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NOTE: Attempt any Four Case
Studies with all Questions. All questions carry equal marks.
Case: 01:
Richard Branson Shoots for Moon
Case: 02: “Can Disney Save Disney?”
Case: 03: “Developing Leaders at UPS”
Case: 04: “Paying Attention Pays off Andra Rush”
Case: 05: “Integrating Terms at Hernandez &
Associates”
Case: 06: “Keeping up with Bills Gates”
Case: 1:
Richard Branson Shoots for Moon
The virgin Group is the umbrella for a variety of business ventures
ranging from air travel to entertainment. With close to 200 companies over 30 countries, it is one of the largest companies
in the world. At the head of this huge organization is Richard Branson. Branson
founded virgin over 30 years ago and
has built organization from a small
student magazine multibillion-dollar enterprise it is today.
Branson
is not your typical CEO. Branson’s
dyslexia (difficulty in recognizing & understanding written language)
made school a struggle and sabotaged (deliberate destruction /resistance
Damage) his performance on standard IQ
tests. His teachers and tests had no way of measuring his greatest
strengths-his uncanny
(strange-Supernatural) knack (skills-ability) for uncovering lucrative
(productive) business ideas and his ability to energize the ambitions of others
so that they, like he, could rise to the level of their dreams.
Richard
Branson’s true talents began to show themselves in his late teens. While a
student at Stowe School in England in 1968, Branson decided to start his own magazine, Student. Branson was inspired by the student activism on his
campus in the sixties and decided to try something different. Student differs from most college
newspapers & magazines; it focused on the student & there interests.
Branson sold advertisings to major corporations to support his magazine. He
included articles by ministers of Parliament, rock stars, intellectuals &
celebrities. Student grew to become a
commercial success.
In 1970
Branson saw an opportunity for student
to offer records cheaply by running ads for mail-order delivery. The
subscribers to student flooded the
magazine with so many orders that his profit spin-off discount music venture
proved more lucrative than the magazine subscriptions. Branson required the
staff of student for his discount music business. He built a small recording
studio and signed his first artist. Mike Oldfield recorded “Tubular Bells” at
Virgin in 1973; the album sold 5 million copies. Virgin Records & the
Virgin brand name were born. Branson has gone on to start his own airline
(Virgin Atlantic Airlines was launched in 1984), build hotels (Virgin Hotels
started in 1988), and get into the personal finance business (Virgin Direct
Personal finance Services was launched in 1995), and even enter the cola wars
(Virgin Cola was launched in 1994). And those are just a few of highlights of
the virgin group-all this while Branson has attempted to break world speed
records for crossing the Atlantic Ocean by boat hot air balloon.
As you
might guess that Branson’s approach is nontraditional–he have no giant corporate
office or staff & few of any board meetings. Instead, he keeps each
enterprise small and relies on his skills of empowering people’s ideas to fuel
success. When a flight attendant form Virgin Airlines approached him with a
vision of a wedding business, Richard told her to go do it. He even put on a
wedding dress himself to help launch the publicity. Virgin Brides was born.
Branson relies heavily on the creativity of his staff; he is more a supporter
of new ideas then a creator of them. He encourages searches for new business
ideas everywhere he goes and even has a spot on the virgin Website “Got a Big Idea?”
In
December 1999, Richard Branson was awarded a knighthood in Queen’s Millennium
New Year’s Honours List for “Services to
entrepreneurship”. What’s next on Branson’s list? He recently announced
that Virgin was investing money in “trying to make sure that, in the not too
distance future, people from around the world will be able to go into space.” Not everyone is
convinced that space tourism can become fully fledged part of the travel
industry, but with Branson behind the idea it just fly.
Questions:
1.
Would you classify Richard Branson as a manager or
a Leader? What qualities distinguish him as one over the other?
2.
Followers are part of the leadership process –
Describe the relationship between Branson and his followers.
3.
Identify the Myths of leadership development that
Richard Branson’s Success helps to disprove.
Case: 2: “Can Disney Save Disney?”
The
Disney name identifies an institution whose $22billion in annual sales makes it
the world’s largest media company. It
was Walt Disney’s creative leadership that established the Disney Company as
one of the leader in American business. Walt Disney and his brother Roy started
Disney Brothers Studio in Hollywood in 1923. Artistically, in 1930s were
Disney’s best years. Walt Disney embraced
(Make use of) new advances in color and sound, and put his team of
enthusiastic young artists to pursue the most sophisticated techniques of the
day. Disney risked everything on his first feature film, snow white and the Seven Dwarfs, released in 1937. Audiences loved
it. His focus on the positive and
life-affirming themes he introduced into all his work provided much-needed smiles and laughter for audiences
during the depths of the great
Depression.
Roy
Disney became chairman after Walt died of lung cancer in 1966. In 1971 Roy died
and his son, Roy E. Disney, became the company’s principle individual share
holder. In 1984 new CEO Michael Eisner and president Frank Wells ushered (introduces
strangers at formal events) in an era of
innovation and prosperity. They instituted marathon meetings for generating
creative ideas, forcing everyone to
work grueling (demanding-tough-hard) hours. The approach worked, and for the
first 10 years of his tenure, Eisner was considered a genius. He revived Disney’s historic animation
unit, invested in the theme parks,
led the expansion in to Europe, and breathed new life in to the company by partnering with cutting age
companies like Pixar and Miramax. Eisner built Disney into a formidable media
power-hose, boosting its profits sixfold
and sending its share price soaring
almost 60000 percent.
But more
recent years have been challenging for Eisner and Disney Company. Eisner’s
initial magical effect has lost its shine and his more recent actions and
decisions have had less-than-desirable effects on the company. Roy Disney, the last of founding family to work at
company. Quit the board in 2003 and
began a company to try and oust Eisner. In his letter of resignation Disney asserted that Eisner has become an ineffective
leader, claiming that Eisner consistently “micro-manages” everyone, resulting in loss
of morale. He saw Eisner’s cost-conscious decisions to shut down an
Orlando animation studio and cut cost at theme parks as resulting in “creative brain
drain” and creating the perception that the company is looking for “quick buck”
solutions rather than long-term value.
Disney also cited Eisner’s inability to maintain successful relationship creative partners like Pixar and Miramax (both
contracts with these studios were not
renewed) and his lack of a succession plan as dangerous to the future of
the company.
Eisner
ultimately lost his bid to retain his position as CEO and was forced to resign
in 2005, one year before his contracts as CEO expired.
Questions:
1.
Consider Walt Disney’s effectiveness in terms of
the three domains of leadership- the leader, the followers, and situation. For
each domain name factors that contributed to Disney’s success.
2.
Now think about Michael Eisner’s Leadership
effectiveness. Name factors within the three domains of leadership that might
be responsible for controversy surrounding Eisner’s success and then ultimate
failure and removal as Disney’s CEO.
Case: 3: “Developing Leaders at UPS”
UPS is
the nation’s fourth largest company
with 357,000 employees worldwide and operations in more than 200 countries. UPS is constantly
recognized as one of the “top companies
to work for” and was recognized by Fortune as one of the 50 best
companies for minorities. A major reason for UPS’s success is the commitment to its employees. UPS
understand the importance to of providing both education and experience for its next generation of
leaders-spending $300 million dollars annually on education programs for
employees and encouraging promotion within. All employees are offered equal
opportunities to build the skills and knowledge they need to succeed. A perfect
example of this is Jovita Carranza.
Jovita
Carranza joined UPS in 1976 as a part-time clerk in Los Angeles. Carranza
demonstrated a strong work ethic and a commitment to UPS, and UPS rewarded her
with opportunities-opportunities Carranza was not shy about taking advantage of
By 1985 Carranza was the workforce
planning manager in metro LA By 1987 she was district human resource manager based in Central Texas. By 1990 she
had accepted a move to district human resource manager in Illinois. She
received her first operations assignment, as division manager of hub, package,
and feeder operations; in Illinois in 1996 she accepted the same role in
Wisconsin. By 1999 Carranza’s progressive success led UPS to promote her to president of Americas Region. From
there she moved into her current position as vice-president of UPS Air Operations, based in Louisville,
Kentucky.
The $1.1
billion air hub she currently oversees sprawls
across the equivalent of more than 80 football fields. It can handle 304,000
packages an hour, its computers process nearly 1 million transactions a minute,
and it serves as the lynchpin for
the $33 billion business that has become the world’s largest package-delivery
company.
Carranza
attributes much of her success to her eagerness to take on new challenges: “The
one error that people make early on
in their careers is that they’re very
selective about opportunities so they avoid some prefer others.” She says.
“I always accept all opportunities
that presented themselves because from
each one you can learn something, and they serve as a platform for future
endeavors.”
It has
also been important, she says, to surround
herself with capable, skilled employees
who are loyal to the company and committed to results. After nearly 30 years with UPS, it is teamwork, interaction, and staff
development that Carranza says is one of the achievements of which she is
proudest: “Because that takes focus,
determination, sincerity to perpetuate the UPS culture and enhance it
through people.”
Carranza’s
corporate achievements, determination, drive, innovation, and leadership in
business have earned her the distinction of being named Hispanic Business
Magazine’s Woman of the year. She credits her parents, both of Mexican descent,
with teaching her “the importance of being committed, of working hard, and
doing so with a positive outlook,” principles she continue to guide her
personal and professional life. The principles mirror those of the company
whose corporate leader she has climbed nonstop, an organization she says that
values diversity, encourages quality, integrity, commitment, fairness, loyalty,
and social responsibility, among other values.
Among
Carranza’s worlds of wisdom: “…sit back and listen and observe,” she says. “You
learn more by not speaking. Intelligent people learn from their own
experiences; with wisdom, you learn from other people’s mistake. I’m very
methodical about that.”
Questions:
- What are the major skills Jovita Carranza has demonstrated in her
career at UPS that have made her a successful leader?
- Consider the spiral of experience that Jovita Carranza has travelled.
How has her experience affected her ability as a leader?
- List out the characteristics of successful leaders. How many of
this is demonstrated by Jovita Carranza?
Case: 04: “Paying Attention Pays off Andra Rush”
Paying
attention has been the key for Andra Rush. As a nursing school graduate she was
paying attention when other nurses complained about unfair treatment and
decided she wanted to do something about it—so she enrolled in the University
of Michigan’s MBA program so she could do something about how employees were
treated. As she completed her business courses and continued to work as a
nurse, she was paying attention when a patient described his experience in the
transport business. The Business sounded Intriguing, and so, with minimal experience
and minimal resources. Rush took a risk and started her own trucking business.
She scraped together the funds to buy three trucks by borrowing money from
family and maxxing out her credit cards. She specialized in emergency shipping
and accepts every job that came her way, even if it meant driving the truck.
She paid attention to her customers and made a point of exceeding their
expectations regardless of the circumstance. When the terrorist attacks of
September 11 shut down local bridges, Rush rented a barge to make sure a
crucial shipment for Diamler Chryusler made it to its destination on time.
Rush
continues to pay attention and credits her listening skills as a major reason
for her success. Rush is distinct in the traditionally white male –dominated
trucking industry –a woman and minority (Rush is Native American) who credits
her heritage and the “enormous strength” of her Mohawk grandmother for helping
her prevail.
“It is
entirely possible that my native sprit, communicated to me by my grandmother
and my immediate family, have enabled me to overcome the isolation, historical
prejudice, and business environment viewed as a barrier to native and woman
owned businesses. The willingness to listen, to understand first, and act
directly and honestly with integrity is a lesson and code of conduct my elders
have bequeathed to me. Being an entrepreneur has reinforced those lessons again
and again.’’
Her
Mohawk heritage is pervasive. Rush’s company logo is a war staff with six
feathers representing the six nations of the Iroquois: Mohawk, Onondaga,
Oneida, Cayuga, Tuscarora and Seneca. She believes in the power of a diverse
work force and as a result more than half of the 390 employees at Rush Trucking
are women and half are Minorities.
Rush
Keeps close tabs on her company and its Employees. Thought the company has
grown from its humble three-truck beginning to a fleet of 1,7000 trucks, Rush
still takes time to ride along with driver. She has provided educational
Programs like “The Readers’Edge,” a literacy program, to improve the skills and
lives of her employees. Rush is actively involved in several organizations that
work to improve the positions of minorities—she’s on the boards of
directors of the Michigan Minority
Business Development Council, Minority Enterprise Development/Minority Business
Development Agency, Minority Business Roundtable, and has served as president
of the Native American Business Alliance.
Question:-
1.
As we have discussed, competency models describe
the behaviors and skills manager need to exhibit if any organization is to be
successful. Consider the general competencies found in figure 8.3 and apply
these to Andra Rush, providing example of why these competencies apply.
2.
Mentoring has played a role in the careers of many
successful minorities in leadership positions. Who could be identified as a
coach or mentor for Andra Rush?
3.
Consider some of the self-defeating behaviors
outlines in this chapter that contribute to management derailment. What lessons
has Andra Rush obviously learned from the failure of others?
