Teaching Note SHIMLA DAIRY PRODUCTS PRIVATE LIMITED, INDIA: POISED FOR GROWTH?

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1 # S # w Teaching Note SHIMLA DAIRY PRODUCTS PRIVATE LIMITED, INDIA: POISED FOR GROWTH? Professor Michael J. Rouse prepared this teaching note as an aid to instructors in the classroom use of the case Shimla Dairy Products Private Limited, India: Poised For Growth?, No. 9B05M017. This teaching note should not be used in any way that would prejudice the future use of the case. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) ; fax (519) ; cases@ivey.uwo.ca. Copyright 2005, Ivey Management Services Version: (A) CASE SUMMARY The case is set during a time when cheese was a relatively new product in India, and the Indian cheese industry was moving out of its infancy. New competitors were emerging, new markets were opening up, multinationals were merging or allying with Indian firms, and some firms were closing their doors, unable to compete. In the context of these market conditions, the technical director of Shimla Dairy, Dinesh Khanna, must decide on the long-term strategy for his firm. CASE OBJECTIVES The goal of the case is to challenge students to address a competitive situation using a wide variety of tools and concepts in an integrated manner. Students will need to assess the issues, alternatives and decision criteria before selecting a strategic direction and the action to be taken. The case is well suited for use as a summary case at the end of an introduction to strategy course/module. It is also well suited for use as an integrated examination/assessment. Discussion Questions 1. What macro-environmental issues are relevant for Dinesh Khanna s strategy development? 2. Describe the industry. What are the most powerful industry forces?

2 Page 2 3. What should Shimla s strategy be? 4. Shimla owns its own refrigerated storage. Should it outsource this function or continue to run its own storage facility? Similarly, should the firm continue to own and supply refrigerated units for some of its retail customers? 5. Should Shimla integrate backwards into dairy production to ensure continuous, high quality supply of milk? 6. What should Dinesh Khanna do for the long term to implement the strategy and to ensure the future of the firm? TEACHING PLAN Instructor Preparation The case is fairly difficult in terms of analysis and concepts. Analytically, the case requires students to assess the issues, alternatives and decision criteria before selecting a strategic direction and the action to be taken. Conceptually, the case requires students to apply a variety of strategy models and theories to a complex situation with multiple connections between different levels of analysis. The integration of the theories and their application is challenging for most students. The case is presented, however, in a fairly structured and easy-to-read way with little in the way of extraneous information, though there is missing information, which pushes students to deal with uncertainty and to make best guesses. Overall, it is a good case to challenge students understanding of multiple analytical tools and integration abilities. The case is designed for an 80- to 90-minute class. TEACHING OUTLINE The analysis can be done from the outside-in (external to internal) or by beginning with internal analysis and moving outwards. Either method will work, but the case actually teaches better using an outside-in progression. Begin with the external environment. 1. What macro-environmental issues are relevant for Dinesh Khanna s strategy development? PEST Analysis There are a number of political, economic, social and technological issues that students will raise, and the instructor should write these on a side board (see Exhibit TN-1). Many of these factors are interconnected, and those linkages should be indicated with double headed arrows on the board as students make the connections. Political e.g., stability of government, regulation of the industry (coming? How soon? impact barrier to entry/growth for domestic competitors?), establishing climate for FDI Economic e.g., large and growing middle class, increased disposable income

