BAJAJ CASE STUDY 1. What challenges confronted BAL and which were of its own making? In 1980s, the government’s impact was the most challenging factor confronting BAL. It witnessed an increase in both foreign and domestic competitors because of the Indian government’s permission of foreign technology and local manufacturing capacity expansion. Accordingly, Japanese products were more preferred than domestic brands due to its durability and eye-catching design.
Apart from Yamaha, Suzuki, and Piaggio, Honda who took out the major market share of BAL scooter and motorcycle segments was its fiercest rival.
Since 1990, due to the economic downturn, two-wheelers vehicles were no longer the first prioritized consumer products but TVs, VCRs, and washing machines. Thus, the demand of BAL’s two-wheelers significantly decreased. There were two main internal challenges that BAL had to face. Firstly, there had been insufficient labor force in R&D field resulting in the poor product design compared to Japanese products and therefore, creating the larger gap with Honda.
Lastly, no preferential credit was given to its dealers on working capital leading to the profitability pressure towards its dealers and the difficulty for BAL in building a wide dealer network. 2. How was BAL performing? Chart 1: Sales, Operating Expenditures and Operating Profit from 1986 to 1996E Table 1: Changes of volumes of Sales, Operating Expenditures and Operating Profit through periods | 1986-1988| 1988-1990| 1990-1992| 1992-1994E| 1994-1996E| Sales | 795| 5098| 2013| 5283| 5971| Operating expenditures| 1147| 4204| 2022| 5090| 5298| Operating profit| -352| 894| -9| 193| 673|
Table 2: Changes of rates of Operating Profit through periods | 1986-1988| 1988-1990| 1990-1992| 1992-1994E| 1994-1996E| Sales | 18. 92%| 102. 02%| 19. 94%| 43. 63%| 34. 33%| Operating expenditures| 33. 59%| 92. 15%| 23. 07%| 47. 18%| 33. 37%| Operating profit| -44. 73%| 205. 52%| -0. 68%| 14. 62%| 44. 48%| From 1986 to 1988, BAL showed a slight increase in Sales but Operating Expenditures regrettably had a remarkable rise. As a consequence, these created a fall in Operating profit. These were probably because BAL had the establishment of a second plant in 1985.
However, between 1988 and 1990, Sales had a higher rise than Operating Expenditures; therefore, Operating Profit grew strongly. These were because the overview of market expressed the excess of the demand compared to the supply in this period. Between 1990 and 1992, although revenue rose slightly, it can be said that the speed of Sales growth subsided significantly. Concurrently, Operating Profit in 1992 was less than in 1990. These could be originated from the economic recession, market saturation, the excess production capacity and increasing competition.
Finally, BAL gave an estimation of promising growth in Sales, Operating Expenditures and Operating Profit from 1992 to 1996. Hopefully, they believed that they would achieve steady rises in revenue and operating costs while profit could also acquire impressive jumps. Their belief could be supported by planning renovations in departments such as R&D, marketing, manufacturing and HR. 3. How was the Indian market for two and three wheelers evolving? Initially during 1960s, there was a shortage in the two- and three-wheelers market in India.
This market had become competitive since 1980s when India permitted foreign entry and expanded production by domestic manufacturers. In 1992, India was the world’s second largest market for two- and three-wheelers in which scooters represented the largest domestic sales of 690,000 units. From 1985 to 1992, Bajaj got the highest market share of scooters while its strongest competitor – Honda – won the motorcycle sector. However, the demand dropped dramatically from 1993 due to the economic recession and the increase in volume of consumer goods such as televisions, VCRs. . How should BAL respond to increasing in competition? Firstly, they identified their target customers as rural and semi-urban consumers. They had found that this target market predominantly valued the purchasing – maintenance cost and the low fuel consumption. BAL also penetrated secondary market to buy BAL’s used vehicles with higher price. In order to match consumers’ want, BAL reorganized its structure to obtain better cross-functional cooperation among Marketing, R&D and Production departments.
New products were introduced periodically and spare parts were sold nation-wide with low cost, which reinforced BAL’s competitiveness. Beside strengthening cost advantage, they established a technology acquisition agreement with Orbital, which provided solutions to improve fuel efficiency and decrease emission levels. In order to enhance the competency in distribution, BAL connected with private transport companies and trained dealers’ staff to improve their technical capability. BAL also supported their dealers in planning sales targets for specific products, services and advertising.
