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Business Restructuring at L&T

August, 2009 – Business Strategy, Strategic Management Article

Larsen and Toubro (L&T), the engineering and construction giant wants to reposition itself and be a more focused value-added engineering company. L&T is a USD 8.5 billion company and has 12 operating companies and three subsidiaries. The company was mainly into engineering, procurement and construction segments. It also has a large exposure to commodity businesses such as cement and ready-mix concrete. In the year 2000, L&T began implementing its business restructuring exercise with its first two five year plans. The restructuring plans had set a target to reach a business volume of Rs 35,000 crore annually which the company achieved and exceeded by 15-20%. As per the restructuring plans, L&T had divested its cement business in favour of the Aditya Birla Group and its ready-mix concrete business in favour of Lafarge SA. The third five-year plan of the company will be executed from 2010 to 2015.

L&T’s operating divisions

  • Engineering & Construction Projects (E&C)
  • Heavy Engineering (HED)
  • Engineering Construction & Contracts (ECC)
  • Electrical & Electronics (EBG)
  • Machinery & Industrial Products (MIPD)
  • Information Technology & Engineering Services

As part of its Business restructuring exercise L&T plans to:

  • Revise the status of each of its 12 operating companies, depending on financial performance, size and strength. A threshold value of Rs 5,000 crore has been fixed for identifying size. Only a company having a certain size and strength will be called a “L&T-promoted company”.
  • Executive vice presidents running operating companies will be upgraded to senior VPs based on performance.
  • A succession plan, with chairman A M Naik retiring in September 2012.

In August 2009, L&T had announced an internal restructuring exercise wherein it planned to form a new entity within the company to cater to the growing opportunities from the railway sector. The new entity was to be formed from L&T’s existing arms which were currently involved in railway work, including the manufacturing, design and marketing arms. The company had also announced plans to enter the general insurance business.

Keywords: L&T, Business Restructuring, engineering and construction

McDonald’s International Innovations

July, 2009 – Strategic Management, Innovation Article

McDonald’s, the fast-food retailing giant has a proven formula for doing well in a recession – courting consumers globally by targeting local tastes with global menus. McDonald’s has expanded its global appeal which has resulted in good results, even though almost every type of industry is seeing widespread sales dips and tougher times.

While still strong in the United States, McDonald’s sales growth has dipped but has been saved by strong international sales. More than half of the McDonald’s total sales have come from abroad since the late ’90s. In 2008, of the total revenues of $23.5 billion, sales abroad accounted for more than 60%. McDonald’s did particularly well in Europe where even the analysts were not expecting good results. McDonald’s has managed to improve its image in France where earlier it was traditionally met with disdain and seen as a symbol of global capitalism. The company also did well in the U.K. which is seen as a tough market with strong competition and the most skeptical customer base. The company’s sales also rose in Asia/Pacific, Middle East and Africa segment.

McDonald's International Innovations

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Keywords: McDonald’s, fast-food retailing, global menus, Innovation, globalization, adapting to local tastes, International expansion strategy

Nokia’s Strategy in the Emerging Markets

Business Strategy – India – November 2008

In the emerging markets, Nokia’s business strategy is to:

  • Increase mobile usage in rural areas
  • Reduce the mobile phone ownership and operating costs
  • Bring the benefits of mobile telephony to people in emerging markets
  • Bring the power of the Internet to these markets

An end-to-end player with a product for everyone

Nokia caters to the mass-market and also the high-end market and has a product for everyone. The company’s focus would continue to be driving demand and foster brand aspiration.

In November 2008, in India, Nokia introduced handsets (prices ranging from €25 to €90 – Nokia’s lowest cost handset to date at €25) and a range of services (available from first-half of 2009). The services will be expanded to other countries in Asia and Africa later.

Nokia’s Market Positioning: Different price points and value propositions

Nokia’s service offerings

The services being introduced include:

  • Nokia Life Tools: Farmers and students can get relevant local information on seeds, crops, markets and weather through SMS. Advantages include information in two languages simultaneously, easy icon-based user interface and availability of critical information without a GPRS connection.
  • Mail on Ovi: An email service directly on the mobile phone. No PC required.
  • Education Services: Users can opt for an English word a day and learn how it is pronounced and its meaning in their native language.

Nokia to exit expensive Germany, move production to low cost countries

January 15, 2008 – Business Management Article

Finnish cellphone maker, Nokia is planning to close its mobile devices plant in Bochum, Germany by mid-2008, stating that it is not competitive enough. Nokia, the world’s top cellphone maker, may cut up to 2,300 staff. Nokia is moving production to lower-cost regions and to its existing plants, mainly in Romania. Even with additional investment, Nokia’s German plant was proving uncompetitive chiefly because labor costs were almost ten times higher in Germany as compared to Romania. All non-production operations will be closed.

