Reference no: EM133039570

The CWBM Story

The Classic Watches and Business Machines (CWBM) was a wholesaler of wristwatches and calculators. In, 2005 the company was only 12 years old its sales were already touching Rs. 13 crore per annum. The company was mainly catering to south India with its distribution facilities located at Chennai and Hyderabad. During the same year another company called Malhotra Home Appliances (MHA) which had completed 20 years in business was doing exceedingly well in the business of wholesaling home appliances. In 2005, it posted its sales at a whopping Rs. 32 crore per annum. MHA was mainly catering to the North Indian markets with a single distribution facility and a very large warehouse cum distribution centre located in the suburbs of the Chandigarh. 

Both these companies were doing fine until such times the market conditions and wholesalers started to change and this called for an urgent policy review and strategic introspection with respect to changing scenario to be able to maintain the past growth rate. The next 20 years saw both the companies on two different platforms. The following indicators highlight the standing of the two companies: 

• By the end of 2014, the CWBM posted a sales figure of Rs. 260 crore which was a two hundred times increase as compared to its 2005 sales, whereas MHAs sales were posted at Rs 330 crore, approximately ten times its sales in 2005. 
• By this time the CWBM had developed and expanded its infrastructure and its facilities at the national level and was actively considering exporting by tapping the South Asian markets, while MHA still remained a regional wholesaler, undergoing a tough time to cope up with the rising pressures from its competitors. 
• Despite the three-fold increase in its sales the MHAs profits were not growing at an increasing rate but rather they were decreasing, while CWBM not only grew in sales and assets but its profits also increased rapidly. 
• The CWBM had a good credibility in the market and it enjoyed good liquidity with diverse and substantial business interests, while MHA remained in the same business of home appliances with tight liquidity, considering to sell-off its assets and converted its distribution facilities into retail outlets. 

The two companies despite having promising futures in 2005 were now in two different situations, which were not only very extreme in themselves but also very opposite to each other. The reasons attributed to their situations could be attributed to many factors such as: 

1. The flexibility in approach 
2. Adaptability to changing business climate 
3. Diversification to spread risk 
4. Modernization 
5. Expansion to reap economies of scale 
6. Modern management practices 

In the case of the two companies, the management of CWBM looked at the changing business scenario with an open mind and changed its approach to business thus giving due consideration to the aforesaid factors, while the management of MHA remained traditional in its approach and did not show any inclination to change in true with the changing business climate, still using its age-old strategies to do business. By the time MHA geared up to respond to the situation it was already too late and the damage had already been done. A bird's eye view of how the management of the two companies perceived and acted in changing business conditions is highlighted here. 

CWBM story 

In 2006, the concept of merchandising was gradually picking up. Merchandisers were the big players with substantial capital backup with sound business acumen. Their strategy was to buy in bulk directly from manufacturer as the middlemen. Merchandisers thus pose the threat to the existence of wholesalers especially in the consumer goods industry, which had its impact on all the wholesalers including those of the CWBM and MHA. The CWBM management immediately prepared a contingency plan to gear itself up to meet the ensuing situation. The strategy adopted by CWBM included following steps: 

Growth in the existing lines 

Diversification into unrelated lines 

Takeover, mergers 

Growth in areas where Company's core strength could be utilised. 

Growth in existing Business

The sub options were: 

1. Globalization 
2. Changing product mix 
3. Adding new facilities to cater efficiently to all the regions 
4. Setting up an assembling facility abroad to export computers to other countries 

Globalization: in the backdrop of volatile conditions in the Indian market and CWBMs plans to maintain its growth rate it was felt by the management that the company must venture into global markets. The company had immense scope of increasing its export to European countries. The CMD strongly felt that the realization of their growth rate with a target of doubling their sales every two years was impossible to achieve without significant global presence. 

Product mix: from wristwatches and calculators the company decided to venture into assembling the computers, telephone instruments and other telecom products such as walkie-talkie and selling computer hardware peripherals. There was an estimated demand of Rs. 30 crore per annum. On the export front there was a demand for computer peripherals, wristwatches and pocket calculators. 

Adding new facilities to cater efficiently to all the regions: some managers were of the view that setting up new distribution centers in West, North and East India and making franchises all over the country could give a boost to their sales. In view of this, the company acquired several distribution facilities and gave away franchises to all those interested in company's products. 

