Indian Institute of Management Rohtak

No. IIMR-C9-04/2018
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Lava Mobilephones: Strategies in a Competitive Environment

On the morning of Monday, 10th July 2017, Mr. Gaurav Nigam, the product head of LAVA
mobiles, is going through a detailed report which he ordered to investigate the reasons for
LAVA’s poor performance in the year 2016-17. Gaurav received a sales performance report for
LAVA in April (see Exhibit 1). The company’s revenue growth and market share declined in
FY16-17, and its senior management expects both to increase. Gaurav has assured management
that the scenario will improve considerably in the next year, but as early as Q1 2017 all the
market indicators seem to be stacked against LAVA. The revenue growth and the sales forecast
for rest of FY17-18 do not look very encouraging, either. This performance came as a shock to
the company’s management.

In a cursory look at the report, Gaurav has found several worrying facts about the future of the
LAVA brand. The competitive landscape of the mobile phone industry has changed drastically
over the last year. All Indian mobile phone vendors, including LAVA, are struggling to survive,
let alone grow, in the face of aggressive Chinese competitors with deep pockets.
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Prepared by Ms. Aashritha Chowdary, Zonal Manager – Sales, LAVA, Dr. S. K. Pandey,
Assistant Professor of Marketing at IIM Rohtak, and Mr. Gaurav Awasthi, Research Associate at
IIM Rohtak. The authors thank Mr. Gaurav Nigam, Head-Product at LAVA INTERNATIONAL
LTD. for his valuable contribution to the development of this case. This case has been prepared
as a basis for class discussion. It is not designed to present illustrations of either correct or
incorrect handling of administrative problems. The primary data in the case is disguised to
maintain confidentiality.
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The report indicates that customers perceive the quality of LAVA mobiles to be less consistent
than that of its competitors. The report also casts doubt on the company’s market segmentation
strategy. Gaurav wonders if they are targeting the right customers with appropriate products. He
remembers that the top management has asked him to present a revised marketing strategy for
rest of FY17-18 within a fortnight. Now, he has a week’s time to prepare to allay the fears of his
top management.

1. Development of the Telecom Industry in India

The decade 2001-2011 witnessed an explosion of telecom operators in India. During that time,
the total number of telephone subscribers grew at a compound annual growth rate (CAGR) of
35%. By contrast, CAGR of telephone subscribers in the 1980s and 1990s was 9% and 22%,
respectively (NCAER 2012). International comparisons show that India has one of the lowest
mobile tariffs in the world. The wireless data cost is coming down rapidly. As of Q1 2017, the
annualized cost of 1 GB data per month had come down to 1.3% of the country’s annual average
gross domestic product (GDP) per capita. The threshold for widespread affordability is 2% GDP
per capita (see Exhibit 2). Between 2007 and 2010, prepaid and blended rates showed a decline
of 25.3% and 21.5%, respectively. Under a blended rate, multiple services are provided as one
package; for example, voice calls and data would be provided as a bundle instead of having
different tariffs for each. By contrast, postpaid tariffs showed a decline of only 8.23% (NCAER
2012).

The majority of phone subscriptions in India are of the prepaid type. The dominance of prepaid
emerged in South Asia first and is termed the budget telecom network model. The Indian
telecom sector underwent a major transformation through significant policy reforms at the advent
of the 21st century. These reforms encouraged opening up of the telecom sector to competition.
Many new entrants to the market, such as Uninor, Aircel, and Vodafone, offered lucrative plans
to consumers. The heightened competition led consumers to maintain multiple SIMs. One SIM
would be used as a primary SIM to receive calls, while the other/s would be used to make calls
based on the best available offer. Realising this consumer behavior, mobile manufacturers started
offering dual SIM technology in mobile phones. Nokia was the most dominant player in the

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2000s, but its portfolio consisted mainly of single SIM phones in feature phone and smartphone
segments.

2. LAVA Mobiles: Sensing the Opportunity, “Creating Possibilities”

There was a definite opportunity for dual SIM phones in the market. Sensing this opportunity,
four Indian entrepreneurs, Shri Hari Om Rai, Sunil Bhalla, Shailendra Nath Rai, and Vishal
Sehgal started a company to cater to the growing mobile handset market.
Initially, the company entered the trading business. It imported mobiles from China and sold
them in the Indian market. After a while, however, the founders realized that to create value, they
needed to build a brand. This led to the establishment of LAVA International in 2009.
LAVA and its channel partners follow a principle –“Create Possibilities.” LAVA was set up with
the aim of providing customers with high-quality mobiles at affordable prices; to that end, it has
set up a research and development (R&D) center and a quality center in China. The company has
become known for its ethical policies among channel partners and its excellent quality and
customer service experience among customers. LAVA China and LAVA India act as two
separate entities of LAVA International Ltd. LAVA India operates in India, while LAVA China
caters to the rest of the world.

The LAVA family has now grown to more than 15,000 people. It is headquartered in Noida,
India, and has operations in Thailand, Nepal, Bangladesh, Sri Lanka, Pakistan, Indonesia,
Mexico, the Middle East, Russia, and Egypt. It sells a variety of items, including mobile phones,
tablets, and laptops, but the major part of its revenue comes from its mobile phone business. It
has two manufacturing plants in Noida, each with a production capacity of 1.5 million units. The
first plant was set up in April 2015 and the second plant in August 2016. LAVA is planning to
set up a factory in Tirupati, Andhra Pradesh, in line with the government’s “Make in India”
initiative. 1

Hari Om Rai, one of the founder of LAVA, said the following in a press meet in 2015: We
currently have about 7,000 people, and we are on track to double this number by March next

1
Information accessed with the consent of LAVA International.
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year. These people will be hired across various roles in manufacturing, R&D, sales, and
marketing.

LAVA’s revenue has increased exponentially over the years. Its market share has grown to a
considerable 9% of the Indian market. It started its operations with a portfolio of six feature
phones, which it increased to more than 50 handsets by 2015-16, including both feature phones
and smartphones. LAVA has emerged as a leading multi-national corporation (MNC) in India
with a base of 1,200 distributors and 1.5 lakh retailers.

In an interview with Business Standard in April 2017, Gaurav told a correspondent that
LAVA is building an army of at least 700 personnel to monitor the market by directly touching
some 100,000 outlets that sell LAVA phones. This sales force is to visit every retail outlet at
least twice a month, checking stock levels and brand visibility.

3. Mobile Industry in India: The Current Scenario

The global smartphone industry amassed revenue of $431 billion in 2016 (statistica.com 2017).
Traditionally, most of this revenue used to come from developed markets such as North America
and Europe. However, due to market saturation, smartphone manufacturers are now looking
towards developing countries for growth. Among developing countries, India’s market potential
is high (see Exhibit 3).

India has one of the faster growing mobile phone markets in the world. Regarding revenue, the
Indian mobile handset market recorded a 22% rise in revenue at ₹1.36 lakh crore in 2016
(calendar year), against around ₹1.12 lakh crore in 2015 (CMR, 2017).. The mobile phone
industry grew rapidly between the years 2010 and 2016. As of March 2016, India had taken the
second position after China in the list of the biggest global markets, overtaking the USA
(Novonous, 2016).. That same year, India had 355 million mobile users with 28% market
penetration. The growth trends are on the upward swing and show huge potential (see
Exhibit 4). Many technologies are developed every year in this industry. The rapid
developments happening in mobile technology create new segments of phones every year. These
innovations have made the mobile industry very dynamic. It has become more and more

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competitive, with new players entering the Indian market. Mobile phone technologies become
obsolete faster, forcing companies to innovate more quickly. Faster obsolescence has led to a
shorter life cycle for the products.

