STRATEGIC MANAGEMENT ASSIGNMENT

ASSIGNMENT ON
ANALYSIS OF THE SECTOR
USING
PORTERS DOUBLE DIAMOND MODEL
ON
INDIAN AUTOMOBILE INDUSTRY

Submitted To
Prof. A. K. Kher
Submitted By
Rameez Bagban

03

Shahanawaz Mujawar 11
For the academic year
2014-15

INTRODUCTION:
The Indian automobile industry is one of the key drivers of industrial growth and employment,
which will gain rapid importance. In order to accelerate and sustain growth in the automotive
sector, a roadmap is needed to steer, coordinate and synergize the efforts of all stakeholders.
Exogenous and endogenous factors affecting industry also affects the competitiveness of
the firms. Competitiveness captures the awareness of both the limitations and the challenges
posed by global competition as an exogenous factor. Underdeveloped economies tend to be
competitive by producing cheaper products, developing economies by producing better products,
and developed economies by producing innovative products continuously. Though Indian
automobile manufacturers are manufacturing innovative products and leading India to a new
summit, there are various roadblocks, which prevent this industry from being a global player.

COMPETITIVENESS DEFINED:
Competitiveness has emerged as a paradigm towards the economic development. Michael Porter
has defined competitiveness as productivity with which a nation utilizes its human, capital and
natural resources. To understand competitiveness, the starting point must be a nations
underlying sources of productivity. Productivity depends both on the value of a nations products
and services measured by the prices they can command in open markets and by the efficiency
with which they can be produced. Productivity is also dependent on the ability of an economy to
mobilize its available human resources. True competitiveness, then, is measured by productivity.
Competitiveness is a special challenge, because there is no single policy or grand step that can
create competitiveness. Improving competitiveness is a marathon, not a sprint. How to sustain
momentum in improving competitiveness over time is one of the greatest challenges countries
are facing.

3. PORTER'S DIAMOND MODEL:

Porter (1990) contributed the diamond model on competitiveness, which analyses national
(or industry) competitiveness through four major dimensions: factor conditions, demand
conditions, firm strategy structure and rivalry, and related and supporting industries. Porter
(1990) concluded that due to various national characteristics, nations cannot succeed in all
industries, and thus it is important to identify and develop their internationally competitive
industries. Therefore, he proposed the diamond model with four major (and two additional)
determinants of competitive advantage in a particular industry.
Porters diamond model provides an analytical framework with multi- measurements favorable
for national or industry competitiveness. According to Porter (1990) nations are most likely to
succeed in industries or industry segments where the diamond factors are mostly favorable.

Factor Conditions:
For production are the inputs and infrastructure necessary for competition, which include:
Human resources: Quality and quantity of skilled labour, cost of personnel, and labour skill
variety;
Physical resources: The abundance, quality, accessibility, and cost of the nations land, water,
mineral, or timber deposits, hydroelectric power sources, fishing grounds, and other physical
traits.
Knowledge resources: Market, scientific, technical knowledge residing in a nations
research institutions;
Capital resources: Capital availability and cost to finance industries. Capital resources can
be affected by the rate of savings and national capital market structure;
Infrastructure: Availability and quality of infrastructure, including communication system,
transportation system, payment or funds transfer, health care, and so forth

3.2. Demand Conditions:

The nature of buyer needs, the size and growth rate of home demand, and the transferability
of domestic demand into foreign markets. Porter has also described in his location
competitiveness study, about the advantages arising by having sophisticated and demanding local
customers or customers with unusual need for specialised varieties that are in demand.

3.3. Related and Supporting Industries:

Include parts and service suppliers and distributors in the supply chain. As Porter stated,
competitive supplier industries can provide efficient,
early, rapid, and preferential access to inputs, which are basic production needs. Moreover,
the geographic proximity with internationally competitive suppliers in the home nation helps
build coordination and a communication network, which in turn improves production efficiency.
Based on the availability and efficiency of supporting industries, the most significant benefit of
homebased suppliers lies in the ability to accelerate innovation and upgrade in the overall auto
industry.

3.4 Firm Strategy, Structure, and Rivalry

It discusses the context in which firms are created,managed, and operated, given the domestic
demand conditions, factor conditions, and supporting industry situations. In a developed
industry, firms would build on the strengths provided by the source(s) of competitive advantage
and invest in improving the less competitive factors. Moreover,
as per his research, the fierce domestic competition forces firms to innovate constantly and
improve productivity and hence increase national competitiveness in the industry. Thus, strong
local and global competition not only sharpens advantages at home turf but also compels
firms in the domestic market to sell abroad as growth strategy.

4. AUTOMOBILE INDUSTRY
The automobile industry plays a pivotal role in countrys rapid economic and industrial
development. It caters to the requirement of equipment for basic industries such as steel,
nonferrous metals, fertilisers, refineries, petrochemicals, shipping, textiles, plastics, glass,
rubber, capital equipments, logistics, paper, cement, sugar, etc. by either consuming it or
supporting in
logistics. Due to its strong forward and backward linkages with almost every segment of
the economy, the industry has a strong and positive multiplier effect and thus propels the
progress of any economy.

4.2. Present Landscape of the Indian Auto Industry

India is emerging as one of the worlds fastest growing passenger car markets and second largest
two wheeler manufacturer. It is home for the largest motor cycle manufacturer and fifth largest
commercial vehicle manufacturer. The industry is producing about 3.3 million passenger
vehicles, 1 million commercial vehicles, 15.7 million two wheelers and about 0.7 million tractors
per annum. The automobile industry has achieved a turnover of US $65 billion and the auto
component industry has reached a turnover of US $35 billion. The Indian tyre industry, which is
an integral part of the Indian automotive industry, has registered a turnover of almost US $ 6
billion.

Major automobile clusters in India:

Halol Pune-Nasik
Aurangabad
General Motors
Skoda
Tata Motors
Mahindra & Mahindra
Bajaj Auto
Volkswagen
Mercedes-Benz
Eicher Motors
Force Motors
Delhi-Gurgaon-Manesar
Maruti Suzuki
Honda Motors
Hero Honda
Eicher Motors
Yamaha
Jamshedpur
Kolkata
Chennai Bangalore Hosur
Hyundai
Ford
Hindustan Motors
Ashok Leyland
BMW

Drivers of Growth
Rising per capita income and the changing demographic distribution are conducive inclusive for
growth. India has the highest proportion of population below 35 years, 70 per cent, (potential
buyers), which means that 130 million people will get added to the working population between
2003 and 2009. The trends indicate that small and medium cars would remain dominant and a
shift towards high end cars is expected at a faster rate. The SUV (Small Utility Vehicle)
market is expected to develop rapidly in future. Higher disposable incomes coupled with
availability of easy finance options have driven the passenger vehicle segment. The growth of the
Indian middle class with increasing purchasing power along with strong growth of the economy
over a past few years have attracted major auto manufacturers to the Indian market. The marketlinked exchange rate and availability of trained manpower at competitive cost have further
added to the attraction of the Indian domestic market.

Roadblocks:

Factor Condition
Less productivity because of skill shortages and skill mismatches
Wages and salaries of labour
Low Quality, inconsistent supply of raw material and land
Contractual nature of labours
Low Quality, inconsistent supply of raw material and land
High costs, inconsistency and low quality of power
Low investment in R&D expenditure as a share of turnover
Does not possess good design facilities
Poor and insufficient infrastructure, poor connectivity
Immense port congestion and excess lead time

SUGGESSTIONS
Wages and salaries of labour as per world standards to increase productivity
Flexible and investor friendly labour laws
Cheap raw material & land to promote competitiveness
Reliable and quality power supply. Small firms to adopt better technologies and minimize
wastage of power/fuel.
R & D expenditure should be as percentage to sales ratio. Centers for automotive
manufacturing excellence to be created
R & D for product, processes and technology to be incentivized. Establishment of world class
testing, homologation and certification facilities.
Expenditure Infrastructure as percentage of GDP especially around automotive clusters.
Fleet Modernization to be encouraged

Demand conditions
Low demand because of traffic congestion, and poor road conditions
High interest rates of finances, excessive taxes and fees, operational restrictions, and red tapes
in vehicle purchasing and registration.
Poor brand image of Indian cars parameters of performance, features, and safety
Low penetration level
India basically a small car market

SUGGESSTIONS
Lower financing and single window operations
Measures for demand creation, brand building (Made in India) should be promoted
Measures for demand creation, brand building (Made in India) should be promoted.
Cost effective small carriers, strong, rugged, low cost vehicle for the rural market.
Alternative cheap fuel to enhance demand

Related and supporting industries

Highly fragmented and counterfeit auto component Industry.
Demand uncertainty, credit constraint and lack of skilled manpower

SUGGESSTIONS
Joint ventures with foreign suppliers.
Setting up of virtual SEZ and Auto Parks for auto component industry
Policy measures to reduce the indirect taxes on all input materials
Capacity building, capability augmentation, competency profiling by suppliers
Reduce the vulnerability to oil prices by designing lower fuel consumption vehicles

Firm strategy, structure, and rivalry

Unused Production capacity
Laggard nature in outsourcing
MNEs and indigenous automaker strategic Difference

SUGGESSTIONS
Increase latent demand
Anti-dumping mechanism to be strengthened
Increases penetration in the international markets
Firms should benchmark their performance against best in the industry
manufacturing practices and production techniques
To identify rivalry & partner strategy differences

& adopt

best

CONCLUSION
The industry expects the growth in the automotive sector to continue, fuelled by rising
disposable incomes and increasing consumerism. They also believe that global automakers will
continue to allocate a rising proportion of their foreign direct investment into India,
growing auto manufacturing first and later auto engineering and R&D services. But even as the
sector grows, some concerns are becoming more pressing. A KPMG report found that senior auto
executives are also concerned about India's eroding cost advantage and the increasing challenges
of rewarding and retaining talent. The report also expresses concern about the pace of
consolidation in some parts of the industry and the challenges firms face in building Indian auto
brands. The leading concern is the continuing cost imposed by Indias relatively poor physical
infrastructure, and the slow pace of improvement in road, rail and port facilities. Added to this,
the fact that the automotive industry lags behind other sectors such as IT and financial services
in management training, reward and retention. Above all, Indian companies recognise that to
achieve global scale they will need to meet the challenge of building persuasive global brands.
Nevertheless, the overall impression is that Indias auto sector has passed a critical turning point.
The inherent strengths of Indias manufacturing economy an exceptional human resource base,
the capacity to deliver high quality engineering products, and the strategic geographical
positioning have been reinforced by a strong domestic economy and a new readiness on
the part of global auto manufacturers to make key investments in India. The opportunity for
Indias automotive companies to emerge as leading participant in the global industry is clearly
present: the challenge is no longer to create the opportunity, but to manage it.