Business Model Optimization and Transformation: Balancing Change with Continuity

Business Model is one framework that drives an organization towards growth and profitability. Business models in startups are developed by building and integrating models (or platforms) of technology, organization and resources. Technology determines the specifications of products and services, and how they are developed, manufactured and delivered to meet consumer requirements. Organization determines how roles and responsibilities are specified and talent assembled. Resources represent financial and material resources that constitute the infrastructure. The way the three models of technology, organization and resources are built up and are integrated determines how effective the business model is in terms of growth and development.  While this broad prescription is common for any firm, startup or established, in any industry, the relative balance of growth and profitability depends on a host of external and internal factors.

Interestingly, while the business model requires and determines how the platforms of technology, organization and resources are developed and utilized, once an organization is established, they tend to act as both enablers for and as constraints on how the further business models are developed. At first look, given that startups get developed with little of technology, organization and resources, established organizations should find it easy to have a multiplier effect from those established platforms. The reality in certain cases is that technology, organization and resources act as constraints than multiplicative enablers when established corporations try to develop themselves further. Again, a host of internal and external factors determine how the three models interact and influence business model development, from time to time.  Different academicians and practitioners have different opinions about the need for, and methodology of, transforming a business model, from time to time.

Static or dynamic

Industrial history has examples of firms being successful on product or service specialization not only over years but even over decades. Business model, however, is broader than just product or service definition. A business model has several components. Firms in the same industry may have business models that are entirely different. In some cases, transformations in technology have fundamental impact on business models. Very recently, HMV, once a global leader in the music industry and a global iconic brand in itself, called for administrator intervention to handle bankruptcy after nine decades of growth and turbulence. The music industry all these decades grew by leaps and bounds but HMV could not optimize its business model, including the technology, organization and resource components, to meet the transformational wave of music digitization.

HMV’s classic business model has, over the decades, been one of contracting music, recording it exclusively on certain media and marketing the media through physical stores. The musicians or the providers of music were paid royalties out of sales. While the company did change its technology platforms of recording from the classic long playing record to cassette tape, audio CD and DVD formats, and also opened marketing through distributed kiosks and the Internet, the company could never change the business model effectively enough to meet the competitive intensity of the new players.  There are several other firms which saw their industries grow but could not keep pace with the growth only because they were either impervious to, or ineffective in, changing their business models. It is no longer a point if business models can stay static at all in the competitive environment; business model optimization versus business model transformation is, on the other hand, is the only question.

Business model optimization

Business management is an essential feature of sustaining and growing business. Normal business management rarely is sufficient to assure success. At the very least business model optimization needs to be resorted to by each and every firm to stay successful. Business model optimization involves more innovative and effective use of the models of technology, organization and resources to keep business moving at least at the industry average rate. Automobile companies expanding portfolios and penetrating new regions based on new technologies, stronger organizations and deeper resources reflect business optimization. Similarly, automobile component makers diversifying their component portfolios are only optimizing their businesses to deepen and broaden their business linkages to automobile makers.

Business model optimization typically grows business and profitability at reasonable rates. It handles normal business and economic vicissitudes and additional competition. It helps companies keep pace with consumer demand, occasionally triggering additional demand. Business model optimization typically works best in a mature industry environment which has distributed competition and continuous technological improvement. Business model optimization is rarely effective for firms which want aggressive growth and profitability or in economic and industrial environments marked by discontinuities. Business model transformation would come in handy to such firms. Business model transformation does not mean either integration or diversification; rather it connotes an entirely different way of furthering its business.  

Business model transformation

Business model transformation involves moving of firms into adjunct areas utilizing new technologies, new organizations and full scale resources. Tata Coffee’s move into coffee shop business in collaboration and joint venture with Starbucks is an example. Microsoft’s move into computers with Surface tablet, Apple’s move into music streaming, Amazon’s move into electronic retailing and into digital publishing are some examples. That said, Google’s entry into mobile phone manufacture through acquisition of Motorola Mobility or Microsoft’s intended acquisition of Dell (to become a full-fledged computer hardware manufacture) may not be termed business transformation models. They are plain classic business diversification models. How then is business transformation characterized?

Business transformation expands the business boundary for a firm, utilizing breakthrough advances in technology, organization or resources. It invariably transforms how a firm conducts its business; for example, from a backend player in coffee growing and distribution to frontend coffee brewing and drinking. This case reflects a transformation of its organizational and resources models. Apollo Hospitals has transformed itself from a general medical and surgical healthcare company into an oncology therapy company additionally, bringing newer technologies such as robotic knife and photon knife for increasingly precise annihilation of cancerous cells. This is a combination of technology, organization and resource models. As may be seen, in business model transformation, the basic market that is served does not change.

