CASE Studies

case studies HCL Laptop Case Analysis for Vikalpa (IIM-A Case Journal)

Background and Key Challenges

The case brings to light the key challenge of transforming a business to anaspired-forconsumer brand and the associated hurdles and challenges. HCL, a leading desktop player wants to acquire a significant standing in the laptop segment too.The company has its eyes set on the booming laptop category growing at double digits in the household category compared to the B2B space. The segment is presently in its fastest growth phase and a sharp strategic move now may translate into a sizeable gain in market share for HCL in this high margin and high image segment. HCL is on a growth path but does not enjoy a healthy margin and needs to grow to a certain scale (15% market share in two years) to be reasonably profitable. The business challenge hence is to scale up profitably and the key marketing challenge is to increase the market share in a highly competitive market within the inherentconstraints of being an Indian value-for-money brand.


Environment Scan

The laptop segment is on a growth path aided by falling prices (10% YOY), rise in consumers’ need for portability and their improved affordability. The segment is dominated by the heavily marketed MNC brands, perceived to be better in quality than Indian brands. Laptops are sold from retail outlets, largely through multi-brandretail with metros showing the best growth rates year on year. The overall ad spends are growing by 100 per cent year on year, with HP leading the market on the “Innovator” plank. With what looks like a “higher spends lead to better market share” approach on the surface, the conclusion still needs to be examinedin depth.


Consumer Behaviour

The laptop category is divided into business (establishment) andindividual (household) buyers. While the business buying is done in bulk and through tenders, individual purchasesrest on the price-value equation.There is a completely new set of habits, characteristics, andconsumer behaviour emergingin theevolving laptop segment. Consumers’ belief, that MNC brands are better in quality than Indian brands in the laptop category hinges on the perception of MNC brands as new, young and modern. The retail segment reflects increased knowledge levels and improved negotiation power for the consumer. Laptop is largely a personal purchase for work and entertainment supported by the convenience of portability. It is also seen that laptop consumers are mostly image and brand conscious.

Individual Buyers (Household) Segment

The household segment has the following characteristics.

Fastest growing segment: Young students and the newly-employed
Characteristics: Value for money; entry level and lowest-priced laptops with most features; first-time buyers; prefer MNC brands

Largest segment: Middle level executives
Characteristics: For work andplay, to climb up the corporate ladder; second purchase; value-seeking

Smallest segment: Senior executives
Characteristics: Laptop as a fashion accessory; high-end features; low on knowledge; most purchase Sony and Apple.


HCL vis-a-vis Market

HCL has grown at a healthy rate in the laptop segment, matching the growth rate of the household segment and inching up on market share. HCL being a seasoned desktop player has set up a widespread desktop distribution channel over the years but has not been able toleverage the networkfor laptops. HCL's financial results show that the margins for the Info System Business are under pressure and it is only the computer business, which has shown any kind of growth in profitability (Exhibit1). HCL is growing at a rate, which is twice that of its direct competitors, Dell and Acer.

Exhibit1: HCLPerformance vis-a-vis Market  & Direct competition *Dell and Acer

Items 2008 2009 Delta %
Computer systems, product and services Sales – HCL (INR mn) 34,139 35,340 1201 4
Desktop sales – HCL (Nos.) 660,113 550,689 -109,424 -17
Laptop sales – HCL (Nos.) 161,088 292,785 131,697 82
Desktop overall sales (Nos.) 5582,107 5208,046 -374,061 -7
Desktop sales-Organized (Nos.) 2523,756 2217,252 -306,504 -12
Laptop overall sales (Nos.) 2315,214 4085,743 1770,529 76
Direct competitors*- Laptop 692,276 1012,205 319,929 46
Household-Laptop (Nos.) 769,760 1409,785 640,025 83
Establishment-Laptop (Nos.) 746,699 1098,779 352,080 47

