Tata Steel Group Strategic Capabilities

Introduction

In this report, Tata Steel Group has been chosen as an organisation to analyze its strategic changes over the past five years. The report covers the impact of changes upon its strategic positioning, strategic capability, SWOT and drivers behind these changes.

Figure 1

Tata Steel Group currently is a major player in global steel industry. In year 2005 (Figure 1), Tata Steel Group operation was mainly focused in India and revenue generated was close to US$ 5.0 billion only. However their initiative to expand their operations globally proved very successful over last five years. From being a mere local steel producer, they transformed themselves in a major global player in steel producers by way of organic and inorganic growth. They have been aggressively involved capacity expansion by acquisitions, mergers and organic growth. As per a published article in Business Standard, “Tata Steel moved into its next target to become the world’s second largest steel company by 2012 with the help of its most expensive bet worth US$ 12.9 billion on Corus Group”.

However last two years has been very difficult period to global steel industry because of worldwide recession. The global crude steel production for year 2009 was 1220 mpta (million tonne per annum) as reported by World Steel Association lower by 8% against that of 2008. The decline in demand was due to deterioration in economy experienced by key steel end users. Table 1, shows the growth/decline in terms of crude steel production for the top ten steel producing nations.

Table 1: World’s Top Ten Steel Producing Nations (in million tonnes)

However, by acquisition of Corus and other assets, Tata Steel Group is among world’s top ten (Table 2) largest steel companies with current steel production capacity of 32 mpta. After five years of its expansion programme, Tata Steel is now world’s second most geographically diversified steel producers.

Table 2: World Top Ten Steel Producing Companies

Tata Steel Group’s Strategic Capabilities

Resources

Competences

Threshold Capabilities

Threshold Resources

Threshold Competences

Steel production plants at various geographical locations.

Production and Sales management.

Offices and buildings at various geographical locations.

All other general management skills.

Sufficient supply of raw materials for steel making.

Sophisticated IT skills.

Sufficient cash flow.

Safety management.

Pool of skilled personnel.

Excellent customer service.

IT System in place.

Efficient management structure.

Logistic, freight and shipment facilities.

Effective employee welfare system.

Capabilities for Competitive Advantage

Unique Resources

Unique Competences

Varieties of products which caters to industries like Infrastructures, Automobiles, Aviation, Energy etc.

Very competent sales team with high negotiation skills which create market for their products.

Tata and Corus brands.

Excellent use of IT systems for very effective use in sales process.

Highly capable management team.

Continuous developing and upgrading new products to serve different industry levels.

Online portal Metal junction for buyers.

Highly skilled managers and directors who improve and support the company success.

A century experience in steel making.

Integrated supplier and buyer management.

Strong financial backing from group.

Lowest cost steel producer in world.

Very strong presence in India which is a big market for their products.

Enterprise Risk Management (ERM) to eliminate risk associated with various processes.

First mover advantage through innovative products & processes.

Continuous Improvement Process (CIP).

Excellent R&D for cutting edge technology and products.

Operational efficiency and excellent quality control.

Many proprietary products such as Tata Tiscon etc.

Long-term relationship with buyers and suppliers.

Mission Statement

In its mission statement Tata Steel expresses that while honesty and integrity are the essential ingredient of a strong and stable enterprise, profitability provides the main spark for economic activity. Founded way back in 1907, Tata Steel Group stress on their core ideology in its vision statement by making emphasis on their people, supplier of choice, innovative approach and their conduct. Tata Steel’s vision statement is now became a tangible asset, which provide right direction to their managers. Tata Steel press hard on creating differential value for their customer with help of continuous improvement in their business process and product technology.

Resource Based Value Chain Analysis

The value chain is an economic tool used to determine the strategic resources available to a company. Basic principle of the Value Chain Analysis is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (Wernerfelt, 1984, p172; Rumelt, 1984, p557-558). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (Barney, 1991, p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Hoopes, 2003, p891; Barney, 1991, p117). Tata Steel have some capabilities which are valuable, unique, non-substitutable.

Tata Steel Group SWOT Analysis

SWOT analysis of any firm provides knowledge about the challenges and opportunities faced by Tata Steel group in future. They are detailed below.

Strengths

Tata Steel Group has acquired vast mineral reserve which is a key to their operations. They have mineral reserve which can cater their raw material demand for next three decades. Tata Steel’s mineral reserves are located in various countries such as India, Australia, Canada, Mozambique, Oman, Ivory Coast etc.

Tata Steel has very capable, credible and reliable top management. Their successful global expansion plan in last five years proved capability of its management. Tata Steel has successfully acquired and integrated Corus Europe, NatSteel Indonesia and Millennium Steel Thailand.

TATA Steel uses custom made state of art integrated information management system for their routine operation. Their advanced R&D capability has improved further by acquiring Corus which is world renowned for its product innovation.

Tata Steel Group uses Tata Group’s strong distribution and retail network. Tata Group’s demand for steel is very high due to their presence in most of the sectors.

Currently Tata Steel produces 32 mpta of steel and by completion of DPCL project its total capacity will reach to 50mpta which will make it second biggest steel producer in world. Tata Steel among the world’s lowest cost steel producer.

Tata Steel has structured risk management process in place in their operation known as Enterprise Risk Management (ERM). ERM’s key function is to identify risk at every level and mitigate the same.

Tata Steel mitigates very well the cyclicality situation which occurs in steel industry occasionally by its broad spectrum of its product portfolio.

Tata Steel expansion plan has consolidated its position worldwide and by diversifying its portfolio and market is in process to become a pioneer in steel industry.

Tata Steel has very strong brand value for its products. This has strengthened further by acquiring Corus which itself is a big brand. Their successful integration with Corus was a benchmark in corporate history.

Weakness

Tata Steel’s substantial debt burden of US$9.8 billion is a major weakness. Their debt equity ratio is currently 1.77, which reflects company finances are met by debt due to Corus acquisition. As inflation is big problem in many country and economy is coming back to normal, interest rates will go up which will affect the Tata Steel’s profitability in future. Their European division could not generate enough demand due to recession hence they closed down few of their facilities.

Its European business (Corus) has a high exposure to spot price and a high operational gearing. Due to this reason they have very high risk of price volatility.

Tata Steel relies for some raw material on international suppliers, which expose their profitability in case of steep rise in their prices.

Tata Steel’s Indian operation is very much hampered lack of infrastructure, shortage in power supply, lesser productivity, bureaucratic hurdle in export etc.

Additional levies and tax put by local government put them in less profit making situation. The subsidies provides by some nations (China etc) will make their product less competitive in price hence reduce their demand.

Opportunities

Currently the emerging economies are undergoing huge infrastructural developments, which require significant amount of steel in all sectors. In India the scope for expansion of its steel products are enormous in every sector, which Tata Steel can exploit it very well with its increase production capacity. As per World Steel Association estimate, the consumption of steel will be doubled in next two decades.

By Acquiring Corus and improving its own R&D activities, Tata Steel Group moved towards a better product differentiation and enhanced product portfolio which provide them new opportunities over its competitors.

Their geographical locations with integrated operations and marketing strategy are a key factor in capturing market share and increasing their financial performance. They can implements Corus’s advanced automation technology in their own plants to improve productivity, economies of scale, cost reduction, increased output and operational efficiency to achieve better performance.

Following recent recession, various assets (minerals, coal, production facilities etc.) are available on a very low price due to their financial difficulty. Tata Steel Group, with strong backing from Tata Group can secure future supplies of raw materials for steel making.

With increased steel production capacity of 50 mpta, they will be the second largest steel manufacturer after Arcelor Mittal and most geographically diversified company with wide variety of product mix.

Threats

In many countries, especially in developed countries, additional taxes and duties are imposed on steel producers which could be a big threat on their profit margins. Steel Industry is major source of greenhouse gas emission, which makes them very venerable against many litigation and legislation in future.

The raw materials used in steel production are non-renewable and their source is depleting very fast.

Due to rising cost of steel products, the end users are looking for substitutes of steel; which can be a major threat to Tata Steel’s business.

Intense competition among international steel player and cheap steel available from China are another major threat to Tata Steel’s performance.

Tata Steel’s huge debt is one of major threats against them. The rising interest will increase their debt burden.

Porters Five Forces Analysis (Tata Steel)

The worldwide steel industries as well Tata Steel Group have registered phenomenal growth over past few decades due to high growth in economy worldwide. Due to large infrastructural projects and industrialisation process, there was huge steel demand for steel. In Developing countries and emerging economies the developmental process has picked up fast pace. In Indian market Tata Steel has achieved double digit growth in past few years. By applying Porters’ Five Forces Analysis principal, we can evaluate the Tata Steel Group’s market competitiveness and its current and future strategy towards intense competition faced at various fronts.

Threat of New Entrants: Low

Threat to new entrants in any industry sector is a major challenge. However in steel producing industry, the threat to new entrant are based on factors such as heavy investment, economies of scale, goodwill, policies adopted by various governments and product differentiations.

Currently Tata Steel facing biggest threat by two global steel majors, Arcelor Mittal, which is the world’s largest steel producing company and POSCO. These two company and other Indian domestic players has shown their intention to expand their capacity in India which is major market for Tata Steel products. The entry barriers in steel industries are very high. Steel industry requires huge capital investment to set up an integrated steel production facility. Currently it is close to US$ one billion/mtpa as per Steel Manufacturers Association’s recent estimate. This high capital investment cost deters new entrants from entering in this field. However Tata Steel Group has done substantial investment in Greenfield and Brownfield projects to capture market share worldwide. By acquiring Corus they have shown their intention of being a global player with strong financial background.

Tata Steel is continuously improving and achieving economies of scale by integration of their operations. This has been achieved by better bargaining with suppliers and buyers, improved R&D process etc. By increasing their production capacity to 50mtpa and wide variety of products they can lower their cost, hence more profit, sustainability and these conditions are unfavourable to any new entrants.

Tata Steel Group enjoys enhanced goodwill from various governments due to their corporate governance and CSR program. Raw material is a major issue with corruption related to mining allocation and land acquisition, it makes difficult to new entrants to come in this field. Various regulatory clearance and environmental issues also pose big barriers to new entrants.

Steel industry has very low barriers in terms of product differentiation. However Tata Steel enjoys a premium for their products because of its quality and its brand value created more than 100 years back. Tata Steel has introduced brands like Tata Steelium (the world’s first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanized wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material).

Competitive Rivalry: High

The steel industry is truly global in terms of competition with large steel producing countries like China significantly influencing global prices through aggressive their exports. In steel industry branding is not very common hence there is very little differentiation exists between their competing products. Tata Steel faces stiff completion with their competitors such as Arcelor Mittal, POSCO, SAIL, JSW etc. However major players like Arcelor Mittal, POSCO facing environment related litigation which delayed their expansion plan hence Tata steel can enjoy comfortable margin on their revenue.

Bargaining Power of Suppliers: High

Tata Steel enjoys greater autonomy in raw materials supply due to their own mining operation for raw material supply. Their fully integrated supply chain system which keeps enough supply of raw material for their own plants. However, any other steel producers, who don’t have their own mines, they have to rely on raw material suppliers.

In many case steel producers imports or buy materials from suppliers overseas. On global level raw material market is dominated by the three mining giants BHP Billiton, CVRD and Rio Tinto. They make mineral market as oligopolistic. These three mining giant supply two-thirds of the processed iron ore to steel producers hence command very high bargaining power. Tata Steel has adopted strategy of backward integration, which ensure against any exploitation by major suppliers. According to managing director of Tata Steel “Ownership of raw materials and a continuous improvement in production have been the key to Tata Steel’s profitability. In fact we’ve believed in owning raw materials for the past 100 years.” Tata Steel have acquired many raw material source worldwide and aggressively investing huge money in further acquisition and mining exploration.

