Strategic Management for Beginners: May 2020

From a small time salaried class, you need to graduate to an Intrapreneur to add value to your employer and grow in the scalar chain.
As an Entrepreneur, you should know how to take meaningful corporate actions. It is an interesting journey through 92 years and 5 generations; creating value by holding wealth in Trust for this country according to the vision of Jamanlal Bajaj, the founder and follower of Mahatma Gandhiji.
Have a nice reading:

The origins of the Bajaj group date back to 1926—the year it was founded by Jamnalal Bajaj, Rahul's grandfather Jamnalal Bajaj a freedom fighter, philanthropist and close confidante of Mahatma Gandhi. The adopted ‘fifth’ son of Mahatma Gandhi, and the ‘merchant prince’ who held the wealth he created in trust for the people of his country. Trust – a simple word that contains a whole philosophy handed down by Jamnalal Bajaj to his successors. He valued honesty over profit, actions over words and common good over individual gain. In 1931, at the behest of Mahatma Gandhi, Bajaj founded a sugar factory in Lakhimpur Kheri of Uttar Pradesh, paving the way for the formation of what was originally the flagship company of the group, the Hindusthan Sugar Mills Ltd, renamed Bajaj Hindusthan Ltd in 1988, holding wealth in Trust for the people of this country

Rahul’s father Kamalnayan Bajaj succeeded him in 1942. Kamalnayan started the precursor to Bajaj Auto, the Bachraj Trading Corp. Pvt. Ltd in Nov 1945. Within three years he expanded into new businesses, including cement, electrical appliances and scooters.

Rahul Bajaj worked as a junior purchase officer in Mukand, the steel company of the group, and later left for Harvard Business School for an MBA. He took over control of the Bajaj group in 1965. He took over at a time when India was a socialist state shackled by the stringent rules and regulations of the licence Raj and nothing could be done without the government’s permission.Rahul Bajaj became chief executive officer (CEO) of Bajaj Auto (BAL) in 1968; he was 30.

Taken together, the Bajaj group has revenues of more than ₹ 50,000 crore in 2014. The group comprises 34 companies including Bajaj Auto Ltd, Bajaj Holdings and Investments Ltd, Mukand Ltd, Bajaj Electricals Ltd, Bajaj International Pvt. Ltd, Bajaj Allianz General Insurance Pvt. Ltd and Bajaj Finserv Ltd..

He relaxes at home on the premises of Bajaj Auto's plant in Akurdi, near Pune, Rahul Bajaj, at 80. He oversaw the successful transition of Bajaj Auto from the ‘Hamara Bajaj’ days through its popular Chetak brand of scooters to the World’s Favourite Indian — Bajaj now sells its motorcycles in over 70 countries.

Bajaj Finance, run by younger son Sanjiv Bajaj, has been on a tear over the past few years, and the stock has been included in the BSE Sensex from December 24, 2018 as a proxy for the financial services sector.

Meanwhile, elder son Rajiv Bajaj is planning to introduce new superbikes in association with the British motorcycle maker Triumph, launch electric vehicles, and capture the commercial car market with the quadricycle Qute. Mukand Ltd, the group's steel arm, has started work on the Rs 600-crore steel rolling plant of Mukand Sumi Special Steel in Karnataka - a joint venture between Mukand Ltd (run by cousin Niraj Bajaj) and Sumitomo Corporation of Japan.

The Bajaj group ended the year 2018 as the fourth biggest in the country by market capitalisation (the market cap of the group was Rs 3.77 lakh crore on December 31, 2018, as against Rs 30,321 crore on March 31, 2007), behind just HDFC, Tata group and Reliance Industries, and pipping such worthies as the AV Birla group, the Wadias, the Godrejs, the Mahindras, the Adanis...They are now the third-largest family group after Tatas and Ambanis.