HCL is perceived as trustworthy, value-for-money and old-fashioned brand in comparison to the MNC brands in the success critical (20-35 years) customer age group.However, MNC brands have a wider range in the value-for-money entry-level laptopswithmore variants,as well as being perceived better on quality. Discountinghas resulted in neck-to-neck pricing in the entry-level segment. The key challenge in retail hence is to have the consumer preference on non-price metrics. Both Acer and Dell have a wide product portfolioin the entry-level segment. While Dell enjoys the ‘high-performance’ perception riding on its enterprise equity, it has also been investing on creating a fresh physical channel apart from selling online. Acer has benefitted from the rub-off from its brand ambassador Hrithik Roshan.


Marketing Analytics

The equation between adspend andgain in market share is peculiar toa high-activity market going through a paradigm shift and points to some interesting patterns (Exhibit2). The overall adspend is growing at a higher rate (100%) than the market growth rate (83%Household and 47%Establishment).

Exhibit2: *Return on Marketing spends

Brands 2008 2009 2008 2009
AD Spend
(INR mn)
Market Share AD Spend
(INR mns)
Market Share
%
Delta AD
Spend
%
Delta Market
Share
Saliency of ROM* Saliency of ROM*
Ad Spend
%
Ad Spend
%
HCL 10 6.96 140 7.17 1,300 0.21 1 1.4 5 19.5
HP 130 31 470 33.5 262 2.5 10 4.2 17 14
Lenovo 230 13 150 14.3 -35 1.3 17 17.7 5 10.5
Acer 120 13.5 250 12.12 108 -1.38 9 8.9 9 20.6
Dell 500 16.42 1,150 12.66 130 -3.76 38 30.5 42 90.8
Toshiba 90 3.61 200 4.7 122 1.09 7 24.9 7 42.6
Sony 150 3.9 340 3.5 127 -0.4 11 38.5 12 97.1
Others 100 11.69 70 12.1 -30 0.41 8 8.6 3 5.8
Total 1,330 2,770 100


HP, the market leader has gained 2.5 points in market share in 2009 with a 262 per cent increase in ad spend, but Lenovo has gained 1.3 points in market share with a 35 per cent drop in ad spend. Dell, the largest spender (42% saliency of adspends in 2009), still lost market share in 2009, whereas Acer, which spends less than 25 per cent of Dell on ads, enjoys a market share on par with Dell’s. Return on Marketing (Exhibit2: ROM*) reflects the ad spend per market share point for each player and hence the effectiveness of money spent to retain market share by each player.

Exhibit 3: Correlation between Ad Spend and Market Share
There seems to be no set formula that the growth in ad-spends would Necessarily translate into growth in Market share. Dell, Sony & Acer Have lost market shares in spite of spending more in Advertising over Last year’s spend, whereas Lennovo has gained market share in spite of reduced Ad spends.

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Exhibit 4: Effectiveness of Marketing
The Multiplier here reflects the returns on marketing spends & is a numeric value. Lesser this value, better the returns on marketing & ad spends.
Further, the effectiveness of ad spend can be analysed indepth to assess the marketing effectiveness. Thisis best reflected through the Multiplier (See Exhibit4). Multiplier is the amount of money spent by a brand (in INR 100 mn) to gain 1 market share point in 2009 over 2008.The lower the Multiplier corresponding to the gain in market share, the more effective is the marketing strategy over a shortterm period, like one or two years. Lenovo and HP have been effective overall with Acer being the most effective in HCL’s competitive subset;e.g., Multiplier (HP) = (470-130) / (2.5*100) = 1.4 (in 100 mn)

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Some observations:
  • Dell, in spite of doubling its ad spend and higher saliency of ad spends, lost market share in 2009.
  • Lenovo, in spite of reduced ad spends gained 1.3% share.
  • It is not just the value of money one is spending but also how it is being spent. Forexample, Dell spends moremoneybut is onpar in market share withAcer, which spends less than 25% of Dell(’08,’09-ad spends).                                                                                 
  • ROM may lag ad spends
  • Purchase decision shows the importance of brand pull for the household laptop category in multi-brand retail.
  • HCL is struggling on ROM* and the multiplier and is certainly not among the front-runners oneither parameter currently.
  • Laptops have a better acceptance and are growing faster in the metros and the next 4 towns