4. The Competitive Landscape

The competitive landscape of mobile phone market has also changed considerably from 2009
to 2016. During the decade 2001-2010 Nokia was the undisputed market leader and enjoyed
nearly 65% of the market share. Nokia lost its ground eventually, and in 2012 Samsung
emerged as the new market leader. Samsung Electronics acquired 31.5% of the market share,
and Nokia got 27.2% during FY12-13 (Voice and Data, 2013).. Many other Indian companies
also entered the mobile phone segment around 2010. Over the years, these companies have
gained considerable market share in the industry. Few Indian players had a market share of
around 10% each from 2012 until 2015 2.

The industry classifies mobile phones broadly into three categories:

1. High-end smartphones (> ₹35,000), dominated by Apple and Samsung;
2. Medium-range smartphones (₹10,000 - ₹35,000), dominated by Samsung, Oppo, and
Vivo;
3. Low-end smartphones and feature phones (< ₹10,000), dominated by Samsung and
intense competition among various Indian and Chinese vendors.
Feature phones provide voice calling and text messaging functionalities in addition to
basic multimedia (FM radio, music, etc.) and internet facilities. Smartphones have an operating
system and can run many third-party software applications. Feature phones are available in the
price range below Rs.2000. Smartphones are available at prices higher than Rs.3000. Not long
ago, Indian mobile phone manufacturers predominantly targeted the lowest strata of the mobile
phone market, that is, feature phones. Their go-to-market strategy used to be to penetrate the
market with ultra-low costs, keep the quality average, and just sell to what they perceived as the
ignorant people of the hinterland. However, this strategy has started to reveal its myopic vision
and failing in the face of renewed competition.

2
Government of India’s Import Data
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The entry of Chinese smartphone makers such as Xiaomi, Vivo, and Oppo has made the Indian
mobile phone industry very competitive. Earlier, Indian companies imported Chinese phones and
sold them in the Indian market. Then Chinese smartphone makers entered the fast-growing
Indian market at the first opportunity; they are known for having deep pockets. Their high
spending capabilities arise from the fact that most of them are implicitly or explicitly owned or
supported by the Chinese government. The Chinese state links their strategic foreign policy
influence with the success of their own companies and hence, leaves no stone unturned in
making sure that Chinese companies perform well in foreign countries. Owned by China’s BBK
Electricals, both Vivo and Oppo entered the Indian market in 2014 (Mukharjee, 2017)

New data from India Rating and Research presents some damning statistics for Indian
smartphone manufacturers. In Q1 2016, Indian vendors held a 41% share of the Indian
smartphone market, while Chinese vendors held a 15% share (Krishnatry 2017). However,
within a year the Indian vendors’ share fell dramatically, to 14% in Q1 2017 (see Exhibit 5). In
the same year, the Chinese companies tripled their market share, a serious cause of concern for
the Indian players. There is a well-thought-out strategy behind this drastic change in the
competitive landscape. Some of the more evident reasons are as follows:
• Effective Marketing: One of the biggest factors behind the success of the Chinese
manufacturers is their large-scale and well-funded marketing campaigns. Billboards
advertising Oppo and Vivo have suddenly cropped up in every nook and corner of the
Indian hinterland. The Chinese companies are sponsoring big-ticket events like Indian
Premier League (IPL), and celebrities such as Virat Kohli and Ranveer Singh are now
their brand ambassadors.
• Offline Sales Strategy: The biggest eye-opener is the unprecedented success of Chinese
companies in the rural and offline markets of India, which used to be a lucrative hunting
ground for Indian smartphone manufacturers. A large part of India still has very limited
access to the internet. People largely prefer buying smartphones offline, in brick and
mortar stores. Companies like Vivo and Oppo are opening up numerous stores and
service centers across India, even in remote rural regions. Oppo alone has nearly 35,000
stores across India. These stores are under direct control of the company itself, not run by
third-party retailers (Borde 2017).

