Blue Star India Ltd

Business Policy - Company Strategic Analysis

Submitted by: Abhishek Sehgal (46) Kavita Singh (56) Ankit Verma (59) Abhrajit Sett (140)

Table of Contents
Blue Star: Company Profile ........................................................................................................................... 3 Blue Star Business Portfolio .......................................................................................................................... 3 Blue Star: Largest single source of Air-conditioning Equipment ............................................................... 4 Air-Conditioner Market Analysis ............................................................................................................... 4 Blue Star Market Performance & Competitors ......................................................................................... 5 Strategic Key Decisions & Company milestones ....................................................................................... 6 SWOT Analysis............................................................................................................................................... 9 Strategic Decisions ...................................................................................................................................... 11 Porters Five Forces ..................................................................................................................................... 11 Firm Rivalry ......................................................................................................................................... 12 Threat of new entrants ....................................................................................................................... 12 Bargaining power of suppliers ............................................................................................................ 13 Bargaining power of buyers ................................................................................................................ 13 Critical Success Factors ........................................................................................................................... 14 Key Challenges ........................................................................................................................................ 14 Tetra Threat Framework ............................................................................................................................. 15 Threat of Imitation .............................................................................................................................. 15 Threat of Substitution ......................................................................................................................... 15 Threat of Hold Up................................................................................................................................ 15 Threat of Slack..................................................................................................................................... 16 ADDING Framework .................................................................................................................................... 16 International Presence ................................................................................................................................ 17 International Partnerships ...................................................................................................................... 18 ECO FRIENDLY ..................................................................................................................................... 18 CAGE Framework ........................................................................................................................................ 19 Strategic challenges Faced.......................................................................................................................... 19 Quality of R&D .................................................................................................................................... 19 High Number of Players ...................................................................................................................... 20 Foreign Players .................................................................................................................................... 20

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Blue Star: Company Profile

Blue Star Limited (originally known as Blue Star Engineering (Bombay) Pvt Ltd) was founded by Mohan T. Advani in 1943. The Company was initially engaged in reconditioning of refrigerators and airconditioners. Today, Blue Star is India's largest central air-conditioning company with an annual turnover of Rs. 1178 crore crores, a network of offices in 29 cities and three modern manufacturing facilities. Blue Star became a public limited company in 1969 with its corporate headquarters at Kasturi Buildings in Mumbai. Blue Star is India's largest and most preferred airconditioning and commercial refrigeration company. With six decades of experience in providing expert cooling solutions, Blue Star has been associated with the most prestigious corporate and commercial installations in the country.

Blue Star Business Portfolio

Blue Star manufactures and markets a wide range of air-conditioning and refrigeration systems and products. These include large central air-conditioning plants, packaged air-conditioning systems, split and window air conditioners; commercial refrigeration equipment such as water coolers, bottled water dispensers, ice-cube machines, deep freezers and walk-in cold rooms.

Central AirConditioner

Commercial Refrigeration

Blue Star

Room Air Conditioning

Hi-tech Electronic and Industrial Products

Commercial Equipment

Blue Star's other businesses include marketing and maintenance of hi-tech electronic and industrial products such as Testing Machines, Data Communication products, Medical and Analytical Instruments and Special Control Valves. The Company has business alliances with worldrenowned technology leaders such as York International, USA; Hitachi, Japan; Kolpak, USA; Vestfrost, Denmark; Electrolux, Sweden and many others, so as to offer superior products to the Page | 3

customers. The lines of business include Central Air-conditioning, Room Air conditioners, Commercial Refrigeration, Commercial Equipment and Professional Electronics and Industrial Products. The International Software Services business was spun-off into a separate company, Blue Star Infotech Limited (BSIL) in April 2000. BSIL provides Internet/E-commerce, HP 3000/ MPE, Baan ERP services, Client Server applications and Embedded Systems to clients in USA, Europe and Japan. This software export business was started in 1983 and is headquartered in Mumbai, at the Santa Cruz Electronics Export Promotion Zone (SEEPZ) with offices in the U.S. and U.K.

Blue Star: 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. 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.

Air-Conditioner Market Analysis

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. The commercial refrigeration segment includes a wide range of products such as cold storages, supermarket refrigeration equipment, water coolers, bottled water dispensers, deep freezers, milk coolers, bottle coolers and ice cubers.

Rs. 2,000 Crores Rs. 5,750 Crores Rs. 4,500 Crores

Central and Packaged Airconditioning Systems

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The air-conditioning and commercial refrigeration market in India is growing at a CAGR of 22.5%. Market of Central and packaged AC system is growing at a CAGR of 27.2%, while market of Room ACs and Commercial Refrigeration is growing at a CAGR of 19.5% and 17.5% respectively.

6000 5000 Market Size (Rs. Crore) 4000 3000 Cooling Appliances 2000 1000 0 2004-05 2005-06 2006-07 Financial Year 2007-08 2008-09 Commercial Refrigeration System Central and Packaged AC System

Blue Star Market Performance & Competitors

Market share of Blue Star in India is 19.53% in air-conditioning and commercial refrigeration market. Company is market leader in central and packaged air-conditioning segment with the market share of 31.34% in this segment. In the Room AC segment company has market share of 6% while in commercial refrigeration segment again Blue Star is market leader and it has a market share of 16.10% in this segment. Main competitor for Blue Star in central and packaged air-conditioning business is Voltas, Hitachi, Diakin and Carrier. In room AC segment approximately 20 players are there. Market leader in India in this segment is LG Electronics.

19.54% 15.13% 65.33%

Blue Star Voltas Others

Market Share in Air-conditioning and Commercial Refrigeration

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31.34% 52.31% 16.35%

Blue Star Voltas Others

Market Share in Central and Packaged Air-conditioning

25% 53% 16%

LG Electronics Voltas Blue Star

Others
6%

Market Share in Room AC

Strategic Key Decisions & Company milestones

Blue Star has over a period of time established itself as an expert in the field of central air-conditioning and commercial refrigeration. Their expertise lies across different industries and sectors and they constantly try to leverage this expertise to expand the purview of their operations in diverse industries. 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 Page | 6

projects. Then came the 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. The sixties and the early seventies witnessed Blue Star continuing to expand and thrive. A team of dedicated professionals aided Mohan T Advani in ever furthering his vision of a profitable company dedicated to its ideals of professionalism and success. Employee strength crossed the 1000 mark and the company went public in 1969 to become Blue Star Limited, as it continues to be called today. In 1970, the Company took up the all-India distributorship of Hewlett-Packard products, a business relationship which continues today and has grown ever stronger through the years. As the Company's reputation for delivering the goods in the most challenging of air-conditioning projects grew steadily, the early seventies saw a series of prestigious projects being entrusted to Blue Star skyscrapers such as Air India Building, Express Towers, the Oberoi Hotel in Mumbai, apart from several others. Revenues touched the Rs. 10-crore mark and staff strength doubled to exceed 2000. As its Indian presence reached greater heights, the Company began building determinedly upon its existing overseas presence, Blue Star set up a joint venture with Al Shirawi in Dubai and went on to execute some outstanding projects in Syria, Iraq and Saudi Arabia. To complement its air-conditioning projects and undertake turnkey industrial projects, an Industrial Division was set up in 1978. Always moving with the times and ever on the lookout for business possibilities, Blue Star next set up a software export unit at Seepz, Mumbai in 1983. Then came associations with more global leaders - a collaboration with York International of USA for central air-conditioning equipment and joint ventures with Motorola and Yokogawa. In 1984, Ashok M Advani & Suneel M Advani, the sons of Mohan T Advani, took over the reins of the Company, after spending nearly 15 years within the Company steadily climbing up the ladder. A renewed thrust was placed on the company's core business areas - air-conditioning and refrigeration and the distribution of professional electronics equipment - and the company emerged a market leader in these focus areas. The nineties witnessed India entering an era of economic

liberalization and an upsurge in competition as the dynamic business scenario attracted the world's most forward-looking corporations. It was time to re-look at existing business competencies, reengineer those that were obsolete and forge ahead in acquiring new business competencies. Blue Star was more than equal to the challenge and expansion continued unabated.

