AIRCONDITIONER INDUSTRY ANALYSIS Subject: Business Strategy Industry: Consumer Durable(Air Conditioner) Company: Bluestar

Haresh Ashar(01) Prashant Arekar(19) Narayanan Palani(09) Devina Deshmukh(02)

INDUSTRY ANALYSIS
CONSUMER DURABLES

Consumer durables Sector can be classified as follows:

Consumer Electronics includes VCD/DVD, home theatre, music players, colour television, cameras, camcorders, portable audio, etc White Goods: include dishwashers, Air Conditioners, water heaters, washing machines, refrigerators, vacuum cleaners, kitchen appliances, non-kitchen appliances, microwaves, built-inappliances, tumble dryer, personal care products, etc. Molded Luggage includes plastics Clocks & Watches

AIR CONDITIONER INDUSTRY

INDUSTRY
-In 2008-09, the estimated total market size for air-conditioning in India was around Rs. 10,250 crores. Of this, the market for central air-conditioning, including central plants, packaged/ducted systems and VRF systems was about Rs. 5750 crores, while the market for room air conditioners comprised the balance Rs. 4500 crores. -The commercial air-conditioning segment catering to corporate and commercial customers amounted to around Rs. 8000 crores. -The market for commercial refrigeration equipment and systems was estimated at around Rs. 2000 crores.

Rs. 2,000 Crores Rs. 5,750 Crores

Rs. 4,500 Crores

Central and Packaged Airconditioning Systems

PORTERS FIVE FORCES/1

Threat of new entrants(LOW)
Capital Requirements
The initial investment that goes into setting a plant is considerably high as there needs to be sufficient investment in providing quality components and also in R&D to meet the changing technology. Thus there is a low threat of entry into this sector.

Economies of Scale
Manufacturers in HVAC industry need to build economies of scale due to high fixed costs and meet the demands. Due to this there is a low threat of entry into this sector.

Customized Products
In the central and packaged AC system level of customization is high and it is not possible for new player to do that customization. Due to customization, the threat of new entrants is low.

Switching costs
It is not easy to switch to the new players in the field due to high initial investment & also a number of collaborations & contracts exist among the players of the world who are into the same line of business. There is thus a high switching cost and thus a low threat to entry.

Distribution Channels
The existing players have strong distribution channels and thus difficult to match proving to be a high barrier of entry.

PORTERS FIVE FORCES/2

Bargaining power of suppliers(HIGH)
Supplier Concentration
There is comparatively higher number of suppliers. So the bargaining power of suppliers is low.

Importance of volume to suppliers

The industry is dependent on volume sales and hence facilitates bulk buying. This reduces the bargaining power of the suppliers.

Presence of substitute inputs

In the current scenario there is little substitution that is possible to the raw materials that go into the manufacturing of air conditioning products. This increases the bargaining power of suppliers.

PORTERS FIVE FORCES/3

Bargaining power of buyers(HIGH) Quality vs Performance
There are large numbers of players in the market. So quality and performance is the most important factor while selecting the product. It gives high bargaining power to buyers.

Backward Integration
Backward integration to make the air conditioners means a high investment and also expertise in the manufacturing would be required. Bargaining power would be less since the probability that the companies would integrate backward would be less.

PORTERS FIVE FORCES/4

Firm Rivalry Size of Industry
The industry is not concentrated & there are large number of Indian companies and MNCs, hence there is a high degree of rivalry.

Industry Growth rate

As long as the entire economy is in a growth face and real estate sector is in boom there will be a huge growth in the industry

Fixed Cost
The manufacturers of air conditioners and refrigeration products have high fixed costs as there is heavy investment in plant and the development of new technologies thus decreasing the degree of rivalry amongst them.

Product Differentiation
Product differentiation is very less hence high degree of rivalry.

Brand Identity / Client loyalty

This plays a very important role in the market of HVAC industry. Generally it is seen once a client go for some brand he stick to the same brand in the future also.