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 • Transition to 4G: The Indian telecom industry has undergone a revolution over the past
year. Reliance 4G brought high-speed internet to the masses and forced incumbent
telecom providers to lower their costs significantly. As a result, there has been an
exploded demand for 4G VoLTE-enabled smartphones. Chinese vendors took advantage
of this vacuum by flooding the market with high-quality, yet affordable 4G handsets.
• Better Technology: While most Indian vendors have had only limited experience with
smartphone production in their home country, Chinese vendors have a greater global
presence, especially in their home country. Their larger budgets and greater experience
means that they have access to better technology, and thus can produce higher quality
products. As a result, Chinese vendors are offering better-built phones with better specs
and lower prices as compared to Indian vendors.
• Focus on Desirable Features: Chinese vendors have studied the Indian market deeply.
They are focusing on what Indian consumers want from their smartphones, and providing
exactly that. Dual SIM capability and removable storage are a couple of notable
examples. However, the biggest example of this is surely their focus on selfie cameras.
Camera quality on Chinese phones is generally good across the board, with 62.2% having
a resolution of 13 megapixel or higher.
• Indianizing Themselves: A huge factor driving the success of Chinese vendors is how
well they have integrated with the Indian culture and mind-set. Xiaomi co-founder Lin
Bin spoke about his desire for Xiaomi to “become a truly Indian company.” A crucial
manifestation of this is the extensive language support provided by Chinese companies.
Multiple regional language support extends the reach of Chinese companies to even more
regions of India. This is especially the case in regions where English and Hindi are not
prevalent.

In a nutshell, the Chinese players are well-entrenched in the Indian market, and it will be an
uphill task for Indian vendors to compete with them. Each of the Chinese vendors offers fewer
models of phones in every category than their Indian counterparts, yet they are able to charge
higher prices and are eating away the market share.

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5. Report Findings

After a thorough analysis of the current situation, Gaurav’s team came up with some key
insights. After going through the report, Gaurav has identified three major areas of concern:
product portfolio rationalization, customer perception and quality concerns, and market
segments' rationalization.

5.1 Product Portfolio Rationalization

Since its inception, LAVA has predominantly catered to the segment of phones with market
operating prices (MOPs) of less than Rs.10000. To maintain its competitive advantage, LAVA
needs to regularly launch newer, upgraded versions of its mobiles. The company has been trying
to cater to the kind of value-conscious consumers who always seek better features at lower
prices. Sometimes product managers strike a good deal with the vendors and launch a model at a
lower price compared to a model with comparable features that already exists in the market. The
newer model then “eats” the existing phone market, leading to an inventory pile-up of the
previous model. If product managers do not launch new models regularly, their competition may
introduce better products and eat into LAVA’s market share and revenue.

From 2009 to 2015, LAVA India continuously added newer models to its kitty. At the end of
2015, LAVA had around 50 models in both feature phones and smartphones. In comparison, the
Chinese companies have large marketing budgets and fewer models. For example, Xiaomi has
around six models, and currently has the second-highest market share after Samsung.

A market survey by LAVA in 2016 revealed that retailers were interested in stocking only nine
or 10 models of any particular brand. LAVA decided to significantly rationalize its product
portfolio and retain only nine feature phones and seven smartphone models in FY16.

Feature phones: The feature phones segment was divided into six further segments (Segments
A to F) based on a combination of screen sizes and battery capacity (three screen sizes and two
battery capacities). Based on the size of the segments, it was decided to have two models each in
segments A, B, and C and one model each in segments D, E, and F. The models were chosen
based on their historical sales data. Once the models were chosen, a pilot project was run in a
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small region. The results of the pilot run were positive, and the company decided to go ahead
with these nine models.

Smartphones: The smartphone segment was divided into four more segments (S1, S2, S3, and
S4). LAVA operates in the price range of Rs.3000 to Rs.10000. While choosing the smartphone
models, the company ensured that all the customer price points were covered, there was no
cannibalization, and all the propositions were noticeably different from each other. It retained
two models each in segments S1, S2, and S3, and one model in segment S4. After finalizing the
choice of the seven models, LAVA ran a pilot project in a territory, and the idea proved to be
successful.