However any other steel producer, who doesn’t have its own mining operations, may require buying raw material on market prevailing price and passing that hike to consumers which makes them less competitive.

Threat of Substitute Products: Low

Some developing materials threat pose to viability of steel. Aluminium, plastics and other composite materials are being considered as substitute in sectors like auto, aviation etc. Concrete is another substitute material may pose threat to use of steel in infrastructure and energy sectors. However Tata Steel offers options to various end users with alterative products to carbon steel. Some of the substitute materials such as aluminium itself are very costly, hence doesn’t pose very big threat against steel producers. However the growth led by infrastructure sector, automobile sector, aviation sector and consumable goods will keep demand up for steel hence more growth for Tata Steel.

Bargaining Power of Buyers: Average

Bargaining power of buyers is very limited due to their fragmentation. Big players of the major steel consumers in sectors such as auto, aviation, energy etc may squeeze greater amount of bargain. On the other hand these bulk consumers may offer long term procurement offer to the company hence more revenue generated. However, small and retail consumers are scattered, though they consume significant amount of steel production, don’t have the same bargaining powers as in case of big players.

Future Outlook

Following two years of worst global economic downturn, the world seems to be regaining some economic stability. There is moderate growth from developed world; however emerging economies are registering very strong and sustainable growth with robust domestic market.

Before recession, the steel demand was very strong with over 6% growth during current decade; this is primarily driven by robust growth in BRICS nations (Brazil, Russia, India, China and South Africa), South East Asia and Middle East. By 2025, as per forecast BRICS countries will have 46% of global population and will consume 65% of the global production and will have three quarter of the global GDP.

The raw materials for steel making are going at record due to high demand, higher freight rates and monopoly of three big natural resources companies. The effects of the above factors are reflected in higher steel price and decrease in profit margin of steel companies. However Tata Steel’s strategy adopted over last five years for securing long term contract for raw materials supply or acquiring new raw material mines at various geographical location has helped them to keep their prices competitive and making whole operation as viable.

Tata Steel’s integration with Corus has completed successfully and producing better result than expected. Tata Steel’s strategic effort of capacity expansion and effort to secure raw materials source at various geographical locations yielding positive results.

Tata Steel’s upstream integration process ambition will lead them to achieve 100% self-sufficiency in India and around 50% self-sufficiency in Europe in next 5 years. Tata Steel is investing heavily in R&D to get breakthrough technologies and develop new products and services that reduce the production cost and environmental impact over the product lifecycle. To improve its processes, priority is given to energy conservation schemes; in technology break-through such as Ultra Low Carbon Steel making and in other innovative projects where the Group has proprietary technology.

Conclusions

“It was the best of times, it was the worst of times…”, this famous line meant a lot to Tata Steel. Five year back, just after starting of their ambitious global expansion plan, they were hit by worldwide financial tsunami which tested their resilience. Their well formulated and proved business strategy shown resilience and withstand to the unprecedented highs and lows of a future that often comes unheralded. They have taken proactive initiative across all geographies to minimise aftermath sock of recession. Their strategy began to pay off them towards the last quarter of year 2009, when they rebound to profit after held in turmoil of recession. Undeterred by the economic turbulence, the Company continued to place emphasis on working practices in health, safety and corporate citizenship, with specific initiatives taken in all these areas.

In addition, a continued focus on engineering solutions for customers is helping it maintain its position of a product pioneer. Tata Steel believes in staying alert to future opportunities while never letting go of its core values. This is the philosophy that has underpinned its growth over the years and one that remains its key driving force.

The strategy adopted by Tata Steel Group during last five years to become a global player pail well. They increased their revenue and production by six fold by capacity expansion or acquisition. They achieved raw material self-sufficiency up to 50% by year 2010 and by year 2012 they aim to achieve it to 60% by more investment in mines acquisition. In last five years Tata Steel Group became a global player from a local steel producer.

Appendix A: Reference List

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http://www.tatasteel.com

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