Cost Academy

Strategic Management- 1

Case studies
1. DD is the Indias premier public service broadcaster with more than 1,000 transmitters covering 90% of the countrys population across an estimated 70 million homes It has more than !0,000 employees managing its metro and regional channels "ecent years have seen growing competition from many private channels numbering more than #$, and the cable and satellite operators %& ' () *he & ' ( networ+ reaches nearly ,0 million homes and is growing at a very fast rate DDs business model is based on selling half-hour slots of commercial time to the programme producers and charging them a minimum guarantee .or instance, the present tariff for the first !0 episodes of a programme is "s ,0 la+hs plus the cost of production of the programme In e/change the producers get 700 seconds of commercial time that he can sell to advertisers and can generate revenue 1rea+-even point for producers, at the present rates, thus is "s 7$,000 for a 10 second advertising spot 1eyond !0 episodes, the minimum guarantee is "s #$ la+hs for which the producer has to charge "s 1,1$,000 for a 10 second spot in order to brea+-even It is at this point the advertisers face a problem 2 the competitive rates for a 10 second spot is "s $0,000 3roducers are possessive about buying commercial time on DD 4s a result the DDs pro5ected growth of revenue is only #-10% as against $0-#0% for the private sector channels (oftware suppliers, advertisers and audiences are deserting DD owing to its unrealistic pricing policy DD has three options before it .irst, it should privatise, second, it should remain purely public service broadcaster and third, a middle path *he challenge seems to be to e/ploit DDs immense potential and emerge as a formidable player in the mass media %i) 6hat is the best option, in your view, for DD7 %ii) 4nalyse the (68* factors the DD has %iii) 6hy to you thin+ that the proposed alternative is the best7 %!0 9ar+s) Answer (i) .or several years Doordarshan was the only broadcaster of television programmes in India 4fter the opening of the sector to the private entrepreneur %cable and satellite channels), the mar+et has witnessed ma5or changes *he number of channels have increased and also the :uality of programmes, bac+ed by technology, has improved In terms of :uality of programmers, opportunity to advertise, outreach activities, the broadcasting has become a popular business 1roadcasters too have realised the great business potential in the mar+et 1ut for this, policies need to be rationalised and be opened to the scope of innovativeness not only in term of :uality of programmes *his would not come by simply going to more areas or by allowing bureaucratic set up to continue in the organisation (trategically the DD needs to undergo a policy overhaul DD, out of three options, namely privatisation, public service broadcaster or a middle path, can choose the third one, i e a combination of both *he whole privatisation is not possible under the diversified political scenario ;or it would be desirable to hand over the broadcasting emotively in the private hand as it proves to be a great means of communication of many socially oriented public programmers *he government could also thin+ in term of creating a corporation %as it did by creating 3rasar 1harti) and provide reasonable autonomy to DD (o far as its advertisement tariff is concerned that can be made fairly competitive <owever, at the same time cost of advertising is to be compared with the reach en5oyed by the doordarshan *he number of viewers may be far more to 5ustify higher tariffs (ii) *he (68* analyses involves study of strengths, wea+nesses, opportunities and threats of an organisation (68* factors that are evidently available to the Doordarshan are as follows=