Scenarios to Choose From

Given the current dynamics, Ajai has the following scenarios to choose from:
  • Intense consumer advertising on the lines of (a) Delland/or (b) Acer
  • Focus on a particular segment - B2B space
  • Focus on a particular segment- Youth in retail segment
  • Focus on a particular segment- Mid-level corporate executives
It’s crucial to examinethescenarios through the competitive landscape and HCL’s position so as to check the strategic fitment & to assess whether it is in line with HCL’s core competence and constraints. Refer Exhibit.5


Exhibit 5: Strategic Fitment Matrix*
This matrix reflects the fitment of probable strategies with respect to HCL’s strengths, weakness & current reality.

S.no. Scenario Factors in favourof  HCL Factors not in line with HCL Strategic Fitment*
1 a Intense advertising on the lines of Dell Features, pricing for entry laptops Strong equity in Enterprise, specialized network, 42% saliency of market spend (INR 1,150 mn), the elusive MNC Tag Weak
1 b Intense advertising on the lines of Acer Value for money, entry laptops,network, 7% saliency (market spends), moderate spends 2009 MNC image, product variants, brand ambassador route to advertising (Actors rub off sophistication) Strong
2 Focus on B2B space Widespread network, proven experience in the space Lower margins, brand disloyalty, network suited for desktops but struggles in the laptop category Moderate
3 Focus on Youth in Retail Segment Value for money, entry-level laptops, affordable options Product variants with a lot of features, attracted to MNC brands Strong
4 Focus on mid-level executives Widespread service network Value-seeking, image conscious, for work andplay Weak


A strong strategic fitment is when the approach leverages HCL’s core competence and strengths and is possible within the constraints faced. Clearly, the choice is between Scenario 1b-Intense consumer advertising on the lines of Acer andScenario 3- Focus on youth in retail segment. Both look strong in strategic fitment for HCL.


Suggested Approach for HCL
               
So, how is that Acer is pegged witha similar market share as Dell in spite of spending 78 per cent lowerthan Dell on ads. Perhaps Acer is doing something which Dell is not. Is it the MNC imagery, the product portfolio, discounting or something else? The case details out that most of these are on par. Has it got something to do with more entry variants coupled with HrithikRoshan as the brand ambassador for Acer? Perhaps there is merit in evaluating this combination. Looking at the ad spends to market share statistics (Exhibit3) Acer had a negligible fall in market share compared to Dell in spite of Dell spending INR 900 mn more than Acer.

The numbers show better return on marketing spends (ROM) for Acer compared to Delland even better than HP who is the market leader. The multiplier for Acer is 0.9 compared to 1.7 and 1.4 for Delland HP respectively. This coupledwith the fact that Acer is a direct competitor ofHCL and competes for the same consumer in entry-level laptops makes this worthy of further attention.

One of the challenges faced by HCL is to overcome the “old and cheap Indian Brand”. A brand ambassador approach can definitely help HCL reposition itself, improving itself with sophistication andbecome a better-valued brand. From the ad spends data, year on year ad spends is growing by around 100 per cent. HCL, with INR 600-800 mn (estimated range of advertising budgets for 2011) would have a good 11-15 per cent saliency in total adspends for the laptop category if the adspends carried on with the same growth rate of 100per cent. The brand proposition, for example, could be “Choose the smart value-for-money HCL laptops, endorsed by Yuvraj Singhandbacked by a wide service network.” This would translate to choosing a value for money andreliable*laptop onpar in quality with the MNCs (*endorsed by an Achiever Indian player andbacked by a wide service network). This approach would help HCL reposition itself, and give a PAN India reach riding on the brand ambassador, especially the Rest of India.

