Competitive Strategy

Tata Power has till now followed a focused cost-leadership strategy. Their operations are concentrated in the western state of Maharashtra, and that too in Mumbai and suburbs.  Tata Power Co. Ltd (TPCL) is into generation, transmission and distribution (T&D) of electricity and has license to supply power to bulk consumers in Mumbai and some residential areas in Mumbai and its suburbs. Apart from that, it has a joint-venture with the state government of Delhi for the distribution of power. Tata Power charges the lowest tariffs in Mumbai from the consumers. It has been possible due to their unrivalled cost-advantage in electricity production through the use of state-of – the-art technology and their regular up gradation and employing a unique mix of hydro and thermal generating capacity.

After having established a firm base in Mumbai, Tata Power is currently pursuing an aggressive expansion policy with the objective of becoming a major national player in the future years.

Competitive Advantage:
Firm’s strategy of being a focused low cost service provider is being aided by following competencies it had build.

Technology leadership: Tata Power will be commissioning the first Ultra Mega Power Project in the country and has a slew of mega projects under implementation Firm base in Mumbai: The Company has been associated with the growing legacy of Mumbai as a business city for over nine decades. Here Tata Power has modified its offerings to different clienteles. Low Cost provider: Besides from opting for UMPPs Tata motors has occupied stake in coal mines in Indonesia for cheaper fuel supply, required for low cost production Access to hydro and solar energy production: It provides firm dependability and pitch for green energy unlike most of its rivals.

mild competition in the transmission business and an increasingly competitive distribution business. hydro as well as nuclear power generators) in the power generation field. Number of competitors – While there are about 15 major players (includes thermal. The position Tata Power has achieved is due to its presence in market for 90 years. the numbers indicate a moderately competitive generation industry. PORTER’S FIVE FORCES ANALYSIS Threat of Rivalry – The overall rivalry is low but will increase with increasing investments. Base in Mumbai and relations with different genre of clients/ partners. To imitate that by any other rival is unlikely Risks associated with strategy implementation:    With Nuclear Deal by India-US govt. exposure to non thermal sectors and coordination and ventures with State power utilities. But some of the Tata Power’s competencies that provide sustainable competitive advantage to firm. As of now. technology.Sustainability of competitive advantage: Tata Power owns competitive advantage over other private players in terms of their size. Rivals (Reliance) are also investing in UMPPs and have backward integrated for coal supply like Tata Power. investment in coal mines provides a strong natural hedge as it stands to benefit from any increase in coal prices (the current trend) but may not necessarily lose if the prices fall (as the coal can be used in house). We take a look at individual factors below: 1. .   Exposure to Hydro power: With thermal it is the cheap source of power. nuclear power is a threat to low cost thermal power Changing environment concerns may change policies about highly capital intensive Thermal Power Industry. The distribution business is largely controlled by discoms (state power distribution utilities) and the private sector is only active in 5-7% of the business but the overall number of players is high. there are about 7 big players in the transmission business which is quite regulated. Due to environmental regulations this exposure is rare and non imitable by other (new) players.

6. there is low rivalry in trying to retain the customer here. Hence there is a tremendous potential for growth which implies little or no competition as everyone will have an opportunity to gain from the increased size of pie rather than trying to eat away each other’s share. The annual addition in transmission lines and substations has barely managed to reach targets often falling short of the planned additions.There are economies of scale linked with power industry which does imply rivalry. there is no rivalry so far as excess capacity is concerned. Excess capacity . Jaypee. 8.There are significant costs associated with switching from one generator to another for a transmission company and so on for a distribution company. NPCIL. the rivalry is high from this point of view. 5. This has still failed to catch up with the growing demand. JSW. 4. for a customer to switch from one distributor to another is probably possible in theory due to small switching costs but lack of a second distributor almost always makes it impossible.Since the sector has consistently lagged the targets and there is target of 1000kWh per capita as against a current consumption of around 800 kWh. . there is a huge demand-supply mismatch and scope for further capacity addition( to the tune of 100. Again. Torrent) are diversified thus bringing in more rivalry to the industry. Differentiation – As there is little product differentiation in the generation and transmission business (which may increase as concerns towards green energy increase) while only slight differentiation based on the quality of distribution.2. almost all the private players (Reliance. 3.000 MW). So. Exit barriers – with huge costs of exiting. Economies of scale . 7. Industry growth – The power generation capacity grew by almost 65% over the nine years from 2001-2010. etc). Lanco. Fixed cost – There are huge fixed costs involved in the commissioning of power plants and installation of transmission infrastructure. 9. This means an intense rivalry as firms must produce near capacity to lower costs and then sell the electricity. Adani. So. Strategic stakes – If we exclude the public sector players (NTPC. Switching cost . government regulations and asset specificity the industry has high exit barriers and hence the firms needs to continue in business and compete.

Distribution access – It is not difficult to tie-up with transmission and distribution companies as new contracts are awarded based on competitive bidding and there is open access to transmission and distribution. Hence there is moderate threat from new entrants. if any. linkages to end users. For a new entrant in distribution and transmission business though. Relationships/brand identity . in awarding new projects or renewing contracts. but this may still not be strong enough to deter new entrants. 6. Also. the entry may not be all that easy with significant hurdles in form of government regulation. This therefore reduces the threat of new entrants. a new entrant may ensure distribution access for its generated power very well in advance increasing threat for entrants. In fact many barriers like requirement of license have been done away with and positive features like competitive bidding. open access in transmission and distribution introduced. resulting in low threats to incumbents.Threat of New Entrants – The threat is medium owing to multiple reasons. 1. Let us look at the reasons one by one. promotion of captive power plants. Scale economies – To earn profits. they enjoy negligible differentiation if any. transmission and distribution. the government is making all efforts to attract private participation in power sector. 4. This is true for all the three major businesses – generation. relationships have little influence. This implies a low threat of new entrants due to high investment requirements. Access to land. Capital requirement . So. its imperative for a new entrant to invest significantly to build economies of scale which reduces the threat of entry by new competitors. Hence. First mover advantage and differentiation – The incumbent firms do enjoy some first mover advantage with existing contracts and infrastructure in place. etc. technology and raw materials – With the sudden growth in the sector. transmission and distribution to bridge the supply and demand gap and improve distribution at lowest cost to the users. All this imply no legal barriers and easy entry for new players.The industry is highly capital intensive with long gestation periods (especially the thermal power plants). . ensure uninterrupted access to technology and raw materials especially in the first few years of operation.Both central and state governments are trying their best to bring in investments in power generation. a new entrant may find it difficult to acquire land for the plant. Hence. 7. 5. 3. 2003. Legal barriers – Through the improved Electricity Act. making it easier for new entrants. Even existing players find it difficult to ensure continuous fuel linkages. 2.

Switching costs – As discussed earlier. Let us try to understand why. 6. 2. transmission and distribution. The government can always integrate backwards if it chooses to but may not be feasible as it requires huge investments. the individual customers don’t wield the same bargaining power being large in number.Bargaining Power of Buyers . the government discoms being the big buyers from power companies have some bargaining power. . Number of buyers – The buyers include government (both central and state for the numerous end users) and industrial sector. big industrial customers are increasingly going in for captive power plants for their power needs.This again is low. the bargaining power with even large buyers is limited in nature. 7. more power generation companies can come into T&D and hence they pose a threat to the existing T&D companies. So there is mild threat of backward integration mainly from industrial customers. 5. 4. So. Industry’s threat for forward integration – Just like some of the power companies work across all the three segments – generation. Importance of product for price and quality – The buyers bargain on price with little differentiation in terms of quality from the electricity producers. 3. So price sensitivity does impart some power to the buyers. Contribution to buyer’s quality – Electricity contributes to quality only as an essential commodity and its continuous availability allowing its buyers (both the general public. 1. switching costs are not all that low even for government buyers as there are very few companies which may be available in an area and sourcing power from elsewhere might be costly. Threat of backward integration – While retail customers cannot integrate backwards. since the power generation and distribution companies are still fewer in number as compared to the number of buyers. But T&D companies by themselves do not pose any threat of forward integration to the industries or governments they serve. So. this reduces buyer power. it reduces their bargaining power. Volume per buyer – Again. This being an essential commodity. Further. Industrial customers have a huge demand for power which is in short supply leaving them with little bargaining power. While the government and industries enjoy bargaining power. farmers and industries) to function smoothly.

Availability of substitutes – For most manufacturers. 10. This therefore gives them an incentive to bargain. Contribution to buyer’s cost – electricity is a basic cost for all manufactured products as well as agricultural products and a significant part of the governmental (buyers for end users) expenditures.8. Profitability – Now since electricity costs do form a part of manufactured and farmed items. Thus leaving them with virtually no bargaining power so far as alternatives are concerned. They therefore will resort to bargaining to get it at a cheaper cost. there would be no direct substitutes for agriculture and similarly for individual end users (though they can switch to other forms of which are likely to be less convenient. . 9. a reduction in the cost will certainly increase buyers’ margins. cleaner and more costly).

Sign up to vote on this title
UsefulNot useful