Case: 05: “Integrating Terms at Hernandez &
Associates”
Marco
Hernandez is president of Hernandez & Associate Inc., a full- service
advertising agency with clients across North America. The company provides a
variety of marketing services to support its diverse group of clients. Whether
called on to generate a strategic plan, create interactive Web sites, or put
together a full- blown media campaign, the team at Hernandez & associates
prides itself on creative solutions to its clients’ marketing challenges.
The firm
was founded in 1990 with an emphasis in the real estate industry. It quickly
expanded its client base to include health care, as well as food and consumer
products. Like many small firms the company grew quickly in the
“high-flyinf”1990s, but its administrative costs to obtain and service
businesses also skyrocketed. And, as with many businesses, the agency’s
business was greatly affected by the terrorist attacks of September 11 and the
economic downturn that followed. Clients’ shrinking budgets forced them to
scale back their business with Hernandez & Associates and cut backs in
staffing meant clients needs more marketing support services as opposed to full
scale campaigns.
Hernandez&
Associates now faced a challenge—to adapt its business to focus on what the
clients were asking for. Specifically, clients, with their reduces staffs, were
looking for help responding to their customers’ request and looking for ways to
make the most of their more limited marketing budgets. Its small, cohesive
staff of 20 employees needed to make some changes and quickly.
As
president of Hernandez & Associates, Marco Hernandez Knew his tram was up
for the challenge. He had worked hard to create environments to support a
successful team—he recruited people who has solid agency experience and he
consistently communicated the firm’s mission to his team, he made sure the team
has all the resources it needed to success and constantly took stock of the
resources. He has built his team as he built his business and knew the group
would respond to his leadership. But where to start? Getting the team to
understand that growth depended on a shift in how it serviced its clients was
not difficult—each of the employees of the small firm had enough contact with
the clients that they knew client needs were changing. But making significant
changes to the status quo at Hernandez & associates would be difficult.
Group roles has to change—creative folks
has to think about how to increase a client’s phone inquiries and Web site
visits; account people needed a better understanding of the client’s desire for
more agency leadership. And everyone has to have better sense of the costs
involved. The company as a whole needed a more integrated approach to servicing
their clients if they hoped to survive. Marco needed a plan.
Question:-
1. Like
many leader, Marco has team in place and does not have the luxury of building a
new team from the ground up to adapt to the changing business environment his
firm is face with, Use the TLM to help Marco diagnose the problems faced by the
firm and identify leverage points for change.
a.
Consider the major functions of the TLM—input
process and output where do most of the firm’s
challenges fall?
b.
What are the team’s goals for outputs?
2. Identify
potential resources for Marco and his team in implementing a strategy to change
the way they do business at Hernandez & Associates.
Case: 06: “Keeping up with Bills Gates”
Bills
Gates inherited intelligence, ambition, and a competitive spirit form his
father, a successful seattle attorney. After graduating from a private prep
school in seattle, he enrolled in Harvard but dropped out to pursue his passion
– computer programming. Paul Allen, a friend from prep school, presented gates with
the idea of writing a version of the BASIC computer language for the
Altair8800, one of the first personal computers on the market. Driven by his
competitive nature, Gates decided he wanted to be the first personal computer
on the market. Driven by his competitive nature, Gates decided he wanted to be
the first to develop a language to make the personal computer accessible for
the general public. He and Allen established the Microsoft Corporation in 1975.
Gate’s passion and skill were programming- he would work night and day to meet
the extremely aggressive deadlines he set for himself and his company.
Eventually Gates has to bring in other programmers – he focused on recent
college graduates. “we decided that we want them to come with clear minds, not polluted
by some other approach, to learn the ways that we liked to develop software,
and to put the kind of energy into it that we thought was key.”
In the
early days of Microsoft, Gates was in charge of product planning and
programming while Allen was in charge of the business side. He motivated his
programmers with the claim that whatever deadline was looming, no matter how
tight, he could beat it personally if he had to. What eventually developed at
Microsoft was a culture in which Gates was king. Everyone working under Gates
was made to feel they were lesser programmers who couldn’t
Compete
with his skill or drive, so they competed with each other. They worked long
hours and tried their best to mirror Gates—his drive, his ambition, his skill.
This internal competition motivated the programmers and made Microsoft one of
the most successful companies in the computer industry, and one of the most
profitable. The corporation has creates a tremendous amount of wealth—many of
its employees have become millionaires while working at Microsoft, including,
of course, Bill Gates, currently one of the richest men in the world. During
the 1990s, Bill Gate’s net worth grew at an average rate of $34 million per
day; that’s $200 million per week.
Gates
need a castle for his kingdom and so he built a much talked-about his house on
Lake Washington. The house lies mainly underground and looks like a set of
separate buildings when viewed from above. The house was conceived as a
showcase for Microsoft technology—it took $60 million, seven years of planning
and construction, and three generations
of computer hardware before is was finally finished. A feature of the house
that reveals a lot about it owner is the house’s system of electronic badges.
These badges let the house computer know where each resident and visitor is in
the house. The purpose of the badges is to allow the computer to adjust the
climate and music and to match the preferences of the people in the house as
they move from room to room. What happen when more than one person is in a
room? The computer defaults to Gate’s personal preferences.
Questions:-
1.
Would you classify Bill Gates as a charismatic or
transformational leader? Why?
2.
Consider followers/employees of gates. What are
some of the unique characteristics of Gate’s followers that might identify him
as a charismatic or transformational?
*******
End of Question Paper *******
International Finance Marks:100
NOTE:
v ATTEND ANY FOUR CASE
STUDIES
v ALL CASE STUDIES CARRY
EQUAL MARKS
CASE
I
You are just one week ‘young’ in your job
as a treasury executive in a leading laptop trader/supplier in India.
Earlier your company was sourcing assembled laptops from China, but with the incentives provided in the
Budget of 2006 by the Finance Minister of India,
your company is planning to enter assembly/manufacturing market in India.
Now,
your company is planning to source components and sub assemblies from Taiwanese
firms. This will involve a lot of foreign exchange trading and contracts.
Since
you are from a leading business school in India,
your CFO has asked you to make a presentation to the top management on various
possibilities relating to forex market in India.
Question: What is all that you would like
to tell the top management so as to establish your credibility?
CASE
II
While you are making presentation to the
top management a middle aged person enters the boardroom. All the board members
exchange smiles with this person.
At
the end of your presentation, this new entrant speaks up, “Well, that was a
very interesting presentation. It appears that you know a lot about forex
markets in India.”
This person continues, “While, I was on flight today, I came across an
interesting bit of information. There was a story in the newspaper mentioning
that one can make a ‘killing’ in forex market, if one is smart enough. I feel
that you should tell us about this ‘killing’ business as well.” And goes on to
add with a smile and tinge of sarcasm, “I guess this will make our treasury a
‘profit center’”. All the board members nod in unison. The chairman takes out
the day’s paper and hands it over to you to examine the possibility of making a
‘killing’ in the market.
Sweat
breaks on your eyebrows. You do not remember having seen newspaper quotes
during your course work, since you devoted the majority of your time during MBA
days to cultural activities and student exchange programmes. This is going to
be your first real challenge in the industry. You ask for some time to examine
the numbers. The chairman and CFO give you patronizing looks and ask you to
come back after a working lunch and tell the board about your findings. As you
come back to your desk, you feel sudden loss of appetite.
After
a while, the same person walks up to your desk and says, “I can understand your
predicament. I know you are fresh from your MBA, and just one week young with
our company. I hope these numbers help you to present your case”, while handing
over a piece of paper to you. You do not like the patronizing tone. You thank
this person for encouragement (!). You find following details staring at you.
USD/CHF : 1.5963/1.5973. This is a quote
available from a bank in Zurich.
At the same time, a bank in New York
is offering the following spot quote: CHF/USD : 0.6265/0.6270
Further, a New York bank is currently
offering these spot quotes:
USD/JPY : 112.25/112.55 and USD/AUD :
1.6659/1.6672
At the same time, a bank in Sydney is quoting :
AUD/JPY : 68.80/68.97
Additionally, the following pair of spot
and forward quotes are also available:
GBP/USD spot : 1.6531/1.6600 and
GBP/USD 1-month forward : 1.6566/1.6577
Hope this helps!
Question: What will you do next? How will you
present your analysis?
CASE
III
You are back to your office after a long
holiday in Caribbean
Islands with your family
members. This was a gift for your outstanding performance last year. Your
predictions about exchange rate and interest rates were bang on target. This
forecast helped your company to save over a hundred million dollars. Your CEO
wants you to replicate this performance this fiscal. You have promised your
daughter and your spouse that you will be taking them to Amazon forests for
white water rafting next year.
Business
Situation
Your company is the largest cloth
manufacturer in the world in your segment. You are planning forays into the
branded garments segment. Since you want to keep transportation costs at their
minimum, you are planning to set up manufacturing bases in all the major
markets. Think Global –Act Local’ is your mantra, as well.
Plant
and Machinery
It is expected that your three plants will
be set up in Mexico, Brazil, and Australia. These plants will have
about the same capacity and are likely to cost about USD ten million each. The
construction period could be anywhere from two to five years, depending on the
support received from local government officials. This investment could easily
make your company the second largest manufacturer of cloth in that segment.
Ownership
Your company has a choice of either setting
up a 100% subsidiary or a joint venture with one of the local companies.
Local
Issues
There are local political parties who can
make life difficult in Brazil.
However, in Mexico and Australia
you are likely to sail smoothly.
Cashflow
There are no credible estimates for
cashflow because the local markets are an uncharted territory for you. All you
know is: you goods will be priced in local currency.
Capital
On this front, you have multiple choices:
(i) raising domestic equity in rupee terms, (ii) mix of debt and equity in
rupee terms, (iii) USD denominated bond issue, (iv) raising local currency
debt.
Question: Should your company make this investment?
If yes, then which will be the best route to (a) maximiza-tion of profits, (b)
minimizing risk, (c) finding the optional mix of profits and risk.
What all information to you need to arrive
at these answers? How will you structure your analysis?
CASE
IV
“Ready for take off”, voice of the Captain
crackles over announcement system and brings you back to present. You are
returning after attending the glittering function where ‘DFO of the Year’ award
was presented. While coming out of the function, you overheard someone saying,
“That’s no big deal! If this person is really great then why not try and get
the ‘Financial Engineer of Year’ award!!” The comment was definitely aimed at
you, the winner of this year’s award.
Your
company is one of the leading software companies in India, having a turnover of over
USD 500 million in the last financial year. Now, for reasons best know to them,
the board members are keen that the company should diversify into commodity
trading. As you savour the gourmet meal, the aircraft starts shaking suddenly
and an announcement is made, “We have hit an air-pocket. We expect more
turbulence ahead. Please occupy immediately the nearest vacant seat available
and fasten seat-belts for your safety.” There is near commotion in the cabin,
and the next moment you find a middle-aged gentleman seated.” There is near
commotion in the cabin, and the next to you whose face is familiar; you
exchange greetings with each other.
You
start talking and as the discussion builds up you find that the other person
was also there during the presentation ceremony and he was, in fact, ‘Financial
Engineer of the Year’ last year. He shows keen interest in your company and
appears to know a lot about your company’s future plans. He offers to exchange
you purchase of coffee worth USD 10 million options floating in return for
sugar futures fixed, over next six months. You struggle to see the reason and
remain non committal.
On
your return to office you find that your company needs to enter into interest
rate swap for its forthcoming commodity trading project. But this activity will
be starting in about nine months from now and it will involve series of swaps,
required to be settled every month for about JPY 100 million fixed against AUS
dollar floating. This is coming from your overseas software business in these
countries, where your company has taken a perpetual loan from the local banks
due to the Government’s policy to demonstrate that you have long term business
interests in those countries.
You
are keen to manage the risk of your foreign currency receivables portfolio,
typically in EUR, with variable timing by having a cross currency swap with a
hardware vendor from China.
You have not yet decided about the currency which will be profitable against
EUR.
While,
you are in this process, your phone rings and the winner of ‘Financial Engineer
of the Year’ award is on line asking you to join him for a dinner meeting next
Friday. You sense that it could be good opportunity for you to learn a few
things from him.
You
have about ten days time on your hand, and you are keen to get ‘Financial
Engineer of the Year” award next year.
Question: How will you proceed to structure this situation? What
all information will be needed? What is your perception of the risks involved
in the proposed structure?
CASE V
You are the chief financial officer of a
leading dental hospital located in India. Your hospital has been
having a roaring practice. You have a large group of dedicated doctors and a
wide range of patients traveling from all over the region. Your hospital is
known for its professional perfection and value-for-money services.
Of
late the hospital has started offering services to relatively well off
customers under ‘cosmetic dentistry’. The opening of this market segment has
helped the hospital to reduce per patient charges for patients of ‘essential
dentistry’. The hospital is also planning to start ‘mobile dental clinics’ to
cover rural areas, in line with its motto ‘Oral Hygiene for All’.
