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INDIANINSTITUTEOFMANAGEMENT AHMEDABAD
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TI Cycles : Corporate Strategy (A)*

In 1994-95 TI Cycles, a part of Tube Investments Limited, had incurred a loss of Rs. 2.98 crore. It had slipped to the number three position in the industry. Its sales in the domestic market had flattened. It was slow in responding to the new market needs. Its lead-time in reaching the market was three to four weeks. It had lost its faith in its ability to deliver according to the deadlines of dealers. There was a situation where cycle parts that reached the central warehouse could not be assembled into complete bicycles owing to mismatches arising from poor co-ordination. As a result, trucks used to wait for five to six days to get their consignment of ready to assemble bicycle kits. TI Cycles had incurred a loss of more than Rs.1.00 crore on export operations alone. The orders from Europe had declined. It had to decide whether to keep its independent export unit running or close it down. The heads of marketing, manufacturing and product development who had pioneered the efforts of product development and new product introduction had left. Mr. Padmanabhan, who was holding the position of Vice President of TI Cycles since 1989 had also left the company for other prospects. Against this background I was asked by Vellayan, Managing Director of Tube Investments Ltd. to take over as the vice president of TI Cycles. Mr. Ramkumar, General Manager, Finance, of Tube Investments Ltd. told the case writers, as above, as he reflected on the situation he was in. Ramkumar, 38, a post graduate in management from the Indian Institute of Management, Ahmedabad, and a Cost Accountant, had to decide whether to accept the offer or not. In his capacity as General Manger, Finance, he had helped the company raise funds through Global Depository Receipts (GDR) to support its export operations. Before joining Tube Investment of India, the holding company, he was in charge of the finance function at TI Cycles itself.

Company Background
TI Cycles was promoted by the family of Murugappa Chettiars in September 1949 in collaboration with Hercules Cycles & Motor Co. of U.K. to indigenously produce complete bicycles and bicycle parts, and substitute imports. The factory at Ambattur, a suburb of Madras, now Chennai, Tamil Nadu state, was commissioned in 1951. It was a significant technical and managerial challenge to put up such a unit in an industrially less developed region. The family had also promoted other enterprises like Tube Products India Ltd., TI Diamond Chain, TI Miller, Wright Saddles India and TI&M Sales. Together they formed the Tube Investment Group. Tube Products India and TI Cycles were merged to form Tube Investments Ltd. In the 1930s and 40s the family was involved in money lending in Burma, Malaysia, Sri Lanka and Vietnam. In 1940 the group decided to give up banking and venture into manufacturing. It set up Ajax Products Limited and began manufacturing steel products and abrasives. The business interests of the family covered diverse areas such as sugar, plantation, confectioneries and ceramic ware.
1*

Prepared by Professor Mukund R. Dixit and Professor Abhinandan K. Jain. Key performance figures in the case are disguised. The authors are grateful to the executives of TI Cycles for their co-operation and support in writing the case. The financial support for this case writing project was provided by the Research and Publications Committee of the Indian Institute of Management, Ahmedabad. Teaching material of the Indian Institute of Management, Ahmedabad, is prepared as a basis for class discussion. Cases are not designed to present illustrations of either correct or incorrect handling of administrative problems. Copyright 2002 by the Indian Institute of Management, Ahmedabad.

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Since its inception, the members of the Murugappa family had shown keen interest in the growth of TI Cycles. It was a ground for inducting younger members into business. However, since 1983 the family members had withdrawn from day to day management of TI Cycles. The leadership was handed over to professionals. In 1994-95, Mr. Vellayan, a member of the Murugappa family, was the managing director of Tube Investment Ltd. and Mr. Subbiah, an elder member of the family, was the Chairman. The family believed in the values of fairness, truth, honesty and human considerations in treating people in managing its businesses. The family advocated strict adherence to the laws, regulations and rules of the land. It was also keen on making a distinct contribution to the well being of the society. See exhibit 1 for a statement of values and beliefs. The initial production of cycles in 1952 was 36,000. This increased to 89,000 in 1955. The mark of million cycles was reached in 1960. The second million mark was reached in December 1963 and third in April 1967. In 1994-95 the total production of cycles was 19,46,000.

