Asian Paints Corporate Strategy

Corporate Strategy of Asian Paints

Corporate Strategy of Asian Paints 1 IDENTIFICATION OF INDUSTRY DYNAMICS .................. .............................. ................. ........... ............ ......... ... 5 1.1 Industry description description................................................. ...................................................5 1.1.1 Industry Structure- Decorative: ........................................................ .......................6 1.1.2 Industry Structure-Industrial Paints: .................................. .......................... ................................. .......... ...7 1.1.3 Industry Characteristics: ................................................................... ........ ............... ............. ...... 8 1.1.4 Margins and Industry Attractiveness................................................. ......................................................... ............... ............. ...... 8 1.1.5 Decorative Paints industry: Working capital intensive ........................................11 ........................................11 1.2 Segment Segmentation ation................................................ ........................................... ....... .............. ........... .... 12 1.2.1 Price based segments in architectural paints ..................................................... ....13 13 1.3 Current Scenario Scenario........................................................ .................................................................................................... ............................................ ...14 1.3.1 Market Size ...................................................... ...................................... ............................................. ............... ........ 14 1.3.2 Growth Rates...................................................... ........................... .................................. ............... ............... .........14 1.3.3 Manufacturing Bases & Capacities................................................. ....................................................................... ......................15 15 1.3.4 Raw Materials ................................................................... ....................... .............................. ............ ..... 17 1.3.5 Backward integration ................................................ ................................................................................. ........................................ ........... ....19 19 1.3.6 Distribution methods....................................................... .................................... ...................................... ..19 19 1.3.7 Forward integration................................................ ............................................................................................ ............................................... ...21 21 1.3.8 Technology ................................................ ................................................................................... .......................................... .............. ............... .......... .. 21 1.3.9 Branding ........................................................ .................................................... ....21 21 1.3.10 Duty Structure....................................................... ...................................... .............................................. ........ 22 1.4 Porter’ Porter’ss Analysis.................................................. ...................................... ............................................. ............... ........ 22 1.4.1 Substitutes............................................... ................................................................................................ ........................................................ ............. ......22 22 1.4.2 Threat of new entrants................................................. .................................................................... .......................... ............... ............... ....... 22 1.4.3 Buyer’s power pow er................................................ .............................................................................................. ..................................................... ......... ..23 1.4.4 Supplier’s power................................................ .................................................................................... ............................................ ............... .......24 24 1.5 Global Trends...................................................... ...................................................................................................... ................................................ ......24 24 1.6 Expecte Expected d growth in each segment................................................ ........ ............... .............. ............ ..... 27 1.7 Changes in segmentation...................................................... ................................................................................... .................................... ....... 28

2 IDENTIFICATION OF COMPETITORS .................................. ............................ ............ ........... ........... ............ ........ ..29 2.1 Main Compet Competitors itors.................................................. .................................... ............................................ ............... .......29 29 2.2 Identific Identification ation of focus areas of competitors................................................ ............ ............30 30 2.3 Entry of Global Players, Recent Joint Venture agreements...... ............ ........... ......... ....... ....... ........ ......31 2.4 Importan Importantt brands of competi competitors tors.................................................... .............................................................. .................. .............. ...... 32

3 KEY DRIVERS OF SUCCESS ................ ................................... ...................................... .......................... ............. ............ ........33 2

Corporate Strategy of Asian Paints 3.1 Key drivers in past, present and future for each of the three segments.... ....... ...... ...... ..... 33 3.1.1 Industrial Segment ...................................................... .......................... ................................. ............... ..........33 3.1.2 Urban Decorative ...................................................... ................................. ........................................ ........... ....34 34 3.1.3 Rural Decorative Segment................................................. ........................................................................ .............................. ............ ..... 36 3.2 Other Factors Factors................................................. ................................... .......................................... .............. ............... .......... .. 36 3.2.1 Branding ........................................................ .................................................... ....36 36 3.2.2 Inventory Management: .......................................................................................37 37 3.3 Drivers for growth of Industry Industry...................................................... ..................................................................... ...................... ........... .... 37

4 HISTORY OF ASIAN PAINTS LTD. .................. ..................................... ........................ ........... ............ ............ ........... ..... 38 4.1 The initial initial years years................................................... ................................................ ......38 38 4.2 Financin Financing g growth................................................... .................................. ......................................... .............. .......... ... 38 4.3 Capacity expansion ............................................... .................................... ............................................ ............... .......38 38 4.4 Moderni Modernization zation........................................................ .......................................................................................... ......................................... .............. .......... ... 39 4.5 New Product Product Offerings Offerings................................................. ................................. ........................................ ........... ....39 39 4.6 Internati International onal Exposure Exposure....................................................... ............................................................................................ ......................................40 4. 0 4.7 Colourworlds – A revolution in the paints industry..... ........... ........... .......... ........... ........... ......... ........ ....... ...... ... 40

5 HISTORICAL STRATEGIES ADOPTED BY ASIAN PAINTS...... ............ ............ .......... ....... ... 41 5.1 Market Leadership through Distribution Excellence. ........................................... ...........................................45 45

6 ASIAN PAINTS PERFORMANCE ANALYSIS................. .................................... .......................... ............. ...... 47 6.1 Financia Financiall Performanc Performancee..................................................... .......................................................................... ............................ ............... ............ ....48 48 6.2 Market Performance Performance....................................................... .......................................................................... .......................... ............... ............... ....... 49 6.3 Management of working capital by Asian Paints..... .......... ........... ........... ........... ......... ....... ........ ....... ....... ........ ......51

7 ASIAN PAINTS STRATEGY.................. ..................................... ...................................... ............................... ................. ......... .... 54 7.1 Corporat Corporatee Strategy Strategy.................................................. ............................. .................................... .............. ............. ......54 54 7.1.1 Asian Paints Overall Corporate Strategy .............................................. ..................................................... ............... ..........58 7.2 Asian Paints Acquisition Acquisition targets targets................................................... ........................ ........................... ...59 59 7.2.1 Possible acquisition of Snowcem Sn owcem..................................................... .....................61 61

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Corporate Strategy of Asian Paints 7.3 Business Strateg Strategy y....................................................... ............................................................................... ................................ ............... .............. ........62 . 7.3.1 Urban strategy................................................ .............................................................................................. ..................................................... ......... ..62 7.3.2 Rural strategy................................................... ............................................................................................ ................................................ ............ .....65 65 7.3.3 Strategy for international markets ................................................... ......................................................................... ......................65 65 7.4 Differen Differentiation tiation and the role of branding....................................................... ................................................................. ..........65 65 7.4.1 Branding ........................................................ .................................................... ....66 66 7.4.2 Classification of paint ..........................................................................................67 67 7.4.3 Shift in brand strategy ....................................................... ............................. .................................... ....... 73

8 POSSIBLE FUTURE CHANGES: .................................................................... 75 9 EXHIBITS................... ...................................... ..................................... ..................................... ...................................... ................................ ............. 78 10 BIBLIOGRAPHY.................. ..................................... ...................................... ............................. ................ ........... ........... ............ .......... .... 82

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Corporate Strategy of Asian Paints

1 Identification of Industry Dynamics 1.1 Industry description The Indian paints industry has been valued at Rs. 43 bn. with annual consumption of 0.6 million tons. The industry has been growing at a CAGR of 8% to 10%. The industry can mainly be segmented into decorative and industrial paints with a rough distribution of 70% to 30% in favor of the former. This distribution is expected to move towards a 50:50 distribution. The demand for decorative can be split into first time demand and demand for  repainting. The first time demand is a derived demand and the growth in the demand for  decorative paints is linked to the state of the housing sector and the government infrastructure sector. In turn the housing and infrastructure activity is dependant upon the state of the country’s economy. Cement and Steel are the first sectors that reflect the state of the economy, followed by the housing and infrastructure sectors, which affects the  paints industry. Therefore, the demand for new paints follows the economic cycle with a lag of about 12 to 18 months. Empirical evidence shows that the paint industry grows at about 1.5 to 2 times the GDP growth rate.1 The demand for repainting is a slow growing area, since India, as of now has not developed the culture of using paint as a fashion tool, therefore repainting is not done very often. But, this sector does show consistent growth, though it is slow. The demand for decorative paint is also highly seasonal, especially for the repainting segment, the bulk of the demand being during the festivals seasons. The  peaking of demand during specific seasons has been a unique feature of the Indian paint industry and has led to the introduction of such paints like Utsav by Asian Paints. The marketing activity is also stepped up during the festival season. The industrial paint segment is highly cyclical and again, it is also a derived demand depending upon the sector that is being served. E.g. the automotive paint segment is linked to the fate of the automobile industry that is directly linked to the state

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From www.capitaline.com

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Corporate Strategy of Asian Paints of the economy and reflects changes in the economy quite fast. Therefore the demand for   paint in this segment also reflects changes in the economy quite quickly.

1.1.1 Industry Structure- Decorative: The decorative segment of the industry is hourglass shaped. There are a small number of  large players having a high market share and a large number of players in the unorganized sector. Even though regional medium sized players exist, they do not command a high market share. The large players have Economies of Scale in manufacturing, large distribution networks, centralized Marketing and Advertising departments and very high brand equity among the consumers, which gives them a significant advantage over the mid-sized  players. Since, regional variation in demand of the product is minimal, the regional  players do not have any advantage over the big players. The unorganized sector’s market comprises of the rural and small town segments, where they offer a viable, affordable substitute to Proxies. The unorganized sector’s competitive advantage lies in operating in the right willingness to pay segment of the market. The unorganized sector has a 20-30  percentage cost advantage over the established players and therefore they have a high share in the price-sensitive rural segments. They offer low-quality paint as an ideal substitute for the proxies and attract the value-sensitive rural customer with the  proposition.

1.1.1.1 The Advantage of the unorganized sector: The cost advantage for the unorganized players was derived mainly from government  policies. The tax structure for the paint industry was one of the major constraints and government policies regarding taxes led to the negative growth of the industry in the early 90s. The government had classified the paint industry as a luxury industry and therefore the industry attracted very high excise and import duties. These adversely affected the organized sectors. The unorganized sectors were small industries and therefore had to face much lower tax rates. Also, the import duties on the intermediaries and the raw materials required for the paint industry were very high. This again hit the organized sectors because they were the companies that were mainly importing these raw 6

Corporate Strategy of Asian Paints materials, and the unorganized sectors were using lower quality local raw materials. All this led to the proliferation of these unorganized sector industries, and enabled them to offer significant lower prices than the organized companies. This price differential was crucial because the rural customer was very price sensitive and therefore bought from the vendor offering the cheapest options. However, in recent times, the unorganized sector has struggled to match the offerings of the organized sector. The rationalization of the tax rates has nullified this advantage for the unorganized sector. The excise duties have been brought down to 18% from 40% in 1992-93 and the import duties of raw materials have been brought down to a mean of 40.8% from 67.5% in 1993-942. This has primarily been due to the change in the classification of the industry from a luxury industry to a protective industry. This has minimized the cost advantage that the unorganized sectors has had on the organized sector, though the unorganized sector shall continue to have some cost advantages from the use of inferior quality raw materials. The other reason for the recent failure of the unorganized sector has been changing customer preferences. The rural market has matured and the primary factor of demand is now not only price but also quality and the value added services provided. The organized sector has a significant advantage in this area, and therefore the price disadvantage that they have is overcome and in fact, some sort of advantage is built.

1.1.2 Industry Structure-Industrial Paints: The Indian industrial market, like the global markets is dominated by a few players. This is because there is a high technological competence required for competing in the industrial segment and the unorganized sector do not have this competence. The industrial segment is further sub-divided into a number of segments and since it is a technology based industry, the competencies required to be successful in different segments are distinctive and unique. Due to this, the market operates like a set of niches with different players operating in different segments. Each segment is like a monopolistic industry with one player dominating the niche. There is no head on competition and every player has a set of independent niches to operate in. The customers 2

CRISINFAC

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Corporate Strategy of Asian Paints also have long-term contracts and customized service requirements with the industrial  paints companies.

1.1.3 1.1.3 Indu Indust stry ry Chara Charact cteri eristi stics: cs: The industry is characterized by low fixed capital requirements but high working capital requirements requirements.. A plant for manufacturing manufacturing decorative decorative paint can be set up with low capital requirements, though for industrial paints there would be specific technologies and higher  capital requirements. High inventory management costs is a very important reason for  working capital requirements. The wide choice offered to the consumer and the large number of SKUs that are present increases the inventory requirements vastly. The problem of high inventories inventories due to high variety has been partially partially solved by the introd introduct uction ion of tintin tinting g machin machines. es. These These tintin tinting g machin machines es postpo postpone ne the proces processs required for generating by a large extent and shift the timing of customization to the point of delivery, thereby reducing the inventory requirements drastically.

1.1.4 1.1.4 Margin Marginss and and Indust Industry ry Attr Attract active iveness ness The margins that are being offered in the decorative and the industrial segments are different but the differences are not very significant. The gross margins for the various  players are as follows3: Company

Gross Margins

Asian Paints Jenson and Nicholson Goodlass Nerolac Berger Paints

12.37% 9.54% 7.78% 7.36%

It can be observed from the above that the margins for players that are very highly exposed to the decorative segments are higher and as the dependence on industrial paints increases the gross margins go down.

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Source: www.capitaline.com

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Corporate Strategy of Asian Paints The above differences differences in margins margins may be slightly distorted distorted by the much higher margins margins of Asian Paints. The higher margins of Asian Paints are mainly because of much lower  raw material costs. The proportion of raw material costs of Asian Paints is 34% compared to about 48% for the rest of the players.

This advantage to Asian Paints could have accrued due to two reasons:

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Better logistical management: Asian Paints has a very good supply chain structure and the entire supply chain has been integrated through the use of IT. This could lead to better availability and utilization of resources, less wastages and lower transaction and coordination costs. All this would lead to lower costs for the supplier and Asian Paints and therefore lower prices.

