tata steel - an adaptive organization
TRANSCRIPT
1IMT CASE JOURNAL, JUL-DEC 2014
TATA STEEL - AN ADAPTIVE ORGANIZATION1S. Subramanian
ABSTRACT
Steel is an old industry and hence not expected to have dramatic changes in its structure or technologies. Hence the steel companies were also generally not prepared to face such shocks. But Tata Steel, India’s oldest private sector integrated steelmaker, faced many such life threatening situations between 1991 and 2013. It had overcome three such scenarios successfully. In 2007, the company acquired the British-Dutch Steel maker Corus, which was five times bigger than itself in revenue terms. Within a year of acquisition, the steel demand fell sharply in Europe, which severely affected the financial performance Corus seriously. Tata Steel also had other problems like poor efficiency at the European Plants, burgeoning debt and lack of integration between Indian and European operations. As on 2013 the company was struggling to turnaround the European operations which in turn resulted in overall loses.
Keywords:
Adaptive Organization, Turnaround Management, Tata Steel, Steel Industry, Merger & Acquisitions, Emerging Market Multinationals.
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Introduction
Tata Steel, the century old Indian steel bellwether, was facing a major problem as
on 2013, as it struggled to cope up with falling demand situation and poor
productivity in its European operations. Turning around Tata Steel Europe (TSE),
which was earlier known as Corus, became a major challenge for the new
Chairman Cyrus Mistry, who had taken the reins of the group in December 2012.
Tata Steel acquired Corus in 2007, at the peak of steel demand cycle, at a relatively
very high price according to analysts. Within two years, the global economy fell
into recession, pulling down the European steel market along with it. This resulted
TSE getting into losses, which in turn was effectively dragging the overall
performance of Tata Steel Group. The initiatives taken by the top management had
not yet streamlined the financial performance and analysts were predicting no
Tata Steel - An Adaptive Organization
immediate recovery of European steel market. But the patience of Tata Steel
investors might run out soon.
Tata Steel – Till Nineties
Tata Steel, which was known as Tata Iron and Steel Company (TISCO) till 2005,
was formed in 1907. It was a part of Tata Group, one of India’s largest and oldest
business conglomerates. It started steel production in 1911 in Jamshedpur (now in
Jharkhand State in North India) and went public in 1917. TISCO was Asia's first
integrated private sector steel company. The company had captive mines for the
raw materials used in steel production including coal, iron ore and other minerals.
The growth of TISCO was gradual and consistent till seventies. In the eighties, the
company diversified in to businesses like bearings, tubes etc as the government
controls did not allow it to grow in its core business of steel. The company had 18
subsidiaries in eighties and all of them were located in Jamshedpur. TISCO was
always ranked among India’s top companies till eighties in terms of its financial
performance.
The Indian steel industry was a highly protected one until the year 1991. New
capacity additions were reserved for public sector units and the Government of
India controlled prices and distribution. There were only two major integrated steel
producers, namely the Steel Authority of India (SAIL), owned by Government of
India and TISCO. Due to restrictions on capacity additions, there was shortage of
steel in the country as the demand exceeded the supply. In such environment,
TISCO was able to sell whatever it produced. Hence the company concentrated
only on distribution and ignored other issues like cost control and product
promotion.
Problem of early nineties- Outdated structure & technology and lack of focus
Indian government started introducing measures to liberalize steel industry since
1991 and by mid 1990s almost all the controls were gone. This led to the addition of
new steelmaking capacity in the private sector, particularly in secondary steel
sector. This in turn transformed the Indian steel market from a duopoly to a highly
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competitive market place. New players like Jindals, and Ispat entered the market
with their own steel making units that were equipped with the latest technology.
In 1991, Steel making in TISCO was still done through the traditional and
outdated open-hearth process; its youngest blast furnace was about 33 year old.
The steel productivity was at 80 tons of ingot steel produced per man year against
the 400 tons per man-year in South Korean steel plants. The productivity at SAIL, i
the other Indian primary steel producer was 105 tons per man year .
The company’s organizational structure was also unwieldywith around 30 layers
in its organizational hierarchy. This in turn made the decision making process very
slow. Further, due to the licence raj regime, the company had diversified a lot and
had 18 subsidiaries ranging from steel related business to engineering business.
Almost all the subsidiaries were making losses. Besides, some of the subsidiaries
were in same area of operation and competed against each other. For example,
there were three companies which were making refractories (Ipitata refractories,
Tata refractories and TISCO itself), resulting in avoidable duplication.
Analysts commented that the company resembled a merchandise store, producing
and selling a wide variety of steel products, at the cost of economies of scale, both
at the production as well as in market. TISCO’s product mix was very poor. Only
half of the crude steel produced was used to produce high margin downstream steel
products. The rest was sold to steel re-rollers as ‘semis’, which were of low margin.
In the financial year 1991-92, TISCO made a profit of INR (Indian Rupee) 2.78
billion of which only INR 0.69 billion was from the company’s net sales of INR
26.86 billion in steel business. The rest came from ‘other income’ including
dividends and interest earnings.
In addition to these operational issues, TISCO was also besieged by problems at
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Ii Business Today 1992. Going for a new mould. November 22, 50-53.
the board level as Chairman Mr Rusi Modi and Vice Chairman Mr Ratan Tata had
difference of opinions. Given the plethora of problems faced by the company,
many analysts had predicted that TISCO would be the first casualty of the ii
liberated steel regime of the 90s .
Overcoming the Problems
TISCO’s management realised these problems quickly. In November 1992, the
company’s then newly appointed Managing Director Mr. JJ Irani unveiled a new
vision for the company that focused on quality and customers. It read:
“Tata Steel dedicates itself to Total Quality. We shall constantly strive to be a
supplier of World Class goods and services, by anticipating and exceeding the
expectations of all our customers. Continuous improvement, teamwork,
commitment and credibility will be our guiding values”
First the board problems were sorted out with the removal of Mr.Rusi Modi and
Mr.Ratan Tata became the Chairman of the company. Subsequently the company
adopted the following strategies to overcome the weakness.
Concentrating on the core business of steel
In 1994, the company decided to focus on its core steel business and all the non-
steel businesses were sold off. The cement division was sold to France based
multinational cement major Lafarge. The captive power plant was sold to the sister
power companies from Tata Group. TISCO’s stake in Tata Timkin was sold to the iii
US partner Timkin . The infotech division was also hived off. The other steel
related business subsidiaries were delinked from the main steel business by
creating seven new profit centers. These profit centers were to be governed by their
respective company boards and required to become sustainable on their own over a
period of ten years.
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ii Business India 1995. Seize the day, ‘, September 12-25, 98-101.iii "www.equitymaster.com 1999. Restructure, core competency is the latest mantra at Tisco. January 8, retrieved from http://www.equitymaster.com/detail.asp?date=01/08/1999&story=1&title=Restructure-core-competency-is-the-latest-mantra-at-Tisco on 20th Nov 2013."
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Modernization and Moving up the value chain in terms of the product-mix. iv
The downstream products in steel industry typically carry higher margins . But
TISCO’s presence in this segment was very marginal in early nineties. To
overcome this short-coming, the company directed its new investments towards
downstream values added products, particularly the flats. The modernization in
1996-98 periods increased the capacity of the flat products to 2 MTPA (Million
Tonnes Per Annum). These moves helped to tilt TISCO’s product mix towards
more profitable products.
Organization restructuring and right sizing
As noted earlier, as a typical old manufacturing company, TISCO had several
layers in itsorganizational hierarchy. The company went restructuring, and with
the help of consultants like Mckinsey, it was able to bring down the number of
layers to 11 from 30. Besides, the IT facilities like intranet and email were also
introduced to ease flow of communication between the layers. The over sized
manpower (78,000 employees in FY 1992-93) was another majorissuethat TISCO
had to tackle. The firm gradually reduced the number of employees in its payroll
through voluntary separation schemes and by 1998, the company was just 55,000
strong, thirty percent lower from its peak in 1993.
Customer orientation
Given that TISCO never needed to worry about customers till nineties, the culture
of customer focus was missing in TISCO. The management took many efforts to
bring in customer orientation among the employees.
They include:
1) Segregation of marketing and the sales functions v
2) Introduction of performance-based compensation system .
3) Conducting ‘Customer week’ program every year to reiterate the company’s
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iv Ibid 2v Business Today 2001. Tisco Then & Now. February 21, 2001, retrieved from http://archives.digitaltoday.in/ businesstoday/20010221/cf.htmlon 20th Nov 2013
vicare for the consumers
With the above mentioned measures, TISCO was able to successfully establish
itself as competitive player once again in Indian Steel Industry by late nineties.
Problem of late nineties – facing downward cycle of steel industry
Steel Industry, like any other commodity industry, is cyclical in nature where the
prices move up and down cyclically over time. The downward cycle period would
always be tough and typically forced steel makers to adjust their product capacity
by shutting down the plants. These closures restore the equilibrium between
demand and supply and would create an upward movement in steel prices.
However, Indian steel makers remained largely insulated from the cyclical
movements of the global steel industry till early nineties thanks to Indian
government's restrictions on steel imports till nineties.
The global steel industry got into a downward cycle in late nineties. But this time
the price crash was more serious than the previous cycles. There was a dramatic
shift in the supply-demand picture following the collapse of the erstwhile Soviet
Union. After the breakup of the Soviet Union, steel consumption in the former
Soviet Union states fell drastically. Consumption in the region fell from 116.6 vii
MTPA in 1990 to 28.8 MTPA in 1998 and recovered to 40.7 MTPA in 2000 .
Steel production too fell, but not so sharply as consumption resulting in huge
surplus steel in those countries. The notional surplus of finished steel (difference
between production and consumption) in the year 2000 in the former USSR
countries was around 45.6.million tonnes. Hence these countries resorted to
exporting their surplus steel products. They sold steel in the international market
cheaply on account of lower production costs flowing from large-scale
devaluation of their currencies and the vastly depreciated plants and machinery,
built during the socialist regime at low costs. This led to collapse of steel prices in
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vi Business India 2001. New Steel in an old bottle. Jul 23- Aug 5, 54-60vii Scope Marketing 2001. Steel Industry-2001
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the international steel market.
Falling demand growth rate
Given the fact that by late nineties Indian steel market was liberalized fully and
hence not protected from global steel cycle, steel prices fell in India also. This
condition was further exacerbated by decline in domestic steel demand due to the
general economic problems (Table 1). There was also another reason for the fall in
demand growth in Indian Steel industry. In the pre 1991 controlled regime, the
steel demand was artificially contained to have it on on par with the supply. And
once the curbs were removed, the demand moved up from the contained level to the
actual levels during 1994-95 and 1995-96 (Table 1). By mid-nineties this
adjustment was complete and the steel growth fell. However, the new steel makers,
who entered the steel market after liberalization, misread the situation. They
considered it as real growth in demand for steel and went in for huge capacity
additions. The excess capacity thus created led to a glut in the domestic steel
market. The demand for hot rolled (HR) products for the fiscal year 2000-01 was
8.5 million tonnes whereas the capacity in the segment was around 12.5 million
tonnes. Similarly in the cold rolled (CR) segment, the
demand was 3.5 million tonnes whereas the capacity stood at 5 million tonnes. The
demand-supply mismatch took its toll in the steel prices. The domestic steel prices
fell drastically in the late nineties along with international prices. In 1998, the
prices of steel products on average have fallen by 40 % compared with price levels
in 1994-95. They recovered slightly in mid 1999. However, the recovery was
mainly restricted to long products and was not significant for flat products in India
owing to the poor performance of end user industries of flat steel like consumer
durables.
Another effect of the demand-supply was the fall in the capacity utilization. Given
the capital-intensive nature of steel industry, capacity utilization is vital for
steelmakers for ensuring good financial performance. However, due to the slump
in demand growth, the capacity utilization of Indian steel makers fell drastically to
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78 % in 1998 from around 100 % in early nineties (Refer annexure).
Many steel makers, both at the Indian level and global level, were not able to
withstand the lower price regime and absorb the hit in their bottom line (Exhibit 1)
and hence closed their plants (Table 2).
Tata Steel realized that the only way to overcome the problem is to cut down cost
and improve productivity. Besides it also decided to focus on high margin products
by altering the product mix.
viiiIn 1998-99, TISCO set its vision as below
• 'Tata Steel enters the new millennium with the confidence of a learning
organisation; knowledge-based and happy organisation.
• We will establish ourselves as the supplier of choice by delighting our
customers with our services and our products.
• In the coming decade, we will become the most cost competitive steel plant and
so serve the community and the nation.
• Where Tata Steel ventures ....... others will follow.'
Cost cutting efforts
To overcome the problem, TISCO took many cost cutting initiates in its
production process. The company benchmarked with the best practices of leaders ix
like Nippon and POSCO for cost cutting efforts . Lot of measures have been taken
in this regard, particularly in the production processes, which ultimately led to a
significant reduction in costs. The effects of cost cutting measures were visible in x
many fronts. A few major signs were :
• The raw material consumption per ton of saleable steel came down by 31
percent in the period 1991-2003 and stood at 3.3 tons of raw materials per ton of
saleable steel in March 2003.
• Cost of production of HRC came down from $ 218/ton in FY 1990-91to $
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viii http://www.tatasteelindia.com/corporate/vision-archives.aspix Ibid 5x Irani Jamshed J, 2003. Business Excellence for Corporate Sustainability. Tata SearchJayaraman,R, Agarwal R K , & Chatterjee Amit . 2003. The Transformation of Tata Steel, Tata Search
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150/ton in FY 2000-01
• Specific energy consumption came down from 8.7 Gcal/tcs to 7.1 Gcal/tcs in
2003.
• Specific lubrication consumption came down from 1.25 kg/ton in FY 96 to 0.55
kg/ton in FY 02
• Specific Refractory consumption came down from 20.61 Kg/ton in FY 96 to
8.19 kg/ton in FY 02
The management ensured that reduction in manufacturing cost did not affect the
quality of the products. Quality coordination was considered as the backbone of
the steel major, and all 90 departments in the company received the ISO 9000
certification. The core group attached to the Managing Director's office drove the
quality program in TISCO. Besides ISO 9000, the company also adopted ISO
14000, QS 9000 and six sigma.
The cost cutting measures did not stop with the production processes alone. The
company was procuring around INR 20 billion worth of raw materials from
hundreds of vendors across the country. It roped the consultancy firm, Booz-Allen
& Hamilton to help set up a procurement mechanism through efficient vendor-xi
management, long-term contracts, and other systems . It cut down the manpower
cost further by bringing down the employee strength by 38,000 by 2001.
These efforts paid off and by April 2001, TISCO had emerged as the world's
lowest cost producer of steel. TISCO's operating cost at the 'hot metal' (liquid)
stage was US $75 per tonne while for other steel makers it varied from US $90 to
US $150. The company's cost per tonne of finished steel stood at $152 for the
financial year ending March 2001. The World Steel Dynamics (WSD), renowned
industry analyst firm based in the US, in a report stated, "Tata Steel is a 'world class'
steel maker – the only company in India – and one of the few companies in the
world with such a standing. TISCO was the only steel maker in India which
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xi Business Today 1999. Can TISCO Remake Itself Into Tata Steel?” April 7, pp 30-32.
remained profitable during late nineties and early 2000s (Refer Table 3). The
global steel market turned around in early 2000s as the prices recovered.
In April 2002, the company launched its ‘VISION 2007’ in May 2002, which
focused on becoming an EVA (Economic Value Added) positive company by
2007. The reward system of the company also focused on ‘ability to achieve’ even
in uncertain environment to reach the Vision 2007. This has been indicated
through the ‘ASPIRE’ program. ASPIRE was the acronym for ‘Aspirational
Initiatives to Retain Excellence’. The conceptualization of ASPIRE program
started in the year 2002, immediately after Vision 2007, and the program was
launched formally on May, 2003 to achieve its vision of becoming an EVA positive
company and also sustaining and improving EVA year on year, even during xii
average steel price scenario . Thus the challenge was to become EVA positive
under normal steel prices and not be dependent on favorable market conditions. In
other words it focused on achieving EVA positive result in uncertain environment,
i.e. overcoming the cyclical nature of steel industry. ‘Aspire’ program created a
well established reward and recognition system to recognize individuals and
groups in different forums for increasing employee morale.