3 Page 3 Social e.g., young nation demographically, increased Westernization in many areas including food and food preferences, increase in fast food such as hamburger franchises and pizza chains Technological e.g., low levels of technology in dairy farming (resulting in low yields per cow) and transportation (e.g., walking two to 10 kilometres to deliver milk to collection centre). 2. Describe the industry. What are the most powerful industry forces? Stage in the Industry Life Cycle The industry is arguably in the shake-out stage of the industry life cycle. There are differences in penetration levels and market sophistication regionally, i.e., the market behaves more as a mature industry in the larger cities and more like an embryonic industry in rural areas. This has implications for the strategies that firms might pursue. For example, in rural areas, firms might have to do more work and shoulder greater investment loads to help structure the industry (e.g. provide refrigeration units to retailers) than is necessary in urban areas. Overall, though, firms will want to target market share goals to exceed industry growth levels, given that the market is growing so quickly. Firms will want to position themselves for long-term industry maturation. Industry Analysis Power of Suppliers Low. Milk producers are highly fragmented. Other inputs such as rennets and bacterial cultures, vats, cutters, molds, etc., are available from multiple sources, are generally commodity type products, and are subject to low switching costs. Power of Buyers Low to medium. Large customers such as the military or fast food/pizza chains can pressure firms to reduce price or increase quality so they would have relatively high power, though this is offset by the sheer growth of the sector. Firms not willing to submit to buyers demands could conceivably walk away and find other markets or convert easily to other products. Power of small grocers, independent stores, and independent hotels and restaurants is low. They have no power to force lower prices or increased quality. Grocers who rely on firms for retail refrigeration are tied to the supplying firm. Threat from Substitute Products Low to medium. There is no substitute for cheese on pizzas nor for cheese on cheeseburgers. However, all other sources of protein or other snack foods, or even other foods that can be eaten for picnics or desserts could substitute for cheese. Coupled with the social elements, however, e.g., the cultural loading of Westernism onto cheese which is perceived as a sign of affluence and Westernization, the threat of substitutes, in practice, is quite limited. Threat of New Entrants High. The market is growing rapidly and margins are fairly good, especially for high-end cheeses. Volumes make low-end cheese attractive. Investment is relatively low, and there are few barriers to entry from regulation, technology, proprietary knowledge, access to distribution channels and markets. Access to inputs does not present a

4 Page 4 barrier to entry. For domestic firms wishing to enter the low-end traditional market sector, there are no significant barriers to entry. Rivalry High. Firms are competitive for large customers and for regional market share. Large competitors especially foreign owned or linked firms are fierce competitors with mature market experience. That experience makes them formidable competitors in the growing Indian cheese market. Such competitors tend to have deep pockets, mature management and processes, and experience from highly competitive markets in other countries. Small domestic firms producing low-end cheese are able to use price to capture the low-end traditional market segments, whereas those same firms cannot compete in the organized market segments because of quality, marketing, distribution and other issues. The most powerful forces in the industry are rivalry and the threat of new entrants. At this point it is useful to direct the discussion to the Diamond-E (Crossan et al., 2005) or other integrating framework that links the external environment with strategy and organizational issues. Such a framework can be used to move the discussion through the elements of strategy development to answer question What should Shimla s strategy be? Organizational and Strategic Issues Look first at Shimla Dairy s value proposition. Should Shimla pursue a low-cost or differentiation generic strategy? Should the chosen strategy be broadly based or focused? The answer to this depends upon students assessment of the industry and the firm s resources. There is likely no single correct answer here. As students present their points, the instructor should record them on the centre white board. The quality of the argument supported from the case material is what makes for a good answer here, with several reasonable options. If a low-cost strategy is pursued, that will likely mean a focus on technology-driven processes, large customers and an urban focus for bulk cheeses as well as a rural focus on low-end, pre-packaged cheese, and a supporting configuration of organizational structure, processes, resources and skills. If a differentiation focus is pursued, there would necessarily be a change in organizational processes including technology, employee skills and knowledge, distribution channels and marketing, etc. The selected value proposition and linked generic strategy would suggest different product/market foci as well as different core processes. Core processes can be further pushed by extending the discussion to the mapping out of the supply chain and the value chain. The value chain discussion would focus on the configuration of activities needed to support the value proposition and strategy. I would map out the value chain on a side board.

5 Page 5 The value chain and supply chain discussions provide opportunities to address discussion questions 4 and Shimla owns its own refrigerated storage. Should it outsource this function or continue to run its own storage facility? Similarly, should the firm continue to own and supply refrigerated units for some of its retail customers? The question here is essentially one of vertical integration. Should Shimla outsource its refrigerated storage or keep it inside the firm? After some discussion, usually around quality control and management control issues, someone hits on asset specificity. Why would an outside contractor not build a refrigerated storage next to Shimla s plant? This brings out the issues of hold-up and moral hazard. Someone may suggest that Shimla could write a contract for 10 or more years to overcome problems of asset specificity and this, in turn, brings out a discussion of the uncertainty of growth and demand in a new industry. The next discussion point is Shimla owning and supplying refrigeration units for some of its small and usually rural customers. Should these be rented to buyers or loaned/given to them? The issues here revolve around the need in rural areas to structure the market for a new product, grocers inability or unwillingness to make the capital investment for refrigeration units to display a new food product with which they may not be familiar, and Shimla s desire to erect barriers to entry by getting a lock on display space for their cheese products. Supplying retail refrigeration involves considerable expense and is not something that Shimla would want to do indefinitely. It can, however, generate brand recognition, product awareness and availability and would function as a barrier to entry. 5. Should Shimla integrate backwards into dairy production to ensure a continuous, high quality supply of milk? This question usually generates little initial debate. Clearly, dairy farming is outside of Shimla s skill set and many students think that is the end of the discussion. What they often miss, however, is the idea that since the dairy farmer s profit potential (quality and quantity of milk produced) is directly aligned with Shimla s (high quality, available inputs), there is no need to backward integrate. Shimla can also benefit in terms of price and quality from low switching costs and a fragmented milk producers industry. There is the possibility that dairy farmer co-operatives, which use their own members milk production to produce cheese, could use that as a marketing device. Since Shimla uses local milk production and is unlikely to need to source milk from great distances, co-operatives may not be able to do a convincing job of marketing on that element alone.

6 Page 6 6. What should Dinesh Khanna do for the long term to implement the strategy and to ensure the future of the firm? Since the question is about the long term, this suggests the need for sustainable competitive advantages. Push students to analyse the firm for potential sources of competitive advantage. VRIO analysis (Barney, 1997) is useful for this. Does the firm have any resources or capabilities that are Valuable, Rare, Inimitable and Organized to leverage those core competencies and to capture value? The analysis suggests that there are NO core competencies, which means there is currently no sustainable competitive advantage. A key part of the strategy and implementation, therefore, must be designed to generate core competencies within the firm. What core competencies might the firm generate? The most obvious is brand recognition and reputation. This has implications for all aspects of the strategy, from hiring highly qualified employees to sourcing first-rate inputs, employing the most efficient (e.g. fast, JIT, refrigerated) distribution methods, using effective marketing and developing a professional management team. Similarly, a network of relations with suppliers and buyers might qualify for competitive advantage, perhaps with a regional focus (but not necessarily). Other than brand and reputation, few options for core competencies for the firm are likely. What Dinesh needs to do is to decide on an intended strategy (clearly there will be emergent issues as the firm and industry dynamics develop) and strive for the optimal configuration of elements to support the strategy. The instructor can use the material recorded on the board to make the linkages using colored white-board markers and lots of arrows and circles. To conclude, the instructor should return to the issues/changes in the macro environment and link those to industry stage and dynamics and what Shimla can do with regard to rivalry and the threat from new entrants. All of these will need to be linked to the proposed strategy, which needs to be focused on the value proposition, how to organize for the product/market focus and the implications for the firm s core activities, including issues around market structuring and vertical integration. Finally, there is a critical need for Shimla Dairy s management immediately to begin to focus its activities to generate core competencies in the areas of brand and reputation to ensure a sustainable competitive advantage. SUGGESTED READINGS The following readings are fairly comprehensive, though the longer and more complex ones will be suitable only for more advanced students. Other readings that provide the essentials of industry analysis, value chain analysis, the resource-based view and vertical integration can be used instead.

7 Page 7 Industry Analysis Porter, M. E The structural analysis of industries, chapter 1 of Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Simon & Schuster: Value Chain Porter, M. E The value chain and competitive advantage, chapter 2 of Competitive Advantage: Creating and Sustaining Superior Performance, New York: Simon & Schuster: Core Competencies and VRIO Analysis Barney, J. B Evaluating firm strengths and weaknesses: Resources and capabilities, chapter 5 of Gaining and Sustaining Competitive Advantage, New York: Addison-Wesley: Vertical Integration and Transaction Cost Analysis Stuckey, J. and White, D When and when not to vertically integrate. The McKinsey Quarterly, 3: REFERENCES Barney, J. (1997) Gaining and Sustaining Competitive Advantage. New York: Addison-Wesley. Crossan, M. M., Fry, J. N., and Killing, P. J. (2005) Strategic Analysis and Action, 6th edition. Toronto: Pearson/Prentice Hall.

8 Page 8 Exhibit TN-1 BOARD PLAN Side Board Centre Board Side Board PEST factors Resources and Caps Core Competencies? Organization VRIO Analysis Diamond E Supply Chain Five-Forces Goals Value Proposition Product/Market Focus Core Activities Value Chain Inputs Conversion Outputs Storage Distribution (sales, refrigeration)