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Backward Integration: Asian Paints has established capacities to manufacture PAN and PET, two raw materials that comprise about 35% of the cost of the product. This  backward integration helps reduction in the raw material cost in two ways. This immunizes Asian Paints to the fluctuation in the prices of raw materials in the external market. Also, the raw materials produced at the plants are transferred to Asian Paints at cost or a low margin over cost; therefore the cost of raw materials is much lower for Asian Paints than the costs for the other players. The prices of the raw materials materials depend upon the prices prices of petrochemicals petrochemicals in the international international market. The intermediate raw material companies help insulate Asian Paints from major price rises and pass on the price drops.

This implies that though there is a slight differential in the margins of the decorative and industrial segment, the differential is quite small and therefore both the industries would have similar attractiveness. It must also be kept in mind that these figures are for 20012002 when the industry conditions were quite depressed. Industrial segment depends upon the growth of the economy and the depressed conditions might have driven down industrial margins slightly and they could be expected to bounce back. 9

Corporate Strategy of Asian Paints

Therefore, financially, the attractiveness of the industrial and the decorative segments is quite similar. Therefore the differentiation between the decorative and the industrial segments can be dependant upon the capital intensiveness and the technology of the segmen segment. t. The manufa manufactu cturin ring g proces processes ses of the decora decorativ tivee segmen segmentt are quite quite simila similar  r  throughout throughout the industry industry but the processes in the industrial industrial segment vary from market market to mark market et,, with with each each havi having ng its its own own meth method od of manu manufa fact ctur ure. e. Th Ther eref efor ore, e, the the capi capita tall intens intensive ivenes nesss and the technol technology ogy depende dependence nce of the indust industri rial al segmen segmentt cannot cannot be evaluated as a whole, but each market can be evaluated separately as a wholly different segment and its attractiveness with regard to these parameters gauged separately. 

Technological Technological Requirement Requirements: s: The technology technology required required to manufacture manufacture decorative decorative   pai paint ntss is quit quitee stan standa dard rd and and quite quite simp simple le and chea cheap p to imit imitat ate. e. Th Ther eree are are no technological advantages for anyone in the manufacturing side of the decorative  paints segment. Comparatively, the technological requirements for each market in the indust industria riall segmen segmentt are unique unique and theref therefore ore are marked marked by low imitabi imitabilit lity. y. The uniqueness of the technological capability that a company possesses increases the attractiveness of the industry for that particular player. Most of the Indian players do not have any propri proprieta etary ry technol technology ogy in the indust industria riall segmen segmentt and theref therefore ore the market marketss they they enter enter depend depend upon the tie-up tie-upss that that they they have in the intern internati ational onal markets.

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Capita Capitall Intens Intensive ivenes ness: s: The decora decorativ tivee paints paints indust industry ry is very very workin working g capita capitall intensive. This point has been justified later along with the practices being followed in the industry. The capital investment required for decorative paints is quite low with the cost of a 1 million tpa plant being only about Rs. 12 crore. Comparatively, the initial capital investment required depends upon the technology being used. There is no standard template for the capacities being setup in the industrial paints segment. If  the indust industry ry is a highly highly capita capitall intens intensive ive one, one, the expectati expectation on for revenues revenues and margins is bound to be high and is that is not satisfied, that industry becomes less attractive.

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Corporate Strategy of Asian Paints 1.1.5 Decorative Decorative Paints Paints industry: industry: Working Working capita capitall intensive intensive As mentio mentioned ned earlie earlier, r, the decora decorativ tivee paints paints indust industry ry is not fixed fixed capita capitall or initia initiall investment intensive but working capital intensive. The following points can justify this: 

The initial investments required setting up a plant for the decorative paints area is quite low; a 1 million tpa plant can be setup for Rs. 12 crores.

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Since the variety of the paints being sold is very large, the inventories of each type of    paints being manufactured is to be kept, this leads to inventory accumulation and therefore need for larger warehouse space. This inventory would always be a problem and management of this inventory would create even bigger problems. problems. What type of  inventory to keep? What product to keep in inventory? What is the optimal inventory level? Some of these questions would always trouble the managers.

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Inventory management is even more crucial keeping in view their customer focused marketing strategy. If a particular shade is not available, the customer would go to a different provider since the switching costs are not very high. So, again inventory as  part of working capital gains importance.

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Highly raw material intensive: The industry is also highly raw material intensive and 50% of the raw materials are imported. The international raw material prices are highly volatile and depend upon the prices of oil. So, to hedge this price volatility  better  better cash management management is required required and higher cash balances have to be maintained. maintained. Also, higher raw materials inventory needs to be maintained.

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Long debt periods and Seasonal nature of demand: The industry is characterized by long credit periods for the retailers and dealers. In normal circumstances also this would require better receivable management. Also, more cash would be stuck in the cred credit it provi provide ded d and and as the the cash cash to cash cash cycl cyclee incr increa ease ses, s, requi requiri ring ng bette betterr cash cash management. If we throw in seasonality of demand where most of the sales occur  around the festival season, this long debt period creates a bigger problem. Since the sales during festival time are a high percentage of the company’s sales, due to the long debt period, a huge amount of cash is trapped in the cycle leading to higher  working capital requirements during this period of time.

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Corporate Strategy of Asian Paints 

 Not just in the last point, but also in the points above that, basically more and more cash reserves are required because the cash to cash cycle in every case is going up.

1.2 Segmentation The paint industry can be segmented mainly on the following bases: 1. End Use classification : Under this heading, paints can be classified as decorative/ architectural paints and industrial paints. As the names suggest, decorative paints are mainly used for household and construction purposes while industrial paints are used as coatings for industrial products. Main types of decorative paints are enamels, acrylic emulsions, distempers and exteriors and primary types of  industrial paints are marine paints, anti corrosive metal coatings, etc. 2. Solvent based classification : this includes paints, which use petro products or  water as the main solvent. Water based paints are gaining popularity due to their  environment friendliness. 3. Solid content: can be classified as liquid or solid (powder) paints. Powder  coatings find application mainly in the white goods industry.

On the basis of end user classification the industry is mainly divided into two segments: 1. Decorative/Architectural : This segment can again be geographically divided into two categories, rural and urban. In India, both these segments show different   buying and decision-making characteristics and the value drivers for both the types of customers are different. The decorative segment can be further classified into the following: 

Emulsions: These can be used on concrete for interior or exterior application. Product variety is greatest in this segment, but this is a h igher priced segment.

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White washes and distempers: White washes are basically whiteners in glue solutions, while distempers can be applied to interior concrete walls.

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Cement paints: Are of more use than others for exterior use.

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Enamels: These can be used on a variety of substrates like steel, wood, concrete etc. and are preferred because they provide gloss to the substrate.

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Corporate Strategy of Asian Paints 2. Industrial

The industrial segment can be classified into the following: 

Automotive segment: This segment serves the large automobile segment.

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Powder coatings: These are used for metals that require protective coatings

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Performance coatings: These are used by engineering companies and are used for maintenance coating.

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Coil coatings: They are applied on coils and metal rolls and have a very specific industrial application.

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Marine coatings

1.2.1 Price based segments in architectural paints4  Particulars

Premium

1st Quality

Popular  

Product

Super-acrylic

Plastic Emulsions,

Oil-bound

Description

Emulsions,

Acrylic distempers

distempers,

Premium Enamels

Synthetic enamels

Target

Up-market buyers

Segment

High income group,

Middle class and

Upper middle class

Rural markets

Key Purchase

Quality, Shades &

Quality, Surfaces,

Cost &

Influencers

Dealer push

Shades, Cost &

Availability

Dealer push

The end user classification is the one that is the primary differentiator. The end user  classification decides not only the marketing and the customer contact part but also the manufacturing technologies and the capital investments required. The following  points differentiate these two segments: 

The decorative segment is characterized by low fixed investments and high working capital investments. The industrial segment on the other hand requires huge fixed capital investments.

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Classification derived from CRISINFAC, CRISIL’s Business Intelligence Service

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Corporate Strategy of Asian Paints 

The technology required for manufacturing of decorative paints is easily replicable and of a relatively low cost while the technology required for  manufacturing of industrial paints is highly specialized. The technology for  industrial paints is not easily replicable and also requires high capital investments.

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In the Indian context, success in the decorative arena depends upon nonmanufacturing and service related factors. Therefore distribution, availability, value added services etc are more important. For the industrial arena, technical expertise is more important. This has led to a lot of companies  participating in joint ventures for serving the industrial markets.

The methods for customer development also differ in both these markets. The decorative segment demands heavy advertising, brand development, value added services etc. The industrial segment requires very good quality, relationship management, direct marketing etc.

1.3 Current Scenario 1.3.1 Market Size The estimated size of the paint industry in India is about Rs. 5500 crores. The organized sector occupies 70% of the market and the rest 30% is catered to by the unorganized sector. Over the last few years, there has been a significant shift in customer   preference in favour of the players in the organized sector.

The Indian paint sector is dominated by decorative paints, which occupy about 70% of the market. The industrial paints have a meager share of 30%. This situation is very different from that of most developed countries where the share of these two segments is 50:50

1.3.2 Growth Rates The demand for paints depends on the country’s economic development. In India, the demand for decorative paints comes from two segments i.e. new building construction 14

Corporate Strategy of Asian Paints and retail demand for refurbishment. The demand for industrial paints is mainly from the consumer durables, automobiles, shipping and engineering industries. The growth had been sluggish (2-4% p.a.) in the late 80s and early 90s (87-92) due to low industrial growth and steep excise duty imposed. In the period 1992-96, the market grew at a faster face of about 12% on account of lowering of the duty structure and the improvement in the economic condition of India. This era of high growth extended beyond 1996 as even after a lower growth in the last couple of years due to economic slowdown. The growth is on two counts: Increase in price realization and the increase in the volume consumed. As the price increase has been lower than 5% p.a., most of the growth I due to higher consumption, which is a healthy sign. The Indian paint sector is dominated by decorative paints, which occupy about 70% of the market. The industrial paints have a meager share of 30%. This situation is very different from that of most developed countries where the share of these two segments is 50:50. The demand for decorative paints is expected to grow by 8% p.a. for each of the next 5 years, courtesy the construction of new houses. The shortage of housing and the tax concessions provided in the recent budgets will lead to the growth of the housing construction and thus the paint industry. Rural areas are expected to be centres of growth in this regard. Due to a rapid growth in industries like consumer durables, automobiles and the lower current base, the industrial paints segment is expected to record a higher growth.

1.3.3 Manufacturing Bases & Capacities The plants are usually located in multiple locations so as to be near the customer. For e.g. Asian Paints has 4 manufacturing facilities at Mumbai (Maharashtra), Ankleshwar  (Gujarat), Patancheru (Andhra Pradesh) and Kasna (Uttar Pradesh). The capacities of the above plants are 20000 MT, 50000 MT, 50000MT and 42700 MT per annum

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Corporate Strategy of Asian Paints respectively in March 2000. The locations of various plants for major paint companies have been given in the exhibit 3.

The capacities for manufacture of Paints, varnishes, enamels & oils (in MT) for the top  players in the industry are as follows:

Company

Mar 98

Mar 99

Mar 00

Mar 01

Asian Pints

118900

162700

162700

168900

Berger Paints

34920

56420

56420

25847

35318

Goodlass Nerolac

39123

Mar 02

39588

In the last 2-3 years, the top players have not added significant capacities.

Utilization

Paint is manufactured in a batch process and the downtime between batches is significant. In decorative paints, lighter shades are produced in the beginning of the month, and darker shades as the month progresses. This maintains the purity of the shades. The equipment is rinsed quickly between the production cycles of two shades and washed thoroughly at the end of the month. Batch sizes are however significantly lower  for industrial paints because the product variety is much wider. Also, the equipment used in this case have to be washed thoroughly between different batches, leading to a significant loss of downtime. Paint is not a capital-intensive industry. Hence, it is affordable to create extra capacity to meet seasonal demand only. This is more cost affective than building up inventory during the lean season. The average capacity utilization of the paint industry is 65%. Low levels of plant automation in India product mix variety, batch size, batch  processing time and downtime between batches adversely affects the plant utilization levels.

Economics of scope in industrial and decorative paints

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Corporate Strategy of Asian Paints Theoretically a paint producer has the flexibility to shift from the production of  decorative paints to industrial paints and vice versa. The manufacturing process is very similar and the equipment can be modified, too. However, varying batch sizes of the two segments, different vessel sizes and additional safety precautions to be adopted in the manufacture of industrial paints deter the paint producer from switching equipment  between the two segments of paints. However, the big players are generally present on  both sectors because the Economic cycles are different and this provides the companies with an opportunity to de risk their operations.

1.3.4 Raw Materials The paint industry is raw material intensive, with the raw materials accounting for about 70% of the total production costs. Approximately, 300 different types of raw materials are used in the manufacturing process. The most critical ones are Titanium Dioxide (TiO2), Phthalic Anhydride (PAN) and Pentaerythritol (PENTA) which constitute 30%, 20% and 15% of the total raw material cost. Besides these, organic pigments, solvents, oils and a range of chemical additives are used in paint production. The industry imports around 30% of its total raw material requirements, primarily titanium dioxide.

Titanium Dioxide

Titanium Dioxide is a white pigment that gives colour, consistency and durability to  paints. It exists in two forms namely rutile and anatase. Rutile is 12-15% more expensive and is used in high value decorative paints and in industrial paints. Anatase is more commonly used for exterior paints. Due to the high price of TiO2 (about Rs. 90000/MT for imported rutile), transportation cost is not much of an issue. India has 7-8% of the world’s ore deposits, mostly in Kerala, but is unable to exploit it due to power supply  problems, the lack of appropriate technology and the minimum economic size of plant (about 50000MT/annum, costing about Rs. 1000 crores). In India, the demand for rutile and anatase are about 40000MT/annum and 30000MT/annum respectively. The 4 existing manufacturers are currently operating at near 50% of their utilization and meeting less than half the existing market demand primarily due to lower quality of their 

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Corporate Strategy of Asian Paints  products (unable to produce finer grades). Their prices are however, not lower than the imported products. Hence, the high imports. Setting up a TiO2 manufacturing facility in India is currently unviable. 60% of titanium dioxide produced worldwide is used by the paints industry, which is much more fragmented than the rutile/anatase producing industries (the top 4 players hold about 60% of the market). Hence, there is significant supplier power.

