Cost Leadership - Bajaj Auto Ltd.

Agenda

Introduction About Organization PESTC Analysis SWOT AnalysisPorter’s ModelTOWS MatrixCost Leadership as StrategyCPM (competitive profile matrix- containing the IFE / EFE matrix) Conclusions & Recommendation

Cost Leadership Strategy- Introduction

• This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience curve effects.

• Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business.

• The associated distribution strategy is to obtain the most extensive distribution possible.

• To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labour, or some other important input.

• New entrants or firms with a smaller market share may not benefit from such strategy since mass production, mass distribution and economies of scale will not make an impact on such firms. Low cost leadership becomes a viable strategy only for larger firms.

The Journey So far…. Founded in 1926 by JAMNALAL BAJAJ.

Bajaj Auto started its operations in 1945, as in importer of two and three wheelers.

BUSINESS: Currently it is ranked as the world's fourth largest two- and three-

wheeler manufacturer and is well-known across several countries in the world.

PARTERSHIP: Bajaj Auto has a technical tie-up with Kawasaki Heavy Industries of Japan to produce a range of the latest, state-of-art two-wheelers in India.

LOCATION: Bajaj Auto has f our plants at Akurdi , Waluj, Chakan & Sidcul.

• The company has a network of 498 dealers and over 1,500 authorised service centers and 162 exclusive three-wheeler dealers spread across the country. Around 1,400 rural outlets have been created in towns with population of 25,000 and below. The current dealer network is servicing these outlets.

• Bajaj has identified a segment of customers 'Probikers', who are knowledgeable, appreciative of contemporary technology, they are rendsetters and very choosy about what they ride. Hence, Probikers need to be addressed in a meaningful way that goes beyond the product. Bajaj Auto is in the process of setting up a chain of retail stores across the country exclusively for high-end, performance bikes. These stores are called " Bajaj Probiking". Eight such stores have been opened, viz in Pune, Ahmedabad, Chennai, Hyderabad, Kolkata, Navi Mumbai, Chandigarh and New Delhi.

• ISO - 9001(Quality Systems) and ISO-14001 (Environment System) certification.

• Largest Exporter of Two & Three Wheelers.• 139056 units exported in 2008-09, a growth of 25 percent over 2007-08.

CURRENT MARKET SHARE

Vision & Mission (BAL) Bajaj doesn't have a straight vision or mission statement. They define it in terms of

brand identity, brand essence (derived from mission) and brand values.

Our Brand Identity• Our Brand is the visual expression of our thoughts and actions.• It conveys to everyone our intention to constantly inspire confidence.• Our customers are the primary audience for our brand.• Indeed, our Brand Identity is shaped as much by their belief in Bajaj as it is by our

own vision.• Everything we do must always reinforce the distinctiveness and the power of our

brand.• We can do this by living our brand essence and by continuously seeking to enhance

our customers’ experience.• In doing so, we ensure a special place for ourselves in the hearts and the minds of

our customers

Our Brand Essence• Our Brand Essence is the soul of our brand.• Our brand essence encapsulates our mission at Bajaj.• It is the singular representation of our terms of endearment with our customers.• It provides the basis on which we grow profitably in the market.• Our Brand Essence is Excitement.• Bajaj strives to inspire confidence through excitement engineering.• Blending together youthful creativity and competitive technology to exceed the

spoken and the implicit expectations of our customers.• By challenging the given. By exploring the unknown and thereby stretching

ourselves towards tomorrow, today.

Our Brand Values• We live our brand by its values of Learning, Innovation, Perfection, Speed and

Transparency.• Bajaj will constantly inspire confidence through excitement engineering.

- Learning– Learning is how we ensure proactivity.– It is a value that embraces knowledge as the platform for building well informed, reasoned, and

decisive actions.

- Innovation– Innovation is how we create the future.– It is a value that provokes us to reach beyond the obvious in pursuit of that which exceeds the

ordinary.