This perhaps, may help HCL in reaching around 8.5 per cent market share at a growth of 200 per cent in a year’s time (Exhibit6). However, this approach has two major limitations. First, that the middle-level executives would not find HCL appealing when seeking value. Second, this approach does not propel HCL to a premium fashion accessory to be chosen by the senior executives. Clearly, this would fetch traction mainly with 20-35 year old  first-time buyers.
Assumptions
Ad spends growing at 100 per cent YOY as seen from 2008-2009 data (Exhibit 4 from the Case) Youth segment for laptopis growing at a rate of 110 per cent+ 2008-2009 is taken as 2008 and 2009-2010 is taken as 2009 (Exhibits 1,2,5,6,8, 10 from the case)
HCL buyers are mostly first-time buyers.

On the other hand, if we apply the same brand ambassador approach on a focused segment (Scenario3), focused on a specific segment, e.g., Youth (20-35 years) first-time buyers. There is not only an exact fitment, but this approach gives HCL the opportunity to make a much more focused impact on the fastest growing andmost knowledgeable consumer segment.  Chances are that, this segment may become the largest, both in numbers and influence for laptops. They may graduate to becoming middle-level executives who would use an HCL laptop and if they find them delivering on quality, then they may become the Early Adopters in the mid-level executive consumer segment.

Building this approach further, suppose the brand proposition is, “HCL-sub brand(to be positioned for younger audience-e.g., ME) laptops for ‘value for money,’ endorsed by ViratKohli backed by a wide service network.” This would translate intochoosing a smart and refreshing entry Laptop* (*Backed by a reposition itself as a young and reliable brand with a better acceptance in metros andthe next 4 towns, growing faster than rest of India. This approach perhaps gives HCL the best chance to cross the 10 per cent market share with a growth of 400 per cent (Exhibit 7).

Exhibit 6: Projected Scenarios

Scenario Target Customer Metrics Multiplier ('11) Projected Ad spends
mn INR
Projected Delta
in Market share
Estimated
Market Share
1b

Entire Household
Category

Growing at 83%

6.2 800 1.3 8.5
3

Youth niche within
 Household category

Fastest growing*

4.3 800 1.9 9.50~10


Exhibit 7: Projected Multiplier &Market Share of HCL for both the scenarios
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NET-NET

Focusing on a particular segment, with a sub-brand for youth in retail, riding on a youth icon as the brand ambassadorseems to be the best way forward for HCL as this is in line with HCL’s strengths and limitations,andstill presents an opportunity to grow to 10 per cent and market share with improved profitability and renewed brand imagery. The next best alternative is to go for the entire household category but this may backfire and also result in the classic “spray everywhere and you may touch your consumer” outcome. There is also a high need for HCL to seek in-depth information around purchase decision-making for laptops especially in youth andmid-level corporate executives.

This warrants the need to do an in-depth research across some metros and smaller towns, to know the emerging gaps andto be the first to address them. HCL also needs to make sharp choices between investing in R&D, design,product portfolio, innovation andlaptop-focused distribution network. There is a merit in going with investments in design, features andvariants for now and outgrowing competition riding on the fastest growing youth segment. It needs to appeal to the youthwith design and new variants consistently so as to build a strong pull and improve its marketing multiplier.

Summary Note

HCL, a leading desktop player wants to acquire a significant standing in the fast growing laptop segment.A sharp strategic move now may translate into a sizeable gain in market share for HCL in this high margin and high image segment. HCL is on a growth path but does not enjoy a healthy margin and needs to grow to a certain scale (15% market share in two years) to be reasonably profitable. The challenge is to scale up profitably and to increase the market share in a highly competitive market within the inherentconstraints of being an Indian value-for-money brand.The overall ad spends are growing by 100 per cent year on year. With what looks like a “higher spends lead to better market share” approach on the surface, the conclusion still needs to be examined in depth.

 

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