BLUE STAR

The Role of Strategy in Success: A Study of Blue Star Ltd MBA 2013-15 Section C, Group No 4

Submitted By: Kumar Yash:

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Manish Dubey:

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Joydeep Mitra:

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Mohnish Priyam:

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Akshansh Kumar:

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Nishant Kumar Prusty:

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Ch Krishnendu Sundar Patro:

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BLUE STAR

Strategic Analysis

Company Background: Blue Star was founded in 1943, by Mohan T Advani, an entrepreneur of exemplary vision and drive. The Company began as a modest 3-member team engaged in reconditioning of air conditioners and refrigerators. Within three years, the Company secured the agency for US-based Melchoir Armstrong Dessau's air-conditioning equipment. Shortly after, the Company was selected by Worthington, the US leader in air-conditioning, as its India based partner - these were the first of numerous foreign associations to follow. An expanding Blue Star then ventured into the manufacture of ice candy machines and bottle coolers and also began the design and execution of central air-conditioning projects then came to manufacture of water coolers. In 1949, the proprietorship company set its sights on bigger expansion, took on shareholders and became Blue Star Engineering Company Private Limited. Ever since, there has been a constant and profitable growth. Blue Star diversified and took up agencies for Material Testing Machines and Business Machines. The export arena beckoned and the Company began exporting water coolers to Dubai, where in fact, 'Blue Star' soon became the generic name for water coolers. Blue Star is India's largest central air-conditioning company with an annual turnover of Rs 2800 crores, a network of 32 offices, 7 modern manufacturing facilities, over 2000 dealers and around 2500 employees. It fulfils the air-conditioning needs of a large number of corporate, commercial and residential customers and has also established leadership in the field of commercial refrigeration equipment ranging from water coolers to cold storages. The Company also offers comprehensive Electrical Contracting and Plumbing & Fire Fighting Services. Blue Star's other businesses include marketing and maintenance of hi-tech professional electronic and industrial products. Blue Star has business alliances with world renowned technology leaders such as Rheem, USA; Hanbell, Taiwan; Hitachi, Japan; Midea, China; Information Security Systems, Thales, UK; E's Inc, Japan; Carel, Italy; GREE, China and many others, to offer superior products and solutions to customers. C4 2

BLUE STAR

Strategic Analysis

Strategic Direction Vision: Blue Star will be the entrepreneurial leader in the high performance air-conditioning industry. We will be persistent in our pursuit of customer satisfaction. Intelligent and successful ideas will translate into customer growth, employee growth and business growth. We will be the chosen and preferred partner for our target customers and will earn this distinction through excellent technology coupled with highly competent field support to create the highest productivity standards. The Blue Star brand will be synonymous with EXCELLENCE as conveyed in each and every customer experience. Mission: 

For our customers: become the compelling supplier of choice for high performance airconditioners and equipments.



For our employees: provide exceptional opportunities and rewards for achievement.



For our industry: be the most imaginative and resourceful company in the business

Organization view of the future, sources of competitive advantages and its scope of the business are highlighted. The obligations towards the firm’s stakeholders need to be addressed. Core Values: Blue Star is founded on five core values: 

Relentless pursuit of customer satisfaction Striving for customer satisfaction is our foremost commitment. Blue Star is customercentric in everything we do. Being a reliable partner and creating sustainable value for our customers is vital to our success as a company.

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BLUE STAR 

Strategic Analysis

Follow through on commitments Blue Star’s integrity hinges on honouring the commitments we make to our customers and employees. They are promises by which we measure ourselves. We will do everything in our power to accomplish a task and hold ourselves accountable to achieve success.



Shoot high in expectations and performance. An entrepreneurial spirit will be pervasive in everything we do. We will grow, as individuals and as a company, by reaching for goals that initially appear to exceed our grasp. We will hold ourselves to standards of performance that demand our best efforts.



Be a leader Blue Star will not be constrained by the historical behaviour of any competitive company. We will, however, leverage the collective experience of our people to build a better company. Whatever we think are the limitations and constraints of today, we will choose what we want to be and act to change for the betterment of our customers.