Competency transformation

Business model optimization requires incremental improvements in technological, organizational and resource capabilities. On the other hand, business model transformation requires competency transformation of a higher order. In the domains of fine chemicals and pharmaceutical ingredients, conversion of synthetic manufacture into enzymatic manufacture is a transformative technology competence. In the wine industry, retention of pure resveratrol content and elimination of alcoholic tannin and toxin content is a transformative technological competence. In today’s world of outsourced development and manufacture, competency transformation may be seen as one of access and alliances and not one of availability. System integration, however, is a key competency that is required in-house in the accessed transformation.

Transformative technologies are at the core of business transformation models. Integration of state-of-the-art digital technologies and telecommunication platforms has helped a host of companies either reinforce the existing business models or morph into new ones. That said, organizational and resource capabilities are no less important. Steel makers in India, for example, never thought of owning mines abroad; oil refiners never thought of owning shale gas fields abroad. These models of business transformation require newer organizational competencies. Regional knowledge and cultural knowhow become important as Indian companies seek to secure supply sources and market segments in countries as varied as Africa and Middle East on one hand and Australia and America on the other.

Ownership, constraint or enabler?

In the Indian context, ownership becomes a key factor in how business models are operated. Promoter-led enterprises typically have struggled to break free of the startup mold and explore new pastures. Equally, there have been instances of such companies attempting extremely aggressive business transformation models without fine-tuning organizational models, upgrading technology models and, even more importantly, not taking resource models into consideration. The Indian public sector corporations, weighed down by governmental ownership constraints, are unable to leverage the existing technology, organization and resource platforms to achieve newer business platforms, despite the feasibility. Clearly, there is a need to view business models, whether for optimization or transformation, independent of ownership interests. National wealth is maximized only when business models are continuously optimized and/or transformed by firms keeping in view technology, organization and resource dimensions.

Posted by Dr CB Rao on January 27, 2013

     

 

   

       

Music as an Inspiration to Management

Whenever I go to Vijayawada, a city in Andhra Pradesh, I go to a restaurant in Hotel Ilapuram. I am pleasantly surprised each time I visit the restaurant that it still plays the Telugu songs that were a rage in the 1960s and 1970s. It is surprising because, in today’s musical cacophony, the simple melodies of the past seem to have been completely washed away. In Chennai itself, Hotel Palmgrove consistently plays the musical melodies of the 1970s in its restaurant. Many FM radio channels still give a pride of place to old melodies. Even more surprisingly, in most child singer music reality shows, old songs come to the fore as benchmark tests of singing capabilities. If the Indian musical wealth, classical folk and cinematic, is passed through generations seamlessly, in spite of the continual assaults of multiple external musical trends, two factors are perhaps at the core.

The innate ability of a person to appreciate and absorb music is significantly cultural. In this, the Indian music which is based on Saptaswaras (Seven Notes of Music) is unique. Sage Bharata defines music as the confluence or combination of Swara, Thala and Pada. Indian music is a unique confluence of all the human senses. This has led to the enduring appeal of the Indian music across generations. Secondly, musical Kacheris and Sabhas (congregations) have been the backbone of community participation in the eclectic experience of Indian music. With the advent of the radio and later the television and various other audio-video musical streaming devices, music has evolved beyond generations.  With the ability of the modern telecommunication and computer systems to upload, download, transmit and store trillions of bytes of music, possibly there would be no chance to lose even one bit of music to the annals of history anymore.  

Music and management     

In life, only some are gifted to be a musician, that too as a profession or as a complete avocation or a way of life. Some are gifted to be actors, some directors and some painters. However, most are borne and brought up to seek a job or a career, and within that most want to be managers. Management, like music, is passed through generations of organizations through the people and texts. Many executives and managers would see music as a hobby or as a pursuit of fine art but musicians rarely fancy having management as their hobby or as a pursuit of organized life (successful musicians may have managers though!). Music is said to soothe frayed nerves, and is in fact credited with an ability to cure certain diseases. On the other hand, management despite its objectives of planned execution more often than not frays tempers rather than cools them. But, how are music and management which apparently have nothing in common are linked or linkable to each other by any stretch of imagination?

The reasons are a few. Both music and management are centrally dependent on the person delivering (music as a product or management as an outcome). Both the musician and manager are trained in a set of rules and both mellow with age and experience. Both of them perform to please others and also to actualize themselves. Both can be rendered solo or as an orchestra/team. Both have moved from physical, event based performance to virtual, globally networked performance. Both need continuous training and development to be contemporary and competitive. Unlike many other activities, both can be ingrained and integrated in everyone’s life in every wakeful moment. This is perhaps the unique feature of both the avocations. However, the most important reason why music and management need to be put in one common bucket is this: just as the fundamental foundation of all music in any form lies in seven basic notes, the fundamental foundation of all management lies in seven basic functions.

Saptaswaras and seven functions

Indian music has seven basic notes or swaras: Sa, Re, Ga, Ma, Pa, Da and Ni. All music is derived from the ragas that are evolved out of the seven basic notes to different scales. Raga as defined by Sage Matanga is a combination of musical notes that gives delight, and a melody arrangement to project a definite mood, emotion or feeling. Management has similarly seven basic functions: Planning, Organizing, Staffing, Directing, Coordinating, Budgeting and Reporting.  These functions help a manager manage resources to deliver outcomes. While several amplifications and supplementations have been brought forth by several scholars and practitioners over the years, these seven functions remain the core of management. There is one other commonalty as well. Just as the seven musical notes require a musician and a delivery by him and the team, the seven managerial functions also require a manager and an execution by him and the team.

Musical swaras, the sages say, are derived from nature, especially the expressions of certain birds and animals. Some are intrinsically melodious and mellifluous while some are stern and harsh. Managerial functions, on the other hand, are derived from the bare necessities of organized effort. They are expressions of one’s own faculties. Like the saptaswaras, some are soft and others hard. All the seven faculties are not endowed in equal measure in all persons but each faculty is certainly required to a certain degree for the overall management.  Interestingly, organizing and staffing, directing and coordinating, and budgeting and reporting come in pairs, albeit with different capabilities for each of the six factors. Planning is one function that has certain unique umbrella positioning as a base function. Without planning, management becomes suboptimal and none of the six other functions would have any framework to operate for, or towards.   

Infinite music, finite management

The similarities between music and management possibly end with the above in a normal reading. While music, though based on just seven notes, has infinite possibilities, management that is based on the seven basic functions gets classified into just a few operating styles. The reason is that unlike the swaras or notes, the basic functional capabilities are seen in a binary form to either exist or not exist. For example, a planner would be either good or bad but not acceptable in infinite shades as a swara would be. It is this fundamental difference that apparently limits management to have infinite styles. The basic styles that would emerge are governed by one core functionality of planning which also becomes the managerial core competence. A manager thus gets known for three essential combinations of core competencies: planner-organizer, planner-director,  and planner-controller. There could be several similar expressions of managerial styles but all of them can be simplified to these three. Corporations are usually content to have managerial teams that comprise individual teams reflecting the three combination styles.

 The above common premise may not be accepted by corporations and conglomerates aiming at competitive growth. Managerial limitations translate into organizational limitations. Every manager should avoid getting straight-jacketed into such simple stylistic formats. Management must be inspired by the infinite variations of music, and explore how the seven basic functionalities can be developed into multiple managerial styles. A planner’s competence is enhanced by understanding industrial and market scenarios, and constantly increasing the planning skill-sets. An organizer’s capabilities are enhanced by understanding business and operational needs under different conditions with an appreciation of what structures work well where and what talent needs to be in place when. A director’s abilities are best enhanced by understanding how the different dimensions of directing and coordinating could be uniquely appropriate in different conditions. From authoritative and dominative to facilitative and enabling approaches could be useful under different business conditions and with different types of teams. Often, it is thought that control has a negative connotation. On the other hand, if inclusive and considered plans are developed, budgeting and reporting would be enablers for planned and directed delivery. An ability to track macro and micro parameters with appropriate physical and financial parameters would be strengthening the control function in an organization.

Soulful, melodious

Music that is soulful, melodious and evocative based on appropriate combinations of raga, tala, pada, and in addition bhava (expression) has sustained itself over generations appealing to public at large. At the core has been the innovative and skillful use of saptaswaras by the musicians over generations to deliver such eternal music. Management is an integral part of life that is invisible and inadequately appreciated. Corporations recognize it as an essential facet of their organized growth with its seven core functions but are yet to find a paradigm that inspires multiple fine variants out of the seven core functions that could suit diverse business conditions and challenges.  Music and musicians offer a template for management and managers in this regard, as discussed in this blog post.  Just as the melodious old songs still play out soothing the guests in restaurants and public events, managerial folklore would inspire successive generations with their recounts of soulful achievements by managers who molded and remolded themselves continuously to meet diverse challenges of their own and their corporations’ evolution over time.

Posted by Dr CB Rao on January 20, 2013  

Three Forms of Entrepreneurs: Existential Reality or Hypothetical Paradigm?

Kishore Biyani, Founder CEO of Future Group and considered a pioneer of modern retailing in India with Pantaloon is reported to have said that entrepreneurs are essentially of three types: the creators, the preservers and the destroyers. He said that he was a creator and a destroyer simultaneously. That Biyani has been a fantastic creator of retail format in India is well-known. Established in 1987, his Future Group operates in the Indian retail sector through over 17 million square feet of retail space, serving 300 million customers in 93 cities and 60 rural locations across the country based on products and services supplied by over 30,000 small, medium and large entrepreneurs and manufacturers from across India. Future Group employs 35,000 people directly from every section of our society. The revenues are variously indicated around USD 2 billion annually.