Meanwhile Tata Steel continued its efforts to cut costs and improve efficiencies. As
part of the exercise, it started outsourcing the non-core activities. The company
outsourced its Jamshedpur city municipal service activities to Jamshedpur Utility xiii
& Services Company (Jusco), its 100 % subsidiary in FY 2003-04. It outsourced
logistical management involving running its warehouses and stockyards to Tata
Ryerson, the 50:50 joint venture xiv
with Ryerson Tull of the USA in September 2003. Similarly in mid 2005, Tata
Steel outsourced its IT requirements to IBM India and Tata Consultancy xv
Services . Due to the changes at the organizational level, Tata Steel has changed
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xii http://aspire.tatasteel.com/aspConcept.aspxiii The Financial Express 2003. Tata Steel Payroll Outsourcing Process To Cut Costs By 20%. December 9th . Retrieved from http://www.financialexpress.com/news/tata-steel-payroll-outsourcing-process-to-cut-costs-by- 20/72397/ on 20th Nov 2013xiv http://www.tata.com/company/Media/inside.aspx?artid=UwaT8dTLzJU=xv http://www.tata.com/company/Media/inside.aspx?artid=guAgfKV4ZAw=
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their organization structure many times in since early nineties. Still the
performance of the company was not affected during those years (Table 3).
Problem of early 2000s- Too small to survive
Globally, steel industry was a fragmented industry. The top 10 producers
accounted for just 25 % of the total market share in 2001. This stood in contrast
with other capital-intensive industries, where the concentration was much higher.
For example in automobiles, the top 10 players controlled more than 90 % of global
output in 2001. Intense competition among competitors on the same turf resulted in
mutual destruction. Achieving synergy and economies of scale through
consolidation was the only way to survive in the long term. Hence global steel
industry took the consolidation route in late eighties. It gained momentum in late
nineties and early 2000s. In 2002, Boston Consultancy Group (BCG) published a
study, which indicated that the steel companies need to be big to survive in the long
run. Steel Industry experts estimated that after two decades there would be room
for only 10 to 15 primary steel makers in the global steel market. But in 2002,
TISCO, which was a primary steel maker, did not even figure in the list of top 50
steel makers in terms of crude steel capacity. With 3.5 MPTA capacity TISCO was
ranked 57th in the world in 2001, and for comparison SAIL was ranked at 14th. So
it was clear that the TISCO’s capacity was not enough for the long-term viability,
going by the argument given BCG.
Acquisition Drive
One option was to grow big through greenfield capacity additions. But in Indian
context, due to bureaucratic delays and political hurdles, it would take decades to
match the global giants’ capacity through greenfield capacity additions. Greenfield
capacity additions outside India were not advisable, given the excess steel capacity
in the global steel market. So the only possible route was to grow through
acquisitions. But the opportunities for making acquisitions in India were limited. xvi
By 2001, in India the steel capacity was around 30 million tons per annum . But
apart from SAIL, all other steel makers were very small in terms of the steel
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xvi Annual reports 98-99, 2001-02, Ministry of steel, Govt. of Indi
making capacity. Hence acquiring them would not significantly increase the
capacity of TISCO. Further acquiring them was also difficult as they were family
owned and the families are generally reluctant to sell their core businesses.
Another option was to acquire SAIL. But the Government of India had no plans for
outright sale of SAIL. Hence TISCO decided to make acquisitions abroad. But 70
percent of international mergers fail due to various reasons. So TISCO decided to
go slow. In 2004 August, TISCO acquired the steel business of Singapore based
NatSteel Ltd for SG $ 486.4 million (Indian INR 13.13 billion) in an all cash deal.
NatSteel was a major player in Singapore and owns steel mills in China, Thailand,
Vietnam, Phillipines and Australia, with a capacity of 2 MPTA. The steel business xvii
of NatSteel reported a turnover of $1.4 billion and a profit before tax of $47
million . In December 2005, the company acquired a controlling stake in Thailand
based Millennium Steel (with a capacity of 1.7 MPTA) for US $130 million.
Meanwhile Tata Iron & Steel Co Ltd was officially renamed as Tata Steel Ltd in
August 2005.
With these acquisitions and the brownfield expansions at Jamshedpur Tata Steel’s
capacity touched 8.5 MPTA with a consolidated turnover of INR 225.20 billion at xviii
the end of financial year 2005-06 . Still, it remained at 56th rank among the
global steel producers based on capacity. Based on the experience gained through
the smaller acquisitions abroad, Tata Steel went for the big ticket acquisition of
Anglo Dutch Steel maker Corus in 2006-07.
Acquisition of Corus
Corus could trace its origins to British Steel, which was formed in 1967 by the
merger of 14 steel companies. In the year 1999, British Steelmerged with the Dutch
steel producer Koninklijke Hoogovens to form Corus. In 2006, Corus was the
ninth-largest steel producer in the world with a capacity of 18.3 MTPA of steel
output. It had a turnover of £10.14bn (INR 850 billion) with a pre-tax profits of
£580m. In other words, Corus was five times bigger than Tata Steel at the time of
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xviiThe Financial Express 2004. Tata Steel Acquires Singapore’s NatSteel August 17. Retrieved from http://www.financialexpress.com/news/story/112832on 20th Nov 2013xviii Tata Steel Annual report 2005-06
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acquisition.
Corus had 47,300 employees worldwide and had factories in UK, Belgium,
Germany, France, Norway and the Netherlands. Its client base includes diverse set
of companies in the aerospace, automotive, building and construction, engineering
and packaging industries. Corus had four main operating divisions: Strip Products,
Long Products, Distribution & Building Systems and Aluminium. Corus’ steel
business (Of the four, what constitutes the steel division) accounted for 91% of
total turnover during this period. In terms of geography, Corus derived about 80%
of its revenue from the EU market in 2006, owing largely to its wide distribution
network in this region.
The process of Corus acquisition started in October 2006, when Tata Steel
announced its bid to take over Corus Group for US$7.6 bn, paying 455 pence per
share. The bid was accepted by the board of Corus. But in November 2006, xix
Brazilian steel maker Companhia Siderurgica Nacional’s (CSN) joined the fray
and made a counter offer to Corus of 475 pence per share. Tata Steel responded by
raising its offer price to 500 pence per share, which valued the company at $9.6 bn.
CSN persisted and revised its bid to 515 pence per share amounting to US$9.6 bn.
As a result of offers and counter offers from Tata Steel and CSN, the Takeover
Panel, Britain’s watchdog on mergers and acquisitions, initiated an auction process
to decide the winner. On January 31, 2007, Tata bagged Corus with 608 pence per
share in the auction process.
The final valuation of Corus was thus put at $12.04 billion and the final deal
structure was as follows:
• $3.5–$3.8 billion infusion from Tata Steel ($2 billion as its equity contribution,
$1.5–1.8 billion through a bridge loan.
• $5.6 billion through a LBO ($3.05 billion through senior term loan, $2.6 billion
through high yield loan).
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xix CSN was Brazil’s 2nd largest steelmaker. It was founded as a state-owned enterprise in 1941 andwas privatized in 1993
With the acquisition of Corus, the total steelmaking capacity of Tata Steel jumped
to 27 MTPA, which vaulted it to the #5 spot amongst the largest steel making firms
in the world when the deal became effective in April 2007.
Aside from making Tata Steel as one world’s largest steel makers, thereby giving it
the much needed scale, the acquisition was also expected to provide significant
synergies. Some of the prominent synergies that were expected to arise from the
deal were:
• Tata Steel had a strong retail and distribution network in India and South East
Asia. This would give Corus an in-road into the emerging Asian markets. Tata
steel was a major supplier to the Indian auto industry and the demand for value
added steel products was growing in this market. Hence the combined entity
would benefit from powerful combination of high quality developed and low
cost high growth markets
• There would be technology transfer and cross-fertilization of R&D capabilities
between the two companies that specialized in different areas of the value xx
chain
• There would be significant cost savings in logistics and by sharing best
practices.
But the stock market reacted negatively to the announcement of the acquisition and
Tata Steel’s shares fell by about 8.1% on the very first day. Some analysts felt that
Tata Steel had overpaid for the deal. The price paid by Tata Steel was 68% higher
than the average of Corus' stock price over the year ending October 4, 2006, when
Tata Steel launched the bid to acquire Corus. Rating agencies also downgraded
Tata Steel shares. Another reason for investors’ and analysts’ scepticism was that
Corus had been less profitable as compared to the highly profitable Tata Steel.
Immediately after the acquisition, Tata Steel initiated integration processes at both
the strategic level and the functional level, by constituting joint integration teams.
The company indicated that the overall philosophy of the integration process was
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“One Enterprise – Two Entities”. A Strategy and Integration Committee, headed by
the Group Chairman, was formed. The committee was tasked to meet on a regular
basis to review progress on the strategy and integration road map and ensure that
key milestones are being met. Teams with defined synergy targets to be achieved
were also created in the areas of manufacturing, procurement, research and
development, IT, finance and capital projects. The first phase was termed 'Wave
One' synergies and the group was targeted to achieve savings worth US$450
million target by the end of Financial Year 2009-10.
Also, a new organization structure was created for Tata Steel group. It included an
umbrella management team that consisted of senior Corus Group and Tata Steel
executives. The team was co-chaired by Tata Steel's Managing Director and Corus
CEO. The other members of the team include directors from various functions of
both the companies. The ‘group centre’ was set up to ensure a common approach
across the key functions - technology, integration, finance, strategy, corporate xxi
relations, communications and global minerals (Refer Exhibit 2).
To further leverage synergies between Tata Steel and Corus and accelerate
performance improvement through learning and sharing, a Performance
Improvement (PI) Committee was constituted in January 2008. Under this
committee, seven PI groups started functioning, identifying Key Performance
Indicators (KPI’s) to be improved and improvement projects to be undertaken
across various sites of the Tata Steel Group. Each group had Process Improvement
teams from various areas. This Process Improvement Teams (PITs) were required
to ensure application of best practice across the Group to improve the operational
efficiency of the chosen process. The PITs benchmarked their chosen operations,
particularly in Europe, against major competitors and identifying best practices
within the Group that can be transferred to other sites.
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xx Vishwanath.S.R,2010 Tata Steel: Financing the Corus Acquisition, Asian Case Research Journal, 14(2), 295–312xxi www.rediff.com 2007. Tata Steel rejigs senior team to integrate Corus, November 29th, Retrieved from http://www.rediff.com///money/2007/nov/29corus.htm on 20th Nov 2013
The first year of integration went according to the plan and, in the financial year
2007-08, Tata Steel and Corus jointly realized synergy benefits of US $76 million,
which amounted to 16 % of total target. Also Tata Steel achieved the Vision 2007
and become an EVA positive company. Hence it outlined its next vision statement
‘Vision 2012’ in March 2008. Vision 2012 envisioned the company to double
returns on investment (ROI) from around 16 %in 2008 to 32 % by 2012. Also, by
2012, the group wanted to be the “global steel industry benchmark for value xxii
creation and corporate citizenship . Besides doubling of the ROI and value
creation, the vision also envisaged safety and environmental aspects and the Tata
Steel Group’s aspiration to become an “employer of choice.” Vision 2012’ was co-
created by the group’s manpower resources in Jamshedpur, South-East Asia, the
UK and the Netherlands. While commenting on Vision 2012, then Corus CEO
Philippe Varin commented that the plans to "achieve ROI levels of 32% by 2012 is
stiff. But, if it is achieved, it will really be a benchmark in value creation. Currently,
20% of the raw materials for Tata Steel group is produced in-house and the rest
80% is outsourced. We aim to improve this ratio to 50:50 by 2012. With focus on
margins and performance improvement, we expect that the resultant monetary
benefit of this value creation for Corus will amount to nearly $600 million year on xxiii
year .”
Global Meltdown after the Financial Crisis in 2008
In mid-2008, the global economy went into a recession after the meltdown of the
financial markets. This in turn affected the demand for steel, and the apparent steel
consumption fell sharply in the Western countries. Globally, steel prices nosedived
to $600 a tonne by the end of 2008, which is one half of the peak price of $1,250 per
tonne in January 2008. This severely affected Tata Steel’s Corus operations also.
Table 7 shows the steel demand in the markets where Tata steel had a presence.
Europe was the key market for Tata Steel Group. In 2007-08, Corus accounted for
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xxii Hindu Business Line 2008. Tata Steel outlines ‘vision’ 2012 March 4th , retrieved from http://www.thehindubusinessline.com/2008/03/04/stories/2008030452400200.htm on 20th Nov 2013xxiii Economic Times 2008. Tata Steel aims 32% RoI by 2012 March 4th , retrieved from http://articles.economictimes.indiatimes.com/2008-03-04/news/27695682_1_tata-steel-corus-ceo-philippe-varin-b-muthuraman on 20th Nov 2013
17
76 % of the total revenue of Tata Steel Group. Hence the decline in demand in the
major markets of Corus affected the overall performance of Tata Steel Group. In
2011-12, the revenue share of Corus (renamed as Tata Steel Europe- TSE) stood at
62 % of the total revenue.
The steel demand in south East Asian market was also impacted by the financial
meltdown to certain extent. But it recovered quickly after 2010. This fall in
demand reflected the steel production and shipment of all the Tata Steel Group
companies (Table 9a & 9b). Apart from the falling demand and hence the lower
prices, the company had other issues as well, which are explained below.
Dependence on Raw Material imports
The Indian operations of Tata Steel had 100% self-sufficiency in iron ore and 60 %
for coking coal. The overall raw material self-sufficiency for Tata Steel India was
80 %. But post Corus acquisition, the overall raw material self-sufficiency for Tata
Steel dropped precipitously to 22 %. This was mainly because Corus did not have
captive iron ore and coal resources and depended almost entirely on outside supply
of raw materials. It imported iron ore from Australia, Canada, South Africa, and
South America, and coal from Australia, Canada, and the US. This dependency
made the European business vulnerable to the fluctuations in the iron ore and coal
prices.
Productivity and Efficiency Issues at Corus
The Corus operations were not as efficient as Tata Steel India. In 2005, Corus’
income from operations was just about $108 per ton of steel produced. This pales in
comparison to Tata Steel’s operating income, which was about $280 per ton of steel
in the same year. Analysts predicted that the operating income of the combined xxiv
entity would be around $146 per ton of steel . The problem with Corus was that it
was a product of numerous mergers and acquisitions over the years - first by
merging 14 British steel firms and then with Hoogovens of Netherlands. The
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xxiv Frontline 2006. Burden of steel, Nov. 04-17, retrieved from http://www.frontline.in/static/html/fl2322/
stories/20061117002703500.htm on 20th Nov 2013
operations were not integrated properly, post merger. “They (the Dutch and British
units) practically functioned as two companies and even competed for the same
orders until recently” said Uday Chaturvedi, a Tata Steel veteran in a media xxv
interview . Another media report also indicated quoting a former Tata Steel
executive who said "When we acquired the company, the fight between the British xxvi
and Dutch sides was at its peak. We inherited a legacy . " There were also other
issues like bloated and bureaucratic organizational structure, lack of integrated and
robust supply chain, legacy pension schemes etc.
The poor efficiency also resulted in further erosion of market share in its main
market UK. "While the going was good, Corus dominated the UK market as it was
the only home-based company. In a way, Corus was in a cocooned environment.
But once the market collapsed, the Europeans entered Corus's domain," said Malay
Mukherjee, who has handled several acquisitions as a board member of Arcelor-xxvii
Mittal till 2008 .
The production units in Europe also had history of safety related issues and
industrial accidents some which were fatal. The accidents continued even after the
takeover the Tata Steel. There was one fatal accident in April 2008, a third-party
fatality to a customer’s employee in April 2009. Few more fatal accidents occurred
in April 2010, August 2010, and April 2011. The company was required pay hefty
fines to the victims for such accidents.
Integration of Corus with Tata Steel India
The media reports indicated that Tata Steel faced problems in integrating Corus
operations with Indian operations due to cultural issues. The European
manufacturing culture was vastly different from Indian manufacturing culture and
this proved to be a stumbling block. The recommendations given by the Indian
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xxv Forbes India 2013. Putting the Shine Back Into Tata Steel, April retrieved from http://forbesindia.com/
article/boardroom/putting-the-shine-back-into-tata-steel/35049/1on 20th Nov 2013
xxvi Business Standard 2013. What the Tata Steel write-off reveals retrieved May 21, Retrieved from
http://www.business-standard.com/article/companies/what-the-tata-steel-write-off-reveals-113052101267_1.html
on 20th Nov 2013
xxvii ibid
19
advisors were not taken seriously by the European Executives, according to media xxviii
reports . The situation was further complicated by frequent management
changes at the top at Corus. The company had three CEOs in short span of two
years between 2010 and 12.
High Debts
As indicated earlier, Tata Steel financed its Corus acquisition mainly through
debts, as it is a leveraged buyout. The poor operational / financial performance of
Corus during this period put additional pressure on Tata Steel's debt position. The
net debt of Tata Steel group stood atINR 613 billion (US $ 10.2 billion) at the end xxix
of June 30, 2013 .
All the above mentioned had affected the financial performance of Tata Steel
Group during 2009-13 period (Table 4).
Efforts from Tata Steel to overcome the problem
The top management of Tata Steel was aware of the problem and started taking
efforts to overcome them. Those measures are explained below.
Streamlining of European Operations
To streamline the operations of Corus, Tata Steel took two major initiatives in
2008-09, namely “Weathering the Storm” and “Fit for the Future” programs.
Weathering the Storm was aimed at offsetting the impact of reduced steel demand
in Europe. It involved several short-term actions designed to cut costs and keep
supply-demand in balance. As a part of this initiative, the production was cut by at
least 40 % through temporary idling of the blast furnaces. Additionally, the
company eliminated overtime, altered shift patterns to reduce shift bonus
payments and implemented work agreements that allowed the company to reduce
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xxviii Ibid 24xxix The Telegraph 2011. Tata Steel charts three-point strategy to tackle debt, January 3rd Retrieved from http://www.telegraphindia.com/1110103/jsp/business/story_13384470.jspon 20th Nov 2013
the hours of employees who were experiencing shortages of work. There was also a
reduction in the use of third-party services. These measures provided notable relief
in the very first year as the firm reported an estimated net savings of over £700
million in the second half 2008-09.
The main items in the ‘Fit for Future’ initiative included divestment, asset
restructuring and an efficiency & overhead review. The initiative resulted around
3,700 job cuts as on June 2013 out of the Corus’ 42,000 (as on June 2008)-strong
workforce. In November 2008, Corus sold its 50% stake held in GrantRail, which
was providing rail infrastructure services, to VolkerWessels, its joint venture
partner for an unknown sum. The company sold its two aluminum smelters in
Netherlands and Germany to Klesch & Co in February 2009, for an unknown sum.
In February 2011, the company sold its Teesside Cast Products unit in northeast
England, to Thailand’s Sahaviriya Steel Industries Pcl (SSI) for $469 million.
Further, as part of this initiate, the company wrote down assets worth INR 40.95
billion (US$ 805 million) for the financial year 2008-09.
These measures were expected to produce steady-state benefits of more than £250
million (US $ 400 million) per annum at Corus. In September 2010 Corus was
rebranded as Tata Steel Europe, to have a common identity.
The company went for restructuring in its other arms also. In July 2010, the
company’s Singapore-based subsidiary NatSteel Holdings sold its 27 % stake in
Malaysian firm Southern Steel Berhad for US $72 million.
Quick completion of expansion plans in India
Tata Steel faced strong headwinds in the European Steel market but that was partly
offset by a steady demand for steel products in the Indian market. (Refer Table)
Given that Tata Steel India was one of the low cost steel producers, it had a good
opportunity to benefit from the growing Indian market by increasing its capacity. It
completed the 2.9 MT Brownfield expansions on Jamshedpur during the financial
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21
year 2013-14 there by taking the total capacity in Jamshedpur facility to 9.7 MT
finished steel. The company was working on a 6 MTPA Greenfield Integrated
Steel Plant at Kalinganagar, Odisha, which would make hot and cold rolled flat
products and would be built in two phases, each of 3 MTPA. They were expected to
be commissioned in 2014-15 and 2015-16 respectively.
Investment in raw material assets to provide better raw material security
The Global Mineral resources division of Tata Steel increased its efforts to secure
raw material supply for the European Operations. As of October 2013, it was
working on two major initiatives in this regard, one for coal and the other one for
iron ore.
In Mozambique’s Moatize basin, Tata Steel partnered with global mining giant Rio
Tinto in the Benga project. Tata steel had 35% equity stake and was entitled to 40%
off-take of coking coal produced in the project. The project started producing coal
and made its first shipment in June 2012 and capacity would be ramped up in
phases.
Tata Steel, through its subsidiary Tata Steel Minerals Canada Limited (TSMC),
was involved in the development of Direct Shipping Ore (DSO) project in Canada.
The Company had 80% equity stake in TSMC with the balance 20% equity stake
held by New Millennium Iron Corporation (NML), a Canadian mining company.
Direct Shipping Ore project successfully completed trial production in 2012 and is
targeting to produce 1 MT of iron ore in Financial Year 2013-14. The production
would be ramped up to about 6 MTPA In March 2013, Tata Steel entered into a
framework arrangement through TSMC with Labrador Iron Mines (LIM) for the
acquisition of a 51% stake in LIM’s Howse deposit to exploit significant synergies
that exist between the two mine deposits.
Raw material from these would be mainly used to partially integrate the
Company’s European operations.
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Vigorous pursuit of continuous improvement across all operations
Tata Steel started focusing on continuous improvement of its operations and
supply chain systems across all its subsidiaries and Corus was targeted heavily as
its inefficiencies were estimated to be very high.
As noted earlier, one of the main reasons for the poor efficiency was the lack of
cooperation among various European Units of Corus and a poorly designed supply
chain system. In November 2010, Corus, by then rechristened as Tata Steel Europe
(TSE), introduced a new organizational model to bring in ‘One company’ mindset
and ‘Customer First’ outlook among employees. This was basically aimed at
unifying sales and marketing function and to drive the activities of a single supply
chain function which would be fed by three operational hubs. The three hubs were
Strip Products Mainland Europe based at IJmuiden, Strip Products UK based at
Port Talbot, and Long Products Europe based at Scunthorpe. They included the
Company’s production, engineering and technical operations. The creation of the
supply chain and sales and marketing functions was expected to allow the
management of the three hubs to focus exclusively on improving production
stability, efficiency and costs. Also, the new operating model comprised of
integrated support functions including finance, procurement and xxx
communications .
The 'Kar Vijay Har Shikhar' (KVHS) initiative was launched in marketing and
sales at the Indian operations in October 2010, to enable a proactive and
differentiated approach towards market creation and thus develop a market to
support Tata Steel's volume expansion in India to 16 million MTPA.
Subsequently in 2011, as part of developing and deploying an integrated strategy
process across the company, Tata Steel introduced OGSM (Objective, Goal,
Strategy, Measure) process throughout its European operations. This was done to
ensure that actions undertaken in the coming years are in sync with the long-term
goals of the company. The OGSM process aimed step by step improvement in
three key areas: corporate citizenship (health, safety and environment), value
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xxx Tata Steel Annual Report 2010-11
23
creation and enablers (business excellence and people engagement). OGSM was
expected significantly reduce the competitive gap in the areas like EBITDA&
cash, health & safety, environmental asset compliance, business excellence and xxxi
customer service & satisfaction over a period time (Refer Exhibit 3).
At NatSteel, the group launched Total Operational Performance (TOP) initiatives
to improve the efficiency of the upstream operations and productivity
enhancement drives to improve the efficiency of its downstream operations. In
Financial Year 2011-12, NatSteel's operations in Vietnam underwent a complete xxxii
modernization, doubling its rated capacity to over 2 million MTPA .
During the Financial Year 2011-12, Tata Steel Thailand (TSTH) launched the
'Turnaround plan' in Thailand, which included most of the company's
improvement projects. These improvement projects covered the areas of product
portfolio optimization, new product development, operations cost reduction and xxxiii
procurement cost savings .
In South East Asia, the group had taken initiatives to coordinate business activities
between Nat Steel and Tata Steel Thailand to gain synergies. As part of it, a joint
endeavor was undertaken between the two subsidiaries to share best practices, in
areas of safety, sales and marketing, procurement and rolling operations.
Problems Continue
Despite all the efforts, the problems of Tata Steel Group continued. The group had
made net losses in the financial year 2012-13. Tata Steel Europe alone made a
cumulative loss of about INR 100 billion during the five year period (2008-13). In
May 2013, Tata Steel announced that it is writing off goodwill and assets worth US
$1.6 billion (INR. 83.56 billion) for the financial year 2012-13, primarily due to
the weaker macroeconomic and market environment in Europe.
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xxxi Tata Steel Annual Report 2011-12xxxii Tata Steel Annual Report 2011-12xxiii Tata Steel Annual Report 2011-12
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“In our key overseas markets of Europe and UK, where the Company has
significant manufacturing presence, the economic downturn has significantly
affected steel demand, which is now almost 30% lower than the pre-2008 financial
crisis level. The outlook for the euro zone area currently continues to be depressed”
admitted the Chairman Mr. Cyrus Mistry in Tata Steel’s annual report 2012-13.
Steel industry lobby group Eurofer had also pointed out that European Union has
capacity to make about 210 million tons of steel a year, while demand in a “normal xxxiv
market” is 150 million to 160 million tons . This clearly indicated the huge
demand-supply mismatch in the forthcoming years and hence lower prices and
lower capacity utilization.
These problems continued to reflect in the performance of Tata Steel Group. The
group’s Europe sales declined by 3.8% sequentially during the first quarter of
2013-14 due to lower sales volumes, even though profitability improved slightly.
Such continued losses are expected to affect the capital structure of the company
also. In July 2013 a report by Bank of America Merrill Lynch projected Tata Steel’s
net debt at INR.632 billion in fiscal 2014, and forecasted the net gearing, or debt to
equity ratio, to rise to 1.75 compared with 1.6 in fiscal 2013.
Tata Steel- an adaptive organization
Between 1991 and 2007, Tata Steel faced three major problems, which threatened
the very existence of the company. However, the company was able to overcome
all of them. Fast forward to 2013, the company was in the midst of another serious
crisis, which according to analysts was largely due to external factors, unlike the
past. The company indicated that it was expecting the outlook of its European xxxv
operations to turn positive by the financial year 015-16 .. Analysts remained
sceptical about this timeline, indicating that the efforts taken by the company
might not be enough to solve the problem.
xxxiv Mint 2013. Cyrus Mistry forecasts challenging two years for Tata Steel, July 17th , retrieved from http://www.livemint.com/Companies/VbnXJWzoJ5rlRYryCUoLAL/Cyrus-Mistry-forecasts-challenging-two-years-for-Tata-Steel.htmlon 20th Nov 2013xxxv The Financial Express 2013. Tata Steel to restructure European ops, August 15th retrieved from http://www.financialexpress.com/news/tata-steel-to-restructure-european-ops/1155563on 20th Nov 2013
24
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ANNEXURE
Table.1 Real Consumption of Total Finished Steel (million tonnes)
(Source: Ministry of Steel, Govt. Of India)
Year on Year growth
rate in %
Financial Year
Real Consumption
in Million Tonnes
1991-92 14.836
1992-93 15.811 6.6
1993-94 16.114 2.0
1994-95 19.550 21.3
1995-96 22.370 14.4
1996-97 23.294 4.1
1997-98 23.808 2.2
1998-99 24.710 3.8
1999-00 26.348 6.6
2000-01 27.649 4.9
2001-02 28.523 3.2
2002-03 30.677 7.6
2003-04 33.119 8.0
2004-05 36377 9.8
2005-06 41.433 13.9
2006-07 46.783 12.9
2007-08 52.125 11.4
2008-09 52.35 1 0.4
2009-10 59.339 13.3
2010-11 66.423 11.9
2011-12 70.915 6.8
2012-13 73.255 3.3
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Exhibit 1 Net Profit Margin (NPM) of Indian steel companies (Period 1991-2000)
(Source: CMIE Databases)
NP
M i
n %
Financial year
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998- 99 1999-00
8
6
4
0
-2
-4
-6
-8
-10
-12Net Profit..
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1 Electric arc furnace 188 12,456,860 150 5,758,860 38 669,800
2 Hot rolled units 1,246 24,225,838 469 8,872,209 777 15,353,629
(long products)
3 Hot rolling mills 12 6,302,500 5 262,500 7 6,040,000
(Flat products)
4 Steel-wire drawing units 92 1,205,205 49 619,467 43 585,738
5 Cold rolling mills 85 4,378,521 21 446,580 64 3,931,941
6 GP/GC and polymer 21 2,173,250 3 84,500 18 2,088,750
coated sheets/strip
7 Tin plate units 3 151,638 1 60,000 2 97,638
(Source: Ministry of Steel, Govt. Of India)
Table 2 Closures in Indian steel sector
Closed Units Si.No
Segment Commissioned Units
Working units
No. Capacity No. Capacity No. Capacity
27
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1990-91 23.35 1.60 6.86 11.62 4.9 6.42 0.84
1991-92 28.95 2.01 6.93 13.51 4.84 6.44 1.34
1992-93 34.87 1.19 3.42 6.76 2.16 2.75 1.55
1993-94 38.67 1.81 4.68 8.09 2.67 3.3 1.38
1994-95 46.89 2.64 5.63 10.2 3.5 4.33 1.33
1995-96 60.43 5.66 9.36 18.05 6.72 8.26 1.07
1996-97 69.09 4.69 6.79 12.91 5.01 6.18 1.1
1997-98 70.40 3.22 4.57 8.63 3.21 3.99 1.22
1998-99 57.64 2.82 4.90 7.65 2.64 3.34 1.37
1999-00 63.80 4.23 6.62 11.75 3.78 4.9 1.42
2000-01 72.07 5.53 7.68 14.94 4.78 6.39 1.26
2001-02 77.49 2.05 2.64 5.63 1.73 2.44 1.37
2002-03 99.56 10.12 10.17 30.53 7.99 13.01 1.33
2003-04 122.39 17.46 14.27 46.29 12.83 23.05 0.78
2004-05 162.04 34.74 21.44 62.01 22.89 40.1 0.4
2005-06 174.96 35.06 20.04 42.9 19.72 32.46 0.26
2006-07 203.44 42.22 20.75 36.09 16.57 23.75 0.69
2007-08 231.65 46.87 20.23 26.36 10.78 13.64 1.08
2008-09 274.95 52.02 18.92 22.48 8.39 10.18 1.32
2009-10 280.46 50.47 17.99 16.4 7.03 8.47 0.68
2010-11 333.38 68.61 20.58 16.07 8.31 9.88 0.58
2011-12 385.03 65.23 16.94 12.62 6.94 8.27 0.48
2012-03 428.89 50.63 13.12 9.0 NA 11.9 0.44
Table 3: Tata Steel (Standalone) Financials
Debt to equity ratio
(times)
Financial Year
Total income INR.
Billion
Profit after
tax INR. Billion
PAT as %
of total income
PAT as % of net worth
PAT as %
of total assets
PAT as % of capital
employed
(Source : CMIE Prowess Database & Tata Steel Annual Report 2012-13)
28
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2001-02 85.61 1.94 2.26 7.70 NA 6.30 1.97
2002-03 104.91 10.22 9.74 34.98 7.77 13.49 1.30
2003-04 126.03 17.79 14.11 45.24 12.66 22.69 0.77
2004-05 177.43 35.71 20.13 60.73 21.78 38.45 0.46
2005-06 226.21 37.21 16.45 42.86 18.76 30.94 0.33
2006-07 281.61 41.66 14.79 33.09 11.59 15.58 1.66
2007-08 1476.29 123.22 8.35 55.47 13.99 19.19 2.01
2008-09 1514.57 48.49 3.2 18.49 3.86 5.48 2.84
2009-10 1064.05 -21.21 -1.99 -9.07 -1.78 -2.57 2.24
2010-11 1250.72 88.52 7.08 28.70 7.02 10.09 1.60
2011-12 1409.61 47.75 3.39 11.32 3.30 4.66 1.29
2012-13 1388.49 -73.62 NM NA NA NA 1.36
Table 4: Tata Steel Consolidated Financials
Debt to equity ratio
(times)
Financial Year
Total income INR.
