $11.71 Million. Year 2001-2002 was a very difficult year for the steel industry. All the companies in the world made losses but Tata Steel made a profit of Rs 205 crores and in 2002-2003, The company has done exceedingly well by making a net profit of Rs. 1012 crores i.e. about $18.72 Million. Tata Steel in its new vision statement in 1998 had taken up the challenge to become the lowest cost producer of steel in the world. Till the year 2000, it was second to the leading Korean Steel Company, Posco Steel.
In year 2001-2002 as per the World Steel Dynamics, Tata Steel of India has become the lowest cost producer of steel in the whole world.
This is the only company among the Tata Group, which has crossed 600 points out of 1000 points to qualify for the JRDQV award in July 2000. Tata Steel is way ahead of the other companies because it's quest for Total Quality and Excellence, which started in the late 1989, when it started its Total Quality Management (TQM) movement. In early 1992, it adopted the Malcolm Baldrige Award Criteria for implementing TQM in various divisions of the company and called it the JN Tata Quality Award, where various divisions within the company were competing with each other on Total Quality Implementation. In 1994, Tata Steel adopted the JRDQV guidelines again based on Malcolm Baldrige guidelines for moving towards Total Quality or Business Excellence, and started competing with other Tata group companies. From 1998 onwards it has been leading in the JRDQV award total scores in the Tara group. The need for TBEM and what it does are given in the next sections.
The Need for the TBEM:
The following issues were considered before the Tata Group felt the need for adopting the Tata Business Excellence Model (TBEM). They are:
* Processes and practices were not customer-centric in the companies
* Tata Group Companies pursued size instead of agility
* Performance standards varied between organizations
* Knowledge and best practices were not being shared
* There was no unified management strategy for the Tata Group
What the TBEM Does?
* Provides a framework for the group to become competitive
* Uses quality as the route to acquiring competitiveness
* Works as a competition to ensure participation
* Becomes a transformational tool for every company
The TBEM Model:
Beyond the broad guidelines, the model has no prescriptions, and is extensively adaptable. The choices of the tools of implementation lie entirely with the company, as does the method of deployment. Here is how the TBEM drives excellence across functions:
* The leadership criteria checks how senior leaders create a leadership system based on Group Values
* The customer and Market Focus checks how the company determines customer groups, key customer needs, and complaint-management issues
* The Strategic Planning criteria examines how the company develops strategic-objectives, action plans and resource allocation
* The information and Analysis criteria check whether the organization has key metrics in place to measure and analyze performance
* The human resources management checks the appraisal-system, the work environment, and the training and development of employees
* The process management examines the product-design, production and delivery process and supply-chain management
* The business results criteria measures the organization's performance in business areas like customer satisfaction, human resource results and company's financial results. This is depicted in Figure 4.
[FIGURE 4 OMITTED]
The inter--linkages between the different criteria for the model on the above points as given in the JRDQV Model, based on American Model Malcolm Baldrige Model for Business Excellence is given in Figure 5.
[FIGURE 5 OMITTED]
The foundation on which the Tata Business Excellence Model (TBEM) is built upon is the 1) JRDQV Award guidelines (based on Malcolm Baldrige Quality Award), which emphasizes on quality practices, customer focus and process improvement and 2) the Tata Brand Equity Business Promotion (BEBP) which lays down the criteria for using the Tata Brand and 3) the code of conduct for the Tata group and ethical practices for the Tata Group.
Beyond the broad guidelines, the model has no prescriptions and is extremely adaptable. The choices of tools of implementation lie entirely with the company, as does the method of deployment. TBEM drives excellence across functions. Every group company with different business is applying this model for business excellence in their own way. This is illustrated in Fig. 6.
[FIGURE 6 OMITTED]
Massive education and training effort is in place in the company to take care of the minimum training needs for each employee and the developmental need for every employee. This is achieved through in-house Management Development Center and Technical Training Institute for the company. Every Department in the company has Training and Educational Executive and coordinates the Education and Training function with the central company facilities. The Human Resource Division has now an organizational learning wing, which caters to the employee's learning needs. When Tata Steel won the JRDQV awards in July 2000, its highest scores were in the category of "Customer and Market-Knowledge" and Public Responsibility and Citizenship" Now, Knowledge Management structures has been created for the benefit of integration of knowledge within the company. The measures based on Customer, In-process, Financial and Innovation and Learning are monitored at the top management level. It also percolates to each department and division and individual employee. Tata Steel started positioning itself as a more competitive and customer-oriented steel manufacturer. For this, a process was needed which could be used by the managers throughout the organization to improve their performance and hence the competitiveness of the organization. In order to achieve such a goal, the company incorporated Benchmarking into its corporate strategy and started Reengineering its core Business processes. The ongoing Improvement initiatives applied at Tata Steel over a period of time is given below in Figure 7.