While retail forms the core business activity of Future Group, group subsidiaries are present in leisure and entertainment, brand development, retail real estate development, retail media and logistics. Some of the other businesses include, mobile telephony brand, T24, operated in association with Tata Teleservices, a supply chain and logistics infrastructure company, and a company engaged in providing educational and training services through three Future Innoversity campuses in Ahmedabad, Bangalore and Kolkata. In the financial space, Future Capital and Future Generali companies offer consumer finance and insurance to customers, as well as corporate loans and equity investments to companies engaged in consumer businesses. Where does the concept of Biyani being an entrepreneur of the destroyer type come from?

Possibly, Biyani has in mind the huge debt he had to accumulate in the aggressive attempt to build his retail, finance and services empire. This situation has led to his divestment of stake in Future Capital and parleys to unlock value from the two insurance ventures. Probably, this is also related to an effort by the group to identify core and non-core businesses. This brings us to the broader question as to whether divestments by an entrepreneur are tantamount to destroying of the edifice, or the parts of it, that he or she would have built at great passion. The history of mergers and acquisitions points out, on the contrary, that what appears to be destroying of the edifice ends up creating wealth for the promoters and the broader set of investors and stakeholders. This is notwithstanding the fact that in some cases divestments (and acquisitions) destroy wealth for one or both the parties.

The theory of trinity

The concept of three entrepreneurial types alluded to by Biyani corresponds intriguingly to the Hindu religious concept of the Trinity of Gods who drive the total universal and living system; Brahma, the Creator, Vishnu, the Preserver and Shiva, the Destroyer. While in the Hindu religious mythology, each of the three Gods specific functions in the cosmic system, and rarely do they transgress the respective roles, Biyani seems to indicate that an entrepreneur could be one or more of the three roles rolled into one. While it is great that entrepreneurs are playing God to the growth dependent Indian economy, the concept of entrepreneurs as harbingers of change itself needs to be better appreciated by entrepreneurs and professionals to ensure that each productive activity generates value on a sustainable basis, and never destroys it.

Whether or not there indeed exist three types of entrepreneurs as postulated, entrepreneurs themselves are made up of three unique forces, competence, passion, and gumption. While without doubt, professionals also possess, and are made up of, these three attributes, these attributes are much more specific in respect of entrepreneurs. For example, an entrepreneur’s competence tends to be his or her individual core knowledge that is critical to the establishment of the entrepreneurial enterprise. This is different from a professional’s competence that tends to be multifarious to meet a wide range of business needs, across firms. An entrepreneur’s passion is one of laying out one’s own path to the destination of enterprise creation, often based on an intuitive call, regardless of whether everyone agrees or not. This is different from a professional’s passion that is often system compliant and duty bound. An entrepreneur’s gumption is forever driven by rewards and never detracted by the risks. This is different from a professional’s approach to risk-taking which is highly cautious and consensual.

An entrepreneur who is a creator tends to have an equal mix of competence, passion and gumption. An entrepreneur who is a preserver tends to accord greater emphasis to enterprise management by competence rather than by passion and gumption. An entrepreneur who is a destroyer believes that the limits of competence, passion and gumption have been reached. It may be tempting to hypothesize that an entrepreneur could be in a perpetual creator mold by entrusting preservation of enterprise to professionals, and in the process avoiding becoming a destroyer altogether. Rarely, however, businesses can sustain themselves to perpetuity independent of human, entrepreneurial or professional, errors and oblivious of environmental discontinuities, technological or competitive. An entrepreneur has to reengineer himself periodically to be able to create and preserve more, and even if inevitable, destroy less. If the entrepreneur finds it difficult to transform or play different roles to suit different business contexts, appropriate supplementary measures need to be considered.      

Limits of assumption

While the three Gods, the Creator, the Preserver and the Destroyer are the Almighty Gods, the entrepreneurs who are creators, preservers and destroyers are unfortunately not. They face an environment that variously supports the outcomes of creation, preservation and destroying. Reverting to the case of the Future Group, the genesis of destroying of its own enterprise parts, if the divestment can be so called, lies in its own creation, far beyond what the resources could permit or the investors could appreciate. Unlocking of value in financial sector is taken by the group on the basis that the group should defend its core of retail business in an environment that would see a massive influx of foreign direct investment. The defence could be in terms of further organic growth based on resources generated and/or a partial destruction of even the core by ceding stake to a global retailer. An entrepreneur’s ability or positioning to be a creator, preserver or destroyer could well depend on how the forces of environment shape to support or oppose.