Though the group is still relatively small in terms of revenues - group revenues were Rs 65,000 crore as of March 2018 (including over Rs 17,000 crore gross written premium of two insurance companies) - it is immensely profitable. In FY18, it boasted profits of around Rs 10,000 crore. While most people still associate the group with Bajaj Auto, over the past decade, revenue and profit growth has been driven by the financial services companies headed by Sanjiv.

Till 2007, the finance business hardly existed. Because Bajaj Auto was so cash rich, it had an auto financing division for Bajaj two-wheelers. Rahul Bajaj demerged it from the auto business to create Bajaj Finserv, besides creating a holding company, Bajaj Holdings & Investments (BHIL), with the cash pool that both auto and finance businesses could access.

During the year 2006-07 the company incorporated PT Bajaj Auto Indonesia as a subsidiary company in Indonesia with an issued and subscribed capital of US$ 12500000.

Bajaj Holdings & Investment Ltd (BHIL) (formerly known as Bajaj Auto Ltd) is acting as a primary investment company and focusing on new business opportunities. BHIL holds strategic stakes of 31.54% in Bajaj Auto Ltd. (BAL) 39.29% in Bajaj Finserv Ltd. (BFS) and 24% in Maharashtra Scooters Ltd. (MSL). BHIL is essentially an investment company. Its focus is on earning income through dividends interest and profits on investments held. It is largely dependent on the equity and debt markets for its income.As the part of the scheme the existing Bajaj Auto Ltd was renamed as Bajaj Holdings and Investment Ltd. The appointed date of this de-merger was closing hours of business on March 31 2007. A fresh certificate of incorporation in the new name of the company has been issued by the Registrar of companies Maharashtra on March 5 2008.On 31 January 2017 BHIL's Board of Directors approved proposal for delisting the company's GDRs from the London Stock Exchange. The GDRs were delisted from the London Stock Exchange with effect from 24 March 2017.

Finserv is fast catching up with Rajiv's Bajaj Auto: the firm with a finger in both insurance and lending has seen a huge turnaround from a loss of Rs 32 crore in 2007/08 to a profit of Rs 1,338 crore in 2011/12. In comparison, Rajiv's auto business profits have jumped four times from Rs 726 crore to Rs 2,990 crore during the same period.

"We don't want to act like venture capitalists. We'd rather focus on the long term and build businesses which we think have tremendous value," says Sanjiv, sitting in his swanky sixth-floor Pune office. "Choosing when to grow, and growth of the right quality are also important parts of strategy."Sanjiv makes it a point to spend time interacting with financial regulators. He says the nature of auto manufacturing is different because, once emissions and sound rules are followed, the product can be manufactured without fear of regulations changing.Sanjiv believes there should be no chasing of market share at the cost of profits. Sanjiv always asks two questions about any fresh business proposal. Can it scale to become a billion-dollar business? And, how will it be different from others in the same field? "Once broad goals are set, he gives the operating CEO a free hand" says Rajeev Jain, who heads Bajaj Finance Ltd, a non-banking finance company (NBFC).

"The Bajaj group rightly sensed that financial services was going to boom and stayed focused on it, cashing in on the big data," says Raamdeo Agrawal, co-founder of Motilal Oswal Financial Services. By Dec 2018, the two listed financial services businesses - lending arm Bajaj Finance and its holding company Bajaj Finserv - are together around three times the market size (Rs 2.55 lakh crore on December 31, 2018) of the far better known Bajaj Auto, the third-largest motorcycle maker in the world. While conquering new heights on one side, the Bajaj group is only now trying to get equally aggressive in its other two businesses - electricals and steel.

In 2001, soon after insurance was opened to the private sector, the Bajaj group had set up both a life and a non-life insurance company in partnership with the German insurer Allianz Group - Bajaj Allianz Life Insurance and Bajaj Allianz General Insurance. After the demerger in 2008, both were brought under Bajaj Finserv, and a non-banking finance company (NBFC), Bajaj Finance Ltd (BFL), floated under it (Bajaj Finserv has 55 per cent stake in BFL and 74 per cent each in two insurance companies). Sanjiv and Nanoo Pamnani, Vice-Chairman, BFL interviewed over 30 candidates before choosing Rajeev Jain as Managing Director of BFL - and it is this trio of Bajaj, Pamnani and Jain that has since charted the company's amazing rise. These two account for over 45 per cent of BFL's business. SMEs account for another 30 per cent; commercial lending and rural business account for the remaining portion of the pie.