Honesty,

open

communications,

and

respect

for

people

Fostering open and direct communication among all levels of the company is critical for maintaining respect and trust. Honesty and fair treatment should never be compromised. Goals: 

To increase market penetration through the products they are providing and hence to

  

increase market share. To enforce good corporate governance practices. To push their capabilities so to deal with unprecedented challenges. To view deviation from targets as failure, discourage failure and ensure achievement of



set targets. They should maximize employee satisfaction so that their employees provide the best



they can and also it is important for employee retention. To provide sustainable livelihood to people in the local community and improving their standard of living.

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BLUE STAR 

Strategic Analysis

To spend higher on activity basis so to complete the project within time, ensuring that the overall cost is within cost budget. This would lead to rapid growth for them and their

 

stakeholders. To invest new ideas in experimental procedures to improve continuously. To create wealth for investors, employees, business associates and communities where they operate by experimenting and implementing new ideas for improving efficiencies and maximizing the ratio of output product to input resources

The company has set very clear and justifiable goals. It doesn’t reflect on the innovative plant’s mission. Objectives: 

  

  

To become India’s leading engineering company with substantial competence in revenues from 3 streams of business. o Air conditioning o Commercial refrigeration o Professional electronics and industrial systems. To become a customer focused organization, deliberately turned to deliver a world class experience to corporate and commercial customers. To serve customers with differentiated products expert solutions and value added services. To recruit and retain employees and business partners who relate to our customer oriented, specialist or expert culture with a belief that happy employees make happy customer. To deliver a world class experience and ordering to corporate values constituting the 2 pillars of Blue Star way. To win the trust and admiration of all stakeholders by shaving with them the fruits of business success. To be strong in having corporate social responsibility which is built on 3 pillars i.e. o Environment production o Energy conservation o Community development around facilities.

The company has set significant objectives in order to achieve their goals but it lacks specific time period in all of them.

EXTERNAL ANALYSIS PORTER’S FIVE FORCES MODEL

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BLUE STAR

Strategic Analysis

Although the Indian Consumer electronics market is highly competitive, the high growth rates that it promises make it a good industry to enter.

THREAT OF NEW ENTRANTS Capital Requirements and Economies of Scale: In the case of retail stores, there is lack of good distribution network and lack of knowledge of consumer buying patterns which calls for large investment in distribution channels and research to improve the reach. Economies of scale is required in as there are large fixed costs associated with setting up a manufacturing plant as there are problems of under-developed infrastructure, erratic supply of water and electricity in many areas, a high cost of capital and continuous up gradation of technical and managerial skills. Supply Chain Issues: The existence of too many intermediaries in the supply chain coupled with issues in logistics, management of POS data, pilferage and distribution and inventory management, eats away the profits of the retailer, making it unattractive for new entrants Product Differentiation: Awareness is increasing amongst Indian consumers, retailers and manufacturers are unable to increase brand loyalty. The Indian consumer is very price sensitive and hence he keeps hoping from one place to another, hunting for good deals. Switching costs vary amongst the electronic categories. Government Policy: By encouraging manufacturing zones and improving the infrastructure, the government is developing the entire manufacturing sector, which will help in boosting the electronics production in India, which has traditionally been a very small slice of the overall manufacturing segment. While the government is trying to encourage the growth of the retail and manufacturing industries in India, there are some policies which need to be looked at. The duty structure for electronics adds up to 30% which is a significant amount. This is mainly due to the multiple tax structure which consists of 12% VAT, 8% excise, 4% Goods and Service Tax, 2% Central Sales Tax and Local taxes. The FDI policy limits to 51% stake for foreign investors, which forces foreign retailers to use franchise arrangements, and in the manufacturing sector, the FDI is 100% favouring foreign investors.

BARGAINING POWER OF BUYERS The general consumer (buyers) who usually purchase electronic goods from electronic retailers, hyper marts, can easily compare prices and go for the best deals in town. Though the better brands can command a higher price, buyers are constantly comparing prices, service quality and product features and hence commands a moderate to high power in this industry. As brands play an important role in the electronics market, the retailers find it difficult to integrate C4 6

BLUE STAR

Strategic Analysis

backwards to produce their own electronic goods. Considering the market dynamics and the size of the market, the buyers have moderate to high power in the consumer electronics industry

BARGAINING POWER OF SUPPLIERS In the Indian electronic context, there are a large number of suppliers in the market who face overcapacities, poor distribution, large duties, and declining margins and hence the bargaining power for suppliers is less and competitive pricing comes into play. Product differentiation is more and more difficult in the consumer electronics industry and the existence of cheap Chinese suppliers also adds woes to the suppliers.