Pthalic Anhydride

It is used for the manufacture of synthetic resins, which act as binders in paint products. About 50% of the PAN produced is consumed by the paints industry. The top 2 players viz. I.G. Petrochemicals and Thirumalai Chemicals account for almost 75% of the domestic production. Asian Paints with a capacity of about 20000MT has a 7% market share. Although India has a surplus of PAN, with 40% of production being exported, I.G. Petrochemicals is an export-oriented unit and does not flood the Indian market. As such, the prices are at a moderate-high level, fluctuating widely (Rs. 29000 – Rs 39000 in last 1 year) in toto with the international prices. During such time of high international prices, Asian Paints has a significant advantage in cost of production of paints. Technology is stable and easily available but scale advantages are large. Hence, the small paint manufacturers are unable to go in for backward integration for captive consumption only.

Pentaerythritol

A large number of industries use this product, paints being one of them. The top 3 players control about two-thirds of the industry. Asian Paints has a market share of 20% and uses two-thirds of its production for its own use. The quality of Asian Paints’ produce is higher than the other majors, resulting in a 15% higher price, of about Rs. 100,000/MT. The fragmented consumers of Penta results in high profits for Asian paints.

Organic Pigments

They are pigments, usually in powder from, consisting of white or coloured particles and  provide the characteristic colour and opacity to the paint. It is a fragmented industry, with more than a 100 small and medium players manufacturing a wide variety of colouring 18

Corporate Strategy of Asian Paints  pigments. Thus, supplier power is low. Also, as far as the major paint manufacturers are concerned, it makes little sense to set up facilities to manufacture organic pigments. As far as consumption in paints go, they are a low value, high price item (about 20000MT annually at Rs. 400,000/MT). The technology is not well developed in India. As such, a  partnership in some form with foreign firms is necessary.

1.3.5 Backward integration Asian Paints has established capacities to manufacture PAN and PET, two raw materials that comprise about 35% of the cost of the product. This backward integration helps reduction in the raw material cost in two ways. This immunizes Asian Paints to the fluctuation in the prices of raw materials in the external market. Also, the raw materials  produced at the plants are transferred to Asian Paints at cost or a low margin over cost; therefore the cost of raw materials is much lower for Asian Paints than the costs for the other players. The prices of the raw materials depend upon the prices of petrochemicals in the international market. The intermediate raw material companies help insulate Asian Paints from major price rises and pass on the price drops. The process of backward integration also equips the company with the ability to meet sudden surges in demand that could be created if the industry dynamics undergo a drastic change. AP is one of the few companies to have been involved in Backward Integration. This is fundamentally because of the need for having high capacity utilization in the captive manufacturing plants. Even Asian Paints, for its size of operations, is able to consume only two-thirds of its captive production. The rest 1/3rd it sold to other  manufacturers of paints. This might prove to be strategically important to AP if the demand surges.

1.3.6 Distribution methods The availability of a wide variety of shades and an extensive distribution network  is critical for the success of the decorative paint business. The company salespeople keep visiting these dealers and maintain a cordial relationship. This is what prevents international players from entering the Indian market on their own, without any tie-up 19

Corporate Strategy of Asian Paints with a local player. Although Asian Paints’ 14,500 dealers are not much more, compared to Goodlass Nerolac’s 11,000 dealers, the quality of dealers that Asian Paints has (in terms of financial power, customer interaction, etc) are much better than that of its competitors. The dealers receive their supplies from the nearest of 55 company depots which in turn are supplied by 6 regional distribution centres in India. These depots in turn receive the goods directly from the 4 Asian Paints’ factories. Having plants spread across the region being serviced is very important for  cheaper products like distempers but not so for emulsion paints. The high transportation costs as a fraction of the COGS would wipe out a substantial portion of the profit margin, otherwise

(The distempers sell for about Rs. 50/litre and the exterior paints and

emulsions for Rs.150 to 200 per litre. The transportation cost from Mumbai to Kolkata is about Rs. 1,500/kilolitre.) The number of product-pack-shade combinations offered by a paints company is vital for its profitability in the decorative paints market. Although temporary in nature, Asian Paints had the first mover advantage in introducing a wide variety of colours first through an extended shade card of 151 colours. In response to J&N’s introduction of  2500 readily available shades through tinting machines in late 1996, Asian Paints and the other majors followed suit by offering 1000-1500 shades to their customers. However, Asian paints gained the most as it was able to penetrate the market most with its tinting machine so much so that most people think that Asian Paints was the pioneer. Although the inventory carrying cost drastically comes down as only 10-15 varieties of stains need to be stocked for mixing, an investment of about Rs. 5 lacs is required by the dealer for  such a machine. Hence, the penetration of such machines is still low, with non-existence in rural areas. Inventory management is critical in the paints industry. The majors normally carry 70-90 days of sales equivalent of inventory. Among them, Goodlass Nerolac is more efficient due to more of its sales coming from the industrial sector where lower  inventory is required (fewer varieties and more specialization). Asian Paints was the first paints major to take a rural initiative as long back as 1989. Since then, it has built up a good dealer network in such areas, where availability of paint is the primary concern and not the shades or the services offered. Also, small 20

Corporate Strategy of Asian Paints  pack sizes (1kg and 0.5kg) are critical as the customers often paint only one or two walls and even if the entire room is painted, 4 litres of paint is rarely required. (1 litre of  distemper and emulsion are sufficient for painting 2 coats 100 and 150sq ft area. Asian Paints offers the distempers in 0.5kg packs and the emulsions in 1kg pack.

1.3.7 Forward integration The major players are considering providing services also, instead of just selling   products. They are thinking of taking care of their customers’ needs right from the selection of the paint to the completion of painting their house. This will be discussed in detail in subsequent chapters.

1.3.8 Technology Technology is very important for industrial paints. The Indian companies have not invested in research and development and hence are backward in this regard. They try to copy the offerings in the international market. Industrial paints can be classified into various categories including automotive coatings, marine coatings, powder coatings and coil coatings, all of which are based on different technologies which require considerable R&D effort for developing and improving. Hence, the Indian players are not geared up to meet the needs for industrial paints on their own. The companies are increasingly going in for joint ventures and technical tie-ups with foreign firms, which have access to modern technology in order to make an impact in the industrial paints segment. These joint ventures are also very useful in getting the Indian accounts of the global players that are currently customers of the JV partner. By virtue of partnering with PPG Industries of USA, Asian Paints got the account of DCM Daewoo, Hyundai Motors and GM in India. Such joint ventures are beneficial for both the partners, the Indian partner getting access to the critical technology and the foreign  player to the distribution network and service personnel.

1.3.9 Branding  The top players have launched various brands in the market. Different brands are targeted at various segments. For e.g. Asian Paints has Royale for the high end of the decorative 21

Corporate Strategy of Asian Paints  paint market and Utsav for the lower end. Brand building is an important deterrent for  new players wanting to enter the paint market in India.

1.3.10 Duty Structure The excise duty on paints i.e. the finished products has remained at 16% since 1997-98. Till the early 90s, the unorganized sector had various SOPs, which enabled them to  produce at 40% lower cost and hence play a major role in the decorative paints market. However, in the mid 90s, the change in the duty structure brought down the cost advantage from about 40% to 4-5%. This resulted in the increase in market share of the  players in the organized sector.

1.4 Porter’s Analysis A Porter’s five-force analysis was done. It is given in a diagrammatic form in the exhibit 1.

1.4.1 Substitutes The threat of the substitues is much greater in the rural markets, where the awareness about paints is still quite low, and it is considered as a luxury good. Either the walls are left as such without any paint on, or substiutes like whitewash are used. This threat is visible in the urban markets also, especially in the exterior paint segment. White cement is one of the most preferred substitutre for the paints for exterior walls. Houses are increasingly made with walls, constructed of bricks in such a way that the bricks act as a natural décor. Stones are also being used in many cases.

1.4.2 Threat of new entrants We see that the drivers for success are different in both the segments, that is decorative and industrial. In decorative segment, distribution channel becomes most important for a player to be a success. Thus for a new player to succeed here, entry 22

Corporate Strategy of Asian Paints  barriers are huge. That may have been one of the reasons that ICI isn’t such a big player  in Indian decorative segment. Although, the growth rate of Indian market is very attractive, in comparison to global markets, APIL, because of it’s distibution channel, is not all that threatened by new entrants. Even if an international player wishes to enter into this segment, it will take him inordinately long time to establish channels which could threated APIL. The brands of the existing players could also make it difficult for a  potential new entrant, especially if the Pull factor further increases in the industry. The industrial segment, which gives mcuh more importance to the technology used, and doesn’t require such huge networks, is more prone to new entrants. But the flio side of this segment is the technology. It raises the entry barriers to forbid entry into this segment. Also getting a foothold in the market is very difficult, as the swittching cost is high for the customers.

1.4.3 Buyer’s power  The decorative segment is very fragmented market as most of the buyers are small  buyers. There are a huge number of buyers, all of them with small demand. Thus they don’t have much power. They have low switching cost though, thus it might be difficult to establish a brand loyalty though. There might be corporate customers with whom a  player may have tie-ups. In those cases the buyers do have certain power. The consumers of paints especially in the decorative paints segment do not have adequate knowledge about the quality, properties and perceived benefits of a particular   paint. Hence, there is a strong reliance on intermediaries like painters, contractors and even paint dealers in making an informed decision about the type and even the brand of   paint to buy and use, thereby becoming strong influencers.

In industrial segment the buyers do have some buying power. There are fewer    buyers with huge demands. Loss of one customer would hit the company in quite noticeable way. This can be overcome by raising switching costs. The costs can be increased by giving the customers specialized services, like after sale services etc.

23

Corporate Strategy of Asian Paints

1.4.4 Supplier’s power  One of the main RM in the manufacture of paints is TiO2. 50% of it is imported  primarily because the quality of indigenously prepared compound is not very high. There are very few suppliers of this material. Also the threat of backward integration into making TiO2 is low, as the capital costs are in the tunes of 450 to 500 crores, suppliers  power further increases. In industrial segment, technology is imperative. There are only very few companies which pioneer in the technology, for example Du Pont, thus they command their prices.

1.5 Global Trends Till now we have examined the domestic market and the present scenario through which we are getting a picture of what the future scenario can be in the Indian market. The Indian market is expected to move towards the model of the western markets as it matures. In the global market the share of industrial paints is 70% and that of decorative is 30% while for the Indian market it is the other way round. The Indian industrial paints market has just about started growing and the decorative paints market has started maturing, so the long-term distribution of paints shall be comparable to the world scenario now.

The global market is estimated at about $21 million tons per annum and valued at about $60 billion5. The world market is growing at a rate of 3-4% a year, or slightly less than the world economy and is serviced by 7,000 paint makers. This is because the market in developed countries is quite mature and a very high level of market penetration has been achieved and there are few areas where market expansion can take place.

5

Source: www.indiainfoline.com

24

Corporate Strategy of Asian Paints The global market is in a very high stage of consolidation and the top players control almost 60%5 of the total demand. A lot of mergers and takeovers have happened in the recent past. Despite the presence of thousands of paint suppliers, the impact of mergers and acquisitions has been dramatic. In 1980, the top 10 paint manufacturers accounted for  15% of world sales. During 1980-2000, ICI grew more than four-fold to become the world’s largest paint manufacturer with a market share of 10%5 worldwide. Akzo Nobel grew five times and Sherwin Williams grew three times. The level of consolidation can  be seen from the example of the DuPont takeover of Herberts. DuPont was the leader of  automotive coatings in North and South America and Herberts was the leader in the area in Europe. DuPont planned it expansion to Europe and the executed this plan through the takeover he Herberts to itself become the largest automotive paints manufacturer in the world.

The market is quite differentiated and a lot of sectors and niches have been identified. The bigger the sector or the niche, more likely industry leaders will dominate it. The reason for this is that most of the players have now started concentrating on the only specialized niches and they try to dominate that particular niche. Due to a high level of  consolidation, only the large players have remained in each of the markets and therefore survival of marginal or low market share players has become tough. Therefore, even the large global players who have a small presence in non core segments have begun hiving off those divisions and are concentrating on the core segments and the competition in even the core segments is only from very large competitors.

Also, in the industrial arena technology advancements started making the technologies for manufacture more and more exclusive to the proprietary technology holders. This has made it infeasible for other players to advance in the markets and they have either sold out or closed shop. It is very tough for one player to dominate more than three to four  niches in the industrial segment because that would require a lot of R&D capability and expenditure. Also, it would have to compete with highly focused companies who are just concentrating on one or two areas and are therefore specialized in these areas. Such a

25

Corporate Strategy of Asian Paints company would find it tough to keep up with the technological advancements in the area and would therefore have to move towards more focus on a smaller number of niches.

The ultimate structure of the industry (the signs of which can be observed even now) would be where a small number of highly focused global competitors compete in each niche with each having a substantial market share.

Companies such as ICI, Kalon and Akzo Nobel have become experts and so dominate the decorative markets, with ICI in particular choosing to quit car paint segment four years ago to concentrate on decorative segment. It has, however, stayed in two big worldwide industrial sectors: vehicles refinish and can coating.

This trend to concentrate on core competencies was started by Herberts in Germany in the mid-eighties, when Hoechst, its parent company, allowed it to exit from decorative  paints, revive the former Herberts brand name and concentrate on industrial market alone. The move astonished an industry then obsessed with volume, for Herberts immediately dropped out of the premier league of the world’s top 10 paint manufacturers. Today, it is   back in the top 10 after building up through acquisitions and accelerated growth in sectors where it is confident it can make the world’s top five. In powder coatings it is world number one. It was, of course, taken over by DuPont in 1999.

