A Strategic Analysis of the Proposed Takeover - Term Paper Example

Strategic Analysis: Tata Takeover of Jaguar Land Rover This paper is a strategic analysis of the proposed takeover by Tata of Jaguar Land Rover (JLR). This case is very interesting because it involves three companies in three continents: Tata, the buyer, is an Indian conglomerate; JLR is an English company currently owned and being sold by Ford Motor Corporation, which is American. The event involves four well-known automobile brands: two British luxury icons, an American mass-market automobile brand, and an Asian (Indian) brand known in its region for its presence in a wide range of different industries, not only in mass-market automobiles but also in tea, telecommunications, property, and steel. The paper has three parts. The first part is a strategic analysis of the Tata Group using common strategic analysis tools such as SWOT/PEST, VRIO, and S-C-P (explained below) and explains why Tata is making the strategic decision of buying other companies. The second part analyses the automotive industry, which includes Tata Group’s automotive business, Ford Motor, and JLR. This part would help determine why Tata is buying and why Ford is selling JLR. The third part looks at the strategic fit, which answers the question as to whether Tata, Ford, and JLR are all making the right strategic decisions. Tata Group Brief Overview The Tata Group’s website gives a brief outline of the firm’s history and organisational scope. Founded in the mid-19th century as a textile manufacturer and trading company based in Mumbai, India, the Tata Group includes 98 companies in seven business sectors. At the top are two so-called Promoter companies that own and manage the complex web of firms: (1) Tata Sons, which is the family’s main holding company, and (2) Tata Industries. Each promoter company has two divisions: (1) Tata Sons: (1.1) Financial Services, and (1.2) Quality Management Services (2) Tata Industries: (2.1) Interactive Systems, and (2.2) Strategic Management Group. This structure allows Tata to operate as a global conglomerate in seven business sectors (with examples of types of firms): (1) Materials: steel and composites; (2) Engineering: automotive, construction, manufacturing; (3) Communications and Information Systems: software, telecommunications, industrial automation; (4) Services: hotels, real estate, financial management; (5) Energy: power generation, oil and gas sales; (6) Consumer goods: tea, retail, publishing; and, (7) Chemicals: pigments, chemicals, and pharmaceuticals In 2006, the Tata Group’s total sales grew over 30% to almost $29 billion. It also had profits of $2.8 billion after tax, $26 billion in assets, and over 2.9 million stockholders for 27 publicly-listed companies at the Bombay Stock Exchange. Ranking the business sectors in their contribution to revenues, Engineering is biggest (31% of revenues), followed by Communication (25%), Materials (21%), Services (7%), Energy (6%), and Consumer Goods and Chemicals (5% each). Tata Group exports account for 5.6% of India’s total exports. The market capitalisation of its listed companies makes it the largest business house in India. Its revenues amount to 3.2% of India’s 2006 GDP of $914 billion. Tata Group’s 295,000 employees make it a serious company that can take on and compete in global markets. Strategic Analysis The Tata Group’s mission is to improve the quality of life of its stakeholders – owners, led by the Tata family and shareholders, its employees, customers, suppliers, and the Indian nation – by managing its resources to achieve long-term growth and profitability as a globally competitive organisation. The Tata Group’s mission is reflected in the Tata Core Values of integrity, understanding, excellence, unity, and responsibility. The vision to achieve this mission is to grow aggressively in focused business areas. The latest strategic vision of the Tata Group was developed by Current Chairman and CEO, Sir Ratan N. Tata or RNT, the founder’s grandson, who led the company successfully venture into telecommunications, financial services, oil exploration, and biotechnology. The plan included the professionalisation of management, human resource development, and information technology. An important and relevant part of the plan was the design and production of an automobile priced at 1-lakh (100,000 Rupees or £1,200). Car production, which began in 1998, reached 1 million in 2007. Tata therefore has an over-all strategic growth plan, but is the company delivering a sustainable competitive advantage? The answer becomes clearer after an analysis of the firm’s resources. An internal analysis of Tata Group’s strengths and weaknesses allows an evaluation of the value, rarity, and imitability of resources and whether it has the appropriate organisational structure using the VRIO framework. An external analysis of the opportunities and threats of the Tata Group would be done using the structure-conduct-performance (S-C-P) framework. Using these frameworks allows a better understanding of the firm’s past, present, and future business performance using the SWOT-PEST model to summarise the findings. