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Micromax case study - operations management

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  • 1. Reading: Upwardly mobile: Nothing micro about MicromaxAlthough he’s never driven a truck in his life, Rahul Sharma’s past, present and future ismemorably connected to a truck battery. IIn August 2007, in the powerless village of Behrampur in West Bengal, Mr Sharma saw anAirtel PCO being powered by a truck battery. Every night, the PCO owner would lug thebattery 12 km to an adjoining village on his cycle, charge it there overnight, and lug it backto Behrampur in the morning.In late 2007, when Micromax decided to diversify from PCO devices into the business ofmobile handsets, the PCO owner of Behrampur was the inspiration for its first product. Thecompany designed a battery that could last 30 days on a single charge and give 17 hours oftalk-time. Micromax asked vendors in China and Taiwan to manufacture 10,000 handsetswith these battery specs. The X1i, priced at Rs 2,249, was an instant hit in rural India, andMicromax’s handset business was on its wayIn just 30 months, by staying with this philosophy of making handsets that address specificuser needs and are also affordable, it’s come a long way. Says Rajesh Agarwal, one of thefour promoters: “We sell a million handsets a month now. With a market share of about10%, we are a close second to Samsung.” There are many views on that 10% figure.Citigroup put it at 10% in February, a top executive of a rival says it’s 8%, IDC India saysit was 4.8% in 2009. According to IDC, Nokia had a market share of 54.1%, Samsung9.7% and LG 6.4%Never mind the quibbling over numbers. Fact is, the company is mounting a seriouschallenge to the slippery No. 2 spot in the mobile handset business. In the past four years,the second spot has been lost by Motorola, Sony Ericsson and LG. Samsung has held it forthe past 24 months, but Micromax is catching up. “We will be No. 2 by the end of thisfiscal,” says co-promoter Vikas JainDecided to be differentMicromax, its promoters say, posted revenues of Rs 1,600 crore and a net profit of Rs 150crore in 2009-10. Early on, they decided there was no point in aping the leaders. “We hadtwo options — compete on price or be different,” says Mr Jain. “We decided to bedifferent.” In its case, different meant a longer battery life or a phone that had two SIMs.Micromax has taken the utilitarian philosophy to the mid- and high-end also, with areasonable degree of success. But here’s where it gets tougher. Says Romal Shetty, nationaltelecom head, KPMG: “In the mid- and high-end, customers expect certain service quality.Micromax’s challenge will be to achieve such quality standards, and convey the samethrough branding and positioning.” Asks Ajay Parmar, head (institutional research), EmkayGlobal Financial Services: “Their biggest challenge will be brand stickiness. Will their
  • 2. existing customers buy Micromax again?”Before it found its centre, Micromax dabbled on the fringes, changing its identityrepeatedly. Rajesh Agarwal started Micromax in 1991 to distribute IT peripherals. One ofhis neighbours in Pitampura, in West Delhi, was Rahul Sharma. In Delhi’s Jamia MilliaUniversity, Mr Sharma was friends with Sumeet Arora, a junior. And one of Mr Arora’sfriends was Vikas Jain.It would be eight years before they would come together to do business. After college, rJain moved to the US and joined GE, Mr Arora joined BlueStar and Mr Sharma worked with an auto components company called Bundy Engineering.In 1999, all three quit their jobs to join Mr Agarwal. They set up Micromax Technologies,an IT education company dealing in e-commerce and embedded technologies.The four divided responsibilities on functional lines, which hasn’t changed since. MrJain, 35, is the business director; Mr Agarwal, 45, managing director, handles finance; MrSharma, 34, executive director, oversees marketing; and Mr Kumar, 35, is the chieftechnology officer. While they don’t say how the equity is divided among the four, theydo say theirs is an easy relationship.Their big break came in 1999, when Nokia signed them up as an all-India distributor formachine-to-machine devices — essentially landlines that were customised to run on amobile network. They were used by call centres and PCOs. By 2004, Micromax hadrevenues of Rs 10 crore and employed about 80 people. It was installing about 10,000Nokia 32s a year in India, making it the largest Nokia distributor worldwide for theseproducts. But, overnight, it all threatened to come apart.The