Teething Troubles at Pioneer Electronics Ltd

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By 2003, with revenues of around Rs. 160 crores, Pioneer Electronics Ltd. had established itself as a leading local manufacturer of consumer electronics and electrical goods in India. The company used to supply certain parts of TV, refrigerator and air-conditioners to various players in the industry apart from selling finished products directly in the market. With the increasing popularity of the company's products the CEO of the company, Mallesh Sen Gupta (Mallesh) planned to foray into new markets.

Pioneer Electronics Ltd. was established in 1977 by Rakesh Sen Gupta (Rakesh), father of present CEO Mallesh. Before, starting his own venture, Rakesh, who was an engineer, worked as technical expert in various organizations. After working in various organizations for considerable time, he decided to start his own venture. Initially, he started a small plant in Pune. He decided upon Pune because it was strategically located. During the initial days Rakesh did not have enough funds. So he took loan of Rs. 25 lakhs from bank, borrowed Rs. 9 lakhs from his father-in-law and put Rs. 12 lakhs on his own. The venture started with an initial capital investment of Rs. 46 lakhs. The company initially concentrated on manufacturing certain parts of electronic goods. However, credit sales increased the fund lock, which had a heavy impact on the company. The company struggled to pay the bank loans.

In early 1980s, there was spurt in the number of suppliers. With growing market for electronic items in India, many players entered the market. Most of the buyers of the company had multiple suppliers and the buyers uses to give order to the suppliers who quoted less price. Therefore, in order to get orders, Pioneer Electronics Ltd. was forced to quote lower price than its competitors to get order. This price cut had further eaten away the revenues of the firm.

In 1986, Mallesh, after completing his graduation in management, joined Pioneer Electronics Ltd. Mallesh understood the operations of the business very quickly. In one of his strategic discussions with his father, he said, "Time has come for us to bring in certain changes. Further, we need to increase the production level of our factory to avail the benefits of economies of scale.”
“I agree with you. But, what about the purchasers. Even if you produce, buyers need to buy our products. So, we need to produce according to the demand existing in the market,” said Rakesh.

“There is much more potential for TVs with the advent of cable network. The growth in upper middle class segment will lead to much more market demand in the coming years. To tap this potential we need to expand our production and produce goods at much more cheaper price. Even growing competition in the market is making big players to outsource certain activities like spare parts development etc. So, our buyer count is also going to increase. Still if there is slack in off take of our products, we ourselves will assemble the parts and sell the products. Anyway, we are manufacturing majority of the parts required for TV except picture tubes,” said Mallesh.

“But that requires lot of funds. Further for selling goods, we need to have good distribution network,” said Rakesh.
“Things will take care of itself with time,” replied Mallesh.

In 1988, Pioneer Electronics Ltd. opened a new manufacturing plant in Hyderabad. The company also started cost cutting exercise and organizational restructuring. The company reduced the manpower and decided to leave the relatively low value adding manufacturing processes to suppliers. The entire manufacturing process was streamlined by bringing in much more professionalism in procurement division. Mallesh restructured the materials management division and it resulted in cost reduction. This was possible by controlling the flow of goods from Pioneer Electronics Ltd.’s suppliers. By restructuring its relations with suppliers, the company was able to get quality products from its suppliers at a competitive price.