[FIGURE 7 OMITTED]
Journey for Business Excellence at Tata Steel
Prior to globalization of Indian economy in 1991, the competition in steel industry was limited. By adopting measures leading to marginal improvements, Tara Steel was ahead of its Indian competitors. However, the company was primarily inward looking and was not affected much with the happenings beyond Indian economy with globalization, the environment changed dramatically and the company had to think 'out of the box'. It became necessary to redefine the business elements (technology, products, market-segment, human resource, input materials, plant location, etc.), business priorities, vision, strategies, management tool and techniques etc. In effect, the company redefined and reoriented itself in a turbulent environment. First adopting the Total Quality Management (TQM) philosophy as a part of Competitive Strategy was formally launched in the company in late 1989. It started with massive effort on education and training on TQM. It started with ISO 9001 and ISO 9002 certification of various manufacturing and later service units. Process Improvements through Quality Improvement Projects (QIP's), Value Engineering Projects and Statistical Process Control projects and Operations Research Projects by managerial teams was making great contributions in various departments and divisions of the company. Quality Circles and 5S as strategic tool for employee involvement and improvement were adopted in all departments of the company. It adopted the J N Tata Quality Award Model based on Malcolm Baldrige Model for its various divisions in the company in 1992. Later it adopted the JRDQV Model for Business Excellence in 1994 for competing with other group companies. Benchmarking and Business Process Reengineering (BPR) emerged as powerful Management Tools in this direction complimenting the TQM efforts at Tata Steel in terms of continuous improvement in process and practices. Concept of Balanced Score Card was integrated with the TQM strategy of the company in 1998. It was integrated with the Annual quality Improvement Plans (AQUIP's) of various departments. The TQM Strategy Development and its Implementation is shown in Fig. 8.
[FIGURE 8 OMITTED]
New thrust areas at Tata Steel:
In the quest for further increasing their benchmark and improving their processes, Tata Steel has signed an Automotive Steel Technology Cooperation with Nippon Steel of Japan and Arcelor of Europe. This will help Tata Steel get the technology of making high quality sheets for the Indian automotive market. The top management of Tata Steel has created the new vision 2007 after Tata Steel became the world's lowest cost producer of hot-rolled coils at $160 per tonne in the year 2001.
The new vision 2007
"To seize the opportunities of tomorrow and create a future that will make us an EVA +ve company. To continue to improve the quality of life of our employees and communities we serve"
This vision will uphold the spirit and values of the Tata's towards nation building. It will realize the core business for a sustainable future and venture into new business that will own a share of the company's future. Applying and adopting the strategic issues as discussed in this paper, Tata Steel, has been able to achieve the JRDQV Award in July 2000. This is the only company among the Tata Group of companies to have got this award for excellence based on the Malcolm Baldrige Award criteria for Organizational Excellence. The judges for the award found that Tata Steel exhibited the following strengths:
* System based approaches in addressing many areas of the TBEM
* Demonstrable strength in processes addressing key customer and stakeholder needs
* Fact-based evaluation and improvement processes
Tata Steel also won the CII-EXIM Award for Business Excellence in November 2000. This award is based on the European Model for Business Excellence (EFQM). Tata Steel become the third company in India to win this award after Hewlett Packard India and Maruti Udyog Ltd., (the biggest car manufacturer in India) who have a Japanese collaboration with Suzuki Motors. In 2003 Tata Steel has won the TBEM sustainable award by getting 675 marks out of 1000 points based on Malcolm Baldrige criteria for Excellence assessed by experienced Baldrige Assessors along with the Tata Group Assessors. Despite difficult times in Steel industry worldwide as well as in India, Tata Steel has been always making net profit every year since its inception. World Steel Dynamics has identified 12 companies as World Class Steel Makers. Tata Steel of India has been rated on the top above Posco of South Korea, Nucor of USA and Nippon of Japan and other such companies.
By applying the Japanese Business Excellence Model, the Deming Prize as shown by two small auto component companies in India namely Sona Steering Limited and Sundaram Clayton which have won the Deming Prize in India have become globally competitive companies. It has been seen that by applying the principles of the American Model for Business Excellence and fine-tuning to the needs of an old and culturally strong Steel Company, Tata Steel, has inculcated the philosophy of Total Quality Management and Business Excellence as part of the company's Corporate Business Strategy. Any company can gain competitive advantage and move towards Business Excellence as described in this paper. Tata Steel, Sona Koyo Steerings Limited and Sundaram Clayton Limited in India have done this because of its foresight and the vision it had among the Top Management Leadership and support from all its employees in the company. These companies have as prepared themselves to compete and be successful in a competitive globalized world.