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Strategic Management- 2

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S Strength 9ore than 1000 transmitters > &overing 90% of population across 70 million homes against only ,0 million home by & ' ( >9ore than !0,000 employees > W Weakness "igid pricing strategy ?ow credibility with certain sections of society @ > uality of programs is not as good as compared to & ' ( networ+ > O Opportunities Infrastructure can be leased out to cable and satellite channel >Digital terrestrial transmission > "egional focused channels >4llotment of time, slots to other broadcasters > T Threats Desertion of advertisers and producers may result in loss of revenues Due to :uality of program the reach of & ' ( networ+ is continuously e/panding 4s the & ' ( networ+ need the trained staff, some employees of DD may switchover and ta+e new 5obs >1est of the mar+et-technology is being used by the private channels (iii) It is suggested that the DD should adopt a middle path It should have a mi/ of both the options It should economise on its operational aspects and ensure more productivity in term of revenue generation and optimisation of use of its infrastructure 6herever, the capacities are underutilised, these may be leased out to the private operations 4t the same time :uality and viewership of programmes should be improved 1ureaucracy may reduce new strategic initiatives or ma+e the organisation less transparent &omplete privatisation can fetch a good sum and may solve many of the managerial and operational problems <owever, complete public monopoly is not advisable because that denies the government to fully e/ploit the avenue for social and public use *he government will also lose out as it will not be able to ta+e advantage of rising potential of the mar+et Read the following ase and answer the !uestions at the end" Dr (u+umar inherited his fathers Deys ?ab in Delhi in 199$ *ill !00!, he owned A labs in the ;ational &apital "egion %;&") <is ambition was to turn it into a ;ational chain *he number increased to 7 in !00, across the country, including the ac:uisition of 3latinum lab in 9umbai *he number is li+ely to go to $0 within !-, years from !1 at present Infusion of "s !0 crores for a !#% sta+e by 3harma &apital has its growth strategy *he lab with a revenue of "s 7$ crores is among top three 3athological labs in India with 4tlantic %"s 77 crores) and 3acific %"s $$ crores) Bet its mar+et share is only !% of "s ,,$00 crores mar+et *he top , firms command only #% as against A0-A$% by their counterparts in the C(4 *here are about !0,000 to 1,00,000 stand alone labs engaged in routine pathological business in India, with no system of mandatory licensing and registration *hat is why Dr (u+umar has not gone for ac:uisition or 5oint ventures <e does not find many e/isting laboratories meeting :uality standards <is si/ labs have been accredited nationally whereon many large hospitals have not thought of accreditationD *he &ollege of 4merican pathologists accreditation of Deys lab would help it to reach clients outside India In Deys ?ab, the bio-chemistry and blood testing e:uipments are sanitised every day *he bar coding and automated registration of patients do not allow any identity mi/-ups Even routine tests are conducted with highly sophisticated systems *echnical e/pertise enables them to carry out 1#$0 variety of tests (ame day reports are available for samples reaching by , p m and by 7 a m ne/t day for samples from $00 collection centres located across the country *heir

2.

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Strategic Management- 3

technicians wor+ round the cloc+, unli+e competitors <ome services for collection and reporting is also available *here is a huge unutilised capacity ;ow it is trying to top other segments !0% of its total business comes through its main laboratory which acts as a reference lab for many leading hospitals ;ew mega labs are being built to Encash preclinical and multi-centre clinical trials within India and provide postgraduate training to the pathologists #. %i) 6hat do you understand by the term Fision7 6hat is the difference between GFision and G9ission7 6hat vision Dr (u+umar had at the time of inheritance of Deys ?ab7 <as it been achieved7 .or growth what business strategy has been adopted by Dr (u+umar7

%ii)

%iii) 6hat is the mar+eting strategy of Dr (u+umar to overta+e its competitors7 %iv) In your opinion what could be the biggest wea+ness in Dr (u+umars business strategy7 Answer (i) 4 (trategic vision is a road map of a companys future 2 providing specifics about technology and customer focus, the geographic and product mar+ets to be pursued, the capabilities it plans to develop, and the +ind of company that management is trying to create 4 strategic vision thus points an organisation in a particular direction, charts a strategic path for it to follow in preparing for the future, and moulds organiHational identity 4 companys 9ission statement is typically focused on its present business scope 2 Iwho we are and what we doJ 9ission statements broadly describe an organisations present capabilities, customer focus, activities, and business ma+eup 9ission is also an e/pression of the vision of the corporation *o ma+e the vision come alive and become relevant, it needs to be spelt out It is through the mission that the firm spells out its vision Dr (u+umars vision at the initial stage was to turn his one pathological laboratory firm into a national chain of pathological laboratories <e is in the process of achieving the vision as a number of ?abs have been opened and others are in pipeline <owever, at the same time the mar+et share is low when compared with the e/ternal benchmar+ from C( mar+et (ii) *o a large e/tent Dr Deys ?ab has opted the business strategy of internal growth rather than going in for ac:uisitions or 5oint ventures *he reason for such a strategy is that Dr (u+umar does not find many e/isting laboratories meeting the :uality standards *o fund its growth and raise funds it has also given a !#% sta+e to 3harma &apital Dr (u+umars mar+eting strategy is superior to its competitors 8ver a period of time it is able to evolve itself as reference lab for many leading hospitals *his is a testimony of the level of confidence it en5oys among the medical professionals It provides a high level of customer services because of the following=