MARKET SHARE IN AIR-CONDITIONING AND COMMERCIAL REFRIGERATION

19.54%

15.13% 65.33%

Blue Star Voltas Others

MARKET SHARE IN CENTRAL AND PACKAGED AIRCONDITIONING

31.34%

52.31%

Blue Star Voltas Others

16.35%

MARKET SHARE IN ROOM AC

25%

53% 16%

LG Electronics Voltas Blue Star Others

6%

PORTERS FIVE FORCES/5

DEGREE OF COMPETITION

H I G H

STRATEGIC GROUP WITHIN INDIAN AIRCONDITIONING INDUSTRY

Category: Based on Market Segment
Commercial Market and Consumer Market: Carrier,Voltas,LG,Bluestar,Hitachi
Strong at Commercial Market: Carrier, Bluestar , Hitachi Strong at Consumer Market: LG, Voltas

Mobility Barrier: Product Customization E.g: Bluestars has a strong Product Standardization in Industry. Economy of scale will go down if it focus on product customizations. So B2C will be a challenge for Bluestar

Found by Mohan T. Advani in 1943 India's largest and most preferred airconditioning and commercial refrigeration company with an annual turnover of Rs. 1178 crores. It has been associated with the most prestigious corporate and commercial installations in the country.

IndustryLifeCycle
A growth industry is one where first-time demand is expanding rapidly as new consumers enter the marketplace. Typically, demand takes off when consumers become familiar with the product, prices fall with the attainment of economies of scale, and distribution channels develop. 1. During an industrys growth stage, there tends to be little rivalry. Rapid growth in demand enables companies to expand their revenues and profits without taking market share away from competitors. 2. Growth industries provide opportunities for firms to expand their market share and revenues in a relatively low rivalry situation. Firms entering at this stage avoid the high expenses of initial product development. The industry views that this year air conditioner sales will register 15 percent growth over last year when a total of 3.4 million units (both home air conditioner and industrial air conditioner) were sold in the country, B. Thiagarajan, president (Air Conditioning & Refrigeration Products Group), Blue Star Ltd

Latest NEWS
Blue Star Ltd. has just launched a new range of contemporary and stylish room airconditioners for the residential segment which will be available in all the retail channels across the country. These air-conditioners, apart from modern features, offer higher energy efficiency resulting in significant power savings.

StrenghtsWeaknessOpportunityThreat/1
STRENGHTS WEAKNESSES

1. Manufactures open-type centrifugal chillers with ozone friendly refrigerant HCFC 123. 2. Only Blue Star manufactures variable air volume systems for economic localized cooling control, air handling units with dependable ratings to factory precision 3. Air-conditioning of the largest number of synthetic fiber plants in India exceeding 25,000 Tons and 36 customers. 4. Largest Industrial air-conditioning contracts in India Rs.40 crores. 5. First to manufacture semi hermetic reciprocating compressors in India

1. Not a premium brand. 2. Although BLUE STAR protects its Position in Domestic AC market but is regularly losing market share. 3. Market share is low and not having penetration opportunity. 4. Low qualities resulting in exports prices being non competitive.

StrenghtsWeaknessOpportunityThreat/2
OPPORTUNITIES THREATS 1. Opportunity to influence Growing 1. The increasing presence of Indian middle class in influencing their multinationals in India for decisions with regard to the products manufacturing be it Samsung, LG, offered by Blue Star through Carrier, Hitachi, thus providing an comparatively lower prices. HIGH threat to compete in the market 2. Advent of Internet provides an 2. Likely to face fierce competition from excellent opportunity to reach to a domestic companies as they have welllarge base of customers and cut costs. acknowledged brands, an extensive 3. Confederation of Indian Industry (CII) distribution network and better has urged the government to reduce insights about the local market special excise duty (SED) on airconditions. conditioners from 16% to 8% in the 3. Less Market Share forthcoming budget.

TOWS Strategic Alternatives Matrix

External Opportunities (O) 1. Reach to a large base of customers 2. Special excise duty (SED) on air-conditioners from 16% to 8% in the forthcoming budget. External Threats (T) 1.Domestic Competition 2.Foreign Players(Hitachi, LG etc)

Internal Strengths (S) 1. open-type centrifugal chillers 2. Synthetic fiber plants in India exceeding 25,000 Tons and 36 customers.

SO "Maxi-Maxi" Strategy Strategies that use strengths to maximize opportunities. Open-type centrifugal chillers -Reach to a large base of customers

ST "Maxi-Mini" Strategy Strategies that use strengths to minimize threats. Effective use of fiber plants to increase productivity and decrease the power of competitors in commercial market

Internal Weaknesses (W) 1.Less Market Share 2.Not a premium brand 3. Low qualities resulting in exports prices being non competitive.

