Question

Case : BHEL

Bharat Heavy Electricals Limited Concentrates on the Power Equipment Industry Bharat Heavy Electricals Limited (BHEL) is India’s largest engineering and manufacturing enterprise, operating in the energy sector, employing more than 42000 people. Established in 1956, it has established its presence in the heavy electrical equipment’s industry nationally as well as globally. Its vision is to be ‘a world class enterprise committed to enhancing stakeholder value’. Its mission statement is: ‘to be an Indian multinational engineering enterprise providing total business solutions through quality products, systems, and services in the fields of energy, industry, transportation, infrastructure, and other potential areas’. BHEL is a huge organization, manufacturing over 180 products categorized into 30 major product groups, catering to the core sectors of power generation and transmission, industry, transportation, telecommunications and renewable energy. It has 14 manufacturing divisions, four power sector regional centers, over 100 project sites, eight service centers and 18 regional offices. It acquires technology from abroad and develops its own technology at its research and development centers. The operations of BHEL are organized into three business sectors of power, industry and overseas business. Besides the business sector departments, there are the corporate functional departments of engineering and R & D, human resource development, finance and corporate planning and development. BHEL’s turnover experienced a growth of 29 per cent, while net profit increased by 44 per cent in 2006-07. BHEL has formulated a five-year strategic plan with the aim of achieving a sustainable profitable growth. The strategy is driven by a combination of organic and inorganic growth. Organic growth is planned through capacity and capability enhancement, designed to leverage the company’s core areas of power, supported by the industry, transmission, exports and spares and services businesses. For the purpose of inorganic growth, BHEL plans to pursue mergers and acquisition and joint ventures and grow operations both in domestic and export markets.

BHEL is involved in several strategic business initiatives at present for internationalization. These include targeting the export markets, positioning itself as a reputed engineering, procurement and construction (EPC) contractor globally, and looking for opportunities for overseas joint ventures. An example of a concentration strategy of BHEL in the power sector is the joint venture with another public enterprise, National Thermal Power Corporation, to perform EPC activities in the power sector. It is to be noted that NTPC as a power generation utility and BHEL as an EPC contractor have worked together on several domestic projects earlier, but without a formal partnership. BHEL also has joint ventures with GE of the US and Siemens AG of Germany. Other strategic initiatives include management contract for Bharat Pumps and Compressors Ltd. and a proposed takeover of Bharat Heavy Plates and Vessels, both being sister public sector enterprises. Despite its impressive performance, BHEL is unable to fulfil the requirements for power equipment in the country. The demand for power has been exceeding the growth and availability. There are serious concerns about energy shortages owing to inadequate generation and transmission, as well as inefficiencies in the power sector. Since this sector is a major part of the national infrastructure, problems in the power sector affect the overall economic growth of the country as well as its attractiveness as a destination for foreign investments. BHEL also faces stiff competition from international players in the power equipment sector, mainly of Korean and Chinese origin. There seems to be an undercurrent of conflict between the two governmental ministries of power and heavy industries. BHEL operates administratively under the Ministry of Heavy Industries but supplies mainly to the power sector that is under the Ministry of Power. There has been talk of establishing another power equipment company as a part of the NTPC for some time, with the purpose of lessening the burden on BHEL.

Questions :

1) BHEL is mainly formulating and implementing concentration strategies nationally as well as globally, in the power equipment sector. Do you think it should broaden the scope of its strategies to include integration or diversification? Why?

2) Suppose BHEL plans to diversify its business. What areas should it diversify into? Give reasons to justify your choice.

Total: 500 words.

Answer 1

Question one answer

The company BHEL is world recognized company promoting its business mainly in the power equipment sector. It is doing exceedingly well and it is reflected by the growth in turnover and net profit. Its turnover growth is 29 percent and the net profit growth is 44 percent. BHEL also pursues to acquire and merge with other companies. But the company also suffers from shortcoming to not fulfilling the demand of power equipment in the country. It means that there are potential demands in the market that are not being fulfilled by the company. Energy shortages as well as power sector inefficiency make the country unattractive for foreign investors to invest in the power sector. Moreover, BHEL is facing extreme competition from the international companies. Talk of setting another company in the power equipment sector is also posing threat to the business of the BHEL Company. Thus considering the above scenario and reliance of the BHEL Company in only the power equipment sector, it is feasible that the company should broaden its business operation. Dependence on a particular sector may jeopardize the future success for BHEL if market slows down or recession takes place. Therefore, the company to build its capacity must choose integration strategies. The integration strategies will be helpful as the market has a good demand and therefore, the company should pursue mergers and acquisition strategy to fulfill the market demands. With mergers and acquisition, the company can be able to gain economies of scale to beat competition from Chinese and Korean companies, and grow its business. Thus, the integration strategy should be pursued by the company. Another strategy to consider is diversification to mitigate the risk factor of dependency on only one sector. Diversification to the other areas can increase earning sources and broaden the products base of BHEL Company.

Question 2 answer

The BHEL Company is dealing in the power equipment sector. But due to present competition and challenges in the power sector, it should diversity its business and the areas are transportation and telecommunication sectors. In transportation sector, it has good opportunity as the case reveals that the company already has experience of transportation industry, it should consider the transportation sector. The transportation sector can provide the impetus to the business growth for BHEL company because this sector has significant potential. The company focuses on sustainable development; therefore, it should diversify its business to nuclear power sector. This initiative can promote sustainability as well as add more earning sources to the BHEL Company. The next thing the company should consider is diversifying its business to infrastructure sector. Infrastructural development by BHEL Company can also support its core business in the power equipment sector. It can diversity its business to the defense sector as well. This sector also provides promising return to the company. Thus these sectors should be targeted by the BHEL Company to reduce its dependency on the power sector and increase its revenue sources.