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In keeping with this focus, an advanced manufacturing facility was set up at Dadra in 1997, in technical collaboration with Rheem, USA, to enhance manufacturing competency. Today it bears the distinction of being regarded as the best such plant India-wide. The dealer network was strengthened and expanded to bring products within easy reach of every customer. With the advent of the much awaited new millennium in 2000, the action continued. The software unit was spun off into a separate company, Blue Star Infotech Ltd., the export of air-conditioning products from the Dadra factory began and contract manufacturing for local and foreign brands commenced. A new Corporate Vision was developed - "To deliver a world-class customer experience". Every employee is determined to follow this vision and keep their organization a competitive and forward-looking one. Blue Star crossed the Rs. 500 crore milestone in 2000 and the Rs. 600 crore milestone in 2002-03. With the boom in construction activity and increased infrastructure investments, the Company leveraged its leadership position to grow aggressively. In the following three years, the Company nearly doubled its turnover, clocking Rs 1178 crores in 2005-06.Even more than size, Blue Star enjoys an enviable reputation as an ethical corporation, ever mindful of its obligations towards customers, shareholders, dealers, business partners, employees and the environment in which it operates.

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SWOT Analysis

Strengths: Only Blue Star manufactures open-type centrifugal chillers with ozone friendly refrigerant HCFC 123. Only Blue Star manufactures variable air volume systems for economic localized cooling control. Only Blue Star manufactures air handling units with dependable ratings to factory precision and the widest choice with single skin, double skin, horizontal, vertical, ceiling suspended and unitary. Air-conditioning of the largest number of synthetic fiber plants in India exceeding 25,000 Tons and 36 customers. Largest Industrial air-conditioning contracts in India - RBI Note Mudran Private Limited: Rs.40 crores. First to manufacture semi hermetic reciprocating compressors in India to international standards. First air-conditioning company to introduce the concept of a Comfort Shop.

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It has a strong setup, Willis Carrier Engineering Center, to provide technological support to develop new products and upgrade existing ones. It has successfully introduced finance schemes that have taken air-conditioners out of the luxury category and made it affordable for the homebuyer.

Weaknesses Considered as premium brand so middle class people think it is unaffordable. Although BLUE STAR protects its 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: 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 MNCs like Samsung, Carrier, LG and Voltas are continuously raising their share while Blue Star despite of increasing sales is losing its market share.

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Strategic Decisions
Within 3 years of inception Company was selected by Worthington, the US leader in airconditioning, as its India based partner Blue Star diversified and took up agencies for Material Testing Machines and Business Machines In 1970 Company took up the all-India distributorship of Hewlett-Packard products, a business relationship which continues today Prestigious projects being entrusted to Blue Star - skyscrapers such as Air India Building, Express Towers, Oberoi Hotel in Mumbai Blue Star set up a joint venture with Al Shirawi in Dubai and went on to execute some outstanding projects in Syria, Iraq and Saudi Arabia Air-conditioning and refrigeration and the distribution of professional electronics equipment - and the company emerged a market leader in these focus areas Technical collaboration with Rheem, USA, to enhance manufacturing competency & open a state of art plant in Dadra in 1997 Software unit was spun off into a separate company, Blue Star InfoTech Ltd in year 2000 A new Corporate Vision was developed - "To deliver a world-class customer experience".

Porters Five Forces

Bargaining Power of Suppliers

Threat of New Entrants

Degree of Competition: High

Threat of Substitutes:

Bargaining Power of Buyers

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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. Threat of new entrants 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. Page | 12

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

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Critical Success Factors

High growth

India is witnessing big growth in segments such as infrastructure, power, healthcare, telecom and hospitality and large IT/ITES companies are continuae with their aggressive expansion plans

Retail Boom Distribution of perishable agricultural output Cold Chain Infrastructure

Retail sector is also in boom in India. Based on plans announced by several players, the cumulative non-residential air-conditioning opportunity over the next 5 years is estimated to be around Rs.38,000 crores

India has great potential for the production and distribution of perishable agricultural commodities including fruits and vegetables. This potential needs a modern cold chain infrastructure including conventional, controlled and modified atmosphere cold storages, to be effectively harnessed.

This includes facilities such as pre cooling, pack houses, ripening chambers, controlled atmosphere storages, reefer vans, refrigerated containers, retail cabinets and mobile refrigerated units

Key Challenges

Quality of R&D High Number of Players

With most of the multination companies entering into Indian market most of the quality people are going to those companies as they are paying high salaries.

There are more than 20 players in the market in this industry and they are killing the market share of Blue Star. Though revenue of Blue Star is increasing but marketing share of company is decreasing from last couple of years.

