Strategy EXAM

8/13/2019 Strategy EXAM

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Question 1:

1. Inverter vs. UPS industry in IndiaWe conducted an industry analysis of the Inverter and UPS industry in India using the

five forces and also the trends affecting the industry using PESTLE. Below are our

findings:

Trends in Market Size for the Inverter industry

Looking at the Inverter industry under the PESTLE lens our key findings are that the

impact on market size will be technological innovations in the field of batteries for

inverters. Batteries today are not always bought from the manufacturer of the

inverters. By investing in R&D on batteries manufacturers can drive the cost of

production of combinations and hence capture the margins that the battery

manufacturers are currently commanding.

Figure 1: PESTLE Analysis of Inverter Industry


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The other factor where we see an increase in market size is due to the growth in

disposable income among the increasing middle class. This will directly translate to a

growth in users of inverters as customers have more and more money to spend on

products that are now considered wants but are soon moving to be needs. All our

findings for the inverter industry are summarized in Figure 1 above.

Trends in Market Size for the UPS industry

With the large scale movement of technology companies to India and the explosion in

required infrastructure to support this growth we expect there will be a continued

growth in the market size for this industry. The supply of energy requirements has not

kept up with the demand from these growing companies. In effect there are large scale

power cuts and hence we anticipate growing dependence on UPS devices.

Figure 2: PESTLE Analysis of UPS Industry

Also since these technology companies need more and more data integrity and

storage, backup will be critical. Even a few minutes of loss of connectivity can lead to


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catastrophic effects. This will be another factor contributing to continued growth in

this market. More on the factors affecting trends in this industry is given in Figure 2

above.

Inverter Industry Value Chain

The value chain for the Inverter industry is as shown in Figure 3 below.

Figure 3: Value Chain for the Inverter Industry

Currently customers are capturing most of the value chain because they are very price

sensitive. The retailers and distributors get their margins over the manufacturers. The

battery developers capture a lot of the value in this ecosystem. Suppliers of other parts

do not possess too much leverage here. Overall the value captured by the

manufacturers is not as high as that captured by other players in the chain.

UPS Industry Value Chain

We analyzed the industry by splitting it into large and small UPS manufacturers since

these markets address different needs.


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Figure 4: Value Chain for the small UPS Industry

The small UPS manufacturerscater to a limited subset of customers and the market

is largely fragmented. This has led to large reduction in prices here. The parts required

here are easily available and commoditized leading to low margins for suppliers. The

value is again captured more by the customers and the resellers/channel partnersrather than the manufacturers. The large scale entry of low cost options from China

and Taiwan are further driving this value down. Figure 4 shows the value chain for

the small UPS industry.

The large UPS manufacturers on the other hand cater to corporate clients. This

market needs more technological investment and brand awareness. Corporate clients

are less price sensitive and willing to pay for devices that provide better back-up and

also better service and maintenance contracts. Manufacturers are able to capture more

value along the value chain here as compared to other segments like low power UPS

and the inverter market. Figure 5 below summarizes the value chain for the large

power UPS market.


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Figure 5: Value Chain for the large UPS Industry

Porter Analysis of Inverter Market

Porter analysis of the inverter market revealed power of buyers to be the highest in this

industry. Customers in India are highly value conscious and pay only for the features theyneed. This has manifested on the price of Luminous Inverters actually having to reduce prices

from $980 in 1991 to $270 in 2001, a 72% reduction in price. Moreover the power of the

complements the batteries is pretty high as well. These batteries are priced about three times

the actual inverters and involve significant costs for the buyer. However these are not specific

to the brand of the inverter and hence can allow customers to switch to a lower cost inverter.

In the future when overlaying the PESTLE factors we do not anticipate a significant change

in buyer power. The power of complements however will reduce based on the increasing

investments in R&D in this domain.

Figure 6 below shows the analysis of the forces affecting this industry.


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Figure 6: Porter 5 Forces for Inverter Industry

PESTLE


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Porter Analysis of large UPS and Small UPS markets

Figure 7: Porter 5 Forces for large UPS Industry

PESTLE


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Figure 8: Porter 5 Forces for small UPS Industry

Figures 7 and 8 above summarize the porter analysis of the large and small UPS markets. For

the large UPS market we see the barriers to be entry to be high now and tomorrow. The

PESTLE


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competition will also continue to be intense among the big players. The customers are less

price sensitive here and that will continue to want good brands backing the products.