While
the Ministry of Public Health and Social Welfare is supporting the second
initiative, the Ministry of Tourism and Hospitality is supporting the previous
initiative along the lines of ‘Smile India’ campaign. This has helped India
in becoming a preferred destination for the emerging market for ‘health
tourism’. A majority of customers of cosmetic treatment are from Europe and the US of A. Recent interest of some of the
corporate clients from Australia
and some pop-divas has given your hospital practically free media coverage.
Expectedly,
this success is not an unmitigated blessing. Competition in the region is
coming from a Chinese dental hospital. They are offering ‘tooth’ transplant
with the help of a Korean firm. This firm has asked a claim that they have the
technology to organically grow a tooth with the help of root-canal cells taken
from a patient. This is a time consuming and costly process and requires a
longer stay in China and
frequent visits to Korea,
but patients do not seem to mind—since they are assured of an ‘organically’
grown tooth.
There
is another competitor coming up in Belgium. They have a different
technology. It is neither ‘organic’ nor as good as Indian, but highly cost
effective since they fix an artificial tooth in a metallic socket, which can be
removed and refitted without much effort.
However,
in last few months, the dedicated lot of dentists with your hospital are also
reading the media reports and there is growing feeling among them that the
hospital is increasingly straying away from its path of ‘oral hygiene for all’.
Some of the younger dentists have, on more than one occasion voiced their
demand for higher compensation. Recently, a group of experienced dentists have
taken up visiting positions with the Belgian hospital for a few weeks in a
year. Now, the dentists have taken up visiting positions with the Belgian
hospital for a few weeks in a year. Now, the dentists want a pay hike and that
wages to be paid in USD, not in INR as was the practice so far.
Your
CEO has asked you to see her with the possible scenario analysis in a month from
now.
You
have gone through all your cost sheets. You know that the costliest element is
the special grade dental cement, which is to be imported in packs of 1000gm
each costing over INR 1,000,000. Each tooth requires about 2gm of this secial
grade cement. Adding other facilities and services, it costs INR 3000 per tooth
for each ‘cosmetic’ treatment. Your charges are in the range of USD 200 which
is very competitive in the international market. However, the Chinese-Korean
combine is offering ‘organic’ tooth at USD 600 per tooth, all inclusive. The
Belgian experiment is at about USD 30 per tooth, but has a shorter useful life.
When you look at your cash inflow you find
that your earnings are in all possible currencies of the world but your costs
are tied with USD and INR. The cover story of The Economist indicates
possibility of USD appreciating against INR and other major currencies on
account of successful resolution of the Iraq
situation and peaceful resolution of the Iraq crisis, leading to the softening
of world oil market prices. Though you are not a dentist by profession, you
have a tooth in every possible profession! You have suggested to the chief
dentist to explore the possibility of using heavy metal/precious metal with
ceramic composite. You heard about this kind of material in your previous job
while dealing with the Japanese Satellite Agency. The chief dentist was not
very happy but promised to explore the possibility. You want to get into this
material because there are commodity futures available on heavy/precious
metals, while there is no way to cover ‘special grade cement’.
With
this information on hand, you want to approach the Ministry of Public Health
and Social Welfare and the Ministry of Tourism and Hospitality with a request
to absorb price variation due to strengthening dollar. You have also approached
RBI to grant permission to trade in futures in all the currencies in the world,
but there are problems.
Question: How will you guide your CEO in this
situation?
CASE
VI
Here are the ‘excerpts’ from a closed room
discussion heads of purchase, marketing, production and the treasurer of
Advanced Tectonic Devices. [The dialogues given below might appear to be unduly
contrived to an expert. This was necessary for attaining clarity for our
purpose and maintaining the printability of the statements; impolite usages are
deliberately expunged.]
Head
Marketing: See, after a long
drawn effort, spread over six months, my boys and girls have managed to get
this big #$%^*@ order totaling equivalent of USD 1.5 million. I had to
@#$%^*& the happiness of all my staff to get this deal going. Despite an
international competitive bidding we have got this order for the supply of high
precision devices to the European Space Agency for the launch of a Japanese
communication satellite. This supply agreement is likely to be signed in
anytime over next two weeks. The exact rupee equivalent of this order will be
known when the price is frozen, on the date of signing of contract.
Head
Production: Thanks to all your
efforts and advance planning, we are in a position to meet all deadlines,
without an iota of problem. My only concern is about the raw material supply
linkage. Give me material today and I will deliver the component without any
problem in a matter of ten days. Add a cushion of two more days, if some rework
in required due to material flaw. [Ends this sentence with a deprecating
chuckle, obviously directed towards the head of purchase.]
Head
Purchase: (He turns to Head
Treasury) You production persons, when will you learn to behave. See, just
before coming to this meeting I called the raw material supplier with our dates
and quantity. He told me that material for entire order can’t be purchased in
one lot due to international trade restrictions. This grade of alloy steel is
on the international watch list due to possible use in nuclear weapons.
Therefore, only a part of total material requirement can be bought at a time.
As soon as one lot is consumed in production, we will need to issue a
certificate to this effect, and then only the next lot of high alloy steel can
be purchased. He turns to head treasury, See, the payment is to be made every
fortnight for raw material (high alloy steel billets) over next six months, in
equal installments of USD 100,000 each. Without fail! Any trouble on that front
will jeopardize the entire supply sequence.
Head
Marketing: As per the terms
of contract, the buyer will be able to pay 50% of the contracted amount once
the payload in fitted on the launch rocket in EUR (that is equivalent of USD
750,000) and the remaining 50% (that is equivalent of USD 750,000) immediately
after launch of the satellite in JPY.
Head
Treasury: [Definitely not
amused] What is this @#$%& contract you have drawn. At least you *&%^$#
should consult me before getting into any such commitments. Our chief economist
is not comfortable with the world economy outlook. In her opinion, Japan
appears to be heading towards yet another cycle of recession. EUR is likely to
strengthen against JPY and USD over next six months. As far as INR is
concerned, not much variation is expected over next months. And you expect me
to do a profitable deal under the circumstances!! [Leaves the meeting room
abruptly, door slams behind him, and some muffled shouts are heard]
Well, as you would have
guessed it by now, you are the treasurer who feels slighted due to the process
adopted by marketing, purchase, and production heads.
Question: What are the choices available with you to
meet these cashflow requirements? Analyze each possibility in detail and argue
for and against each of them.
NOTE:
v ATTEND ANY FOUR CASE STUDIES
v ALL CASE STUDIES CARRY EQUAL MARKS
CASE 01: GLOBAL Human Resource management at
coca-cola
CASE 02: Troubled Team
CASE 03: Waiting in New Delhi
CASE 04:
Human Resource Practices at Disney
CASE
05: A steady in Corporate Foreign Expansion
CASE
06: More problems than Solutions
CASE-01:GLOBAL
HUMAN RESOURCE MANAGEMENT AT COCA – COLA
Coca—Cola Company is one of the most
successful multinational enterprises.
With operations in close to 200 countries and nearly 80 per cent of its
operating income derived from businesses outside the United States. Coca--Cola is typically perceived as the
quintessential global corporation.
Coca—Cola, however, likes to think of itself as a “multi – local” company that just happens to be headquartered
in Atlanta but could be headquartered
any where and that presents the Coca—Cola brand with a “local face” in
every country where it does business.
The philosophy is best summarised by the phrase “think globally, act locally,”
which captures the essence of Coca—Cola’s cross—border management
mentality. Coca—Cola grants national
business the freedom to conduct operations in a manner appropriate to the
market. At the same time, the company
tries to establish a common mind-set that all its employees share.
Coca—Cola manages its global
operations through 25 operating divisions that are organised under six regional
groups: North America, The European Union, the Pacific Region, the east
Europe / Middle East Group, Africa and Latin America. The corporate human resource management (HRM)
function is charged with providing the
glue that binds these various divisions and groups int the Coca-Cola family. The corporate HRM fuction achieves this in
two main ways: (1) by propagating a
common human resources philosophy within the company, and (2) by developing a
group of internationally minded mid—level executives for future senior management responsibility.
The corporate HRM group sees its
mission as one of developing and providing the underlying philosophy around
which local businesses can develop
theirown humanresource practices. For
example, rather than have a standard salary policy for all its national
operations, Coca—Cola has a common salary philosophy—the total
compensation package should be competitive with the best companies in the local
market. Twice a year, the corporate HRM
group also conducts a two—week HRM
orientation session for the human resource staff from each of its 25 operating
divisions. These sessions give an
overview of the company’s HRM philosophy
and talk about how local businesses can translate that philosophy into human
resource policies. Coca—Cola has found
that information sharing is one of the great benefits of bringing HRM
professionals together. For example,
tools that have been developed in Brazil to deal with a specific HRM problem
might also be useful in Australia. The
sessions provide a mediumthrough which HRM professionals can communicate and
learn from each other, which facilitates the rapid transfer innovative and
valuable HRM tools from region to region.
As
much as possible, Coca—Cola tries to staff its operations with local
personnel. To quote one senior
executive: “We strive to have a limited
number of international people in the field because generally, local people are
better equipped to do business at their home locations. “However, expatriates are needed in the
system for two main reasons. One is to fill a need for a specific set of
skills that might not exist at a particular location. For example, when Coca—Cola started
operations in Eastern Europe, it has to bring in an expatriates from Chicago,
who was of Polish descent, to fill the
position of finance manager. The second
reason for using expatriates is to improve the employee’s own skill base. Coca—Cola believes that because it is a
global company, senior managers should have an international exposure.
The
corporate HRM group has about 500 high—level managers involved in its “global
service programme”. Coca—Cola characterises
these managers as people who have knowledge of their particular field, plus
knowledge of the company, and whocando two things in an international
location---add value by the expertise they bring to each assignmentand enhance
their contribution to the company by having international experience. Of the 500 participants in the programme,
about 200 move each year. To ease the
costs of transfer for these employees,
Coca—Cola gives those in its global service programme, a US-based compensation package. They are paid according to US benchmarks, as
opposed to the benchmark prevailing in the country in which they are
located. Thus, an Indian manager in this
programme who is working in
Britain, will be paid according to US
salary benchmarks---and not those prevailing in either India or Britain. An ultimate goal of this programme is to
build a cadre of internationally minded high level managers from which the
future senior managers of Coca—Cola will be drawn.
QUESTIONS
·
1. Substantiate
the phrase “think globally, act locally”,from the perspective of key HRM
functions that could be practised by Coca—Cola.
·
What in your
opinion, is the objective of the two—week HRM orientation session organised by
the
corporate HR?
KEY
TERMS
Child labour
Rapidly Developing Economics (RDE)
Globalisation
Regional Trading Blocks
Off—shoring Wage disparities
Outsourcing
REVIEW QUESTIONS
1. What are the key drivers of globalisation?
2. What are RDEs and what is the role played by
RDEs in globalisation?
3. Discuss the impact of globalisation on child labour. Why is this predominant in the emerging
economics?
4. How has the woman benefited from globalisation
trends?
5. How has the Indian organisation been impacted
by globalisation?
CASE-02:TROUBLED TEAM
When
a major international software developer needed to produce a new product
quickly, the project manager assembled a team of employees from India and
the United States. From the start, the team members could not
agree on a delivery date for the
product. The Americans thought the work could be done in two to three weeks;
the Indians predicted it would take two to three months. As time went on , the Indian team members proved reluctant to
report setbacks in the production process, which the American team members would find out only
when work was due to b passed to them.
Such conflicts, of course, may affect any team, but in this case, they
arose from cultural differences. As
tensions mounted, conflict over delivery dates and feed back became personal,
disrupting team members’ communication about even mandate issues. The project manager decided he had to
intervene---with the result that both the American and the Indian team members
came to rely on him for direction regarding minute operational details
that the team should have been able to
handle itself. The manager became so
bogged down by quotidian issues that the project careened hopelessly off even
the most pessimistic schedule—and the team never learned to work together
effectively.
QUESTIONS
1. What mistakes did the project manager commit while
constituting the team?
2. Which of the strategies (see Table 2.7) do you recommend to bring the team
back on track?
CASE-03:WAITING IN NEW DELHI
Richard
was a 30-year old American set by his Chicago—based company, to set up a buying
office in India. The new office’s main
mission was to source large quantities of consumer goods in India: Cotton piece goods, garments, accessories and
shoes, as well as industrial products such as tent fabrics and cast iron components.
India’s
Ministry of Foreign Trade (MFT) had invited Richard’s company to open this
buying office because they knew it would promote exports, bring in badly—needed foreign exchange and
provide manufacturing know-how to Indian factories.
Richard’s
was, in fact, the first international sourcing office to be located anywhere in
South Asia. The MFT wanted it to succeed
so that other Western and Japanese companies could be persuaded to establish
similar procurement offices
The
expatriate manager decided to set up the office in the capital, New Delhi,
because he knew he would have to meet frequently with senior government
officials. Since the Indian government
closely regulated all trade and industry, Richard often found it necessary to
help his suppliers obtain import licences for the semi-manufactures and
components they required to produce the finished goods his company had ordered.
Richard
found these government meetings frustrating.
Even though he always phoned to make firm appointments, the bureaucrats
usually kept him waiting for half an hour or more. Not only that, his meetings would be
continuously interrupted by phone calls and unannounced visitors, as well as by
clerks bringing in stacks of letters and
documents to be signed. Because of all
the waiting and the constant interruptions, it regularly took him half a day or
more to accomplish something that could have been done back home in 20 minutes.
Three
months into this assignment Richard began to think about requesting a transfer
to a more congenial part of the world—“somewhere where things work,” He just could not understand why the Indian
officials were being so rude. Why did
they keep him waiting? Why didn’t the
bureaucrats hold their incoming calls
and sign those papers after the meeting so as to avoid the constant interruptions?
After
all, Government of India had actually invited his company to open this buying
office. So didn’t he have the right to
expect reasonably courteous treatment from the officials in the various
ministries and agencies he had to deal with?
CASE
QUESTIONS
·
1. Why is Richard
not able to jell with local conditions?
·
If you were
Richard, what would you do?
KEY
TERMS
Cultural
dimensions
Power distance
Ethnocentric
Polycentric
Geocentric
Regiocentric
Individualism Subculture
Multicultural
teams
Uncertainty avoidance
Masculinity Work values
QUESTIONS
1. Discuss briefly the four cultural
predispositions MNCs tend to have towards managing things in a global context.
2. What are some challenges faced in
communicating across cultures?
3. Draw and describe the phases of cultural
adjustment that an expatriate experiences during the first move to a hose country.
4. Discuss Geert
Hofstede’s cultural dimensions that enable an understanding o cultures
across countries
5. How does an organisation ensure effective
group / interpersonal behaviour in an international environment?
6. Discuss
Trompernaar’s framework of cultural dimensions.
7. Describe Globe Projects’ leadership
dimensions.
CASE-04:HUMAN RESOURCE PRACTICE AT
DISNEY
The
Walt Disney Company was founded in 19 22 by 21
year—old Walt Disney and his
older brother Roy. Walt Disney was the
creative producer, Roy the ‘business
brain’ behind the company (Ellwood, 1998).
The partnership ended only with Walt Disney’s death in 1966. By the end of the 1990s, the Walt Disney
Company had developed into a $ 23billion
media conglomerate, arguably the most influential force in the globalization of
Western culture (Ellwood, 1998).
Gomery (1994) argues that the Walt Company was not always “a paradigm of
corporate success”. Initially
specializing in animated films, it struggled tofind a niche in the market until
1928 when it produced the first cartoon to use sound (Gomery, 1994). The company built on this success by
negotiating distributing agreements with powerful corporate sponsors. It supplemented revenues by merchandising
characters, initially Mickey Mouse. Snow
White and the Seven Dwarfs, released in 1937, was the first feature—length
animated colour film and proved hugely successful. Innovative use of sound and Technicolor
continued. Walt Disney also pioneered
the use of ‘audio—animatronics’:
Life—like replicas of people and
animals.
Early
animation production was highly labour—intensive. Rigid division of tasks was further
delineated on gender lines. By the time Fantasia was completed in 1941, the
Walt Disney Company employed eleven hundred people. Ellwood (1998) describes Walt Disney as “a
notorious workaholic, a perfectionist who ran his company like a personal
fiefdom”. Both “paternalistic and
domineering” he rewarded loyalty and excluded dissenters. There were no women or black people
promoted to senior positions during this
period. The company was the only Hollywood studio without union representation
and as such was targeted by the American Federation of Labour. Walt Disney became militantly opposed to
communism after animators took industrial action over conditions and lack of
recognition in 1941 (Gomery, 1994)
By
1971, both brothers had died. The
business then seriously under-performed,
especially within the film division, and came close to being broken up.
In
September 1984 a new management team was employed, led by Michael Eisner and
Frank Wells, both former executives with other studios. By 1988 they were “the highest-paid
professional manager in the history of American business”. However,
Gomery (1994) suggests that despite their “supposed inventiveness” they
adopted “common textbook business strategies” and maintained a ‘Hard’ human
resources management policy Ellwood (1998) argues that real power within
consumer capitalism increasingly has come to rest with those controlling the
“infotainment industry”. By 1991 the
Walt Disney Company had become a corporate power.
Walt
Disney World in Florida containsfour theme parks and associated services, and
attracts 30 million visitors a year. It
employs 50,000 people, the largest number of workers located at one site in the USA, the majority
in low-paid service jobs. The Florida
state government initially was attracted
by the development potential and gave the company “all the rights and powers of an independent
municipal government”(Ellwood, 1998).
The company has secured major tax concessions and effectively is exempt
from state legislation governing various aspects of transport and public
services (Wilson, 1994), The impact on
the economy and development of Orlando and surrounding areas has been profound,
with increasing disparity between affluence and poverty.
Employees
are routinely assigned jobs according to age and appearance, a process
officially known as “casting”. The most
“presentable” get the most popular “front-line” jobs and shifts. “Old ladies sell the merchandise, old men
work in security. Haitian women work in
housekeeping, Puerto Rican young people work in food services and
preparation, African—Americans work as
cooks or stewards or in food preparation “(Ellwood, 1998). Animal Kingdom, opened in April 1998, employs
50 Africans on 12-month contracts “to lend authentic flavour”.
The
rate of staff turnover is between 200 and 300 per cent a year. The service Trade Council Union (STCU), a
consortium of six unions, is the only workers’ organisation recognized by the Walt Disney Company. It represents about 22,000 full-time and 5000
part-time workers at Disney World. In
addition to concerns about wagescales
and other conditions of employment, the STCU has concerns about the company’s
‘benchmark’ monitoring system, based on maximizing numbers using each
attraction (Ellwood, 1998).
JAPAN
Disneyland
in Japan is virtually an exact copy of the original California development but
with some features ostensibly adopted for the Japanese market. For example, “Main Street USA”. A highly—idealized version of
small-town America, is renamed “World Bazaar”.
Yoshimoto (1994) argues hat the opening in 1983 had symbolic value for a
generation seeking to dissociate or ‘move on’ from the Second World War. Success also is attributed to ‘the absolute
separation of leisure from work’. With
maintenance and other utilitarian functions effectively invisible, Disneyland offers an almost unique
opportunity for Japanese visitors to
forget about everyday working life.
Yoshimoto (1994) suggests that with its focus on order and minute
attention to detail in management,
Disneyland is arguably the most Japanese institution in the United
States’. Equally, those same
preoccupations make the Japanese market ideal for Disney; ‘the epitome of
American popular culture’.
EURO
DISNEY
Euro
Disney opened in April 1992 in an agricultural area just outside Paris of which it was one fifth
the size (Anthony et al., 1992). The
project was promoted and defended by senior company managers in America, but
other analysts questioned whether the Disney ethos would be compatible with
French culture. While incorporating many
standard Disney theme part features, some adjustments were made in response to
these criticisms. Links were made with
European literature and mythology. As in
Tokyo Disneyland, renaming was used as a marketing device, resulting in Euro
Disney reflecting European interest in the history of Western United
States. Unlike Tokyo, an international
cuisine was provided, served in
accordance with European social and eating patterns. However, the non-availability of alcohol
proved controversial. Faced with charges
of cultural imperialism the corporation had to reassure the government that
French was technically the first language in the complex. However, employees also were expected to be
fluent in English and signs were bilingual (Anthony et al.., 1992). These dilutions of the Disney image led to
the counter claim that the corporation was trying to be “all things to all
people” and would be less successful as a result.
As
in its other complexes, Euro Disney placed particular emphasis on rigorous
training, orienting employees to the global corporate philosophy. As early as 1961 the company had created the
Disney University for this purpose,
located at individual sites and also addressing issues of specific local
relevance. The Euro Disney division
opened in September 1991. The aim was to
recruit 10,000 people in six months with nationalities to ref- lect anticipated visitor profiles. However, when the development opened, 70 per
cent employees were French compared to the target of 45 per cent. A totalof 270 managers had been trained in service delivery standards
operating in the other three centres. An
additional 200 experienced Disney managers were relocated to the French
site. From the outset Euro Disney was
criticized for elements of its selection process and human resources
management. In particular stringent
requirements regarding personal appearance were compared unfavourable with the
approach of other employers. In
addition, some 4000 employees were unable to find suitable affordable
accommodation in the vicinity.
Retention
also proved to be a problem. Within the
first nine weeks, 1000 of those appointed left, about 50 per cent
voluntarily. Doubts were raised about
whether people familiar with European work expectations would be able to adapt
to the regimented enthusiastic servie-driven ethos required by Disney. Unreasonable working conditions, poor
communication and lack of cultural awareness among managers were the
mainreasons given for the staff turnover (Anthony et al., 1992).
BRANDED
MERCHANDISE
The
Walt Disney Company has promoted branded merchandise since 1930 and has
contracts with about 3000 factories worldwide (MacAdam, 1998). The National Labour Committee, an American
human rights advocacy group, has highlighted the position of 2000 Disney
workers in Haiti, the poorest country in the Caribbean. Unemployment is about 70 per cent and
subcontracting a vital source of income.
The National Labour Committee attempted to persuade the Walt Disney
Company to allow independent monitoring of terms and conditions in their four
Haitian plants. At first Disney claimed
that it has no employees in Haiti and no responsibility for
subcontractors. It then sent its own representatives but refused requests
for independent monitors. The company’s
chief executive, Miachael Eisner,
received over $ 185 million in pay and share options in 1996. MacAdam (1998) points out that one hour’s
remuneration for Eisner wasthe equivalent of 156 years work for a Haitian
machine operator producing Disney clothing.
More
recently, the Walt Disney Company has focused attention on the lucrative
Chinese market. There are plans for a Chinese Disneyland.
QUESTIONS
1. How does this case help us appreciate the
striking nature of how HRM is different in the domestic vs. the international
context? (Discuss with reference to the
theoretical framework provided in the chapter)
2. What organizational strategy is Disney
practising globally? Proide justification from the case / through independent
research.
3. How does the nature of IHRM impact the
organizational objectives of Disney operations world wide?
CASE-05:A STUDYIN CORPORATE FOREIGN
EXPANSION : EURO DISNEY
On April 15, 1983, The Walt Disney Company
opened in Tokyo, Japan, their first theme park outside the United States. This theme park, Tokyo Disney land became an
instant hit. In fact, since the Walt
Disney Company executives believed they learned so much about operating a theme park in another country, and since Tokyo Disney land was an instant
success, they began immediately to search for a site for a fourth park. To find a site for their forth theme park, The Walt Disney Company looked to Europe
Where Disney films historically have done better than in the United
States. Because of this film success,
the Western European audience already was familiar with Disney
entertainment and merchandise the
possibilities were narrowed down to Costa del Sol in Spain and Paris in
France. France with its larger
population and a spectacular transportation network became the choice site for
their fourth theme part, Marne-la-vallze
is located in an ideal geographic location since it is 20 miles (32 kilometers0
due east of the centre of Paris and is halfway between the two international
airports of Orly and
Roissy-charles-de-Gaulle.
The
French railway regional e express network connects Marne-la-VallZe with the
Paris metro system, and Major highways
are nearby. In fact, of more than 350
million Western Europeans, 17 million can reach the Euro Disneyland resort
within two hours by car and 310 million can fly creating a “…denser market than the United States”
The
Walt Disney Company promised new jobs and contracts for local suppliers which
resulted in red carpet treatment from France.
More specifically Euro Disneyland
planned on hiring 12,000 new Cast Members (employees0. About 6,000 would work in Euro Disneyland’s
Magic Kingdom, 5,200 in hotels on theproperty,
and the remainder in reaction and support facilities. The area was suffering high unemployment at
the time and theWalt Disney Company executives believed the economic benefits
to the region would be great since they
would employ so many local citizens and since tourism generates revenue without
requiring such costly social services as schools and hospitals.
On
April, 12, 1992, despite a few protests, the Walt Disney Company’s fourth theme
park, Euro Disneyland opened its doors to the public with essentially the same
attractions as in the other Disney theme parks
in in California, Florida, and Japan
Euro Disneyland’s target of 11 million guests in
the first year was met, but revenues did not roll in as had been planned. In fact, Euro Disneyland reported a $ 905
million loss for the fiscal year that ended in September 30, 1993, and by December 31, 1993, Euro Disneyland had amassed cumulative loss
of 6.04 billion French francs or 1.03 billion US dollars. Euro Disneyland’s first chairman, Robert
Fitzpatrick, an American, won kudos for setting up the park, yet he stumbled
over day-to-day operations. Fitzpatrick
spoke French, knew Europe well and his wife was French. But he seemed to be ‘ “…caught in the middle and quickly came to be
regarded with suspicion by some on both sides”.