ICI, now the world’s largest paint manufacturer, has led the rush for volume and continues to do so. It has pared down its high-tech, specialized global niches to two vehicle refinishes and can coatings - and has developed a profitable world business since its big leap forward in 1986, when it bought Glidden, a US giant then in the top 10. A few months prior to this purchase, BASF, Herberts’ German rival, had bought Inmont, another US giant, from United Technologies. Glidden specialized in can coatings, having developed an environmentally friendly water-based lacquer for spraying the inside of   beverage cans. Inmont’s expertise was in vehicle repair paints. Both acquisitions gave their purchasers years of corporate indigestion.

26

Corporate Strategy of Asian Paints Meanwhile, Courtaulds sold its local UK automotive business to PPG and built on global niche management skills acquired through its world-leading marine and protective coatings.

Akzo, the Dutch chemical giant, has made a rapid series of acquisitions in the nineties that have made Akzo Nobel, the largest paint manufacturer in Europe and second to ICI in volume terms in the world. Many of these companies exchange parts of their portfolios from time to time, to strengthen their positions in particular niches.

The emerging markets to which the paint majors are targeting are Latin America, Asia and the Pacific regions. These markets are expected to be the thrust areas of the future competition.

All the big names i.e. PPG, DuPont of US; ICI and Courtaulds of UK; BASF and Herberts of Germany; Akzo Nobel of the Netherlands; Nippon and Kansai of Japan are in India. Kansai is the parent company of Goodlass Nerolac and it owns a 65%6 equity share in the company.

The Indian market has also started seeing a lot of mergers and acquisitions happening in the recent past. Asian Paints also survived a major threat of acquisition from ICI. Even the Indian market has consolidated quite a lot and most of the minor   players in the Indian market have been taken over. The next major events could be related to mergers or takeovers of Indian companies by major global players or takeovers of  smaller Indian companies by market leaders like Asian Paints.

1.6 Expected growth in each segment The growth rate of the industry is expected to be about 10% CAGR in the future. The growth rate of industrial segment now is about 10%, this is expected to accelerate and hit 6

Source: www.capitaline.com

27

Corporate Strategy of Asian Paints 12%-13% in the next few years. The reasons for this could be increased industrialization and more importantly, the growing importance and awareness about the need for  industrial paints. The decorative paints segment is expected to grow at a slower 7%-8% pa with the exterior paint segment being the star with 10%-11% growth rates. Growth in the decorative paint segment is expected to slow down even more in the future.

1.7 Changes in segmentation The Indian markets are expected to move towards the international model of competition and segmentation. In the decorative paints arena, there shall still be stiff competition but the focus of competition shall move from variety to service, that has been explained in greater detail later. The rural segments shall themselves upgrade and move towards the equivalents to the current urban markets.

In the industrial segment, the Indian market is, as of now, not matured. This market shall evolve to form well-defined niches. Each of these niches shall have very specific demands and specific technology requirements, which shall ensure that only one or two  players who have the competence in the area shall dominate each niche. These niches exist in this segment because of the switching cost of the buyers, increases with the   period of association. This is because the supplier would have acquired a significant knowledge about the customer and this is the reason why market shall develop as an aggregation of monopolies.

28

Corporate Strategy of Asian Paints

2 Identification of Competitors Indian paint industry is characterized by presence of five big players, who command 62% share in decorative segment and 87.1% in the industrial segment. Various competitors and their strategies are as below:

2.1 Main Competitors This is the market share of the companies in both the markets. It includes the organized and the unorganized sector also. 7

7

Company

Industrial Market

Decorative Market

APIL GNPL Berger Paints ICI Jenson & Nicholson Others

14.50% 42.50% 14.20% 7.80% 8.10% 12.90%

37.50% 10% 11.20% 7.80% 5.50% 38%

all the information from CCS report on Asian Paints.

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Corporate Strategy of Asian Paints

Industrial and Decorative Market Share Others Jenson & Nicholson

5.50% 8.10%

ICI

7.80% 7.80%

Berger Paints GNPL

38%

12.90%

11.20% 14.20% 10%

APIL

42.50% 37.50%

14.50% Industrial Market

Decorative Market

The market share of the leading paint companies (the competitors to AP), keeping only organized sector in mind, are as given below. This includes both the industrial and the decorative segments.

Market Share (FY 99) Asian Paints

41%

Goodlass Nerolac

21%

ICI

15%

Berger Paints

13%

J&N

6%

Shalimar

4%

2.2 Identification of focus areas of competitors

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Corporate Strategy of Asian Paints Focus strategies of the various competitors were studied. This would help APIL in determining its future course of action.

APIL: Focus solely on architectural paints and complete the vacant slots in product range. Gain market share in the auto OEM segment through the joint venture. GNPL: Provide paint shop management services to sell solutions rather than products. BPIL: Increase the focus on southern markets of India. ICI: Increase capacities to strengthen presence in fast growing architectural segments. JNIL: Leverage on joint ventures for growth in the industrial paint segment. SPIL: Consolidate position in architectural paints. SNIL: Consolidate position in the re-painting exterior paints market. RPL: Increase presence to cover all segments of architectural paints. Consolidate position in the re-painting exterior paints market

2.3 Entry of Global Players, Recent Joint Venture agreements Company Asian

Collaborator  Nippon Paints

Purpose Pre treatment chemicals, Coil & Powder 

•

Paints

•

PPG Industries

coating

•

Sigma Coatings

Automotive paints

•

BASF

High performance coating Can coating

GNP

Kansai Paints

Auto & Industrial coating

 Nihon Tokushu Herberts

Auto coating

Valspar Corp.

Heavy duty coating Powder coating

•

Teodur  Tikkurila

•

Herberts

Auto refinish

Chugoku Becker 

Marine

•

•

Berger 

•

•

•

J&N

•

Rajdoot

•

Auto coating

Decoratives

Coil coating 31

Corporate Strategy of Asian Paints Shalimar 

•

•

ICI India

•

Salphi

Marine coating

W.R.Grace ICI

Can Coating & metal packaging Auto refinish

2.4 Important brands of competitors Brands in the market in decorative segment

Premium category ( emulsions)

ICI

Duette, Dulux, Weather Shield and Dulux Velvet Touch.

APL

Royale

Berger Paints

Luxol Silk 

Medium segments ( enamels)

ICI

Dulux

APL

Apcolite

Shalimar

Superlac

Berger

Rangoli, Vinyl and Luxol.

Popular segment ( distempers) ICI

Farco, Supercote and Maxilite.

APL

Utsav, Tractor.

Berger

Butterfly

GNP

Goody

Shalimar

Diamond

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Corporate Strategy of Asian Paints

3 Key drivers of success 3.1 Key drivers in past, present and future for each of the three segments The key drivers for success in the three segments Industrial, Decorative urban and Decorative Rural are fundamentally different. Even within the segments, the drivers have changed over time. The Industrial segment has been driven by technological innovation and performance while the decorative segment has been driven by variety and service. The following table gives the most important drivers for success for each of the segments at different points of time.

Key Drivers for Success Segments Past

Current

Quality-

Future Relationship, R&D, Niche

Industrial Assurance Technology Urban-

Development Service, Design

DecorativeVariety RuralConcept

Total Package

etc

Decorativeitself

Distribution/PricingChoice

3.1.1 Industrial Segment  In the pre-liberalization era the Indian Industrial market was relatively underdeveloped technologically. The Indian companies did not have the technological know-how to develop specific products for specific industry requirements. The Indian companies, operating in a protected environment, invested very minimal amounts on R&D and offered very basic paints to the customers. During this period, the differentiation among the products on the basis of their performance was minimum and the quality (reliability

33

Corporate Strategy of Asian Paints and long-lasting nature) of the paint and the assurance provided by the manufacturer were the most important factors for choosing a particular supplier.

In the early nineties, with the opening up of the Indian markets, a large number of  foreign players entered the Indian industry. These players did not have either the  branding or established dealer networks of the leading Indian Paint companies, as a result of which they could not compete immediately in the decorative segment. However, these companies, armed with the experience of having served mature industrial markets around the world were equipped with the technology to deliver specialist products to the Indian Industrial segment. These companies entered into a large number of Joint Venture agreements with the existing Indian players and vastly raised the bar for service in the Industrial segment. Technological superiority and product delivery on specific attributes sought by the industry became the drivers for attracting customers in the industry.

The industrial segment in India is still in the growth stage and the penetration levels are significantly lower compared to developed countries. Differentiation based on technology can be expected to be the key driver for success till the market matures. However, in the future, Paint companies can be expected to focus on micro segments and  Niches within the industrial segment and develop expertise in these. Joint R&D spending   by industry and the paint manufacturer and development of long term relationship   between the buyer and the paints companies could be some emerging trends in these markets. Worldwide, the big paint companies have focused on minor niches for  themselves and emerged as dominant players in these niches. The mature industrial segment can be compared to an industry with a large number of small monopolies (a version of oligopolistic competition).

3.1.2 Urban Decorative In the past, the number of shades that could be offered to a consumer was the key driver  for success. The “mera wala yellow” and the “chocolaty brownie yellowy” campaigns  bear testimony to this fact. The paint manufacturers tried to distinguish themselves on the

34

Corporate Strategy of Asian Paints  basis of the choice they could provide to the consumers. In a previously low-involvement category, the paint manufacturers tried to introduce emotional appeal among consumers to increase the “Pull” factor for their products. “Choice” became a very important factor  among consumers for choice of paints. This was also the period that companies started realizing that branding could play a very important role in affecting consumer decisions and this increased the net ad spend in the industry. This was coupled with making with the consumers more informed about the paints in general. This move was intended to reduce the effect of the painters as opinion leaders, and make the consumer real “decision maker”. In the mid 90s the tinting machines were introduced, which increased the choice available to consumers exponentially. The mixers, which were generally present in the retailers outlets gave the consumers the choice to choose from up to 2000 shades. This removed “Choice” and “Variety” as differentiating factors amongst competitors. The consumers in the urban market became more service-sensitive than price-sensitive.

Surround Product Core Product Intangible elements Reliability Responsiveness Assurance Empathy

Tangible elements Quality Product features Technology Durability

Empathy

The Intangible elements played a more important role in decision-making than the tangible elements.

In the future, when the urban decorative segment further saturates, the peripherals can be expected to play a more and more important role in influencing decision-making 35

Corporate Strategy of Asian Paints especially as the number of differentiators based on product features is very low in this segment. Already, some of the Paint companies have gone into providing Total solutions, i.e., providing services for the consumer right from Product selection to annual maintenance. In the urban segment, the interior designer and architect act as very strong influencers in deciding on the paint to be used. Bearing this mind, a large number of the  paint companies are setting up designing and interior decoration subsidiaries in an effort to play an increasing part in the decision making process.

3.1.3 Rural Decorative Segment  The rural segment has been consistently following the Urban segment with a time lag. Till the early 90s, paints in the rural market were looked upon as a luxury item. It was only after the establishment of a very wide rural distribution network by the major  Paint companies (Asian paints in particular) that the rural penetration began to increase. As compared to the urban segment, the rural segment is extremely price-sensitive and therefore price is a very important determinant for gaining market space in the rural market. The rural markets also exhibit a high level of seasonal fluctuations in demands and the availability of paints during the peak season is a crucial factor for success. Therefore, the distribution network of the companies is the most important driver for the companies for succeeding in the rural markets. In the future, as the distribution system  becomes more entrenched in the rural psyche, factors like the variety offered and choice available could become the drivers for market penetration.

3.2 Other Factors Apart from these sector specific drivers of success, there are some factors influencing success that are common across sectors. They are

3.2.1 Branding  Branding plays a very important role in creating a sustainable competitive advantage for companies, especially in the decorative segment. Even though it is a fairly low-involvement category, the stress placed on assurance and reliability implies that  branding would have a very important role to play in this industry. This coupled with the 36

Corporate Strategy of Asian Paints fact that the companies started emphasizing on the emotional side of the purchase, made  brand all the more important. Slogans like, “mera wala green” became the catchwords. In the future, when the distribution strength fails to provide a competitive advantage and after the entire span of the country has been reached, the companies would have to resort to creating a “pull” for their products as the “push” strategy fails to give advantage. As the market matures, more segmentation would take place and paint would become less of  a “commodity”, which would necessitate branding. Even in the industrial segment, as the companies try to gain expertise and dominance over specific niches, branding could help them create an identity in these niches.

3.2.2 Inventory Management: As the market moves towards more customization and greater choice to customers, the management of inventory along all layers of the supply chain becomes more and more crucial. In a progressively expanding market, capacity utilization of various manufacturing plants could also be very important. Even though inventory management and operational efficiency cannot be instruments providing sustainable competitive advantage, the introduction of foreign players could put pressure on the existing companies to improve their operational efficiencies.

3.3 Drivers for growth of Industry Paints are still considered as luxury goods in many parts of India, and therefore, the total consumption of paints in India is a function of the net disposable income of the country, which in turn is dependent on the performance of the Economy. In such a scenario, the crucial demand drivers in the paint industry are macroeconomic factors such as a good agricultural and industrial growth, good overall economic growth,   performance of the related industries like construction, automobiles, white goods, capital goods and heavy industries, increase in consumer income and consumer buying capacity and impetus given to the housing sector by improved availability of housing finance

37

Corporate Strategy of Asian Paints

4 History of Asian Paints Ltd. 4.1 The initial years Asian paints was started in 1945 under the registered name of ‘Asian Oil and Paint Company Pvt. Ltd.’ It went public in the year 1973. Since the early years of its incorporation, the company has played an active role in expanding its product offerings,   bringing about technological innovation, and expanding its distribution network to include small towns. Its financial strategy to plough back its earnings instead of  distributing large dividends helped it to grow at a rapid pace. The company was renamed ‘Asian Paints (India) Pvt. Ltd.’ in 1974 and got listed on the stock exchange in 1982.

