Blue Ocean Strategy (BOS) – HCL Technologies –India's fourth largest IT Services Company -Performance 2005-2010

2005 was a year of make over for HCL as the baton passed from founder Shiv Nadar to Vineet Nayar as President. Vineet Nayar adopted the Blue Ocean Strategy immediately and his four pronged strategy focused on service innovation, pricing innovation, creation of new markets and technology disruption. Also he adopted the policy of Employee First philosophy and full service co sourcing model. The company saw revenue YoY growth of 26 %( 6200Cr) in 2007-08, 41% (8764Cr) in 2008-09, and 25% (10983Cr) in 2009-10 under the leadership of Vineet Nayar as CEO. It has been an up and down performance during the time where financial crisis and recession played a spoil sport. Company still sticks to the Blue Ocean Strategy.

Initial part of 2007 most of the Indian IT vendors suffered form appreciating rupee and by mid year the financial crisis started unravelling and by end of year it was a big mess which led to bankruptcy of Lehman Brothers and many bank failures across the globe. Key clients of HCL in BFSI cut budgets drastically. 2008 was year when HCL tried to accelerate to growth with acquisitions of Liberata (provides platform based BPO offering in the insurance space) and Control Point Systems (another platform based offering). HCL acquired Capitalstream, a US BFSI product company for US$40 million in February 2008.HCL also acquired the UK based AXON Group for US$658 million in December 2008. HCL also raised $800 million, much of it devoted to the takeover of Axon, the SAP consulting firm.

2009 was year when recession was at its peak when even the Indian IT vendors were handing over pink slips to the employees. HCL’s Employee first and Customer Second Philosophy helped them to grow in recession and also gain the No.1 spot in employee satisfaction. HCL invited ideas from employees and launched the cost cutting exercises with the support of employees. Employees actively participated in increasing the revenues from existing customers by their value addition and significant commitment. SAP offerings also played a crucial role during this time.

The tough market scenario forced the company to move away from value to volume growth in 2009 and 2010.  HCL signed many deals during this year and volumes came from BFSI and large transformational deals from telecom. Some of the key clients are Nokia, Vodafone, and Electrolux etc. HCL also tried to improve geographical mix as most of the revenue is coming from US (60%-65%) by focusing on Latin America, Middle East and Asia Pacific. European revenues increased on the back of SAP offerings. HCL also have seen margin declines as mainly due to investments of profits back into business primarily in people, sales and marketing.

HCL is expecting the JFM and AMJ 2011 quarters to see significant improvement in margins as they invested in SG&A expenses. HCL is expecting its BPO unit to turn profits by March 2012 and the company is also looking at divesting some of the existing business by 2015. HCL is also focusing more on the emerging markets including India and Africa for future growth. Despite the fact the margins may be low in these markets it is expecting good volumes.

Discussion Points:

1. Does dependence on Blue Ocean Strategy help HCL enter  into top 3 vendors?
2. What should the company do to improve its margins further?
3. How to improve the geographical mix reducing the dependence on US revenues?

Blue Ocean Strategy (BOS) – Samsung Electronics 2006-2010

Value Innovation, first component of Blue Ocean Strategy is Samsung’s primary tool for product development. Value Innovation Program centre was started in 1998 and by 2004 the centre was playing a very key role in rapid growth of Samsung to become the world’s top consumer electronics company. Many cross-functional Blue Ocean project teams were at work, and had ingrained the approach in the corporate culture with an annual conference presided over by their entire top management. One of the key successes of VIP centre was, within five years of entering the mobile phone market, in 2003 Samsung has become the No2 player in the mobile phones market.

Samsung BOS strategy has also helped it to maintain top position in TV market (since 2006-2010), Global; LCD panel market since 2002. BOS is still at the core of the Samsung product strategy and company has been able to make the necessary adaptations according to the business environment and changing consumer preferences. In 2006 Samsung launched Market Driven Change (MDC) where its focus was on the consumer insights and how to develop better and new products using consumer insights. One of the successful results of the MDC was Flat panel LCD TV Bordeaux. This TV has played a crucial role in Samsung overtaking Sony in the LCD market. In 2007 Samsung keeping focus of teenager customers has launched a store in the Second Life Site. The virtual space will be used to showcase range of mobile handsets to teenagers the future consumer group, in a competition-less way.

2008 has been a tough year for Samsung as the Chairman of the group was indicted and forced to resign on tax evasion charges. Samsung also failed to acquire SanDisk, the flash memory giant. Fall in sales of microchips and TVs has hit the company badly due to recession. Early 2009 Samsung merged its LCD (liquid crystal display) and semiconductor business into one business unit called Device Solution Business. It is also merged its digital media and its telecommunications business into one business unit, called Digital Media & Communications Business. Samsung launched green management initiative that is intended to make Samsung a leading eco-friendly company by 2013. The 'Eco-Management 2013' plan seeks to reduce greenhouse gas emissions from manufacturing facilities by 50 percent, and to reduce indirect greenhouse gas emissions from all products by 84 million tons over five years.

2009 also saw Samsung enter into Mobile OS market with launch of its own open mobile operating system, called "bada," which can be used to develop applications for Samsung phones. Samsung launched mobile phones Wave based on Bada platform along with its first smart phone on Google’s Android platform – Samsung Galaxy. The company plans to bring down smart phone prices significantly. Samsung launched 3D LED TVs and at a premium pricing and changing the home entertainment experience from 2-D to 3D.