WO "Mini-Maxi" Strategy Strategies that minimize weaknesses by taking advantage of opportunities. Reach to a large base of customers Reach to top level as Premium Brand and increase market share.

WT "Mini-Mini" Strategy Strategies that minimize weaknesses and avoid threats. Strong distribution channel and large customer base to compete with Carriers. LG and other competitors

PEST
Political The green trend is taking off in a big way in the asia pacific. Global warming continues to remain a major factor propelling market demand, especially in the residential segment. Economic Growing affluent middle class population,robust economic growth coupled with the booming retail sector will ensure that the expectation of a 2530 percent growth in 2011 is a reality for this segment. Legal Backed by the environmental Protection agency (epa), The US government and 190 countries world-wide, january 1 marked the beginning of the phase out of hydrochloroflurocarbons. Technical The us department of energys national renewable energy laboratory has invented a new air conditioning process with the potential of using 50 percent to 90 percent less energy than todays topof-the-line units.

VALUE CHAIN(MOVED UP)

The company has moved up in the value chain by offering system integration, apart from distributing products like analytical instruments, medical electronics, data communication products, material testing, and measuring instruments from global manufacturers.

COMMERCIAL MARKET VS CONSUMER MARKET/1

Consumer market Pros: The residential segment, growing at 20% annually, comprises 4.5 LAKH UNITS WHEREIN WINDOW acs ACCOUNT FOR 1.5 lakh units and the split ac segment for about 3 lakh units Huge market With over 350 exclusive distributors and several multi brand dealers,carriers is leading the market in india Cons: Price cut Heavy competition Commercial market Pros: Industry:25%annual growth rate Low margin Consumer market companies like lg are not interested in commercial market No:1 player:bluestar Cons: Carrier is a strong player High competition

COMMERCIAL MARKET VS CONSUMER MARKET/2

Consumer Market ( Strategy: Price Cut) Commercial Market (Strategy: Volume)

1. LG Voted India's Most 1. The commercial air conditioning Trusted Consumer Durable Brand comprises of the ductable split ACs to 2. Voltas India Ltd. became the first large sized chillers. This segment player in the air-conditioner market to comprises of retail chains, MNCs, offer consumers an air-conditioner in IT/ITeS sectors, BPOs, call centres, the Rs 10,000 price range. institutes, malls, etc. 3. While the key players in the popular 2. The market is of around Rs 3,600 segment of the air-conditioner market crores! are LG, Voltas, Carrier, and Samsung, 3. Blue star which has recorded sales of the premium segment is dominated around 1.5 lakh units of window and by Japanese brands such as Hitachi, split AC's in the fiscal ended March 09 Daikin, and National. is expecting a growth of around 10-15 per cent in this fiscal.

COMPARISON

INTERNAL ANALYSIS
Key Resources of Blue Star:
State of the art manufacturing facilities located at Thane, Bharuch, Dadra, Himachal and Wada Technical manpower recruit and retain employees and business partners who relate to customeroriented, specialist culture of the company Extensive use of IT to enhance productivity and product development capabilities Strategic partnerships with York- to manufacture its own chillers Tie up with Rheem for technical support for building world class manufacturing unit at Dadra Long term arrangements with key suppliers e.g. blue star sources its Switchgears from Siemens Compressors from Danfoss of Netherlands Robust R&D facilities for continuous up gradation Consultants from various industries are also hired for specific industrial design projects Technical, engineering and contracting expertise Competitive edge Blue Star M & E designs, engineers & executes central air-conditioning cooling solutions Expertise in creation of contemporary designs, project management skills & efficient service Strong expertise in Green Building projects- establishment intended to reduce operating costs like energy and water Use of energy efficient & eco-friendly equipment thereby reducing energy consumption Use of non toxic, recycled and environmentally friendly materials for construction Efficient use of water and water recycling Effective controls and building management systems

Capabilities:

INTERNAL ANALYSIS
Green building project: (continue) Minimal disturbance to landscape and site condition Excellent indoor environment quality for human safety and comfort Use of renewable energy Energy efficient designs of HVAC Systems Well formulated installation methods for professional management of project sites All products are designed on the energy-efficiency platform, and offer a host of advanced featuresincluding tandem scroll technology, hiper and hisen packaged airconditioners and more recently the screw chillers and VRF systems. Provides indoor air quality management services-fresh air management, energy recovery ventilators, duct cleaning, UVC emitters and air balancing and leakage detection With well established in house R&D for new product development and an integrated manufacturing set-up to deliver high quality products in a short lead time Wide expertise in domestic and international markets, they are well set to offer contract manufacturing Offer products to meet new market requirements right from conceptualization to delivery of large volumes in the brands specified