Jain believes BFL has entrepreneurial nimbleness and institutional strength. "We're constantly innovating and disrupting, identifying the gaps in our product portfolio and filling them," he says. Sanjiv adds one more reason. "We looked at long-term business opportunities and stayed away from short-term profitable distractions." For instance, BFL shut down its two-year-old infrastructure lending business in 2012 sensing a downturn.

In the 11 years Jain has steered the company, revenues have grown from ₹503 crore to ₹13,466 crore in March 2018, a compound annual growth rate (CAGR) of 39%, and profits have jumped from ₹21 crore to ₹2,647 crore. In these years, Bajaj Finance’s market capitalisation has shot up from ₹900 crore to ₹1,10,000 crore, making it the Bajaj group’s most valuable company. And in the last quarter of FY19, its profits jumped 57% to ₹1,176 crore from the same period last year. Investors seem to love the story. In the aftermath of the carnage after a large non-banking finance company (NBFC), IL&FS, defaulted on its borrowings, Bajaj Finance was one of few stocks to recover lost ground. Its stock price rose to ₹3,131 in early May after losing a third of its value when it fell to ₹1,974 in October 2018.Over the years, with extensive use of technology, BFL has striven to make borrowing easier and less costly. It claims to process loans in 30 seconds. "When we entered the business, the processing time was four days," says Jain. To make things easier, BFL distributed existing member identification (EMI) cards to 15 million customers. The company's Wallet app provides instant loans of Rs 5,000-15,000 to those with EMI cards. The company has also launched a credit card in partnership with RBL Bank; over half a million have been distributed in two years.

To increase its customer base - the costliest part of any financial services company's operations - BFL uses cross-selling and creates 'propensity models' based on analytics. Of the 15 million new loans BFL gave in the last financial year, 9.2 million were to repeat customers.

Much of BFL's consumer financing business comes from tie-ups with manufacturers, which leads to financing from Bajaj being provided routinely - often at no interest - to buyers. "Winning over business houses is a hard job; much tougher than dealing with retail customers," says Jain. Its partners in consumer durables financing include LG, Samsung and Sony.

"They give us a commission for the additional sales they get because of our financing, usually out of their marketing spend. This enables us to offer zero per cent interest. But they have to be convinced we're adding value."

The insurance business has also increased in the past few years. "In general insurance, the margins are razor thin. But we have been able to grow the business faster compared to the industry. The general business is Rs 1.5 lakh crore. The industry's annual growth is 16-17 per cent, but we grow at 24-25 per cent," says Tapan Singhel, MD and CEO, Bajaj Allianz General Insurance.

The combined market capitalisation of Bajaj Finserv and Bajaj Finance, the two listed companies he heads, stood at ₹2.6 lakh crore as of end June 2018 — about 32 times higher than what it was at the end of fiscal 2008 — as Bajaj diversified the business into consumer and SME finance, insurance, financial advisory and wealth management, from primarily auto finance in 2008.

BFL has democratised entrepreneurship within the company. "Once we're convinced of an employee's new idea, we give him all the tools to build the business," says Sanjiv. "We have 30 different CEOs running 30 different lines of business. The entrepreneurial freedom we have given employees helps us keep attrition low."

As India's economy grows, so will the loan market. Jain maintains that the best for BFL is yet to come. "The opportunity will increase as the country's GDP per capita crosses $2,000, which it is expected to do by 2020/21," says Sanjiv. "We are committed to growing our balance sheet by 25-27 per cent each year and net income by 20-22 per cent, in the medium term. We want to double our balance sheet and profit in the next three-and-a-half years." He believes that while BFL's range of products is largely complete, distribution coverage - despite 862 urban branches and 751 rural ones - can still be doubled. "We now serve a Rs 14 lakh crore market but want it to become a Rs 30 lakh crore market in the next decade."

