Tata Motors Limited, India’s largest automobile company, is the leader by far in commercial vehicles, and the second largest in the passenger vehicles market with winning products in the compact, mid-size car and utility vehicle segments. The purpose of this report is to study and analyze the internal and external environments of the automobile industry in India. The analysis should enable us to assess the current as well as previous strategies of the company and redesign new strategies for further optimization.
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Key Findings
The research shows that Tata Motors has successfully implemented ‘Low-Cost Strategy’ by providing unmatched value for its customer’s money. With 50 years of experience, the company has successfully served varied needs of its customers by providing an extensive range of products. Tata Motors is a pioneer in R&D department which allows it to constantly innovate and discover new technologies.
Recommendations
Considering the emerging economy and changing consumers’ spending, implementation of ‘Low-Cost Strategy’ might not benefit in the long run. Consequently, it is recommended that the company should follow ‘differentiation strategy’ and focus on providing unique goods and services to win over the market from the rivalry players. By bringing revolutionary changes in the market, it would not be unrealistic to think of a future where customers would willingly pay for the added value to the product.
Introduction
Outline of Business under study
Tata Motors, a subsidiary of the Tata group, was formerly known as TELCO (TATA Engineering and Locomotive Company). The group takes its name from the founder Jamsedji Tata and has its headquarters at the Bombay House in Mumbai, India. Established in 1945, Tata Motors has more than 4 million vehicles driving on the Indian roads. It was the first Indian company from the engineering sector to be listed in the New York Stock Exchange. It made its place amongst the world’s top three passenger vehicle makers and is currently the leader in commercial vehicle. It also stands as the fourth largest truck and second largest bus manufacturer.
The company employs 23,000 workers, who are directed by the vision to become the best in its operations and product while staying intact with the business ethics and value system. The multinational often hits the headlines because of its takeovers and mergers, especially with the recent acquisition of Jaguar Land Rover (Tata Motors 2011).
External Analysis of the Automobile Industry
Ever growing Indian population and hence the workforce, has increased the number of independent earners. This favourable trend provides a greater scope for the development of automobile industry in India. During 2008 the industry had a share of up to 3.9% in country’s GDP, which is expected to rise to 10% by 2016 (India Retail Report Q1 2011). Consumer spending on transport is also expected to experience an upward trend and advance by 73.2% in 2007-2015. Also, increased investment by the government for improved road infrastructure has further led to a growth in multi-axle vehicles (Euromonitor International 2008).
Reason for studying Tata Motors
Tata Motors is lately the most talked about company. Over the years it has emerged as a low cost vehicle manufacturer with prime focus on innovation. In divergence to its strategy, it would be interesting to learn about its new ventures in the luxury market. The study therefore focuses on closely scrutinising and reviewing its current tactics and verifying for any scope for improvement.
Strategic Analysis
Methods & Techniques for Data Collection
For the execution of this research, we conducted an in-depth study of the available secondary data. The gathered information was verified with the online company records, reports and official websites.
Tata Motors Internal Records and Annual Reports
Companies internal records helped us analyzed its current position by revealing its earnings until 2010 and understanding its past strategies and actions.
Online Databases
Data retrieved from EBSCOhost database, Factiva database and e-books available online at Deakin library and google scholar proved to be extremely beneficial.
Online Websites and Other Resources
Reliable articles, magazines, statistical trends, government websites and other relevant online sources like financial express, further enlightened our knowledge about the company.
Text Book and Lecture Notes
The textbook ‘Exploring Corporate Strategy’ by Gerry Johnson provided us with the framework to go about this project. Study guide and lecture notes were also valuable source for information.
Business Strategy Statement
Tata Motors aims to emerge as the world-class automobile leader with the remarkable price-performance ratio in combination with hyper-efficient engines to acquire the large market share internationally.
Tata Motors’ mission is to create an organisation that people enjoy working for, doing business with and investing in. It focuses on customer needs to provide them a range of innovative products and maintain long-term relations, by working closely with its workforce and business partners. The company’s purpose is to consistently create shareholder value by generating greater returns and to foster long lasting ties with the vendors and channel partners (Global Reporting Initiative 2010).
The company’s objective is to invest INR28.8billion over the next few years for increasing its production and INR60billion for the expansion of the existing manufacturing plants and in setting up vehicle testing facilities (Automotive Manufacturing Solutions 2010).
Tata Motors unmatchable ability to manufacture low cost vehicles provides the company with a greater scope of earning high profit margins and enjoys a greater market share. Economic slowdown has hyped the competition to provide low priced but the best quality vehicles. Understanding rural Indian economy and growing incomes of the farmers, Tata Motors view increased opportunities for its commercial sector (Thakkar 2010). Nevertheless Tata Motors have a range of upcoming Jaguar and Land rover cars for the luxury brand buyers to capture the higher-income/premium customer segment. This could create a greater success for the company in near future.
Tata Motors have remarkable advantages of manufacturing in India when compared to other MNC competitors. It benefits from the low labour cost, extensively skilled and interwoven backward and forward linkages, boosting IT engineering, strong auxiliary industry, substantial knowledge of the market, improving infrastructure and increasing domestic demand.
Tata Motors aspires to be a world-class maker of quality vehicles by striking balance between the needs of its customers, employee, suppliers, investors and the community as a whole.
Analysis of External Environment of the Business
Macro Environment analysis
Economic Factors: The Indian economy has experienced constant growth due to the increasing per capita income, which grew by 14.2% in 2006-07. The total consumer spending increased by 73.9% during 1995-2007 this is expected to reach 58.2% in 2007-2015 (Euromonitor International 2008).
According to the World Factbook (2011), India’s inflation rate rose to 11.7% in 2010 driven by increasing food and fuel prices. Moreover, rising commodity prices and hardening interest rate has posed immense pressure on costs and margins of Indian manufacturers (Mitra & Sen 2011).
Figure 1: India GDP
Source: Index Mundi 2011
Demographic Factors: India’s total population of 1.19 billion constitutes 70% potential buyers, which are below 35 years. It is seen that 130 million people had been added to the working population between 2003 and 2009. This indicates an increase in number of people with lesser dependency. The trend is likely to add value to vehicle demand with a shift toward high end cars (Automotive Mission Plan 2006).
Figure 2: Vehicle Sales in India
Source: India Retail Report Q2 2011
Political-Legal Factors: Indian government has taken several incentives under the current 11th five year plan (2007-2012) to boost the automobile sector. The Finance bill 2006 has reduced the excise duty on the small cars and duty on raw material which is now 5-7.5% as compared to the previous level of 10%. The Ministry of Finance announced 150% weighted deduction under the income Tax Act for in- house R&D expenditure for all sectors (Anand 2009). The government has introduced a National Automotive testing and R&D Infrastructure Project (NATRIP) which is based on building world class testing and R&D infrastructure for vehicles in the country for automotive safety, emission and performance standards in India. Moreover, the Government has allocated a part of its budget for the improvement of road infrastructure (Planning Commission 2006).
Environmental Factors: Increasing consciousness about global warming requires production of fuel efficient vehicles. Moreover, diesel fuelled locomotives pose greater threat to the environment as compared to the CNG vehicle (Centre for Science and Environment 2011). Furthermore, Recent disclosure of Euro V standard by the European commission requires India to revise its emission standards (Automotive Mission Plan 2006). Recently legislated carbon tax on coal producers has provided a source of financing clean energy research and development (Building Green Business 2010).
Technological Factors: The automobile industry’s spending on R&D has increased from US$54.58 million to US$214.26 million in last four years which is 0.8% of the total nation’s GDP (The Financial Express 2008) (Ramanathan 2011). Furthermore, NATRIP is aiming to integrate the strengths of IT and electronics with the automobile engineering sector (Planning Commission 2006).
Impact of Macro Environment on Business: Overall, developing economy with growing working population and consumer spending indicates an increase in the consumer demand, subsequently a growth in the automobile industry. Other prime factors contributing to this trend are improved expenditure on R&D, boosting IT and reduced duty on raw materials. However, the escalating fuel and commodity prices and rising interest rates can obstruct industry’s progress.
Thus PESTEL analysis shows that mainly the economic and demographic factors are likely to be the main drivers for the advancement of automobile industry in future.
Industry Analysis
Threat of new entrant: Emerging Indian market is attracting automobile companies from all over the world. International car rental firms are posing a greater threat with nearly twelve brands, expected to enter the market (Gupta & Shekhar 2010).
However, Tata Motors enjoys economies of scale and level of experience, thus challenging for the new entrants.
Figure 1: Five force framework
Source: Johnson, Whittington & Scholes 2011
Bargaining power of buyers: Increasing disposable income and availability of better alternatives have raised the customer expectations and array of choice. This has led to a decline in consumer loyalty towards particular vehicle brand. Indian consumers are now enjoying the greater bargaining power (Gupta & Shekhar 2010).
Bargaining power of Suppliers: The Indian auto component industry has witnessed a strong growth during 1995-2005, subsequently making automobile one of the fastest growing Industry. Increased availability of supply sources has lowered supplier’s bargaining power. This can be seen in Tata Motors extended forward and backward vertical integration of its value chain through acquisition or creation of steel, manufacturing and retail operations (Zahrai 2009).
Rivalry between Competitors: Indian automobile industry is highly competitive with three major players, namely Maruti Suzuki, Tata and Hyundai. Tata Motors and Hyundai Motors have nearly equal percentage of market share, although less than Maruti Suzuki. An important factor, which adds fuel to the competition, is that all major vehicle providers are highly competent to pursue opportunities with aggressive strategies.
Figure: Market Share of Passenger Vehicle Providers (2010-2011)
Source: Adapted from The Economic Times 2011
Threat of Substitutes: Automobile industry in India may fear the rapid development of public transport, most economical and speedy being metros.
The analysis infers that four forces are strong enough to make this industry less attractive. However, to survive Tata Motors need to closely monitor the competitor actions and respond quickly to the changes in customer needs and expectations.
Strategy Canvas
Source: Adapted from Taylor 2011
Critical Success Factors
The Critical Success Factors will enable Tata Motors to gain competitive advantage over the competitors to enter the blue ocean.
Economies of Scale: Reaping the benefits of economies of scale, Tata Motors has been able to establish itself as a successful low cost provider (Business India Intelligence, 2008).
Diversification: Tata Motors’ product line ranges from world’s cheapest car to expensive models such as Jaguar and Land Rover to trucks passing the million unit output mark reaping the benefits of economies of scale (Maekawa 2008).
Innovation: Today the company employs over 2000 engineers and scientists, providing a leading edge in R&D. This endowed technological capability has allowed constant innovations, thus serving the unique needs of the customers (IBEF 2010).
Analysis of Internal Environment of the Business
Company’s Capabilities and Strengths
Tata Motors have distinctive capability due to its comparative advantage in producing low cost cars, which is out of the reach of competitors.
The value chain for Tata Motors starts with the IT team’s innovation as a tool for business growth.
Primary Activities
Inbound logistics such as Tata Power Co., Tata Steel help them gain economics of scale.
R&D, designing, manufacturing, assembling, Kaizen & TPM teams for testing and packaging to improve its operating efficiency.
To capture significant market, it provides variety of light and heavy commercial, utility vehicles, and passenger cars. Tata distribution Company limited (TDCL) provides logistics support for distribution.
The company optimized its cost on sales and marketing to ensure awareness about their latest launches.
Easily reachable service centres, 24 hours IT Service desk and Tata AIG insurance & finance facilities provide an ease to the customers (Tata Motors 2011).
Support activities
Tata constantly strives on innovation by providing its employees with a room for development through vocational and cross-functional training programs. Its HR process has been automated for far reaching profits.
Competitive Strength of Business
Tata Motors give tough competition to other players in automobile industry with its strong low cost strategies like production of Tata Nano. These schemes provide value for service to customers.
SWOT Analysis
Strengths
Weaknesses
Strong domestic player with a turnover of approximately $15,771.6 million in 2009.
Extensive range of commercial and passenger vehicles with several variants to suit customer preferences.
INR50,154million expenditure on robust research and development (R&D) capability with Strong engineering skills in designing.
Enjoys Low labour cost by manufacturing in India. Ultra cheap Nano, which was designed to replace the two wheelers with an affordable four-wheeler, was their greatest achievement.
Tata Motors had debt of INR435, 815 million at the end March 2009, which unable cash inflow and degrades creditworthiness.
General public associate Tata as low price and hence low quality, however this image may not do well in the premium sector.
Inferior labour productivity and lean production.
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Opportunities
Threats
Technical know-how may transfer from Jaguar Land Rover and also the premium brand can benefit from reduced cost.
Emerging market of India with increasing income levels.
Infrastructure development in India will further increase the vehicle demand.
Fuel efficient and eco friendly cars may find its way into the market.
The price of raw materials is increasing and the company cannot pass the burden to its non-affluent customers.
Rising fuel prices may have an adverse effect.
Cost of meeting environmental regulations.
Global financial crisis of 2007-08 has lead to financial crunch thereby rising the interest rates.
Developing markets has attracted severe competition which could jeopardise Tata’s position.
Source: Datamonitor 2010
Strategy and Culture
Tata Motors have a distinct way of doing business, more profoundly known as, “The TATA way”. The most deeply engraved value in the company is trust. The company’s logo, “leadership with trust” personifies people’s belief in the brand. Thus the company respects the trust embedded in it by many and strives to honour its commitments. Other five core values that underpin the Tata way of doing business include integrity, responsibility, unity, understanding and excellence (Tata Motors 2011).