Billion
Profit after
tax INR. Billion
PAT as %
of total income
PAT as % of net worth
PAT as %
of total assets
PAT as % of capital
employed
(Source : CMIE Prowess Database & Tata Steel Annual Report 2012-13)
29
Table 5: Sales Turnover in INR Billion
2007-08 196.91 1002.18 75.48 40.77 1315.34
2008-09 243.16 1095.7 84.16 39.65 1473.29
2009-10 250.22 640.1 62.54 31.57 1023.93
2010-11 293.96 738.44 74.13 39.11 1187.53
2011-12 339.33 821.53 86 41.1 1329
2012-13 381.99 780.12 93.93 44.36 1347.12
YearTata Steel India
Tata Steel
Europe
NatSteel Holdings
Tata Steel
Thailand
Tata Steel Consolidated
(Source: Tata Steel Annual Reports)
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Table 6: EBITDA in INR Billion
2007-08 82.57 90.96 4.3 5.04 182.87
2008-09 94.42 89.06 1.91 1.47 184.95
2009-10 98.06 -14.11 2.5 1.37 93.4
2010-11 116.25 46.91 2.03 0.53 171.16
2011-12 115.59 17.77 2.11 0.02 135.33
2012-13 116.98 7.64 3.56 1.27 126.54
YearTata Steel India
Tata Steel
Europe
NatSteel Holdings
Tata Steel
Thailand
Tata Steel Consolidated
(Source: Tata Steel Annual Reports)
30
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Exhibit 2: Tata Steel Group Structure in 2008
The Governance Structure
The Tata Steel Group Board
Chairman
Deputy Chairman
Tat Steel Executive Committee
Chief Operating Office
Director
South East Asia
Vice President
Engineering and Projects
Vice President
Corporate Services
Chief Human Resource Officer
Chief Financial Controller,
Corporate
Group Corporate Functions
Group Director
Technology and Integration
Group Chief
Financial Office
Group Director
Communications
Group Director
Global Minerals
Corus Executive Committee
Chief Operating Officer
Strip Products Division Director
Long Products Division Director
Distribution and Building Systems
Division Director
Director Finance
Director Human Resource
Director Legal,
Compliance and Secretariat
Strategy and Integration Committee
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Table 7:Steel Consumption in Tata Steel Groups’ Market Regions in Million Tons
(Source: World Steel Annual Report 2012)
2005 2006 2007 2008 2009 2010 2011 2012
11.4 12.9 12.8 11.8 7.0 8.8 9.1 9.0
165.5 188.7 198.9 183.5 119.5 144.6 154.4 140.1
105.4 119.6 108.3 98.4 59.2 79.9 89.2 96.7
39.9 45.6 51.5 51.4 57.9 64.9 69.8 71.6
48.4 45.4 51.7 51.9 49.7 56.1 61.4 66.6
1042.5 1139.4 1218.7 1218.6 1140.0 1300.1 1395.3 1412.6
Region
United Kingdom
European Union
(27 countries
including UK)
USA
India
Asia (excluding India,
Greater China, Japan
& Middle East)
World
Table 8: Crude Steel Production at Tata Steel
Financial Crude Steel
Year Production
Million Tones
1983-84 1.973
1984-85 2.049
1985-86 2.094
1986-87 2.250
1987-88 2.275
1988-89 2.313
1989-90 2.323
1990-91 2.294
1991-92 2.415
1992-93 2.477
1993-94 2.487
1994-95 2.788
1995-96 3.019
1996-97 3.106
1997-98 3.226
Financial Crude Steel
Year Production
Million Tones
1983-84 1.973
1984-85 2.049
1985-86 2.094
1986-87 2.250
1987-88 2.275
1988-89 2.313
1989-90 2.323
1990-91 2.294
1991-92 2.415
1992-93 2.477
1993-94 2.487
1994-95 2.788
1995-96 3.019
1996-97 3.106
1997-98 3.226
(Source: Tata Steel Annual Reports)
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Table9a: Salable Steel Production in Million Tons
2007-08 4.9 23.1 2.5 1.5 31.7
2008-09 5.2 19 2.4 1.1 28.5
2009-10 6.2 14.2 1.8 1.2 23.6
2010-11 6.4 14.7 1.8 1.3 24.5
2011-12 6.6 14 1.8 1.1 24.2
2012-13 7.5 13.1 1.9 1.2 24.1
YearTata Steel India
Tata Steel
Europe
NatSteel Holdings
Tata Steel
Thailand
Tata Steel Consolidated
(Source: Tata Steel Annual Reports)
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2007-08 4.9 20 1.8 1.4 28.1
2008-09 5.4 15.8 1.6 1.1 23.9
2009-10 6.4 14.4 1.6 1.2 23.6
2010-11 6.7 14.6 1.6 1.3 24.2
2011-12 7 14.3 1.6 1.2 24.1
2012-13 7.9 13.4 1.7 1.2 24.2
YearTata Steel India
Tata Steel
Europe
NatSteel Holdings
Tata Steel
Thailand
Tata Steel
Consolidated
Table9a: Salable Steel Production in Million Tons
Exhibit 10: Employee Strength
(Source: Tata Steel Annual Reports)
FY 07 FY08 FY09 FY10 FY11 FY12 Fy13
37205 35870 34918 34101 34912 35793 35905
NA 87598 86548 81269 81251 81622 80534
Grouping
Tata Steel India
Tata Steel Consolidated
(Source: Tata Steel Annual Reports)
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Exhibit 3: OSGM Process
OGSM Ensuring consistence cascading of strategies throughout TSE
Strategy of one level become objective of level below
What we need to achieve
How we will chieve our O & G
1O
2G
3S 4M
O G S M
Level 1
ExCo (Level2)
O G S M Hubs, Businesses,Sales Directoers (Level3)
Objective Objective statment.
Goal Quantitative measures and targets for the objective.
Strategy Intiatives: the programmes, initatives required to deliver the strategy.
Measure Numericak statment of the progress made.
(Source: Tata Steel Annual Reports)
(Source: Tata Steel Annual Reports)
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Glossary of Terms
Blast furnace: A furnace used in integrated steelmaking in which coke and iron ore
react together under a hot air flow to form liquid hot metal, also called pig iron.
Semi-Finished Steel Products (Semis): Intermediate solid steel products obtained
by hot rolling/forging of ingots (in conventional process) or by continuous casting
of liquid steel are known as Semis. These are called so since they are intended for
further rolling/forging to produce finished steel products.
Crude Steel: Steel in the first solid state after melting, suitable for further
processing or for sale. It includes Ingots (in conventional mills) and Semis (in
modern mills with continuous casting facility). According to World Steel
Association (an international trade body for Iron & Steel Industry), for statistical
purpose, crude steel also includes liquid steel which goes into production of steel
castings.
Finished Steel: Products obtained upon hot rolling/forging of Semi-finished steel
(blooms/billets/slabs). These cover two broad categories of products, namely
Long Products and Flat Products.
Long Products: Finished steel products produced normally by hot rolling/ forging
of Bloom/billets/pencil ingots into useable shape/sizes. These are normally
supplied in straight length/ cut length except Wire rods which are supplied in
irregularly wound coils. Long products are used in all industrial sectors,
particularly in the construction and engineering industries.
Flat Products: Finished steel flat products are produced from slabs/thin slabs in
rolling mills using flat rolls. These are supplied in Hot Rolled (HR), Cold Rolled
(CR) or in coated condition depending upon the requirement. The two major flat
steel product categories are thin, flat products (between 1mm and 10mm in
thickness) and plates (between 10mm and 200mm thick and used for large welded
pipes, ship building, construction, major works and boilers).
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Saleable Steel: The term is used to designate various types of solid steel products,
which are sold to outside customers for further processing or for direct
use/consumption. Therefore, it includes ingots and/or semis and/or finished steel
products. (Liquid steel is normally not traded).
Rolling:Rolling is a metal forming that reduces and transforms the shape of semi-
finished or intermediate steel products by passing the material through a gap
between rolls that is smaller than the entering materials. Rolling is classified
according to the temperature of the metal rolled.
Hot Rolling: Solidified steel preheated to a high temperature (above 1000 degree
C) is continuously rolled between two rotating cylinders. Hot rolling is used
mainly to produce sheet metal or simple cross sections, such as rail tracks.
Cold Rolling: Passing a sheet or strip that has previously been hot rolled and
picked through cold rolls at room temperature. Cold rolling makes a product that is
thinner, smoother and stronger than can be made by hot rolling alone.
Integrated/Primary steelmaker: A producer that converts iron ore into semi-
finished or finished steel products. Traditionally, this process required coke ovens,
blast furnaces, steelmaking furnaces and rolling mills. A growing number of
integrated/primary mills use the direct reduction process to produce sponge iron
without coke ovens and blast furnaces.
Author Information
1. S.Subramanian, Assistant Professor (Strategic Management)
Indian Institute of Management Kozhikode, IIMK Campus
Kunnamangalam-673570, Kerala, India.
Email: [email protected]
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RYANAIR LOW COST STRATEGY: IS IT SUSTAINABLE?1Atul Gupta
ABSTRACT
Michael O’Leary, who closely modelled after the Southwest low-cost strategy, restructured Ryanair to much success. It is a leader in the European industry and of low-cost carriers. The strategy of Ryanair is truly a notable one despite lack of quality customer service. It’s able to maintain low costs while also charging low fare prices. In essence, keeping fares cheap and affordable is what drives consumers to keep dealing with Ryanair. Creating a niche in short-haul and national destinations, now Ryanair seeks market share in the long-haul sector. You may ask, what implications do trans-Atlantic routes have on Ryanair’s future profitability? And will this create a sustainable competitive advantage for Ryanair as competition increases and also embarks on the same route? With experience in the short-haul industry, Ryanair has to make sure it keeps up with market demands and remain prominent as an efficient services airline.
Keywords:
Commercial Aviation, Low-cost Airline, European Airline Industry, Customer Service, Profitability.
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Introduction
Ryanair was founded by the sons of Tony Ryan. Tony Ryan was a well-established
individual. He was the leasing manager of Aer Lingus—one of Ryanair’s
competitors—for many years and was the founder of the biggest aircraft leasing
company in the world, Guinness Peat Aviation (Box & Byus, 2007). Funding for
the initiation of Ryanair was no problem for Ryan’s sons.
Ryanair began in 1985 with only a share of €1 and 25 staff members. Its first route
was in July with daily flights on a 15-seater Bandeirante aircraft from Waterford,
Ireland to London Gatwick. Because of the first cabin’s small size, the crew had to
be less than 5’12”. By the end of the year, five thousand passengers were carried.
The following year, the profitable Dublin-London route was used with two 46-
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seater BAE748 aircraft that carried a total of 82,000 passengers. Two 46-seat BAE
turbo props challenged big companies like British Airways and Aer Lingus
charging higher fares, in which Ryanair would offer half of their fare prices.
The austere and charismatic leader, Michael O’Leary was brought in 1990 after
Ryanair experienced a $20 million loss and needed total reformation (Box & Byus,
2007). In this process, O’Leary was advised to look at the Low Cost Leadership
fundamentals of the most profitable American carrier, Southwest Airlines (Box &
Byus, 2007). Because of the Gulf War at the beginning of 1991, airline traffic took
a hit across the globe. Nevertheless, Ryanair was able to make a profit and
transported 651,000 passengers. Its London base in Luton Airport was changed to
Stansted Airport in 1991 as well. In 1993, it reached more than a million
passengers. In ’96, it
was voted as the Best Value Airline. Boeing 737-800s had come into the picture in
1999, which is the standardized aircraft Ryanair uses as part of its low cost strategy.
This same year passengers topped five million. Passenger traffic took another
dramatic increase in 2003 reaching twenty-five million passengers. The numbers
have steadily been increasing until present day.
Ryanair initially explored a simplistic, low-fare strategy accompanied with
excellent customer service regarding its punctuality in on-time arrivals, least
cancellations, and low percentage of lost bags (Box & Byus, 2007). It was known
to model closely after Southwestern Airlines and its low-cost strategic business
model.
The company experienced rapid growth, especially under the leadership of
O’Leary. The introduction of Ryanair.com in 2000 became Europe’s largest travel
website, with attracting about 50,000 bookings per week within the first three
months. It also offered low and competitive prices for car and hotel rentals, rail
services and travel insurance. This year also carried over seven million passengers,
and had established a business model of standardized aircraft, no free amenities,
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quick flight turnarounds, and minimum baggage allowance, which will all be
discussed in detail later.
Its history concerning bases in Europe started with its first base in 2001 at Brussels’
Charleroi Airport. This base took passengers from Charleroi to Dublin, London,
Shannon, Glasgow, Venice, Paris, and Carcassonne. Although it provided great
costs savings and advantages, many speculated that Ryanair would fail because of
its remote location from the capital in Brussels. However, it fared well evened after
the attack of 9/11 and subsequent results in the surging increase of operational
costs due with fuel price increases. At the end of the year, Ryanair had carried over
nine million passengers. In 2002, Frankfurt became its second base. Entering into
the German aviation market it swayed standards of Lufthansa’s high price
monopoly and introduced its low fare methodology. The Stansted-based Buzz
Airlines was acquired in 2003; from this acquisition it gained access to eleven new
French regional airports. By 2004, Ryanair became the largest low cost airline in
Europe! In this year, the airline introduced two new bases in Rome and Barcelona
and added 73 new routes, creating a total of 150 routes. Operating expenses as a
percentage of revenue increased in 2003 to 2004 due to an increase in fuel costs. To
balance the effect of higher fuel costs, newer Boeing 737s were purchased that
consumed less fuel per mile than older models of 737s (Box & Byus, 2007). The
fuel and oil costs are remarkable given how prices have actually been increasing.
The CASM (Cost per ASM) results from the division of operating expenses,
excluding ancillary expenses, to ASMs. From a financial standpoint, the average
cost per employee is of good quality. As organizations get larger, so do their
bureaucratic costs, which may increase managerial roles and positions. This would
normally show, not just a big increase in wages, but also in wages per employee.
Not so here. In effect, Ryanair has a good hold on controlling wage costs.
Minimizing the amount of employees may be one of Ryanair’s strategies in
maintaining low costs. However, in light of Ryanair’s known reputation of poor
customer service, the high number of passengers booked per employee doesn’t
help that.
Ryanair Low Cost Strategy: is it Sustainable?
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European Aviation
The deregulation of European air transport dramatically changed the way airlines
operated thereafter. A larger number of airlines entered into the market, creating
increased competition. It also called for former airlines to evaluate their strategy in
being able to stay competitive amongst newcomers who started to operate on the
basis of “high volume, low price.”
The European Union Open Skies agreement made it possible for airlines to fly
internationally from the EU to any point in the United States. Originally, there
were high restrictions and agreements between the United States and certain
European Union nations, where limited traffic access was available on
international routes for many airlines. In effect, this had created a competitive
disadvantage for airlines left out of the agreements. American Airlines, British
Airways (BA), United Airlines and Virgin Atlantic were amongst the airlines that
were able to freely fly on trans-Atlantic routes (Eastlund, 2008). So the Open Skies
agreement granted the ability to operate freely and increased competition as
airlines were encouraged to add long-haul routes with nothing holding them back.
Low Cost Carriers
Low cost travel has currently become a dominant force in the airline industry and
literature it is rapidly growing. The airline industry regarding low-cost carriers
(LCC) is highly competitive and became common place in Europe sometime after
1990. Ryanair and easyJet are now industry leaders in Europe. LCCs in Europe
won 10% market share and gained 25% of domestic share in the United States
(Emerald Group Publishing Limited, 2006). LCC’s offer affordable fares to those
who desire to buy cheaper flights and it also reaches out to underserved markets
that otherwise would not be able to fly due to high fare prices. A common model of
LCC’s is that they use secondary airports, provide no frills, and uses one type of
aircraft. Southwest Airlines was the leader of low cost carriers in the United States,
and Ryanair modeled after this business strategy to build up to the profitable results
it has now. These factors help cut down on costs. As years progress, efforts are
made to increase the perks provided on low cost airplanes. Expanding to offer more
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comfortable seats and having more than one class—considered as a premium
class—are possible additions to low-cost carriers. According to the OAG
Quarterly Airline Traffic Statistics, the low cost sector had 16% of the 2.6 million
scheduled flights; also out of the 309.7 million seats offered worldwide in 2007,
20% percent were LCC (Kerensky, 2007).
Low-cost carriers perform well during recession time periods, which makes sense
due to the fact that people prefer cheaper fares in a poor economy. LCC have to
operate with very high breakeven load factors (Dunn, 2011). If fuel goes up, it
increases the breakeven load factor. The booked passenger load factor is the total
number of seats sold as a percentage of total seat capacity on all regions flown. The
break-even load factor corresponds to the number of RPMs for scheduled
passenger revenues that would be equal to operating expenses divided by ASMs.
Ryanair’s booked passenger load factor is relatively stagnant, which isn’t a huge
concern since the numbers are already high. However, the break-even load factor is
rising, in spite of increased flights, profits, and presumably efficiency.
The insurrection of budget airlines began with Southwest Airlines in Dallas, Texas.
Flights became profitable in 1973 and have proven themselves ever since by
becoming the biggest airline in the United States and the second biggest in the
world in terms of passenger volume each year (Budget Airline Guide, 2006-2007).
Southwest has no intentions to expand globally (Budget Airline Guide, 2006-
2007). A rationale for this maybe that Southwest has become complacent with the
market share it has and the fact that its past success may guarantee future success.
Nevertheless, this could be a faulty assumption.
European airlines had a somewhat monopolistic market in its ability to charge
extremely high prices. London’s Heathrow is the busiest airport in the world and
the UK’s capital is one of the most traveled hubs in the world which enabled it to
charge these high prices (Budget Airline Guide, 2006-2007). This was first
challenged in the seventies by the budget Skytrain flights to the United States.
Thereafter in the nineties, EasyJet and Ryanair entered the market as low budget
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airlines and challenged this monopolistic airline environment. From their pioneer
efforts, they opened up the neglected airport of Stansted, and began to offer
cheaper flights. According to this source, Ryanair and EasyJet operated on
different routes and destinations in Europe and avoided direct competition with
one another. LCC’s also is growing fast in the Asian market. Since 2000, Asia has
experienced explosive growth. One major airline is Malaysia’s AirAsia which has
created opportunities for individuals to travel more so than usual (Budget Airline
Guide, 2006-2007). The US, Europe, and Asia are the three dominant nations that
exploit the use of low cost carriers.
