The 'C' factor

GUEST COLUMN

It was a hot Sunday afternoon on the outskirts of Chennai. I was travelling with my friend in his new luxury car. We dozed off, only to be woken by a sudden jolt "" the driver had stopped so a cow could cross the road.

The driver started the car again. With a loud noise the gearbox jammed. This was a four-month-old car that had just finished 15,000 km. After struggling for 15 minutes, we decided to walk to the nearest village. All through the gruelling 4km walk, my friend cursed the company that manufactured the car.

The market leader in trucks and light commercial vehicles (LCVs) made that car. My friend owned two vehicles from that company. He used to say that the running costs of the LCV was low: he could repair the vehicle at any road-side shop at minimal cost.

So, what went wrong here? The truck company did not understand the critical factor of the luxury car business "" luxury. The LCV driver is used to the tough life on the road "" but not the user of a luxury car. Ultimately, the company paid a very high price and it had to start the business from scratch again.

In the pre-1990s era, the standard Indian soft drink size was 200 ml. Then the cola majors came in with 300 ml portions; a decade later, they had to hire Aamir Khan to communicate the message of "Paanch" for chhota Coke. The message is not for the consumers but for themselves. Again, a case of not getting the critical factor "" size "" right for the business.

The popular statement on quality "" get it right the first time "" holds good here as well. Get the critical factor right before starting the business. If you haven't got it right, don't start. The cost of damage control is often very high.

What is a critical factor?
All businesses entail various activities "" purchase, manufacturing, marketing, finance and so on. Out of all these, every business requires one of these to be better than the rest as perceived by the consumer. That is the critical factor.

If you are in the commodity business, the cost of your raw material is your critical factor, and if your organisation is the best in the industry (core competence) in achieving this, you are the leader. If you are an FMCG, then brand is the critical factor. If you have the best brands and keep developing innovative brands, then you become the leader.

Focusing on the critical factor does not mean other factors can be ignored. If other factors are good by industry standards, the business can survive. But in the critical factor area, the organisation should be the best in the industry. Otherwise, it will slip and lose its leadership over a period of time. The prioritisation should be very clear: the critical factor needs to be on top.

Why is it important?
The lack of clarity on the critical factor leads to a lack of focus and the critical factor gets the same treatment as other areas. The top management's time and efforts gets spread over all business areas or focuses on wrong areas and the organisation suffers. The major reasons for this lack of focus on critical factors are:

Bias of previous success: The truck company carrying over the truck business bias to its car business. Cola majors imposing 300 ml drinks on a market used to 200 ml portions.

Wrong people: A powerful CEO with a commodity business background in an FMCG business will be biased in building the cost-leadership aspect of the business, thereby losing the focus on the critical factor of brand leadership. In the long run, this will impact the competence of the organisation.

Are critical factor and core competence the same?
No. Core competence is that capability of the organisation that makes it the best in the industry. Whereas the critical factor is the important factor for the business of which the organisation is a part. They are and should be complementary to each other. A perfect marriage of the two will result in industry leadership.

For example, the funds and project management competencies of Reliance made it the lowest-cost producer of petrochemicals and today it dominates that business. It has created world-class capacities at lowest costs and so, even in a poor commodity cycle year, it retains profits and leads the segment. Here, the core competence of Reliance and the critical factor of the petrochemicals business matched perfectly.

Reliance used the same strategy in infocomm but not in the critical area of the telecom business. The company bought ad slots at rock-bottom prices to save more than Rs 200 crore, imported handsets in bulk and securitised receivables to Reliance Capital to save costs.

But it lost the focus on customer expectation: no SMS, up-front payments and long-term payment commitments in a business dominated by cash cards, limited choice on handsets at the launch of the business.

This is a business where a strong brand and service are the critical factors, not cost efficiency and financial engineering. The core competency of Reliance did not match the critical factor for success in telecom industry. The result of the initial launch was similar to the car from the truck company "" good, but not to the expectations of the consumer.

Back to Chennai. The managing director of an edible oil company (say X) wanted to create big brands. He made innovative dispensers to distribute oil and talked activity-based costing in a commodity business.

Another man called Munusamy had a small oil company and a so-so brand. He concentrated on buying oil cheap and selling it mainly through the wholesale market by offering better cash discounts than company X.

Munusamy's brand is the fastest-growing edible oil brand in the country "" Gold Winner. The moral of the story: look at your core competence and match it with the critical factor of the business. It's the only way to build sustainable world-class businesses. Or else, you will be dead.

M Balasubramaniam is a senior manager, commodities, at Dabur India