- Perfection– Perfection is how we set new standards.– It is a value that exhibits our determination to excel by endeavoring to establish new benchmarks all

the time.

- Speed– Speed is how we convey clear conviction.– It is a value that keeps us sharply responsive, mirroring our commitment towards our goals and

processes.

– Transparency– Transparency is how we characterise ourselves.– It is a value that makes us worthy of credibility through integrity, of trust through sensitivity and of

loyalty through interdependence.

BAL – Objectives of the year• Expand company’s international presence and export numbers of two

wheelers• Introducing upgraded pulsar model in May 2009 and brand new models

for exceutive segment in the second quarter in 2009• Focus on better product mix, higher productivity and lower input costs. • Bajaj Auto Ltd is determined to release “Ultra Low Cost Car” in 2011.• The Bajaj-Nissan-Renault design team worked on the car for more than a

year.• The ULC project is entirely controlled by Bajaj. It is designing and

producing the car and it will also control the supply chain.• The ULC would cost Rs.100,000 and will compete with Tata Nano.

PESTC AnalysisPolitical/ legal Factors: • The excise duty on two wheeler, which previously ranged between 10% to 30% according to the engine capacity

was rationalized in 1991-92 budgets to only two-categories viz. 15% up to 75cc and 25% above 75cc. this mainly affected manufacturers of 100cc category in the early nineties. Since then the excise duty structure for two-wheelers has been left unchanged till 1999-2000 budgets, due to rationalization of duty structure the excuse duty up to 72cc vehicles was increased to 16% while for those above 75cc decreased to 24%. As a result, scooter prices were reduced by Rs. 200-400 per vehicle. The components used for manufacturing two-wheelers are charged an excise duty of 15% the industry has been asking GOI to reduce this excise duty to 10%.

• The price of the two-wheelers varies across the country due to variation in registration charges, state taxes and octopi levied by the states.

• The Government of India (GOI) wants the automobile industry to achieve a major improvement in emission levels in two steps. The first milestone was achieved by applying stringent norms applicable from April 1, 1996. this confirms to Euro I standards. The second hurdle has been set with a dead line of April 1, 2000, which confirm to Euro II norms.

• Reduction in customer tariffs on imported components as well as excise concessions to fuels-efficient vehicles up to 100cc.

Economic Factors: The improvement in Asian market is expected to improve the two-wheeler exports in the year 2000 and grow by 8% till 2001. this will lead to exports of 0.1 million two-wheelers in 1999 to 0.11 million in 2001. Improvement in disposable income: With the increase in salary levels, due to entry of multinationals following liberalization process and fifth pay commission, the disposable income has improved exponentially over the years. This will have a multiplier effect on demand for consume-durables including two-wheelers. This is already witnessed in improved demand for 2-wheelers in 1999 compared to a meager growth in 1998.

Changes in prices of second hand cars The second had car prices small cars have come down sharply in the recent past. This well shift the demand from higher end two-wheelers to cars and affect the demand for two-wheelers negatively. A further drop in second hand car prices will lead to pressure on the two-wheeler majors who plan to release higher end scooters and motorcycles. Availability of credit for vehicle purchase The availability and cost of finance affect the demand for two and three-wheelers as the trend for increased credit purchases for consumer durable has increased over the years. Therefore any change with respect to any of these has to be closely watched to assess the demand for two and three wheelers.

Socio-cultural factors A deteriorating public transport system. A growing middle class and increasing demands for two wheelers in small towns and rural areas. Teenagers and women prefer easy maneuverability ease. Urbanites are lured by fuel efficiency and low maintenance. The lower end of the market looks for durability, value for money and higher resale value. The demand for scooters is price sensitive compared to motorcycles Customer preference towards fuel-efficient and aesthetics has increased, leading to higher growth in sales of premium end scooters. This has induced the companies to bring in new models in this segment, to beneficiary from this trend had been in the industry, which has a dominant position in premium scooters segment.