4.2 Financing growth Since 1960, the company has been issuing bonus shares at regular intervals to signify its growth in earnings and to gain shareholder confidence. In the 1980s, Asian Paints resorted to raising both debt (in the form of debentures) and equity to fuel its growth  plans. The fresh equity shares were preferentially offered to the employees and business associates of the firm in order that they strive harder for the company’s well being. The debt raised was long term (8-10 years) with the repayment starting after about 5 years enabled the company to push for growth instead of worrying about repayment immediately. Also, the debenture redemption was done in installments so as not to suddenly strap the company for cash.

4.3 Capacity expansion In 1985 Asian Paints started its third Indian plant for the manufacture of paints and enamels in Patancheru, near Hyderabad, taking advantage of tax benefits for setting up a unit in a backward area. In a similar fashion, a fourth plant with a higher capacity was established in Uttar Pradesh Pentasia Chemicals Ltd. (PCL) was jointly set up with Tamil Nadu Industrial Development Corporation (TIDCO) for the manufacture of pentaerythritol and sodium formate in 1987. In the 1990s, PCL first became a subsidiary of Asian paints and was later merged into it.

38

Corporate Strategy of Asian Paints In 1994 the Company envisaged a grand plan to expand the existing capacities for  manufacturing paints and enamels to 50,000 tonnes/annum at its plants in Ankleshwar, Kasna and Patancheru. A fifth manufacturing facility was set up in Ratnagiri, Maharashtra in1996.

4.4 Modernization Timely modernization has been a key to the company’s superior performance. Its Bhandup plant being the largest and among the most sophisticated factory in the paints industry, besides being vertically integrated and producing a wide products variety of    products is a clear indication. To achieve maximum capacity utilization, adequate attention has been paid to streamlining the process, planning the layout of machinery and selective addition of new capacity to minimize the bottleneck at any particular stage and replacement of old and rusty equipment.

The Company imported the ‘Van Heyden’ low energy process from a German company, along with other technical knowledge for the production of pthalic anhydride, an important ingredient in the paint industry in the late 1980s.

In 1992, Asian Paints entered into a technical collaboration with Nippon Paints of Japan, wherein the latter provided technical know-how for producing powder coatings and coil coatings. Subsequently, adequate manufacturing facilities were set up at its Kasna plant.

4.5 New Product Offerings As part of its effort to provide solutions in areas going hand in hand with decorative  paints, Asian Paints launched the NC range of wood finishes, Asian wall putty and ACE exterior emulsion in 1998 and the ‘Opal’ brand of polyurethane wood finish in 2000.

To wrest away market share from local competitors who were selling lime-based paints, Asian paints launched ‘Utsav’ enamel (in essence a distemper) in 2001 at the lower entry level 39

Corporate Strategy of Asian Paints

4.6 International Exposure The company decided to make its presence felt outside India in 1990. It set up a subsidiary each in Fiji and Tonga, in partnership (almost 50:50) with local players. Asian  paints provided the technical know-how. Similar joint ventures were also set-up in Nepal and the Pacific Island of Vanuatu. By 1995, joint ventures had been established in Queensland (Australia and Mauritius, too. In 1999, the joint ventures had a strong hold in the markets they were operating in and were turning in a good performance.

Asian Paints further expanded into Sri Lanka in 1999 and Australia in 2000 through the acquisition route. It expanded to Oman in 2000.

Australia, an anomaly?

The technological innovation in Australia is not up to developed country standards and the main entry deterrent is distribution network and understanding of the consumer. Asian Paints gained these competencies through the acquisition process and has competencies in taking them further. It would be very beneficial for its foray into the Asia-Pacific market, which along with South America is the fastest growing with a lot of    potential. Besides, many international majors have already taken steps to make their   presence felt in South America.

4.7 Colourworlds – A revolution in the paints industry Asian Paints took this marketing initiative in 1998. Till then the concept of a one-stop colour shop for paints was unknown in India. Aided by advanced computer software,  paints could be mixed in varying proportions to satisfy even the fussiest of customers by  providing them the exact colour and shade of the decorative paint they required. The 350 colourworlds that it set up turned in an encouraging response.

To further its image of being customer centric, Asian Paints even opened an exclusive showroom in Mumbai.

40

Corporate Strategy of Asian Paints

5 Historical strategies adopted by Asian Paints

Opportunities

Competencies

Aspirations

The success of a firm is a function of the Opportunities available in the market, the competencies the firm has and/or can develop and the ability of the firm to create a competitive advantage from its resources and competencies. The strategy adopted by a firm is the conceptual framework that the firm has designed to achieve this objective by creating a link between the three factors determining success. When Asian Paints entered the market, it was dominated by foreign companies and their big wholesale distributors. These foreign companies appointed a few trusted traders as their wholesale distributors and made the business their monopoly. The management of this distribution was shoddy to say the least. These traders enjoyed virtually unlimited credit and made payments once in the year, at Diwali time8. Further  the focus was only on urban market, with no inclination or compulsion to enter into semiurban and rural area or to improve their distribution infrastructure. They shut down the doors on any possible new entrant. Thus it was virtually impossible for a new player to enter into the market as the distribution network was totally lacking. When AP tried to make the foray into this business, they had to tackle two issues, to find a distribution channel and to find a market. They didn’t have any competence to take head-on with the players on their distribution network and in their playing space.

8

Marketing management, by VS Ramasawmy. 2nd edition

41

Corporate Strategy of Asian Paints AP short-circuited the established network, bypassed the bulk order segment, and went directly to the individual consumer. This was highly counter-intuitive, as bulk order  was the major segment and any company needed a portion of it for sheer survival. Also AP sensed this was not the  future growth segment . This was the momentous decision made by AP, which affected all other decisions made by AP. Since they were servicing the customers directly, they had to necessarily keep a wide product range. This resulted  because of the divergence of the multitude of consumers whereas in bulk business it was  possible to service the market with limited products. This move helped AP in the long run, which will be explained in subsequent pages. As stated earlier, all the big players were vying for a share of pie of urban market. AP decided to distance itself from the prevailing urban orientated marketing. This decision was taken due to two reasons. One, AP sensed a huge potential in hitherto untapped rural markets and two, major companies and their distributors weren’t  providing them any openings in the urban segment. AP targeted semi-urban and rural markets, which implied that they had to expand their distribution channel further. Further  they decided to limit themselves to the decorative segment, as neither was there a market for industrial segment, nor did they have any competency in that area, which is technology.   Now due to the above reasons, and some strategic decisions (which stemmed from the fact that AP decided to go to the end consumers directly), it will be shown how AP’s legendary distribution network came to existence. This was the genesis of the strategy of AP, which even continues today. The decorative paints industry was an industry that was not technology driven, and therefore   product based differentiation was not possible in this industry. Since the competitive advantage was not product-based, it was likely to be shortlived. Historically AP has been adopting a strategy that involved adopting measures that gave them a series of short-term competitive advantages. On every occasion in which Asian Paints advantage ran out, they further raised the standards of the industry by adopting measures that increased the cost of doing business for the other competitors. Being the market leader, they could afford to make these changes to the market that forced other competitors into increasing the hygiene factors of doing business. All the changes that Asian Paints introduced in the

42

Corporate Strategy of Asian Paints market were driven by their consumer focus and market orientation. But the operationalising of all these strategies was strongly rooted on the logistical efficiency of  the company. For example, in the 70s Asian Paints discovered that customers needed smaller    pack sizes for their smaller requirements. Introducing smaller pack sizes for all their   product offerings would increase the number of SKUs exponentially, thereby creating enormous problems in inventory management. But the Asian Paints Supply-Chain management system was robust enough to make this change and AP began to offer a wider range of SKUs to its customers at little additional costs. This forced the competitors also to come out with different pack sizes and this raised their cost of doing  business. The short-term edge that AP achieved through this move was the competitive advantage during this period.

Logistical Efficiency as a backbone for providing competitive advantage: Asian

Paints established a series of depots all across the country to set up their own distribution network. They were the ones who introduced the retailer as a channel for selling Paints. They brought in customer-focus into the industry and were the first ones to modify their  offering to suit customer needs. This increased the number of SKUs that they had to offer   per brand. This increased the inventory costs and caused a conflict to be created between costs and service levels. In spite of its large number of SKUs, Asian Paints managed a very high service level (85%) compared to the industry average (50-60%). Detailed Analysis of AP’s log man strategy gives us the following as the reasons for their success in inventory vs. service management. •

A strong commitment to distribution cost control without compromising the service level: While following a totally customer-oriented strategy, AP did not forget the Cost angle. Firstly, Asian Paints was very careful not to invest large amounts of money for the sake of increasing sales. This is because, AP had to stick to its targets in Sales volumes and  Profits. Secondly, AP’s marketing   philosophy demanded that the final prices of its paints were always kept reasonably low to suit the Indian consumer’s ability to pay. Te Company could not attempt to transfer the distribution costs to its consumers. Thirdly, growing

43

Corporate Strategy of Asian Paints volume of business meant growing investment in distribution infrastructure. AP had to find the resources for this and therefore couldn’t afford to have high distribution expenses. •

 Affective Inventory Management : Effective Inventory management in fact is the

single most important component of AP’s distribution/cost control strategy. This was all the more crucial to AP due to its wider range of product offering. AP’s average inventory level equals only 28 days sales while the industry average was 51 days. This provided a 45% cost savings advantage in inventory costs to AP compared to its competitors. In spite of having tight inventory management schedules, AP was able to maintain high service levels due to its strong distribution and transport networks. •

 Effective control of credit outstanding : The fallout of having a large distribution

network is the problem of large credit outstandings. So, an effective credit management strategy was crucial to AP’s working capital management. AP stipulated that every one of its dealers should pay for the supplies within a specified time norm. The company offered them attractive incentive schemes to induce them to comply with its stipulations. o

A special discount of 3.5% to be passed on at the end of the year, provided each and every payment throughout the year was made within the stipulated time norms. This is refereed to as the discount for   perfection in  payments

o

A cash discount of 5% for all outright cash purchases. The cash discount was given whenever payments were received within 24 hours of the supply/invoice.

The scheme became a grand success. AP’s credit outstandings always stood  below 25 day while the outstandings of competitors were mostly in the range of  40 days. •

Total computerization of the physical distribution and the credit control system: Effective computerization of the distribution system, inventory control and control of credit outstanding is the other factor that helped AP to control

44

Corporate Strategy of Asian Paints distribution costs without lowering service level. A totally computerized and a totally integrated distribution system was evolved by the company beginning from 1976. Computerization of sales and inventory data and the use of rational distribution models helped the company increase its service levels by 10% with no increase in the overall level of inventory carried.

Computerization also

enabled AP to process recent sales data for the 100 fastest moving SKUs. This analysis was used to project sales of specific products, which helped plan  production, raw material purchases and advance stocking.

5.1 Market Leadership through Distribution Excellence. AP achieved an enviable leadership position in marketing through the distribution route. Though, AP concentrated on all the marketing functions, it was the mastering of  the distribution network that gave AP its distinct competitive advantage. AP took the route of bypassing the bulk-order segment and introduced retailing into the Paints industry to change the entire Industry dynamics and occupy leadership  position. AP had also decided to target the rural and semiurban areas initially as they could not compete in the urban segment. To sustain its advantage and to serve this  particular target segment, AP had to build an extensive distribution network. Developing such a distribution network had two far-reaching consequences. 1. They could not serve this market with single centralized distribution network. Thus they opted for a decentralized distribution network serviced through depots, located all over India. This set the base for AP to make whole India as their market. 2. They decided to go retail and have an open door policy. This was the time when AP’s distribution network started taking a shape, and they went for  channel management in a big way. This network was far bigger than distributor-dependent network. While other companies were playing with just a handful of distributors, AP was managing a channel of more than 6500 dealers in 80s itself.

45

Corporate Strategy of Asian Paints As stated earlier, with the strengthening of the supply chain, AP decided to serve whole India as their market. This step placed heaviest demand on their distribution side. Thus they developed a nationwide network of depots/stock points. As a logical corollary to it, they had to develop a national marketing organizational structure (exhibit 4). This gave them two specific advantages. •

They had a distinct competitive advantage over the smaller regional players in the industry who tried to spot niches and occupy them. AP was very efficient in spotting the gaps in the market and defended its market leadership position very well.

•

Having a strong dealer network gave AP the necessary qualification to compete against the big players in the urban areas.

Strategy Adopted: AP’s strategy focused on the aspect of obtaining short-term

competitive advantages by increasing the Cost of doing business for the competitors. The strategy was based on collecting of consumer insights that gave AP the knowledge of the changing value-drivers in the industry. Based on these insights, AP decided its Marketing moves and acquired the competencies to help it leverage this understanding. Thus, the strategy adopted by AP was driven by 1. Strong Customer Focus 2. High Operational Efficiency to enable it to offer the features demanded by the customers. With its strong customer orientation, AP has been able to spot the change in the value-drivers among the customers and has been able to consistently vary its internal  processes to deliver on the most-important criteria sought by the consumer.

Urban Strategy:

In the urban segment, the key benefit sought by the customer kept changing over a  period of time. In the initial phases, when the economy was still supply driven, The availability and reach of the paints were the most important criteria for purchase among

46

Corporate Strategy of Asian Paints the consumers. It was during this period that AP developed the retailer network and changed the industry pattern from making Bulk sales to making retail sales. After a period of time, the distribution-retailer network of all the big players were well established and product availability ceased to be an issue. During this period, the consumer’s purchase decision was driven by variety. To meet this demand from the consumer, AP further increased its number of SKUs and offered a wider range of   products to the consumers. Its fully integrated and computerized supply chain enabled it to do this at little additional cost. AP ran ad campaigns focusing on the ability to provide variety and choice offered became the platform of competition in the industry. However, with the explosion of the number of shades offered (and more recently, the introduction of tinting machines), variety has stopped functioning as a differentiating factor.

