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.
 Asian Paints Overall Corporate Strategy

New Develop
Discover

Exploit new markets by

creating products /services Build new competencies
to create the future
by leveraging
existing competencies
Market Opportunities differently

Defend Deepen

Defend existing markets Build complementary/

by strengthening new competencies
existing competencies to fortify position
in existing markets
Existing

Existing Distinctive Competencies New

For any firm operating in a market,, there are four generic strategies open to it. They are
depicted in the above diagram. Here it will be analyzed where is AP playing in which
market, and how are they doing it.
Defend: this is the rural and the urban market in which AP is playing. They are a target
to many global companies, which are playing in Indian market via Indian arm of their
operations like ICI has Berger, Kansai has JN.
Deepen: this is the industrial segment of Indian paint industry where AP has a weak
presence. They have a presence in automotive segment but rank a poor second. They
need to form alliances with foreign players to enter into this segment. They can also look
for tie-ups with the company, which have tie-ups with those companies whose daughter
arm is operating in India, to lock the account. Their move of taking over Haucoplast is
one step in this direction. Their tie-up with PPG has given them a good presence in
automotive segment, capturing clients like Santro, GM, Ford etc.
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 strategy
The industry is characterized by the presence of intermediaries who have a very high
influencing power on the purchase decisions of the consumer, especially in the urban
areas. Asian Paints strategy for acquiring higher product demand could be three pronged.
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 strategy
The above-mentioned strategies can be used for the urban segment. The dynamics of
the rural segment are slightly different and different strategies need to be adopted for
these. The rural segment is not mature enough to appreciate service related offerings
and therefore the strategy should be product related. The basic strategy that has to be
adopted in the rural segment is one of customer up gradation. The penetration of the
 rural segment has been achieved by offering a basic product well tailored to match the
low willingness to pay of the rural consumer.

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

Strategy for international markets

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

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.