Bajaj - Strategy: A Game-Theory Approach

Strategy: A Game-Theory Approach

The introduction of BS IV norms is a very significant event in the time-line for the two-wheeler industry in India. The BS III norms which are followed so far and the planned BS IV norms are emissions control procedures that the two-wheeler must adhere to in order to avoid any kind of strict action from the regulating bodies. Two-wheelers release four to five times more NOx compared to four-wheelers, which defeats the purpose of stringent norms for four wheelers. In order to control the pollution caused by the two-wheelers, the BS IV norms will be put to effect from January,2017 onwards. As motorcycles and scooters do not have exhaust air systems, this results in higher pollution compared to four-wheelers. Implementing the BS IV norms would be possible only if the engines are that are used presently are replaced with newer upgraded engines. This demands a massive overhaul of the technology and the production procedures for the engine making and assembly processes.

Bajaj Auto has already invested significant amount in the R&D of the new BS IV compliant engines and have also come up with new production procedures for the same. But since adopting a new technology and fine-tuning the production processes is a time-consuming process, Bajaj understands that the initial costs of production would remain high. But over time, the costs will gradually come down once the plants in Pune start achieving economies of scale. Bajaj knows the stringent regulations in its field of operation and further knows the penalties any violation and bring about. So it is ready to invest more money to bring about the best engine by January,2017 when the BS IV norms would be coming to effect.

 Bajaj knows that its competitors are aware of the upcoming emission regulation standards and would try their best to counter any strategic move on the part of Bajaj with their best strategy. The choices for Bajaj are assumed to be two for simplifications. The positives and negatives of each are discussed below.

Strategy 1: Bajaj can go for an early launch of the BS IV compliant Pulsar models in November,2016 itself. As almost none of its competitors would have the product ready to the new standards in the short time-line, Bajaj would see a jump in its market share. If Bajaj can utilise this increase in market share and generate positive response from the customers, it will be clearly ahead of its competitors in the upcoming two-years. But the down-side is huge immediate increase in the R&D costs for the next two quarters. This would mean the cash flow would decrease and the company will be under pressure to increase the product awareness and the added benefits that they are providing vis-à-vis the other players within a short period of time without developing a full-fledged marketing plan.

Strategy 2: Bajaj can wait to launch the BS IV compliant models till 2017. This would mean that it does not have to increase the R&D costs all of a sudden and can wait till the economies of scale are naturally achieved. The huge technology costs would have meant the company would have to cut costs elsewhere and perhaps would have taken a huge debt to finance the project. On the consumer front, the company would also be on a secure footing as it can now devise a proper marketing plan and gather data from market research. This will help it to be at a better position to gauge the consumer behaviour regarding the new attributes and help it to better position the product.

Bajaj has competitors like Hero Motorcorp, TVS Motor company and Yamaha in this two-wheeler market. But for the sake of simplification we assume the market leader, Hero and Bajaj (our point of study) as the two players for the short-term. In the long-term we would not be able to neglect the other players and would take into consideration the effects of the others for the scenario where all companies go for a 2017 launch.

 Hero and Bajaj has had fierce competition in the past and the scenario is not pressing enough so as to bring the two companies to collude. So we can safely assume the scenario would be a non-cooperative one. We also assume that the scenario for the two players is same i.e. each knows of what the other company might strategically think of and the technology costs, marketing costs associated with each of them are equal. Under those conditions we can safely apply the game-theory construct as taught in class and come up with the associated pay-offs. In each case Bajaj is the Row player and the column player is denoted by Hero Motorcorp. The game is non cooperative, one-time and static.

The two-wheeler market in consideration is the 150cc motorbike segment with the estimated market value of 8000crores in 2016. If each player goes for a 2016 release, the market will be equally divided into 4000 crores each. By 2017 based on current trends the market size would increase to 9000crores. So there is an additional 1000crores market to be owned. We visited the nearby Bajaj outlets to conduct a survey based on the question: Would you be willing to pay a higher price for a technologically advanced 150 cc bike?