Solstice

We had the 5th Solstice this weekend. Solstice is the annual ISB Alumni Reunion. It was a good chance for the current students to meet with alums given there is no overlap of two batches this being a one year course. It was also a good chance for alums to meet their own batch mates. This weekend was full of masti, partying and networking - last and most important alum gyan sessions.

On the party front, the new events lounge was inaugurated. We also had a concert by Indian Ocean. To be frank, I had not heard of this band earlier, but I liked the music yesterday. I think I am going to follow this band in the future. Some of the songs were really cool.

Met with a few alums and got a lot of gyan. I think it will help. It came right in time for placements. I could get the resume reviewed, get tips on prep and how to approach companies. Overall, a fun filled experience this weekend. However, now I need to catch up with my schedule and prepare for the exams coming up in 6 days

Leaving you with a picture of Indian Ocean.

Interesting Link on Global Consumption and Wastage

Story of Stuff

Marketing Notes - Should you reduce prices to counter competition?

Let's take a scenario where you join a new firm and are asked to manage a brand. The brand is not doing well right now and you need to prove that you made an impact. You obviously have a limited marketing budget. After a lot of introspection you come out with two choices:

1. Spend budget on advertising

2. Spend budget on price promotion.

What would you choose?

You evaluate the two options and here is the analysis:

1. Price promotion because it will introduce trial.

2. Price promotion because it will attract switchers.

3. Price promotion because it is offensive strategy while advertising is a defensive strategy.

4. Price promotion because big impact expected immediately while advertising will be a long term investment.

5. Advertising because it will influence perception.

6. Advertising because it will create loyalists.

7. Advertising because it increases perception of quality.

8. Advertising because it will build brand image.

Now you also know that in the short run even you don't advertise for a month your sales might not be affected much. e.g. say if coca-cola stopped advertising today, would you stop drinking coke?

I am sure you will go the price promotion route. This is what most managers will do. It seems sensible. However, there is a pitfall in this strategy. It leads you to a vicious cycle.

As you drop prices, you are at par with the other low price products. There are more low price products that high price products. So, the consideration set for the consumers increases. Given a larger consideration set, the consumer becomes more sensitive to price as there is very little differentiation. The product becomes a commodity and you end up with lower margins. Lower margins mean, less cash available for advertising or adding product differentiation by virtue of R&D. So, how do you sell more product - Reduce Prices. And you are back to where you started with. The path of no return!

Here comes another bubble

A hilarious video I found...

Marketing Notes - Slow Death of the Brand

Disclaimer: The end of the story is very grim. This real story can cause you to get a feeling of déjà vu.

This story starts in a happy world. Our Brand, called "Hit", is a high quality, high price brand in a growing market with over 30% market share. There is another competitor, with slightly inferior product and about the same market share, and the rest 40% divided between some 100 small competitors, with inferior products. Our brand was enjoying good premiums and everyone in the firm was happy.

Good time do not last forever, and enter a new competitor. The person feels there is a vacuum in the market and there is a place for a Low Price Brand. He positions his product in a low but acceptable quality and low price. This brand gains 1% market share. Hit is still enjoying life and doesn't care about a newbie. Time passed and the new brand keeps gaining the market share continuously. People start seeing the value for a low price brand the brand reaches a 10% market share. Now Mr.Hit take notice and after hours of meeting come out with a killer strategy. They can not reduce price because the brand premium will go away. So, to compete with the new product, they launch a new product called Mr. Fighter, a flanker brand. This is a neat strategy. The brand image or Mr. Hit will not be hit and the firm will be able to capture additional market share from the competitor.

Mr. Fighter does a good job and takes share from other 100 competitors and some from Mr. Hit and some from the new competitor. Now the competitor has to make the next move. Competitor already had lowest prices, wafer thin margins, so he obviously can not cut prices further. So, it decides to go to the retailers and gives them the proposition to go private label. Retailers will be happy to do that. They can squeeze the manufacturer further. Now, the ball is back to Mr.Hit's court.

Mr. Hit, now thinks that they can either let competition take the market share, because the retailer owns the shelf space, or go private label themselves. Now, Mr.Hit is both manufacturing private label and also providing trade incentives to the retailer for shelf space for the flagship brand. The margins goes down. So, Mr.Hit outsources the manufacturing and designing and is left with only the brand name.