Read case study on Nokia’s Business Strategy in India (pdf file)

In March, last year, Nokia had announced its plan to set up a mobile phone plant in Romania. Nokia had invested 60 million euros ($89 million) in its Romania plant. A majority of Nokia’s cellphone production is in lower-cost countries like Hungary, Bulgaria, Romania, China and India. Nokia also has manufacturing operations in high-cost country Finland. However, the Finnish manufacturing site has been re-focused onto high-end production, and research and development. So it is unlikely to be closed any time soon.

Market changes and cutthroat price competition in the production of mobile devices has led to this move. To the German mobile devices/telecommuniations manufacturing industry, Nokia closing its manufacturing plant is another setback after 3,000 employees lost their jobs at BenQ which declared bankruptcy about a year earlier. By 2010 end, Nokia Siemens Networks is also aiming to cut almost 15 percent of its global workforce. Around 2,290 of these are likely to be in Germany. Nokia also plans to sell its automotive accessory business and is in talks with India’s Sasken Technologies to sell its research and development unit.

Meanwhile, the union [IG Metall and member of the supervisory board of Nokia GmbH (Germany)] are planning action against Nokia. Deputy Economy Minister Hartmut Schauerte said understood the anger of workers at the plant. He further said that, “Germany is globally competitive, Numerous success stories of German export-oriented firms testify to this. Unfortunately, Nokia has evidently not managed to take advantage of this potential despite considerable state support. The German government is in permanent contact with the company and is ready for intensive discussions if the company is prepared to reconsider its decision.” He vowed to stop Nokia getting financial assistance from the European Union to carry out the relocation.

Mobile Devices, Nokia, Motorola, iPhone

Nokia increases market share, Motorola Struggles

January 25, 2008 – Business Management Article

Nokia with 40% market share in the fourth quarter of 2007

In what is being regarded as the much-awaited and psychologically important milestone, Nokia (NOK), the Finnish handset maker and global giant, announced that it had achieved a 40% market share in the fourth quarter of 2007. This lead in the global handset business was achieved by Nokia while also becoming more profitable. Nokia increased profit in the fourth quarter of 2007 by 44%, to $2.68 billion, on sales of $23 billion. Increasing sales in emerging markets, coupled with growth in high-end phones were two important factors responsible for the boost in profits. Nokia plans to increase its market share further in 2008.

Read case study on Nokia’s Business Strategy in India (pdf file)

In times of global economic uncertainty…

According to market tracker ABI Research, last year, Mobile phone sales grew 15.8% to 1.15 billion units. But in times of global economic uncertainty, Nokia’s growth is commendable largely aided by the fact that consumers regard phones as necessities and they keep buying new handsets. Nokia has the right products and a distribution strategy to reach the customers. Nokia’s rivals are struggling to match Nokia’s marketing and distribution networks. Nokia can leave its’ competitors further behind by leveraging the increased sales volume, greater economies of scale, and investing more in new product introduction and research and development.

Motorola’s market share dips in the fourth quarter.

Meanwhile, a day earlier, Motorola announced that its profits plunged 84%, to $100 million, as sales declined almost 19%, to $9.6 billion. Motorola’s market share shrank to 12.4%, from 13%, in the fourth quarter. Motorola, the biggest U.S. maker of mobile phones, is also struggling with its inability to deliver phones that can match the popularity of its bestselling Razr. Motorola suffered in places such as Europe and emerging markets with sales of low-end phones and also high-end, multifeature 3G smartphones. However, it did sell more than 8 million Razrs, 3 million Krzrs, and 1.5 million Razr2s. Even established competitors like Samsung Electronics and Sony Ericsson are are yet to match Nokia in emerging markets, where basic phones sell for less than $40. Nokia sold 133.5 million phones in the quarter, more than its three closest rivals combined.

Apple’s iPhone sales are impressive and Nokia is paying attention

Since its launch in March 2007, Nokia has sold more than 5.5 million units of its multimedia handset N95. This is more than the iPhone with sales of about 4 million units. But the iPhone is not available in many parts of world and costs more than an N95. Nokia is aware of iPhone’s popularity and has plans to launch a handset with the same touch-screen technology that made iPhone popular.