Technological Factors For the two-wheelers new emission norm for year 2000 will be an acid test as none of the present models except four stroke vehicles confirm to the norms. To full-fill emission norms the manufacturers have three options, to switch to four-stroke engines, to fit catalytic converts for the existing models, to improve upon the existing two-stroke engine. The temporary option for overcoming emission norms is to fit the catalytic converters; this will increase the cost of vehicles. But as long-run solution scooter manufacturers have to opt for four-stroke engines or improvement in two stroke engines. The indo-Japanese motorcycle segment will be able to overcome emission norms with the technology help of respective Japanese collaborator. The Indian motorcycles have to either shift to four- stroke technology or make use of catalytic converter. But this will reduce the price difference between Indian and indo-Japanese motorcycles, reducing the price advantage of Indian motorcycles. The mopeds segment will be badly affected due to Y2K emission norms as none of the existing moped models confirm to the specifications. With the deadline nearing, the moped manufacturers have to tighten the belt to meet the norms. The Competition:

Gone are those days when we could only see a Yamaha or Bullet on the road. There is no shortage of competition in the motorcycle market now. Infect it is intensifying and greatest threat is to the leader Hero Honda. 

Ever since Hero Honda's first model cd 100 rolled out on April 1985. It has ruled, barring of course, the four stroke motorcycle from Enfield that catered exclusively to the 350cc plus niche. But, given the phenomenal 25% annual growth rate of motorcycle demand over the last seven years, Nemours competitor have cropped up with their own four-stroke offering.

SWOT AnalysisSTREGTHS-Highly experienced management.Product design and development capabilities.Extensive R & D focus.Dominant presence in Africa and Latin America with increasing market share every yearMarket leader in 2-wheelers in Sri Lanka, Bangladesh , Colombia and Central AmericaWidespread distribution network.High performance products across all categories.High export to domestic sales ratio.Great financial support network (For financing the automobile)High economies of scale.High economies of scope.

WEAKNESS-Hasn't employed the excess cash for long.Still has no established brand to match international bykes.Not a global player in spite of huge volumes.Not a globally recognizable brand

OPPORTUNITY• Double-digit growth in two-wheeler market. • Untapped market above 180 cc in motorcycles. • More maturity and movement towards higher-end motorcycles. • The growing gearless trendy scooters and scooterette market. • Growing world demand for entry-level motorcycles especially in emerging markets.

THREATS• The competition catches-up any new innovation in no time. • Threat of cheap imported motorcycles from China. • Margins getting squeezed from both the directions (Price as well as Cost) • TATA Ace is a serious competition for the three-wheeler cargo segment.

CONSUMERS ARE BECOMING DEMANDING IN TERMS OF CHOICE

ADVENT OF BIKES AND DEMAND OF PERSONAL MOBILITY

Porter’s 5 Forces Model

Cost Leadership Strategy @ BAL• Companies first plant was closed at Akurdi (Pune) due to the high cost of

manufacturing, which placed this location at a disadvantageous position compared to the other facilities of Bajaj Auto

• Company has invested in state of art technology at Pantnagar (Uttarkhand) plant. In 2008-09 the production capacity has increased by 15% as compared to the last year.

• To maximise the tax benefits available at Uttarakhand, the company is shifting some of its more profitable products to the Pantnagar plant. After the shift of these products, the plant is expected to produce around 60,000 vehicles by the third quarter of 2009-10.

Contd……• Leveraging on economies of scale by producing specific products at each

plant :

• R & D has enhanced its digital computational capabilities along with the ability to prototype and test the products to even higher standards. This has enabled Bajaj Auto to design and produce ready-to manufacture prototypes for the new generation products.

• Advanced machines have been installed in the prototype shop to enable quick and precise building and inspection of parts. Moreover, the testing areas have been enhanced with special equipments to enable performance and durability testing from component to full assembly — resulting in end-to-end self sufficiency of R&D department.