In case of the small UPS markets the buyer power will remain high. Also the barriers to entry

will continue to be high and the rivalry among existing firms will also be high. The product

will become highly commoditized leaving very small margins for incumbents.

Conclusion

Overall our analysis of the inverter and UPS markets has led to the following conclusions.

The large UPS market is the one with lowest power of buyers. The small UPS and the

inverter market have and will continue to have large buyer power. The power of suppliers is

low in all these industries. Though considering battery makers as suppliers for the invertermarket leads to high power for the inverter market. The threat of new entrants is low for the

inverter and small UPS market whereas it is low for the large UPS market. The rivalry is

intense in all three markets and this will continue to be the trend as manufacturers compete

for market share. In general the inverter and small UPS market are used for non-critical

applications whereas the large UPS market is more for critical applications and hence

customers require more brand backing and also service requirements. Large UPS devices also

have high installation costs leading to high cost of switching when compared to the small

UPS and inverter market.

Question 2:

Schneider electric is well positioned in the Indian market with 9.4 percent share in market,

ranking third in a market dominated by multinationals.

Its differentiation strategy has revolved around positioning itself on the value curve with high

value high relative cost product offering


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Figure 2: Schneider's Positioning

It has achieved this by leveraging its existing advantage in technology and know-how and

then taking the requirements of the local market into account. This approach has relied on

the following competitive advantages:

Organizational advantages:

Organizational Service initiatives that include a rapid response customer initiativehelping reduce down time and complaints.

Field remote testing that has helped lower costs of maintenance call outs.

Intangible advantages:

Technological know-how and leadership allowing them to tailor to the local marketenvironmental and infrastructure conditions, which would require a large R&D

investment to match.

Brand name known worldwide for reliability in the corporate UPS market, and builtover many years allowing them a certain element of brand loyalty making an entrants

task more difficult.

An innovative pay as you grow system , which works well in a market wherecustomers demand as little upfront payment as possible, allowing to lock in long term

recurrent revenue and making it difficult for competitors to poach the client.

Among the competitive disadvantages which are mainly due to the global UPS business :


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Quality standards set by the head office which prevent flexibility when it comes tosacrificing quality vs. cost as per market requirements.

Stringent requirements to stick to legal requirements and standards arduouslysomething local competitors sometimes do not in the interest of capping cost.

Question 3:

a)

In order to draw the value curve for Schneider and Luminous in the converter industry, we

used the following customer value drivers:

Price Reliability Design Prestige Life expectancy Service responsiveness Maintenance requirement Cost effectiveness Distribution network Noise


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Price

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Presti

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Schneider Louminous

As can be seen in the chart, while Schneider is ranked higher on some of the drivers, such as

design and life expectancy it, it fails to focus on the drivers that actually are perceived

valuable by the customers. Therefore Schneiders cost is higher, without actually raising the

willingness to pay at the customer.

Luminous on the other hand is very focused on keeping costs lower, by cutting out value

drivers, which dont raise the willingness to pay, but it is not compromising on others, such

as service responsiveness and a strong distribution network.

b)Luminous is well position in the Indian inverter market with 14.6 percent share, ranking

second behind Microtek in a market dominated by local players.


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It has achieved this by being extremely customer oriented, with rapid innovation, and

innovative aggressive marketing.

This approach has relied on the following competitive advantages:Organizational advantages:

Integrated growing manufacturing and supply chain allowing cost savings througheconomies of scale.

24/7 call center facility for servicing the inverters with specialized software Staff culture where degrees take a back seat to motivation and working beyond the

normal call of duty, difficult to replicate as it is a reflection of the founder and CEOs

philosophies and work ethos.

Intangible advantages:

Brand image built with effective marketing involving local celebrity endorsements

Tangible

Office locations in cheaper areas of Delhi. Distribution infrastructure network with far reach with hubs in every state bringing

them closer to consumers and expensive to build and replicate.


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Among the disadvantages luminous suffers is:

being India centric means that improving power availability in the big cities issqueezing its total market size,

Being a top down company, too reliant on its CEO for decision making which wouldsuffer in his absence.

c)

Schneider electric is not well positioned in the Indian inverter market with a negligible

share in a market dominated by local players , this being due to their product being

overpriced and not localized enough hence lying under the willing to pay curve in the

productivity frontier curve.

Its main tangible advantage here is its technological lead with superior know how, but this

has not proved very effective due to the fact: most consumers did not see their product as a

better offering or did not care enough about the drivers like noise and aesthetics that they had

a lead in. Educating the consumersabout the long term cost savings due to superior offering

would have proven difficult due to the highly fragmented market and the cultural acceptance

of product breakdowns as long as someone would come fix them (lower cost of labor in India

would probably be one the main reasons behind this).