High speed rail has questioned the prevalence of low cost carriers in the future.
Traveling by rail provides many advantages over short haul air flights. It has been
proposed that in order to reduce carbon dioxide omissions by 60%, the use of short
haul flights could be replaced by rail services (Milmo, 2011).
In addition to high speed rail, long haul routes may suggest increased flights in its
industry over short-haul flights. In light of all these possibilities to arise in the
future, it may be best for short haul carriers to start in the long-haul business to keep
up profits. They can also, as some have done so and as the EU transport
commissioner proposed, to connect airports with the high-speed rail lines (Exhibit
1 & Exhibit 2).
Ryanair: Strategy of Operation / Business Model
In 2004, when Ryanair became the leader in low-cost travel it carried around 25
million passengers, with only about 2,300 staff members. It was estimated that
each employee had an average of 10,049 passengers. This demonstrated cost
savings in personnel costs, such as wages paid.
As of June 30, 2010, Ryanair offered about 1,300 scheduled short-haul flights per
day serving 155 airports, with an operating fleet of 250 aircraft flying
approximately 1,100 routes (Yahoo, 2011). As briefly noted previously, Ryanair
provides various ancillary services—non-flight scheduled operations, car rentals,
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in-flight sales, sale of bus and rail tickets, and Internet-related services, such as
insurance, accommodation, and cruise.
Ryanair remains profitable despite “lousy” customer service, in light of its very
affordable fare prices. One source quoted that Ryanair even looks to a time when it
flies passengers free! Ryanair was number one in 2004 because of its lowest fares,
least cancellations, on-time flights, and fewest lost bags. The following quote was
given by the CEO, Michael O’Leary (Slack, Chambers, & Johnston, 2007):
Our customer service is about the most well defined in the world. We guarantee
to give you the lowest air fare. You get a safe flight. You get a normally on-time
flight. That’s the package. We don’t, and won’t, give you anything more. Are
we going to say sorry for our lack of customer service? Absolutely not. If a
plane is cancelled, will we put you in a hotel overnight? Absolutely not. If a
plane is delayed, will we give you a voucher for a restaurant? Absolutely not.
The extract shows Ryanair’s strict focus on providing the bare minimum of
customers’ needs. Customer service regarding punctuality, lost bags, and flight
cancellations are what Ryanair strives at being successful in. No extra perks or
accommodations are provided.
Ryanair’s success is due to its use of a low-cost model, which comprises a number
of strategies. The company is able to charge low air fares for a number of reasons:
point-to-point service, short haul routes, no frills provided, standardization of its
aircraft, and ancillary services.
Ryanair’s point-to-point service provides direct, non-stop routes which help
Ryanair avoid additional costs for baggage handling and passenger transit costs.
Their short haul routes allow them to offer frequent service. Traveling short
distances affords them the aptitude to eliminate frill services, as expected on long
haul routes. This strategy helps improve efficiency and productivity by not
providing complimentary meals and drinks, newspapers, and seat allocation. As a
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result of cutting back on these supplementary benefits or free amenities, presents
an environmental advantage by reducing garbage disposal.
Ryanair utilizes secondary and regional airports. These airports are less congested
and it allows for higher rates of on-time departures, fewer terminal delays, and
cheaper landing and gate fees versus the larger traditional airports. Secondary
airports also give Ryanair faster turnaround times which are a key element to
maximize aircraft utilization. Average turnaround time is 25 minutes, which is an
outstanding amount of time. Improved personnel productivity partly explains why
this is possible; in addition labor costs are controlled by having continuous
improvements in productivity. Another rationale as to why turnaround time is
superior because avoiding from offering frill services, such as serving meals,
eliminates the need to load the required items onto the airplane. This helps reduce
time on the ground and a quicker take-off time. Landing and servicing fees are
lower as a result of secondary airports. Stansted, based in Essex, serves as its
secondary airport.
An exceptional strategy that Ryanair employs, deal with the standardization of its
aircraft. It uses a single fleet type which produces standardization across the board.
Ryanair operates the Boeing 737-800. Purchasing from a single manufacturer
enables Ryanair to limit operating costs associated with employee training for
maintenance and the purchase and storage of spare parts. This also allows for
greater flexibility in the scheduling of crews and equipment. Ryanair paid as little
as possible for its aircraft; it picks strategic times to purchase equipment. For
example, after the 9/11 attack, Ryanair decided to purchase its aircraft when other
airlines were unwilling to take on the risk of buying when the number of
passengers had a great possibility to decrease.
Ancillary services are used in charging for in-flight services and other travel
expenses such as travel insurance, car rentals, and hotel businesses. Ryanair may
up-sell the services provided by Hertz car rental and many hotel businesses and
receive commission from the sales (Marketing Teacher Ltd.). Ryanair also
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provides internet and phone services, phone cards, and bus tickets. Phone cards
and bus tickets make up 16% of Ryanair’s profit and keeps costs lower (Marketing
Teacher Ltd.). From the use of online bookings and via phone, it removed the need
of travel agents, thus reducing costs regarding agency commissions. Booking over
the internet saves 15% in agency fees. All advertising is done in-house, with use of
direct marketing to recruit and retain customers. Third party contractors are used at
some airports for passenger and aircraft handling, ticketing and other services as a
cost efficient means.
Within the airline industry, ancillary services have become a big part of revenue.
Ancillary revenue as a percentage of total revenue is becoming an increasing
strategy for industry-wide low cost carriers. As demonstrated below from select
group of LCC’s, Ryanair is amongst the top airlines with use of ancillary services.
Ancillary revenue is over 20% of total revenue.
Ancillary revenue has been increasing over the years, while scheduled revenues
have been on a slow decline. As mentioned, ancillary revenue is becoming
increasingly popular for low cost carriers. With regards to operating expenses, fuel
and oil have the highest percentage of total revenue. This is of no surprise due to the
increase in fuel prices in the previous years. Staff costs increased slightly, probably
due to the fact that as the company grows more employees are needed. Also to no
surprise, maintenance has been kept to minimum expenses (the lowest of all) as a
result of standardization of aircraft which requires less maintenance and materials
for different aircrafts (Exhibit 3 & Exhibit 4).
Controlling airport access fees also are incorporated in Ryanair’s low cost strategy.
It focuses on airports that offer competitive cost terms. With its high passenger
volume, Ryanair was able to negotiate favorable contracts with airports for access
to their facilities. Ryanair also reduces charges by opting for less expensive gate
locations and outdoor boarding stairs. These types of decisions provide cheaper
costs and further enable Ryanair to charge lower fare prices.
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Overall, Ryanair looks at cutting costs in areas that really shouldn’t affect
customers too much. As long as the customers are satisfied with getting to their
destination on time and at a lower cost than other airlines, they are okay with the
exceptions of poor quality customer service. By maintaining the low costs via
different strategic means, Ryanair is able to focus on high passenger volume rather
than large margins per passenger like other big airlines. Its low fares capture the
audience who prefer not to drive or travel via train. Potential customers may
consider the overall benefit of flying, with a strong guarantee to arrive at the
destination on time (Exhibit 5).
Challenges of Ryanair Business Model
Ryanair faced a number of business conflicts through its practices in the area of
human resource management, governmental relations and treatment of customers.
However, part of these practices constitutes its low cost leadership strategy, which
has contributed to Ryanair’s success of a profit-generating airline company.
One conflict with Ryanair regards its human resource management. It operates as a
non-union organization within a strong pro-union Ireland background. Pilot and
flight attendant compensation wasn’t the best suited for the workers; it consisted of
part salary and part “based on efficiency issues, such as number of flight segments
flown” and “amount of revenue generated from sales of items in the in-flight
magazine” (Box & Byus, 2007). Once Ryanair refused to provide wheelchairs at
the Stansted airport because it felt this responsibility was upon the airport itself.
Ryanair disputed that out of the 93 airports they fly from, 87 provide wheelchairs
for the disabled passengers. The court ruled in 2004 that this responsibility should
be shared by both Ryanair and the airport owners.
Ryanair doesn’t uphold the best relationship with all of its stakeholders, including
the government. According to one source, O’Leary was insensitive to Ireland and
Europe’s government officials. In particular, his attitude towards Aer Lingus
officials was aloof and disrespecting. In addition, Ryanair condensed the number
of flights flown in its home country after the Irish government imposed fees.
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The deal that Ryanair negotiated for landing rights at Charleroi airport created a
significant disparagement towards Ryanair. In 2004, “the European Commission
ruled that €4 million of the €15 million in incentives paid to Ryanair comprised
illegal state aid;” within the same year, “Ryanair agreed to put €4 million in an
escrow account” as it waited its appeal” (Box & Byus, 2007).
Competitor Analysis
Ryanair has many competitors such as British Airways, EasyJet, and Aer Lingus.
This analysis focuses on two of its primary top low-cost competitors—EasyJet and
Aer Lingus. British Airways (BA) no doubt presents a threat, but it is also a full-
service airline. In 1998, BA invested in a low cost airline, Go, for $25 million
which was sold in 2003 to the owner of easyJet for $375 million (Ryanair
Successful LC Leadership article). Even though a much smaller airline, Ryanair
has a slight advantage in its market cap over BA’s market cap.
EasyJet is one of Ryanair’s closest and toughest competitors. It began in 1995 by
Stelios Haji-Ioannou at the young age of 28. According to the Skytrax Annual
Survey, the Global Top 3 airlines were Jetstar Airways, Air Berlin, and easyJet,
respectively (Kerensky, 2007). This low cost carrier airline offered some services
that Ryanair did not. EasyGroup was founded in 1998 and had services in hotels,
car rentals, internet cafes, and credit cards services.
Aer Lingus is a main competitor that is not only a low cost competitor, but also
based in Ireland. It has long haul flights as well, but maintains a small part of its
business. According to a 2007 article, the Irish government owns 85% of Aer
Lingus. The airline had rapid growth up until 1993, when revenues and profits had
an extensive decrease. As part of a restructuring plan, the government invested
222.2 million Euros in equity. The financial crisis in 2001 led to Aer Lingus’
implementation of a survival plan, which comprised of “a staff reduction of over
2,000 employees, a pay freeze and sales of non-essential assets” (Box & Byus,
2007).
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Revenues and profits picked up with the adoption of a new low fare strategy.
Ryanair has exceeded its competitors in many aspects based on each individual
company’s annual report. Aer Lingus lags behind Ryanair and easyJet. Ryanair
proves to have the most employees, passengers carried, routes and airports served,
RPMs and ASMs than the other two competitors. Across the board, it maintains
the cheapest airfares (Exhibit 6 & Exhibit 7).
Long-Haul Possibilities
In 2007, speculations were made that Ryanair was to kick off into the long-haul
business on trans-Atlantic routes around 2010 or 2011. According to one source,
fares are expected to be twelve dollars one way, which will exclude taxes and free
food and entertainment (McGrath, 2007). Ryanair would use secondary airports as
did with short-haul routes, such as Baltimore and Providence in Rhode Island.
Premium class seating will also be offered to passengers. O’Leary noted that
money wouldn’t be an issue; at the outset the new carrier would be funded by eager
private investors who hold interest in seeing a low-budget airline enter into the
transatlantic business (The Travel Magazine, 2007).
As a result of high oil prices and the credit crisis, four transatlantic airlines have
failed. Ryanair has hopes of overcoming this hurdle. Ryanair has already ordered
fifteen long-haul aircraft and made plans to lease some of the new Boeing 787
Dreamliners (Minot, 2008).
Considering the feasibility of moving into the long-haul market, Ryanair has to
evaluate a number of factors. Will it be more profitable for Ryanair to turn to long
haul routes with increasing operating costs or stay with its niche in short-haul
destinations? Southwest has expressed that it has no desire to enter into the long-
haul business. Is this a smart stance on the matter, or will they get left behind? With
the increase of high-speed rail services, maybe it’s a factor of how quick all LCC’s
will move to long-haul routes, with the possibility that short-haul routes will be in
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Ryanair Low Cost Strategy: is it Sustainable?
intense competition with high speed rails.
It is common to say that price is big driver of what airline customers choose over
another. In Ryanair’s case cheap fares sustained and continue to sustain people
through poor customer service. But will this be the case when customers have to
travel hours away with poor customer service? Would company-wide training of
employees on how to display superior customer service be necessitated?
The fare price has been addressed, but will Ryanair be able to maintain cheap fares
in the future, such as in consideration of increasing fuel and oil prices? How will
Ryanair provide these extra amenities while simultaneously maintaining its low
cost business model strategy? Obviously, long-haul routes have to have a level of
comfort employed. Ryanair has taken initiatives to make long-haul routes more
comfortable for passengers, such as plans to offer premium classes. Meals would
have to be provided as well as a level of entertainment for international flights.
How effective will Ryanair be in charging for meals and use of entertainment?
A final thought involves standardization. Ryanair has started with 15 long-haul
aircraft. Ryanair’s short-haul routes have been standardized with a single fleet type
of Boeing 737-800s, so is it possible to install some kind of standardization across
the long haul and short haul aircraft that will cut down on costs and enable a better
transition?
The Future of Ryanair
Ryanair had been successful in growing its business by relying on high volumes
and adding capacity to its network. The company has greatly focused on building
its network in other routes that had not been utilized before. The use of secondary
airports whose fees were lower than those of major airports gave them major costs
savings. Some of these airports were located a little distance far from the major
cities but the local authorities offered subsidies to the airlines which may have had
great contribution to lower costs. Furthermore, Michael O’Leary had been
successful in doing deals with the underused airports.
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As of June 30, 2012, the company offered over 1,500 scheduled short-haul flights
per day serving approximately 160 airports largely throughout Europe, with an
operating fleet of 294 aircraft flying approximately 1,500 routes. (Ryanair
website)
However, the company management had been wary of the issue of maintaining
their current status and pushing the company forward. The company is not sure
about its increasing fares and revenues to offset high business costs. Other risks
that they could face in future would be effects of instability by capital markets.
The company indicated selling some of its stake in Aer Lingus. The company held
a 29.8% interest in Aer Lingus Group plc , which it has acquired through market
purchases following Aer Lingus’s partial privatization in 2006. This deal had been
marred with controversies because the company had been trying to buy a larger
stake in the company unsuccessfully. The UK competition commission was
investigating whether Ryanair’s stake in Aer Lingus constitutes a “substantial
lessening of competition”.
The company had been looking forward to the opening up of trans-Atlantic flights
which they hoped would start at $10 or 10 euros. However the company would be
cautious of starting the operation into the transatlantic market and follow footsteps
of other carriers who went bankrupt in the early 1980s.
Michael O'Leary said a long-haul business would have to be run separately to
succeed, allowing management and staff of the short-haul business to remain
focused on that. A long-haul service would also need to start operations with a
fairly large fleet of 30-50 aircraft in order to have economies of scale. With the
open skies agreement, this would expand their network connecting 15-20
European cities with other 15 US cities. A long haul service would require a
different business model with the inclusion of a premium section and some frills
that are left out in the short haul services.
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Many airlines had stopped operations due to the inefficiencies of sticking to a low
cost model in a long haul route. Laker Airways went bust in a recession in the early
1980s, and as its full-service competitors on the trans-Atlantic services cut fares in
order to get more passengers on-board as demand fell. There have also been
questions about the profitability of the Asian airlines. Malaysia's AirAsia X
dropped services from Kuala Lumpur to London and Paris due to the cost of fuel
and the relative inefficiency of the Airbus A340 aircraft, and due to competition
from full-service airlines such as Emirates. It also dropped services to India due to
the country's high taxes, showing how factors outside an airline's control can affect
its cost base and make a dent on thin profit margins.
In an international Air show at Le Bourget, Paris, the company signed off a multi-
billion-dollar deal for the purchase of 175 737-800 jetliners. The company hoped
to grow its fleet to more than 400 aircrafts flying 100 million passengers in five
years’ time.
Expansion the way forward
In a bid to grow and increase its market share in Europe, the company would
consider the options of venturing in another segment such as the long haul but Mr.
O’Leary was careful to point out that in case they decided that was the way to go,
they would use a separate company and not the Ryanair brand. The company
planned to increase its European market share to 20pc from 15pc and transport 100
million passengers a year within five years.
Despite the fact that previous players in the low cost market especially for the
transatlantic market failed to bring their business to profitability, Ryanair is willing
to try their hand in the game and predict what their outcome would be. The question
would be, what’s in it for them in the long run?
Questions
1.Was the containment of costs the only of the reasons for the success of a low-
cost carrier?