same year, Nokia decided to exit this segment. “As much as we were shocked, wedecided to turn this into an opportunity,” says Mr Agarwal. So far, they had beencustomising a Nokia instrument. Now, they decided to build and sell the whole thingthemselves — that too 40% cheaper than the Nokia 32.Airtel was its first client. Against the 10,000 devices it sold for Nokia in a year,Micromax was selling 35,000 of its own within a year. Business peaked in 2007, withsales of 250,000 devices. Then, the mobile revolution took over. Overnight, again,Micromax faced extinction. Again, Micromax converted the threat into an opportunity.Six months on, it too hopped on to the mobile bandwagon. But it went about the business
  • 3. differently. It stressed on product innovation for the low-end, price-conscious user. So, itwent rural. It worked. Says Mr Sharma: “Customers were willing to pay a premium of Rs200 for the X1i.”Then, instead of manufacturing itself, Micromax sourced its handsets from 12 factoriesin China, South Korea and Taiwan. It was model-based sourcing: Micromax would comeup with an idea and give it to the factory best placed to deliver it. This is different from,say, Nokia, which would be compelled to stay in-house or go to a vendor-partner, even ifanother vendor had better capabilities to execute a particular model.Micromax also looked at distribution in a new way, standing by its cash-only model.While rivals offered a 60-day credit line, Micromax refused to give credit. “If thedistributor does not buy your handsets, there is no pressure on him to sell them,” explainsMr Agarwal. At the same time, Micromax offered to supply distributors regularly to keepinventories down. So, distributors didn’t have to shell out large amounts upfront or have alot of money locked in. “If we give a distributor 1,000 handsets and ask him to sell themover a month, he will worry about his daily sales,” says Mr Agarwal. “But if we supplyless, demand will be close to equal or more than supply.”Micromax has 34 super-distributors across India. Unlike a Nokia or a Samsung, it doesn’tinteract with the 500-plus sub-distributors. Neither doesit intervene in how the super-distributors sell or place the products. “We offer our super-distributors a 15% margin, which is higher than the industry average of 6-10%,” claimsMr Jain.Some of Micromax’s competitors, who do not want to be named, say the company farespoorly on after-sales. “It addresses a segment that is comfortable with the use-and-throwphilosophy. Also, the company’s claim of 450 service/care centres are inflated,” says anexecutive with a rival telecom firm. Nokia and Samsung have 900 and 800 serviceoutlets, respectively.The Micromax promoters refute these charges. On product quality, Mr Agarwal says:“The plants we are associated with also manufacture handsets for all global majors. Theydon’t apply different standards while manufacturing for us.” He also points out that theirphones sell well in rural India, where users demand longevity.Micromax is investing Rs 100 crore to set up a manufacturing plant in Baddi, HimachalPradesh, to ensure its outsourcing model does not cause supply-side uncertainties.Production is being scaled up from 50,000 units per month to 500,000 units a month by
  • 4. March 2011.In December 2009, US-based private equity firm TA Associates invested $45 million(about Rs 200 crore) in Micromax for a minority stake. While Micromax has notspecified the exact holding, ET has reliably learnt that TA picked up 15-20%. That wouldvalue Micromax at Rs 1,000-1,200 crore. It has also learnt that the company is looking atan IPO, at a valuation of Rs 3,000-3,500 crore. While industry and banking executivesindicate a mop-up of around Rs 600-800 crore, company executives refused to comment.Micromax has already used the TA funding to expand to neighbouring countries such asSri Lanka, Bangladesh and Nepal. The company now plans to expand to Middle East,Africa and Latin America.Over the next six months, Micromax plans to launch four handsets a month. There’s amosquito-repellent phone, which is designed to emit frequencies to repel mosquitoes, aphone that doubles up as a computer mouse, and a waterproof one. The truck-batteryphilosophy still rules at Micromax.Questions for discussion: 1. Discuss the importance of product design and development process for an organization keeping in view the case of Micromax Mobile. 2. What/who was the source of Product/Service Innovation for Micromax design? Mention other possible sources. 3. 4. Discuss some latest trends in product development process.
