Asian paints strategy

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 period.

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-

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

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.

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.

Exploit new markets by creating products

/services by leveraging

existing competencies differently

Defend existing markets

by strengthening existing

competencies

Build new competencies

to create the future

Build complementary/

new competencies to fortify position

in existing markets

Distinctive Competencies

Market Opportunities

Existing

New

Existing New

Defend Deepen

Discover Develop

Asian Paints Overall Corporate Strategy

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.

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.

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.

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.

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.

Business Strategy

The business strategy of AP has been on the basis of acquiring a series of short-

term 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.

Urban strategyThe 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.

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 end-

consumer 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

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 well-

qualified 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

and the other intermediaries get totally eliminated, thereby removing an entire layer

in the value-chain. (Similar to the Dell model of operations).

Rural strategyThe 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.

Strategy for international marketsFor 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.

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

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.

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.

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

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

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 takeover 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.