The investigative report gave the average market growth rates of various segments, as well as
smartphone and feature phone segments’ sales figures for FY16 (see Exhibits 6, 7, and 8). These
numbers will prove to be the moment of truth for the product rationalization initiative, and
Gaurav wants a clear answer to the question “Has product rationalization worked in favor of the
company?” He realizes that he will have to analyze the segment sales data to answer this
question. He is also struggling to identify which market segments are performing well for the
company and which are not.

5.2 Customer Perception and Quality Concerns

Customers perceived LAVA’s product quality to be less consistent than that of its competitors.
The quality across models varied, as LAVA had multiple vendors. Currently, LAVA was dealing
with around 14 vendors to manage its vast product portfolio. The multitude of vendors was
making standardization and quality control difficult for LAVA. It was unable to standardize
mobile phone parts, as the projects were spread across multiple vendors. LAVA was not able to
realize many benefits of the supply chain, as there was no consolidation of projects. As a result,
its logistical costs were also higher than those of some of its competitors.
After the product portfolio rationalization in FY16, Gaurav took some initiatives to overcome
marketing and sales and distribution challenges.
• He decided to hold a training session for the sales team at least once every month. With
the reduced product portfolio and the company’s renewed focus on smartphones, a well-

9
 trained sales team – who could highlight the USP of the products and sell to premium
outlets – would be absolutely essential.
• A few models were not selling well in particular regions. In such cases, the team would
create region-specific retailer schemes.
• Schemes were planned for distributor sales executives (DSEs), who are the distributors’
employees.
• More below the line (BTL) promotional activities were planned to increase the
company’s penetration into the rural market.
• The sales team was told to put more effort into increasing distribution width by bringing
more distributors on board.

However, the less-than-flattering perception of LAVA mobile phones’ quality still persists.
Furthermore, it is also affecting the brand equity of the company. The report points out that even
though LAVA now has many excellent smartphone product offerings, in customers’ minds its
products are still synonymous with cheap, low-quality mobile phones. Gaurav suspects that the
problem does not lie in the actual quality of the phones – which is at par with the best offerings
of their competitors – but with marketing. Not long ago the Chinese companies had a similar
problem in the Indian market. However, recently they completely overcame consumers’ negative
perception with superior branding. Gaurav pauses here for a moment and wonders whether the
time is ripe to revisit the whole marketing and branding initiative of the company?

5.3 Customer Segmentation

The traditional market segment for LAVA has always been the customers who buy feature
phones, but the company has slowly made its presence felt in the smartphone segment as well. In
fact, the smartphone sales revenue has been surpassing that of feature phone since FY13. The
smartphone segment also contributes more to the company’s bottom line. However, LAVA is
still playing at the lower end of the smartphone market, where margins are low. Furthermore, in
addition to the usual threat from Chinese competitors, the smartphone category has additional
formidable competitors, like Samsung and Apple. Notwithstanding the importance of the
smartphone category, the company cannot afford to lose sight of its traditional forte, the feature
phone market. The price conscious feature phone customers, being emboldened by cheap data
plans’ availability, are increasingly demanding more value for their money (more features even
10
in feature phones) and are rapidly moving towards smartphones. However, the feature phone
market is still huge and is driven by volume. The competition is messy, and margins are low. In
future, Gaurav wants to further cut down feature phone product offerings and concentrate on
only a few “high market share - high/stable growth” products and segments.

The company’s segmentation, targeting, and positioning (STP) strategy must be spot-on if it is to
overcome the multitude of challenges. Gaurav remembers his Marketing Management lectures
during MBA on STP and portfolio analysis using the BCG growth-share matrix. The
requirements for effective segmentation are that the segment should be measurable, substantial,
accessible, differentiable, and actionable. Furthermore, a profitable segment should ideally have
high market growth rate and substantial relative market share. However, he is finding it difficult
to make sense of the market segment data in front of him to come up with few insights which
would help him zero in on a profitable and growing target segment.