STRATEGY
Functional Level Strategy:
Manufacturing Strategy: Eco-friendly products Extensive use of R& D in manufacturing products Customer-oriented products Continuous up gradation of skills of operators Strong network of suppliers

Marketing Strategy
Product awareness through newspaper ads, magazines etc Strong dealer network all over India Credit facilities & Discounts to dealers Customer care after sales service Pull strategy

Human resource Strategy

Skilled manpower largest pool of qualified & trained air-conditioning & refrigeration engineers Training & development of operators

STRATEGY
Information Management Strategy:
Extensive use of IT for product & productivity enhancement Tie-ups with reputed technical institutions like IIT, Mumbai for individual project execution Tie-ups with reputed companies for knowledge sharing

R & D Strategy:
Product Innovation:- provide differentiated products & expert solutions Process improvement:o Technological Leader :- as market leaders blue star sets standards for products, practices & services

STRATEGY
Business Level Strategy: Cost Leadership: Strategic Sourcing : -Lean manufacturing: Production efforts aimed at reduction of wastages -R & D: Use of extensive R&D for energy efficient product development -Innovation: Offer innovated products to customers

Dual Competitive Strategy : Differentiation: -Technology -Customers Intellectual Property Rights: TRIPS(Trade Related Aspects of the Intellectual properties Agreement) The Indian Copyright Act 1957 was amended in 1999, The Patent Act 1970 was amended in 1999 & 2003, Trade Mark Act 1999, The Design Act 2000

KEY SUCCESS FACTORS

KEY CHALLENGES

TETRA THREAT FRAMEWORK

TETRA/1
Threat of Imitation Threat of imitation is high for Blue Star. There are number of players in the market like Hitachi, Voltas, LG etc. They can easily imitate what Blue Star has done by using the reverse engineering. They can also recruit existing Blue Star employee and can easily copy the new developments in Blue Star products. Upgradation of technology is one way by which threat of imitation has been reduced by Blue star. They have upgraded the technology in the long run and have been doing so to keep the imitators at bay. Threat of Substitution

Threat of substitution is almost nil for company. Most of the people now shifting to air conditioners from the conventional cooling products like fan, coolers etc. Leapfrogging is the way out opted by Blue star as by this it looks to respond to the threat of substitution; it involves trying to oust substitute threat by looking for a performance improvement and/or value innovation that promises even better performance . This is one field where Blue star has been consistent and has been successful to avoid competition by constantly renovating especially in the institutional domain of AC selling.

TETRA/2
Threat of Hold Up
Holdup threatens to divert the sustained added value to buyers, and suppliers. Blue star has had a hold up problem when the suppliers of a big order at Infosys as the suppliers were not cooperating with the management. Even if the company can protect its added value from the threats of imitation and substitution, the ability of its owners to appropriate the added value cannot be taken for granted. Long term contracting, building mutual dependence and developing trust were the most important factors that helped Blue star to counter the threat of hold up.

Threat of Slack
This refers to the difference between the potential values available to the company and how much of it is the company able to capture. This happens when the company has been consistently making excess profits or has done so presently. The way to respond and eliminate this slack is to ensure optimum utilisation of resources. Blue Star is continuously making huge investments in state-of-art technologies in manufacturing, IT etc all with the overall objective of being more efficient and scaling up the production to meet the higher levels of energy requirements of the country. The problem of slack is not imminent in Blue star as the firm is not performing as per the competitive standards of the industry and has been making less profit.

ADDING FRAMEWORK
Ghemawat provides a framework the ADDING Value Scorecardto help companies assess whether a particular strategic move makes sense. In other words, will it add value to the business both locally and globally. The acronym stands for
Adding volume, or growth; Decreasing costs; Differentiating or increasing willingnesstopay; Improving industry attractiveness or bargaining power; Normalizing (or optimizing) risk; and Generating and deploying knowledge (and other resources and capabilities.