Numerous times he attempted to warn Disney executives that France should
not be approached as if it were Florida, but his warnings were ignored. He was replaced in 1993 by French man
Philippe Bourguignon. The all-American
enterprise suddenly had raced to put on a European face. Although there was a change in the head of
Euro Disneyland there are problems which it faced with the old management and
still faces problems with the new management.
Among these problems are included their optimistic assumptions, staffing
and training cultural issues, interest rates, marketing, communication, and
convention business.
The
Walt Disney Company, overly ambitious in their venture, made several strategic
and financialmiscaliculations. The Walt
Disney Company wanted to build a state of the art, as near to perfect as
possible, theme park. In order to meet
this goal the company frequently attempted to build and rebuild, with no regard
for the “bottom-line” construction
cost. Michael Eisner, the Chief
Executive Officer of the Walt Disney Company, ordered several last-minute
construction changes, known as budget-breakers, which further increased himself
by Euro Disney land’s debt. For example,
one cold day before Euro Disneyland opened Eisner warmed himself by a Paris
hotel lobby fireplace and ordered more than a dozen wood-burning fireplaces for
Euro Disneyland despite the added construction cost and upkeep. Another example of an Eisner budget-breaker was his decision to
remove two steel staircases from Euro Disneyland’s Discovery land. He wanted them removed because they blocked a
view of the Star Tours ride. It was estimated
the cost to remove the staircases was approximately $ 300,000.
Euro
Disneyland executives and advisors failed to see the signs of the approaching
European recession. “Between the glamour
and the pressure of opening and the intensity of the project itself, we (the
executives) didn’t realize a major recession was coming”.
OPERATIONAL
ERRORS : There were numerous errors made
regarding the overall operation of Euro Disneyland .
For example,
from its American experience the Walt Disney Company thought Monday
would be the light day for guests and Friday a heavy one, and allocated staff
accordingly. In reality the reverse was
the case. In fact to this day, the
company still struggles to find the right level of staffing at a theme park where “…the number of visitors per day in the high season can be 10 times the number in the
low season”. Furthermore, to add to the
operation problem is the difference inemployee acceptance of conditions
of employment. In Orlando Cast Members are accustomed to and
have learned to accept being sent home if they are not needed. However, in Paris, French Cast Members feel
extremely irritated by and have a very difficult time accepting the inflexible
scheduling.
Another
example of operational assumptions at Euro Disneyland involved the bus drivers.
The Walt Disney Company built the French bus parking spaces much too
small. Bus drivers were unhappy as they
had a very difficult time fitting their buses into their designated spots. In addition, the Walt Disney Company provided
only 50 restroom facilities for bus drivers and on peak days there would be
2,000 drivers.
A
final example of the operational errors made by Euro Disneyland involved the
computer stations at the hotels. Euro
Disneyland executives assumed guests
would stay at the park for several days.
This in fact did not happen. Many
guests arrived early in the morning, spent the day at the park, checked into
the hotel late that night, and then checked out early the next morning before
heading back to the park Since
there were so many guests checking-in
and checking-out, additional computer stations had to be installed at the
hotels in order to decrease the amount of time the guests stood in line.
LABOUR
COSTS; Before the opening of Euro Disneyland executives had estimated labour
cost would be 13% of their revenues
(Meltdown at the cultural, 1994). This
was another area where the executives were wrong in their
assumptions. In 1992 the true
figure was 25% and in 1993 it increased
to a whopping 40%. These labour cost
percentages increased Euro Disneyland’s debt.
STAFFING
AND TRAINING: Before Euro Disneyland
opened the Walt Disney Company built offices in Marne-la-VallZe in order to
recruit their Cast Members. In just 12
months 12,000 Cast Members had to be
recruited, hired, trained, and housed.
This is a challenge for any company, “…but it is more complex for
Disney, whose employees (Cast Members)
become more like members of a theatre troupe”.
Euro Disneyland recruited through job fairs, a popular European
recruiting technique. In two days, 1,000
applied. However, since the Walt Disney
Company’s requirements for employment are so high, for every 10 candidates
interviewed only one was hired. To
complicate the hiring process,
there were language requirements
since the official languages of Euro Disneyland are French and English. Preferences were given to trilingual applicants because it was hoped thast the
park would draw guests from all over Europe.
Once
the candidates were hired Euro Disneyland’s challenge was to train the
Europeans, half of them French, to be Disney Cast Members. “Every employee goes through human resource training, then additional
training in requirements of specific jobs”
(Bakos, 1991.p.102). The success
to Disney parts’ repeat guest visits is the employee-customer rapport. Thus, the largest challenge Euro Disneyland
encountered was implanting a “have nice
day” mentality and teaching12,000
European employees to smile the “Disney smile”
all day. Throughout training and
employment ALL Cast Members learn they must adhere to the company’s strict 13 page manual of dress
codes, known to Cast Members as the “Disney Look. “The Europeans did not understand this
“Disney Look”. The “Disney Look” is a
rigid code of Cast Member appearance that
imposes a well-scrubbed, all-American look. It details the size of earnings to the size
of finger nails to the no tolerance rule regarding facial hair and dyed
hair. It is difficult for the Europeans
to adhere to an “American look” since they are not American and they believe
this requirement has stripped them of their “individualism”. Furthermore, the French “… were hardly specialists in service:. In December 1994 Euro Disneyland was taken to
French court contesting the Walt Disney Company’s strict dress code. The European believed the dress code violated
French labour law. As a result Euro
Disneyland restructured their French dress
code. However, the French
believed that the Walt Disney Company just instituted a new policy not as a
result of being taken to court but in attempt to patch up the rocky labour
relations at the theme park.
CULTURAL
ISSUES: Although European public
acceptance of the theme park itself has not been a problem for Euro Disneyland
there has been a different type of cultural clash. Most Europeans believe there is cultural
imperialism. Europeans have not taken to
the “…brash, frequently insensitive and often overbearing style of Mickey’s
American corporate parent”. Disney
executives’ contentious attitudes exacerbated the difficulties it encountered
by alienating people with whom it needed to work. “Its answer to doubts or
suggestions invariably was: Do as we
say, because we know best”.
Much
has happened with Euro Disneyland since its opening. Although there have been successes at Euro
Disneyland the high debt incurred along the way has caused the financial
problems to become the number one priority.
To end numerous labour disputes over long-hours and poor pay, Euro
Disneyland has “…shifted away from imported American working practices and
towards a more French approach” (Saseen,
1993.P.27). This new approach set a
maximum working week and annualized hourly work schedules. In addition, it reclassified jobs using the French method which allowed
French citizens the ability to recognize their standard French job
classifications. As a result, Euro
Disneyland won greater acceptance and willingness to be flexible from its work
force.
CONCLUSION
The
Walt Disney Company’s venture of Euro Disneyland is an excellent source of
study, training , and learning or human resource professionals involved in
possible foreign expansion. Although
Euro Disney lands located in Europe, the lessons learned and experiences gained
can apply to any country on the globe.
The astute human resource professional can learn from this process and
apply these newly acquired skills in similar situations anywhere in the world.
A
move by any company to any foreign market should not be made without an
extensive, in-depth study based on exhaustive research into every applicable
aspect of the economy, Laws, culture, climate, interests, customs, life-style
habits, geography, work habits, just to name a few.
(Source: Extracted from @ 1995 by Lyn Burgoyne. University of Illinois at Urbana-Champaign,)
QUESTIONS
1. Apply the six steps in the strategic HR
process to understand the IHR challenges at Euro Disney.
2. Use the information in this case to discuss
IHR as different from strategic IHR.
3. Discuss the ‘managerial basis’ for strategy
implementation that you can gather from this case.
CASE-06:MORE PROBLEMS THAN SOLUTIONS
It
was March 27,1999, For the first time in the history of business, a Japanese
and a French company had come together and set up a joint project. Renaults is a French Company and Nissan has
its origin in Japan. Both are known for
distinct corporate cultures
and brand identity.
Both companies share a single joint strategy of profitable growth and a
community of interests. Renault holds a
44.3 per cent stake in Nissan, while Nissan owns 15 per cent of Renault
shares. Each company has a
direct interest in the results of
its partner.
The
partnering between Renault and Nissan has everything going in its favour. As stated above, the partners have a synergy
for having a culture, identify and common interests. There are also strong geographical and
operating strengths and complementarities.
A charter signed by both the companies sets out the principles of shared
ambition, mutual trust, respect for each partner’s identity and balance between
the two partners, completed by operating and confidentiality rules.
But
the new outfit brought more problems than solutions. Before the partnership, Nissan was a typical Japanese company with a
collectivist approach.
Within
Nissan, only group performances were supposed to createvalues, individual
performances were discouraged. The board
of Nissan comprised more than 30 members, and thus, it was very slow to make
efficient decisions in a fast changing environment. Besides, the communication between the top
management and their subordinates was quite difficult, direct contacts were not
common. There were lots of
intermediaries between the subordinates and the top management, which was also
a means to avoid individual initiative.
Nissan, as most of the Japanese companies, was part of a large Keiretsu,
which implies several sub-contractors, subsidiaries and suppliers. This system allowed the company to share the
risks with others; in fact, this
phenomenon was related to the high level of uncertainty avoidance of the
company. A strong family atmosphere was present within the company to encourage group performance. Moreover, this feeling was increased bythe
existence of the life-time employment security within Nissan. Thus, enterprise loyalty was also considered
to be high. Employees were supposedto
stay all their lives within the same company.
As in the Japanese society, Nissan was a male organisation, which means
that manager positions were offered to males.
However,
due to the partnership, lots of upheavals have been made within the Nissan
organisation. The arrival of C.Ghosn
(CEO of Renault) and his team at the board of Nissan has lead to several
important changes in the whole company.
One of the first actions of Renault was to reduce the horizontal
contacts that Nissan had within its Keiretsu.
Nissan had to get rid of many of its sub-contractors and suppliers; this
will allow Nissan to realise lots of savings.
Nissan’s board has also been reduced to ten members in order to make it faster and more efficient
to make decisions. According to Renault, the board should be limited to a small
number of members. Since the
partnership, is striving to shift Nissan’s approach to a more individualistic
one. Renault hopes to encourage
individual initiatives that were not common with the old system. In addition to encouraging individual
initiatives, Renault is making Nissan’s organisation flatter to ease the
contacts between the top management and their subordinates. Another important change is the introduction
of female managers in Nissan’s management.
Indeed , Renault has sent some of its female managers to occupy
managerial positions within Nissan. This
action has the objective of changing the mind-set of the Japanese managers
about females.
Several
conflicts exist between the two partners.
Firstly, it is clear that for the Japanese employees, the existence of a
family atmosphere within their
organisation is of high importance. For
them, the company is another family.
Yet, for the moment, since the beginning of the partnership and the
entrance of Renault’s managers onto Nissan’s board, the Japanese employees have
been having the feeling of having lost their family atmosphere. They do not feel as comfortable within Nissan
as they used to do. Hence, Renault has not succeeded in keeping this
atmosphere.
Second
there exists a problem of communication between Renault’s top management
Nissan’s. The frustration among Nissan
employees has increased steadily since the deal. They do not
know what Renault really stands for and what its objectives are in its
partnership with Nissan. Moreover, some
managers feel frustrated and opposed to the entry of Renault representatives on
Nissan’s board. These managers are old
timers, and for them, individual initiatives are not appreciated. For them employees should only promoted
according to their seniority. But this
problem of communication is also caused by the language difference. Even if the official language of the
partnership is English and this can lead to
misunderstandings between French and Japanese employees who are working
together and co-operating.
Third,
Renault shouldgive more attention to Nissan capabilities and include them more
into the decision-making process.
Japanese employees are not familiar enough with the French company and its methods; training and seminars should be implemented
to make it clearer.
Fourth,
the main task for Renault is to create a united culture. This needs to have a common language, which
is English. It is important that all the
managers and most of the employees know English, to avoid discrimination by the
language and frustration among the non-English speaking employees.
QUESTIONS
*1. What problems did the partnership
bring to the partnering companies?
* 2. What strategies do you suggest
to Renault make the deal successful.
* 3. Recollect the conversation cited
in the beginning of this chapter. Do you
think Mihir Desai would support the partnership between Renault and Nissan?
Why or why not?
International Marketing Marks:100
NOTE:
v ATTEND ANY FOUR CASE
STUDIES
v ALL CASE STUDIES CARRY
EQUAL MARKS
CASE-01: Asian
Paints: Decorating the World
CASE-02:
Biocon India Ltd.
CASE-03:
Indus Fila – Success Story
CASE-04:
Cognizant Technologies
CASE-05:
Tatas Acquire Corus: Building Global Mind Share
CASE-01: Asian
Paints: Decorating the World
THE NEED TO
GLOBALISE
The world has become a smaller place
but a bigger market. Globalization has exposed the Indian consumer to global
trends, and technology is seen to be the critical edge for competitiveness and
survival. This made it imperative for Indian companies to expand their
horizons.