Annual Report 2000-2001, 2001-2002 2002-2003, Tata Steel, www.tatasteel.com
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Chandler, Kurt, "Doing the Right Things Right", Quality Progress, March 1998
Desmukh Kiran, "Policy Management at Sona Koyo Steering Systems Ltd.", CII 11th Quality Summit proceedings, Nov. 2003
Dhawan, Radhika, "The House of Tata Restructuring for Excellence", Business Today, March 22--April 6, 2000
Garvin, A. David (1993), "Manufacturing Strategic Planning", California Management Review, Summer 1993
Jha, Vidhu Shekhar and Sreedhara, T.N, "Strategic Issues for Business Excellence in Competing in the 21st. Century-An Indian Context", The Quality Management Forum, Summer 2003, Vol. 29, No.3
Kume, Hitoshi (2002), "The Challenges of Indian Industry", CII 10th Quality Summit Proceedings, Nov. 2002
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Raghunathan, N. (2002), "The Journey of Continuous Improvement at Sundaram Clayton", CII 10th Quality Summit Proceedings, Nov. 2002
Vidhu Shekhar Jha, Management Development Institute, Gurgaon, INDIA
Prof. Vidhu Shekhar Jha earned his M.S. in Industrial Engineering and Packaging Engineering with specialization in Production and Management from the Rutgers State University, New Jersey, USA in 1986. Currently He is an Associate Professor and Chairman of Strategic Management at MDI Gurgaon, India. He is pursuing his Ph.D. in the area of Strategy and Business Excellence. He has about 18 years of work experience in Industry in different companies in India and USA. He is a Member of American Society for Quality (ASQ), USA.TABLE 2. 1. Leadership 2. Strategic Planning 3. Customer and Market Focus 4. Information and Analysis 5. Human Resource Management 6. Process Management and 7. Business Results
TABLE 1. KEY CUSTOMER FOR THE COMPANY Maruti Udyog Ltd. 59.4% of sales Mahindra & Mahindra Ltd. 20% of sales Toyota 5.6% of sales Hyundai 8.5% of sales Tata Motors 5% of sales
Copyright 2005 Gale, Cengage Learning. All rights reserved.
A leading consumer-packaged-goods (CPG) player was struggling to respond to challenging market dynamics, particularly in the value-based segments and at the price points where it was strongest. The near- and medium-term forecasts looked even worse, with likely contractions in sales volume and potentially even in revenues. A comprehensive transformation effort was needed.
To fund the journey, the company looked at several cost-reduction initiatives, including logistics. Previously, the company had worked with a large number of logistics providers, causing it to miss out on scale efficiencies.
To improve, it bundled all transportation spending, across the entire network (both inbound to production facilities and out-bound to its various distribution channels), and opened it to bidding through a request-for-proposal process. As a result, the company was able to save 10 percent on logistics in the first 12 months—a very fast gain for what is essentially a commodity service.
Similarly, the company addressed its marketing-agency spending. A benchmark analysis revealed that the company had been paying rates well above the market average and getting fewer hours per full-time equivalent each year than the market standard. By getting both rates and hours in line, the company managed to save more than 10 percent on its agency spending—and those savings were immediately reinvested to enable the launch of what became a highly successful brand.
Next, the company pivoted to growth mode in order to win in the medium term. The measure with the biggest impact was pricing. The company operates in a category that is highly segmented across product lines and highly localized. Products that sell well in one region often do poorly in a neighboring state. Accordingly, it sought to de-average its pricing approach across locations, brands, and pack sizes, driving a 2 percent increase in EBIT.
Similarly, it analyzed trade promotion effectiveness by gathering and compiling data on the roughly 150,000 promotions that the company had run across channels, locations, brands, and pack sizes. The result was a 2 terabyte database tracking the historical performance of all promotions.
Using that information, the company could make smarter decisions about which promotions should be scrapped, which should be tweaked, and which should merit a greater push. The result was another 2 percent increase in EBIT. Critically, this was a clear capability that the company built up internally, with the objective of continually strengthening its trade-promotion performance over time, and that has continued to pay annual dividends.
Finally, the company launched a significant initiative in targeted distribution. Before the transformation, the company’s distributors made decisions regarding product stocking in independent retail locations that were largely intuitive. To improve its distribution, the company leveraged big data to analyze historical sales performance for segments, brands, and individual SKUs within a roughly ten-mile radius of that retail location. On the basis of that analysis, the company was able to identify the five SKUs likely to sell best that were currently not in a particular store. The company put this tool on a mobile platform and is in the process of rolling it out to the distributor base. (Currently, approximately 60 percent of distributors, representing about 80 percent of sales volume, are rolling it out.) Without any changes to the product lineup, that measure has driven a 4 percent jump in gross sales.
Throughout the process, management had a strong change-management effort in place. For example, senior leaders communicated the goals of the transformation to employees through town hall meetings. Cognizant of how stressful transformations can be for employees—particularly during the early efforts to fund the journey, which often emphasize cost reductions—the company aggressively talked about how those savings were being reinvested into the business to drive growth (for example, investments into the most effective trade promotions and the brands that showed the greatest sales-growth potential).
In the aggregate, the transformation led to a much stronger EBIT performance, with increases of nearly $100 million in fiscal 2013 and far more anticipated in 2014 and 2015. The company’s premium products now make up a much bigger part of the portfolio. And the company is better positioned to compete in its market.