Rahul Bajaj's brother Shishir Bajaj and his son Kushagra separated from the group entirely in 2008, taking the sugar and power business, Bajaj Hindusthan Sugar, and the consumer care business, Bajaj Consumer Care, which they had been running, with them. Post the exit of Shishir and family, the Bajajs formalised their succession and ownership process. In June 2018, the 22 members of the family signed a Family Settlement Agreement (FSA) which delineates how the family wealth will be divided and who will manage which companies.

Rajeev Bajaj has worked at Bajaj Auto in the areas of Manufacturing & Supply Chain (1990-95), R+D and Engineering (1995-2000), and Marketing and Sales (2000-2005), and has been its Managing Director since April 2005.

Rajiv Bajaj has his own plans to put Bajaj Auto on a high-growth, high-profit trajectory with super bikes, electric vehicles and the quadricycle. Bajaj Auto reported 31 per cent growth in motorcycle sales in December at 2,98,855 units. The overall sales including three-wheelers increased by 18 per cent to 3,46,199 units. The exports stood at 165,848 units in the month, an increase of 16 per cent.

Rajiv says his focused business strategy works in favour of the company. "Do whatever you think best, but be the best at whatever you do." This motto, of Rajiv's grandfather Kamalnayan Bajaj, repeated to him by Rahul Bajaj when Rajiv joined Bajaj Auto (BAL) in the mid 1990s, resonates in his mind. At that time, BAL exports were almost nil; the likes of Yamaha, Suzuki, Honda, Kawasaki, BMW, Ducati, Harley Davidson and Triumph dominated the global two-wheeler market.

"Our total manpower at the time was about 10,000, while a company like Honda had 10,000 people in its R&D division alone," says Rajiv. He decided - in keeping with his learnings from marketing gurus like Al Ries and Jack Trout - to narrow BAL's focus.

He decided that the company would not make all kinds of two-wheelers but stick to one segment: motorcycles. "Across the world, it was the biggest in generating sales and profits and had the highest profile and the most sophisticated technology," Rajiv says. If that meant giving up on mopeds and scooters - despite the reputation the Chetak had acquired - Rajiv decided he would do so. The decision was highly controversial, with even Rahul Bajaj opposing it, but Rajiv was determined. (BAL, however, did not give up three-wheeler manufacturing - it still makes many of the 'autos' and three-wheeler goods carriers - 62 per cent market share - on Indian streets and also exports them to several African and Southeast Asian countries.)

In the 1970s, when Italy's Piaggio didn’t renew Bajaj's licence, Rahul Bajaj began manufacturing his own brand of scooters with names like Chetak and Super.BAL had earlier made motorcycles in 1986, in collaboration with Kawasaki, but the alliance ran into rough weather after the Japanese company raised quality issues. Restarting work on a new bike, the Pulsar, in 1998, Rajiv focused heavily on quality. He introduced the digital twin spark ignition technology, which has since become a Bajaj trademark. Pradeep Shrivastava, who started with Tata Motors, was put in charge of the factory in Chakan, Maharashtra, which would manufacture Pulsars, the first lot being produced in 2001. Shrivastava reduced the number of suppliers - each component earlier had multiple suppliers - from 800 to 200, and introduced the tough 'Japanese work culture' with the guidance of a Japanese consultant. Productivity shot up - while at the peak 25,000 workers produced 1 million scooters annually, a workforce of 9,000 now makes four times that number of bikes.

