Target costing case study tata nano

Tata Case Study

1. Identify and explain what the four pillars of Blue Ocean (value innovation) strategy are (your textbook will be helpful for this one... this is also known as the Four Actions Framework).

2. Apply the Blue Ocean strategy pillars to the Tata Nano case, be specific and include case citations (refer to the textbook, if you need help).

3. Provide your assessment of the Tata execution and diagnose both what was done well and what was done poorly. If something was done poorly, then also provide justification that explains WHY it was not done well (e.g. Tata was not successful at A, as evidenced by B (pg. 3)).

Tata Nano’s Execution Failure: How the People’s Car Failed to Reshape the Auto Industry and Create New Growth

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This case was written by Dr Robert Bong and Dr Mi Ji, under the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Special thanks go to Oh Young Koo for her research on this topic.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

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On January 13, 2008, Ratan Tata, Chairman of the Tata Group, unveiled the Tata Nano: “the People’s Car”, at the Auto Expo in New Delhi. According to Mr Tata, the Nano was built to meet all safety standards, designed to meet and exceed emissions norms, be low in pollution and high in fuel efficiency. Moreover, the car was within everyone’s reach, the price of its base model being only 1 lakh1 (US$1,984).2

The Nano and its creators received rock-star greetings at the event. The cheers and whistles from the crowd drowned the polite applause from the front row VIP guests. Ratan Tata had to pause several times for the crowd to calm down. In the next ten days of the Expo, hundreds of thousands of people visited the Tata Motors pavilion to catch a glimpse of the Nano.

On March 23, 2009, the Tata Nano was officially and commercially launched at the Taj Mahal Palace in Mumbai. As there were only 1,000 cars on display across India, most people had to place an order without having seen, let alone test drive, the Nano. Within two weeks, the Tata Nano official website received 20,000,000 hits. Order applications reached 200,000 – the biggest sales uptake in the history of global automobile industry.

Tata Nano: The People’s Car that Promised to Reshape the Auto Industry

The Tata Nano changed the dynamics of the Indian automobile industry. Socioeconomic development in recent years led to fast growth of the automobile industry in India. As people in the emerging middle-income class aspired to greater mobility, the small and compact car segment had grown phenomenally. Of a total of 1,551,880 passenger cars sold in India in 2009, about half were small and compact cars. The growth of the segment attracted competition from local as well as foreign players. Renowned makes such as Suzuki, Ford, Hyundai, Toyota, Renault-Nissan, Chery (Dodge) and Mercedes all jumped into the competition with their respective economy models. The average price was at first in the Rs 200,000 ($3,968) range. As the market got crowded, automakers tried to differentiate themselves by offering new models with more advanced technology, design and styling, features and functions. With each new model, prices moved up into the Rs 450,000 ($8,928) range.

While engaged in fierce competition, auto manufacturers had actually missed the low-end mass market that small and compact cars normally targeted in more developed economies. India’s GDP per capita remained low – nominal GDP per capita was only US$1,127 in 2009.3 Middle-income consumers who could afford to buy passenger cars represented only a very small percentage of the total population. Even in urban areas, the majority of people either used public transport or two-wheeled vehicles for their daily transportation needs. In 2009, of total motor vehicle sales in India, only about 7% were small and compact passenger cars, and 76% were two-wheeled vehicles. In fact, only 10% of Indian households owned a motorcycle. As economic development boosted demand for personal mobility, for the majority of Indian families two-wheelers were the entry-level choice to the world of motor vehicles.

1 A lakh is a numbering system in India equal to 100,000. Rs 1 lakh=Rs 100,000. 2 To provide readers with a consistent reference, the currency conversions here and below all use the

historical exchange rate at the commercial launch of the Tata Nano (March 23, 2009). At the time of the Tata Nano unveil in 2008, Rs 1 lakh was equal to US$ 2,556.

3 World Bank, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD . Accessed November 24, 2012.

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The Tata Nano was conceived to appeal to this vast population of people neglected by the automobile industry. Tata Motors, a subsidiary of the Tata Group, one of the largest conglomerates in India, is the country’s largest automobile company by sales, with consolidated revenues of US$14 billion in 2009. Tata Motors was the leading manufacturer in commercial vehicles and among the top three in passenger vehicles, with products in the compact, midsize and utility vehicle segments.

