Q1.

Discuss the changes in manufacturing strategy that the TATA’s are working on and how will
this changed strategy help in lowing the cost of the car?

Solution: - Key points to be discussed:-

1. What is a manufacturing strategy?
2. Defining various strategies Tata is working on to manufacture Nano
3. How these strategies influence the cost of the car.

A manufacturing strategy is defined by a pattern of decisions, both structural and infrastructural, which
determine the capability of a manufacturing system and specify how it will operate to meet a set of
manufacturing objectives which are consistent with overall business objectives.
Manufacturing has now become a necessity for maintaining competitive pricing and appropriate times to
market. The company must decide what its manufacturing strategy will be throughout the product life
cycle. A product that will be sold into an already established market, with an accepted technology will
have different manufacturing needs than a new product with a new technology in the market.

Tata’s Nano is a new product with a new technology which promises the market of an efficient car with a
very low cost. Let us see the Manufacturing stunts it has used to cut down cost.

New Market Segment

What Tata is doing is creating a whole new segment and getting the first mover advantage. They are
making the maximum profits by penetrating in the mass market. They found standardization is best way to
make cars cheaper and assembled cheap units in their final product which could therefore be afforded by
middle class families.

Brand Image
Tata is taking the advantage of their brand image and has cut down on all gizmos in the car. Take an
example of cars made in 50's and 60's when cars were like bicycles... a means of transportation and not a
living room. They may also want to introduce version that has only one bench seat instead of trying to
create vehicle for six people.

Purchasing also plays a big role in cost control. They plan to introduce open and transparent bidding
process to avoid corruption in purchasing.

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Usage of Composite material
There is more usage of plastic and composite materials which will cut down manufacturing cost. Increased
use of plastic components can reduce the overall weight of a car by as much as 40 percent, which can go a
long way in improving fuel efficiency. In addition, the cost of tooling plastic is half that of a conventional
metal-based tooling system.

Distributed manufacturing
A distributed manufacturing system refers to a control system, in which the controller elements are not
central in location but are distributed throughout the system with each component sub-system controlled
by one or more controllers. The entire system of manufacturing is connected by networks for
communication and monitoring. Tata Motors is studying the possibility of letting local assemblers produce
its low-cost small car, the Nano, and selling it under their own brand. Tata is changing India’s
manufacturing practices. That’s because the auto maker is asking engineers and mechanics to join together
to set up their own assembly operations to build the Nano.

Tata not only will supply complete-knocked-down kits but also provide the entire assembly plant, at what
it says to be the most economical price. The auto maker will monitor the quality and reliability of the
assembly operation, taking full responsibility for product liability. Using this strategy, Tata expects to
make and sell 250,000 cars in the first year and up to 1 million annually in the next three to four years.

Tata Motors is going all out to strengthen its distribution channels so that the people’s car would be a
success. It is being said that Tata Motors is going ahead with its distribution and financing plans for the
Nano car. Tata Motors is implementing a ‘hub-and-spoke’ model for Nano’s distribution, which would
mean that it would involve increasing dealership points as well as adding sales and customer touch
points. As per the plan, the Tata Nano dealers in the cities would play the role of hubs. They in turn will
undertake the effectiveness of other sales and customer touch points, which would play the spokes. In
terms of manufacturing strategy - the possibility of the 1-lakh cars final assembly being done at the dealer
point is truly path breaking.

Economies of scale
Economies of scale are the cost advantages that a business obtains due to expansion. They are factors that
cause a producer’s average cost per unit to fall as scale is increased. Economies of scale may be utilized by
any size firm expanding its scale of operation.

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The common ones are purchasing (bulk buying of materials through long-term contracts), financial
(obtaining lower-interest charges when borrowing from banks and having access to a greater range of
financial instruments), and marketing (spreading the cost of advertising over a greater range of output in
media markets). Each of these factors reduces the long run average costs (LRAC) of production by
shifting the short-run average total cost (SRATC) curve down and to the right. Tata is counting on this
economies of scale and "careful sourcing of materials" to keep prices down.

Modifying the Traditional Pricing System

Tata is also working on the strategy of reducing costs and waste to improve profits by implementing a new
style of pricing than the traditional way of pricing of automobiles.
Traditional way: - (cost plus, cost price + a markup over cost price = SP and the markup is their profit).
Tata Nano strategy is cost minus (SP-cost = Profit). More cost reduction means more profit. This means
Tata’s will continue to squeeze suppliers.

These unusual manufacturing strategies will enable Tata to meet increasing demand. Thus all these
strategies contribute to the lowest possible price showcasing Nano - Small Car Big Dreams!

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Q2. What kind of market structure is TATA facing, specifically in this 1 lakh car segment? If you
think there is any competition name the competitor.

Solution: - Key points to be discussed:-

1. Various market structures in brief
2. The kind of market structure Tata Nano is facing
3. Prevailing competition to Tata Nano

There are four basic types of market structures under traditional economic analysis which are:-
 A Perfect competition is a market where there are many small firms producing homogeneous
goods.
 A Monopolistic competition prevails where there are a large number of independent firms which
have a very small proportion of the market share.
 An Oligopoly is a market dominated by a few large suppliers. The degree of market concentration
is very high
 A Monopoly is a market structure is which a single supplier produces and sells the product.

The elements of Market Structure include the number and size distribution of firms, entry conditions, and
the extent of differentiation. The main criteria by which one can distinguish between different market
structures are: the number and size of producers and consumers in the market, the type of goods and
services being traded, and the degree to which information can flow freely.

Automobile industry in itself is a differentiated oligopoly market. In differentiated oligopolies companies

attempt to differentiate their products from those of their competitors. Essentially, Oligopolies have a few
key players in an industry that can cooperate to effectively form a monopoly or at least approach the level
of a monopoly. Automobile industry typically has barriers to entry which deter newcomers from starting
up businesses, keeping the market small. In the case of an automotive company, costs are a large barrier.
Who exactly has the money to throw around on a factory, national advertising, labor pool with benefits,
repair structures and mechanical warranties etc will jump in an automobile industry.

But the case of Tata Nano is different in terms of its price. Currently it clearly enjoys clear monopoly in
the world market. Let us see how.

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If there is a single seller in a certain industry and there are no close substitutes for the goods being
produced, then the market structure is that of a "pure monopoly". A monopoly should be distinguished
from a cartel in which several providers act together to coordinate services, prices or sale of goods.
Although there are innumerable small car manufacturers, currently Tata Motors Ltd. long-awaited Nano
the “people’s car” stands out as the only car manufactured around the globe with the cheapest price. Tata
says it has filed 34 global patents for the vehicle’s platform.

A monopoly is said to be coercive when the monopoly firm actively prohibits competitors from entering
the field. Economic barriers include economies of scale, capital requirements, cost advantages and
technological superiority. Monopoly is the result of access to key resources, which may be either natural
resources or some patented process or special knowledge. New firms cannot enter the industry without
access to those resources. The Nano technology which includes the above factors will make it difficult for
new entrants.

A monopoly is a price maker as it holds a large amount of power over the price it charges. Tata Nano is
the only car in the world which has been priced with a starting rate of Rs.134000.00 for the Base model
and Rs.160000.00 & Rs.185000.00 for the CX & LX model respectively.

An existing competitor is the Maruti 800 which is trusted and consumed by a big share of Indian market.
Although Nano is cheaper than the Maruti 800, its main competitor which is next cheapest Indian car
priced at 1,84,600.00 Rupees, Maruti 800 is the car which is around for many years and is still going
strong. Maruti Suzuki will most probably bring down the price further to attract the customers. There are
also rumors of Maruti Suzuki introducing a lower priced version of Alto to counter Tata Nano. Customer
votes say this car is much more reliable than Nano as it is the best one can say for the city rides and easy
to maintain in traffic. But still Nano proves to be better. Nano is 8 percent smaller in exterior size and has
23 percent larger interior space in comparison to Maruti 800.

Now news is spread about the RENAULT YENI. RENAULT YENI will be launching in India in collaboration
with Mahindra. This Car is launching in India only for Rs 1, 30,000. Now how far this car proves to be a
truth or a myth depends. But if it is a truth than the competition for Nano from RENAULT YENI will be
much more than the Maruti 800. Besides rival car makers including Bajaj Auto, Fiat, General Motors,
Ford Motor, Hyundai and Toyota Motor have all expressed interest in building a small car that is
affordable to more middle-class consumers in emerging markets.
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