Product Range over the Years

The early emphasis of TI Cycles was on manufacturing quality bicycles as per the design and drawings from the collaborator. It started with the assembly of `Hercules brand of standard cycles in its plant at Ambattur, in 1951. `Hercules brand was promoted as a life companion. It was aimed at the office goers and workers. The product created a market for indigenous bicycles in India. Encouraged by the success of `Hercules the company introduced a new brand, `Phillips, for the student segment in 1955. Both `Hercules and `Phillips were the registered trademarks of Hercules Cycles and Motor Company of UK. `Philips was followed by a sports cycle called `BSA-SLR in 1964. The product was slim with features like small tyres and wire breaks. It was aimed at the upper middle urban youth. It introduced a special cycle for ladies with cross frame that was easy to climb on to and ride. The company offered its models in black and green colours. Cycles, till early 70s, consisted primarily of the workhorse 'Standards' models. TI Cycles was the largest producer and marketer of bicycles in India. Over the years the company tended to offer its products in two distinctive ranges: Work Horse for day today use of middle and lower income customers, and specials for multiple uses, like trekking and racing, of high-income customers. The two types of bicycles were different in the features offered. A work horse cycle was a standard cycle in black colour with horizontal handle. The sports and racing cycles had thicker tyres. They also came with multiple colours, wire breaks, thin frames and thin tyres. The range of cycles targeted the adults and children, male and female segments separately. The cycles were marketed under 'Hercules' or 'BSA' brands. In all there were 13 variants sold under the `Hercules brand and 29 variants under the BSA brand. The variants were built around alternative designs of carrier, cover chain, tyres, basket attachments, frame shapes trainer wheels. They also targeted different customer segments. For example, `Hercules Captain', aimed at the 15 year and above gents segment, was a 20 high cycle with no frills except a hard saddle and a chain cover. 'Hercules MTB Jr.' aimed at the 8-12 year old boys segment, had oversized tubing frame, solid deflected plate, carrier, stand and wheel reflectors. It was offered in red colour. 'BSA Lady Bird Jr.', aimed at the 8-12 years old girls segment, was a cross tube frame slim cycle with a carrier, specially designed wire mesh basket, chain cover and a stand. It was offered in blue colour. In 1994-95 the price of `Hercules brand of cycles ranged from Rs.1,450 for Hercules kids in the 4-7 year age group to Rs.2,275 for Hercules cannon barrel meant for kids above 9 years. The price of BSA brand of cycles ranged from

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Rs.1,300 for 'BSA Snow White', meant for children in the 2-4 year age group, to Rs.2,235 for 'BSA Lady Bird'.

Operations at the Ambattur Plant

The Ambattur unit began with the assembly of completely knocked down kits imported from the collaborator. The indigenisation of the components began with the commissioning of components manufacturing units in 1954 at Ambattur itself. The management decided to make all parts under one roof, as there were no reliable suppliers of parts in and around Madras. The unit started by producing parts for standard black coloured `Hercules bicycles. An executive remarked, In those days producing parts that fitted to each other was a commendable engineering effort. The key parts were the frame and the fork made from steel tubes. To the frame and fork assembly were fitted the various parts of the bicycles like tyres, mudguards, handles, brakes and carriers. Fitting the frame and the fork together was the most critical operation. The technology used to join the various metal parts was called dip brazing. The technology called for dipping the parts to be joined in a bath of molten brass and allowing the molten metal to enter the gap between two parts and solidify. This was a very tough and hazardous operation. It led to wastage by way of excess deposit of brass on the parts. The excess metal was recovered by dipping the joined parts in zinc acid. This operation released zinc fumes and caused pollution. It also restricted the shape of the frame to a `triangle. This technology was changed in 1985 and a new technology called charge brazing was adopted to join the parts. In this technology fine particles of brass were charged into the cavities of the two parts and heated at high temperature. This saved the metal but consumed more energy. This technology was replaced by welding. The parts were welded together using welding rods. Welding created the possibilities of alternative shapes and facilitated the introduction of luxury and sports bikes. The frames and fork assembly was painted in the painting shop. Earlier the parts were dipped in a paint bath. This was discarded in favour of spray painting in which fine particles of paint were deposited on the parts by a spray gun. Organization of the shop floor The shop floor was organized along technical processes like cutting, machining, welding and painting. All equipments needed to make a family of parts were housed in one hanger of the shop floor. For example, frames for all the varieties of cycles were produced in one location and all the painting was done in another location. The parts were sent to a central warehouse for packing and dispatch. The cycle was dispatched to the dealer in completely knocked down condition. The components needed to assemble four cycles were grouped together and packed. On the experience with this organisation of the shop floor an executive commented: The initial layout of the plant was for a single type of cycle. Hence the company did not experience confusion at the stage of assembly. Over time the company introduced variations of `Hercules and a category of sports bikes. Despite the introduction of variety and considerable increase in capacities, the organization of the shop floor did not change. The parts were shifted to the central warehouse without verifying whether the complementary parts were produced in other units for assembling the full cycle. This led to non arrival of parts for packing the completely knock down kits, increase in inventories, and considerable increase in waiting time for the trucks outside the central warehousing facility. A queue of trucks waiting outside the gates became a common sight. The time delays resulted in late deliveries to the dealers. This made them lose faith in the companys ability to deliver as per promised schedule.

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In 1994-95, 60% of the trucks waited for more than 96 hours and 31% of the trucks waited for 48 to 72 hours to receive their consignment. The remaining 9% waited for 72-96 hrs. The other issue was the discrepancy in delivery. 27% of the consignments delivered was not as per the dealers orders. In June 1992 Lucas Engineering Consultants (LCE), a UK based engineering consulting company, was appointed to study the layout of the shop floor and make suitable recommendations. LCE had carried out a similar assignment for the TVS group of companies that had its business interests in two wheelers and auto components. They had recommended to TVS that the shop floor should be organised along cells that made a set of parts that made a complete assembly or sub assembly. By 1994-95 LCE had made a detailed study of the shop floor layout and the causes of imbalances. It had noted that the technologies and requirements of parts of the various ranges of cycles were different. Hence it was advisable to reorganize the shop floor along modules and not along parts. The switch over from parts based to module based organization called for communication with and retraining of workers and supervisors. The issues in managing change in a tradition and hierarchy bound organization needed to be thought through.

Reaching the Customer

Initially fully assembled bikes were sent to the market. To save the cost of transportation and improve logistics, the format was changed to sending ready to assemble kits to the dealers. The components were put in a cardboard box and dispatched to the dealers by truck. The dealers received the cycles in completely knocked down (CKD) conditions in cases. Each case contained 5, 6, 10 or 16 cycles. The dealer assembled the cycles before sale. The dealers assembled the parts into full bikes at their premise. The technicians of the dealers were trained by the dealer himself. The company had its dealers in 993 towns out of 4,313 in India. It was represented fully in towns with a population exceeding 1 lakh. However, in smaller towns with population of less than one lakh, TICycles's representation was partial. Some dealers appointed sub-dealers to expand their reach. The dealers and sub-dealers could stock other brands of cycles as well. A few dealers stocked automobile ancillary parts and consumer durables in addition to cycles. The company canvassed for sales through the company appointed sales representatives. The sales representative booked the orders from the dealers and passed them to the central marketing office at Ambattur. The sales representatives of TI Cycles dealt primarily with the dealers. The marketing office passed the orders received from the representatives to the production unit for planning the production. The dealers viewed TI Cycles as a supplier of special category cycles. They had lost interest in selling the standard category of TI cycles. They expected the company to innovate in features, styles and accessories, and give them an opportunity to charge premium prices. The fancy cycles attracted customer to the stores. This was reinforced by the behaviour of the sales representatives. A marketing executive remarked: When our sales representatives met the dealers they encouraged them to book orders for specials. They mentioned the standard category reluctantly.

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Competitiveness of TI
TI Cycles faced competition from Hero Cycles Limited, Atlas Cycles Limited, and Avon Cycles Ltd. All of them were located in the North. TI Cycles had established a name and reputation for quality. Till the early seventies, being a dealer of Hercules cycles was a symbol of prestige. It lost its exclusivity when competitors from the North entered the industry and built leadership positions on the basis of lower price. (See the appendix for the evolution of the bicycle industry in India.) In the sixties TI cycles was a price leader with a price of Rs.198 for BSA cycle and Rs.172 for Hercules. Hero from Hero Cycles Limited and Atlas from Atlas Cycles Limited sold their cycles for Rs.140 and Rs.150 respectively. In seventies TI Cycles sold its BSA for Rs224.95 and Hercules for Rs.205.90. Hero Cycles and Atlas Cycles had increased their prices to Rs.170.30 and Rs.181.60. In the early nineties TI had increased its prices to Rs.1475 and Rs.1270. Hero Cycles and Atlas Cycles had increased their prices to Rs.1090 and Rs.1176. Avon from Avon Cycles Limited sold its cycles at the lowest price of Rs.690.

In 1994-95 Hero held 47 per cent of the `standard market, followed by Atlas with 27 per cent. TI cycles share was 12 percent while Avons share was 14 per cent. The specials
segment, constituting about 35% of the total cycle market was expected to grow by more than 20,000 per month and TI Cycles lead this segment with 50 per cent market share followed by Hero Cycles with 35 per cent and Atlas with 10 per cent. An executive remarked:
Since our company had started the industry in India the general psychology was that the leadership would continue owing to the technical sophistication of the product. Hero Cycles intuitively learned to make the cycles on its own and offered value for money. It competed on price and tapped the price conscious segment, which turned out to be the largest segment in the country. We lost our leadership position in 1978 when our employees went on strike, and the strike lasted for a year. This enabled competitors to strengthen their position. The company got marginalized in north and was almost forced to vacate the northern market.

Competing through new products With the increase in competition in the standards segment, TI Cycles chose to create the category of special cycles in 1969-70. The specials cost more and were aimed at specific segments like sports, ladies bike and use in mountainous regions. In 1989-90 the company introduced the Mountain Terrain Bike (MTB) range in response to Heros Ranger. These cycles called for production of frames of different shapes. This was possible through welding. The executives of TI cycles had noted this during their trips abroad. TI installed the welding equipments and experimented with this technology. The other companies soon followed and challenged TI cycles in the specials as well with their strategy of value for money. The launch of "Street cat" in 1995 resulted in favourable launch response and an opportunity to sell the bikes at a premium. It helped TI build a distinct segment as well: It introduced the dimension of `fashion in ATB segment distinct from TOUGH the traditional platform of ATBs. Exhibits 2 and 3 provide the stories on these new product launches. Hero had maintained its lead over TI in the MTB range till 1994. In early 1995, TI Cycles introduced the first bike with front shock absorbers and in 1995 'Rockshock FST' with front and rear shock absorbers. Product management, Product Development, Manufacturing, and Purchase jointly shared the new product design and introduction activity at TI Cycles under the overall guidance of General Manager, Marketing, and the Vice-President. A Senior Product manager headed Product

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Management Department and three Product Managers assisted him. Each of the Product Managers was responsible for a set of products for which they prepared marketing plans and monitored the same. Product Managers were generally either MBAs and / or experienced TI personnel who had worked in sales and or marketing. A Manager who was assisted by three Product Designers headed the Product Development Department. Product Designers were engineering and /or design graduates with design / manufacturing/ quality experience. The Product Management Department, as a part of their task of preparing marketing plans, regularly collected sales and marketing data about TI Cycles as well as its competitors and the industry. The data was collected through in-company sources and other secondary sources. For managing the products, the Product Managers also designed and collected primary information about bicycle buying, competitive positioning, product and communication testing, etc., through reputed marketing research agencies. On the basis of relevant market information, Product Managers generated new product concepts. The concepts were tested with target consumers before being handed over to Product Development Department for specifications and prototype development. Prototypes were tested with target consumers and selected dealers. During this phase, Product Development constantly interacted with Manufacturing and Purchase for checking out production and sourcing requirements. Adequate samples of selected models were then produced and tested with target customers. The product testing also provided some idea about the likely demand, which helped in planning the production Marketing Department of TI Cycles had identified some schools in Chennai whose student profile was similar to that of the target customers of TI Cycles. The Company had also identified some of its dealers as the ones who could provide feed back about new products and other marketing initiatives and policies. Besides, the company had prepared a cycle testing track (MGM) where new models were kept for children and any body else to ride. TI Cycles used all the three (the schools, the dealers, and the track) at various stages of new product design and development to test their new concepts, prototypes and samples.

Competing through Outsourcing

TI Cycles suffered from a major cost disadvantage (of about 10%) because of integrated production facilities and higher overheads. As independent entrepreneurs set up facilities for producing bicycle parts in other parts of the country, TI Cycles saw an opportunity to outsource the requirements of non-critical parts and reduce its costs. It started outsourcing of components from Ludhiana, Punjab state, in 1980. It focussed on in-house manufacturing of frames and forks. It set up a state of the art painting facility to paint the parts and cater to a large variety of bicycle types. It led to the closure of several parts making units within the plant. Though out sourcing helped the company reduce the absolute cost, it did not confer a relative cost advantage because the parts had to be outsourced from the North and the company had to pay freight charges. The cycle companies located in Ludhiana did not have to incur the freight cost. The higher costs of in-house production and the cost disadvantage in obtaining supplies from Ludhiana had made the location of the unit in Ambattur uncompetitive.

Export Operations
In the early sixties, TI exported completely knocked down kits (CKDs) to Africa and Middle East markets. The devaluation of rupee in 1965 had made exports from India very attractive. However, the company could not compete with companies from China and Taiwan. Another opportunity to export arose in 1988 with the increase in the demand for export of bicycle parts. This was triggered by the absence of duties imposed by European countries on Indian exports. The European cycle importers scanned the Indian suppliers and identified TI Cycles as the source. The export venture required that the company learnt new technical competencies in parts making, painting and welding different from the current ones.

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In 1991 an importer suggested that the company should supply completely assembled cycles. An assembling unit for exports was set up in Ambattur itself. The importer helped the company to set up the assembly facilities and provided assistance in quality control. Since the unit was required to cater to a wide variety of cycles in terms of shapes, size and colour combinations, the unit aimed at being flexible. The export assembly unit obtained the parts either from the parts plants at Ambattur or from the newly set up unit in Puruthipet or from outside, assembled the bikes, and placed them in semi knocked down condition in a container. The container was loaded on to a truck for dispatching. In 1991-92, a four-phase international market strategy was drawn up. In the first phase, TI was to establish credibility through entry to European Community (EC). It was planned to cover EC countries one by one, using one customer (distributor) per country, with a low-end product and without a brand name. The second phase was to create visible credibility in the EC. This was to be achieved through upgrading the product from low to low-mid range, explore possibilities of establishing a brand, and direct selling to retailers. Simultaneously, the thrust of first phase (unbranded) was to continue to provide stability. The third phase was to substantially increase the market share in EC through both strategies designed in first and second phases with more emphasis on branding backed by manufacturing (mostly assembly) in Europe. In the last phase, TI Cycles was to become a truly international player. TI Cycles initiated measures to develop an international mindset and capabilities and achieve the goals of above strategy. EC was selected as the key market because of tariff preference to India and dumping duties imposed on China, the largest exporter of bicycles. The product was improved to cater to the lower end of the market through overseas exposure, training, participation in trade fair, technology upgradation within, and global sourcing. A dedicated Export Oriented Unit (EOU) of 300,000 units was set up for catering to the volumes anticipated. Also, an international subsidiary, Perry Overseas Ltd, Virgin Islands, was set up to manage the operation. The export operations showed promise of higher growth. To finance the expansion of the exporting operation it raised $50 million through global deposit receipts (GDR) in 1994-95. The company got itself listed on Luxumburg Stock Exchange in May 1994. The steady growth in exports could not be sustained as the European countries imposed duty also on imports from India. The export of frames declined from1,38,000 to 18,500 in 1994-95. The CKD exports had increased from 1,05,726 to 1,86,126. The companys profits before tax from export operations declined from Rs.28.7 lakhs to a loss of Rupees one crore.

Information Technology
TI Cycles used computers for office related work like accounts finalisation, budgeting and planning, report preparations and the like. Computers were not installed on the shop floor.

Human Resources
In 1994-95, TI cycles had total staff strength of 4016 people. The non-managerial staff strength was 3742. The industrial relations had been cordial barring the ten-month strike in 1978. The workers were retrenched during this period. After the strike got over the workers were reemployed. In 1994-95 the average wage of the worker was higher than others in the neighboring units. However the wage cost ratio between the workers in Ludhiana and TI Cycles was 1:3. The average age of the workers was 40. The average qualification was high school pass. The workers

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saw TI Cycles as a stable employer. The management had provided facilities for schooling, healthcare and recreation. The TI group ran its own school for the children of its employees. The supervisory staff and managers were diploma holders or engineering graduates.

Organization Structure and Culture

TI Cycles was organised functionally. The unit head, called vice president, was responsible for the overall functioning of the unit. He reported to the President of TI Group. The head of production was responsible for the production related activities purchase, maintenance, quality control and stores of all varieties of cycles. Similarly the head of marketing was responsible for the marketing related activities pricing, promotion, distribution, product management of all varieties of cycles. He was assisted by regional managers in South, North, West and East. The head of personnel looked after recruitment and training of personnel up to the managerial level. Manager Finance was in charge of day to day accounting and working capital management. The functional heads reported to the Vice President of the unit. The head of Research and Development was in charge of product upgradation and new product development.. The Vice President together with the functional heads constituted the unit management committee. They met once a month and on as and when needed basis to plan and review the performance of the unit. On organizational culture and hierarchy, a senior executive with fifteen years in the company, commented: Change here is a slow process. We have grown up looking to the leader for advice and confirmation of our action. We have not taken independent decisions on our own. As far as technical matters are concerned the section head in-charge of the part knows best. Similarly marketing people know best what is good for the customer. Trying to know each others roles, responsibilities, achievements, and failures would amount to interference. The work culture was described by another executive as easy going. Each one did the task that was assigned to him. The supervisors and managers focused on problems relating to their areas of operations. For example, dealers complaints were to be addressed by the marketing executives only. Similarly industrial relations were the concern of HR executives. Quality was the problem of production executives. Hierarchy was respected. Everyone waited for initiatives and instructions to emanate from the higher ups. One of the executives described the culture as risk averse In 1994-95, Mr. Vellaiyan, a member of the promoters family was the President of TI Group. As noted earlier, the family members had withdrawn from day to day management of TI cycles and handed over the control to professionals. Mr. Palini Kumar from the marketing function was the first professional to head TI Cycles in 1983. He left TI in 1989 and Mr. Padmanabhan, also from the marketing function, took over from him. Mr. Padmanabhan left TI in 1994. TI Cycles had incurred a loss of Rs. 2.98 crore before tax on a turnover of Rs.208 crore. The fixed expenses were Rs. 27.28 crore.

Ramkumars Dilemma
Against this background, Ramkumar had to decide whether to accept the position of vice president of TI Cycles or not. Ramkumars own apprehension in accepting the offer was that TI

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Cycles had the tradition of appointing marketing executives as Vice President. The marketing function was seen as a more important function than others like production and finance. As a finance executive he was not sure whether the staff would accept him as their head in the company. If he decided to accept the assignment how he should go about his task of turning around the company was another question. He had to think through the challenges and opportunities ahead before making up his mind.

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Exhibit-1 Values and Beliefs of TI Group of Companies

Adhere to ethical norms in all dealings with shareholders, employees, customers, suppliers, financial institutions and government. Provide value for money to customers through quality products and services. Treat our people with respect and concern; provide opportunities to learn, contribute and advance; recognise and reward initiative, innovativeness and creativity. MAINTAIN An organizational climate conducive to trust, open communication and team spirit. A style of operations befitting our size, but reflecting moderation and humility.

Manage environment effectively for harnessing opportunities. Discharge responsibilities to various sections of society and preserve environment. Grow in an accelerated manner, consistent with values and beliefs, by continuous organisation renewal.

Source: Company records.

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Exhibit 2 Creating the SLR Category2

The Sports Light Roadster (SLR) category of bicycles was brought to the Indian market by TI Cycles through the introduction of BSA Aristocrat in 1969-70. The Aristocrat was positioned as a sporty bike. It was designed as light, flashy, and colourful to attract your children. The bicycle also had both gents and ladies models. The launch used print advertising to support the image. Though advertising resulted in increased brand awareness, the initial high sales growth could not be sustained. Higher price, and `flimsy and non-durable perception of the product were identified by the management as the reasons. In 1984, the product was revamped with a view to address the two problems. Minor product changes were effected which led to increase in contributions by 25 per cent and better perception of the product. This was supported by renaming the brand as BSA SLR and was backed by the slogan, Built like a Champion to position it appropriately in the minds of consumers. Vijay Amritraj, one of the best tennis players of India and Kapil Dev, a leading cricketer of the time were featured in the ads to communicate the position of Champion and durability. TI used the emerging TV medium to promote the brand. The BSA SLR volumes touched 102,000 in 1986. Later, in 1988, the SLR range was expanded by TI along with non-personality based advertising and communication. The slogan was changed to BSA SLR: Moves like a Champion. The sales reached 200,000 units in 1988. Another initiative taken in 1988 was the opening of a BSA shop in Cochin to explore a new channel. Subsequently, TI introduced a lower price SLR, branded as Hercules Pilot, to fight the competition. TI also sponsored a popular TV Quiz programme. All these efforts led to a sale of 25,000 Hercules Pilot and of 2,50,000 BSA SLRs in 1989. The growth in the category did not go unnoticed by competitors. Atlas, Hero, Road Master Industries (RMI), and Avon introduced lower priced look alike versions in mid 1984-85. These were followed by new competition in 1988: `Royal Hunter from Gujarat Cycles (associate of Hero) and `Atlas Funfleet range (Atlas). These later versions were not particularly successful and were withdrawn soon. TI continued to dominate the SLR category with more than 50 per cent share, though the market growth had gone down significantly.

21

This exhibit draws on a case by Mr. S. Ramachandar, Consultant to TI.

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Exhibit 3 Developing All Terrain Bikes3

Hero introduced all Terrain Bikes (ATB) in 1989. ATBs were bicycles of distinctive design with sturdy and tough looks, straight handlebars, and thick and deep treaded tyres. TI was the follower with Street Cat in 1990 at a price of Rs.1,000. Within a quarter of a year of its launch, Street Cat sold 25,000 bikes. This was followed by Hercules MTBs in the price range of Rs.1600 to Rs.1700. According to TI Cycles management, the late entry was far more determined and well thought out. This increased both, the TI Cycless share in ATBs as well as helped the category grow. Consumer research by TI Cycles demonstrated that, in late 1995, an ATB user was typically an urban teenager, westernized, 12 to 15 years of age, very knowledgeable about the bike and its features. The research also showed that the decision-maker was pre-sold (before entering the outlet) on brand and was a heavy TV viewer. His leisure activities were sports and music. Also, peer group acceptance was an important influence on choice of brand. The consumer research further found that the current options in the range had gaps in terms of desirable attributes of easy handling of bike, looks, and colours. TI Cycles developed two pronged strategies to design a suitable offer: product and communications. The final product chosen, after testing prototypes, had thinner tyres, unique `crackle finishes with a range of colours, powder coated handle bar, reflectors in spokes (of wheels) and attractive stickers. The communication strategy, developed on the basis of consumer research and managerial insight was as follows: Promise: Support: Brand name: Tone: Manner: Execution: Media Mix: A Fashionable Bike Range of colours, product looks, a BSA brand BSA Streetcat Fun, a dash of wildness Urban setting Music the executional idiom Boom Boom Shaka Laka TV sports, music based channels Print sports, youth magazines, event sponsorship

2 This exhibit is based on a presentation by Mr. Suresh Kumar from TI Cycles, to students of IIM, Ahmedabad in 1995.

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Appendix The Evolution of the Indian Bicycles Industry

Till 1938, complete cycles were imported in India from Britain. Indigenous production with imported components started in 1938 with the setting up of India's Cycle Manufacturing Company (ICMCO) in Calcutta. In 1939 two more units, namely, Hind Cycles, Bombay, Hindustan Bicycle Manufacturing and Industrial Corporation, Patna were set up. Production by these units using imported components commenced in 1941 and 1942 respectively. Between 1947 and 1950 two units one in Madras, TI Cycles, and other in West Bengal, Asansol, Sen Raleigh, were set up as integrated large units in collaboration with Hercules and Raleigh Group, both from UK. The opportunity to produce components for repairs and maintenance encouraged the setting up of small-scale components manufacturing units in Ludhiana, Punjab. Hero Cycles Industries Ltd. and Atlas Industries were set up in 1951 in Ludhiana, Punjab and Sonepet, Haryana, earlier a part of Punjab state. Avon Cycles was also started in Ludhiana in 1952. In 1953 there were 500 small and medium scale units for manufacturing spare parts and components and more than 400 units were in Punjab. In 1954 Road Master Industries of India was set up at Rajpura at Ambala Cantonment. In 1958 there were twenty cycle manufacturing units with a total installed capacity of 9.30 lakhs. Their total production was 9.26 lakhs. Not all units could sustain their entries in the face of rising costs and controlled prices. In 1960s cycles came under licensing and price control. The cycle producers had to get the approval of Government of India every year to get the prices increased to match the rising costs. The number of units decreased to 9 by 1970. It had increased again to 13 by 1978. The new entrants could not sustain themselves and the number decreased again to 8 by 1987. By 1994, there were 6 manufactures with an installed capacity of 102 lakhs. The major players were Hero Cycles, TI Cycles, Atlas Cycles, Avon Cycles and Road Master Industries and Cycle Corporation of India, a public sector unit. The total production of cycles in 1987 was 66 lakhs. The total production by 1994 was 82 lakhs. Table A.1 provides the details. The value of exports of cycles in 1956-57 was Rs. 3.31 lakhs. This increased to Rs. 804.48 lakhs in 1971-72. It had increased further to Rs. 371.5 crores in 1981-82. In 1994-95 the exports had increased to Rs. 600 crores against Rs.175 crores in 1990-91. The exports were dominantly to Europe. The rise in exports was made possible by the quota restrictions and duties on imports into Europe from China and the absence of duties on imports from India. There were pressures on the European union to impose such duties on Indian imports as well.

Table A.1 Number of Bicycle Manufacturing Units and their production

Year Number of Units 1951 2 1958 20 1970 9 1978 13 1987 8 1990 6 1991 6 1992 6 1993 6 1994 6 Source: Company Records Installed Capacity (000) 120 930 2105 3801 7240 8500 9200 9200 9200 10200 Production (000) 114 926 2052 3686 6600 7200 7700 7900 8000 8200

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Till mid 70s the entire domestic market of bicycles was constituted by Standards. As mentioned earlier, TI Cycles introduced the Sports Light Roadster and led the category of Specials. The Specials category, created by TI, which consisted of several sub-categories, continued to grow over the years with TI leading the industry. Tables A.2 and A.3 provide the details.

Table- A.2 The Market for Bicycles in India: 1985-86 to 1994-95 (000's)
Year Rural Urban All India 5862 6213 6577 6688 6892 6620 6204 6686 6804 8571 Growth (%) 5.6 5.5 1.4 3.4 -3.9 -4.8 4.5 3.3 26

1985-86 1986-87 1987-88 1988-89 5050 1638 1989-90 5120 1772 1990-91 4900 1720 1991-92 4550 1654 1992-93 4750 1936 1993-94 4804 2000 1994-95 5900 2671 Source: Company Records

Table- A.3 Industry Trends: `Mix of Standards' Vs `Specials (In Percentage)

Mid 80s Industry TI Standards Specials Total Sales >90 <10 100 75 25 100 Early 90s Industry TI 90 10 100 60 40 100

Source: Company Records

Bicycle User
Research by TI Cycles had revealed that the Standard and Special bicycles had distinct user groups. The Standard bicycle was a functional, lower price and semi-urban or rural market bicycle. It was used as a workhouse to travel to workplace or carry loads (like milk cans by milk vendors). The user typically belonged to 20 years plus age, lower to lower-middle income group, blue collar/farmer/semi-skilled labour. The brands favoured were Hercules Popular (TI), Hero Royal (Hero), Atlas Goldline (Atlas) and Avon. The Special bicycles were used primarily for going to school and tuition/extra classes in urban markets. They were also used for recreation. The user group consisted of students, both boys and girls, of 6 to 16 years of age, belonging to mid to upper income groups. The MTBs which were introduced much later than SLRs had caught the fancy of boys and constituted the premium range of Specials. The SLRs users were mostly girls. Leading brands in Specials were BSA SLR (TI),

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BSA Mach (TI), Hero Impact (Hero), and Rockshock (TI). The break up and projections of households in different income groups in urban and rural areas is given in Table A.4.

Table A.4 Break up of Household and Projections

Income Group Lower (<2000 PM) Middle (2-6000 PM) Upper (>6000 PM) Total Source: company records Urban Households 1994/95 2001/02 2006/07 15 7 2 23 30 30 7 15 28 45 52 60 (in Millions) Rural Households 1994/95 2001/02 2006/07 71 49 34 40 68 89 5 11 16 116 128 139

Regulatory Environment
The Government of India was keen on developing the cycles industry in the post independence era. It had banned the import of full cycles in 1958, but had allowed the import of cycle parts. The import of parts continued till 1970. Initially the prices were subjected to voluntary price control and the capacity was licensed. All the manufacturers were required to get their price increases approved by the government of India. Along with indigenisation drive, the government of India had encouraged exports. Between 1970 and 1994, the industry was delicenced and decontrolled. The manufacturers could expand the capacity to meet market needs and charge a price that market bore. In 1991 the government allowed the imports of cycles and cycle parts.

Competition
The entry of competitors was facilitated by the growth of independent parts manufacturers in Ludhiana in particular and Punjab state in general. They sold their cycles under their own brands. The new entrants did not have to set up integrated facilities like TI Cycles. They made a few core parts like frames and forks, did the painting, bought complementary parts from independent manufacturers and prepared the ready to assemble kits. Hero Cycles Ltd. Hero Cycles was the largest producer of cycles. It was set up by Brijmohan Lal Munjal in Ludhiana in 1951. He started as a small time trader of cycle parts and supplier of frames to Atlas Cycles. He competed in standard segment. Initially, the quality of Hero Cycles was lower than that of TI Cycles. The cycles of TI lasted a lifetime while the Hero cycles lasted for three years. However, the Hero cycles were rugged and could take extra loads of milk cans and vegetable baskets. Their load carrying capacity made them the preferred bike in the rural and semi urban areas. Hero cycles invested in quality improvements, brand building and innovations in painting and strengthened its position consistently. With the help of a closely-knit network of cycle parts manufacturers, Hero Cycles emerged as the largest producer of cycles in the world. It introduced innovations in painting and brought out attractively painted bikes It was the lowest cost producer in the industry. It worked through a network of four regional offices, twenty local offices located in each state and dealers offices located in each district of the country. The dealers had direct relationship with the family members of Mr. Munjal. One of the

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TI executives pointed out that the dealers appreciated such relationships and expected the family members of the business to interact with them more frequently. On the production side, Hero Cycles operated through a network of 100 cycle parts manufacturers and took responsibility for design, painting and sub assembly. Over the years it became active in both standard and specialty bike segments. In 1989 it launched HERO RANGER at a price Rs.800 to satisfy the need that TI had over looked, cycles for peddling on rugged terrain. It created a new category of mountain terrain bikes (MTB). Hero had further built its market position by diversifying into moped and motor cycle businesses with the help of collaborations from Germany and Japan. It had also introduced fitness bikes under the brand name 'Hero Allegro". Altas Cycles Ltd. Atlas Cycles Industries Ltd. was set up in 1951 by Janki Das Kapoor. In 1950 he had set up a bicycles saddles unit. The cycle's unit was located at Sonipet in Haryana. It also had a steel tube manufacturing plant at Gurgaon and component manufacturing division at Sahibabad in Uttar Pradesh and Ludhiana. It exported to 40 countries and was the only company with an R&D wing recognized by the government. Atlas had also introduced a range of fitness equipments like exercise bicycles, walkers and steppers. Of its total production of 25,00,000, 95% of its cycles consisted of black cycles. It also competed on an all India basis. Avon Cycles Avon cycles was set up in Ludhiana. It competed primarily in the standard segment and focused on the markets in the North. It operated through a dealer network and had not set up its own marketing offices. The performance of various competitors in 1994-95 was as in exhibit A.1

Competition from Mopeds

The cycle industry faced competition from the motorized two wheelers. Kinetic Engineering in West; Luna and Hero Majestic in North; and TVS in South were the key competitors. Kinetic and Hero mopeds with over 60% of the market till early 1983-84 were in mostly work horse range. In 1984-85, TVS emerged as a strong contender in the moped market. The south market penetration increased while the moped market gave way to motor cycles. Majestic sales dwindled with focus on 100 cc motorcycles. Kinetic introduced on 100 cc motorcycles. Kinetic introduced 100 cc scooters leaving the moped market to TVS. Enfield, a south based manufacturer of `Bullet motor cycles decided to enter the moped market by introducing and pricing a product at Rs.2500 in late eighties where as the bicycles cost Rs.1000-1100. The product, called Mofa, was a gearless moped, without frills, which gave a mileage of 100 kms to a liter of petrol. Mofa, the low-end moped to lure the bicycle prospects failed to take off and was withdrawn. In early 90's, Bajaj Auto Limited, a leader in the scooter market had introduced a scooterette, called Sunny, of engine capacity less than 50 cc. Sunny was slowly getting acceptance from youngsters. By early 1995 bicycle prices grew but remained around 2000 plus and moped prices had risen to Rs.10,000 plus.

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Exhibit- A.1 Financial Performance of Competitors (Rs. Crore)

Atlas Cycles Industries Gross Sales Net sales Cost of Production Profit after tax Net worth Capital employed Exports Avon Industries Ltd Gross Sales Net sales Cost of Production Profit after tax Net worth Capital employed Exports Hero Cycles Ltd. Gross Sales Net sales Cost of Production Profit after tax Net worth Capital employed Exports Source: CMIE database 1990-91 136.72 136.69 117.34 1.84 11.19 18.47 5.70 1990-91 2.09 2.09 1.54 0.15 0.64 1.68 0.04 1990-91 231.18 231.14 204.42 4.92 35.06 54.70 14.84 1991-92 146.15 146.12 123.55 2.09 13.11 19.44 5.24 1991-92 6.42 6.41 5.64 0.46 1.37 3.66 0 1991-92 312.95 312.81 274.76 4.52 39.02 62.36 31.77 1992-93 150.16 150.13 127.45 2.30 21.24 27.80 4.99 1992-93 16.92 16.89 13.99 1.81 7.74 8.70 0.15 1992-93 365.66 360.20 312.06 6.86 45.50 67.54 41.57 1993-94 195.73 195.70 165.04 4.00 24.94 30.94 9.49 1993-94 14.94 14.92 11.12 2.2 15.97 18.29 0 1993-94 398.55 390.59 341.27 9.76 53.71 77.48 35.38 1994-95 249.03 249.03 212.54 5.09 29.55 53.55 6.48 1994-95 16.54 16.52 13.19 5.09 18.22 19.22 0 1994-95 462.6 448.36 399.37 9.08 72.70 106.22 27.75