This was when Asian
Paints decided, way back in the late 70’s, that they need to break their
shackles and step into new geographies. It al started with their first green
field venture in Fiji in 1978. Tasting success there they spread their wings to
Tonga in 1982 and Nepal in 1983 and from there on, today, they are present in
23 countries with a total of 29 manufacturing facilities. Their international
business changed from managing a group of 350 people in a few countries to a
workforce of over 1,350 across the world. Earlier, they did about Rs. 75 crores
business outside India, but now their global sales are over Rs. 500 crores with
their Indian business worth Rs. 1,742 crore in sales.
There were huge
opportunities and tremendous learning, but the risks were also involved. They
had to get their strategy right depending right depending on their competence.
And today, looking back they can say that they have grazed on greener pastures
and are looking forward to consolidating growth in these markets and to newer
opportunities.
In 1998, they aspired to
be in the league of the top 10 decorative coating companies in the world, which
they have achieved today. Marching ahead, their vision is to become one of the
top five. This is a huge task, but they believed that they will achieve this by
leveraging their expertise in the emerging markets of the world.
EMERGING
MARKETS FOCUS
Their concentration has
been on high growth in emerging markets across the globe and that had been the
growth strategy. Their clear focus on emerging markets was because of the following
market characteristics:
They
are the fastest growing paint market in the world.
They
have low per capita paint consumption.
Most
paint multi-nationals do not operate in these markets.
The
Management of supply chain is critical, as the retail is not consolidated,
which is an area of strength.
There
is vast potential to upgrade the consumers in the value chain.
They believe in al local
manufacturing-led strategy and follow the same across all their overseas
operations. They have plants in each operating country, as it is important for
them to localize our products as per the consumer requirements in that country.
The idea is about keeping pace with technological and product advancements and
adapting them to their operations. The key was to think regional and act local.
ACQUISITIONS
After the formative years from Fiji
in 1978, then a few years later to Tonga and Nepal, they spread their wings
further with their first acquisition of Delmege Forsyth & Co, the second
largest paint company in Sri Lanka in October 1999. The Oman and Mauritius
plants were commissioned in 2000 and this was followed by the acquisition of
Pacific Paints in Australia in November 2000. Pacific Paints was a respected
brand and had good recall among the trade and retail segment. The company had
carved a niche in the Brisbane market and this acquisition was to create
synergy with their existing operations in Australia. Australian operations were
a learning model for few product lines in a developed country. It was the only
developed market that they tested and they fell flat there.
Moving ahead, they
acquired Hawcoplast Chemicals Ltd in India. It was the pioneer in powder
coatings and was the third largest player in this market, which is one of the
fastest growing segments in industrial coatings. The Bangladesh operations
began in August 2002 with their largest greenfield venture. Then came the big
acquisitions. Asian Paints acquired SCIB Chemical SAE Egypt, the fifth largest
paint company in Egypt in August 2002 and then went on to acquire a controlling
stake in Berger International Ltd (BIL), Singapore in September 2002.
Established in 1760, Berger is one of the oldest brands National the paints
industry worldwide and enjoys high recall across many countries in the world.
Listed on the Singapore stock exchange, BIL gave them access to 11 countries,
which according to their focus mostly in emerging markets.
Most of their loss-making
units started yielding returns now. They expect the contribution from these
units to increase significantly for the financial year 2004. They have also
successfully turned around the loss making Berger International, their biggest
acquisition.
In terms of sales,
international operations will contribute around 20% of net sales for the Asian
Paints group. Berger International would contribute around 65% revenues of
international operations of Asian Paints. They had access to the Berger brand
in more than 70 countries, and the fact is that Berger has the potential to be
much bigger and stronger than Asian Paints. Naturally, they will leverage the
Berger brand equity and combined with Asian Paints’ expertise in technology and
marketing, that will be a potent combination.
CHALLENGES
One major challenge in
going global is integration. Essentially their outlook towards integration has
been two-fold. The first aspect is intellectual integration and the second
aspect is emotional integration. They now had to deal with brands, new people
and new customers and most importantly bring in complete integration. People come
from different backgrounds, different cultures and different languages. How
does one tackle people issues? It’s an ongoing process.
On the integration front,
soon after the acquisition of Berger International and other companies, they
initiated the process of systematically registering all intellectual property
like logos, trademarks and designs. The brand “Berger” is powerful and well
recognized across the world, and leveraging the value of the brand across
geographies was the key aspect.
Asian Paints’ Global Presence
|
Regions
|
Countries
|
Operating Company
|
|
South Pacific
|
Australia, Fiji, Solomon Islands,
Samoa, Tonga, Vanuatu
|
Berger International and its
subsidiaries
|
|
South East Asia
|
China, Malaysia, Myanmar,
Singapore, Thailand
|
Berger International and its
subsidiaries
|
|
South Asia
|
India, Bangladesh, Nepal, Sri
Lanka
|
Asian Paints and its subsidiaries
|
|
West Asia
|
Bahrain, UAE, Oman
|
Berger International and its
subsidiaries Asian Paints and its subsidiaries
|
|
Caribbean
|
Barbados, Jamaica, Trinidad and
Tobago
|
Berger International and its
subsidiaries
|
|
Africa
|
Egypt Mauritius
|
SCIB Asian Paints and its
subsidiaries
|
On most counts Asian Paints
processes were far superior and Berger had the advantage of adopting the best
practices of one company into another.
On the integration front,
the other crucial area was technology. In order to succeed in international
markets, Asian Paints instituted new Technology Centres for each region and
Lead Technology Centres for each product line. They had created free flow of
information across companies.
Emotional integration was
also very critical. You can't go into a company and be seen only emphasizing
technology and intellectual integration because while there are brands, there
are also customers and employees. Soon after the acquisition, they addressed
the emotional issues; they reached out to people and made an effort to convince
them that they were committed to growing the business, and servicing the
customers. And that their commitment was essential.
To address these
integration issues, they held a global managers’ conference early 2003, which
was attended by Senior Managers and Unit Heads from 23 countries. When
individuals realize they face the same problems as others, they start
exchanging ideas. Out of this forum emerged a spirit of sharing problems and
solutions, a feeling of belonging to a group that is present in various markets
and the collective benefits such a group can bring.
AN INDIAN
MNC
Everyone had lot of
questions about what Asian Paints is, what it stands for, what is expected of
them. Suddenly, we realize we are a multinational and responsible for managing
the careers of our people. Earlier, Asian Paints was not a multinational in
that sense. Can an Indian company become an MNC? There are so few role models.
People need a sense of
belonging and the company had initiated various processes to ensure that it
happens smoothly. The company (Asian Paints) defined four guiding principles
for business and success: responsibility, entrepreneurship, continuous
improvement and trust. These four values determine their actions in all
markets: those in which they are leaders and others in which they have
aspiration to grow. All these four values are sacrosanct and the true
representation of what Asian Paints would like to stand for.
Another issue they had to
tackle to operate in foreign markets is that they needed people who speak the
local language and understand the culture. They provide a lot of expertise and
have built a whole function in India, which provides only back office support.
They have various councils of experts who go and share their expertise with the
units. The supply chain is critical and that’s the biggest strength of Asian
Paints. They wanted to leverage their supply chain capabilities across their
international subsidiaries, so that they can reap the benefits like in their
Indian operations.
The challenges are indeed
many. The following problems will be encountered and have to be taken head on
to end up successful.
Manpower:
Integration of cultures, emotions;
Institutionalization
of processes/ systems;
Marketing:
Understanding the competition, consumer and the channel in each country;
Technology:
Regional centres to support 1,400 products within the group;
Supply
Chain Management;
Systems:
To drive operational efficiencies;
Intellectual
integration: Registering logos, trademarks and designs;
Managing
new customers and investors;
Managing
currency risks / fluctuation;
To sum up, each market is different
and needs a different strategy, and organizations must align products /
customer offerings in each market. Acquisition is a preferred mode as it
provides brands, distribution channels and to an extent, a competitive
advantage. For acquisition to be successful, people-related and cultural
factors are crucial. Localization of talent is essential and the speed of
integration and sharing of best practices is necessary to succeed. Early
success is important to keep people motivated and for the processes to roll on.
Ultimately, communication is very important.
Markets internationally
are more developed and the per capita consumption in India is comparatively
lower than other emerging and developed countries. This translates into
opportunities for Asian Paints that they are looking at.
Questions
1.
Discuss
the challenges faced by Asian Paints during the process of globalization.
2.
“Leveraging
the supply chain across the international subsidiaries would yield best results
for the company” Comment.
3.
Do
you think that globalization needs innovation in technology or HR processes?
Critically analyze.
4.
How
important is local manufacturing for an international marketer?
CASE-02: Biocon
India Ltd.
In the year 1978, Biocon India Ltd,
started by extracting two enzymes – papain & isinglass – from papaya &
catfish. Their Research &Development team knew nothing absolutely about
designing of the manufacturing plant. The fermenter’s first blueprint was
prepared in 1989. Today, after nearly three decades of its existence, the top
management was wondering where the company’s future would take them. Some
issues related to new developments in related fields like genetic engineering,
with its accompanying ethical questions, and growth opportunities in various
other product lines, were occupying their minds.
Background: Ms. Kiran Mazumdar Shaw
started Biocon in the year 1978 but until 1998 it was under the clutches of
Unilever. Year 1998 was a crucial year for Biocon. It got freedom from Unilever
& it was in this year Mr. John Shaw married Kiran Mazumdar & joined the
Biocon management team. The two events were more than a coincidence. Mr. Shaw
with his wide experience helped Mazumdar buy Unilever’s share in the company.
The company: Who has not heard about
Kiran Mazumdar Shaw & Biocon in the small track off Hosur Road? Ask about
Biocon and anybody will show you the way to the factory, which is situated just
1.5 kilometers from Electronics City. And about 3 kilometers away from
Electronics City is Glenmore, the residence of Kiran Mazumdar Shaw & John
Shaw. Everything is large in their house. It is about 18,000 sq.ft. The living
room, the dining room, the bedrooms, and everything else give a feeling of
immensity.
The Biocon Group had
earned Rs. 130 crores during January to June 2002 & planned to increase the
revenue to Rs. 200 crore by the end of December 2002. The vital statistics
mentioned in Table 1 show its plans for the future. Biocon isn't easy to
comprehend either. Is it an enzyme company, a biotech company or a
pharmaceutical company? For the world, it is mainly known as the largest
biotech company in India, but at least 60% of its turnover is earned from
pharmaceutical products. We can consider it as a biotech – turned
pharmaceutical company, but it is turning full circle again.
Table 1 : The Vital
Statistics
|
THE VITAL STATISTICS
|
|
Net revenues
|
Rs. 180 crore in 2001-2002
|
|
No. of employees
|
750
|
|
No. of scientists
|
250
|
|
No. of Ph.Ds
|
45
|
|
Recent investments
|
Rs. 150 crore (since 1998), mainly
in manufacturing
|
|
Investment planned
|
Rs. 150 crore over the next three
years
|
Apart from this also has a contract
research subsidiary, Syngene. And a clinical research subsidiary called
Clinigene. Since inception in 1978 it has added to its group many smaller
wings. Table 2 describes the evolution & developmental history of Biocon in
brief.
Table 1 : The History of Biocon
Group
|
THE HISTORY OF BIOCON GROUP
|
|
1978
|
Biocon India, a JV with
Biochemicals, Ireland, starts making enzymes
|
|
1984
|
Biocon begins R&D on
fermentation
|
|
1990
|
Biochemizymes formed as JV with
Unilever to make fungal enzymes
|
|
1991
|
First in-house designed
manufacturing facility commissioned
|
|
1994
|
Mazumdar-Shaw forms Syngene for
contract research
|
|
1996
|
Biocon Quest is formed to make
enzymes
|
|
1998
|
Helix is formed to make
pharmaceutical products
|
|
1999
|
All companies merged under the
Biocon Group
|
|
2000
|
Plafractor commissioned; Clinigene
is formed
|
TECHNOLOGY
LEADERSHIP
In 1978, Biocon had begun by
extracting two enzymes namely papain & isinglass – from papaya &
catfish. In the 80s, it started Research & Development to manufacture
enzymes through fermentation. It focused on the difficult art of solid state
fermentation. During that period only the Japanese were well-versed in the
technology of solid state fermentation. The company started from scratch as
they were unaware about this technology. Fermentation companies do not grapple
with solid state as it is difficult to contain and control. Submerged or liquid
fermentation is more popular because it is easy to contain and control. But the
more attractive point here is the solid state fermentation is a very lucrative
business, in other words it yields more money than liquid fermentation. In
fact, the yield is at least 20 times more. But, some micro-organism like fungi
grow well in the solid state fermentation; with the result Biocon had no other
choice but to learn solid state fermentation.
LAUNCH
& CUSTOMER SUPPORT
After this learning process, the
company went a step further to design a new reactor that had some very useful
features. The reactor could be mixed well when there fermentation was going on,
apart from adding and taking out of the things without disturbing the
fermentation process, which would consume less energy thereby. Biocon called
this novel reactor the Plafractor, which has got the US patent too. According
to Mr. R.A. Mashelkar, Council of Scientific & Industrial Research Director
– General, “I have not seen anybody equal the creativity of Biocon’s
solid-state fermentation”.
Mazumdar Shaw pauses
before entering another space. She begins a business slowly, after testing the
waters first & expands research company, was started by her. Syngene was
expected to earn its funds by itself and expected not to borrow funds from
other group companies. For the initial 4 years it went on a slow pace, but took
off in 1998. In the year 2001 it earned Rs. 14 crores; in 2002, it earned Rs.
13 crores in the first six months. Syngene now has more than 200 employees, a
mix of chemists and biologists. The company soon found unique ways to blend
chemistry and fermentation.
Biocon began with
Lovostatin in 1997 in countries like Canada & Mexico, & regions like
East Europe and South East Asia. Merck’s patent on this drug expired in 2001,
which made Biocon enter other countries too. It followed the product with other
statins like Simvastatin, Provastatin, Atorvastatin, etc. According to
Director, Dresdner Kleinwort Capital, “The statins market will be rich enough
for Biocon for the next ten years”.
Biocon extends
friendliness to its customers. It may have learned a thing or two from IT
companies no doubt. It sells a product as well as service. According to Mr.
Ramesh Bamzai, VP Marketing, “We do not just provide the customer with a
product. We also provide information on the market, a strategy, a future”.
According to the M.D. of Harvest Gold Foods, a Delhi based company that buys
enzymes and emulsifiers from Biocon “Only Biocon works with the customer to
reduce costs.”
HUMAN
RESOURCES
For a company like
Biocon, employee retention is not a big deal, and some of its employees are
here for more than one to two decades. What makes them think that they cannot
work for any other company except Biocon? For instance, though Biocon
Biochemicals had trained Mazumdar Shaw intensely, Biocon had no R&D of its
own. In the early 80’s, Mazumdar had met an enthusiastic student, Shrikumar
Suryanarayan, from the IIT Madras. He wanted to buy enzymes form her for his
project. She gave him the enzymes free. Two years later, the same guy came back
to her after completing his M.Tech from IIT-Delhi. He had offers from US
Universities for a Ph.D and wanted her to help him choose. But she had a
different idea in her mind. She told him to do his research in Biocon &
start a R&D center for her & he agreed. Now he is the head of the
R&D centre at Biocon. Likewise, many other employees like Arun
Chandavarkar, a doctorate from Massachusetts Institute of Technology, US.
Chandavarkar’s father had worked for Hindustan Lever and was expected to accept
an offer from Unilever. But Chandavarkar joined Biocon, where he still heads
the manufacturing department. Similarly Ajay Bharadwaj, who heads marketing,
came from Max India with a salary cut. He is here since 17 years.
At Biocon, their unique
work culture reflects a strong partnership between the company and their
employees. They have created a work environment that enables them to work hard,
work together and share rewards. True to their central belief that “employees
are their most valuable assets”, they provide many benefits like
Annual
health checks for all employees and their families.
Online
medical support in case of accidents.
Round-the-clock
transportation facilities.
A
well-equipped daycare center for employee children.
A
spacious and efficient cafeteria.
A
highly conductive and enabling work atmosphere.
A
well-designed, green, eco-friendly campus.
A
safe working environment.
Dr. Nirupa Bareja, Head HR, is a
doctorate in marine biology who joined the company 13 years ago. Likewise, Mr.
Murali Krishnan, President of Biocon Group Finance, was helping out Biocon in
1981 when he was studying to become a CA. He joined the company soon and did
not finish his CA degree. Tara Jayaram is another old hand who is the head of
Quality who is serving the company since 15 years. That people rarely live
Biocon once they join can be inferred from this. According to Dr. Bareja, “I
can't think of working for another company. It’s either Biocon or nowhere”.
Says Mr. John Shaw “I have never seen a company with such an open culture”. Mr.
Shaw has worked for many MNCs around the globe; he compares Biocon’s open
culture to any other company’s culture. He finds a wide difference in both the
company’s structure as well as culture.
CURRENT
ISSUES
Biocon, however, needs a passage to
biology as much as chemistry. It’s aiming to make a major foray into
biologicals. These are compounds derived from biological sources rather than
through chemical synthesis. The first product is human insulin, apart from
other products that are in pipeline namely streptokinase, monoclonal anti-bodies
& so on. Biocon is betting on them so heavily that the management expects
the turnover from the biologicals to be bigger than from the pharmaceutical
products in a few years.
Making a genetically
engineered (as most biologicals are) bio-pharmaceutical product needs some
molecular biology skills. You need to develop what is known as a clone, a
mircoorganism that has the transplanted gene for the particular product.
Developing this clone, which must produce the product in sufficient quantities,
is one of the most difficult tasks. Then one has to see that the technology can
be scaled in a manufacturing facility. After it is manufactured, the product
has to be purified, which is a very challenging and difficult task, as protein
fall apart at the slightest provocation.
Patents are necessary to
sell even in the generic market. You need an economical and non-infringing
route. But the Plafractor patent was still special. It enables Biocon to make
the statins, immuno-suppressants like mycophanolate mofitil, industrial enzymes
and many other products at a competitive price. If other firms in the world
want to make any product via solid state fermentation at high efficiencies,
Biocon’s patent is likely to come into play. The chance of royalties for Biocon
is not slim, but Biocon wants to exploit the technology on its own first.
The company has to
clearly articulate its priorities for growth and sustenance in the next few
decades. Increasing globalization would mean tougher competition from countries
and companies that are equally ambitious.
Questions
1.
Discuss
the statement “In the market for biotech products, patents are very important
in preserving competitive advantage”.
2.
Learning
the “solid state fermentation” technology made Biocon stronger in the Global
market – Discuss.
3.
Can
India develop as a global hub for biotech in the next twenty years?
4.
“Retention
of professionals in Indian firms is not difficult, given the right
environment”. Can this statement be supported by the case facts?
5.
On
which future product areas should Biocon concentrate?
CASE-03: Indus
Fila – Success Story
Looks can be deceptive. Casually
attired in blue jeans and tees, Nitin Mandhana at first glance, looks just like
any other guy on the street. But allow him a few minutes to articulate his
company’s strategy; you will be convinced that he is a smart business man.
When 39 year old Nitin
Mandhana took over as Managing Director of his traditional, family run textile
company – Indus Fila – in 2004, he was faced with the daunting task of
restructuring the business to compete globally in a post quota regime. He also
realized that huge capital investments in world-class technology and quality
manpower had to be made, if the company was to survive and grow.
Today, he has not only
successfully steered the Bangalore-based company from a turnover of Rs. 16
crore in 2004 to Rs. 250 crore in 2006-2007, but is planning to make the
shareholding broad based by going public. From being a pure domestic company, Indus
Fila now gets 40 percent of its income (about Rs. 100 crore) from exports.
What brought about this
remarkable turnaround? Recalls Mandhana “Ours was a typical family run business
with varied interests. In 2003, after the quota regime was dismantled, we had
to narrow down our focus and decide whether to continue with the textile
business or jump into the booming software industry, as we have a software
company, Indus Infoways.
VERTICAL
INTEGRATION
“Once we decided to focus on the
textile business, the next step was to create a unique selling proposition for
the company and fill in the missing links in the existing business.”
Indus Fila’s success can
be largely attributed to Mandhana’s strategy of veering away from the beaten
track. For instance, while most textile manufacturers concentrated on
production, Mandhana set up a Centre of Excellence (COE) in Nelamangala on the
outskirts of Bangalore for Rs. 30 crore with the intention of reaching out to the global design arena.
The COE can be used by
the design team of global brands such as Nike, Calvin Klein, GAP etc for
developing prototypes of designs, prints, fabric, dyeing, weaving and event the
final garment.
“From product concept and
design to the final garment, the entire gamut of developing the prototype which
normally takes 100 – 108 days can be done in 90 days here. We are looking at
inviting international designers to the COE either on a retainership or on a
profit sharing model,” avers Mandhana.
Another major factor
which contributed to the success story is the company’s foray into a apparel
label manufacturing in 1994, when it entered into a 50 percent Joint Venture
with the Bornemann and Bick, Germany. This partnership resulted in establishing
close rapport with top apparel buyers like Levi’s, Calvin Klein, Nike,
Wal-Mart, JC Penny, GAP, Mexx, etc. “Although we exited the JV by selling our
equity stake to our partner 10 years later; the experience helped us make
significant in-roads into the US and European markets.” “Now, I can pick up the
phone and talk to a customer and figure
out almost instantly whether we can do business with him or not, as I have
one-to-one equations with most of them,” says Mandhana.
Mandhana has also changed
the reporting structure within the organization in order to better service the
company’s 20 odd customers. In his words, “Rather than operating with the
popular pyramid type, hierarchical marketing structure, which collapses if the
top guy is missing, we have broken up the entire team into smaller teams of 2-3
people each, who are assigned to 2-3 customers. This has helped us improve our
focus, deliverables and attention to customer needs, resulting in better
service to our customers.” He has also hired the best of expatriate talent to
man his plants.
VISION
Currently employing 4,000 people,
Indus Fila envisages “being a dominant player in fashion textiles and apparel
by focusing on product innovation, design leadership and superior service.” A
major step toward this vision was the acquisition of a textile unit at
Nanjangud, at a gross cost of Rs. 110 crore from M/s. Sai Lakshmi Industries
promoted by the Sainath Group of Indonesia which was set up to cater to the
apparel industry. Says Mandhana, “The Nanjangud plant with its world-class
machinery from Germany, Switzerland, Israel (inspection machine with 21
in-built cameras) provided the missing LINK to our business, providing us with
the kind of technology we did not have.”
Indus Fila is vertically
integrated company today, engaged in yarn dyeing, fabric weaving, fabric
processing and apparel manufacturing. As fabrics, which is 65 percent of the
cost component of a garment, comes from the company’s own production facility,
it has a greater cost advantage compared to those who buy fabric.
STRONG
FINANCIALS
In the current financial year ending
March 2007, Indus Fila is well on its way to achieve a turnover of Rs. 250
crore – a huge jump from last year: Company’s operational income and profit
after tax (PAT) for the year ended 31st March, 2006 was Rs. 82.49 crore and Rs.
5.49 crores and for the half year ended 30th September, 2006 it was Rs. 109.18
crore and Rs. 10.63 crore respectively.
In order to increase
capacities in yarn dyeing, weaving, processing and garmenting the company plans
to invest close to Rs. 166.24 crore. To part finance this expansion project,
Indus Fila proposes to enter the capital market with an IPO of 48 lakh equity
shares of Rs. 10 each and has accordingly filed its Draft Herring Prospectus
with SEBI.
TAILORING
GROWTH
Says Mandhana, “Our production
capacity is 60,000 meters of fabric a day which we intend to take upto 110,000
meters. A good 80% of the fabric we produce finds its way toward manufacture of
apparel of which we use 23% and the balance is sold to exporters like Gokuldas
Exports.
From manufacturing 20,000
garments a day we are targeting 50,000 garments a day (shirts/tops/jackets).
Our first plant for manufacturing bottoms (skirts/trousers/shorts/capris) will
be up and running in Peenya by end January.
We are opening an apparel
expansion unit (tops and bottoms) near Hindupur, Andhra Pradesh shortly at an
investment of Rs. 40 crore which will provide employment to around 4,800
people. Another Apparel (tops) unit of ours in Peenya, which employs 2,000
employees, will now house a trouser unit with 1,500 machines. When both
Hindupur and Peenya units start working at full capacity, we will be producing
seven million pieces a year.”
Indus Fila has positioned
itself as a multi-product, multi-fiber and multi-market player, ensuring that
its target market is a diverse mix of the domestic fabrics market, garment
export and international market (fabrics exports).
Questions
1.
Focus
is the key to success in International Markets. Do you agree? Why or why not?
2.
Suggest
some strategies for Indus Fila in the local market. Is there any link between
domestic and international growth?
3.
What
are the prominent issues that might challenge Indus Fila in a couple of decades
from now?
4.
Which
new strategies should the company frame for future growth?
5.
Do
Joint Venture bring about growth? Discuss with reference to the case facts.
CASE-04: Cognizant
Technologies
Cognizant Technology, in March 2007,
became the second company in the country, after Infosys Technologies, to ring
the NASDAQ opening bell. This IT services competitor has become the fourth
largest in the industry, in just 12 years.
THE COMPANY
It also tied to the elite billion
dollar league when its sales crossed the $1 billion score in June 2006.
Cognizant achieved this just 2 months after Satyam Computer Services, from
which it was spun off as an independent company in 1996, which is a remarkable
achievement. Its income in the last 15 quarters had been increasing time and
again between 50-65% with corresponding profit and growth.