Mobile Devices, Nokia, Motorola, iPhone

Nokia – A struggling market leader

Business Strategy and Management – January 24, 2009"In recent weeks, the macroeconomic environment has deteriorated rapidly, with even weaker consumer confidence, unprecedented currency volatility and credit tightness continuing to impact the mobile communications industry."
– Nokia’s President and chief executive Olli-Pekka Kallasvuo.

Nokia is the world’s largest handset manufacturer and the maker of four out of every 10 mobiles sold worldwide. In the past few months (fourth quarter 2008), the mobile phone market slowed dramatically and Nokia’s competitors Motorola and Sony Ericsson announced quarterly losses and even the sales of Apple’s iPhone slowed down. The slowing down could hit other handset manufacturers more severely and force them away from the market. However, this isn’t reason enough for Nokia to cheer as its sales also dipped particularly in large markets like China where sales came down by almost 35% from the last quarter. Some analysts even reported that the company’s operating profit margin on handsets was at its lowest point in 10 years.

Why Nokia’s sales and profits dipped?

  • Slowdowns in both developed and developing markets.
  • Nokia’s price strategy: Nokia’s refusal to be drawn into a price war in developing countries. Nokia is clearly struggling to maintain its dominance in the face of aggressive price competition from its rivals.
  • Cash-strapped consumers: In China, which is regarded as the company’s largest market, consumers are now increasingly being price conscious (due to the faltering economy, slowing exports and slumping real-estate market) and are preferring non-branded inexpensive phones.
  • Competition: The total market for high-end devices increased. But, Nokia’s high-end handsets did not do well as compared to Apple’s iPhone and Research In Motion’s BlackBerry.
  • Increasing sales of cheap lower-margin devices: In the fourth quarter of 2008, margins dipped because a large proportion of sales was of cheap lower-margin devices.

Can Nokia turnaround? Nokia’s Strength and Opportunities

Analysts feel that Nokia is in the best position to make a turnaround. With a huge market share it can manufacture at a lower cost per unit. It’s wide range of products can give it an edge over any competitor and it has one of the best distribution networks in the world. Nokia can certainly capture back share in the vital high-end devices market with new products such as it’s 5800 Xpress Music (a lower priced iPhone like touchscreen phone) and making more consumer oriented phones.

Oprah Winfrey Television Network with Discovery Communications

January 15, 2008 – Business Management Article

Oprah Winfrey, the world famous Talk show host and top-earning US celebrity will launch a new television network channel (to debut in 2009 in more than 70 million homes) with Discovery Communications, which owns the Discovery Network and Animal Planet, among others. In a joint statement release, the company said that the new network will be a “natural extension” of her show and that The Oprah Winfrey Network (OWN) will be a multi-platform media venture “designed to entertain, inform and inspire people to live their best lives.”

Oprah said that she had written in her diary that she would set up her own television network one day. Oprah also said that the new network is the evolution of the work she has been doing on television all these years and that it is a natural extension of her show. Oprah Winfrey will have full editorial control over the joint venture and will be responsible for OWN’s programming, branding and creative vision.

In a recent US poll on most admired women, Oprah Winfrey was ranked second to US presidential candidate Hillary Clinton. For five consecutive years, Oprah Winfrey has led the Harris Poll’s favorite television stars list for five consecutive years. However, in a latest poll, Ellen DeGeneres, comedian and daytime TV host replaced Oprah Winfrey as the U.S.’s favorite television personality. Ellen was eighth last year.

Oprah Winfrey, Ellen Degeneres, Discovery Communications, Talk show host, The Oprah Winfrey Network (OWN)

P&G – Building a future supply chain in emerging markets

Supply Chain Management Strategy – January 28, 2009

P&G – Being where future customers are

In December 2008, Procter & Gamble Co. (P&G), announced an aggressive expansion plan to build 19 production plants to cater to future consumers in developing countries (where the GDP has grown quickly and which have vast populations). By 2010, P&G wants to reach an additional 1 billion consumers. Presently, it caters to 3.5 billion people out of 6.5 billion globally.

Being cost-effective in hard-to-reach and hard-to-serve environments

P&G already has its presence in around 80 countries where it has 145 facilities. As per the new plan 18 new facilities will be built in developing countries like Malaysia, Romania, India and Pakistan. Competitors Unilever and Colgate-Palmolive already have a presence in emerging markets. Therefore, expansion is one thing, but doing so cost-effectively becomes paramount for P&G. Economic crisis and corruption pose additional pressures.

P&G targeting emerging markets

Exhibit: P&G’s target markets (future consumers) in developing countriesP&G's, Unilever's and Colgate-Palmolive's % of annual sales in emerging markets

P&G’s strategy to be cost-effective

Extending competitive advantage

  • Enter markets with products with less competition
  • Establish state-of-the-art facilities (In most cases by providing P&G technology to low-cost machine builders instead of buying a complete production unit)
  • Produce more affordable goods for low-income consumers.
  • Leave competition far behind

Too many Starbucks stores for U.S. coffee Drinkers?