A start-up entrepreneur can almost always be assumptive that he or she would be a creator; for that is all what entrepreneurship is all about. However, an established entrepreneur has to balance the roles of creator and preserver with dexterity so that they do not become destroyers. It is often a matter of choice for the creative entrepreneurs to hand over the reigns of their successful enterprises to preservers to sustain or grow the success. The diversified growth of entrepreneurial groups, be it Tatas or Birlas has been due to the recognition of baton change. In such scenarios, divestment or wind-down of parts of the enterprise tends to be a well considered strategic move, rather than an entrepreneur-dependent or driven action.  

The assumptions on which an entrepreneur can operate are few as a startup enterprise. The startup assumption, driven by an internal core competence and an external opportunity perception, is fairly simple though intense: “I Can”. The number of assumptions that an entrepreneur would need to manage quickly escalates as the enterprise expands, and further as enterprises become a group. The competitive forces increase in numbers and intensity as an enterprise grows in scale.  It would be inappropriate, if not futile, for entrepreneurs to attempt to find out the tipping point when their own combined forces of competence, passion and gumption are overwhelmed by the combined competitive forces of technology, market and regulation. Such tipping point is rarely found out until it is too late to find out. There is a simpler and more enduring strategy for entrepreneurs being in a perpetual mode of creation.

Entrepreneurial freeze

It is now well appreciated that firms, as well as their leaders, need to reinvent themselves periodically to stay contemporary and competitive. Entrepreneurs, by definition, can neither be preservers nor destroyers; they can only be creators. Yet, it is a paradox of business history that entrepreneurs find it increasingly difficult to create new ventures as their ventures become established entities. The reasons are twofold: firstly, entrepreneurs fail to recognize the competitive forces that grow rather exponentially with growth and secondly, entrepreneurs, despite growth of their enterprises, increasingly compete with professionals in the tasks of further growth or consolidation and restructuring. These two tasks are best left to professionals with requisite (not necessarily entrepreneurial level) competence, passion and gumption. Attempts by entrepreneurs to transform themselves into preservers and destroyers would be ill advised. In the competitive business of business, virtually every aspect of organization and every member of organization needs periodical refreshing and retooling. Entrepreneurship is the only aspect of business that has to stay frozen in the context of natural instincts of building startups, and growing them to a particular level, organically.

Posted by Dr CB Rao on January 14, 2013

  

    

 

 

  

Common Production and Dual Branding or Design and Manufacturing Innovation: Multiple Approaches for the Indian Automobile Industry

Something unique is happening in the Indian automobile industry. Renault Nissan Automotive India Pvt Ltd, which has a major presence in India with a large manufacturing plant in Chennai and an all-India marketing presence, is implementing a unique business model. Cars and utility vehicles developed and supported with components from Renault and Nissan global network are manufactured in Renault Nissan state-of-the-art manufacturing plant in Chennai and are sold under different brands through Renault and Nissan marketing networks, each product being offered with minor specification variations. Nissan Micra small car is offered as Renault Pulse hatchback, Nissan Sunny sedan is offered as Renault Scala upscale sedan and Renault Duster SUV will soon be offered as Nissan Nuv. Nissan Evalia utility vehicle is being launched as Style by their joint venture partner, Ashok Leyland.

Common product and dual branding in a homogenous market is not uncommon in other industries such as electronics and FMCG but is certainly a new feature in the automobile industry. That India is home to this experiment through Renault and Nissan is a matter of interest and satisfaction to the observers of the Indian automobile industry. The industry has been witness to shared marketing (Tata and Fiat), shared components and aggregates (Maruti Suzuki and Fiat) but the example of one company marketing a common product with minor modifications as two products is unique. This clearly is different from different marketers sourcing the same product for sale as different products, a feature common in the branded generics market of the pharmaceutical industry of India, and also in the branded white goods and electronics industries of India. Renault Nissan unique business model certainly necessitates greater examination of the business model of common production and dual branding.

Benefits of scale

The crux of sustainability in any industry is scale. Scale is of even greater importance in the automobile industry which requires lakhs, if not millions, of product runs to recover the costs of machine tools and dies, especially those related to high technology components and systems such as engines and transmission boxes and stylistic parts such as body panels. While sharing of components across the globe is commonplace in the automobile industry, setting up plants in specific countries is a high cost endeavor, requiring country specific strategies. Renault Nissan, for example, is said to have earmarked Rs 4500 crore in India (over 7 years) for its 200,000 capacity plant set in an area of 640 acres. Most of the production (almost 80 percent) is currently heading for exports. Aiming at a market share of 10 percent means that the company would need further capacity hikes and investments to meet a potential 800,000 capacity mark.