6. The Decision

Gaurav wonders if there is a better way to manage his product portfolio. Exiting some segments
at a time when the market share and revenue are under pressure may be a risky strategy. Another
challenge is how many segments the company should focus on, and which? Can his company
mimic the Chinese companies’ strategy and rework its whole marketing strategy to beat the
Chinese in their own game? Gaurav is struggling to foresee a clear roadmap for LAVA over the
next 2 to 5 years. Will they remain a market challenger, or exit from some segments, or can they
become a market leader? How?

Gaurav knows that the meeting with the top management is crucial for the future of the company
and that time is running out. Right now his mind holds more questions than answers. He must get
his act together and, in a week, devise a marketing strategy for the company’s survival and
growth.

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Exhibit 1: LAVA Sales figures
Feature phones Smartphones
Year Vol(in lakhs) Rev(in Cr) Vol(in lakhs) Rev(in Cr)
FY10 13.8 307
FY11 34.46 713
FY12 27.58 539 0.03 2.05
FY13 55.47 772 1.83 76.02
FY14 105.56 1283 13.1 574.02
FY15 155.57 1669 37.77 1631
FY16 177.06 1767 54.96 2277.9

LAVA Market Share (Overall Mobile Handset Market):

Year 2011 2012 2013 2014 2015 2016
Market Share by Rev. 1.6% 2.1% 4.4% 8.6% 9.7% 8.5%
Source: LAVA International Ltd.

Exhibit 2: Annualized Cost of 1GB/Month vs. % of GDP per capita, Q1:14 – Q1 17

Source: (Meeker, 2017)

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Exhibit 3: Mobile Handset Sales Forecast in India
Mobile Communications (India 2017-2020)

2017 2018 2019 2020

Overall Mobile handset sales, Cr. Rs. 19919.3 21712.1 23079.9 24441.6

Overall Mobile handset sales vol., ‘000 300869.0 309896.0 317333.5 324314.8

Smartphone sales, USD mn 18009.4 20008.4 21569.1 23122.0

Smartphone sales vol., ‘000 153311.2 175274.7 197593.1 218685.7

Source: (BMI Research, 2016)

Exhibit 4: India Internet Users

Source: (Meeker, 2017)

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 Exhibit 5: Competitive Landscape

Source: (Meeker, 2017)

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Exhibit 6: Average market growth rate across various segments for the year 2016
Feature phones Smartphones
Segment Market growth rate Segment Market growth rate
A -10% S1 -14.16%
B 6.71% S2 50%
C -33% S3 40.88%
D -7.20% S4 50%
E 24%
F -21.35%
G -1.78%
H 371.32%
Source: Imports Data
Exhibit 7: Feature Phones Market Segments’ Sales in 2016
Feature Phone Segment Size: No of Market Leader LAVA Volume LAVA Revenue
Segments Units Volume (No) (No) (Rs.)
A -1.8LB 126280181 24394496 9590337 8151786141
B – 1.8 BB 33193278 3389475 3227085 3114136947
C – 2.4 LB 30960580 5220516 2150014 2365015479
D – 2.4 BB 50902865 6246986 1767439 2120926853
E – 2.4 SBB 16038530 2116769 222755 334131966
F – 2.8 LB 14211289 5681617 394753 710555784
G – 2.8 BB 12712461 1987336 264840 609131338
H – 2.8 SBB 6395814 1471746 88778 265002330
Source: Adapted from Imports Data
Exhibit 8: Smartphone Market Segments’ Sales in 2016
Feature Phone Segment Size: No Market Leader
Segments of Units (2016) Volume 2016 LAVA Volume LAVA Revenue (Rs.)
S1 29233662 9129752 2631030 9208603455
S2 40656731 31919905 1492102 6416038766
S3 24438171 7699986 843116.9 4637142954
S4 35336436 16966405 530046.5 4505395578
Source: Adapted from Imports Data

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