TATA STEEL - AN ADAPTIVE ORGANIZATION

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.

Volume 5 Number 1 ISSN : 2229 - 6743

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

IMT CASE JOURNAL, JUL-DEC 2014


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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




3

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.




4

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




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




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




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




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).




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.




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




16

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




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




18

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




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




20

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.




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




22

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.




xxxi Tata Steel Annual Report 2011-12xxxii Tata Steel Annual Report 2011-12xxiii Tata Steel Annual Report 2011-12




“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

25




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




26

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..




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




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




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)



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


Tata Steel

Europe

NatSteel Holdings

Tata Steel

Thailand



30




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

31




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


32

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


Tata Steel

Europe

NatSteel Holdings

Tata Steel

Thailand




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


Tata Steel

Europe

NatSteel Holdings

Tata Steel

Thailand

Tata Steel

Consolidated

Table9a: Salable Steel Production in Million Tons

Exhibit 10: Employee Strength


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







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.



34

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).




35




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]

36


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.


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-

37

Ryanair Low Cost Strategy: is it Sustainable?



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,

38



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.


39




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

40




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

41




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,

42




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

43




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

44




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.

45




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.

46




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).

47




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

48




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.

49




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.

50




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?

51




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

52




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%

53




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)

54




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 - - -

55




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

56




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

57




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

58




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

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Retrieved March 2, 2013, from BNET-Journal of the International Academy for

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700/?tag=content;col1

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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

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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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is-a-middle-east-hub-the-goal-as-it-pushes-the-limits/page1

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growth-expectations.html

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Southwest model: Charting the ups and downs of low-cost carriers. Strategic

Direction , 18-22.

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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

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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

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flights

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http://www.ryanair.com/ie/about

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long-haul.html

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usa_N.htm

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61




Author Information:

1. Atul Gupta, School of Business & Economics

Lynchburg College, Lynchburg, VA 24501, USA

E-mail: [email protected]

62


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.


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,

63

Work-integrated-learning business model: a case study in People’s republic of China



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

64




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

65




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

66




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

67




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).

68




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

69




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

70




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-

71




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.

72




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

73




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



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

74




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.

75




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.

77




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)

78




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

educators from the graduates. Bai Zhi Cheng Professional Training College.

Retrieved from http://www.tz96.com/zh/10332.shtml [Translated].

Beijing Aifu Preschool Education College (2010). Industry background. Beijing

Aifu Preschool Education College. Retrieved

from\http://www.aifuschool.cn/about.asp?keyno=530 [Translated].

Bian, Y. &Ang, S. (1997). Guanxi networks and job mobility in China and

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.

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on Market Entry Strategies: an Illustration of Market Entry in China, International

Marketing Review, 23 (6), pp. 639-49.

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

barriers in a big emerging market. Journal of Consumer Marketing, 17(1), pp. 55-

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

80




[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),

pp.260 – 280.

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Economic Forum, Geneva.

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critique of some new guanxi scholarship, The China Quarterly, 170, pp. 459-476.

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Management Journal, 38(2), pp. 341-363.

Authors Information:

1. Tan Cheng Ling, Senior Lecturer, Graduate School of Business,

UniversitiSains Malaysia, 11800 USM, Penang, Malaysia. Email:

81




[email protected]

2. Wong Kang Ying, MBA Graduate, Graduate School of Business,

UniversitiSains Malaysia, 11800 USM, Penang, Malaysia. Email:

[email protected]

82


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


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.

83

The travails and challenges of promotion



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

84




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

85




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

86




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

87




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

88




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

89




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.

90




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:

[email protected]

2. T. Sunitha is an Assistant Professor, Department of Business Administration,

Annamalai University. Email: [email protected]

91

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