(iii)

>$rodu t %i&" It possesses technical e/pertise to conduct 1#$0 variety of tests >'ualit(" *he laboratories use modern methods to conduct tests Even routine tests are conducted with highly sophisticated procedures *echnology such as bar coding and automated registration of patients is also used *hus there are no mista+es in the identity of samples *here is also daily sanitisation and validation of lab e:uipments >Speed" ?aboratories are wor+ing round-the-cloc+ .urther, using modern systems the company is able to deliver test results faster

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Strategic Management- 4

>Con)enien e" *here are $00 collection centres for the laboratory, thereby the reach is more 4dditionally, system of collection of samples from home also provide convenience to the patients and others

(i))

4 wea+ness is an inherent limitation or constraint of the organisation which creates strategic disadvantage to it In the case it is given that Dr (u+umar has not gone for mergers and ac:uisition as he does not find many prospective laboratories meeting the :uality standards *hus its biggest wea+ness is its inability to capitalise the opportunities through mergers and ac:uisitions 4c:uisitions and partnerships can help in leveraging the e/isting goodwill 9any of these labs must be en5oying a lot of goodwill in their region In fact, a business in the medical field such as a pathological laboratory, trust and faith are important 8n account of its siHe and available resources Deys ?ab could have easily ac:uired some of these labs and built upon their names 6ith resources it should be feasible to moderniHe them to ma+e them compatible with the business ideology and :uality systems of the Deys ?ab <owever, it appears that the company lac+ed capability to modernise an e/isting laboratory

*.

11 ?td , is a business organiHed as three divisions and head office *he divisions are based on mar+et groupings, which are retail, wholesale and Kovernment *he divisions do not trade with each other *he main method of control of the divisions has been the re:uirement to earn a return on investment %"8I) of 1$% p a *he definition of return and capital employed is provided by head office, at the criterion "8I rate of 1$% *he recent e/perience of 11 ?td , is that the group as a whole has been able to earn the 1$% but there have been wide variations between the results obtained by different division *his infringes another group policy that forbids cross-subsidiHation, i e each and every division must earn the criterion "8I 11 ?td Is now considering divestment strategies and this could include the closure of one or more of its divisions *he head office is aware that the 1oston 3roduct 9ar+et 3ortfolio 9atri/ %13939) is widely used within the divisions in the formulation and review of mar+eting strategies 4s it is so widely +nown within the group and is generally regarded by the divisions as being useful, the head office is considering employing this approach to assist in the divestment decision Bou are re:uired to= %i) Evaluate the use by 11 ?td 8f the concept of "8I and its policy that forbids crosssubsidiHation %ii) %iii) Describe the e/tent to which the 13939 could be applied by 11 ?td In its divestment decision Evaluate the appropriateness of the use of the 13939 for this purpose "ecommend, and 5ustify, two other models that could be used in ma+ing a divestment decision Demonstrate how 11 ?td &ould utiliHe these models to ma+e this decision

Answer (i) +)aluation of the use of the on ept of RO, -( .. /td. "8I is an accounting measure that estimates the level of profits as a proportion of the capital employed over the year *he concept of "8I is widely used by different companies to measures its performance *herefore 11 ?td Is not unusual in using this concept of "8I as a means of performance monitoring of its different divisions