2. How is the passengers demand? Are they willing to pay elastic prices?
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Exhibit 1: LCC capacity in Europe
European LCC Country Markets over 1m
seats per month
LCC seat Capacity May 2013
Source: OAG. Oagaviation.com May 2013 Facts
UK
Spain
Italy
Germany
france
Spain(Dom)
Netherland,
Italy (Dom)
Poland
Belgium
Portugal
Ireland
Sweden
8.8
7.4
4.5
3.7
3.2
1.7
1.6
1.6
1.4
1.2
1.2
1.2
1
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LCC Market Share
Source: OAG. Oagaviation.com May 2013 Facts
Exhibit 2: TOP LCCS by Market Share:
Ryanair
easyJet
Norwegian
Vueling
Pegasus
Wizz Air
Flybe
germanwings
Monarch
Jet2.com
31%
21%
9%
7%
5%
4%
4%
3%
3%
2%
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Exhibit 2: TOP LCCS by Market Share:
Period Ending Mar 31, 2012 Mar 31, 2011 Mar 31, 2010
Total Revenue 5,846,400 5,150,600 4,043,200
Cost of Revenue 3,611,700 3,155,100 2,402,200
Gross Profit 2,234,700 1,995,500 1,641,000
Operating Expenses
Research Development - - -
Selling General and Administrative 913,100 908,700 778,400
Non Recurring - - -
Others 411,800 394,100 318,500
Operating Income or Loss 909,800 692,800 544,100
Total Other Income/Expenses Net 78,500 37,700 14,800
Earnings Before Interest And Taxes 988,400 730,600 559,000
Interest Expense 145,400 133,300 97,600
Income Before Tax 843,000 597,300 461,400
Income Tax Expense 96,700 65,700 48,300
Net Income 746,300 531,600 413,100
Net Income Applicable To Common Shares 746,300 531,600 413,100
Source: Yahoo Finance: http://finance.yahoo.com/q/is?s= RYAAY&annual (Accessed 26th July 2013)
(numbers in thousands)
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Exhibit 4: Ryanair Balance Sheet
Period Ending Mar 31, 2012 Mar 31, 2011 Mar 31, 2010
Assets in ‘000’
Cash And Cash Equivalents 4,271,000 4,028,600 2,423,300
Short Term Investments 1,028,300 1,233,800 1,715,300
Net Receivables 81,000 72,500 59,900
Inventory 3,700 3,800 3,400
Other Current Assets 86,400 141,100 109,100
Total Current Assets 5,161,700 4,935,100 4,145,100
Long Term Investments 203,800 195,700 188,100
Property Plant and Equipment 6,558,900 7,001,400 5,837,600
Goodwill - - -
Intangible Assets 62,300 66,400 63,300
Total Assets Liabilities 11,986,600 12,198,600 10,234,100
Accounts Payable 1,888,900 1,951,400 1,682,000
Current Term Debt 528,200 655,800 414,700
Other Current Liabilities - - -
Total Current Liabilities 2,417,000 2,607,200 2,096,800
Long Term Debt 4,408,500 4,712,900 3,688,700
Other Liabilities 332,200 306,900 324,000
Deferred Long Term Liability Chg 425,300 379,900 270,100
Minority Interest - - -
Negative Goodwill - - -
Total Liabilities 7,583,100 8,006,700 6,379,600
Stockholders' Equity
Common Stock 12,400 13,500 12,700
Retained Earnings 3,196,200 2,792,200 2,819,200
Treasury Stock - - -
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Exhibit 4: Ryanair Balance Sheet
Capital Surplus 887,400 935,600 855,000
Other Stockholder Equity 307,500 450,600 167,500
Total Stockholder Equity 4,403,500 4,191,900 3,854,500
Net Tangible Assets 4,341,200 4,125,500 3,791,200
Source: Yahoo Finance: http://finance.yahoo.com/q/is?s=RYAAY&annual (Accessed 26th July 2013)
(numbers in thousands)
Exhibit 5: Ryanair Operating Costs
EUR million 2012 2013 Change % of 2013 total
Fuel 1,594 1,886 18.30% 45%
Airport & Handling Charges 554 612 10.40% 15%
Route Charge 461 487 5.70% 12%
Employe 415 436 5.00% 10%
Depreciation 309 330 6.60% 8%
Materials, repairs 104 121 16.10% 3%
Aircraft Rentals 91 98 8.30% 2%
Other 180 198 9.90% 5%
Total expenses 3,707 4,166 12.40% 100%
Source: CAPA - Centre for Aviation, Ryanair
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Exhibit 6: Top 20 airline groups ranked by seat capacity in Europe: 13-May-2013
Rank Airline Group Total Seats
1 Deutsche Lufthansa AG 3,044,510
2 AF-KLM 2,202,657
3 Ryanair 2,171,988
4 IAG 1,965,486
5 EasyJet plc 1,438,740
6 Turkish Airlines Group 1,182,242
7 SAS Group 837,327
8 Air Berlin Group 835,850
9 Aeroflot - Russian Airlines Group 693,100
10 Alitalia - Compagnia Aerea Italiana S.p.A. 624,848
11 Norwegian Air Shuttle 568,310
12 Pegasus Airlines Group 369,873
13 Emirates Group 306,694
14 Are Lingus Group Plc 304,669
15 Wizz Air 293,760
16 Flybe Group plc 276,866
17 TAP Portugal Group 269,146
18 SIA Group 249,916
19 TUI Travel PLC 241,509
20 Finnair Group 226,018
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Exhibit 7: Performance Measures in the Airline Industry
System Operating Profit/(Loss) per Originating Passenger
20
10
0
-10
-20
-30
-40
-50
-60
-70
2002 2003 2004 2005 2006 2007
Network Lowcost 14 Carrier Average
Exhibit 8: Passenger Growth
Ryanair development of passenger nos. (million) and load factor (%): FY2004 to FY2013
90
80
70
60
50
40
30
20
10
0FY2004 FY2005 FY2006 FY2007FY2008 FY2009 FY2010 FY 2011 FY 2012 FY2013
Pas
seng
ers(
mil
lion
)
85
84
83
82
81
80
79
Loa
d F
acto
r %
Passengers million
Load factor %
Note: March year end. Source: CAPA - Centre for Aviation, Ryanair
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Ryanair growth in passenger numbers: FY2004 to Fy2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
50
45
40
35
30
25
20
10
5
0
Note: March year end. Source: CAPA - Centre for Aviation, Ryanair
References
Box, T. M., & Byus, K. (2007). Ryanair (2005): Successful Low Cost Leadership.
Retrieved March 2, 2013, from BNET-Journal of the International Academy for
CaseStudies:http://findarticles.com/p/articles/mi_qa5452/is_200705/ai_n21289
700/?tag=content;col1
Budget Airline Guide. (2006-2007). Low-cost Airlines History: How It All Got
Started. Retrieved April 20, 2011, from http://www.budgetairlineguide.com/low-
cost-airlines-history
Center for Asia Pacific Aviation. (2010, October 19). Ancillary revenues to total
USD23bn in 2010 and set to triple. Retrieved March 2013, from
http://www.centreforaviation.com/news/2010/10/19/ancillary-revenues-to-total-
usd23b-in-2010-could-triple-in-coming-years/page1
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Centre for Asia Pacific Aviation. (2010, August 20). Ryanair goes medium haul. Is
a Middle East hub the goal as it pushes the limits? Retrieved 2011, from
http://www.centreforaviation.com/news/2010/08/20/ryanair -goes-medium-haul-
is-a-middle-east-hub-the-goal-as-it-pushes-the-limits/page1
Dunn, G. (2011, April 18). Low-cost carriers: growth expectations . Retrieved
April 19, 2013, from Flightglobal:
http://www.flightglobal.com/articles/2011/04/18/355702/low-cost-carriers-
growth-expectations.html
Eastlund, D. (2008, January). Open Skies: Opening Up Opportunities. CWT
Vision , 27-31.
Emerald Group Publishing Limited. (2006). Easyjet and Ryanair flying high on the
Southwest model: Charting the ups and downs of low-cost carriers. Strategic
Direction , 18-22.
Jolly, D. (2008, July 20). Ryanair warns of troubles for airline industry. Retrieved
March 2013, from The New York Times
http://www.nytimes.com/2008/07/28/business/worldbusiness/28iht-
28ryanair.14821766.html
Kerensky, L. (2007, August 10). World's Best Low-Cost Carriers. Retrieved April
21, 2013, from Forbes.com: http://www.forbes.com/2007/08/09/travel-carriers-
affordable-forbeslife-cx_lk_0809biztravel.html
Marketing Teacher Ltd. (n.d.). Ryanair Marketing Mix. Retrieved January 2013,
from MarketingTeacher.com: http://marketingteacher.com/case-study/ryanair-
case-study.html
McGrath, G. (2007, April 12). Ryanair to go long-haul. Retrieved April 2013, from
The Sunday Times
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http://www.timesonline.co.uk/tol/travel/news/article1645813.ece
Milmo, D. (2011, April 18). EU could ground short-haul flights in favour of high-
speed rail. Retrieved April 2013, from guardian.co.uk
http://www.guardian.co.uk/world/2011/apr/18/eu-transport-plan-short-haul-
flights
Minot, L. (2008, September 27). Ryanair's New Long-haul Routes. Retrieved
2013, from The Sun: http://www.thesun.co.uk/sol/homepage/travel
Ryanair Ltd. (n.d.). History of Ryanair. Retrieved January 12, 2013, from Ryanair:
http://www.ryanair.com/ie/about
Slack, N., Chambers, S., & Johnston, R. (2007). Operations Management. In
Operations Strategy (p. 62). London: Pearson Education Limited.
The Travel Magazine. (2007, April 14). Ryanair to Go Long Haul. Retrieved
March 21, 2013, from http://www.thetravelmagazine.net/i-26--ryanair-to-go-
long-haul.html
USA Today. (2007, April 12). Ryanair considers launch of long-haul airline to
USA. Retrieved Mrach 20, 2013, from
http://www.usatoday.com/travel/flights/2007-04-12-ryanair-explores-airline-
usa_N.htm
Wyld, D. C., Jones, M. A., & Totten, J. W. (2005). Where is my suitcase? RFID and
airline customer service. Marketing Intelligence and Planning , 382-394.
Yahoo. (2011). Retrieved January 17, 2013, from Yahoo! Finance:
http://finance.yahoo.com/q/pr?s=RYAAY+Profile
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Author Information:
1. Atul Gupta, School of Business & Economics
Lynchburg College, Lynchburg, VA 24501, USA
E-mail: [email protected]
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WORK-INTEGRATED-LEARNING BUSINESS MODEL:
A CASE STUDY IN PEOPLE’S REPUBLIC OF CHINA1 2Tan Cheng Ling , Wong Kang Ying
ABSTRACT
The top management of Australian China Investment Corporation (ACIC) is considering the future competition will impact to its business model on Work-Integrated-Learning (WIL), which specialize in bringing undergraduate students from western universities (Australia and United Kingdom) to place them as the practical teachers for English as a Second Language (ESL)in People’s Republic of China (PRC). Nonetheless, the growth of the demand of ESL preschool teachers is still encouraging. The business team is assigned to review the company’s existing business strategy in order to continuously sustain its business performance and remain its competitiveness in PRC. An assessment on the globalization agenda of the country, company’s business model, comparative advantages, challenges and performance were done to identify the problems, and overcome the challenges that will lead ACIC to the better competitive position.2
Keywords:
Work-Integrated-Learning, English as Second Language, Competitiveness, Business Model, Education.
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Introduction
Australian China Investment Corporation (ACIC) is a company established by an
Australian-incorporated entity in Beijing. ACIC’s key business focuses on the
areas of Australasia Transnational Education campuses in People’s Republic of
China (PRC), international students’ guardianship, Study Abroad Internship
Program (SAIP) for overseas students with an education major, education
software development and employability skills training. The company specializes
in bringing undergraduate students from western universities, especially from
Australia and United Kingdom, to place them in appropriate workplace in PRC for
practicum. Therefore, ACIC works closely with the institutions and universities,
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such as Leeds Metropolitan University, RMIT and Griffith University, which
Work Integrated Learning (WIL) is well-embedded in their syllabus. These
institutions and universities entrust ACIC as their placement agent in PRC, so that
their undergraduate students are able to fulfill the WIL requirements.On the other
hand, ACIC’s customers are the preschools inPRC. By bridging this supply chain,
ACIC has the competitive advantage by ensuring its service qualityof these
internship students who will be placed as preschool teachers. The minimum
qualification of these internship students must be native Englishspeakers, well
trained and technically qualified preschool teachers in order to ensure it service
quality.
However, due to the issues of overwhelming demands, rapid urbanization,
ethnocentrism and social perceptions, more and more companies invented in this
kind of business. Some of the companies have started to neglect the very essential
criteria of English as a Second Language (ESL) teacher. They employ anyone as
long as the person has the appearance of a westerner (Li, 2010). Hence, the quality
and employability of ESL preschool teachers are becoming seriously questionable
issue in PRC.
The managing director, Mr. Chen aware the upcoming competition will impact to
its business sustainability in PRC. He delegated a task to the business team, which
was led by Ms. Wong to look at the room for improvement to sustain its business
performance in PRC.Ms. Wong has formed a working team to identify the
challenges and business potential created with the current business model. While
doing so, the evolution of global business and its effects arereviewed.
Globalization Agenda of PRC
The tremendous growth of PRC’s economy has seen it being named the seventh
largest consumer goods market with an unprecedentedly rising middle class
expected to impact significantly on the economy (Farrell, Gersch, & Stephenson,
2006). The potential for the next decade is apparently huge. However, penetrating
the PRC’s markets remains challenging to foreigners. The most common mistake
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was neglecting the difference in cultural norms and generalization of strategies.
While strategizing for PRC, it is important to take into account that the consumer
vastly-diversified population that can be categorized into four distinct sectors
comprising of the first, second and third tier cities and the rural areas. Organizing
in such manner conveniently accounts for the variations in income, education,
profession and lifestyle. Disparity exists especially in demand of popular products,
effective marketing tools and logistic costs. There are seven regional markets
located in North China, Northwest China, Northeast China Central China, East
China, Southwest China and South China. Figure 1 depicts the main cities
stratified in these seven regional markets.
(Source: Cui and Liu, 2000)
Figure 1: PRC’s Seven Regional Markets
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The global competitiveness index (2009-2010) for PRC was compiled in Table 1.
Figure 2 is plotted according to the framework as advanced by Schwab (2009).
Table 1: Score of Global Competitiveness Index for PRC in 2009-2010.
Pillar Component Global Competitiveness Index Score
1st Institutions 4.4
2nd Infrastructure 4.3
3rd Macroeconomic stability 5.9
4th Health and primary education 5.7
5th Higher education and training 4.1
6th Goods market efficiency 4.5
7th Labor market efficiency 4.7
8th Financial market sophistication 4.1
9th Technological readiness 3.4
10th Market size 6.6
11th Business sophistication 4.5
12th Innovation 3.9
(Source: Schwab, 2009)
(Source: Schwab, 2009)
Figure 2: Chart of Global Competitiveness Index for PRC
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Key Success Factors of Doing Business in PRC
There are five pillars to the success of doing business in China, namely (i) GuanXi
(i.e. network of contacts), (ii) harmony with continuity, (iii) knowing the market,
(iv) Ren (i.e. obligation of a leader’s responsibility to all subordinates and
organizations and (v) sensitivity to obstacles (Ambler, Witzel & Xi, 2009). These
suggestions were further echoed that no particular niche seemed to excel in the
market as a wide range of firms were succeeding in PRC. Hence, exploring
product mix, market entry and market intelligence, so to accentuate on the aspects
of accurate market information, local representation, and face to face contacts are
very important in doing business in PRC.
The western analysis of networks and interpretations of business or social
relationships are usually linked to cost analysis, social exchange or interaction
dimensions (Scott, 1995). However, in the eastern context, the analyses expand
beyond the dimensions of social and economy (Hutchings & Michailova, 2006),
where social networks prevail beyond institutional structures (Boisot & Child,
1996). This can be traced back to the premise of Confucianism, noting that the
relationships are nurtured on a cultural basis which indicates the way in developing
relationship is different in the western and eastern context (Buttery & Wang, 1999).
The word Guanxi literally means relations, but in reality, it encompasses a vast
extent of personal connections that include the offering of favours among
individuals on a dyadic basis (Yang, 2002). It is regarded as the fundamental to
doing business in PRC and describes the strong ties built on familiarity or intimacy
(Bian&Ang, 1997) based on locality, dialects, kinship, work place, social
attachments and friendship. This has led to the notion of building trust among
business partners, which is regarded as the integral success factor to doing business
in PRC. When trust is built, business transactions can be dealt by one’s word.
However, PRC is progressively implementing and enforcing international
standardsof accounting, business laws, property rights and management, the
influence of Guanxi will dwindle, if it is not redefined. Besides, the developmentof
PRC’s economy will give rise to a highly diversified organizational landscape,
with richcompetitive industrial environment (Luo, 2000). And consequently, only
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those with high quality in technical and organizational skills will be remained,
there will be less need to nurture Guanxi. Referring to Hong Kong with clear
transformation from interpersonal trust to institutionalized trust, the same process
might take many years for PRC, with its background and size.