2010 saw Samsung launching a a new tablet PC named Galaxy Tab as the latest device meant to rival Apple Inc.'s popular iPad. Samsung is still innovating in a big way and it still relies on a basic assessment: product’s competitiveness is everything, and it must be kept away from price wars.

Discussion points:

1. Discuss Samsung strategy to weather recession with innovation
2. What has been the affect of the change of management and restructuring on the company?
3. What should be the Samsung strategy in future?

Financial Information Samsung:

Year                       2007            2008            2009

Sales                     98,508         121,294        136,324

Gross profit          27,627          31,532          41,729

Operating Profit     8,973            6,032           10,925

PBIT                     9,633            6,578           12,192

Net Profit              7,421            5,526            9,761

Currency: Won Tn  Source: http://www.samsung.com/

2. Divisional/Geographical Performance

(1) Sales by Division (Sales between parent and subsidiaries included)

Blue Ocean Strategy (BOS) – LG Mobile Communications & Handsets – Performance Review 2006-2010

BOS Initiative:LG Electronics headquartered in Yeouido, South Korea is the world's second-largest manufacturer of Television sets and third-largest producer of mobile phones. In mid 2006 LG launched Blue Ocean Strategy campaign. The campaign, entitled ‘BLUE OCEAN 2 BY 10’ represented its aim to be among the world's Top 3 mobile communications player in three years, and Number 2 player by 2010. Other objectives included focusing on high end products, focusing on emerging markets like China, India, and Middle East & Africa. The initiative was launched by CEO Nam Yong. LG has invested considerable amount of resources on this initiative and planned to achieve the goals by 2010.

Mobile Communications: No3 position in the world but still short of No2LG had announced that LG Chocolate and the Black Label series are Blue Ocean operational strategy in action in 2006 in mobile communications category. The company also launched the ultra premium fashion phones Shine and Prada in 2008. In 2009 LG launched high end handsets Arena, Viewty Smart, Crystal GD900 and GM730, featured the S-Class touch screen user interface. According to Gartner LG market share in the mobile sales during this time is as follows in 2006(6.3%), 2007(6.8%), 2008(8.4%), 2009(10.1%), 2010(7.1%). BOS is seen working for the company between 2007 and 2009 as the market share highlights. LG suffered a major setback in 2010 as the market share shows.

Dull Performance in China, India & Middle EastChina is another market where LG failed to make an impact with paltry market shares as the local operators have dominated the market. But in India LG has been able to gain the No3 position in the market. LG India launched around 40 models of hand sets from entry level to smart phones and also roped in star brand ambassadors in the Indian market to promote the brand. Even in the Middle East LG has been constantly captured No3 position. LG launched high end jewellery phones and ultra premium phones in the Middle East market with not a great success.

2010: Fall of CEO and Record Mobile Phone losesIn October 2010, LG Electronics replaced its chief executive officer Nam Yong after a record loss at the flagship handset business. LG saw a significant fall in the market share in mobile handsets in 2010. The exhibit below highlights the fact the LG Electronics suffered loses due to the bad performance in the Mobile communications and handsets division. All the other divisions have performed well with double digit growths.

The reason for the failure lies in LG smart phone strategy. LG entered into agreement with Microsoft to use Microsoft Windows Mobile OS which was not up to mark as its platform for 50 types of smart phones by 2012 and had no solution for the Windows OS's lack of applications. Another mistake was LG believed the User Interface (UI) will be the key trend. The UI is focused more on how one uses a handset, rather than on what to use, due to its focus on making usability easier. Delay in launching the smart phones as compared to peers and the company was rushed to launch new smart phones in the later half of 2010. LG stressed on the one hand a more user-friendly interface and more aggressive marketing rather than focusing on smart phones strategy.

The new CEO aims to more than double smart phone shipments and will focus on expanding premium products to catch up with bigger rivals. The android phone Optimus One is LG’s best selling smartphone.
Exhibit: Consolidated Sales & Profit by DivisionCurrency: KRW bn                   3Q'10  QoQ       4Q'10     YoY       FY10          YoY
Home Sales                               5359   15.80%      6205     4.70%     22082     12.50%
Enterment Op.Income 123 -122 211
Mobile Sales 3224 10.90% 3576 -14.70% 13841 -23.90%Comm Op.Income -326 -274 -709Handset Sales 2971 12.00% 3328 -15.20% 12811 -24.90%Op.Income -304 -262 -658Home Sales 2750 2.50% 2819 13.70% 10673 11.90%
Appliances Op.Income 67 78 538
Air Sales 1107 -17.60% 913 50.50% 4820 12.20%
Conditioning Op.Income -52 10 60
Business Sales 1192 1.90% 1215 -7.80% 4832 4.30%
Solutions Op.Income -7 47 59
Source: http://www.lge.com/
Discussion Point:1. Blue Ocean Strategy highlights the critical factors for the success very elaborately but how did LG management fail in this regards?
2. What should LG Electronics do to revive the Mobile handset and communications division?
3. What are the key learning from the LG Electronics failure to adopt the BOS strategy successfully.
4. Impact of the Key economic and other external environment factors on the LG electronics that affected the BOS strategy implementation.