Having common design platforms and common manufacturing infrastructure enables Renault Nissan as a unified company, and also as two different companies, Nissan of Japan and Renault of France, reap significant advantages in a volume constrained and competition intensive country like India. As a result, Nissan and Renault have been able to sell about 40,000 cars each in 2012 in the domestic market while having a common production base of 80,000 cars. It is evident that this strategy provides economies of scale. Potentially, this strategy can be utilized by Tata Motors in respect of Jaguar-Land Rover up-market model range,  although the product overlap is unlikely to be anywhere near that of Renault Nissan. This brings us to the question of whether common production and dual branding should cover non-overlapping, partially overlapping or fully overlapping product portfolio. In other words, should economies of scale be accompanied by economies of scope?

Options of scope

Given that most global car companies are full line producers, the true economies of scope accrue when both the brands offer the full portfolio. In this approach, differentiation becomes tenuous and requires ingenious solutions. Renault Nissan has sought to adopt a strategy of minor upgrades serving as differentiators even as both companies offer the same product platforms. Sunny car of Nissan is upgraded, for example, as Scala sedan of Renault with a minor luxury touch. Any strategy of splitting the product range, for example small cars and sedans with Nissan and luxury vehicles and SUVs with Renault would not provide the same level of economies of scale and scope, possibly according to Renault Nissan. There are, of course, arguments for and against this hypothesis, again based on the experiences of the Indian automobile industry.    

Marketing focus could provide an alternative view.  The experience of Maruti Suzuki has proved that it is possible to be a mass producer of small cars and A, B and C segment sedans. The experience of Toyota Kirloskar has proved that it should be possible to touch a sale of 100,000 units per annum just on the basis of a well designed utility vehicle, Innova. There is, therefore, the possibility that Renault and Nissan could adopt completely different marketing foci, and still derive the economies of scope at the plant level. Potentially, the reintroduction of Datsun brand by Renault Nissan could help in such differentiation. In a sense, it could be seen as existence of two companies of non-overlapping product portfolios in one company. Potentially, this could be seen as a choice between maximizing production economies (common full line product portfolio) versus maximizing marketing economies (split product portfolio).

Design, the integrator cum differentiator

If the possibilities of economies of scale and scope have to be combined, only design offers some significant potential. There are two considerations of design that have promoted the trend of exclusivity amongst the diverse car makers. The first one is the proprietary nature of designs which is prompted by business considerations. The second one is customized nature of designs which is aimed at performance optimization. The first barrier can be overcome by cross-licensing of technologies and sub-products, a trend that is widely seen in the electronics industry, and could be emulated by the automobile industry. The second barrier requires creativity of design with design platforms that are applicable not just for one model but more for a small group of contiguous models. This means that a 1500 cc engine in naturally aspirated, turbocharged and turbocharged-intercooled options should power three distinct car models which require power of 100 PS, 130 PS and 160 PS and torque of say, 140 NM, 200 NM and 260 NM. While diesel engine and heat recovery and recharging technologies make the paradigm within grasp in respect of engines, the challenges could be higher in respect of other vehicle systems, but not impossible.

The first of the challenges pertains to the chassis. A typical ladder type chassis provides maximum flexibility to change wheel base, front track, rear track and width while a typical monocoque in situ welded chassis offers the most inflexibility as every curve and anchor point is preformed.  The new trend of hydro-formed chassis could offer a mid-point. If the designers keep in perspective that typical length of automobiles in A, B and C segments would range between 4000 and 4600 mm and width would range between 1400 and 1600 mm, and the length in B, C and D segments would range between 4400 and 4800 mm and width would range between 1600 and 1800 mm, it would be possible to design and develop chassis that are trended out of certain common profiles.

The second of the challenge pertains to ensuring structural strength and overall form factors appropriate to different segments. The consumer acceptance of “family look” across the full portfolio (as in the case of Audi Q3, Q5 and Q7) favors design exponents to be creative and effective with flexible C Post and other designs. Development of flexible stamping systems has enabled the Japanese automobile firms develop panels and stampings of different shapes, thicknesses and strengths with efficiency. With the greater spread of aluminum as a material for automobile manufacture, greater flexibility could be achieved in this domain. As technologies for cross-metal welding develop in future, the possibilities could be immense.  

The third of the challenges pertains to design of flexible transmission, suspension, safety and steering systems. Probably, this would be one area where compulsions of customization would override the benefits of design flexibility, as these systems have to be matched finely with engine power and torque profiles, segment ride and safety criteria and traffic navigation conditions. This rules out, for example, use of a 5 speed manual box across all models. Customization of transmission systems, in fact, enhances engine performance and overall vehicle performance. Fortunately, manufacture of these systems has become such a specialized manufacture that judicious resort to in-sourcing of such specialized systems provides economies of scale and scope to designers and manufacturers.