The corporate governance of the company originates from its rich legacy of ethical, fair and transparent governance practices followed since ages, even before they were made mandatory by fostering highest standards of professionalism, integrity, honesty and ethical conduct (Corporate Sustainability Report 2008).
Information and power passes through a vertical hierarchy with CEO being the foremost authority. The vice chairman of Tata Motors, Ravi Kant, attaches greater importance to communication. He strongly believes oral communication helps one understand the behavioural pattern. As a leader, the body language, communication style and the way of treating employees matter the most because the followers observes and take their own cues. Friendly relations with workers allow easy flow of ideas, thereby encouraging greater yield. Further, ‘Code of Corporation Disclosure Practices’ confirms transparent declaration of its operations (Business Strategy Review 2010). Company successfully integrates advanced international HR management processes by retaining local managers in recent acquisition and transferring few senior managers from India. This makes exchange and adaption to new expertise easier while maintaining the company’s core values.
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Quality has always remained the cornerstone of the Tata way of business; as such a formal system to scale the performance of different companies was introduced. TQMS help companies under the Tata group to conduct and enhance its business endeavours especially in relation to business excellence and ethics. Further, JRD Quality Value Awards named after the late chairman of the group, JRD Tata where incorporated for ensuring and encouraging quality consciousness. The award acknowledges the company within the group that achieves highest level of quality and excels quality management (Tata Motors 2011). Such practices entrench a learning environment that would consequently help achieve leadership in the marketplace by constantly striving to become the best. Strict fellowship of company’s culture has allowed it to smoothly adhere to its strategy.
Business Strategy Choice
Tata Motors has constantly strived to be a low cost leader in the automobile market. Thus by employing “Low cost strategy”, it has made its presence felt especially in the untapped and developing markets like India. The most evident example is that of the ultra-low cost Nano. However, with increasing interest rates, raw material and fuel prices the company may not be able to sustain this strategy in the long run.
Nevertheless, macro environment analysis suggests that economic growth and rising disposable incomes may increase the potential luxury vehicle buyers. Thus, TATA’s acquisitions of Jaguar Land Rover seem to be a sound decision. Also, the ever-increasing competition in the industry requires Tata to implement “Differentiation strategy”. In accordance to this strategy, the company must focus on providing unique goods and services to win over the market from the rivalry players. This would allow the company to enjoy a premium price that the customers would willingly pay for the added value to the product.
Implementation of this strategy can be a piece of cake for Tata Motors if it duly considers the following-
Strategy execution
Indulge in aggressive R&D to ensure innovations that can add value to the product at minimum cost. This will include designing sophisticated eye-catching models.
Adopt sustainable practices and maintain healthy relations with all the members of the value chain and constantly upgrade their knowledge by encouraging a learning environment.
Conduct surveys to keep the company updated with the current demands of the buyers and meet them much before the rivals.
Rising awareness about global warming and ever increasing fuel prices will see a growth in the green car sector. Thus adding super efficient engine and eco friendly vehicles to the company’s portfolio will win a greater market.
Improving the budget
Regardless of the growing profits, the company must focus on getting rid of the substantial debts and avoid deals that may degrade their creditworthiness.
Focus on improving global sales for speedy recovery of fixed cost.
Outsourcing
Outsourcing of trivial operations is worth the expenditure as it allows the company to concentrate on vital jobs required to stimulate differentiation.
Ensuring Improvement
The company must encourage interaction between the supply chain members for constant up gradation of the market demand and quicker delivery, thereby directing efforts towards the improvement of production time cycle.
Promoting customization, where buyers can customize their vehicles as per their desire, can be an attraction for experimenters.
Capturing greater chunk of market by launching altered models with varied prices for each segment.
Conclusion
The study shows a brighter future for the automobile industry in India. However, vigorous scope for the development of this market has attracted many players. Availability of numerous alternatives and substitutes has further increased customer’s expectations. Also, the growing youth market comprises of the experimenters, who desire up gradations and new innovations in their possessions. All these analyses provide Tata Motors to become more sensitive to the needs of the buyers and ensure is execution much before the rivals. The company must constantly explore new markets and ensure new innovations because the risk takers are the profit makers. Over and above the company can segment the market and have something for everyone in order to capture a major proportion of the market.
Understanding the immense competition where every automobile company is fighting to become the best, Tata Motors is required to build additional competencies. The brand must stabilise its position as a leader in the commercial vehicle market and set new trends in the passenger. The recommended differentiation strategy will give the company a leading edge through its careful implementation and execution.
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