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Introduction
In a competitive market, a firm’s competitive advantage lies in its
performance. In the past few decades we have seen vigorous expansion and
prosperity; however, many firms lost sight of competitive advantage in
their pursuit for growth and diversification. This is the reason why we
find firms throughout the globe facing slower growth both in national
and international markets and also not be able to increase their share
in the pie while the markets and competitors grow.
Michael Porter, through his work “Competitive Advantage –
Creating and sustaining superior performance” has argued that a
firm's strengths ultimately fall into one of two headings: cost
advantage and differentiation. By applying these strengths in either a
broad or narrow scope, three generic strategies result: - cost
leadership, differentiation, and focus. These strategies are applied at
the business unit level.
The Indian Car Market and Maruti Udyog Limited
The Indian passenger car industry as we see today is relatively
recent in origins. Except the ubiquitous Ambassador and the Premier
Padmini's there was not much moving around with an Indian tag. The
restrictive policies of the Indian government did not allow foreign
players to set shop in India and in the absence of adequate technology
and purchasing power it resulted in the slow growth of the industry even
after a long time since independence. Some of the statistics about this
industry are mentioned below:-
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The demand for cars increased from 15,714
in 1960 to 30,989 in 1980 at a CAGR of only 3.5%.
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The entry of Maruti Udyog Ltd (MUL), a
Government of India Joint Venture project with Suzuki of Japan, in
1983 with a so-called "peoples" car and a more favorable policy
framework resulted in a CAGR of 18.6% though with some variations here
and there.
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On the basis of price, the Indian car
industry can be classified into economy or the 'small' car (upto Rs. 3
Lakhs), mid-size (Rs. 3-5 Lakhs), luxury car (Rs. 5-10 Lakhs) and
super luxury car segments (above Rs10 Lakhs).
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Economy segment dominates with a market
share of about 80% of total car sales.
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The capacity of car production has
increased substantially in the last few years and is expected to grow
manifold in the coming years. The capacity for car production in the
country has increased from around 750,000 in 1999 to 1,210,000 in
2001.
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Today the industry is witnessing
substantial over capacity with most of the players not able to utilize
their full capacity.
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The low
capacity utilization is forcing a marketing war between the car
manufacturers. This may result in a major industry shake out resulting
in withdrawal of players from the market in the years to follow.
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The consumers, on the other hand, are the
major beneficiaries of the marketing war in the market as they are
able to get technologically better products at good terms and
conditions.
MUL introduced 'Maruti 800' in 1983 providing a complete
facelift to the Indian car industry. The car was launched as a "peoples
car" with a price tag of Rs40,000. This changed the industry's profile
dramatically. Maruti 800 was well accepted by middle-income families in
the country and its sales increased from 1,200 units in 1984 to more
than 200,000 units in 1999. However in 2000, this figure came down to
189,184 units, due to rising competition from Hyundai's 'Santro',
Telco's Indica and Daewoo's 'Matiz'.
MUL extended its product range to include vans, multi-utility vehicles (MUVs)
and mid-sized cars. The company has single handedly driven the sales of
cars in the country from 45,000 in 1984 to 409,951 cars by 2000,
cornering around 80% market share. Today MUL is a significant exporter
with exports to over 50 countries. The company boasts about its
products, which offer unsurpassed fuel efficiency, low maintenance costs
and easy availability of genuine parts.
The company is known for its strategy of value-for-money pricing which
has been made possible due to the high levels of indigenization of its
vehicles. While the Maruti 800, Zen, Esteem and Omni are indigenized to
the extent of over 90 per cent, the Gypsy is indigenized to the extent
of 82 per cent and the export version of the Zen called Alto to the
extent of 76 per cent. Maruti has a vendor network of about 375 today,
which have been brought down from around 2000 earlier. The company has
several joint ventures with some of these vendors to source its raw
material requirements. On the sales and marketing side, Maruti has a
network of 112 dealers and sales outlets in 86 locations across the
country. It also has a 1,010 strong service workshop network covering
412 locations in the country. This briefly sums up the value chain of
MUL.