To be added later on

6 Asian Paints Performance Analysis The performance of a company can be analyzed in mainly two ways, the financial  performance of the company, and the market performance of the company

The financial performance is the performance that is related to the financial soundness,

the cash flows and the creation of wealth for shareholders.

The market performance is the performance of the company related to the market

 position, the market shares, the expected future growth etc.

Asian

Paints

is

India's

largest

manufacturer

of

paints

selling

around

200,000 MT/KL of paint in the FY ended March 2002. It is the leader in this industry

for

over

three

decades,

controlling

44

per

cent

of

the

Indian

  paint market. It ranks among the top 15 decorative coatings companies in the world. Asian Paints has been recognized as the `Fourth Most Admired

47

Corporate Strategy of Asian Paints Company' across industries in India through a survey carried out by `The Economic Times` in association with ORG-Marg.

6.1 Financial Performance 1. APIL’s’s net sales increased at a CAGR of approximately 16.2% during the  period between 1997-98 and 1999-2000 derived primarily on account of 17.7% increase in the volume off take in paints. The average realizations however  declined by 1.7%. The increase in turnover coupled with higher income from other related activities led to a CAGR of 16.4% in the operating income. During 2000-01, paint volumes grew by 11.8%, while unit realizations registered a marginal increase of 0.6%. Paints volumes grew strongly during the year   primarily on account of higher sales of exterior paints, where APIL has emerged as the market leader.9

2. APIL’s’s net sales are expected to increase from Rs. 12.5 bn. in 2000-01 to Rs. 14.9 bn. In 2002-03, primarily driven by strong growth in exterior paint sales coupled with initiative to expand the overall paint market through color tinting machines, new products launches & direct customer services.

3. The earnings of APIL are at a higher percentage than the industry average. This is   because of their higher exposure to the decorative paints segment. Also, since there is some degree of backward integration, the company has some immunization from cost fluctuations. Also, though the margins from the traditional decorative segments are falling, the company shall be able to maintain its higher operating profit ratio due to higher exposure to exterior paints. Exterior   paints is still a nascent industry in India and therefore is a high growth, high earnings industry. But, now since they are still penetrating the high volume but highly cost sensitive rural market, their margins still have some downward  pressure. With the prices of key raw materials expected to remain stable over the 9

Data taken from CRISINFAC, service from CRISIL

48

Corporate Strategy of Asian Paints next two years coupled with improved cost control following the implementation of the SCM & ERP systems, operating margins are expected to increase over the next two years to touch 16.6% in 2002-03.9

4. PBDIT at Rs2.38bn was 13.4% higher than the previous year. PBIDT margin registered a 70basis point improvement from 17.4% to 18.1%.10 The margin improvement was despite three price decreases undertaken during the year to pass on the benefit of soft raw material prices to the consumer  Though the overall growth rates for the industry have reduced the profit margins of APIL have not come down. This is also because of it superior management of its costs. Due to the introduction of the point of sales mixing machines, the inventory costs have reduced and greater production efficiencies have resulted. Also, APIL has integrated its supply chain with the use of IT. This has led to better  responsiveness to demand changes and also better inventory and production management.

5. The debt/equity of the company is only about 0.55, which indicates low exposure to debt. This is again because of their strategy of having higher exposure to the decorative paints segment. The capital requirements of the decorative segment are not very large, and therefore not much debt is required. The exposure to debt could be increased in the future due to their increasing presence in industrial segments which shall demand higher and more specialized capital investments. Also, they shall have to invest in the newer technology tinting machines in their  ‘ColorWorld’ stores. This could increase debt, but not significantly since the expense on tinting machines is not very high.

6.2 Market Performance 1. Asian Paints has consistently maintained a majority market share in the decorative  paints segment. The market share of APIL has consistently remained around the 10

Data from www.indiainfoline.com

49

Corporate Strategy of Asian Paints range of 37% to 43% in decorative segments. Even after the entry of  multinationals, APIL has been able to defend its turf well and maintain a majority market share.

Decorative

Industrial

Asian Paints

38%

15%

Goodlass Nerolac

14%

40%

ICI

8%

9%

Berger Paints

9%

10%

J&N

5%

8%

Shalimar 

6%

8%

Others

20%

N/A

Market Share (FY 2000)

11

2. In the industrial segment, APIL lags quite a long way behind Goodlass Nerolac. APIL has entered the automotive paint segment through a 50:50 joint venture with PPG Ltd. The joint venture ranks No 2 in this market. Goodlass Nerolac is the leader here, primarily because of its tie-up with carmaker Maruti. Recently, they acquired Hawcoplast Chemicals, a powder coatings manufacturer. This will help them make inroads into the industrial paints market, where powder coatings are gaining favor thanks to their relative eco- friendliness (compared to solvent-based  paints). Hawcoplast also has a technology tie-up with a Europe based company, which shall help APIL gain the required technology. The acquisition has catapulted Asian Paints to amongst the top 3 powder coating manufacturers in India. Basically, APIL is trying to broad base its market in India, so that in the future if it is threatened by a large MNC it would have sufficient dominant markets to resort to. Also, it is trying to pre-empt the entry of such MNCs. APIL also realizes that the growth rates of decorative segments are reducing and the 11

Data from domain-B industrial reports, www.domain-b.com

50

Corporate Strategy of Asian Paints overall proportion of the decorative segment in the total market is also going down, so if it has to maintain its dominant position it has to enter the industrial  paints market.

3. Interestingly, Asian Paints could lay claim to being one of the few Indian multinationals, a rarity given that they are not in a knowledge sector like software or pharma. They already have nine units outside India and sell to more than 20 countries. Though these are largely developing nations with small markets, paint demand growth is likely to be higher than GDP (as in India). Moreover, Asian Paints is well placed to leverage its experience in the costsensitive Indian markets to get ahead of other MNCs. This is in keeping with their  strategy of growth with geographical expansion. Since the opportunities of  geographical expansion are limited in India, APIL is trying to expand in foreign markets.

6.3 Management of working capital by Asian Paints Asian Paints is one of the best managers of working capital in the industry, and they have   been using a lot of innovative methods to either reduce their dependence on working capital by attacking the very parameters that make it important or better managing working capital by being more efficient in handling the components of working capital. Since management of working capital is so crucial, the following have been the initiatives of Asian Paints to reduce their dependence on working capital or improve management: 

Factors to reduce dependence: o

Introduction of tinting machines: The tinting machines that have been introduced through ‘Colorworld’ have helped reduce working capital by reducing inventories. Now, inventories of only a few shades have to be maintained since the wastage and understocking problems are vastly reduced. Each shade will be  produced as required and therefore each shade will be produced only as much as is required, leading to much lower requirement of safety stock. The problems in inventory due to variety are also solved as the result. ‘Colorworld’ has decreased

51

Corporate Strategy of Asian Paints the importance of working capital management as a success factor because the  problems caused due to working capital intensiveness are being diminished. o

Integration of the supply chain: The supply chain of Asian Paints has been integrated with the use if IT. This again leads to a reduction in inventory as the responsiveness is much higher and the company can produce closer to the actual demand and forecast demand more accurately. This has led to lower requirements for safety stock and has also reduced chances of over or under stocking. Also, due to the integration of the supply chain the coordination costs for managing receivables have gone down and therefore receivable can be managed with more efficiency. Also, since the orders are placed much closer to the demand, the risk  for the dealer is also lower and therefore there are lower chances of default.



Management of working capital: o

Low debt: Asian Paints has a low D/E ratio of 0.5212 and this has led to lower  interest costs and therefore better and higher cash flows. Asian Paints is also in the process of reducing its debt further, which shall further improve the cash  position.

o

Lower debt periods: The cash to cash cycle of Asian Paints is not very good mainly because of low payables and low period of payables payments while their  credit period for their debtors is much higher. They are trying to reduce this  problem by reducing the credit period to the dealers to a certain extent. They could cite the advantages being offered by IT integration and Colorworld to induce dealers to pay early. Also, schemes offered for early payers should help them reduce their cash to cash cycle and improve working capital management.

Their recent drive towards providing value added services to end customers is being motivated by reasons other than working capital management but it also helps in reducing the dependence on working capital and leads to better working capital management  because:

12

Source: www.capitaline.com

52

Corporate Strategy of Asian Paints 

Made to order: Since the orders are directly taken from the customer, the paints shall  be made to order and therefore there is no risk of over or underproduction for such orders. This drastically reduces the inventory problem.



Lower risk of default: The exposure per customer in the direct to consumer market is much lower. This reduces the risk of default as defaulting of one customer does not lead to major losses. Also, Asian Paints could evaluate the customer before the transaction. For the customer, too, the purchase of paints would not be such a high value transaction that he would find it tough to pay for it, while the exposure and risk  while supplying to dealers is higher.

53

Corporate Strategy of Asian Paints

7 Asian paints strategy 7.1 Corporate Strategy Currently Asian Paints is the market shaper in the decorative segment with a large market share (53%) and is second in the Industrial segment with a share of 16% behind Goodlass   Nerolac who have a share of 40%. Historically, Asian Paints has focused on the decorative segment while simultaneously trying to maintain a significant presence in the industrial segment. Asian Paints stated corporate aim is to establish itself as one of the top 5 decorative players in the world. Asian Paints future strategy would be in alignment with their past strategies. Asian Paints would be focusing on growing at a high rate in the decorative segment while trying to establish itself in significant niches in the Industrial segment.

Growth in any industry can be achieved through one of three different routes.

a) Expanding the consumer Base (Market Penetration oriented): This strategy is used when the industry is in the nascent stages and the market for the product needs to  be developed. This is a period during which the early entrants into the market are involved in “Concept Selling” thereby trying to develop a market for their   product.  b) Increasing the individual company’s market (Market Share oriented): When the industry comes out of the growth phase and as competition increases, the  positions in the market for the different players becomes similar to a zero-sum game and growth can be got only at the expense of the competitors. Product differentiation becomes the key parameter of competition during this p eriod. c) Increasing Consumer-Consumption: After the market gets stabilized with a few established players, consumer loyalties get built up and the switching costs increase. The market shares of the different companies stabilizes around a mean range. This is a phase when the industry players look to increasing per-capita consumption for fueling growth. During this period companies launch newer, improved versions of their products, thereby trying to fuel growth by “Up-

54

Corporate Strategy of Asian Paints gradation”. Companies involved in the product manufacturing start playing a role in offering product related services, thereby trying to increase consumption.

Companies move higher up this hierarchy as the market matures. The cost of growth of each of these approaches progressively increases. This is the reason that most companies resort to geographical expansion once the market matures, rather than trying to increase per capita consumption. (For e.g. Coke’s entry into India was a move to expand its market geographically as increasing its volumes in the mature market of USA would have proved very costly.)

Asian Paints has also taken this route of geographic expansion to increase its market share in the global market. Geographic expansion into similar markets also gives the player an added advantage of the learning curve effect as market changes can be more easily predicted with the help of knowledge acquired from experience in previous markets. This knowledge of developing markets could be AP’s significant advantage over  the other global majors in the fight for global market space among the developing markets.

In its quest for global geographical expansion, AP has chosen both the organic and Inorganic routes for expansion; AP has grown both by expanding its own markets and by acquiring newer players. AP has set itself a target of achieving two thirds of its growth organically and a third from acquisitions. AP has chosen the acquisitions route   because entering into new markets, establishing their own presence and distribution networks, understanding the consumer mindset and running a business could be a time consuming proposition.

Asian Paints can adopt two approaches to fuel its growth strategy in the decorative segment via acquisitions.

1. The first approach would be to use Acquisitions as a means to providing incremental growth. This would be the case when the acquisition is small and the

55

Corporate Strategy of Asian Paints acquisition has been motivated by the need to enter into the market rather than a strategic reason to capture synergies and leverage their size. 2. The second approach would involve attempting to change the industry dynamics drastically by acquiring all the bigger players of the industry. The fallout of this would be that Asian Paints would get the necessary freedom to develop and grow the Paints market of India without pressures from the competition. Historically, Asian Paints has had both customer focus and competition focus. The pressure  brought about by the competition could have been the reason for the inability of  AP to bring about a high degree of consumer discrimination. If Asian Paints were to acquire the remaining big players of the Industry, Asian Paints would enjoy monopoly power in the industry and it could then attempt to capture the entire consumer surplus by bringing about price discrimination among various customer  segments. This method could be attractive if the benefits accruing out of utilizing monopoly power outweigh the costs involved in acquiring those players.

In the current scenario, the other existing big players are GN, ICI and Berger. Among these GN and ICI are parts of global giants who themselves are also capable of   playing out the same strategy. Infact, in 1997, ICI had made a takeover bid for Asian Paints that was foiled only by an intervention from the government of India. Under  these circumstances, the resistance to a takeover bid by these players is likely to be very high and this would increase the takeover costs exponentially. (Especially  because both of these players are also capable of using monopoly power if they acquire a majority share in the market). Moreover, due to the Indian market still being in the growth stages and the Indian consumer still having a low ability to pay due to the prevailing economic conditions (developing economy), the extent to which monopoly power can be used is also low. (The extent of utilization of monopoly   power would be a inverse function of the price elasticity of demand and this monopoly power could be low in the Indian scenario, if the market is price-sensitive). Due to these factors mentioned above, the acquisition approach entailing acquiring of  the other big players of the Indian industry seems to be both infeasible and not  beneficial and therefore, not likely to happen.

56

Corporate Strategy of Asian Paints So, it can be concluded that AP’s acquisitions would be to bring about incremental growth in its market share in the industry. AP would embark on an acquisition based growth strategy in both India and abroad.

AP’s foreign acquisition strategy would be driven by the acquired company’s  presence in the market and the entry it can provide for Asian Paints in the new market. AP should look to acquire players that have a healthy market position and are poised for  growth in their home market.

AP’s domestic acquisition strategy would be driven by the acquired company’s ability to provide a distinctive competency in a segment in which AP is not so strong. AP’s attempted acquisition of Snowcem is based on this premise. Snowcem has a significant presence in the exterior paints market, a fast growing segment in which AP has little competency.