Foreign Companies in PRC
It is inappropriate to generalize entry strategy to a developing economy such as
PRC, given the fundamental differences entails between developed economy and
developing economy (Aulakh, Kotabe & Teegen, 2000). From the late 1970s to the
early 1990s, foreign investors encountered significant liabilities of foreignness in
PRC (Chen, Griffith & Hu, 2006). A lot of multinational enterprises (henceforth
MNEs) are faced withchallenges in issues such as geographic and cultural
distance. Hence, their choice of entry strategies is especially instrumental in this
highly transitional economy. The contributing factors to liabilities of foreignness
are mainly spatial distance, lack of root in local environment, host country and
home country environments (Zaheer, 1995). MNEs with low liabilities of
foreignness are found to incline to the resource seeking and labour-intensive
strategies to achieve competitive advantage when entering PRC. On the contrary,
those with high degree of liabilities of foreignness strategized more on market-
seeking and control-oriented market entry (Chen et al., 2006).
Foreign companies, especially the multinational corporations (henceforth MNCs)
in PRC, are facing intense price pressure. Price pressure is mainly caused by the
increasing competitiveness of the local producers, and the eroding of premium
positioning of the foreign entrants in various sectors. Besides, the price pressure is
also the transitional nature of the markets as well as the deflationary economic
conditions of PRC. The foreign companies tend to over-estimate the durability of
premium-priced market segments in PRC. Very often, local companies are able to
develop and launch low-priced entry products that boom rapidly in the volume
market. Moreover, these local companies are rapidly improving their product
quality, product branding and marketing strategies (Choi & Nailer, 2005).
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MNCs doing business in PRC give high priorities to knowledge transfer, but it is
considerably difficult due to cultural dissimilarities. However, the role of a PRC-
based company is determined by the resources and capacities (Qin, Ramburuth &
Wang, 2008). In addition, localized practices contribute to the success of MNCs in
the PRC when more experiences are accumulated and knowledge may be
duplicated to other peer subsidiaries (Li & Scullion, 2006). Moreover, in relation to
the political environment, in order to remain competitive in PRC, international
businesses should be able to respond to the high level of intervention from the host
government. In this regard, it is important to maintain high control management
techniques for a narrow institutional environment (Menzies & Orr, 2010).
From One Child Policy to Early Childhood Education
It is interesting to note that the one-child policy has demographically made PRC
one of the most rapidly aging countries in the world. The one-child policy has
created a new family structure of 4:2:1, the ratio of four grandparents to two
parents to one child. This indicates that the amount of compassion and resources
that parents invest on their only child is increasingly out of proportion. It is
estimated that a total of ten millions of babies are born every year and the number
has hit an exceptional twenty seven millions during the PRC Olympics baby-boom
year in 2008 (Jin Hua, 2010). Currently these babies are fit for preschool, creating
an overwhelming demand for early childhood education (henceforth ECE).
There are 130,495 preschools in PRC. The 77,616 private preschools made up
60.1% of this number. These private preschools are catering for 8.69 million or
36.99% of the preschool-student population (Ai Suo Marketing Consultation Pty.
Ltd., 2010). At present, only 38.0% of PRC children, from three to six years old,
are attending preschool education. The total teaching manpower as reported in
2008 is 1.032 millions, including teachers and principals. This made the ratio of
teacher to student as 1:22.7, while the ideal ration according to PRC’s policy is 1:6
to 1:7 (Beijing Aifu Preschool Education College, 2010). Moreover, The National
Middle to Long-term Policies for Education Reform and Development 2010-2020
which was announced recently, aims at 95.0% enrolment of children population by
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2020 (Chinaedunet, 2010). Hence, it is apparent that ECE has become an
overwhelming yet essential and immediate demand. Unfortunately, there was no
formal policy or system in place to cultivate ECE teachers. The following is a
summary of the types of institutes that run ECE courses in PRC.
Table 2: Distribution of Institutes offering ECE studies in PRC
Type of institutes with ECE study Total number
1 Normal universities 75 (including 5 private)
2 Normal professional college 8
3 Universities 15
4 Local colleges 39
5 Vocational institutes 9
6 Private ECE teachers’ training school 38
7 ECE professional schools 3
(Source: Beijing Aifu Preschool Education College, 2010)
These centres have nurtured 43,547 ECE teachers, with 6,487 graduating from
universities, 14,110 from professional colleges and 22950 from Junior college
(Beijing Aifu Preschool Education College, 2010). However, these numbers are
far from answering current demand for 3.3 millions teachers. In the context of
Beijing, as of 2010, Beijing has invested RMB 60millions to establish 30 new
kindergartens. But this will only provide 20,000 places. There is yet another
170,000 places to be fulfilled. It requires 8 years to address the current amount of
demand surplus (Chinaedunet, 2010). The Beijing Research Centre for Socio-
economic Developmentestimated that by 2020, the population of preschool
children in Beijing will reach 270,000, while the population of children younger
than six years old is 650,000. The ideal ratio for 270,000 students will be 33,700
ECE teachers. At present, Institutions such as BeijingNormal University, Capital
Normal University, Chinese Women Academy and the Metropolitan College are
actively training teachers to fulfil the market (Beijing Aifu Preschool Education
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College, 2010).In 2010, the demand for kindergarten places has increased to
another 12,000. Hence, an additional demand for more than one thousand
preschool teachers is to be filled. At present, there are 1,700 vacancies for
kindergarten teachers. The requirement for ECE teachers to teacher in Beijing is
basic degree. But there are only three hundreds ECE graduates available every
year. Moreover, only two hundreds will go on to teach, and to rub salts onto
wounds, they lack practicum experience. The local education committee resorted
to recruit graduates from ECE colleges but find that these teachers, though good in
fundamental skills, are not compatible in theoretical knowledge (Bai Zhi Cheng
Professional Training College, 2010).
ACIC’s Company Background
In 1995, ACIC was incorporated in Brisbane. It existed as an idea and a set of
values aspired to improve the standard of international education. The main office
of ACIC is currently based in the Hai Dian district of Beijing. ACIC also has three
representative offices located at Brisbane, Melbourne and Singapore. The main
operational and management activities are carried out in the main office, while the
recruitment and marketing activities are handled by the representative offices at
Brisbane, Melbourne and Singapore. The main office is operated by twelve staff,
while the representative offices are run by one to two local staff. Lately, the
company has also assigned overseas representatives to engage in the recruitment
activities in United Statesof America and Unite Kingdom.
ACIC’s main customers in PRC are the preschool institutions as their main
servicesfocus on addressing the employability of preschool teachers from both
overseas and local. Their suppliers are the overseas universities / institutionswhich
collaboratewith ACIC in bringing in their undergraduates for practicum in PRC.
These universities / institutions are also supplyingresources to develop the training
programmes for the local preschool English-language teachers.
ACIC’s vision statement sounds, “Our vision is to become the first-choice
accredited Work-Integrated-Learning provider for graduates from the Asia-
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Pacific's main industries". While the mission statement is, "To empower graduates
with the employability skills needed to take their place in the world through a
comprehensive and all-expenses-paid Work-Integrated-Learning program".
ACIC upholds four core values of integrity, customer-needs focused,
innovativeness and sharing as below:
(I) Integrity
• We are professional in all facets of what we do, operating within the legal and
moral bounds of society
• We build trust and respect through transparent processes.
• Our stakeholders never have to query our motives.
(ii) Customer needs focused
• We ensure the quality of services we provide. We are highly adaptable to
customer-needs without compromising on our mission;
• Our priority is to maintain the sustainable, professional relationship with our
customers.
(iii)Innovativeness
• We are proactive, continuously reviewing and improving our programs and
processes, embracing fresh ideas;
• We are not afraid of taking risks and learn from our mistakes;
• We are leaders in our field who see managing change successfully as the only
constant, keeping us ahead of our competition.
(iv) Sharing
• "We take risks together, we reap the rewards together" - not only with our staff and
our stakeholders, but most importantly the community;
• It's our responsibility as a corporate citizen to share our growth and our
resources.
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ACIC’s Business Model
Study Abroad Internship Programme (henceforth SAIP) was innovated by ACIC
in 2004 based on the WIL concept to facilitate foreign students either in their
senior years of bachelor of Education Degree or Diploma Graduates in Early
Childhood Education, to spend one or two semesters as interns in PRC. Practicum
within an enriching cross-cultural environment is one of the selling points of this
programme. To qualify for this programme, a candidate must be a native English
speaker, at least eighteen years old and in good health. It is also essential for the
candidate to love kids and have deep interest in teaching. It is the only all-expense-
paid programme for qualified participants to practice in PRC. Expenses such as
visa application, travel insurance, return airfares, accommodation, and meals are
underwritten by the company. Besides, ongoing care and support as well as
certificates of completion are provided to the interns. In return, the interns will
commit fifteen to twenty hours of teaching every week according to the
programme they have selected. Table 3 lists the benefit matrix offered to the
interns.
Table 3: Benefit Matrix of SAIP
Session
Work week
Teaching hrs/week
Airfares
Insurance
Visa
Mandarin Tuition
Accommodation
Meals
Paid leave of absence
Sick leave
Monthly allowance
Training
Coaching & mentoring
Performance bonus
Benefits First Semester Second Semester
AM or PM
20 hrs
15 max
USD 700, (Reimb-end**)
USD 350 (Reimb-end**)
Full (Reimb-start*)
Yes, weekly
Yes, home-stay
Yes, all meals
Nil
Yes, by med. Cert.***
Nil
Yes
Yes
Nil
AM or PM20 hrs15 maxUSD 500, (Reimb-end**)USD 350 (Reimb-end**)Extension by companyOptionalHome-stay or self arrangedYesNilYes, by med. Cert.***RMB 1,500YesYes
Half day
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Table 3: Benefit Matrix of SAIP
Work week
Teaching hrs/week
Airfares
Insurance
Visa
Mandarin Tuition
Accommodation
Meals
Paid leave of absence
Sick leave
Monthly allowance
Training
Coaching & mentoring
Performance bonus
Benefits First Semester Second Semester
40 hrs
25 max
USD 700, (Reimb-end**)
USD 350, (Reimb-end**)
Full (Reimb-start*)
Yes, weekly
Yes, home-stay
Yes, all meals
1 day/month
Yes, by med. Cert.***
RMB 3,500
Yes
Yes
Nil
40 hrs25 maxUSD 500, (Reimb-end**)USD 350, (Reimb-end**)Extension by companyOptionalHome-stay or self arrangedYes1 day/monthYes, by med. Cert.***RMB 7,000YesYesRMB 7,000 min.RMB 3,000 min.
Full day
Notes:
Reimb-start* -- reimbursed at start of contract
Reimb-end** -- reimbursed at end of contract
Med. Cert.*** -- Medical certificate from medical officer
Performance bonus paid at end of contract
RMB : Ren Min Bi
USD : U.S. Dollar
(Source: Author)
In the value chain of SAIP (as depicted in Figure 3), the first process is the
development of intellectual property (IP). This consists of two main directions,
namely the development of curriculum for Teaching English as an Additional
Language mainly targeted to the local market and the development of training as
well as mentoring programme for the interns from overseas. The IP development
department also engages in the inventory management and maintenance of the
resource centre. The second part is about recruitment of interns. This process
involves the coordination with universities that have collaborated with ACIC in
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the internship programmes such as Leeds Metropolitan University and RMIT.
ACIC is also collaborating with Association Internationale des Éstudiants en
Sciences Économiqueset Commerciales (AIESEC), the global youth organization
that is active within universities in organizing international student exchange and
internship programmes. Recruitment activities are made complete with interview
and selection, followed by offer of placement in PRC. Meanwhile, the third part
depicted in the value chain is logistics. This deals with the pre-departure
preparations such as visa application, flights and purchase of insurance. It also
involves preparing the interns psychologically with an emotional preparation
package, such as information about the culture and environment in PRC. The
fourth process in the value chain is channel development, which is the
responsibility of marketing communication and planning. There are three targets
to work on, the recruitment of kindergartens for placement, recruitment for Out of
School Hours (OSH) classes as well as for the open classes for Teaching English as
Additional Language (TEAL) training. The channel development is also
continuously expanding into new fields.
Placement management function of the value chain prepares training workshops
for the interns, in charge of customer services as well as manages and monitors
contracts with both the interns and kindergartens. Post delivery support function
takes care of the home-stay arrangement, performance management as well as
mentoring and training for the interns. Last but not least, the company attains
customer satisfaction through the efforts of marketing communication, survey and
quality management which in turns determine the financial management of the
company.
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Comparative Advantages, Challenges and Performance
Besides information gained from customer satisfaction feedback forms,
interviews conducted with interns involved in SAIP, as well as principals or head
teachers of preschools that receive these interns, it can be concluded that the
comparative advantages of ACIC are in the following areas: (i) Personal selection
and matching of interns to job specifications (ii) Comprehensive training and
mentoring (iii) Proprietary curriculum and learning materials (iv) Immediate
replacement when necessary (v) Process driven management and quality
audits.Above and beyond, the challenges that occur in the respective functions of
SAIP are in the area of recruitment, accreditation, visa application, placement,
homes-stay arrangement, mentoring and customer satisfaction. The intake details
and revenue are presented in Table 4. The details listed in this table are the batch
period, the number of interns involved with in every batch, their country of origin,
the preschool centres that they are placed, the revenue and charges for the
placement.
Figure 3: Value Chain of SAIP
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Table 4: Intake Details and Revenue of SAIP
ACIC’s Milestones
ACIC sets its milestones in adding values in the term of innovative and quality
features to their SAIP programme. Table 5 lists the features that were being added
to the programme since February 2008 and also ACIC’s future plans in expanding
and improving the quality of the programme. It can be observed that the
improvements of the programme are initially technically and are maintenance in
nature, such as accreditation and arrangement of accommodation. Then, it moved
to diversifying the features of the programme, by offering a half-day option and
expanding to non-education major candidates. It is apparent that from the present
moment onwards, ACIC aims to focus on programme development as they start to
develop and introduce proprietary courses and classes.
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The Business Team
The business team met a week later and they proposed two important areas for
further analysis –current PRC competitiveness; and the trends of intakes and
revenue. These informationcan be obtained fromTable 1, Table 4, and Figure 2.
Ms. Wong put her view of the issue:
“We have to attempt the issue in the right order. First of all, we need to look at the
actual business environment, and then we can come to a decision to meet the
current market demand. Finally, we need to have ideas of how to sustain our
business performance, and under what situation we can sustain our business in this
competitive market.”
Questions
1. What do you think the competitiveness of PRC’s market based on the Global
Competitiveness Index (2009-2010)?
Table 5: Milestone Checklist of SAIP
Milestone New Features added
February 2008 Accreditation
February 2009 Accommodation in home-stay
September 2009 Training and mentoring
July 2010 Offering of half-day program
September 2010 Expansion to non-education study graduates
January 2011 Proprietary training course – Teaching English as Additional
Language (TEAL) Certificate course
February 2011 Open training classes
February 2011 Outside School Hours (OSH) classes in public kindergartens
(*during or after school hours)
September 2011 Placement in primary schools
September 2011 Independent OSH classes (weekend sessions)
(Source: Author)
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2. Plot a graph of the revenue per head count based on the information provided in
Table 4. Analyse the trend that you obtained from the graph and explain the effect
to ACIC.
3. What is the recommendation should the business team make to the director
after they analyse the two important areas: current PRC competitiveness; and the
trends of intakes and revenue?
References:
Ai Suo Marketing Consultation Pty.Ltd. (2010). Early childhood industry in
China: market analysis and projection report, 2010-2015. Retrieved from
http://www.ocn.com.cn/reports/20091029youerjiaoyu.htm [Translated].
Ambler, T., Witzel, M. & Xi, C. (2009). Doing Business in China (3rd ed.).
London; New York: Routledge.
Aulakh, P. S., Kotabe, M., &Teegen, H. (2000). Export strategies and performance
of firms from emerging economies: Evidence from Brazil, Chile, and Mexico.
Academy of Management Journal, 43(3), pp. 342-361.
Bai Zhi Cheng Professional Training College. (2010). Recruitment of preschool
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Beijing Aifu Preschool Education College (2010). Industry background. Beijing
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from\http://www.aifuschool.cn/about.asp?keyno=530 [Translated].
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Singapore, Social Forces, 75(3), pp. 981-1007.
Buttery, E. A. & Wang, Y. H. (1999). The development of a guanxi framework,
Marketing Intelligence and Planning, 17(3), pp.147-154.