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Alternatively producing with lower quality standards in certain points that did not matter to

consumers to lower costs was not possible due to production methodologies set by the head

office over 25 years which could not be ignored.

The competitive disadvantages it suffered from included:

Limited brand recognition in this consumer segment restricting the buyerswillingness to spend.

Low penetrations of the distribution channels where most inverters were sold. The fact it bought parts at market value when competitors manufactured them hence

subsidizing their product and putting it at a cost disadvantage.

Question 4:

Giving the current market conditions and the results that Schneider Electric has experienced

in the Indian Market so far, the pros and cons of the three strategic options presently

contemplated by the company are the following:

Exiting the segment:Schneider Electric is a global leader in the energy management field and its

products are largely considered cutting-edge in terms of safety, reliability, efficiency,

ease of management and ease of connecting renewable energy sources. When the

company first entered the Indian Inverter Industry, it tried to apply the same principles

that catapulted its success and thus, came up with technically superior inverters that

were about 20% more expensive than rival. Given that the Indian market is very

different than the American and European markets, this strategy didnt work. Indian

Inverter customer are much more price sensitive and hence care more about

immediate cost efficiencies than quality. The willingness to pay from Indian

customers is therefore lower but also, due to the high quality of the product, the costfor Schneider of producing Inverters is higher, translating into having lower

competitive advantages in relation to competitors. Even though the latter alone would

be a good reason to exit the market under different circumstances, we should take into

the account the high importance that emerging markets currently have for Schneiders

long term strategy. In that regard, the Indian market is of particular significance due to

its size and rapid growth and therefore would not be wise to abandon a market with

such large potential. The Indian market is widely considered by the company as a

laboratory for experimentation and innovation.


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Going it alone and growing the business organically:Even though we recommend for Schneider to stay in the Indian Market, we consider that

the option of growing the business organically would not be the most beneficial for the

company. Under this scenario the company would still have the competitive disadvantage

related to a lower willingness to pay from the customers and higher production costs (as

explained in the previous point). Moreover, if the company decides to manufacture lower

quality products under the Schneider brand, it could affect the brand value globally (brand

dilution) and also create a risk of cannibalization. In addition, Schneiders workforce is

used to developing and manufacturing high quality products and hence, asking them to

produce what could be viewed as inferior products, might not be well received and

would need extraordinary efforts by the general management to maintain the employees

in synch with the strategy. Another aspect to be considered is the fact that Inverters

needed special batteries that could be bought separately. Nonetheless, lately the trend

among Indian competitors was to also produce the batteries and to sell them in tandem

with the Inverters. This creates another competitive disadvantage for the company as it

does not have the know-how to produce the batteries. Moreover, coming up with reliable,

rapidly-charging and long-lasting batteries, requires significant R&D and capital

expenditure. Finally, an important deterrent to continue growing organically in India arethe non-compliance issues experienced in that market. Some local companies gained cost-

advantages by performing tax evasion and under-delivering on product specifications.

In order to succeed in this type of market, the company might feel compelled to follow

such practices which are by all means against the Schneider Electric core culture. The

latter would greatly damage the brand globally.

Making an offer to acquire Luminous:We consider the option of making an offer to acquire Luminous the most feasible

and practical one. The disadvantages mentioned in the previous points would be

partially diluted due to Luminoustrajectory in the Indian market, its know-how and

its installed capacity. By acquiring an existing company such as Luminous, Schneider

would immediately gain a strong penetration in the market and also would benefit

from the rapid growth that Luminous has been experiencing (annual revenue

growth of 56%). Moreover, an existing local company with a long trajectory in the

market (Luminous operates since 1988) possesses a better understanding of the


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specific customer needs, offering in this way the right product at the right cost for

each particular segment. In addition, Schneider would benefit from Luminous

access to alternative sale channels (28 sales offices and a dealer network of 25.000).

Luminous has also a reputation of being able to rapidly adapt to the market needsand also enjoys the benefits from the flexibility of manufacturing raw materials in

house.