In the industrial segment, AP’s strategy should be to acquire competencies in some specific promising niches, either through acquisitions or Joint Ventures. The industrial segment is largely comprised of a large number of niches in which companies exist as near monopolies. Of the different sub segments in the industrial segment, automotive paints is the biggest. AP has had a long-standing tie-up with PPG, which is the global leader in Automotive Paints. With the help of this tie-up AP has acquired the automotive client accounts of Hyundai, Ford etc.

AP should also look to acquire domestic players operating in the industrial segment if they are operating in an attractive segment and have the requisite technology. AP’s recent acquisition of Haucoplast was also motivated by this. Haucoplast has the requisite technology to compete in the white goods segment of the industrial segment which is one of the fastest growing subsegments of the sector. Asian Paint’s Acquisition strategies are discussed in greater detail in the next chapter.

57

Corporate Strategy of Asian Paints 7.1.1 Asian Paints Overall Corporate Strategy

New

Market Opportunities

Develop

Discover Exploit new markets by creating products /services by leveraging existing competencies differently

Build new competencies to create the future

Defend

Existing

Deepen

Defend existing markets by strengthening existing competencies

Existing

Build complement ary/ new competencies to fortify position in existing markets

Distinctive Competencies

New

For any firm operating in a market,, there are four generic strategies open to it. They are depicted in the above diagram. Here it will be analyzed where is AP playing in which market, and how are they doing it. Defend: this is the rural and the urban market in which AP is playing. They are a target

to many global companies, which are playing in Indian market via Indian arm of their  operations like ICI has Berger, Kansai has JN. Deepen: this is the industrial segment of Indian paint industry where AP has a weak 

  presence. They have a presence in automotive segment but rank a poor second. They need to form alliances with foreign players to enter into this segment. They can also look  for tie-ups with the company, which have tie-ups with those companies whose daughter  arm is operating in India, to lock the account. Their move of taking over Haucoplast is one step in this direction. Their tie-up with PPG has given them a good presence in automotive segment, capturing clients like Santro, GM, Ford etc.

58

Corporate Strategy of Asian Paints Discover : this forms the basis of fast growth. AP has identified opportunities abroad in

developing countries similar to India. To enter into these countries they adopted the  process of acquisition. Develop : till now paint industry has been a product-oriented industry. There maybe a

huge potential in the service side of it. AP has taken some initiative in this direction by introducing color-world. Also they have started providing service in painting and interior  decoration. They are trying to disintermediate the chain and become a part of it. They can take it to new dimensions by acquiring the whole chain and becoming full service  provider. Providing a painter is removal of pain element, but they need to see whether  value-adding services are possible. These can be as integrated to provide an umbrella service. This can span whole gamut, right from approaching a customer (permission marketing), to suggesting the correct shade keeping in mind various factors, to providing  painters. But the most important part of it would be constant reminders to the customers to repaint, or upgrade.

7.2 Asian Paints Acquisition targets Asian Paints could choose to go the Mergers and acquisitions route to either extend its  presence to the markets in which it is not present now or to capture market share from these companies and make its position at the top of the decorative paints segment more secure.

The Indian market has witnessed a lot of takeovers and acquisitions in the recent past. Asian Paints itself has acquired Hawcoplast in the powder coatings segment; Berger  Paints has acquitted Rajdoot paints etc. Asian Paints had to face a takeover bid by ICI (India) which itself is a subsidiary of ICI Plc worldwide. A lot of the companies existing in India are subsidiaries of the major global companies. Goodlass Nerolac, the leader in the industrial segment and second to Asian Paints in the decorative segment is also a subsidiary of Kansai Paints, Japan.

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Corporate Strategy of Asian Paints India is an important market for most of these companies to expand into and therefore these subsidiaries have been setup here. Also, most of these subsidiaries are focused on the same segments in India as their global parents are focused on a global scale. Therefore, none of these subsidiaries are in the non-focus areas of their global parents therefore these subsidiaries are basically a method of method of market expansion and entry for the global players into the Indian market.

For, Asian Paints, it would be really difficult to takeover the Indian arms of global majors  because these Indian arms are subsidiaries of the global players and they are looking to establish a presence in India through these companies and they would definitely not be looking to hive them off.

That does leave a few companies that Asian Paints could target for takeover. Again, these takeovers could mainly be aimed at consolidating and increasing their market presence and garnering a even larger share of the market share in India. Another reason for these takeovers could be to enter into area that Asian Paint has been unable to capture so far  and establish itself in this arena.

Targets could include a company like Berger Paints (subsidiary of the UB group) for  consolidating market position or a company like Snowcem for entering and capturing the exterior paints market and also consolidating its position its position in the market as a more integrated solution provider for a customers needs.

Companies where Asian Paints is looking to acquire only because it wants to acquire the market share of the company, Asian Paints should be careful because these companies would come with a lot of areas which might not be the core areas of Asian Paints, which it might have to hive off later. Also, it might not be worth buying a company that has a marginal market share.

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Corporate Strategy of Asian Paints Let us evaluate Snowcem as a potential takeover target mainly because of two reasons, entry into newer relate markets and a lot of hype about the recent plans of Asian Paints to acquire Snowcem.

7.2.1 Possible acquisition of Snowcem In the decorative range of paints Asian Paints is the market leader and has its presence in almost all the segments. One of the major areas in which it does not have a presence is the exterior cements paint area. The exterior paints market is expected to be the high growth area for atleast five years into the future. This is the area that Asian Paints has entered now with its exterior emulsions. Snowcem is the market leader in this area with a market share of 26% in the cement paints and 50%13 share of the textured finish area.

If Asian Paints decides to takeover Snowcem, it would provide Asian Paints with leadership in the total decorative segments market including the exterior paints market in its portfolio. It could also look at upgrading the customers from Snowcem’s cement  paints to the more advanced exterior emulsions that it has begun offering.

The acquisition of Snowcem would also fit nicely into its strategy of providing value added services, as they would be able to provide a complete solution for any customer, which approaches them. The customer need not go to any other dealer of any other  company to get any part of his house painted. This would be a major advantage that Asian Paints could later leverage and use to improve market position.

For the financial year 1999-2000 the company earned a net profit of Rs14.93 crore on a turnover of Rs153.15 crore. Its net worth stood at Rs70.29 crore while its total asset is valued at Rs185.68 crore.13

Asian Paints has a Debt/Equity ratio of 0.52, which is low debt, and a very healthy ratio. It is also in the process of retiring debt, which shall improve the D/E ratio even further. It is also a company that has shown a healthy growth in the past and is expected to do well 13

Source: www.capitaline.com

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Corporate Strategy of Asian Paints in the future. It is considered to be a blue chip company and has a very good financial  performance. All this would enable it to easily raise additional capital if required. The company might be wary of raising additional debt because the increased interest  payments would stretch its working capital. Working capital management is one of the crucial financial functions of paint companies and problems with cash flow, due to additional interest payments, could cause unwanted problems in other areas. But the company could easily raise equity if required and fund its acquisition through such an equity issue. Any cash that is excess or not required for efficient working capital management could be used. In fact, an executive of Asian Paints mentioned that the company was trying to improve its cash position so that it could fund such acquisitions. The takeover of Hawcoplast was initiated after such improvement in the cash position.

7.3 Business Strategy The business strategy of AP has been on the basis of acquiring a series of shortterm competitive advantages by adopting measures that raised the Cost of doing business for all its competitors by raising the hygiene factor in the business. So far, Asian Paints has been using its distribution strength and logistical efficiency to attain this advantage. The advantage obtained by leveraging on distribution strength is short-lived and ultimately imitable. Moreover, AP has established such an extensive network that getting incremental advantage out of improving the distribution network could be very difficult. The next logical step for AP to look for to gain competitive advantage would be through either  channel control  or through occupying mind space. AP should try to increase the window of competitive advantage by using Marketing as a tool to acquiring competitive advantage. Some of the industry characteristics could be used to gain insights about the competitive scope of Asian Paints.

7.3.1 Urban strategy The industry is characterized by the presence of intermediaries who have a very high influencing power  on the purchase decisions of the consumer, especially in the urban

areas. Asian Paints strategy for acquiring higher product demand could be three pronged. 62

Corporate Strategy of Asian Paints 1. Use these intermediaries for initiating demand: The intermediaries (the painters, contractors, designers, decorators etc.) could be used as a marketing arm of the company. They could acts as spokespersons of the company and promote the company’s products to the customers. Some of the bigger contractors could be  paid a commission for bagging contracts that involve purchase of Asian Paints. 2. Occupy part of the intermediary space and try to sideline other intermediaries: Asian Paints should open a service arm, which would provide the services  provided by the existing intermediaries in the market. For operationalising this strategy, AP could select a few of the existing intermediaries, give them the tag of  Asian Paints service wing, and follow a franchisee model of operations. Being  present in different seditions of the value delivery system and having a strong  brand equity in the Paints market would give AP the credibility to operate a strong service arm. The service based strategy of AP could have two different approaches a. AP could become a service provider with the aim of providing a supporting arm to the Products business. In this case, the fundamental aim of the service sector would be to remove the transaction costs of the endconsumer by providing all the aspects of painting in a bundled fashion. The service sector could be set up as a loss making venture with its fundamental function being bringing in more customers for the product. In this case, AP’s main business would be in the manufacturing business and the service sector would act as marketing arm for this. The ideal analogy to this kind of service would be the financing services arm of motorbike manufacturers of the country. All the financing services are, in themselves, loss-making, but by offering credit they remove the transaction costs of the consumers, thereby increasing product demand. (Or)  b. AP could change the industry dynamics totally by providing value added services as an intermediary player. The company could play the role of  interior decorator and paints consultant and help the consumer in designing and painting his house. In this scenario, AP would be changing

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Corporate Strategy of Asian Paints the business from being a product based one to a service based industry and would be appropriating value through the services it provides. The first approach would entail creating a service arm that can cater to a large market, whereas the second one would necessitate the creation of a wellqualified service arm which is capable of providing value-added services. AP can follow both these approaches and cater to different market segments. The value-addition services arm would cater to the premium end of the market who have a very high willingness to pay and the other bundling services arm would cater to the demands of the masses.

3. AP could try to reduce the power of the intermediary by increasing the Pull  for  the product. The role of the influencer could be drastically reduced by increasing the power of the end-consumer. AP can also try to increase end-consumer power   by removing information asymmetry between customer and manufacturer. AP can achieve this by establishing a strong brand name for its brands. The possible utility of branding in this segment has been analyzed as presented in the next chapter.

AP has actually been taking efforts along all the three above mentioned lines to gain competitive advantage. AP has started a service arm and is attempting to do   Permission marketing ; which essentially means that a marketing team contacts

individual homes and offers specific Painting solutions to them free of cost. AP ‘s Colourworld is also an effort in the direction of providing value-added services. AP’s helpline is a tool designed to reduce information asymmetry and therefore increase end customer power.

Parallel execution of strategies suggested in 2 and 3 could lead to a situation of  eventual disintermediation in the industry. Simultaneously occupying intermediary space and reducing intermediary power could ultimately lead to a situation when the intermediary providing service gets integrated with the parent company operations

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Corporate Strategy of Asian Paints and the other intermediaries get totally eliminated, thereby removing an entire layer  in the value-chain. (Similar to the Dell model of operations).

7.3.2 Rural strategy The above-mentioned strategies can be used for the urban segment. The dynamics of  the rural segment are slightly different and different strategies need to be adopted for  these. The rural segment is not mature enough to appreciate service related offerings and therefore the strategy should be product related. The basic strategy that has to be adopted in the rural segment is one of customer up gradation. The penetration of the rural segment has been achieved by offering a basic product well tailored to match the low willingness to pay of the rural consumer.

After basic penetration levels of the category have been achieved and the traditionally used proxies eliminated, the rural consumer can be offered a “higher ” range of   products with a view to up grading the consumers. The highly value sensitive rural consumer is likely to react positively to product offerings that provide a good cost  benefit equation, even if the products are costlier.

7.3.3 Strategy for international markets For the newly acquired global companies, utilization of the learning curve effect and the knowledge base from having functioned in a developing country would be the most crucial factor for growth. AP can hasten the process of market growth and maturity in these regions by leveraging on its experience and launching newer products at a faster  rate.

7.4 Differentiation and the role of branding AP realized that the market was evolving into a pull-oriented market. Thus they embarked on two different strategies in 80s, one for rural, the other for urban markets. In rural market they mostly sold the concept of the paint, while the urban market, which had already evolved, was becoming more variety conscious with additional benefits. It was a typical case of Product Life Cycle (PLC), which operates at 3 levels

65

Corporate Strategy of Asian Paints 

Product level



Product sub category level



Brand level

In my context, paint is at the product level. There is low product familiarity thus concept selling is required. That is exactly what AP doing in rural markets, and what it did in early 70s when they focused their attention on removing the perception of luxury item from paint. In sub category level, paint can be classified as interior, external, emulsion, distemper etc. The urban market had matured to this extent by late 90s when the premium segment of plastic paint started making inroads. When a market is sufficiently matured, it starts differentiating, and then the brands play an important role. This is the current and future strategy of AP, with a few additional concepts. In this chapter I will discuss those issues.

7.4.1 Branding  It is imperative to define a brand before moving into the strategy of AP.  A brand is a name, term, symbol or design, or a combination of them, which is intended to signify the  goods or services of a seller or group of sellers and to differentiate them from those of  competitors.

There are three basic broad strategic routes open to any company to meet competition in a market place; they are given in the diagram.  Niche market is ruled out for the big players, as far as decorative segment is concerned. They are national players, and it would not be economically viable for them to  play in the niche markets. Rather that was AP’s initial strategy when they started making serious inroads in the paint industry. They kept a very close watch over their distribution network so that no local player could identify gap in the offering, and carve a niche for  itself. Their overall strategy has always been to keep the cost under tight control. But they never fought in the market with price. Rather they raised the cost of doing business for the competitors and kept the cost constant. This was a unique feature of their strategy.