July 04, 2008 – Business Strategy Article

A struggling Starbucks

Starbucks, the leading coffee retailer has been struggling amidst a faltering US economy, its own rapid growth and increased competition from cheaper rivals. In the first three months of 2008 its net income fell to $108.7m (£54.7m) down 28% from the same period of 2007. Its stock price has been falling steadily for the past two years (see exhibit 1). The stock has plunged more than 46% over the past year due to concerns about the weak economy and increased competition.

Starbucks stock price chart
Exhibit 1: Stock performance graph of Starbucks for past five years (NASDAQ: SBUX)

Slowing down US Expansion plans

In July 2008, it announced closing of 600 of its stores (company-operated) across various locations in the U.S. Earlier, Starbucks had plans to shut only 100 of its stores, while 500 were on its internal watch list. Not great news for a company which revolutionized the coffee industry and transformed an everyday ordinary product into extraordinary business success. The reasons: Starbucks has struggled to maintain its differentiation in the face of growing competition. The company says its research shows it is not losing customers to competitors such as the privately-held Dunkin’ Doughnuts, but that consumers are simply not spending as much in Starbucks stores as they used to. The company had 125 stores when it went public in 1992, now has over 15,000 stores in 44 countries. The stores which are being closed are not profitable and are not expected to be profitable in future.

Starbucks forced to change strategy

Starbucks has always followed a strategy to blanket a region with its new stores. This means that by opening multiple stores in the same street or close by locations, it could reduce the customers’ rush in one store and also increase its revenues through new stores. This helped the company to reduce its distribution costs and the waiting time for customers in its stores, thereby increasing the number of customers. When a new store opens nearby, between 25 to 30% of revenue is cannibalized. Shutting down the stores would help return lost revenues.

Out of the 600 stores being closed, 70% had opened after start of 2006 which implies that Starbucks is closing down 19% of U.S. company-operated stores that opened in the last two years. Around 12,000 of its workforce will be affected by the closings.

Will Starbucks regain its past success?

Starbucks wants to turnaround its business by providing customers with the distinctive ‘Starbucks Experience’ and building on Starbucks legacy of innovation. Howard Schultz returned in early January 2008 as Chairman and Chief Executive and laid out several new “customer-focused” initiatives and a restructuring plan to restore an authentic coffeehouse experience back to its’ stores. Read
management case study (PDF file) on Starbucks’ Turnaround Strategy and restructuring plans. So will Starbucks be able to recreate its magic? Perhaps a recent news item that coffee can do more than just wake one up in the mornings and prevent auto-immune diseases such as lupus and rheumatoid arthritis (perhaps also cure multiple sclerosis) will help bring in more customers to Starbucks.

Starbucks, US Expansion, Coffee Retailing, Howard Schultz

Starbucks – Storm in an instant coffee cup

Business Turnaround Strategy – February 15, 2009

Will a ‘transformational product’ help Starbucks turnaround?

Starbucks will begin selling a new product, called Via. Via is an instant coffee product wherein coffee loving consumers can brew the coffee by emptying the granules into hot water (which will replicate the taste of Starbucks coffee).

Starbucks CEO Howard Schultz had already cited this announcement as a game changer which would deliver innovation, competition, and value in
Starbucks’ turnaround strategy. Starbucks’ top management is confident that Via is a ‘transformational product’ in the $17 billion instant coffee market and the new product had significant potential for Starbucks.

Starbucks’ falling profits and consistent Innovation

In recent years, Starbucks’ profits had started to decline. This was due to over-expansion and ever increasing competition from competitors like McDonald’s and Dunkin Donuts. With consumers spending less Starbucks had to close its stores.

The company’s efforts to attract customers with new products such as breakfast foods, Vivanno smoothies, Pike Place Roast have not taken off in a manner that it had expected. (Also read: Starbucks for a dollar, Storm in a coffee cup?)
This recent attempt with instant coffee may take the same path with soluble coffee being deemed as poor quality. Starbucks however claims that Via tastes just as good as brewed coffee. Analysts feel that the attempt will generate only short term revenues for the company.

The new product will be put to test soon. If it also fails then Schultz will have to rethink re-franchising, or selling existing stores to employees which till now he and other Starbucks management feel will result in brand dilution and losing control over the brand.

Case Studies in Coffee Retailing (PDF files)

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