INTENSITY OF RIVALRY AMONGST EXISTING PLAYERS There are few key players in the consumer electronic market, but as they are part of big Indian business groups, they have a lot of muscle power and hence the intensity of rivalry can be placed at a mid level. Though factors such as high transport and storage costs, lack of differentiation, large investments, and low switching costs tend to intensify the rivalry, the fact that the market is only at the nascent stage with promises of high growth rates of 16% coupled with the diverse needs of customer groups, and an untapped rural market; the existing players seem to be enjoying a relatively low rivalry.

THREAT OF SUBSTITUTES The threat of substitutes for the manufacturers of these electronic goods is medium to high unlike the case of white goods. As new technology enters the market at increasing pace, the manufacturers and retailers need to understand the consumer needs.

Internal Analysis STRENGTHS Market Share In Central Air-conditioning (30 tons and above) This market has remained stagnant since past three years. Margins from this segment are as low as 7-8%, which makes it less attractive compared to others. Leading players in this segment are shifting their focus towards the faster growing segment-Room ACs. Blue Star is market leader. In Ducted System (5-20 tons) This is a segment, which lies in-between central and room ACs. These are packaged air conditioners (PAC), fitted with scroll compressors, which are more reliable because it has only three moving parts within the compressor, compared to 15 moving parts otherwise. And more importantly it ensures saving of energy cost to the consumer. Companies such as Blue star, who are leaders in central ACs are now vouching on about 50% future revenues from packaged air conditioners. In Mini Split Air-conditioners (1-3 tons) C4 7

BLUE STAR

Strategic Analysis

The unitary products would include the window ACs and the mini-splits (without ducts). These ACs are ideal for rooms with low heat loads. They are available in the capacity range of 0.5 TR to 3 TR. The room AC sector caters to residential premises, offices and small establishments. Overall growth rate in this segment is about 15%. Split ACs are so named because the unit is 'split' into two parts. The compressor and the condenser forming an outdoor unit and the cooling coil remaining as an indoor unit. Split units can be with cooling solutions. The value proposition for the new campaign is cooling solutions to help your business do better". Blue Star is planning to widen its reach for its recently launched 'Help line Campaign' to many markets in India which will promote its toll-free number 1600-2222-00 to address common customer queries. It includes queries such as what capacity of AC to buy, whether to buy a window or a split AC among other things. Besides, it will also provide an SMS option for cell phone numbers. For the purpose, the company has set up a centralized call centre at Thane in Mumbai. Largest Single Source of Air conditioning Equipment Blue Star is the largest single source for air-conditioning equipment in India. It offers the widest range of air-conditioning products - window and split air conditioners, air-cooled/ water-cooled packaged air conditioners, centrifugal, absorption, reciprocating scroll, rotary screw chillers, variable air volume systems, fan coil units, air handling units, etc. If Blue Star were to be defined it would be put in the following way: Never seen, never heard, yet quietly at work in homes, hotels, offices, factories, showrooms, airports, laboratories, satellite launch stations, hospitals all over India and abroad. That's Blue Star air-conditioning. WEAKNESSES    

Considered as premium brand so middle class people think it is unaffordable. Although BLUE STAR protects it’s Position in Domestic AC market but is regularly losing market share. Market penetration is still very low. Low qualities resulting in exports prices being non competitive. OPPORTUNITIES     

Confederation of Indian Industry (CII) has urged the government to reduce special excise duty (SED) on air-conditioners from 16% to 8% in the forthcoming budget. Opportunity to influence Growing Indian middle class in influencing their decisions with regard to the products offered by Blue Star through comparatively lower prices. Advent of Internet provides an excellent opportunity to reach to a large base of customers and cut costs. The increasing presence of multinationals in India for manufacturing be it Samsung, LG, Carrier, Hitachi, thus providing an opportunity for upgrading the quality of manufacture in the country.