The fourth of the challenges is one of designing interiors such as seats, lights and trim as well as vehicle electronics. These are typically outsourced completely by vehicle manufacturers although the designs have to dovetail with vehicle profiles. The availability of modern and flexible molding technologies and clever packaging would help such component suppliers become scale and scope efficient. The challenge here is probably high as the vehicle designers frequently seek “product refreshes” which typically involve exterior and interior trim and lighting systems.  The elevation of the component industry to mastering high scale and scope is a challenge by itself, regarding which enough attention has not been paid, at least in the Indian automobile industry. The relatively small and medium scale of evolution of the component supply industry in India has been a kind of structural limitation in the past but need not be so now with the increasing volumes of end-products.

Multiple approaches

While Renault Nissan business model of common production and dual branding is an innovative way of reaping economies of scale, there is a need for more involved and design driven approaches to combine design customization and manufacturing flexibility to ensure economies of scale and scope that are structurally internal to the firms and the industry, rather than dependent on market branding. Firms could also pursue more flexible and collaborative strategies of sharing internal systems without compromising the overall differentiation and competitiveness. Collaborative ownership and alliances together with innovative design and manufacturing could help the Indian automobile industry achieve sustainable economies of scale and scope, and become globally competitive.  

Posted by Dr CB Rao on January 13, 2013              

      

Powering the Indian Automobiles: Diesel or Petrol and Euro 4 or Euro 6?

Traditionally, technological trends the world over had favored petrol engines for the lighter passenger cars and diesel engines for the heavier trucks and buses. Petrol engines are lighter and quieter, and capable of developing more power, making them an ideal choice for the lighter vehicles such as cars. They are high-revving and have better power to weight ratios and have nippy acceleration. Diesel engines are heavier and noisier, but capable of developing more torque, making them an ideal choice for the heavier vehicles such as trucks and buses. Diesel engines are low-revving and have better torque to weight ratios, and have greater moving force.  Modern developments in engine technologies, however, upgraded the diesel engine to greater efficiencies, suitable for lighter vehicles too. Europe has pioneered this light diesel engine technological revolution, as evidenced by France having 77 percent of cars as diesel driven, followed by Germany at 44 percent. Japan with its passion for clean and quiet environment has been a great respecter of petrol engines; Japan has only 2 percent as diesel driven cars. US has been at the other extreme, encouraging use of gasoline even for trucks and buses.

India has, surprisingly, already 49 percent of its cars as diesel driven cars. The equal share of diesel prime movers in India has not been due to contemporary diesel engines, until at least the recent years. The share of diesel engines in passenger cars has been driven almost entirely by the differential pricing of petrol and diesel, with the former being more or less market driven and the latter being administered, ostensibly to keep the truck and bus transportation costs low. The oil industry/the government loses roughly Rs 26 per liter of diesel, which is also approximately the cost saving per liter of diesel. Notwithstanding the noisy and dated technologies, diesel driven vehicles have started gaining popularity in India. Today, no utility vehicle (UV) in India comes with a petrol engine option while passenger cars, even smaller hatchbacks, also have taken to offering diesel engines predominantly. This has, not surprisingly, led to a public debate on the entire gamut of fuel pricing, vehicle taxation and use of diesel engines in automobiles.  

Public debate

Diesel engines emit darker smoke with higher particulate matter. As if this was not enough, diesel exhaust was classified by World Health Organization (WHO) in 2012 as a class 1 carcinogen, placing it in the same toxic bracket as tobacco smoke. A recent All India Institute of Medical Sciences (AIIMS) study found growing incidence of lung cancer in non-smokers in Delhi. The study hypothesized that exposure to diesel exhaust fumes could be one reason. The environmental voice against the dieselization of cars is forcefully heard from Centre for Science and Environment (CSE) chief Sunita Narain, who states “it is immoral of the auto industry to create demand for a fuel that makes oil refineries bleed and our lungs explode”. She argues that diesel has to be a confined as a fuel for public utilities. Some experts have proposed higher taxes for diesel cars, in terms of higher excise duty, annual tax on diesel cars and so on.  Others have proposed total decontrol of petrol and diesel prices. Diesel pricing, being a politically sensitive issue, no major change in differential pricing may be expected anytime soon.    

The public itself seems indifferent to the debate on the risks of diesel engines and continues to favor diesel engines. A diehard petrol car maker like Honda is now forced to introduce for India a diesel car named Amaze. The automobile industry says that passenger cars are a small contributor for the air pollution on the roads, laying the blame on the aged commercial vehicle population of the country. It also maintains that consequent to the change from Bharat Stage III (BS III) emission norms to BS IV emission norms, the permissible particulate matter discharge has been brought down from 0.5 grams per kilometer to 0.025 grams per kilometer in diesel cars. Non-introduction of BS IV norms across the country is frowned upon by the industry experts. Lack of smog in Europe, which runs predominantly on diesel engines is pointed out in defence of smoggy pollution of India being caused by factors other than diesel cars.