Retailers are happy by squeezing both the hit brand and competitor. The private label products are gaining popularity because people are slowly realizing that its the same product after all and at a lower cost. In the whole value chain, retailer has the highest margins. Now, our dear Mr.Hit has also lost the design capability. The ODMs (Original Design Manufacturers) on the other hand give a proposal to retailers to manufacture multiple brands for them. They don't have their own brand to begin with and their main capability is manufacturing and operations.

So, now the retailer has high margins and also a good, better, best strategy to have various brands at all levels, i.e. entry level low quality - low price product, middle level medium quality - medium price product and also a premium brand positioned next to Mr.Hit's brand commanding high price for the high quality. With brand being the only thing left and no margins to innovate, the demise of Mr.Hit is evident. It's only a matter of how long can it take the losses, while the retailer makes merry!

That's the end of Mr.Hit! Now, the question arises that while this story is so distressing yet so true, what could have Mr.Hit done differently to stop this eminent death? While there are no straight answers to this question, one thing is clear - Mr.Hit can be saved only by differentiation and by being ahead of competition ALWAYS! It has to constantly innovate if it has to remain alive. It has to create a pull from the customers forcing the retailers to provide shelf space to this product.

IT Outsourcing

This is the continuation of my previous post about IT. To get the IT work done, a company has following choices:

1. Do it internally, or

2. Outsource it.

If the company plans to get done everything internally, then it can either:

1. Do it in a captive unit at its main location

2. Open a new captive centre in a low cost country like India.

If the company plans to get done everything externally, then it can either:

1. Go for near-sourcing (e.g. Capgemini for a company in Europe)

2. Go for far-sourcing (e.g. Infosys for a company in US)

There are advantages and disadvantages of all formats.

Indian companies operate under outsource and off-shore space. They provide the dual benefit of low cost and quality work. You would then think why would not every company go for outsourcing and offshoring? Well, it is because there are a few disadvantages too. e.g. there is a lack of control in case of outsourcing to a third party vendor. A company has no visibility into project schedules, quality of people, safety of sensitive data and risk of key employees leaving and company having no control on retaining them. The business secrets may also get lost as vendor employees move from one client to another.

To connect this thought with the one presented in the previous post, companies could spend the staying in the race or to some extent winning the race budgets in outsourcing and offshoring. The third party companies have already developed expertise in such work and there is not much strategy involved, so the risk is lesser. The innovation part of budget can be spent in-house.

Information Technology

I have been reading a lot of articles on IT off-late. Here is a summary of those articles. None of the stuff here in my research. It is all the knowledge that I borrowed by reading different articles.

In any company IT has three distinct uses:

1. Reduce operating costs by automation, reducing manpower requirement or increasing efficiency (called as "Lets you stay in the race" by some specialists). You have to do it because others have done it, and if you don't you will lose.

2. Give a strategic advantage over competition by doing something first. Also called as "Lets you win the race" by specialists. This is similar to first point, except you always pre-empt the competition and get advantage over them by capturing market share or increasing margins by improving efficiency.

3. The third and most important use of IT is to come out with innovative products, reduce time to market for those products and create such an activity system such that the competition can not find a unique factor for your success.

Most companies today spend in point 1, while some in point 2 and rare companies in point 3. The classic examples of companies spending in point 3 are Dell, WalMart etc.

An important point to note here is that companies can not choose to spend just in 1, 2 or 3. To be successful, they need to spend in all 3 categories. The experts say that companies should create a portfolio of IT spending and should manage it just like a financial portfolio. In this case, the companies should distribute their budget across the three categories, just as you would in stocks and bonds in a financial portfolio. You need some budget to maintain your usual systems like email, messaging etc, some budget to pre-empt competition and stay ahead in a game and some into innovation.

While the portfolio model sounds very simple and logical, the problem comes in the implementation part. Imagine a large conglomerate with different companies. The obvious way to maximize operational efficiency will be to have a centralized IT department, like a shared service. The problem with this model is that distance it creates between the business units and the IT staff. It also tries to commoditize IT. The workaround is to have innovation staff work closely with the business units.

On the innovation front, there are various ways in which CIOs can get new innovative ideas.

1) Work closely with venture capital firms and invest in companies where you see potential for use of technology in future.

2) Work closely with researchers, academia to get to know about the latest and cutting edge technology.

3) Form a innovation cell within the company and encourage Research and Development.

4) Pilot new technology is a small business unit and then extend it to the entire company if there is huge potential.