Cost Leadership Strategy calls for being the low cost producer in an
industry for a given level of quality. The firm sells its products
either at average industry prices to earn a profit higher than that of
its rivals, or below the average industry prices to gain market share.
In the event of a price war, the firm can maintain some profitability
while the competition suffers losses. This is what helped MUL to cut
down prices just hours before TATA introduced Indica. Even without a
price war, as the industry matures and prices decline, the firms that
can produce more cheaply will remain profitable for a longer period of
time. The cost leadership strategy usually targets a broad market.
How MUL gained the comparative advantage - Critical Success Factors
Competitive advantage is an outcome of the firm’s ability to
create value to it buyers after meeting the costs incurred for creating
it. Value can be defined as something which the buyer is willing to
forgo / pay, and superior value stems from offering products at prices
lower than your competitors for equivalent benefits or products.
While the primary determinant of a firm's profitability is the
attractiveness of the industry in which it operates, an important
secondary determinant is its position within that industry. Even though
an industry may have below-average profitability, a firm that is
optimally positioned can generate superior returns.
Firms that succeed in cost leadership often have the following internal
strengths:
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Access to the capital required for making
a significant investment in production assets; this investment
represents an entry barrier;
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Skill in designing products for efficient
manufacturing, for example, having a small component count to shorten
the assembly process;
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High level of expertise in manufacturing process
engineering;
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Efficient distribution channels; etc.
MUL has gained comparative advantage over its competitors
over a period of time. Some of the key reasons for MUL being able to
maintain cost leadership status in this industry may be listed as under:
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Size – Being one of the very
first entrant in the market MUL has been able to raise its capacity
levels in a phased manner. Today its capacity is to the tune of 4.5
Lakh units per annum.
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Low Initial investment – The
cost of installation and maintenance of an assembly line was much
lower than what its competitors might have paid. This definitely has
an impact on the cost of the final product to the extent of the fixed
cost portion.
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Unique concessions from the government
– Being the company promoted by the government, MUL
have received a lot of protection and also financial help early on
which made it possible for MUL to fund its internal operational costs.
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Indigenous sourcing of components
– Over the years MUL had tried to use the built in capacities to
produce the inputs indigenously and also trained its suppliers for
producing almost all its requirements. Today 80% of the components are
produced indigenously while MUL’s competitors import products from
abroad and end up paying more.
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Fully depreciated plants –
Most of the plant capacity has been installed over 15 years ago, which
means products coming out of such plants need not incur any fixed cost
element.
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High labour productivity –
MUL’s effective HR policies and use of quality circles and employee
suggestion schemes have made employee more dedicated to the
organisation.
Furthermore, MUL follows a two-way cost-reduction
strategy to maintain cost advantage –
Implementation of the Maruti Production
System (MPS) similar to that of the Suzuki Production System (SPS), 18
cost reduction workshops to suppliers (focus of these workshop is to
push localization working on specifications, design etc.) have lead to a
cost-savings of Rs.10,900 per vehicle. MPS has helped the company to
reduce its workforce by 325 people and per employee cost by Rs.408/- per
annum.
Cost was also controlled through effective inventory management system.
The company has started a fortnightly ordering system that would ensure
supplies come directly to the plants and resulted in a saving Rs.8 crore
a year. Like vendors, the various divisions of MUL are competing with
each other to match and better their cost-reduction targets. The
engineering unit achieved 23 per cent of its annual target, while the
spares unit met 34 per cent of its annual target and production
engineering unit achieved 36 per cent of its annual target during the
last fiscal. Maruti also decided to have a reverse auction where the
same transporters cut their rates enough to bring down final costs by
7%.
The learning curve analysis shows that the company had learnt a lot
through experience [Refer Learning Curve Graph]. One can attribute this
experience to MUL’s ability to pull down the price by Rs. 40,000/- just
hours before the launch of TATA Indica, and also sustain it until such
time TATA tried to position itself catering to another segment. Even
today MUL has been able to meet the objective of providing a car at the
least possible price than any of its competitors.