In 2002, travelling in his car on a rainy afternoon in Bangalore, Ratan Tata had spotted a family of four on a scooter at an intersection: “The father was riding on the scooter, his young kid standing in front of him between his legs, and his wife seated behind him holding on a little baby.” This was a typical scene on Indian roads. Due to the lack of decent means of transportation, people across the country were risking their lives every day to get to work or to send their children to school.

This encounter prompted Ratan Tata to think about conceiving “a safe, affordable all-weather form of transport for such a family”. The idea of building a four-wheel vehicle from scooter parts came to his mind. At the Geneva Motor Show in March 2003, Ratan Tata revealed the idea to a reporter from the Financial Times: it would look like a real car and have proper seating, not stretch canvas as in the case of an auto rickshaw. The car might be a little noisier than an ordinary car but it would have to be both simple and safe. When asked about the cost, Tata said it would ideally be around one lakh ($1,984)4, which was the price of the most expensive two-wheelers at the time. The next day, March 10, 2003, the Financial Times ran the headline “Tatas plan Rs 1 lakh car.”

Creating the Nano: Achieving Distinctive Value at Low Cost

Ratan Tata’s ambitious plan was greeted with disbelief by the auto industry, as the cheapest existing car was priced at Rs 2.5 lakh ($ 4,960) in India. Even in 2006, two years before the unveiling of the Tata Nano, Osamu Suzuki, founder of Suzuki, made a public statement that it was impossible to make a reliable car for Rs 1 lakh.

Yet from day one, Tata Motors was committed to turning the dream of a people’s car into reality. In 2003, a dedicated team was set up to undertake this ‘mission impossible’. It was mainly composed of young engineers under 35, who were highly motivated and ready to take on new challenges. The initial two years of explorations followed a trial-and-error process. The team tried using different platforms, chassis, engines, transmission, power trains and materials to build a rock-bottom low-cost car to meet the 1-lakh price point. After various experiments, they concluded that all those technological innovations, albeit great, could not be applied to building a Rs 1 lakh car on an scalable basis.

Technology was not the only challenge confronting the team in the beginning. The imperative of creating a “real car” for a family of five on a scooter posed an even greater challenge. A plastic car that met all the performance and safety standards, for example, would still be perceived as a “toy car” within the socio-cultural context in India despite all good intentions.

After many design proposals had been turned down by Ratan Tata, the team realized that simply cutting costs across the board would not put them on a path to creating a low-cost car

4 Rs 1 Lakh equalled US$2,110 at the exchange rate on March 10, 2003.

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that Indian families would embrace. The car also needed to carry the promise of upward social mobility. This would require a completely new paradigm and a revolutionary way of designing and building a car.

In July 2005, the team was assigned a new leader, Girish Wagh, from another division of Tata Motors. His past experience of bringing a low-cost pickup truck to market and eventually capturing the market for three-wheelers prompted him to see the Tata Nano project in a different light. To him the low-cost challenge was not only about cost, but also about customer needs and regulatory requirements. In other words, cost reductions needed to be premised upon delivering the core buyer value that mattered to both customers and potential customers.

From the inception of the idea on that rainy afternoon in Bangalore, the Tata Nano was never about what was good for existing passenger car owners per se. Instead, it was about what was good for the millions of Indian families crowding onto scooters or other two-wheelers and how to provide them with a safe, comfortable, reliable mobility that was economical and decent. The team realized that this value proposition to buyers should not be compromised while they endeavoured to achieve target costing for the 1-lakh price point. It would be a journey to build a proper car that delivered critical buyer value while dramatically reducing costs to make it accessible to the masses.

They came to realize that some factors could not be reduced or eliminated even though doing so would reduce costs. For example, making the Nano a two-door car could achieve substantial cost savings, but omitting easy access to the rear seats would greatly inconvenience the typical multi-generational Indian families, and therefore could not be adopted.

Likewise, a typical small car has a turning circle of more than 8.6m (28ft) corresponding to a steering angle of 38mm to 40mm (1.5in to 1.57in). The team designed a steering angle of 43mm (1.69in) so as to achieve a very small turning circle of 8.0m (26ft 3in). It had never been done before – and not doing so would have saved costs – but they knew it was critical to the end user on Indian roads, and to the Nano’s practicality and character. In fact, all cost innovations were premised upon and conducive to the goal of transforming the life of Indian families by getting them off a two-wheeler and into a safe, comfortable, fuel-efficient passenger car.

In seeking to provide a comfortable, relatively spacious, reliable and low-cost car, Tata Motors collaborated with Bosch to design a two-cylinder aluminium rear engine in place of the conventional four-cylinder steel front engine. While 98% of passenger cars had a front engine with either front-wheel drive or rear-wheel drive, a rear engine with rear-wheel drive would create a lot more space without having to increase the size of the car. Moreover, a smaller footprint would offer buyers tax savings over bigger passenger cars and the car would weigh less, and therefore require a less powerful engine to achieve the same performance, as well as saving on the transmission system, rolling parts and the suspension system. With the engine in the rear, combined with innovative body design and styling by the project team, the Nano was 4% wider, 14% taller and had 21% more interior space than the Maruti 800, the then market leader of the small and compact car segment. It had a curb weight of 600 kilograms (1,322lb).

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The innovative engine of the Nano not only cost less to build but also provided better fuel efficiency, emission control and cost of maintenance. The car had a 4-speed manual transmission system capable of a maximum speed of 105 kilometres (65 miles). It also had fuel economy of around 21 kilometres per litre (49 miles per gallon) under city driving conditions. With a carbon dioxide value of 101 grams per kilometre (5.7oz per mile), it had the lowest emissions of all cars in India and set a new standard for other car manufacturers.

Another example was the system control of the engine. A typical electronic control unit (ECU) for a mid-sized passenger car in Europe had an average of 5,500 parameter groups. Yet the more complex the system control and software design, the more processors and system control sub modules were required, and the higher the power consumption and heat generation, besides the added cost. The Nano reduced the parameter groups to only 1,700. An idle speed control unit, for example, was typically made up of more than 100 parameters, yet most drivers would hardly notice the difference in revolutions per minute (RPM) in their cars, even up to a difference of 20 RPM. The Nano was designed with only 7 parameters.

Among other examples of cost innovations, the front seats of the Nano had no seat frame and were adjustable to only three fixed reclining positions, which resulted in 10% fewer components than the Maruti and a 60% reduction in cost. The door handles were designed with 70% fewer parts than the cheapest European cars. The dashboard was centrally placed with a bare-bones instrumentation panel, speedometer, odometer and digital fuel gauge. The fuel inlet and cap were placed under the nose of car inside the front boot, which eliminated the need to cut a hole on the side of the car body. The wheels were made of low-cost alloy with only three lugs (instead of four on most conventional wheels). The tires were tubeless 12-inch tires, with the front ones smaller (narrower to be exact) than the rear tires, with a 7.1- inch ground clearance which provided better road balance and lighter steering control without the need for power steering. The body was made of lightweight sheet metal, which delivered critical cost savings. But it was stronger than a conventional car body as it had ample crumple zones and borrowed from the design concept of a motorcycle to use both the body skin and internal triangular space frames to support the structural load.

The team’s cost-reduction efforts were not limited to product innovations. To lower the cost to users, they endeavoured to lower the total cost of ownership of the Nano, not only in terms of the upfront purchase price, but also monthly fixed expenses and operating expenses such as after-sales services and maintenance, as well as interest repayments on loans. The team created a suppliers outreach programme that included more than 800 different suppliers. In addition to targeting the manufacturing costs, operating costs and replacement parts were worked out starting from the prototype.

To reduce the monetary burden on customers migrating from a two-wheeler to a car, the team arranged cheaper financing services for borrowers through partnerships with major Indian banks. People could purchase a Nano by paying as little as Rs 2,999 ($59) and financing the rest at a lower rate of interest than that of other four-wheelers. For example, the official interest rate on the Nano’s closest rival the Maruti 800 at ICIC Bank was 14.5-16%, whereas that on the Nano was 13%. Tata Motors itself offered financing at 12-13%, which in turn brought the company extra income through customer loans.

The Tata Nano research team conducted an operating economics study and calculated the total cost of ownership based on the total investment and monthly repayments over 36 months,

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usage of 1,250 kilometres (777 miles) per month, and all monthly fixed expenses and operating expenses. When compared with a range of alternatives, the Tata Nano was among the most affordable options not only against other small and compact passenger cars, but also three-wheelers and motorcycles in India.

An innovative distribution plan was designed to reach the great mass of Indian families. Tata Motors intended to distribute the Nano through Tata Group’s non-traditional channels, like electronics retailer Croma and the fashion retailer Westside. In addition, the Tata Nano team seriously explored the possibility of extending such non-traditional channels to include distributed manufacturing, whereby semi knocked down kits (SKD Kits) could be sent to strategically positioned satellite mini-factories where the Tata Nano could be assembled like Ikea furniture and distributed directly to buyers. In so doing, Tata Motors expected to make massive cost savings on operating assembly lines, running local dealerships, and paying for labour. Furthermore, it could also save on high insurance fees for the delivery of cars requiring a long, dangerous trip across India.

Challenges and Surprises: A Bumpy Road for the Nano

The Tata Nano team was well on its way to achieving its cost target when Ratan Tata announced to the world that the launch price of the base model would be Rs 1 lakh on January 13, 2008. Yet a huge challenge loomed ahead. In the spring of 2008, the prices of oil, metal and other commodities sharply and unexpectedly increased. 5 The manufacturing and processing of raw materials were heavily dependent on petroleum, as was transportation. When the price of oil soared to USD $200 per barrel, it drove up the prices of derivatives like plastic, and other raw materials like copper, anywhere from 40% to 200% in some cases.

With only six months to go until the scheduled start of production, and less than a year to go before the Tata Nano was to be launched commercially, the project team went back to the drawing board and reassessed every single item, looking for further opportunities for cutting costs. At the same time they brought back key suppliers in the outreach programme to renegotiate the pricing of every single item. After a series of deliberations, all key suppliers agreed to cooperate with Tata Motors to reach the cost target by keeping the original prices and engaging in further cost reduction efforts.

The challenge that almost derailed the project, however, came from a completely different source. As a corporation with a strong reputation for social responsibility, Tata Motors intended to locate the manufacturing facilities for the Nano in one of the poorest areas in India. The management believed that by doing so, Tata Motors could create jobs for the local community, thereby helping regenerate a part of the country that was socially and economically lagging. Singur in West Bengal was such an area. The state government of West Bengal offered Tata Motors attractive incentives for setting up the manufacturing plant in Singur in anticipation of the employment opportunities and economic prosperity it would bring to the local community.

5 The causes of the price spikes are subject to debate. Some analysts believe that the global commodity price

rises in early 2008 were caused by a combination of factors, particularly, the strong demand of the developing economies on the one hand, and the attractiveness of commodities as alternative financial assets against the backdrop of intensifying credit market problems and slowing growth in advanced economies on the other.

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The initiative, however, met strong local resistance. Between 2006 and 2008, Ms Mamata Banerjee, then head of the Trinamool Congress Party, repeatedly voiced strong protests in the media against the conversion of arable land for industrial use and the way the West Bengal government had acquired the land. Firmly believing that it was pursuing a lofty cause, Tata Motors went ahead and built the facilities despite the disgruntlement and accusations.

In June 2008, the political agitation turned directly against Tata Motors. Protesters included former landowners who were dissatisfied with the compensation they had received and hired goons reportedly brought in by Mamata Banerjee’s organizers. The swelling crowd of protesters stormed the wall of the new Tata Nano plant in Singur, coming into conflict with the policemen guarding the compound. The protest became increasingly violent, threatening the safety and wellbeing of the company’s 400 white-collar workers and more than 800 apprentices located at the Singur plant.

On the fateful evening of August 28, 2008, Girish Wagh took the extremely difficult and painful decision to stop the work at the new plant. At this point the plant was 95% complete. In fact, five Nanos had already been manufactured in Singur during the test phase and Rs 15,000,000,000 ($297,589,462) had been spent on the site. On October 3, 2008, Ratan Tata announced that Tata Motors would pull out of Singur. Within the next month, Tata Motors managed to strike an agreement with the Gujarat state government for a parcel of land in Sanand, which became the new home for the Nano, 2,100 kilometres (1,305 miles) away.

The move from Singur to Sanand was no ordinary move. The plant had been designed to last for decades, not to be dismantled right after installation. It involved detailed planning down to accounting for literally every single nut and bolt. This forced the team to come up with new ideas and techniques for dismantling the equipment and executing anti-rust protection procedures for transit. Every single part was meticulously tagged, photographed, packed and loaded onto the trucks, so that anyone could track and retrieve any part during the transit. The entire process took 3,200 trailer trucks hauling a distance of 2,100 kilometres (1,305 miles) over a period of four months to complete.

To compound the situation, 46 of the tier-1 ancillary manufacturers who had already made substantial investments in setting up their respective facilities in Singur had to relocate immediately to the new site in Sanand, and in the middle of the global financial crisis. In a true spirit of partnership, Tata Motors agreed to bear 75% of the relocation costs for all 46 of them.

As the commercial launch of the Tata Nano approached, an interim manufacturing site was needed while the Sanand plant was being built. The Tata Motors Ace truck plant located in Pantnagar, 1,300 kilometres (808 miles) to the Northwest of Singur, shouldered the responsibility. In less than four months, the Tata Nano team managed to roll out five cars in Pantnagar, with a maximum capacity of producing 50,000 Tata Nanos per year.

Meanwhile, Tata Motors, working in collaboration with the construction companies, suppliers and the state government of Gujarat, completed the new plant in Sanand in 14 months (for a project that would normally have taken 24 months). On June 2, 2010, the new plant was officially inaugurated in Sanand, with a capacity of producing 250,000 Tata Nano a year to meet peak demand, and a reserve capacity of up to 350,000 a year.

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A People’s Car or a Poor Man’s Car?

Heroic though the relocation effort was, it unavoidably incurred substantial additional costs for Tata Motors. And, more critically, it distracted the management from its original strategic plan and the distribution plan for Tata Nano in particular. Instead of using non-traditional channels and adopting the SKD models to allow the Tata Nano to reach Indian families throughout the country, Tata Motors resorted to traditional dealerships for the display and sale of the car, as these were already in place. Moreover, due to the limited production capacity of the interim facilities, only 1,000 cars were available for display across India when the Nano was launched commercially, and they went on display in larger showrooms in big cities.

As typical two-wheeler buyers were reluctant to walk into a large car showroom, the “people’s car” mostly reached existing car owners who were looking to buy Tata Nano as a second car for its cheap price. As the reputation of the Tata Nano went from being perceived as the “people’s car” to the “cheapest car” by existing owners, two-wheeler owners were turned off. After all, what they wanted was not only better mobility but also to upgrade their socioeconomic status.

By the end of March 2012, exactly three years after its commercial launch, monthly sales crossed the 10,000 mark for the first time. To be exact, 10,475 units had been delivered by Tata Motors’ dealers to buyers that month, nowhere near the original projection of 20,000 to 25,000 units per month.

In April 2011, Tata Motors put together a 10-member crack team to monitor the progress of Tata Nano sales. One of its actions was to set up 210 “First-class Showrooms” in small cities and towns across India, manned by 1,200 personnel. Each showroom displayed one Tata Nano in a floor area of only 50m²(538ft²). To increase the distribution reach, Tata Motors tied up with the hypermarket chain Big Bazaar to display the Tata Nano at the latter’s 70 outlets in smaller cities and towns, making it more accessible and real to potential buyers.

While the crack team was still working hard to get the sales and marketing campaign back on track, Ratan Tata announced at the Geneva Auto Show 2012 that the humble Tata Nano was about to get a major upgrade from its “people’s car” roots to a must-have fashion item. The headline read: “Tata Reboots Nano, World’s Cheapest Car, as Coolest Small Car.”

Despite this effort, Nano sales dropped from 74,521 cars in 2011-12 to 53,847 cars in 2012- 13, followed by 21,130 cars sold in 2013-14 and 16,903 cars in 2014-15. In 2015 Tata Motors launched Tata Nano GenX in an attempt to revive the Nano brand by repositioning it as a more upmarket product. Yet sales of the Nano continued to dwindle. In 2016, barely over 10,000 GenX cars were shipped. Apparently the “people’s car” has missed its people.

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Questions to think about before the class and while watching the three videos:

1. If screened against the Blue Ocean Idea Index (BOI Index), did the Tata Nano, as originally conceived, create exceptional utility? Was it strategically priced to capture the target mass of four-wheeler noncustomers? Did it exercise target costing and hit its cost target? Did it effectively overcome possible adoption hurdles for employees, partners and the general public?

2. When the prices of oil, metal and other commodities rose sharply and unexpectedly in 2008, how did Tata Motors respond? What allowed it to overcome the seemingly insurmountable obstacles posed by the crisis?

3. Despite huge initial orders for the Nano, by the time the car was commercially available, sales fell short of performance expectations. What went wrong here? In particular, what did Tata Motors mishandle when it tried to build its facilities in Singur with the intention to promote local growth and prosperity? In your opinion, what was the key problem in the execution of the Tata Nano strategy? Could you explain this using the blue ocean strategy framework?

4. What would be a step in the right direction for the Tata Nano if it ever wants to get back on track and head towards the blue ocean?

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