Fundamental laws of business for

racing against time

TATA MOTORS, INDIA`S largest vehicle maker faced a net loss of Rs. 500
croredue to a slowdown in the economy ,and was struggling to win customers for
its first passenger car ,the Indica .
But by March 2003 company had led to a net profit of Rs.280 croreby slashing
costs. Five years later in 2008 Tata motors reported a net profit of Rs. 2,170 crore
(a nearly eight fold jump) and unveiled the Nano, billed as the world`s cheapest
car.The pressure to perform is familiar to every company . No one gets much time
to show what they can do , and achieving performance target becomes even harder
when economic turbulence hits.
Leaders of performancebreakthrough start by systematically determines the
business`s current condition. That diagnosis , typically guided by four fundamental
laws of business, enable them to gain a deep understanding of the point of
departure. They next map out a realistic point of arrival ,using the same four laws .
Finally, they craft a few vital initiatives , which can be rigorously tracked, to get
them where they need to go.
The fundamental business laws are these : (1) cost and prices almost always
decline .
(2) Your competitive position determines your option .
(3) Customers and profit pools don`t stand still.
(4) Simplicity gets results.
These laws allow businesses to chart the right path . That`s especially relevant in
today`s challenging economic circumstances.
Let`s discuss each law in turn.
Costs are always a critical dimension. Indeed , it is a basic law that inflation-
adjusted costs and prices in nearly every Industry decline over time . The rate can
best be charted on an experience curve ,which maps costs and prices as a function
of accumulated experience . In most industries ,cost and prices decline between
10% and 30% every time accumulated experience doubles. When sales slow ,cost
leaders find that they have more built -in advantages to respond to the economic
headwinds .
Toyota , for instance ,has recently unveiled the first car – the remodelled Crown
Sedan—produced under its latest cost cutting programme , which should generate
$2.8 billion in savings. The strong position of Toyota --the no. 2 player in the U.S.
market by sales – also stems from the aggressive management of the experience
curve by Japanese auto makers over the past few decades. This allowed their cost
and performance curves to cross those of America`s big three in 1972, and Detroit
has never caught up since .
TATA motors has taken a similar approach to reducing costs by applying
itsaccumulated experience . The Indian automaker slashed break even points for
commercial vehicles from two-thirds of capacity utilisation in the financial year
ended March 2001 to one third in the year ended March 2003 . This helped in
turning the company`s huge loss in 2001 into a substantial profit two years later .
The firm then put to use its experience with commercial vehicle to reduce
manufacturing costs in passenger cars ---a vital discipline which enabled it to
produce the Nano .

A company`s competitive position is the second critical

dimension .
Market leaders generally outperform followers – leader`s , profit and revenues
grow faster , their returns on equity are higher and their customers are more loyal .
However in times of economic turbulence --- when inflation is high ,market
bearish , and credit tight --- the competition for market position grows more
intense and existing position may be vulnerable . in such a scenario, performance
improvement strategies are successful when they reflect a company`s position in
the market and rely on specific insights about which actions can improve it in the
eyes of its customers .Jack Welch began his term at GE by slashing cost and
driving every business down to where it should be on the experience curve . Then
he developed his famous strategy that GE should be number one or number two in
every business in which it competed . These two approaches together accounted for
much of GE`S success under Welch .
Customer and profit pools never stand still ..
But in tougher economic times both business and consumers are likely to shift their
buying pattern faster than ever. These changes in behavior can significantly arrange
the pools of profits that companies compete for . Wining companies prepare for
such shifts . One of these companies is starbucks , the World`s biggest coffee retail
chain . Before the advent of Starbucks ,the coffee industry made most of its profits
in roasting and relatively little in retailing . But when Starbucks introduced its
innovative retail model based on the Italian-style coffee bar , customers began
flocking to the experience and profits shifted from roasting to retailing . The
company not only led the shift but also precipitated it .India has experienced a
similar shift to coffee retailing over the past few years , led by café coffee day and
Barista coffee .
As the coffee example illustrates profit pools shift but they don`t shift randomly .
They shift in predictable directions as customers taste and behaviours change , and
as other forces in the marketplace (and outside of it ) exert their influence .
A company seeking performance breakthrough needs quick , detailed information
about the entire customer base . Is the company focusing on the biggest ,fastest –
growing and most profitable customer segments? .
How well does it meet customer`s need ?
How loyal are its customers ?

Simplicity gets result ..

This fourth critical concept is not realized often enough in good times , as
companies add features ,variations , and line extension . These practices will
inevitably complicate both production process and organizations ,and interfere with
a company`s agility --- especially during economic uncertainty when it needs
flexibility the most . Japanese car makers today enjoy a complexity advantage
over Detroit ---- fewer models, fewer points , and fewer different parts . HONDA
offered its popular, mid-sized ACCORD in a total of just 484 combinations ,
including colour, compared to FORD`S Fusion, a direct Accord competitor ,
which has 35,908 theoretical configurations , including colours . While HONDA
would require half a day to build all possible ACCORDS , it would take FORD ,
92 days to build all possible FUSIONS . Less complexity has also helped Honda`s
bottom line : its sales have been growing 6% a year while Ford`s have been
shrinking 1% a year .
This could be useful learning for India`s increasingly ambitious auto firms which
aspire to make their presence felt on world stage .
Today`s companies are facing ever stronger economic headwinds , as well as more
pressure from stakeholders for breakthrough results. It may be useful to remember
that the simple path to success guided by the four laws represents the basics of
great management . Get them right and you are laying the foundation for success.

Thanks.