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Boisot, M. & Child, J. (1996). From fiefs to clans and network capitalism:
Explaining China’s emerging economic order, Administrative Science Quarterly,
41(4), pp. 600-628.
Chen, H., Griffith, D., & Hu, M. (2006). The influence of liability of Foreignness
on Market Entry Strategies: an Illustration of Market Entry in China, International
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Chinaedunet (2010). Overcoming the bottleneck of early childhood education
through innovation. China Edu News. Retrieved from
http://www.chinaedunet.com/yejy/news/2010/7/content_193706.shtml
[Translated].
Choi, C. &Nailer, C. (2005). The China market and European companies: Pricing
and surviving the local competition, European Business Review, 17(2), pp.177-
190.
Cui, G. & Liu, Q. (2000). Regional market segments of China: Opportunities and
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72.
Farrell, D., Gersch, U. A., and Stephenson, E. (2006). The value of China’s
emerging middle class, The McKinsey Quarterly. Retrieved from
www.mckinseyquarterly.com/The_value_of_Chinas_emerging_middle_class_1
798.
Hutchings, K. &Michailova, S. (2006). The impact of group membership on
knowledge sharing in Russia and China, International Journal of Emerging
Markets, 1 (1), pp.21 – 34.
Jin Hua. (2010). The Olympics baby are ready for preschool’. Jin Hua News.
Retrieved from http://jhnews.com.cn/jhrb/2010-08/04/content_1157402.htm
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[Translated].
Li, Y. (2010). Why must it be a white? Teslcn.com. Retrieved from
http://www.teslcn.com/newshow.asp?id=55 [Translated].
Li, S. X. & Scullion, H. (2006). Bridging the distance: Managing cross-border
knowledge holder, Asia Pacific Journal of Management, 23, pp.71-92.
Luo, Y. (2000).Guanxi and Business, World Scientific, Singapore.
Menzies, J. L. & Orr, S. (2010). The impact of political behaviors on
internationalization. The case of Australian companies internationalizing to China.
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Qin, C., Ramburuth, P. & Wang, Y. (2008). Cultural distance and subsidiary roles
in knowledge transfer in MNCs in China, Chinese Management Studies, 2(4),
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Schwab, K. (2009). The Global Competitiveness Report 2009 - 2010. World
Economic Forum, Geneva.
Scott, W. R. (1995). Institutions and Organizations. Thousand Oaks, CA: Sage.
Yang, M. M. (2002). Rebuttal: The resilience of guanxi and its new deployments: A
critique of some new guanxi scholarship, The China Quarterly, 170, pp. 459-476.
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Authors Information:
1. Tan Cheng Ling, Senior Lecturer, Graduate School of Business,
UniversitiSains Malaysia, 11800 USM, Penang, Malaysia. Email:
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2. Wong Kang Ying, MBA Graduate, Graduate School of Business,
UniversitiSains Malaysia, 11800 USM, Penang, Malaysia. Email:
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THE TRAVAILS AND CHALLENGES OF PROMOTIONl 2T. Frank Suni Justus , T. Sunitha
ABSTRACT
This is a real life compilation of two persons in an organization over a three year period. This covers the travails of a person who gets promoted as an officer from staff cadre and in his desire to perform pokes too much into the role of his subordinates. With experience and after a short training he turns out to be a top class officer going on to receive the top appraisal remarks. It also talks about a subordinate who unable to meet his job demands and because of his own making ultimately walks out. The case study is basically about two personalities, one an officer who wants to outperform and another subordinate with no interest in his job and the dual that goes between them. The dual again has got two focus the first the hard line where action is being taken and the second a humanitarian angle where the superior goes out of the way to restrain him from opting a way out.
Keywords:
HR Appraisal, Organization Dynamics, HR Performance, Operations, Culture
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Introduction
Alpha Chemicals Ltd. was a huge chemical industry with an annual turnover of
Rs.1000 crores with employee strength of one thousand and engaged in the
manufacture of chemicals such as light and dense soda ash and the fertilizer
Ammonium Chloride. It is situated in Tuticorin, Tamil Nadu, a belt known for
quiet industrial relations. The native people of the area are usually hard working,
submissive and carry a sense of pride in their work. Their attitude was high in
affective component and they had an affinity to the establishment where they
worked.
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Organisation Overview
The employees of the company are categorized as staff, officer and executive cadre
employees (Annexure 3). The staff cadre employees are categorized from A to G
level. ‘A’ cadre employees are senior technician whereas employees like drivers
and sweepers are classified as F and G cadre technicians respectively. The officers
are classified as (Annexure 4)., Engineer, Senior Engineer, Manager, Senior
Manager, while the executive cadre includes Chief Manager, Joint General
Manager, General Manager and Executive director. Technician in A cadre with
more than twelve year experience are sporadically promoted to management cadre
as officers (probably one out of eight employees may get the promotion chance and
this is purely based on performance and attitude of the employee. When promoted
these employees who were technician earlier will be designated either as engineer.
Technicians who were earlier working in process plant are called operation
engineers and those from maintenance department are called maintenance
engineer.
The company has a best International Business class training system has churned
out erudite and disciplined employees through ESS (Engineering Subordinate
Services) and EMS (Engineering Management Services) program for technician
and engineer cadre, respectively. Engineers on successful completion of training
were absorbed as operation / maintenance engineers and ESS trainees at C cadre.
Usually promotion was given at a 4 -5 year interval.
Promotion as an Officer
Mr. Sivaram was a senior technician, hardworking and brilliant in his work. He
was also the president of the single trade union of the company for two terms (a few
years back) and always stood for the welfare of employees (Staff). He was
promoted as an officer (operation engineer) and was made shift-in-charge of off-
site section which included the water treatment plant, boilers, coal handling units
and effluent treatment section. His promotion was hailed among staff cadre people
as the promotion to one among them who really deserved and one who would
really understand their problems. The moment he became an officer, Mr. Sivaram
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showed a complete change of character. In his desire to do justice to his new avatar
as an officer he almost turned to be an autocratic officer. Being a Process technician
for a long time meant that he knew all the tricks of the trade. There were certain
areas of work which the operators cheated or failed to do or in some cases the
technicians entered readings (log book entry) without checking the field
parameters.
The aim of the case is to bring to light the problems faced by employees when they
are promoted (Especially in this case from a staff cadre employee to an officer).
Though they know all the nuances of the work they take time to adjust to their post
and how the company should constantly support them in order to enable them to
actualize with their postings. This case simultaneously deals with another
employee who loses his way turns himself into a chronic absentee and ultimately
ends his job. The case study is an interesting depiction of the superiors’ initial
irritation to this rather slothful employee and as he gets acquainted with his post the
case shows the amount of maturity and tact the superior displays to ensure that the
subordinate does not lose his way.
The missing operator
Sivaram always had the persona of checking things by self rather than listening to
what others say. He was always fast in his work never hesitated to climb the ladders
to rather have a personal check rather than go by what the operators wrote in the log
sheets. One day while Mr. Sivaram was on his routine visit to Water Treatment
Plant (WTP) area (Annexure 5), he found that the output of demineralised unit
(DM unit) (Annexure1) was out of specification. The demineralised water unit
consists of a cation and anion bed. Water on passing through the bed gets stripped
of all ionic particles (Annexure1) and comes out as demineralised water. The units
had to be regenerated on being exhausted. If not regenerated, the output of DM unit
will be raw water which if fed into the boilers will choke the boiler tubes which
may ultimately lead to a boiler explosion. Usually the output is checked every half
an hour for slippage of silica (silica is dangerous contaminant which causes scaling
in boiler tubes) (annexure 2) and when the unit nears the exhaustion level the
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checks are made every fifteen minutes. On this day the operators had failed to
observe the exhaustion and were operating the same. Mr. Sivaram found to his
surprise that out of the two operators supposed to man the area, one of them Mr.
Jegan was not available for the past two hours. Even a few m3 (cubic meter) of raw
water will make the entire content in DM water tank contaminated and hence even
a small mistake will lead to a heavy wastage of DM water as the tank (200 m3
capacity) had to be drained out fully and refilled. The cost of DM water was Rs. 24 3
per m . Cost of raw water was Rs.10 per m3. The other operator on that day
unfortunately was a person who was equally insincere in his work. Hence Jegan
and the other WTP operator were issued a memo, though it was a general practice
among operators to leave areas when a second operator was present. The truth was
that usually when left alone the lone operator will ensure that the plant was trouble
free. Mr. Sivaram had been an operator in the same plant till a month back and
definitely knew what the trouble spots were. This incident was used by Mr.
Sivaram to reduce water treatment Plant (WTP) to a one operator area, till now
being manned by two personnel. This resulted in a reduction of one operator per
shift that is totally 3 operators per day (earlier it was two operators per shift, totally
6 operators per day). For the management this resulted in a good profit as the spare
operator released from WTP can be used to reduce overtime requirements of other
areas (overtime salary is 3 times of normal pay).On the operator’s (staff cadre)
side, this resulted in a heavy unrest. This incident had an overall impact and
personnel of other departments like maintenance, finance, marketing etc were
scarred of man power reduction in their areas also. There were frequent arguments
between the officers (Shift in charges) and technicians on this manpower reduction
issue. Technicians were wontedly avoiding routine jobs.
Jegan and Work Spot
Jegan was one of the very few operators who lacked proper knowledge and was
always sluggish in his work but talked much always criticizing someone. He
always had a mental feeling that he was sick. Usually unimpressive employees
were never kept in operation portfolio and were utilized in areas like bagging,
Weigh Bridge, etc where not much of technical acumen was required. Jegan had
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the habit of borrowing money from colleagues and was always in debt. Jegan in
order to return the money will borrow from someone else. Mr. Sivaram and Jegan
were great friends when they were technicians. Mr. Sivaram always had a poor
opinion about the efficiency and interest Jegan showed to his work.
One night shift (22:00 to 06:00 hours) Mr. Sivaram asked Jegan to check the ash pit
pump at around 2.00 hours (2 am) early morning. He went down and returned
running back that a snake had bitten him. He was sent to the company hospital for
first aid and returned to duty after an hour for the same shift. He took a long leave
saying that he wanted to shift from allopathic to ayurvedhic (local) treatment. He
joined duty and started talking bad of Mr. Sivaram that he was the root cause of all
his troubles. He soon started absenting from duty for long periods of time though
all through his career he was always a high absentee. His debts got mounting and
his absence being all loss of pay, he soon got himself trapped in a vicious cycle. He
avoided the work spot to escape from his creditors. . Jegan who earlier used all the
leave the company rules allowed soon became a habitual absentee, a prisoner of his
own vices.
Error Leading to Production Loss
One day after a few months the plants (process and offsite) were being started after
a shut down. The operating plants were to be supplied with steam at 30 kg/cm2
pressure superheated to 285°C.The Boiler plant has a panel operator, field operator
and coal handling unit operator looking after the Boiler panel operations, Boiler
field operations and coal handling unit operations respectively all under the control
of shift in charge. Jegan was the boiler field operator. The panel operator was a well
experienced senior technician. Mr. Sivaram around 06.30 hours asked Jegan to
charge steam to operation plants before 07.00 hours. This involved the opening of
the steam export valves which would require at least five people to open it. Though
it was brought to the notice of the officers including Mr. Sivaram that the steam
export valve did not have an equalizing valve (Annexure 6), no such provision was
made during the shutdown which was a good opportunity that was wasted. The
presence of an equalizing valve would balance the pressure on both sides of the
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valve and hence facilitate easy opening of the valve. When Mr. Sivaram returned
by 8.00 hours (one and a half hour later), he was furious to find Jegan just then
getting ready to open the valve with the help of five casual labors. The plant was
well connected by intercom. Mr. Sivaram was always reachable through intercom
and it was the duty of the shift in change to get a feed back every half an hour. The
boiler plant had five causal labors who were taken away by the coal handling unit
operator. At the time of start up there was no need to run the coal yard plant as the
coal bunker level was already safe. In the absence of shift in charge, it was the duty
of the panel operator to coordinate the boiler field and coal handling unit activities.
Also the usual practice was that in case of start up the coal handling unit operator
should stay along with the boiler feed operator. None of these coordinated efforts
had taken place.
Mr. Sivaram lost his cool and started shouting at Jegan and there was a slinging
match between them. The usual case is that any ill temper by an officer becomes the
talk of the day in the tea spot (meant for staff alone) which results in lowering of
morale of all subordinate team. Finally steam was charged by about 8.30 hours and
production for one and half hours was lost because of this delay. Whatever be the
infringements on the part of the technicians involved, Sivaram had not only failed
on the communications front but had also failed to lead from the front and had got
himself engaged in excusable duties. Mr. Sivaram, already simmering with
mudslinging carried on him in the snakebite incident, got the plant manager to
issue a second memo to Jegan. With two memos and a large quota of loss of pay
leave, Jegan was demoted from ‘A’ to ‘B’ cadre technician which meant his pay
from next month will be less by Rs.1000 and he will go back to ‘A’ cadre only after
another 5 years. Hence his cumulative loss will be awesome. Jegan’s absence
started increasing.
Post Training Scenario
The management now had two problems in their hand. On the one hand they had a
troublesome high absenteeism prone employee. On the other they had an over
enthusiastic officer who has to be channeled and seasoned. Mr. Sivaram soon got
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his chance to attend the in- house highly professionalized supervisory
development program wherein he got lot of inputs on interpersonal skills and
transaction analysis. The fifteen day break he had from his routine work, the
conversation he had with his co participants and the program itself had initiated lot
of changes in the attitude of Mr. Sivaram. On return after the completion of his
training he started getting acquainted with his officer post. He soon found that
Jegan was often not available in WTP area even after the same was made a single
operator area. He analyzed and found that the reason for Jegan not being in WTP
after being made a one man area was his habit of spending too much time at the
water cooler leaving his isolated area looking for some one to talk to. Mr. Sivaram
made it a practice to poke his head into WTP at intervals for a brief, friendly
conversation with Jegan. The trips to the water cooler by Jegan diminished
considerably. Mr. Sivaram discovered the varying human needs for recognition
confront any one who works with people. He soon became an officer who was able
to touch and recognize his subordinates appropriately.
Voluntary Retirement Scheme
After a year Voluntary retirement scheme (VRS) was introduced in the company
for the first time. The only technician to opt for VRS was Jegan. He was badly in
need of money and was in debt to the tune of Rs.2 lacs. Mr. Sivaram suddenly felt
that he should help Jegan and offered him an interest free loan of Rs 2 lacs and
asked him to take back his VRS application. Any how Jegan persisted, got his
VRS, paid his debts and went out penniless. Jegan was a chronic absentee all
through his career and Sivaram was in no way responsible for the mess. Jegan’s
lack of interest in the job, his habit of taking debt, his own poor learning skill, his
poor image among his bosses and finally his tendency to frequently absent from the
job all contributed to his undoing. Any how Sivaram had compassion for his
compatriot with whom he had worked for twenty years.
Performance Impact
The salary mode for officers was confidential based on performance. The appraisal
was done by the General Manager with input from middle management. For that
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particular year, the highest increment and exgratia amount went to Mr. Sivaram for
his efforts in man power reduction and the whole issue of Jegan went out of
context.
Pay revision was carried out once in four years by negotiation. The trade union
will negotiate the settlement for staff cadre employees and once their salary is fixed
the revision for officer cadre employees are announce by the company. Mr.
Sivaram submitted a plan to the management whereby he combined overstaffed
area which will result in further reduction of manpower. The union was clamoring
for two days off (6 days work and two days off) from the present one day off
system. The management consented that they where willing to give two days off
provided they were willing to accept Mr. Sivaram’s plan of reduction of
areas(manpower). The union also accepted the proposal. The two day off system
was implemented without any addition to existing manpower. The management
considered Mr. Sivaram as an asset. Perhaps the union also understood that. The
company had to necessarily exercise financial tightness because of the impact of
globalization. This was well understood by the union as any financial instability
will lead to closure of organization and loss of livelihood of all employees. Mr.
Sivaram soon bloomed into an extraordinary officer and after a year he authored a
book, “Managing the control room – The happy way.”
Questions:
1. What do you think about the group resistance to change when man power
reduction occurs?
2. Discuss the impact of performance based salaries.
3. What about communication implication in the boiler startup incident?
4. Discuss the role of training?
5. Is giving authority to a hands-on employee an advantage or a disadvantage?
6. Do you find a situation where Job analysis has not been properly done?
7. Comment on how individual needs progresses through stages as we see in the
career of Mr. Sivaram.
8. Empathy for a co worker has no limits – Explain.
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Authors Information:
1. T. Frank Sunil Justus was Senior operation Engineer at Tuticorin Alkali
Chemicals and Fertilizers Limited and is presently Assistant Professor,
Department of Business Administration, Annamalai University. Email:
2. T. Sunitha is an Assistant Professor, Department of Business Administration,
Annamalai University. Email: [email protected]
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