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Welspun Target Debacle: Wake-up Call for Emerging Market Firms

CASE STUDY, STRATEGIC MANAGEMENT
IMT Ghaziabad, 8 Pages

Case Preview

Welspun Target Debacle: Wake-up Call for Emerging Market Firms

 

As of mid-August 2016, all was going well with Welspun India Ltd (WIL). Its Chairman, Balkrishan Goenka (Goenka), had just celebrated his fiftieth birthday at a five-star hotel in Mumbai.1 The home textile business of his conglomerate had reported a revenue of $900 million and profit of $106 million (Exhibit VII) for the year 2015-162. WIL had a market capitalization of $1,490 million (INR 10,000 crores) and was the largest supplier of terry towels in Asia, having the privilege of supplying towels to the  Wimbledon as well3. Besides towels, the group also manufactured sheets and pillow-cases. The largest customer4 of these products being the US. While WIL has  registered a CAGR of 25%5 in revenue terms during 2005-2017 and its shares were trading at a P/E ratio of 14 and a RoE of 20%6; Mr. Goenka had also announced a goal of becoming a zero-debt and a $2 billion company by 2020.


1 “Why Welspun’s mislabeling of sheets as Egyptian cotton is bad news for ‘Make In India’”, http://www.huffingtonpost.in/2016/08/25/why-welspuns-mislabeling-of-sheets-as-egyptian-cotton-is-bad-ne/, August 25th 2016 (accessed date: August 1st 2017)
2 Anuradha Raghunathan, “Fabric-action? Welspun crisis takes toll on Goenkas”, http://www.forbesindia.com/article/india-richlist-2016/fabrication-welspun-crisis-takes-toll-on-goenkas/44931/1, November 29th 2016 (accessed date: August 1st 2017)
3 Deepak Shenoy, “Not so Welspun: Target finds no Egyptian cotton used in sheets sold by Welspun, terminates relationship”,https://capitalmind.in/2016/08/not-welspun-target-finds-no-egyptian-cotton-used-sheets-sold-welspun-terminates-relationship,August 22nd 2016 (accessed date: August 1st 2017)
4 “Annual Report 2015-16”, http://www.welspunindia.com/investor-corner.php (accessed date: July 31st 2017)
5 “Investor presentation, May 2017”, http://www.welspunindia.com/investors_uploads/Welspun%20India_Investor%20Presentation_Q4FY17.pdf, May 2017 (accessed date: August 1st 2017)
6 Ibid.

Teaching Note Preview

Welspun Target Debacle: Wake-up Call for Emerging Market Firms

 

Synopsis

The case describes the situation that occurred in August 2016 when Target (one of the largest US retailers) severed its retail ties with Welspun India Limited (WIL) after having discovered that the bedsheets supplied by WIL were of inferior quality, though the label mentioned that they had been produced from the finest Egyptian cotton. The other retailers also expressed their intention to severe ties; WIL not only lost its market capitalization but its reputation as well. However, by June 2017, WIL’s share price had started rising once again and retailers other than Target, were doing business with WIL. The case attempts to understand how WIL was able to control the damage and spring back into action. The case also serves an objective of understanding how firms from emerging markets manage business relationships with firms developed nation – risks involved in doing business, response of firms to crisis, and strategic options available for firms.

Pre-requisite Conceptual Understanding/Before the Classroom Discussion

Since the case is more suited to Post-graduate students or Executive Education participants, it is required that they should have undergone a basic course in Strategic Management, so as to identify and analyze the issues in greater detail and offer strategic options. The following readings can be assigned to the participants along with the case as pre-reads:

1. Khanna T. and Palepu K.G. “Chapter 6-Emerging giants: Going global”, in Winning in Emerging Markets – A Roadmap for Strategy and Execution, Harvard Business Review, 978-1-4221-4389-6, 2011, Pages 165-201.
2. Rugman A.M. and Nguyen Q.T.K. “Chapter 4-Modern international business theory and emerging market multinational companies”, in Understanding Multinationals from Emerging Markets eds. Alvaro Cuervo-Cazurra and Ravi Ramamurti, Cambridge University Press, 978-1-107-69832-1,2015, Pages 53-80.
3. Athreye S. “Chapter 7-Value chain configurations of Indian EMNEs”, in The competitive advanatage of emerging market multinations, eds. Williamson P., Ramamurti R., Fleury A. and Fluery, MTL Cambridge University Press, 978-1-107-65941-4,2013, Pages 132-173.
4. Cazurra A., Newburry W. and Park S.H. “Chapter 6- Operation”, in Emerging Market Multinationals – Managing Operational Challenges for sustained international growth, Cambridge University Press, 978-1-107-42152-3,2016, Pages 109-140.

Case Positioning/Setting

This case can be taught for the courses – Strategies in Emerging Markets and Strategic Management. It can be taken up for postgraduate students (PGDM and MBA), as well as Executive Education programmes. Any program that has a module dealing with emerging markets finds a good fit for this case.

Assignment Questions

The following questions can be given to the class –
I. What were the reasons behind Target severing its ties with WIL?
II. How did WIL rectify the damage caused by Target’s actions?
III..............

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Abstract

The case describes the situation that occurred in August 2016 when Target (one of the largest US retailers) severed its retail ties with Welspun India Limited (WIL) after having discovered that the bedsheets supplied by WIL were of inferior quality, though the label mentioned that they had been produced from the finest Egyptian cotton. Target offered to compensate its customers who had bought these sheets in the last two years. The other retailers also expressed their intention to severe ties and pulled off all merchandise of WIL from their shelves. WIL not only lost its market capitalization but its reputation as well. However, by June 2017, WIL’s share price had started rising once again and retailers other than Target, were doing business with WIL. The case attempts to understand how WIL was able to control the damage and spring back into action. The case serves an important objective of understanding how firms from emerging markets that are used to operating in ‘institutional voids’ manage business relationships with firms from developed nations. Insightful lessons are drawn for the firms from emerging markets (EMNEs) to understand risks involved in doing business, response to crisis situations, and developing and exercising strategic options to sustain growth and profitability.



Pedagogical Objectives

  • To highlight issues such as - firm’s response to external shocks which cause a loss in valuation; and charting out future growth options after analyzing the current situation and trends.
  • To understand the importance of stakeholder management in strategy formulation.
  • To highlight the importance of the fact that emerging market firms are operating in global markets, so they have to understand the challenges of operating in such markets; meeting stakeholder expectations; resolving conflicts; and charting a future strategy to mitigate such risks.

Case Positioning and Setting

The case can be used in courses such as Strategic Management and Strategies for Emerging Markets. Concepts such as Trends affecting the growth of firms, firms’ response to crisis, operating in developed markets, stakeholder management, and developing options for growth; can be covered through this case.



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