  • 5. Discuss the importance of product design and development process for anorganization keeping in view the case of Micromax Mobile.Product development is the process of creating a new product to be sold by a business orenterprise to its customers. Design refers to those activities involved in creating thestyling, look and feel of the product, deciding on the products mechanical architecture,selecting materials and processes, and engineering the various components necessary tomake the product work. Development refers collectively to the entire process ofidentifying a market opportunity, creating a product to appeal to the identified market,and finally, testing, modifying and refining the product until it’s ready for production.Micromax mobiles have build their reputation in a very short time-span. These mobilesare targeting the masses. The Company has priced these mobiles at very low cost and hasloaded them with all essential features.Normally the high profile features like advanced camera, internet browsing, Bluetooth,dual sim functionality come at a very high rate. But Micromax mobiles are available atvery low rates and that too loaded with all these features. This is a branded phone andcompetes with established brands.Features like dual sim, long lasting battery and QWERTY keypads at low prices havemade Micromax successful particularly in rural India. Majority of customer in India livesin villages and the demands of the rural population are different from the urbanpopulation. Micromax has able to identify these demands and developed its mobilephones accordingly. Micromax with its different mobile phones brought a paradigm shiftin the mobile industry. Product design and development lie in the core of this paradigmshift.What/who was the source of Product/Service Innovation for Micromax design?Mention other possible sources.
  • 6. The PCO owner of Behrampur was the inspiration for the first product of Micromax. ThePCO was being powered by a truck battery. Every night, the PCO owner would lug thebattery 12 km to an adjoining village on his cycle, charge it there overnight, and lug itback to Behrampur in the morning. Thus the company designed a phone with battery thatcould last 30 days on a single charge and give 17 hours of talk-time.Other possible sources could be:1. Prakash Murarka, a 21-year-old college student, says he has four phone numbers andone handset. He holds up his SIMs as if they were a miniature deck of cards, and slipstwo into a Micromax handset. To switch among numbers, cellphone owners used to haveto swap SIM cards, the little plastic-and-metal identifier chips that slide into handsets.Micromax has designed almost all of its phones to hold two SIMs, and handsets that canhave up to two numbers are part of its signature.2. Micromax has also launched a MTV phone, the MTV X360, which is replete withYamaha amplifiers for listening to the MTV music channel. Then there is a Gameolutionphone, targeted at teenagers who love motion sensor gaming. The X235 on the other handcan work as a universal remote for electronic devices including the television, airconditioner, music systems, etc.Discuss some latest trends in product development process.Development Speed occurs more quickly through digital design, analysis andcollaboration tools to get products to market faster. Using computer-aided design (CAD),computer-aided engineering (CAE), collaboration software, file-sharing software one cantransform ideas into digitized virtual designs for testing and viewing a new product.Platform Flexibility results from using modular product architecture to provide moreproduct variety to customers. CAD and CAE permit easy reuse of already-completeddesign files. In addition to archived files within a companys server, design engineers cansearch for free CAD files offered by some publishers and suppliers. All these files makeproduct design much more efficient, cost effective and accelerated than ever before.
  • 7. Outsourcing and Offshoring permit optimizing supplier skills and capacity,international operations and new markets. Sometimes it saves cost but more importantly,theyre actually taking advantage of global product development networks, largely toaccess new markets in places in the world where theyd like to operate and sell theirproducts, as well as to access talent that is in those different parts of the world.Lean Principles allow for improving product developments efficiency by applying leanproduction ideas to the organizations design process. Small to midsized manufacturersproducts may be just as complex as those of large manufacturers, but because they simplydo not have the infrastructure to support product development employing lean productdevelopment principles allows the product development stakeholders to eliminatewasteful activities.Customer Involvement becomes more easily achieved by using the Internet to bringcustomers ideas into the product design process. Some companies are using the orderinformation about what features, components or configurations customers are orderingand are interested in, and they use that in real time, or as quickly as possible, toreconfigure the next generations of the product.

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