Plant Products

Waluj Boxer, Platina, XCD and allthree-wheelers

Chakan Pulsar, Avenger and Discover

Pantnagar Platina, Platina 125 and XCD

Contd……

• PT Bajaj Indonesia (PT BAI) plans to move into assembling of completely knocked down parts in the latter half of 2009-10 — which will attract lower duties — and also expand PT BAI’s product portfolio

• Cost efficiency with emphasis on environment :-Electrical energy saving was achieved by installation of localised portable air compressors at various shops during low production periods, energy efficient screw compressors by replacing CPT compressors, real timer electrical circuits installed to switch off electrical equipments during lunch / tea breaks and during nonutilisation of production equipments, fanless cooling towers for AC plants, high efficiency reflector fittings with electronic ballasts tube lights, use of LED & CFT street lights and others..

Contd……• Water saving was achieved by replacement of old under-ground water pipes

with aboveground pipes to avoid water wastage through leakage, drip irrigation system for gardening, installation of localised fresh water storage systems, usage of treated water for bin washing and paint shop process, rain water harvesting and use of bio-chemical additives to reduce frequency of water change in various paint processes; and

• LPG saving was achieved by installation of waste heat recovery system for hot water generation used in pre-treatment process of paint shop, use of reflective coating inside furnaces for better heat retention, three-wheeler electro-deposition (ED) painting process changed from Acrylic ED toCathodic ED, optimisation of loading pattern in CGC and seal quench furnaces, reduction of hot water temperature for pretreatment,use of bio-gas for cooking in canteens, startup losses in ovens and hot water generation plants and changed design of paint jigs to reduce jig stripping frequency.

Contd……Impact of measures taken

2008-09 %

2007-08 %

Electrical energy 23 23

Water 11 16

LPG 44 12

Investment / savings

Investment for energyconservation activities

Rs.9.35 million

Saving achieved throughabove activities

Rs.24.2 million

Tows Matrix for BAL

External Factors Internal FactorsStrengths Weaknesses

Opportunities Can use the existing R&D capabilities for new models.Can use Kawasaki's distribution networks internationally.Can invest and grow the life style segments.

Must employ the cash in production and product capabilities to match competitors and for continuous export growth.

Threats Increase the customer centric initiatives and command more customer loyalty.Improve the efficiency of the financing and the insurance arm.Invest in new product platforms.Actively market electric range internationally.

Invest in building world class bikes to sustain the international markets independently in the coming years like WIND 125.

Tows Matrix for BAL

Recommendation• Focus on High Margin Products: Around 50% of the two-wheeler consumers buy high quality products

(products of executive and premium segment motorcycles). Margins on these products are higher. BAL should adopt a deliberate strategy of focusing on executive and premium segment motorcycles and three-wheelers, and is reducing its dependence on lower-end of motorcycles and scooters segment.

• High margin products - Pulsar, Discover, Three-wheelers, Avenger.Low margin products - Platina, Scooters, Mopeds.

• Now with increasing competition in the economy segment and limited scope from cost saving measures, it is believed this strategy of focusing on higher margin products would enable the company in retaining its operating margins.

• Below are other useful recommendations: -• Company should keep focusing on the fast growing motorcycle segment. • In view of the new threat posed by Honda Motors in the scooter segment, the company needs to review

its products line-up and launch new products to cater the changed demand. • The company needs to take a look at its ungeared scooters offerings and need to adapt to the latest

trends. • The company needs to tap the export market more efficiently as there is a huge potential to make India as

the world's two-wheelers production base. For this, it needs to look for joint ventures abroad. • It needs to target the young age group more effectively as this group is extremely trend savvy. The

advertising should have a fresh look and the product should live up to the Gen-X's expectations. • http://www.coolavenues.com/know/gm/ashwin_bajaj_15.php