Speed Breakers Galore - Maruti

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The Building Blocks Contd...

MUL was known for its 'value-for-money pricing' strategy, which had been made possible due to the high levels of indigenisation of its vehicles. While the Maruti 800, Zen, Esteem and Omni were indigenised to the extent of over 90%, the Gypsy was indigenised to the extent of 82% and the Alto to the extent of 76%. The company had a network of about 375 vendors and had several joint ventures with some of them to source its raw material requirements.

Its sales (comprising 112 dealers and sales outlets in 86 locations) and service (comprising 1,010 service workshops covering 412 locations) network was one of the largest in the country. The Stumbling Blocks Till October 1998, MUL enjoyed a market share of 83.6%. Reacting to the increasing number of players, Khattar commented, "Obviously, our market share will decline with the entry of new manufacturers and models in percentage terms, but not in actual volumes." With cars ranging from Rs 2.09 lakh to Rs 6.74 lakh, problems associated with an ever-expanding product portfolio constantly plagued MUL. Besides the declining market share, cannibalization was another issue the company could ill-afford to ignore. Forced to take stock of what went wrong, MUL realized that it was dependent to a large extent on a single product - the Maruti 800.

The 800, along with the Omni (built on the same platform) accounted for 75% of unit sales in the car market in 1998, it had always been the 'breadwinner' for MUL. One of the biggest success sagas in Indian automobile history, the 800 started losing its sheen in the 1990s as newer players emerged in the market. The entry-level segment ceased to be the center of action as easy car finance availability and the lure of new cars made the Rs 3 lakh-4 lakh segment the most attractive one.

The fact that MUL made only minor changes in the models over the years led to the perception that MUL was selling old models. To tackle these problems, MUL adopted a two-pronged strategy. One, to introduce new models; two, it decided to increase the number of variants rapidly, offering a new model with every increase of Rs 25,000. MUL also revamped its engines and took the 800 to semi-urban and rural areas, to compensate for the declining urban sales.

The company was aiming to move entry-level prices up without losing out on volumes by launching cars in the segment just above the 800. As part of this, Baleno, Wagon-R and Alto³ were launched in quick succession. However, despite favorable reviews, these cars did not go on to become the saviors MUL was hoping for.

The engine-revamp exercise for the 800 had pushed its price close to the base-model of rival Daewoo's Matiz, eroding the price advantage on which the model survived. As a final resort, MUL decided to play what it thought was its trump card - price reduction. The move was also justified on the grounds that the company was following the Product Pyramid profit model.⁴

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3] Alto was launched in the same league as the 800. Industry observers contended that Alto's launch in the 800-cc category signaled the beginning of a gradual phasing out of the 800. However, MUL sources were quick to deny this and asserted that the 800 would be retained.
4] The Product Pyramid incorporated the distinct customer segments and their varied purchase-behavior in terms of style, color, feature and price preferences. The base of the Pyramid was occupied by low-price, high-volume products like the 800, where the margins were slim. The apex of the Pyramid was occupied by high-price, low-volume products such as the Maruti Esteem VX. Although profits were concentrated near the top, the base played a crucial role as it created an entry-barrier for competitors, and insulated the profitable area near the top from competition. In the specific case of cars, the most common model was the 'New Product Profits Model.' Thus, the profits associated with a car followed the 'S' curve of its life-cycle, and declined as the product neared the end of the maturity phase. MUL's decision to drop the prices of all the versions of the Maruti 800 came at this stage.

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