Levers of Value Addition Adding Value

DCs Attempts/Achievements It is Indias largest central air-conditioning company that caters to the industrial, commercial and hospitality sectors. The extensive use of IT to enhance productivity and product development capabilities has helped Blue star decrease cost in manufacturing Better PUF Installation and Brazing technology used in ACs than competitors With the increase in the number of malls and other real estate cropping up and better technology and customisation options being offered by Blue star they have decreased the bargaining power of buyers

Decreasing Cost

Differentiating/Increasing willingness-to-pay Improving Industry attractiveness/ bargaining power

Normalizing Risk

They have a Risk Management framework under which all internal and external risks across the various business functions are identified, assessed and acted upon by risk owners
Blue Star has business alliances with world renowned technology leaders such as Rheem Mfg Co, USA; Hitachi, Japan; Eaton - Williams, UK; Thales e-Security Ltd., UK; Jeol, Japan and many others, to offer superior products and solutions to customers.

Generating and updating resources

CAGE Framework
CAGE Cultural Administrative Geographical Economical Malaysia Being Asia within not a AMDB ensured bids for turnkey projects. Advantage being Real estate

within ASEAN region

company AMDB ensured sharing of resources

huge difference

UAE / Middle East

Being Asia

within not a

Local distributors act as the face of the company negotiation government for with

All

US/European

Easy to export material deliver expertise India. and domain from

MNCs have presence.

huge difference

3TESTS
Attractiveness Test: As long as the entire economy is in a growth face and real estate sector is in boom there will be a huge growth in the industry Cost of Entry Test: Manufacturers in HVAC industry need to build economies of scale due to high fixed costs and meet the demands. Due to this there is a low threat of entry into this sector. Cost of entry > Expected returns Better Off Test: Established Synthetic fiber plants in India exceeding 25,000 Tons and 36 customers. Strong Retail Channel across India

THE GLOBALIZATION OF PRODUCTION AND MARKETS

Blue Star's five modern manufacturing facilities coupled with a robust product development team and a significant contribution from the original equipment manufacturers and export market has given Blue Star a cutting edge in manufacturing. International Partnerships: In its quest to offer the most advanced air-conditioning technologies, Blue Star has entered into several technical collaborations with York International, USA, Rheem Manufacturing Co., USA and Climatrol, Italy for the manufacture of air-conditioning equipment - centrifugal chillers, reciprocating chillers, screw chillers, air handling units. And collaboration with York Tempmaster, for variable air volume systems.

Blue Star M & E Engineering Snd. Bhd. - Malaysia A joint venture formed in 1993 between Arab-Malaysian Development Bhd. (AMDB) and Blue Star Limited of India, Focuses on taking care of the Heating, Ventilation, Airconditioning and Refrigeration (HVACR) installation business in Malaysia.

Blue Star Middle East Presence since 1976 through collaborating with local group of engineers and distributors. Based in Dubai, Bluestar caters to demands in UAE, Qatar, Bahrain, Oman and Kuwait. Mainly focused on HVAC contracts.

NATIONAL COMPETITIVE ADVANTAGE

Factor endowments: Basic factors: 1. Manufactures open-type centrifugal chillers with ozone friendly refrigerant HCFC 123. 2. Only Blue Star manufactures variable air volume systems for economic localized cooling control, air handling units with dependable ratings to factory precision Advanced factors: Established Synthetic fiber plants in India exceeding 25,000 Tons and 36 customers. Local demand conditions: 1. The industry views that this year air conditioner sales will register 15 percent growth over last year when a total of 3.4 million units (both home air conditioner and industrial air conditioner) were sold in the country Related and supporting industries: Consumer Market- Air conditioner Strategy, structure, and rivalry: The industry is not concentrated & there are large number of Indian companies and MNCs, hence there is a high degree of rivalry. Bluestar experience a vigorous domestic rivalry look for ways to improve efficiency, which in turn makes them better international competitors.

RECOMMENDATIONS
Target B2B and Expand the Market Share Increase the green building capabilities Reduce pollution from construction activities by controlling soil erosion, water way sedimentation and airborne dust generation. Provide dedicated spaces for proper collection, storage and disposal of recyclable materials and ensure recycling. Due to Domestic rivalry Bluestar has to innovate, improve quality, reduce costs, and invest in upgrading advanced factors

HAVE A BLUE DAY AHEAD!