What is in store for the Future?
Each generic strategy has its risks, including the low-cost
strategy. For example, other firms may be able to lower their costs as
well. As technology improves, the competition may be able to leapfrog
the production capabilities, thus eliminating the competitive advantage.
Additionally, several firms following a focus strategy and targeting
various narrow markets may be able to achieve an even lower cost within
their segments and as a group gain significant market share.
Though MUL had been able to sustain cost leadership over the years, the
question is whether it will be able to continue its status in the
industry given the fact that the plants are outdated and incur huge sums
of money to maintain them. Additionally, installing a new assembly line
proves to be very costly (Rs. 1300 Cr.). Looking into the competitor’s
statistics we find that many of them are using less than 50% capacity
and importing a major portion of their materials which MUL has advantage
of atleast for the time being. Even the distribution and service network
is so effective that you find dealers throughout the country.
The car industry had been asking for excise duty reduction so as to
reduce the end prices of cars to customers and increase the slogging
demand. With continuation of liberalisation and shift in the perception
(of car being a luxury product) are likely to lead to reduction in
duties. This will reduce the prices of cars leading to further boost in
demand. However, on the contrary, the levy of uniform sales tax in all
the states will have a negative impact on the demand front, due to
increased prices. With the entry of most of the world majors in the car
segment, the competition is expected to heat up substantially in the
next few years. This will lead to shakeout in the industry and only
those companies having a backing of multinationals with strong
commitment will be able to continue operations in the segment. So, a lot
of Mergers and Acquisitions are likely to take place. Furthermore, the
flood of variations in existing and new models has provided wide range
of choice for the customer and companies would continue to do so. These
new models will be able to carve a niche for themselves in the crowded
market.
With developments in the small car segment acquiring a degree of
stability in terms of price competition, the action is shifting to the
mid-size car segment. Sales in this segment will pick up as new models
come in and income levels rise but there is still some time till it
comes anywhere close to the economy sized segment. What will also drive
car sales is the wide availability of finance schemes by a variety of
banks and Financial Institutions. The used car market which has come up
in a big way quite recently, is expected to continue to do well as older
models get replaced by newer ones at a faster pace. The coming in of
Euro III and IV norms will also increase scrappage rates. In view of
expected surplus in the domestic market, India will emerge as one of the
leading car sourcing point in the Indian subcontinent. Hence, consumers
will be the beneficiaries as a result of marketing war, as they will be
offered technologically superior products at better prices and terms and
conditions. But the customer has a risk of model discontinuation as a
result of shakeout expected in the industry.
Some of the viable options available for MUL to sustain its comparative
advantage with cost leadership among others would be –
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Contract Manufacturing – Outsource
the production process to some other players in the industry so that
it provides a win-win situation for both MUL and also its competitors.
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Plant Expansion outside North India
– This would help MUL to cut down on the cost of transportation to
places down in the south from the existing plant in Gurgoan.
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Introduce JIT production system –
This is to do away with the existing 15 day inventory concept and help
MUL to contain the costs of inventory holding / carrying cost and
ordering costs.
Conclusion
The success or failure of an organization primarily depends on
its ability to sustain its comparative advantage irrespective of the
kind of strategy it adopts – cost leadership, differentiation or focus.
MUL needs to drive all its efforts towards a common goal – “Being able
to provide consumers with cars at the least possible prices than its
competitors, while assuring the quality and service that is best in the
industry”. This would ensure that MUL maintains its leadership position
in the industry. For this to be achieved MUL needs to drive its efforts
to control costs and maintain quality by banking on the various cost
advantages it has at present and also work on the possible options made
available to it.
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* This paper is presented at the “National Seminar on Competing through
Cost Advantage” organized by the School of Management Studies,
University of Hyderabad, on October 3-4, 2002.
Subash Talatam
Research Associate
Aurora’s P. G. College, Chikadapally,
HYDERABAD – 500020.
subashtalatam@rediffmail.comJai-Hind
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