Today, Bajaj is the world's third-largest motorcycle manufacturer with sales of 3.4 million units in the last financial year after Honda (19.49 million including scooters) and Hero MotoCorp (7.5 million including scooters). Pulsar is exported to 30 countries and is the top selling sports bike in 19 countries. "BAL exports 40-45 per cent of its production to 73 countries," says Rajiv. In comparison, TVS Ltd exports about 15 per cent, Hero MotoCorp and Royal Enfield about three per cent each. In 2017/18, BAL exported 1.39 million motorcycles in all, a rise of 14.5 per cent over the previous year, while its export revenue was $1.37 billion, up by 25.3 per cent. Exports have risen from $200-300 million a decade ago to $1.37 billion in 2017/18.

Will BAL ever make scooters again? Rajiv is quite sure it won't. He is resolute about sticking to what he calls the 'triangle strategy' -one mass product (motorbikes) at the centre of the triangle and niche ones (intra-city vehicles like three-wheelers and Qute, urban electric vehicles and superbikes) at the three corners.

"We have begun research on how to cut down EV costs. We need to make our own battery management system and we are looking at that too."

Bajaj Electricals and Mukand Ltd - have perhaps not capitalised on all opportunities, though they have both become far more aggressive of late.

Bajaj Electricals (BEL) is in transforming from a mere marketer of electrical products into a manufacturer, setting up a unit at Ranjangaon, Maharashtra, to make power distribution related equipment such as transmission towers, various kinds of poles and other fabricated structures. BEL also started an EPC (engineering, procurement and construction) arm which has provided the lighting for a number of iconic infrastructure projects such as Kolkata's Vidyasagar Setu and Mumbai's Bandra-Worli Sea Link.

BEL implemented Oracle ERP (enterprise resource planning) system and Theory of Constraints (ToC) method. But the senior staffers showed reluctance to the new systems and procedures in 2012. BEL is growing rapidly, its turnover in 2017/18 reaching Rs 4,700 crore and its market cap almost doubling in the past year to Rs 5,156 crore.

It was in the last three years that BEL solidified its position in the market, but is

The conservatism helped Mukand Ltd because it avoided the trouble that aggressive investors like Ruias of Essar or Bhushans of Bhushan Steel and Bhushan Power got into with their excessive leverage.

The steel company is growing at its own pace with a new joint venture with Sumitomo Corporation of Japan. Mukand Ltd, together with its group companies, makes more than 400 grades of special and alloy steel used for diverse purposes in the automobile and auto component industry. With a turnover of Rs 3,106.25 crore in 2017/18, it has announced plans to expand existing capacity further, as well as start greenfield ventures.

Questions

1. What are the SBUs of Bajaj group mentioned in the given case study

2. What corporate level strategies are resorted to by Rahul Bajaj

3. Can you identify SBU level strategies in this given case study. List them, if any?

4. What portfolio restructuring is carried out by Rahul Bajaj as per the given information

5. Which SBUs were got separated from the group in 2008? can we call this retrenchment strategy

6. What is the role of technology, leadership and Organisation Strucure you encountered in this narrative about Bajajgroup?

7. Mark the appropriate strategy followed with justification

Jamanlal Bajaj	Kamlanayan Bajaj	Rahul Bajaj from 1965
		Upto 2001	2001-2007	Beyond 2007

Clue: Corporate level- Stability, Growth, Retrenchment

SBU level- Cost leadership, Diversification, Focus

8. Whether portfolio restructuring leads to value creation? substantiate your answer.

NB: do not expect clue in your exam questions

References

1. https://www.business-standard.com/about/who-is-rahul-bajaj

2. https://www.business-standard.com/company/bajaj-holdings-50/information/company-history

3. https://economictimes.indiatimes.com/news/company/corporate-trends/bajaj-family-starts-the-process-to-pass-their-wealth-to-younger-generation/articleshow/62319038.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4. https://www.fortuneindia.com/people/rahul-bajaj-to-step-down-as-bajaj-autos-executive-chairman/104055

5. https://www.businesstoday.in/magazine/cover-story/the-naya-bajaj/story/307498.html

6. https://www.livemint.com/

7. https://www.businesstoday.in/magazine/features/sanjiv-bajaj-finserv-holdings/story/191068.html

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