This and the following set of articles in the series aim to consider different risks that are faced by businesses at several levels of operation — viz. — the strategic, middle-management and operational level. We will cover in some detail diverse risks ranging from ‘difficult-to-control,’ ‘high-level’, ‘environmental’ and also internally controllable risks also in this series.
Each article will begin with a brief write-up and provide a case study covering each type of risk.
Overview of Strategic and Business Environment Risks : Strategy formulation requires understanding and dealing with the external-macro, as well as internal-micro environment, which is depicted in Figs. 1 and 2 below.
Macro environment of business :
A look at the business environment depicted above throws up a number of such examples of organisations formulating strategy and dealing sometimes successfully and at other times unsuccessfully with macro and micro environment changes and risk.
An example of this strategy is that of commercial banks. In India, commercial banks moved to having a greater emphasis on retail banking using Internet technology on the one hand and got into investment banking and portfolio management space for high net worth individuals on the other.
In the USA we saw the strategy of pushing complex financial products based on mortgages that ultimately turned out to be worth less/suspect floundering, and causing economic devastation not only in the USA but also in the entire economic world.
Strategy formulation and tackling changes in business environment need vision, foresight and an open mind. An organisation especially its top management needs to be focussed, alert, responsive and open to adopting changes to be successful. Many big organisations have been overcome and fallen by the wayside having been humbled by modern-day ‘Davids’.
The case study for this month’s study is a company selling ice-creams and milk products that turned itself around and is now on the threshold of taking off.
Koolkat Icecreams Ltd. has been in the business of dairy products especially ice-creams for the last 40 years with a factory in the interior of Karnataka. It has been pulling along and has maintained some name in the market despite having a good product.
Over the years it has seen itself being overtaken by the better known, well advertised brands and seen itself being edged off the shelf in most big cities. Even in its hometown and towns it does not have a significant presence.
What has helped Koolkat survive are the canteen sales through rate contract with many Government offices and departments and also contracts for supplying ice-creams in milk booths and kiosks operated by the Karnataka state dairy, that does not itself make ice-cream.
Hence, though having a good product, it has lost market share and not even attempted to seriously compete in the restaurant or even the low-end street vendor segment. In fact if one were to visit even the restaurants in small towns close to the factory, the company’s products are conspicuous by their absence. However, the factory operates at about 70% to 80% capacity and is doing reasonably well.
The young amongst the owners — that is — the top management have realised the changing market conditions and have decided to formulate strategy to deal with the various issues and risks.
Understanding the Environment :
Prior to the meeting that was called to formulate the strategy an analysis of the environment was made.
Political : Likely change expected in the ruling political party at the state level. Exit polls have indicated a 5% swing in favour of the opposition. New administration may be unfriendly leading to loss of assured government business.
Social/Cultural: The prevailing market conditions favour high-end and high-visibility products. The increasing middle class seems to be moving to international ‘and or high-end brands in ice-creams and dairy products. A recent market survey by a leading publication has shown a 20% shift in consumer preferences among the middle class towards high-end products.
Economic: The economic conditions with low level of liquidity, increasing borrowing costs and stringent market conditions indicate difficult times ahead.
Technological : Better infrastructure, transportation, communication and food preservation/manufacturing technology have lowered entry barriers. The distinction between international brands and smalltime manufactures in terms of both cost and quality is getting blurred.
The Company is currently dependent for its marketing effort on its dealer network and distributors/ agents who are being given incentives as per company scheme based on their performance. The entire marketing expenses and advertisements are locally incurred and fragmented. There is no centralised advertisement and marketing activity. The benefits from the schemes is mostly retained and used up by distributors and it does not contribute to building the brand. The complex duty structure and differential rates for products from outside the state are proving to be a problem, as the entire output supplied throughout India comes from the factory in Karnataka. The cost and quality of packing material is also posing issues due to rising costs. Finally, street vendors and local small-scale manufacturers are also giving the company a tough time due to low cost and better reach.
These aspects have strategic and environmental risks that need to be addressed.
These factors independently and in conjunction with other factors like internal conflicts may result in business risk. As a ‘risk manager/adviser’ you are expected to identify and analyse these risks and advise the company on strategy formulation, and come up with an implementable road map.
The Solution :
The suggested strategy is outlined and implemented as below:
Strategic Options :
Marketing Thrust and Image Makeover:
The current marketing is entirely relying on dealer network and sub-distributors with very little central effort and advertisement support. Sales effort is scheme based with distributors enjoying benefit of schemes against offtake of products.
The proposed strategy is :
(1) to increase spend on marketing and advertising and launch the existing product itself in a new ‘avatar’ and consider manufacturing at multiple locations.
(2) to rationalise incentive schemes, especially those schemes that are bleeding the company.
(3) to consider phasing out schemes which are not yielding results.
(4) to utilise money saved to increase high-end visibility – that is – increase initially local advertising rather than newspaper or magazine advertising.
(5) use local language TV channels which are cheaper than national TV channels.
Production through licences, franchises and tieup units:
Considering the nature of the product, transportation/logistic requirements and taxation structure, it is beneficial for foodstuffs to be manufactured and sold locally. The company should formulate a plan to increase production through tie-ups to at least 10 locations across different states initially and expand to 14 by year end and to 24 by end of year 2.
Ancillary activities:
Consider – investigate setting up facility for making plastic cups, spoons to reduce costs and ensure supply of quality packing material. This would also control counterfeiting. In the alternative seek a dedicated small-scale manufacturer – that is – a sole supplier – who would produce under company’s supervision to ensure quality.
Low-end Penetration:
To consider employing strategy of de-risking its operations by lowering costs of production, cutting frills and targeting low-end consumers by introducing another brand through street vendors. The strategy advised and adopted was:
* change in packaging of the established brand – that is – for the existing product.
* introduce a low-end product under a new brand name with different packaging.
Note:
