Supply Chain Effeciencies

I read this great article the other day which was written by Mr.Raj Jain who is the President,Wal-mart India and MD and CEO Bharti Wal-Mart Pvt ltd. The article throws light on how Bharti Wal-mart is testing the Indian Retail scene and taking calculated and well structured steps to get the Indian retail story buzzing. Droughts, infrastructure issues, wastages etc are the problems that India has been facing. The challenge is to how to be well equipped when times are trying and get the best out of a situation.

It is interesting to note that even this promising joint venture was struck by industry behemoths, they have taken their time and effort to study the Indian market, developed well thought of business practices, are building mini- business models and learning the tricks of the trade through the learning curve.
Mr.Jain is of the opinion that the supply chain issues of India are because if wastages, and inefficiencies and the 3 things to get things back on track are as follows:

1.)Creating Regional Supply Chain to reduce food miles-

It is true that in India, food taste and food habits change every 200 kms. Food miles mean how much distance does food have to travel before making it to consumer’s plates. Hence it is imperative to create regional/local supply chains instead of national supply chains. Bharti Wal-mart has adopted this approach and sources all of its requirements within 150 kms of the store.

Following are the advantages of this approach:
A.Reduces cost
B.Greater predictability
C.Qualiy &
D.Focus

2.)Develop a world class Supplier Base-
Walmart is known for procuring their goods at lower prices. People have an incorrect assumption that because of Walmart’s scale and negotiation power are instrumental fow them getting lower prices. However that’s just not the case. Walmart works with the suppliers to “save their money” by reducing excess cost and wastages out of their system, and inturn, suppliers given them a better prices. Not only this, Walmart also improves their technology, market access and product quality.

3.)Fix the Infrastructure-

Infrastructure development is key for growth. India’s infrastructure plans have to stick to the schedule and if possible get done faster. Bharti Wal-mart has made sure that the stick to shorter transportation routes so that infrastructural inefficiencies do not cause hindrances.

Drought is no doubt a problem, however wastages compound the problem. It’s upon us what we segregate as a controllable issue and an uncontrollable one.
It is interesting to follow this great retail revolution in India which will be a great example of glocalisation and how a sustainable business model is built to suit this great, diverse country.

Pharma Industry: Patents call the shots?

The underlying idea behind granting patents is to encourage pharma innovators to advance the state of technology, and increase the development of better formulations. According to the UN definition, a patent is a legally enforceable right granted by countrys government to its inventor.

Patent Law represents one branch of a larger universe known as intellectual property rights. Patent offers exclusivity covers to many pharma companies and they have literally built and empire out of their patented discoveries. So wonder what is going to happen after the patents of Pharma giants expire?

I am eagerly waiting for 2011...as it will represent the beginning of the end for some of the industry leaders in Pharma sector.Maximum number of innovator molecules are going off patent between 2012-2018. Its going to be a splendid display of shifting loyalties, division of market share and dwindling prices.

The veterans of the industry still have some time to fine tune their strategies and decide on the way ahead. Some of the options are:

1.)Price reduction of your current offering

2.)Launching a fighter brand before your patent wears off, and then tackling the competition head on with price wars.

3.)Authorized Generics/Co-optition

Lets see how each of these options can misfire and what are the learnings that we can have from them.

1.)Price Reduction: Premium offered by your brand will wear off, customer perceptions may change which might increase switching. Patent may go off only in certain geographies, hence this strategy cannot be evenly executed which might lead to inter-geo exports, black marketing and price confusion.

2.)Fighter Brand:

Here s a case which demonstrates how an MNC(Merck) was not adaptive enough and how its fighter brand strategy backfired miserably:

Merck's blockbuster drug Zocor was going off patent in Germany. Zocor—a statin used to treat high cholesterol—had been a major cash cow for Merck, but after the patent expired, generic drugs would offer identical efficacy would be made avialable for as little as 30% of Zocor's price!

The obvious strategic response was a price reduction, but for Merck that was not an option, because it would have encouraged parallel exports of Zocor from Germany to EU markets where patent protection still existed.

Instead, Merck decided to launch a fighter brand called Zocor MSD. It rolled out the fighter brand four months before the patent expiration to give it some time to cannibalize Zocor’s customers, who would then, Merck hoped, remain loyal when generics invaded the market(obvious mistake). Because Merck was competing with only itself during this initial stage of Zocor MSD’s launch, the fighter brand was priced just slightly less than the original premium brand(there should have been a significant price-value erosion to make a difference and change people's preferences). Once generics entered the market, the new brand’s price dropped to 90% of Zocor’s.

Within three months of its launch, Zocor MSD had missed its modest sales goals by 50%. More than 30 generics would divided the lion’s share of the category among themselves. Merck’s desire to protect its profits for as long as possible had prevented it from launching a brand priced low enough to seriously compete with the generics.

Even when Merck realized it had set the wrong initial price, it was incapable of quick course correction. As a blue-chip multinational, it lacked the competencies to win the kind of price war it was entering. Merck was used to maintaining prices for long periods of time and altering them only after much consultation and reflection(Typical of any MNC). Its generic competitors, accustomed to competing on price, obviously benefited. With losses mounting fast, Merck withdrew all marketing support from Zocor

3.)Striking strategic alliances with low cost manufacturers and opting for co-opetition.

This I believe, is one of the most sound policies that neither calls for the efforts required to launch a fighter brand nor pushes the competition to go crazy on price wars. One can strike a strategic price alliance with one of the local generic manufacturers and control the price at a certain point(still a little above the generic drug providers).It calls for shifting and creating a relatively new category, called "authorized generics". Essentially, the original manufacturer licenses exact copies of its branded drug to a generic manufacturer, allowing it to hang onto some of the generic revenues.

This approach also appeals to those patients who feel most comfortable with a name they know. The premium drug manufacturer can retain its brand name and positioning and let the price go down.This way it can fight with other generics on price, saves its brand name and also expect very limited erosion of loyalties.

So,lets wait and see how "molecular" strategies shape Pharma industry in times to come!

Brand Cannibalization

In today's world “premiumization,” “trading up,” are receiving the same attention as "commoditization" and "trading down".A strategy which might click in one part of the world might have to be executed in complete opposite way in the other part.

Economic downturns are now causing consumers to trade down, and many midtier and premium brands are losing share to low-priced rivals. Their managers face a classic strategic dilemma: Should they tackle the threat head-on by reducing prices, knowing that will destroy profits in the short term and brand equity in the long term? Or should they hold the line, hope for better times to return, and in the meantime lose customers who might never come back? Given how unpalatable both those alternatives can be, many companies are now considering a third option: launching a fighter brand.

A fighter brand is designed to combat, and ideally eliminate, low-price competitors while protecting an organization’s premium-price offerings.In its best applications, a fighter brand strategy can have even more impressive results.A fighter brand not only eliminates competitors but also opens up a new, lower-end market for the organization to pursue.

But launching a fighter brand is like walking on a double edged sword. Great application might leap frog you way beyond competition and have your success stories illustrated in b-school cases however there are also chances of misfire and lead to significant collateral losses for the companies that initiated them.

Account For Cannibalization

Most fighter brands are created explicitly to win back customers that have switched to a low-priced rival. Unfortunately, once deployed, many have an annoying tendency to also acquire customers from a company’s own premium offering, which is called cannibalization.You must ensure that it appeals to the price-conscious segment you want to attract while guaranteeing that it falls short(in terms of value/quality) for current consumers of your premium brand. That means you must match your fighter brand’s low price with equally low perceived quality.To prevent cannibalization, a company must deliberately lessen the value, appeal, and accessibility of its fighter brand to its premium brand’s target segments. It may even need to actively disable existing product features and withhold standard marketing support from the fighter brand.

Managers need to weigh the effects of cannibalization before rolling out fighter brands. Because these brands are explicitly oriented toward the rivals that have stolen share from a company, the initial break-even calculations used to justify their launch often are oversimplistically derived from an estimate of the lost sales that can be recouped, which not usually the case.An accurate break-even analysis must account for cannibalization as well. How can you predict whether excessive cannibalization will occur? Test-marketing is the best way to ensure that a fighter brand can compete with low-price offerings without robbing significant sales from its higher-price, more profitable sister brand.

The Gospel:

To calculate the effect of cannibalization, the Break Even Cannibalization rate for a change in a product is:

New Product Unit Contribution / Old Product Unit Contribution.
New Product is the planned addition to a product line (or change to a product within a product line), Old Product is the product that loses sales to the new product (or the product line that loses sales). The cannibalization rate refers to the percentage of new product that would have gone to the old product, this must be lower than the break even cannibalization rate in order for the change to be profitable. When making changes to a specific product, cannibalization of other products may occur. To calculate the effect of cannibalization, the Break Even Cannibalization rate for a change in a product is: