BUSINESS STRATEGY

INTRODUCTION Larsen & Toubro Limited (L&T) is a technology, engineering, construction and

manufacturing company. It is one of the largest and most respected companies in India's private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.

History of Larsen & Turbo

The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry. Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity.

In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream and the courage to dare. Their first office in Mumbai (Bombay) was so small that only one of the partners could use the office at a time! In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected.

In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to

manufacture products such as hydrogenated oils, biscuits, soaps and glass. By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies. Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence.

The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide. L&T has a global presence. A thrust on international business over the years has seen overseas revenues growing steadily. The company has manufacturing facilities in India, China, Oman and Saudi Arabia. It has a global supply network with offices in 10 locations worldwide, including Houston, London, Milan, Shanghai, and Seoul. Customers include global majors in over 30 countries.

Achievements of L&T

Built India's first indigenous hydrocracker reactor.

Built the world's largest continuous catalyst regeneration reactor.

Built the world's biggest fluid catalytic cracking regenerator.

Built the world's longest product splitter.

Built Asia's highest viaduct - Panvalnadi for the Konkan Railway.

Built the world's longest LPG pipeline.

Built the world‟s longest cross country conveyor.

Key Products of L&T:

Turnkey projects

Hydrocarbon, Power, Cement and allied machineries, Engineering services, Railway projects,

Construction

Construction services, Building products, Infrastructure concessions, Engineering services, International products

Engineered products and systems

Refinery, Oil and gas, Petrochemicals, Fertiliser, Coal gasification, Aerospace, Thermal power plant, Nuclear power plant, Defence, Cement

Electrical and electronic product and systems

Switchgears, Electrical solutions, Metering systems and relays, Medical equipment , Control and automation , Petroleum dispensers and systems , Tooling solutions

IT and engineering services

IT services, Engineering services, Embedded systems.

Machinery valves and industry consumables

Financial services

1. Infrastructure finance

2. Equipment finance

Shipbuilding

Key Competitors of L&T:

NHAI Nagarjuna Construction DLF Gammon India Hindustan Construction

Mission of L&T:

To compete and grow in a globalised business environment, L&T is implementing a strategic plan (Lakshya) for 2010-15. The plan has been drawn up in consulation with a leading international strategy consultant. It has set ambitious growth target for each business. Create long term value for the customers through superior product structuring by capitalizing on our knowledge pool.

Congruency between Vision, Mission and Core Values:

There is clear accord & harmony among Vision, Mission & Core Values.

1. Core Value: Performance DrivenVision: Attaining global benchmarks, constantly creating value, meeting expectations of employees, stakeholder’s and society, total customer satisfaction, enhancing shareholder value.

Mission: To compete and grow, ambitious target setting for each sector

2. Core value: Innovation & ExcellenceVision: Indian Multinational, professionally managed, Entrepreneurial and empowered team, L&T-ites shall be innovative, shall foster a culture of caring, continous learning, high corporate governance standards & constantaly creating value.

Mission: Included are the opportunity of diversifaction, creat long term value by setting new standard & through superior product structuring, capitalizing, on our knowledge pool & consulation with the leading international strategy consultant

3. Core Value: IntegrityVision : Enterpreneurial and empowered team, proffessionaly managed and committed, foster a culture of caring, trust (show uprightness and honesty as an important part of integrity).Mission: Capitalizing on our knowledge

4. Core value : Customer Focus & Mutual RespectVision: Customer satisfaction, enhancing shareholder value, fostering a culture of caring, trust, meeting expectation of society, employees and shareholders Mission: Create long term value for our customer through superior product structuring, partnering our customer by offering solutions, deep understanding of Indian sector and full range of financial products.

Vision of L&T:

PESTEL Analysis

1. Political Factors:

(i) SEZ Act to Boost infrastructural DevelopmentSEZ is the new destination for real investor. Currently 150 SEZs are approved out of 85 SEZs are in the IT/ITES area and the 10-15 SEZs in the electronics area. 130 SEZs are developed by real estate developers which constitute of about 50% of the total SEZ area. IT SEZ should be developed and made operational within the period of six months from the date of notification. Thus, 130 approved SEZ would result in investment of US$ 12bn immediately.

(ii) Cement Prices Reduced for State Infrastructure Projects:The continued thrust on the infrastructure development will provide impetus to the healthy growth in demand, protecting the bottom-line of cement companies to an extent. The reduction in the CST and in Freight rates on diesel and limestone will be marginally positive for some companies.

(iii) FDI Liberalization to Augment Industry Growth:Recent amendments by the government have made accessibility to the required capital much easier. Opening of FDI in construction and allowing developers to raise capital in international market has led to development of larger projects benchmarked against international standard.

(iv) REITs(Real Estate investment trusts) to Positively affect real Estate BusinessThe proposed introduction of REMF(Real Estate Mutual Fund) and REIT will boost real estate investment from the small investor’s point of view. This will allow small investors to enter real estate market with the contribution as less than Rs 10,000. The concept of REIT is on the verge of entering India and would be structured as company dedicated to owing and in most cases operating income producing real estate such apartments, shopping centre’s, offices & warehouses.

2. ECONOMIC FACTORS:

(i) Growth in Construction Activity Stimulating GDP Growth:India is witnessing tremendous growth & expansion of construction activities and construction is largest component of GDP. It has been growing at a rate over 10% in the past few years when GDP growth is around 8%. Within construction; sector such as roads, railways, housing and power have been keen drivers.

(ii) Rate Hikes Unlikely to Slow down Growth:

It has been analysed that the residential prices has been increased by about 15-20% on average in the last one year. There has been strong growth in demand supported by rising disposable incomes, low interest rates, and fiscal incentives on both interest and principal payment and increasing urbanization.

3. SOCIAL FACTORS :

(i) Shifting Consumption Pattern to Fuel industry GrowthThe consumption pattern of Indian households is undergoing a gradual, but steady change. The share of food and beverages, which used to constitute almost 50% of household spend until 2003 is fall to 45% by FY08. We expect the share of discretionary items to consistently rise given the rising affordability and changing aspiration levels. Increased exposure to western lifestyle has altered the consumption pattern of Indian people.

(ii) Rising Urbanization to Boost Industrial Growth:Urban infrastructure consist of drinking water, sanitation, sewage systems, electricity and gas distribution, urban transport, primary health services, and environmental regulation. Many of these services are in the nature of local public goods with the benefits from improved urban infrastructure. The urban population in India will grow by 85 million over the next 10years.

(iii) Green Building in India:The green building movement has gained tremendous momentum during 3 to 4 years, ever since the Green Business centre embarked on achieving the prestigious LEED rating for their own centre at Hyderabad. The Platinum rating for green building has sensitized the stakeholders of construction industry. There is tremendous potential for construction of green building in India. The estimated market potential for green building will be about $ 400 million in 2010.

4. TECHNOLOGICAL FACTORS:

(i) Low Technology Adoption to Hinder Growth:The poor state of technology adopted by the construction sector adversely affects its performance. Upgrading of technology is required both in the manufacturing of construction material and in construction activities. As a large number of construction materials are manufactured in the unorganised sector, effective monitoring and regulation of the production of these material to ensure proper quality become difficult. Use of low grade technology in the construction sector lead to low value addition and low productivity, apart from poor or substandard quality of construction and time overruns in projects.

(ii) Construction As Per Indian Requirements:The construction needs to be done as per Indian standards and requirements which will demand considerable changes from the international requirements. The Infrastructure requirements of India are much different as the population spread, increasing urbanization, increasing slums, the small space for roads, the water problems are more.

(iii) Ready-Mix-Concrete being Experienced With:The Ready mix concrete business in India is in its infancy. For example, 70% of cement produced in a developed country like Japan is used ready mix concrete business there. Here in India, Ready Mix concrete business uses around 2% of total cement production. The increasing use of ready mix not only saves time but also improves quality.

5. ENVIORMENTAL FACTORS:

Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability

With the entry of global companies into the Indian market, advanced technologies, are used in engineering & Construction.

With the development or evolution of infrastructure sector, many of the MNC enter into Indian market

Environmental situation affect the infrastructure sector.

Infrastructure such as roads and bridges affect the many sector such as automobile sector etc.

LEGAL FACTORS

Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry.

Indian government infrastructure policy aimed at promoting an integrated, phased and conductive growth of the Indian infrastructure sector.

Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world

Establish an international hub for engineering & construction companies so that new technology can be used.

Legal provisions relating to safety measures

Business Strategy of Larsen & Turbo Ltd.

Strategic Vision: To stimulate the active learning of rigorous engineering principles and practices within an environment informed by internationally-leading research this fosters creativity, innovation and professionalism.

1. Growth Strategies:

In a challenging market environment, an environment characterised by prolonged downturn in the domestic industrial sector and a recession in the global market, an engineering company like L&T had to follow some crucial strategies for growth. General practices would be to reduce costs, go into hibernation and wait till the climate becomes more conducive. Move in aggressively thereafter. There is certainly no single sure-fire recipe guaranteeing both survival and growth in a challenging market. According to Mr P.M. Mehta, Senior Vice-President (Operations), L&T is concentrating on hi-tech areas, vacating non-remunerative product lines and focusing on the exports market. The company is currently following a multi-pronged strategy for beating recession without compromising growth. Three years ago the company had visualised opportunities shrinking in the traditional sectors, process plants, power and refineries. It was then that the management really took a decision to move into the hi-tech sector. The company, which had a small presence in the defence sector earlier, started moving in aggressively after the sector was opened up to the private sector. L&T developed technology for manufacturing critical equipment for process, nuclear and defence sectors. It is currently looking at entering into joint collaboration with defence companies in various parts of the world. It is also in talks with leading aircraft manufacturers in India and abroad for supplying components. Defence orders are generally spread across four to six years. A submarine, for instance, would take 12 years for completion. The defence division could contribute Rs 1,500 to 2,000 crore five years down the line which would be almost five times the current contribution. Recently the company signed a joint venture with EADS Defence and Security, for

defence electronics in India. The €5.7 billion (Rs37, 791 crore) EADS Defence and Security is a systems solutions provider for armed forces and civil security.

2. Risk Management Strategy:

Doing business within India remains paramount. Vision is to become an ‘Indian multinational’ not just another ‘multinational’.

Showing a long term commitment to consolidating presence in select geographies through setting up of offices, entering into alliance with collaborators, developing marketing networks, brand promotion and wherever feasible, setting up manufacturing facility.

Investment made in the Middle East for training of workmen.

Building a motivated and globally benchmarked team of professionals through providing a fast track career growth, up gradation of compensation structure, setting up a Project Management Institute, conducting Companywide people engagement & leadership development programmes, international assignments and hiring Expats.

Institutionalised a risk management culture and framework in the Company

3. Future Strategy :

A blueprint for the next phase of growth till 2015, named Vision 2015, at Larsen and Toubro Ltd is being drafted. The company is planning to focus on segments traditionally dominated by foreign defence equipment makers and state-owned companies. Since 2000, L&T has charted two five-year plans to reposition the company which was heavily into engineering, procurement and construction segments with a large exposure to commodity businesses, such as cement and ready-mix concrete, to a more focused value-added engineering company. The first plan was devised by Boston Consulting Group, a leading global management consulting firm. It saw L&T divesting its cement business in favour of the Aditya Birla Group. This was done through a unique arrangement with L&T employees getting shares of their own company following the divestment. More recently, L&T divested its ready-mix concrete business in favour of Lafarge SA. The two five-year plans paid huge dividends to the shareholders of the company including its employees who hold a 12.7% stake in it through a trust. The market

capitalization of L&T was Rs15, 507 crore in January 2000. It soared to Rs1.31 trillion at the height of the bull rally in January 2008. L&T‟s recent moves such as signing a slew of pacts with nuclear engineering firms such as Westinghouse of USA, Atomic Energy Commission of Canada and Russia‟s Atoms troy export for nuclear plants, an entry into nuclear equipment forging, defence shipbuilding and the latest joint venture make it clear that L&T is focusing more on its core competencies. Its power business is also taking shape with 11 new factories making various parts of power equipment. The highly skilled areas of engineering that L&T is entering are currently largely serviced by imports. The operating margins are currently at 8-9% and the new areas it is entering could fetch margins of about 11-12%. The company also hopes that the nuclear program will be in place once the new government assumes power. By signing pacts with three companies in the nuclear energy space, L&T has hedged its risks as a nuclear equipment maker. It has put in place a nuclear equipment forging shop in Hazira in Gujarat at an investment of Rs1, 500 crore. This is in addition to a defence shipbuilding yard near Chennai at a cost of Rs1, 500 crore. As per plan, the company will create three operating companies to look after defence, aerospace and nuclear power sectors for effective operations. The three operating companies could happen in 2012-13, provided they had the requisite volumes.

Porter Five Forces Model:

1. Threat of New Entrants:

Low threat of new entrant due to Economies of scale Labour Intensity High Capital Requirement Lack of Knowledge and Experience Acess to input Access to maket

2. Supplier’s Bargaining Power:High Bargaining power of supplier. Suppliers of construction materials are fragmented and are extremely critical for this industry since most of the construction work is outsourced. Proper supply chain management is a costly yet critical need.

3. Buyer’s Bargaining PowerThe Bargaining power of buyer is low/moderate. Buyers in Engineering & construction sector have less choice due to limited number of players. The market forces haven’t empowered the buyers to a large extent.

4. Industry Rivalry: The industry rivalry is high. This instinct of the industry is primarily driven by the technical capabilities acquired over years of gestation under the technical collaboration with international players and the completion of project on time.

5. Substitute: There is no perfect substitute to this industry. It will be effected only when the country is fully developed than the company need to look forward towards the emerging economies.

SOWT ANALYSIS:

Strengths

Larsen and Toubro (L&T) is India's largest engineering and construction company.

It has created international presence by operating supply network offices in 10 locations worldwide, including Houston, London, Milan, Shanghai and Seoul.

L&T has created a strong brand name by building worlds largest Tubular Reactor for a petrochemical plant and has also built world's longest Product Splitter and longest LPG pipeline.

Larsen and Toubro's order book has reported continuous growth. The company has a strong pipeline of projects in domestic as well as international markets, which is likely to ensure a steady revenue growth

Weaknesses

In spite of having a diversified expertise, the revenues of the company are highly concentrated

Opportunities

The company has acquired the switchgear business of TAMCO Corporate Holdings of Malaysia in April 2008

With TAMCO the company will be able to offer a comprehensive range of MV switchgear and become a significant player in the MV segment in India

L&T has also entered into various joint ventures in the recent past. L&T has joint venture agreement with Tamil Nadu Industrial Development Corporation Limited, Mitsubishi Heavy Industries and A.A. Turki Contracting & Trading Corporation (ATCO) of the Kingdom of Saudi Arabia.

These joint ventures boost and strengthen the operational efficiency of the company, as well as provide it with avenues to generate additional revenues and also leverage its strong presence in order to exploit the growing capital goods and infrastructure industry

Growing Indian capital goods and infrastructure industry as the government has planned a series of measures to encourage private sector participation and increase spending on infrastructure. Capacities are being ramped up in Railways, Roads, Ports, Airports and Urban infrastructure to sustain the momentum of double digit growth in the industrial sector.

Threats

Larsen & Toubro faces stiff competition in the international market with construction majors in the Middle East including ABB of Sweden and Bechtel of the US. Stiff competition could erode the company's market share and reduce its profitability.

Engineering and construction companies such as Larsen & Toubro (L&T) are facing pressure on their earnings due to the high interest rates on working capital. L&T's interest costs increased more than three-fold in the first six months of FY2009, which would impact its profit before tax (PBT). Rising interest rates would put pressure on the margins of the company