A Case Study On Leveraging Capacity Without Using Economies Of Scale

<p>Back in the third year of our business, we faced competition from small, 1-machine units whose owners were operating their company as a means of self-employment rather than as a business. Ever since we had converted the market into selling by weight instead of selling by unit hoards of hand-made paper bag manufacturers faced extinction since paper sheets were purchased on a per-ream basis (which means per piece basis). So, the opportunity that we opened was too big for us to capture alone. This gap in the market, fed by the plastic bag ban gave many opportunities to new manufacturers to creep up. The problem that these guys made us face was that of pricing, what we were paying two operators was all that they wanted to earn for themselves. Lack of foresight made them reduce the prices of paper lifafas manufactured by them.</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="" /></p><p>Although they were small but ever since we had changed the unit of the sale in the market, paper lifafas became standardized as every new manufacturer was copying the grammage of our paper along with our sizes and some were even copying our name, Urza, Ujala, and Oorja are some of the MeToos. With standardization comes commodification and instead of service or quality, paper pouches started selling by price and although our competition was small, there were many of them and even if they had the combined capacity to serve only 25% of the market they affected the rates of 100% of the market.</p><p>We needed a new plan, we did a SWOT analysis, and although our strength was obvious, which was a wide manufacturing scale the solution was not so obvious as the natural strategy to adopt was economies of scale. Economies of scale is really a play on costing and to beat the competition using it means to reduce prices. We could not employ this strategy for two major reasons:</p><ol><li>Increasing prices was and is a huge pain in our industry, we know this for a fact now as our selling prices have remained same for the last 5 years, our achievement is to only prevent them from falling.</li><li>To employ economies of scale we needed to understand how low we could go with costing, since the raw material costs are a major portion of the selling price, the difference was not huge at our scale. So, we were not big enough to employ this strategy yet.</li></ol><p>Come what may our solution was still in our size and nowhere else, after some painful months, we decided to -</p><p><strong>SKU the shit out of the market</strong></p><p>We realized the customer does not like to change packaging material frequently and that if we could shift them out of the non-printed brown paper lifafa market we could have them to us without any competition since more than 90% of the competition did not have a printing facility, some did not have gusseting (give a side to the bag, a third dimension) technology and anyone who had all of these, could not for their life manage 60+ SKUs (stock keeping unit) using 1 or 2 machines.</p><p style="text-align: center;"><img src="" /></p><p>As soon as we introduced this variety, we reduced the market size of non-printed brown paper bags from the existing 100 to 15 while enjoying a 100% market share in the newly introduced SKUs like - Customised sizes, customer-printed bags, self-design printed lifafas, striped/lined paper pouches, all the above with a gusset, all the above in white bleached kraft paper, etc. We had bought ourselves another 2 years till the market re-organized itself and people caught up to this by which time we shifted to something new which we are currently following.</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="" /></p><p>The competition never saw a way out, especially when we reduced our prices to only non-printed paper bags which did not affect us majorly in any big way. The competition lost out because they had not planned for a steep reduction in market size, all they wanted to do was earn enough to run their house, they had not planned for any contingency, they did not have a fall-back fund and they did not have the imagination that something like this could ever happen.</p><p style="text-align: center;"><img src="" /></p><p>If I was the competition, I would have done my own SWOT and my competitor's SWOT and leveraged the fact that no company can go from a 5 SKU company to a 60+ SKU company and still maintain their timelines and service. I would have risen my rates to the rates of Urja and focused on speedy service and great customer experience to retain my current customers and would have planned to increase my capacity using the extra cash generated or moved to a different variety of customers which a bigger company cannot service like the thela-walas who have no storage space and need daily deliveries.</p><p>Very few people give credit to their management education for success in business, I believe I could not have had an easy time had I not done a course in management from LBSIM. MBA gave me the attitude and tools to analyze situations and to make decisions to leverage my strengths and hide my weaknesses. Without being taught SWOT first by my father as a pre-teen and then reinforced in my management school I might not have taken my ship out of the storm and in business, a single wrong decision can bring the entire company down.&nbsp;</p><p>&nbsp;</p>
KR Expert - Sushant Gaur

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