The company’s stock
prices have amplified a 100 times over, after it was listed on the NASDAQ in
1998 & its market value has increased from $100 million in 1998 to over $12
billion presently. Surprisingly, Cognizant is widely held, with 95% of the
company’s equity being held by small and large share holders. Apart from this,
Cognizant was the first offshore IT services company to be listed to the NASDAQ
– 100 Index in December 2004, along with the marquee league of companies like
Microsoft, Yahoo, Amazon, Dell & Starbucks. Cognizant was also chosen to
join S & P 500 Index, which had the listings of all major 500 top companies
across major industries of the US economy in November 2006.
AIMING FOR
THE SKIES
The company not satisfied with its
success, has now set its sight on the $2 billion mark and aims to hire 17,000
more people in the year 2007. To accommodate the intake of 30,000 new entrants,
the company is spending $200 million over the next two years. It has 40,000
plus employees internationally of which 30,000 are from its Indian centers
viz., Chennai, Pune, Bangalore, Kolkata, Coimbatore and Cochin. With its
excellent track record until now, will the company be able to uphold its
present growth?
Fascinatingly, nearly 96%
of Cognizant’s income of $1.424 billion in 2006 were from repeat business, from
its 400 consumers. Sufficient evidence shows that its customers are a contented
group. Unlike other IT companies, Cognizant has no liability load and is
proudly seated on cash and short-term investment of $648 million until December
2006. One important question is – How did Cognizant achieve so much in a
relatively short time? According to Mr. Lakshmi Narayanan, Vice Chairman, “We
adopted a hybrid business model, very different from other IT services
companies, right from day one”. What began as a locked support of Dun &
Bradstreet Corporation in a dual endeavour with Satyam Computer Services (Dun
& Bradstreet Satyam Software) from 1994-96 to service Dun & Bradstreet
Group of companies, blossomed into Cognizant Technology Solutions after the
minority share from Satyam was bought out in 1996. Once this took place, the
company assumed a hybrid business model, which was distinct during the period.
HYBRID
MODEL
Primarily, the headquarters was
changed to New Jersey, which helped in creating a front end in the US with the
CEO, CFO & COO based there & the backend in India with the Vice
Chairman, President & MD based here. While, the chiefs of business units
with years of area of proficiency operated out of the US, which facilitated
them to network intimately and fabricate dealings with customers there, the
delivery management was executed from India.
According to Mr. Lakshmi
Narayanan “Being close to the market we serve, gave us a head start in
identifying future market trends. For instance, we knew there was going to be
an evolution in the BPO business and consciously sat out the cost arbitrage BPO
phase. Thereafter, we got into the high end BPO business, which requires deep
domain expertise, just 3 years ago.”
Turning away from the
trodden path, Cognizant decided to offer consultancy services to customers by
providing way out to business problems rather than projecting their technology
skill sets, which paid off.
Out of its many
customers, 87 strategic customers who contributed the most to the firm’s
revenue were attended by key account managers with field specialization in
respect of the customers’ businesses. When many Indian IT companies were listed
in the domestic market, Cognizant got listed on the NASDAQ in 1998. To have
higher customer visibility in the markets they were providing services, this
was a deliberate choice. As soon as it got listed on the NASDAQ, the company
made a strategic resolution to supervise the operating margins at around of
19-20% and reinvest anything in excess of it back into the businesses for
differentiation, growth and leadership. Even when many IT companies set up shop
in Bangalore, Cognizant based themselves in Chennai, which was the abode to
some of the top engineering talent, where close to 90,000 engineers graduate
every year.
Until 2003, the company
passionately targeted on applications outsourcing for its four verticals –
BFSI, Healthcare & Pharma, Manufacturing & Retail, Telecom / Media
& Entertainment, which put in 48%, 25%, 14% & 13% to revenue respectively.
STRATEGIC
INTENT
According to Mr. Lakshmi Narayanan,
“We are now increasing our verticals by subdividing them into further
specialized areas. Once we create greater depth in those specialised areas,
they will be spun off into independent verticals. For instance, within the BFSI
vertical, we will create sub-verticals
like payment solutions. We are also adding more solutions to the same vertical,
like in Healthcare; we are adding new services driven by technology, eg.
electronic record systems for patients”.
According to Mr. Franciso
D'Souza, who took over as President & CEO from Mr. Lakshmi Narayanan in
January 2007, “Our key differentiator is customer-centricity.” Further he also
felt that Cognizant has developed from strength to strength mainly based on the
customer familiarity, where they continue to treat us as faithful advisors and
thought leaders, whenever they bump into a different circumstance in their
businesses.
DRIVERS OF
GROWTH
Mr. D'Souza thinks that, in order to
move upwards, the growth drivers for the company are, to inflate its geographic
footprint (particularly in Europe), to sum up innovative service line
capacities and to get industry experience (new or existing). Mr. D'Souza said
that “In terms of our overall geographic footprint, in the long-term, India and
China are the only two geographies that have the potential to scale up to tens
of thousands of people to become large scale global delivery centres, serving
customers worldwide. We already have a 300 strong team working out of China,
which has the potential to grow into a huge team in the next 5 years. Although
Europe contributes just 13% to Cognizant’s revenue, its year on year growth in
revenue for the quarter ended December 2006 was as high as 98%.
The company’s Tier II
centers, in Toronto & Latin America, are local in nature and are in the
vicinity of the US market. The company is on the verge of opening a center in
an East European country as well. The third type could be local centers, such
as in Phoenix & Holland which handle work that can't be shifted from these
regions, opines Mr. Franciso D'Souza, President & CEO.
To toughen and augment
new services capabilities Cognizant acquired, Boston based IT infrastructure
services company, Aimnet for $15 million in September 2006. It purchased Pune
based, niche SAP company, Ygyan Consulting for $3 million three years back.
Similarly, it purchased Chicago based, Telecom Consulting company, Fathom
Solutions for $19 million in April 2005. According to Mr. Franciso, “We do not
make acquisitions with growth or revenue in mind, our strategy is to look for
acquisitions to expand our geographic footprint, to add service line
capabilities and to acquire industry expertise”. Cognizant obtained industry
know-how soon after they hired from the industry verticals it catered to and
refining the basic knowledge with further innovations and certification.
Now the important
question is whether Cognizant really has what it takes to emerge as one of the
top three contenders in the IT service space? According to Mr. Lakshmi
Narayanan “It’s a continuous process and we are working at it. We have moved
from customer satisfaction to customer advocacy”. Presently nearly 15% of its
customers are in the advocacy stage, advocating Cognizant to others. The
attrition rate is stable at 14-15% and the company attempts to continuously
upgrade the professional skills of their people.
Questions
1.
Cognizant
adopted good segmentation and positioning strategies to achieve their targets.
Comment.
2.
“Adopting
a hybrid business model would enhance the growth of the company”. How do you
support this statement?
3.
“Are
growth drivers similar for all companies? Substantiate your arguments in
relation to the case facts.
4.
What
could be the company’s status 10 years down the line, if the strategies are
same as at present.
5.
Is
it a good strategy to create new verticals as soon as critical mass achieved?
Argue for or against.
CASE-05: Tatas
Acquire Corus: Building Global Mind Share
Tata Steel, a ninety-nine year old
Steel Company, has acquired Corus, a UK-based company, which is the largest
ever acquisition made by an Indian company. Tata Steel acquired the entire
equity capital of Corus at US $12 billion, at a final bid price of 608 pence a
share. CSN, the Brazilian rival, had bid 590 pence. This acquisition has
elevated Tata Steel to the position of the 5th largest steel maker in the
world, by adding 18.2 million tonnes to its present capacity of 5 million
tonnes.
According to Mr. Ratan
Tata, soon-to-be Chairman of Corus, “This is a landmark transaction in the
global steel industry and for us in India, a very important moment”. According
to Mr. Muthuraman, Managing Director, Tata Steel, this entity of Tata Steel
& Corus would be recognized all over the world as it is increasingly consolidating.
TABLE 1 : The New
Steel Giants
|
Rank
|
Company
|
Country
|
(in million tonnes) Annual Output
|
|
1
|
Arcelor-Mittal
|
Luxembourg
|
109.7
|
|
2
|
Nippon Steel
|
Japan
|
32
|
|
3
|
Posco
|
South Korea
|
30.5
|
|
4
|
JFE
|
Japan
|
29.9
|
|
5
|
Tata-Corus
|
India
|
23.5
|
|
6
|
Baosteel
|
China
|
22.7
|
|
7
|
US Steel
|
USA
|
19.3
|
|
8
|
Nucor
|
USA
|
18.4
|
|
9
|
Riva
|
Italy
|
17.5
|
|
10
|
thyssenKrupp
|
Germany
|
16.5
|
Mr. Tata opined that “The two
companies have common values and business philosophy and are complementary in
what they bring together”. Corus will remain an Anglo-Dutch company & its
management will substantially be the same”. This UK-based company was trying to
exploit its technology along with a growing economy and hence was looking
beyond its shores. It had considered Brazil, Russia & India for this
purpose said Mr. James Leng, Chairman of Corus. The Corus team had explored
various business opportunities like joint venture, technology transfer, etc.
but later decided that complete merger was the only good option for the two businesses.
Strategically, this
buyout by Tata Steel would fetch them “new higher end markets and a more
sophisticated customer base”. According to one of the statements from the Tata
Group “The powerful combination of low-cost upstream production in India with
the high-end downstream processing facilities of Corus will improve the
competitiveness of the European operations of Corus significantly”. Tata Steel
access low-cost raw materials and slab for the expanded group and enjoy high
growth in the emerging markets, besides gaining price stability in developed
markets.
Graph
According to Mr. Muthuraman, Tata
Steel, one of the lowest steel producers in the world, hopes that the company’s
turnover would reach $32 billion by 2011. Tata Steel’s plan are to grow from
4-5 million tonnes to 30 million tonnes and eventually to 40 million tonnes by
2011. The company plans to enhance its capacity at Jamshedpur from 5 mt by the
year 2010. Apart from this, the company plans to establish greenfield plants at
Orissa, Jharkhand and Chattisgarh, along with a portfolio and shipping company
being a part of the plans.
Tata was questioned
repeatedly whether this deal was a good one. He has stressed that it was a
worthwhile effort, because Corus was the last big steel maker available and
that producing 18 million tonnes of steel for Tata Steel would have taken many
years of toil. According to Mr. Shashi of IL & FS Investment “The
replacement cost today is very high, hence it is a good move”.
But Corus suffers from a
few drawbacks like lack of access to raw materials (iron ore and coal) &
high labour costs compared to Tata Steel, the lowest cost producers of steel in
the world. Tata will be setting up an integration committee, like they did with
Tetley. The jobs also would be safeguarded. According to Anshukant Taneja of
Standard & Poor, “Business integration is a critical thing now. Access to
raw materials & processes are key. Soon pressure will be high on
consolidation”.
At present, Tata Steel’s
raw material base is large enough to meet its requirement at Jamshedpur,
inclusive of expansion plan. The other expansion plans would depend on securing
access to iron blocks from the respective state governments, which puts a
question mark on low cost raw material to Corus. Tatas were against exporting
iron ore from India, & they never wanted to revisit the revenue. This would
leave them to process only low cost slabs shipped from India, at Corus plants,
which would be happening only a few years from now. Due to its paucity of
resources, Tata Steel needs to work on speeding up its expansion projects,
whether it is ore or slab that would be supplied to Europe.
Funding: Regarding the funding
structure, the Tatas need to decide on their strategies – total considerations
to Corus shareholders would be about $7.6 billion, including the pension
liabilities. Majority of this would be a Tata Steel UK books. Apart from this,
Tata Steel will infuse atleast $2 billion into Tata Steel Asia and the rest of
$1.8 billion will be from equity, thus affecting price earnings.
On one side the
acquisition would give a global scale to Tata Steel, on the otherhand it has an
aggressive expansion at home. According to the analysts, Tata Steel should
bridge additional funding either from asset depreciation range system or
through global depository receipts, which would depress the stock prices in the
short-term. To make Corus viable & the benefit to be shown on Tata Steel
profits, it would take minimum 3 to 4 years.
Stock Market
Reaction:
Due to concerns about funding, the stock markets gave a thumbs down for the
deal. Due to the counter bid by CSN, hoping that Tata might back out &
avoid further pressure on finances, the stock allied after the counter bid by
CSN. But when such thing never occurred the shareholders started selling out.
But according to an analyst, “At around Rs. 450, the company is a great buy if
you are willing to wait for three years”. And once the profits accrue to Tata
Steel, it would undergo a re-rating in price / earning & then the size
discount would also go up. Even though the present acquisition price at $710
per tonne looks over-valued brokerage SSKI has put a buy a Tata Steel for its
globally competitive cost structure, increased proportion of value-added
products, increasing share of branded product sales and very strong pipeline of
growth projects. Ratan Tata with his soaring ambitions and giant stride, won
hands down.
Questions
1.
Can
you cite any other examples of similar buyouts by an Indian company? Any other
country’s company?
2.
List
3 major advantage of this deal to Tata Steel.
3.
What
are the possible threats because of this deal?
4.
Do
you think this deal will inspire other Indian business houses or companies? Why
or why not?