A recent Central Pollution Control Board (CPCB) study threw up important findings. According to the study, vehicles contribute only 6.6 percent to particulate emissions (PM) in Delhi. Road dust is the biggest contributor at 52.5 percent while industries contribute 22 percent and geography 19 percent. The contribution of road dust to PM pollution is a rampant concern across India. The sharp rise in PM10 (respiratory particulate matter) levels and the NOx (nitrogen oxide) levels are both attributable to public and industry apathy, it looks. Even with BS IV norms, the diesel emission levels are still far more than those of a petrol engine. Public and regulatory options must recognize the operating fuel price incentives available for preferring diesel cars and the lack of incentives for producing more efficient and environment-friendly diesel engines and cars . While the equalization of diesel and petrol pricing is a policy option with several undertones, the automobile industry and the oil industry must take the lead for technological solutions. 

Engine technologies 

The key to finding the right driving and emission options lies in the engine technologies. Diesel engines which are compression ignition engines have to be more rugged (bulkier, heavier and noisier), with the engines designed to meet the pressures needed to compress air to diesel ignition temperatures. This is compounded by the need for precise injection of diesel fuel in each of the cylinders. The introduction of common rail diesel system in diesel engines coupled with electronic injection of fuel has resulted in better combustion efficiency and better combustion balance across cylinders. These developments need to be pursued further to ensure more complete combustion of the diesel fuel. The injection technologies themselves need to be sharpened to ensure greater micro-mixing of fuels. The engine technologies, coupled with ultra-low sulfur diesel would help the efficiency cum emission cause. The choice of diesel engines currently available in India for passenger car applications is too small to evoke these competitive technological forces.  Indian manufacturers and the collaborators/parent corporations would need to bring in their best of diesel engine options to India to reposition the diesel engine technology based on performance and emission levels rather than on price and cost basis.

Ultra low-sulfur diesel 

Ultra-low sulfur diesel (ULSD) is diesel fuel with 15 parts per million or lower sulfur content. The US Environmental Protection Agency (EPA) requires 80% of the highway diesel fuel refined in or imported into the United States (100% in California) to be ultra-low sulfur diesel. One hundred percent was mandated to be ULSD nationwide by 2010 in USA. Ultra-low sulfur content in diesel fuel is beneficial because it enables use of advanced emission control technologies on light- and heavy-duty diesel vehicles. The combination of ULSD with advanced emission control technologies is sometimes called "clean diesel". Nitrogen oxides and particulate matter are the two most harmful diesel pollutant emissions. These emissions can be controlled with the use of catalytic converters and particulate traps. However, sulfur—in amounts that used to be allowable in diesel fuel—deactivates these devices and nullifies their emissions control benefits. Using ULSD enables these devices to work properly. In India, the national capital Delhi first introduced ULSD on April 1, 2010 as a step aimed at curbing vehicular pollution in the capital. However, the rollout of ULSD elsewhere as also modernization of the fleet on the roads or the use of pollution control equipment have been tardy, nullifying the potential benefit of ULSD.

Emission gap

India is on BS IV for emission norms, considered aligned with Euro IV emission regulations. The point to note is that while India is yet to achieve a nation-wide coverage of BS IV norms, Europe has already implemented Euro 5 norms and is committing to deploy Euro 6 standards by 2014.  Diesels have more stringent CO standards but are allowed higher NOx emissions. That is undergoing a significant squeeze. In respect of diesel engines, CO limits have been reduced to 0.5 gms per km in Euro 4 itself while NOx limits have been reduced from 0.25 gms per km in Euro 4 to 0.18 gms per km in Euro 5 and as low as 0.08 gms per km in Euro 6. In fact, NOx limits for diesel engines are now almost on par with those of petrol engines, indicating the huge strides diesel engine technologies would need to take meet the futuristic emission norms. In contrast, BS IV norms are yet to be rolled out beyond the National Capital Region and 13 major cities. If India takes the lead to leapfrog to Euro 6 norms, in respect of both diesel and petrol engines, clearly there would be a transformational change in the emission scenario of India.

Holistic approach

The increasing share of diesel engines in the Indian passenger car industry and the emission implications thereof can only be inadequately and somewhat improperly countered by manufacturer-driven price premiums on government driven additional taxation on diesel cars. The fuel pricing differential must be moderated and subsidies by the exchequer on fuel bills reduced. This would be a better option than keeping the subsidies on and seeking additional tax revenues. Manufacturers should be incentivized to invest in superior diesel and petrol engine technologies that meet first Euro 5 norms, and then Euro 6 norms, which should be introduced as early as possible with all-India applicability. The use of ultra low sulfur fuel must extend across the nation. And, most importantly, the nation as a whole, the governments as well as the society, must wake up to the urgent need to curb the menace of rampant atmospheric dust pollution.

Posted by Dr CB Rao on January 7, 2013