Foreign Players

Now number of foreign players has entered in the Indian market. It is observed that real estate/IT companies of foreign origin prefer foreign companies over Indian companies.

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Tetra Threat Framework

Threat of Imitation
Added value

Threat of Substitution
Appropriated value

Threat of slack

Threat of holdup

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.

Threat of Hold Up Holdup threatens to divert the sustained added value to buyers, suppliers and complementors. Blue star has had a hold up problem when the suppliers of a big order at Infosys as the suppliers were not co-operating 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. Page | 15

 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 Page | 16

Decreasing Cost

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

bargaining power

Normalizing Risk

Generating and updating resources

other real estate cropping up and better technology and customisation options being offered by Blue star they have decreased the bargaining power of buyers 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.

International Presence
Blue Star's air-conditioning expertise extends beyond Indian horizons, from Indonesia in the East to Libya in the West. Blue Star has competed with other European companies on International terrain and satisfied demanding foreign consultants. Blue Star has set up a joint venture in Malaysia with Arab Malaysian Development Berhad (AMDB). The joint venture company has executed large turnkey Central Airconditioning Contracts - 21-storey Bangunan AMDB, Kuala Lumpur, 35-storey Menara Dion, Kuala Lumpur, 22-storey Menara Pelita, Kuching, Sarawak, 48-storey Plaza MBF, Kuala Lumpur, 18-storey Tower A and Tower B AMCORP Trade Centre, Petaling Jaya Selangor Darul Ehsan, 364-room Vistana Hotel, Kuala Lumpur, 269-room Ritz Carlton Hotel, Kuala Lumpur, Arab-Malaysian SGB factory, Nilai, Negeri Sembilan, 275-room Castle Inn Hotel cum Office, Johor Baru, Johor Darul Takzim, 340-room Hilton Hotel, Seremban, Nageri Semibilan Darul Khusus, 420-room Hotel, AMCORP Trade Centre, Petaling Jaya, Selangor Darul Ehsan and Summit Centre Shopping Complex, Selangor Darul Ehsan. And the list of projects completed abroad is too long to be enumerated. Some of the most notable are: Syria's Presidential Palaces Complex at Damascus, the University, Railway and Radio and TV

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Establishments at Baghdad, the State Bank of Mauritius, the Kewalram Indonesia P.T. Bandung, Henrick Hotel, Kuala Lumpur, U.S. Geological Survey, Saudi Arabia and Hotel Krom, Russia.

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. ECO FRIENDLY Blue Star has made significant progress towards minimizing and even eliminating the environmental hazards resulting from CFCs in certain refrigerants used for cooling. As a matter of fact, Blue Star is one of the few companies selected in India for funding by "The Multilateral Fund for the implementation of the MONTREAL PROTOCOL. Blue Star has already introduced 'ozone friendly' centrifugal chillers using HCFC-123, the safe refrigerant replacing CFC-11. Blue Star also markets absorption chillers, which use water as refrigerant. All Blue Star reciprocating chillers already use HCFC-22 refrigerant, which is more friendly to the environment than the older R-12. The Company actively promotes wider use of large refrigeration systems using ammonia as the refrigerant. In fact, Blue Star is a member of the International Institute of Ammonia Refrigeration, USA.

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CAGE Framework

CAGE

Cultural

Administrative

Geographical

Economical

Malaysia

Being within Asia not a huge difference

AMDB ensured bids turnkey projects. for

Advantage being within

Real estate company AMDB ensured sharing resources of

ASEAN region

UAE / Middle East

Being within Asia not a huge difference

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

All US/European MNCs presence. have

Easy export material

to

and deliver domain expertise from India.

Strategic challenges Faced

Quality of R&D With most of the multination companies entering into Indian market most of the quality people are going to those companies as they are paying high salaries. Because of this Blue Star in not getting quality people for their R&D and hence facing challenge in doing the quality of R&D work in India.

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High Number of Players There are more than 20 players in the market in this industry and they are killing the market share of Blue Star. Though revenue of Blue Star is increasing but marketing share of company is decreasing from last couple of years. Foreign Players Now number of foreign players has entered in the Indian market. It is observed that real estate/IT companies of foreign origin prefer foreign companies over Indian companies. Means though infrastructure development is happening in India but most of the foreign players are getting benefited from that as domestic companies do not discriminate while giving order to particular company.

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