The organizational issues that the management will have to face by acquiring Luminous

would be related to the integration of two firms with very different cultures, which also

operate in dissimilar markets. Therefore, there should be an effort by the acquiring company

to avoid the straddling disease. Acknowledging how different from each other these

companies are would be the first step towards a successful acquisition. First of all, Luminous

has a strong brand and therefore it should not be changed. By maintaining the Schneider and

Luminous brands separated the parent company would be able to benefit from the strong

position that the latter has in the Indian market, while also avoiding the risk of

cannibalization. Even more so, the parent company has to recognize and value Luminous

own culture. This culture is characterized by a top-down structure, where the founder and

CEO of the company has a hands-on approach when managing the firm. He is also extremely

respected by the employees and thus, the loyalty to the individual and to the company is

inseparable. Considering the latter, Schneider should make an effort to retain Malhorta in

order to preserve the loyalty and motivation of the employees. By retaining him and giving

him proper autonomy, Schneider would actively be avoiding the straddling risk mentioned

above. Nonetheless, Malhorta should also have constant communication with HQ

(committee) in order to agree on key strategies and goals.

Question 5:

As mentioned in question 4, one of the benefits Schneider Electric will gain from acquiring

Luminous is the capability of manufacturing products tailored for customers in emerging

markets i.e. low cost products with the necessary specs to exactly satisfy customer needs.

Therefore, Schneider must leverage this capability in order to enter new emerging markets

such as Asia and Africa especially that Luminous has already invested in 2 new facilities as

well as marketing and brand building for this purpose. Also, another market that would be

interesting for Schneidersnew capability would be Latin America. Schneider can build new


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plants in Latin America that would use Luminousmanufacturing model e.g. Bolivia might

be a good country to start as it is very rich in Lithium, has low labor costs and some

energy/electricity issues.

As shown in the figure below, in addition to inverters, Luminous owns a portfolio of current

and planned products some of which are not directly aligned with Schneiders Strategy.

Figure 3: Luminous Product Portfolio

As a result, Schneider can enter the aforementioned markets by extending its product

offerings to include the below cheap and customer-specific products:

- Power Back-up Devices- Project Business- Renewable Energy Solutions

Moreover, Schneider can try to develop a new offering around power storage equipment such

as VRLA and auto batteries.

However, since Schneider has maintained a deliberate Global strategy of not entering the

upstream and downstream sectors of energy, it might need to spin-off Luminous Home

Electrical Products and some of their power generation tools such as the Diesel Generator

sets.

The target customers of these new initiatives are low to medium income households and

businesses that are looking for affordable power sources/backups. The value proposition to

these customers is to buy cheap and efficient power related products with only relevant

features. By doing so, Schneider is attracting a new set of customers in this industry by


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reducing their manufacturing costs and slightly increasing customers willingness-to-pay as

these customers were not interested in purchasing these equipment in the past.

These new and extended offerings are likely to cannibalize some of Schneiders current

global offering as they are cheaper. However, because the key features are targeting a new

and different set of customers (low to medium income households and businesses), the losses

from the cannibalization effect will be much lower than the expected revenues that will be

generated by capturing a relatively high volume of new customers in these emerging markets.

In addition, as mentioned in question 4, Schneider should keep its brand different from that of

Luminous. This will ensure that the global image of Schneiders premium product is not

destroyed and will allow Schneider to play in both positions as shown in the picture below:

1- High end premium products under the name of Schneider and,2- Low to Medium products under the name of Luminous

Figure 4: Schneider and Luminous Positioning

Question 6:

What would you try to sell him?

With the mentioned requirements we assume that the customer is highly price sensitive, and

does not expect superior quality of the inverter and the battery. Rather than paying a bigger

upfront price, he is willing to compromise on the life expectancy and design. He furthermore

does not care about any of the brands, as he is not even aware of them.


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As a result he wants the cheapest option, which gets the job of supplying energy done.

Therefore we would sell him either a Microtek or Luminous inverter, which should fulfil all

his requirements, while being a low cost option. As we carry a wide range of products, we

dont care if we sell him a system of inverter and battery from a specific brand, but actually

want to sell him the cheapest battery to make the sale. Therefore we would sell him an Exide

battery, which we assume to be the cheapest.

The sales pitch. Why the right product for him:

The sales pitch, would be that he gets the best solution for his needs, without paying a high

price. He gets what he needs without paying for any other fancy stuff, which just drives up

the price but doesnt actually helphim. The option he bought will let him run the number of

fans and lights he needs and as the components are available off-the-shelf any repairs will be

cheap and quick.

Why did you take this approach?

We took this approach in order to close a sale. We assume that, if we tried to push the

customer to buy a higher priced product, he would not buy anything, as he does not see the

value in paying more, and we would have lost the sale.

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Strategy EXAM