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Corporate Strategy of Asian Paints 7.4.2 Classification of paint  Let us take a close look at the differentiating strategy. Differentiation can be based on  product, channel and promotion. “Product”, however, lends the maximum scope for  differentiation. Here I should be careful to point out that a product can be a brand also. Thus in those cases when the product attributes are same in a product category, then the intangibles play an important role. This is where branding becomes important.

Broad

Cost Differentiator

Leader Competitive advantage

Niche

Narrow Cost

Strategic Advantage

Features (Tangible + Intangible)

To understand the importance of brands in paint industry, it would be useful to analyze the following factors: 

Understand the type of industry paint is



The consumer purchase pattern for paint



The benefits sought by the consumer 

For this purpose a few frameworks are provided below.

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Corporate Strategy of Asian Paints Whether the brands play any role in a product category, it will depend on the  priority of the benefits, which the consumer seeks. In India, market is divided into rural and urban. in rural market, concept for the paint has been sold, but the people there still look for the basic offering. Some of those are a medium to cover the walls, reliability, etc. Any brand, which has been with the concerned market for an extended period of time, with a good basic offering, can make inroads in such a market. AP scored heavily here  because of their earlier decision of going to the rural market, and thus reaped first mover  advantage, where reliability and assurance is synonymous with AP and AP’s brand mascot, “GATTU” lovingly referred to as “ chhota bachcha”. In urban market people look more than basic offering. They also look for a look and feel with the paint. Thus the  phrase, one buys shade and not colour. Also function/role of a brand in paint market is optimization of choice, sign of high quality performance, and the power of the manufacturer’s brand become quite important14.

How much brands play a role also depends on the stage of the industry. When the market is germinating, the basic offering is most important, like paint industry in India in 50s. When it starts taking a definition, then the variety starts playing a role, and people look for particular offering that suits their needs. This is the time when brands can be used to establish the link between those needs and the product benefits. If these links can  be built at this stage, it helps the firms in the next stage, when the differentiation starts occurring. The brands become most important at this stage, as the market is highly fragmented and one needs to differentiate oneself on the basis of intangibles.

14

Strategic brand management by J N Kapferner, page number 31

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Corporate Strategy of Asian Paints

f

o e c n at r

g ni s a er c e D

o p mi s d n ar b e ht

High

Paints Cost of   purchase

It Low will be important to see at which stage of the decision making process does the  brand play a role. When Low the cost of buying goods is high, which features is true in the case of High Understanding of product   paints as one buys it in bulk to paint the whole establishment and it is infrequent   purchase. Brands play an important role in this case to bring that brand to the Increasing importance of the brands consideration set, but not necessarily result in the purchase. This is the case with the  paints. Whereas if the soap industry is analyzed, it is apparent owing to the low cost of   purchase and the frequency of purchase, brands can result in direct purchase. Similarly if  the product benefits can be easily discerned, then the role of brands goes low. By the term, understanding of Product features, I imply that the consumer can form the link   between observable product attributes/features and the benefits sought. As it has been stated earlier, paint industry is not a product driven, as the basic offering is the same across the players. Thus the switching cost for a consumer would be zero to shift between the brands. It would be like buying any rice (belonging to a particular category) as it is quite easy to see and understand the quality of rice. That is not the case with paints. Therefore brands play an important role, as the benefits are more emotional than the  physical.

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Corporate Strategy of Asian Paints

f c n at

o e

r

o p mi g ni s a er c e D

s d n ar b e ht

High

Paints Cost of   purchase

A logical parameter, which comes out of above matrix is the trialability. The fact that Low High Low  people have very high switching cost if trialability Trialability is low makes branding very important in these categories. In the case of paints, trialability is low thus brands would play a major role. As trialability is the parameter that helps the evaluation process of the Increasing importance of the brands consumer, it is the crucial link that could bring a product from the consideration set to the   purchase set. Trialability reduces the asymmetry of information between the product features and consumers and therefore aids evaluation. Since trialability in the paints industry is very low, firms have tried to find a suitable substitute for this to remove information asymmetry. To counter this, firms resorted to aid of computers. AP introduced color-world. The introductions of service centers, colorworlds, computer  simulation centers are all efforts in this direction. AP has realized that due to the inherent  brand value and proposition, the brand is well entrenched in the minds of the consumer  ad is therefore present in the consideration set. But since the cost of purchase is high, the value of brand in making the switch from consideration set to purchase set is low. AP’s efforts have been to increase information dissemination and aid this process.

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Corporate Strategy of Asian Paints

f c n at

o e

r

g ni s a er c e D

o p mi s d n ar b e ht

High

Paints Involvement

Low As it is typical of any durable ofof thepurchase purchase is low, and the Low industry, where frequency Frequency involvement is high it is the case with paints. Brands would be useful to get the attention in consumer’s consideration set, but the actual purchase wouldofnot place. But if  Decreasing importance thetake brands  brands could be supplemented with information, then the brands can affect the purchase step of the buying decision process. Keeping all the points in mind, it was a good decision taken by AP to brand their   products. It can be said here that AP also had the advantage of “ path dependence.” As it went to the rural and semi-urban areas early, they already had a presence in the consumer’s mindset there. Thus they had to back their basic product offering with the appropriate emotional benefits, and bundle those in a brand. They could always talk  about trust and reliance, which are very in the priority list of the customers. They were so successful in their endeavor of using the brand that people had instant recall of tractor   brand, even though they had no idea about AP.

In more developed urban market, they used the power of information. By setting up Helpline, highly informative website and introducing the concept of color-world, they facilitated the knowledge dissemination. Thus they helped the more sophisticated

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High

Corporate Strategy of Asian Paints customers to take a conscious decision. This was also the segment where they bundled more emotional benefits. This was the reason why “mera waala pink” ad campaign was run. They indicated that they have any and every shade, which a person may want, indicating a very high reliability. Each brand was so successful that people had instant recall of particular brand like Apcolyte, Utsav, Apex etc.

There were two problems with this brand strategy of AP. 1. They had introduced many brands, which had good recall but independently. That is, AP as a brand name had no value. A good parallel that could be drawn here is with Madura garments here. They have most prominent brands under their   portfolio in readymade wear, but almost no brand equity as Madura garments. Earlier AP had adopted  Product Brand Strategy where a particular name is given to one and only one product with an exclusive brand positioning.

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Corporate Strategy of Asian Paints 7.4.3 Shift in brand strategy

Brand A

1.1.1.1.1.1.1.1 Company X  Brand B

Brand C

Product A

Product B

Product C

Positioning A

Positioning B

Positioning C

There are various advantages of product brand policy like allows freedom to operate in many markets, without producing dissonance in other markets, freedom to move to new markets, failure of one brand doesn’t affect other brands and so on and so forth. The flip side is this is a costly policy as one cannot draw from the parent brand. Thus each product launch is like a new product. This policy makes sense where the market is  growing at a rapid pace enabling quick return on investments . When the markets start

saturating, this advantage disappears. This could be the reason why AP is slowly moving towards Source Brand Strategy.

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Corporate Strategy of Asian Paints

1.1.1.1.1.1.1.2 Parent Brand 

Personal brand names

Specific communication

Brand A

Brand B

Brand C

Promise A

Promise B

Promise C

Products A

Products B

Products C

Products

This strategy is the one, which is conceptualized by the authors of this report. All the moves taken by AP indicate towards this direction. It benefits a company in such a way that there is a two-tiered sense15 of difference and depth. Parent brand offers its significance and identity, modified and enriched by the daughter brand to attract a specific customer segment. This limits the scope in a sense that the core, spirit and identity of the parent brand should be very respectable. AP seems to be moving in this direction with giving the same colored logo to all the packs, and prefixing the product range with Asian Paints. 2. Gattu was used as a brand mascot to increase the brand recall. Mascots make lots of sense in a country like India where illiteracy — or multiple languages — is still a big issue. Gattu was first dreamed up when the company was still small and struggling against large British companies like Imperial Chemicals. This mischievous, aggressive, very Indian urchin made a lot of sense then, attacking the large foreign players.

It came as a shock to the marketing world when AP announced that Gattu is going to be “terminated.” The reasons cited were many and far, mainly from the so called elite of  15

Strategic brand management by J N Kapferner, page number 201

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Corporate Strategy of Asian Paints advertising coterie. In the words of Mr. Shombit Sengupta, founder of Shining Brand Consulting, “I have never found any relation between the high technology oriented  quality of painting in today’s world and Gattu of Asian Paints , rather a conflicting  image

of a naughty boy and a serious value-driven paint company”. PM Murty, president, decoratives, gave a more rational reason. According to him, “Gattu didn’t really fit with the company’s new visual identity.”

The stance taken by the authors is of caution. Gattu was invented to take the global  players head on, when the company was a fledgling. But today, when AP is itself the dominant player, after dislodging those foreign players, Gattu makes less sense. Also Mr. PM Murty is right in claiming that the mascot can add little in its attempts to be a more up-market, market leading player.

There is a negative side to it, which is worth mentioning here. Gattu was one of the driving forces in penetrating rural markets, and even today AP derives a large sales turnover from this market. On talking with some of the field personnel, one thing came out very clearly. All of them were pretty apprehensive about the negative effect this removal will have. Company responded to this by saying that Gattu wouldn’t be totally removed in an abrupt manner. But that it was going to be “  phased out ”, slowly and steadily. I think that the brand equity for Gattu is huge, and company might be taking a  big risk by eliminating it. What future has in store for them remains to be seen.

8 Possible Future Changes: Right now, the industrial segment is characterized by a lot of joint ventures. There basic reason for the happening of these joint ventures has been the change in the customer  demands. In the past, the Indian industrial paint segment was very underdeveloped and the players were not very discerning about the type of paint that was put on their products or on their machinery. With the maturing of the markets the industrial segments began demanding paints that were most suited for the type of products that they were producing

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Corporate Strategy of Asian Paints or using. These types of specialized paints required much better technology than was  being used at the time.

The tie-ups and JVs began forming soon after this change in demand patterns because the Indian players realized that they did not have the technological competency to develop the paints that were being demanded.

Around this time, the large multinational players started looking at India as their next destination for market expansion. The same market maturity that created the need for  technology for the established Indian players could have been the signal for the global  players to enter the Indian market. But these global players were not aware of the Indian market conditions and did not have the understanding of the demand patterns of the market. To enter the market they needed this market understanding, therefore they were looking for setting up JVs with Indian players in India.

Sustainability of Joint Ventures = fn (Complementarity of competencies, Transferability of competencies)

At the time when the joint ventures were formed the competencies that the players had were complementary i.e. the foreign players had the technology and the Indian players had the market understanding. But the sustainability of these ventures is not very high  because, the transferability of competencies is also high. After a period of existence in the market, the foreign players shall start understanding the Indian market and he shall no longer feel the need to partner with the local player. On the other side, depending upon the tie up, the transfer of technological competencies shall also happen in the direction of  the Indian partner. There shall come a time when the partners shall no longer feel the need for each other and this could lead to any of the following three consequences: •

Break up of the JV: Both the players could decide that they do not want to continue with the Joint venture and that they could survive on their own in the marketplace. The disadvantage of this action is that from being partners, the two companies might become competitors with similar technologies and market

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Corporate Strategy of Asian Paints understanding. But there is a chance of this happening if one of the players feels that it has been able to transfer the competencies of the JV partner to itself  effectively and the partner has not been able to garner all the competencies that the second partner had and it is confident that it would be able to get a majority market share even if it has to compete with its erstwhile partner. •

Take over of the company of take over of the JV: This is a more likely scenario. The global players who are entering in the market are entering with a view of long term market presence. Therefore, a situation where they have to break off with the Indian partner and compete with it would not suit them too much because then they would have to almost start from scratch and set up the business though they would have gained the competencies they had lacked. The more preferred way for  the global partners would be to ensure that it gets adequate market understanding and then take over either the Joint venture or take over the company. The reverse takeover where the Indian partner takes over the JV partner is not very likely  because the global companies coming to India are much larger than the Indian  partners. In Indian cases, similarly, the chances of Asian Paints getting taken over  through a JV are quite small though the possibility does exist.

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Corporate Strategy of Asian Paints

9 Exhibits Exhibit 1:

Porter’s five-force model Substitutes White cement Whitewash Brick structure Stone structure

Buyers Fragmented market for decorative, thus low power. Low switching cost Industrial paints, corporates have high power.

Existing rivals

Berger  GN ICI JNPL

Threat of new entrants Growth rate much higher than global, thus global players maybe interested. Huge potential to increase per capita consumption. Thus latent need. Companies can erode into APIL’s industrial market by forming more JVs

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Suppliers TiO2 being imported. Few suppliers, thus high power. Availability of substitutes for RM low, thus high bargaining power 

Corporate Strategy of Asian Paints Exhibit 2:

Distribution channel Factory Fast moving categories/shades

Slow moving

Branches/Depots (48)

Regional Distribution Center 

Stock Points (found at larger branches -- same function as branches)

Dealer retailer (12,000 - 14,000)

Retailers (rural)

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Corporate Strategy of Asian Paints Exhibit 3

Plant Locations Company

West India

North India

South India

Asian Paints

Kasna

Patancheru

Berger Paints

Mumbai Ankleshwar  Mumbai Ahmedabad Vithal

ICI

Thane

Goodlass Nerolac

Jenson & Nicholson Panvel

Kanpur

Bulandshahar

80

East India

Chennai Pondicherry

Howrah

Balanagar

Rishra N 24 Parganas

Corporate Strategy of Asian Paints

Exhibit 4 Organization structure Asian Paints CEO

VP, Finance & Control

VP, HR 

VP, Sales & Marketing

VP, Corp. Strategy

General Sales Manager 

General Mktg Manager 

Regional Manager 

Group Brand Manager 

Area Sales Manager 

Brand Manager 

Sales Supervisor 

Management Trainee

T.S.I

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VP, SCM

VP, Systems