THREATS C4 8

BLUE STAR

Strategic Analysis



Likely to face fierce competition from domestic companies as they have well acknowledged brands, an extensive distribution network and better insights about the local market conditions.  Increased threat from cheaper imports, especially from China  MNC's like Samsung, Carrier, LG and Voltas are continuously raising their share while Blue Star despite of increasing sales is losing its market share. MARKETING STRATEGIES 

Product Awareness  Advertising is the main tool in the hands of the company so as to make the consumers aware regarding the different products available in the market.  Above all Advertising is a good business.  Advertising is the marketing force, which helps in mass selling and distribution. The company gives their advertisements through  Road side hoardings, banners & signboards  Newspapers like 'Times of India', Hindustan Times', 'DNA'  Magazines like 'India Today', 'Business Outlook', etc.  It is about to begin with TV Advertisements Consumers come across advertisements for their brands everywhere -television, print, posters, Internet and through sponsorships and goodwill campaigns. With the changing face and speed of communication today, the company is focused on using media specific to audiences.

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Strong Dealer Network The Company has got a strong dealer network all over India and the products are available in each town and area.

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Credit Facilities & Discounts to dealers Dealers, retailers, sub-dealers are also vital to be due to be given due importance. It is also necessary to understand the dealers, retailers, and sub-dealers because they are one of the important people who can push the sales of the company. It was found that dealers mainly want that the company should give them credit facilities and discounts. BLUE STAR is the overall winner in its category. And according to them the dealers are also the controller of the sales to some extent. One of the important information is that most of the dealers ask the customers to wait and assure him the delivery if the particular brand is not available.

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Customer Care It was found that the company more or less analyses what customers are looking for and then incorporate those features in their products. The company provides quick & efficient after sales services. The service mission of BLUE STAR is to become the most customer-oriented company in the country, by building a proactive service organization that continuously strives to create customer satisfaction, by internalizing the best practices of customer relationships management. C4 9

BLUE STAR

Strategic Analysis

Strategic importance

Fig 1: Capability Mapping of Blue Star 1990

Strategic importance

Fig 2: Capability Mapping of HM 2014

Key Opportunities: Some of the strategies adopted by Blue Star Company which prove to be key opportunities for the company of having a competitive advantage above all the companies in the Air conditioning industryC4 10

BLUE STAR

Strategic Analysis

1. International partnership- As it offer the most advanced air conditioning technologies, blue star has entered into several technological collaboration with York international, USA and Climatrol, Italy for the manufacture of air- conditioning equipment- centrifugal chillers, reciprocating chillers, screw chillers, air handling units. 2. Innovative technology- Blue star at the threshold of VRF technology. the technology called (variable refrigerant flue or VRF) invented by Diakin of Japan is now being developed in India. Blue star, which currently imports and sell VRF units in India plans to manufacture its own VRF ACs this year and will position its products competitively against imported ones. 3. Using investment as its major strategies- Blue star sets aside Rs. 8 crore campaign. Out of total Rs. 601 crore, Blue Star Limited central air conditioning and commercial refrigeration- in this year has marked a total investment of Rs. 8 crore on a new campaign for this summer. The main objective behind the move is to show case Blue Star's strength in providing cooling solutions. The value proposition for the new campaign is ‘cooling solutions to help your business do better. 4. Building customers relationships- Blue star company is widening its reach by recently launching “Help line campaign” to many markets in India which will promote its toll free number. The objective is to clear the queries of customer and stay close to them so as to extract the information about the product generating feedback and having good after sales service. 5. Strong dealership hold- The Company has a strong dealer network all over India and the products are available in each town and area. 6. Expanding Business- Blue Star recently executed 4 major projects to set up cargo handling refrigerated facilities at Bangalore, Pune, Hyderabad and Chennai.

Key Challenges: Blue Star management is working on its business environment. 1. The overhang of tough macros continues to plague the company as its order intake is like to plunge or sharp 25% during the current fiscal. 2. Air conditioner margins continued to bear the brunt of high competitive intensity and increased input cost, so there is more pain in store before gain and expect to turn around to yield results 2015.

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BLUE STAR

Strategic Analysis

3. Any major slow down in capex spending in India and in economy activity with respect to infrastructure creation in India is like to dry incremental order intex for its EMP division. 4. The profitability of its cooling product division is vulnerable to rise in input cost increase in Chinese imports, excess capacity and increase competitive intensity.

Valuations & Recommendation: Infrastructure & healthcare developments in India are expected to bring new orders for BSL, however there should be a significant slowdown in order inflows, considering the current macro scenario. Outlook for Cooling Products segment is negative in the coming quarters but situation is expected to start stabilising by H2FY10 with improvement in economic condition due to government’s fiscal & monetary initiatives. Segment 3, i.e. Professional Electronics & Industrial systems, with its business model and diversification among large spectrum of sectors is expected to maintain its margins, though the revenue growth for the segment may be subdued in FY10 as it is directly related to the country’s GDP growth.

Growth & Margins for different segments Revenue Growth (%) SEGMEN H1FY0 H2FY09 FY10 FY11 T 9 E E E Electro Mechanica 26.1 12.0 12.0 25.0 l Projects Cooling 32.0 (6.0) 8.0 15.0 Products Prof Electronics 9.1 20.0 12.0 20.0 and Ind. Systems Table 1: Source - Company & PINC Research

PBIT Margins (%) H1FY0 H2FY09 9 E

FY10 E

FY11 E

11.4

9.6

10.0

10.5

12.2

10.5

10.6

11.0

20.3

20.0

20.0

20.0

Economic Scenario: Credit crunch and negative sentiments will force companies to go slower on new investments. MEP/HVAC players’ role in a project start with a lag of 9-12 months from the inception of the same. In a scenario where companies are facing liquidity issues and going slow on capex, there can be a dip in order inflow for HVAC/ MEP players in H1FY10. Geographical Risk: Blue Star is mostly concentrated in India. The company is exposed to geographical risk due to non-diversification. Any negative development in the Indian economy due to the bleak outlook across the globe will hit all the segments of the company. Raw material prices vs. Client demand: Most of the orders were booked in FY08 & H1FY09 when raw material prices were at their peak and moving further northward. Sharp decline in C4 12

BLUE STAR

Strategic Analysis

commodity prices can lead to bargain for decreasing the order price, which can ultimately shrink the order book size for the company, consequently reducing earnings for the company. Deferring consumption: Gloomy macroeconomic scenario has led to a slowdown in retail consumption and spending resulting in lower demand for consumer goods. Despite softening raw material prices and lower excise duty which should reduce prices, the business is not expected to recover until the sentiment improves. Working Capital Management: High inventory level due to lower sales of cooling products and credit problem in the market will lead to increase in working capital cycle impacting earnings.

Some other recommendations: In the coming years competition will intensify more, so companies will have to fight hard to woo the customers. Crucial role facilitates price control. In other words, lower down its cost of production. 1.

Company should improve there after sales service & should go for warranties for long durations.

2.

Company should also come up with the new schemes for the customers. This will help in attracting more and more prospects.

3.

It was found that most customers owning AC’s were interested in an exchange offer. So, company can also consider exchange offer scheme to beef up its sales.

4.

Electronic media has a very effective reach in each and every potential household, but Blue Star is not using this media. So Blue Star should stress on electronic media to beef up its sales.

5.

The Advertisement should be such that customer develops an emotional attachment with the product.

6.

Company should come out with 0% Finance Scheme. Due to this scheme more and more prospects will enter into the customer base of Blue Star.

7.

The product must be available at most of the places keeping in mind that the distribution cost should remain less.

Last but not the least the company should introduce their consumer electronics products, such as Television and washing machines. C4 13

BLUE STAR

Strategic Analysis

Conclusion: Blue Star is the largest single source for air-conditioning equipment in India. It is India's largest and most preferred air-conditioning and commercial refrigeration company. Through its strategic long-term tie-ups with key and critical auxiliary manufacturers, Blue Star provides its customers many benefits. The brand’s vision is to deliver excitement to the consumers, by providing comfort at its best. It has complete control over core components & technology. The company has strong potential to grow & that through greater innovations. In addition to corporate sector the company has the option to step into the local households by understanding their psychology. Blue Star is India's largest central air-conditioning company. In short it can be said that the company is still growing by making constant efforts

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BLUE STAR

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Strategic Analysis

BLUE STAR

Strategic Analysis

Exhibit 1

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