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Strategic Management- 5

3erhaps on division of 11 ?td , may have failed to meet its "8I because it might have recently purchased new fi/ed assets 3erhaps another division might be using old assets that have been written off .urther one division might be ris+ier than another division RO, and ross su-sidi0ation" *here could be a lot of problems with cross subsidy *his issue of cross subsidies is more comple/ than it first appears 6e do not +now how the investment funds have been allocated if the head office allocates them, and the divisions cannot ta+e their own investment decisions, there is a cross subsidiHation by the bac+ door as it were .urther one divisions hard earned cash might be used to buy another divisions assets 4rguably, cross-subsidiHation is the advantage of a business li+e 11 ?td .urther, if the businesses have different business cycle, they are able to bail each other out when appropriate, whilst ensuring that the shareholders receive a fairly constant return (ii) Appli ation of .$1$1 -( .. /td. ,n its di)est%ent de ision" 13939 aims to lin+ the overall growth of the mar+et for a product, the growth in the mar+et share of a product, with the products cash-generative activities 13939 classifies a companys products in terms of potential cash generation and cash e/penditure re:uirements into cash cows, dogs, stars and :uestion mar+s (tars are products with a high share of a high growth mar+et In short term, term re:uire capital e/penditure, in e/cess of the cash they generate, in order to maintain their mar+et position, but promise high returns in the future In due course, however, stars will become cash cows, which are characteriHed by a high mar+et share, but low sales growth &ash cows need very little capital e/penditure and generate high level of cash income *he important strategic feature of cash cows is that they are already generating high cash returns that can be used to finance the stars @uestion mar+s are products in a high-growth mar+et, but where they have a low mar+et share 4 decision needs to be ta+en about whether the products 5ustify considerable capital e/penditure in the hope of increasing their mar+et share, or whether they should be allowed dying :uietly Dogs products with a low share of a low growth mar+et Dogs should be allowed to die, or should be +illed off

Appropriateness of use of .$1$1" 1393 is conventionally assumed to apply to products and it is perhaps unusual to see it applied to businesses and divisions *he problem is that we do not +now enough about the firms product range to suggest how the matri/ could be applied "ather than assuming that a whole division is a dog and divesting it, is possible that a through review of the product range of each division could be e/amined to see whether certain products can be pruned from the range

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Strategic Management- 6

13939 should not be used in isolation .urther it needs to be modified from time to time

(iii)

1odels for %aking a di)est%ent de ision" 4 no of models is available, which could be used by the co in ma+ing a divestment decision *wo such models could be= 3orters five forces model and *he product life cycle $orter2s fi)e for es %odel" *his model can be used to place each division in the competitive conte/t *he five forces model suggests that the competitive environment is determined by five factors viH *he threat of new entrants *he threat of substitute products, *he bargaining power of customers, *he bargaining power of suppliers and *he state of competitive rivalry within the industry *he value of this model is that it e/amines each divisions strengths in a competitive conte/t If the trend is for entry barriers to get lower, or if a ma5or new entrant is no the horiHon, this must influence the divestment decision, if the business is a marginal player in the mar+et or if the resources re:uired to fight off such a challenge are too e/pensive (imilarly, if the customers are powerful or suppliers are powerful, then the margins would get eroded steadily and firms business would become less attractive (imilarly if the threat of substitute products becomes serious, then divestment might become a sensible choice The produ t /ife ( le" *his model bears similarities to the 1&K matri/ *his model suggests that a firms products have a natural life cycle that can be analyHed into the phases of introdu tion3 growth3 %aturit( and de line. In the introdu tion phase, the product still has to ma+e money In the growth phase, it starts to ma+e profit 1aturit( occurs when the demand is no longer growing *he demand and the profit are at its pea+ In the de line phase, demand falls off, profits fall and eventually no profits are made *hus 11 ?td &an use this model to e/amine the condition of the products in each of the divisions

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Strategic Management- 7