Regarding developing dealer network, regional depots were built up to quicken inventory turnover and supply a full range of two and three wheelers, hence encouraging dealer loyalty. In addition, BAL provided customers with consumer finance to purchase vehicles by establishing the Bajaj Auto Finance Ltd. Finally, BAL executives invested more in Marketing Department to secure brand awareness and preference as well as to introduce new vehicles. BAL not only broadcast their commercials nation-wide but also allocated promotion budget to local dealers in order to create a consensus image throughout the country.
Direct mail promotion was used in offering discounts to groups of employees and small companies in need of transport vehicles. 5. Why had BAL’s export been weak? Initially, high domestic demands and restricted production by the government were the main reasons for BAL’s limited export. BAL was unsuccessful with Indonesian and Taiwanese licensees. Only Bangladesh licensee existed in 1993. In 1980s, BAL foreign distributorships were established in the United States, Germany, Southeast Asia and North Africa.
However, the lawsuit by Piaggio alleging that BAL had copied its design and shape of the Vespa Scooter made it difficult for BAL to promote export to developed countries in North America and Europe for a decade. In the United States, the market of 50cc two-wheelers was dominated by Japanese companies. It was obviously tough for BAL to penetrate Japanese market owing to strict product standards and freight expenditures. Eastern European market was small due to their low purchasing power. In European countries, two-wheeler products had to meet tringent technical requirements and tough regulations and the market for three-wheelers was non-existent since they were banned from main motorways. As regards to developing countries, especially in Southeast Asia, BAL’s export of two-wheelers could not be increased due to tariff barriers and import bans whilst Japanese producers were also the market leaders with many plants in China – the largest market in the world. To African countries, the major problems were difficult access to foreign exchange and low consumer purchasing power. 6. Was the goal to export 15% of sales realistic?
The goal to export 15% of sales was not realistic owing to five major reasons. The most primary element is the weak brand awareness in international markets. Secondly, it took BAL a long time to obtain licensee agreement with foreign countries because BAL had faced the failures with Indonesian and Taiwanese licensees in the past. Thirdly, tariff barriers and import bans prevented BAL from entering developing countries. Moreover, strict regulations on emissions enforced by government in developed countries were the considerable obstacles.
Ultimately, it was hard to build distribution network, manufacturing plants overseas within 5 years which was a very short period of time. 7. Could BAL rely on the domestic to achieve its corporate goals or should it expand foreign operations? Since it is unrealistic to export 15% of sales due to problems analyzed in question 6, BAL could possibly achieve its goal by investing the majority of resources in R&D, marketing and distribution to remain and increase its current domestic market share of two- and three-wheelers products instead of expanding to foreign markets.
Moreover, BAL’s future target segmentation referring to rural area which took 73. 1% of total population (1991) and current pricing strategy which was low-cost producer were highly suitable with domestic market trend. 8. Which export markets offered the most promise for BAL? With over one hundred million rupees of export sales value accounting for 38% of total export revenue in 1992, Latin America was the most promising market for BAL. There was no competition in three-wheelers and BAL had a price advantage compared with the Japanese competitor in two-wheelers category.
Consumer requirements in Latin market meet with BAL’s products’ characteristics. This market was of high potential due to high demand and expected to grow sustainably in the following years. BAL hoped to be the market leader in both Mexico and Argentina by 1995 and also established licensee locations in Mexico. 9. Should BAL focus on developing or developed markets? Chart 2: BAL export percentage by regions of the world in 1992 BAL should focus on developing market. The developed market had high product performance requirements, along with many regulations on environmental control and products safety.
Moreover, Developed countries’ consumers required high level of style, quick model changing and top-of-the-line technology. Those were the advantages of Japanese competitors. On the other hand, developing countries had less of those regulations and performance requirements. The customers were very price sensitive; couple with other issues such as fuel efficiency, reliability and durability. These were the values that BAL had been trying to deliver to its customers over the years. Therefore, focusing on exporting to developing countries would require minimal adaptation of the current product line and gain the most from BAL’s competitive edges. 1% of BAL export came from developing countries in 1992, whereas only 9% from Europe. With high rate of population and economic growth, these developing markets still held many opportunities for BAL to explore. REFERENCES * Quelch, J 1993, ‘Global Expansion Strategies’, course notes for BUSM2412_3994 Marketing Management, RMIT University, Vietnam, viewed 1st July 2010, [email protected] * Haub, C, Sharma, O 2006, Population Bulletin vol. 61, Population Reference Bureau, Washington, DC.
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