Setting up an assembling facility abroad: some managers were of the view that the larger global demand could be satisfied by establishing distribution centers abroad especially in the Gulf to service the middle East. Another option was to get into a joint venture with a Saudi Arabian company, which had sent a preliminary inquiry in view of the rapid industrial growth in the region.  An advantage in collaborating with this company was that their government was encouraging local entrepreneurs, thus importing the latest technology and sophisticated computer hardware with cheap Indian labour would make the production very cheap and ready for exports in Europe and USA. 

Thus, Gulf was a unanimous choice as it was closer home making controlling operations easier. This move was also accepted because this would give the company the MNC status. Earning foreign exchange through this plant would also benefit the country. In view of the above, the company set up an Import House in partnership with a Saudi based import house. The idea was to import peripherals from the overseas market and using heap Indian labour to assemble the computers and export them to the lucrative European and American markets. 

1. Diversification into unrelated areas: Especially in the growing computer and peripheral market abroad. This helped spread risk on account of business fluctuations and take advantage of the growth in the industry in which CWBM dealt.   
2. Takeovers / Mergers: The company pursued an ambitious plan of takeover and merger by taking over certain sick or potentially sick units and turning them around and merging with good performers. This increased and expanded the sales of the company with bare minimum investment. 
3. Growth in areas of core strength: Using the existing and expanding distribution network established to market wrist watches, pocket and desk calculators etc. company could use the same to sell its telecom computer related products in the future. Further importing peripherals from abroad and assembling in India to export abroad increased the business of the company manifold. 

Besides the above, CWBM drastically cut down its stocks and kept the bare minimum, thus releasing the precious money and used it for working capital. This made the company enjoy liquidity status and meet up all its recurring expenses. All the above measures helped the company cope with and compete successfully with the giant merchandisers or discounters.  By the end of 1995 the company was an entity to reckon with in the wrist watch, calculators, telecom and computer products segment. 

The MHA Failure story 

MHA did not bother much with entry of big merchandisers. The management of MHA did not perceive any threat from merchandisers even when profits were falling, anticipating the trend to reverse. The management was very upbeat about the reputation they enjoyed in the North Indian market and hoped to maintain their growth rate without even considering the changes that were marking the business environment.

The emphasis of the MHA was on procuring more and more appliances in different varieties and increasing quantities. This added up the cost of maintaining such huge inventory and the overheads. Besides, the MHA management did not pursue any major overhaul to cut down on rising costs, but rather recruited a giant sales force of one hundred people to take care of selling the rising inventory levels. The conservative management retained the old employees who had even crossed the retirement age and their sons and daughters were given employment in the company.

Throughout the 2000s the management continued with its traditional management and service policies. While most household appliance companies had begun to examine their merchandise assortment to help in controlling inventory, MHA continued to offer some 75 different appliances to its retailers - double that of its competitors. 

By the end of the 2010, its retailers had already joined the mass merchandisers and some had defected to the new cooperative groups. As a result, its market share declined, operating costs increased and profits squeezed. This time Mr. Ravi Malhotra, the Chairman cum Managing Director who was already 79 years old, expired leaving the management with no choice but to appoint a new CMD. The management appointed an outsider Mr. Krishnamurthy as the new CMD of the company. The new CMD had new ideas to cope with the situation. These were not welcomed by the employees and the management since they were used to the traditional and old practices of the company.

This resulted in the company becoming a likely takeover candidate. The company was eventually taken over by the Manchanda Group who tried to restructure the company. The new management cut down on inventory from 75 to 26 and reduced the stocks. This meant closing down two out of three distribution facilities. This eroded the customer confidence in the company. In addition to this, suppliers to the company started to ask for advance payment to supply the goods to MHA. 

In a bid to cut down the costs the company retrenched some 125 employees and converted its distribution facilities into retail outlets. By this time, the merchandisers had already overtaken the market, so the company had no choice but to lose its giant status that it enjoyed back in the mid-90s.

By the early 2015, there were five big players in the market including CWBM while MHA was nowhere even in the first twenty. 

Questions:  ANSWER IN SHORT

1. Critically analyse the distribution pattern of these two wholesalers.
2. What are the reasons of success or failure of these two wholesalers?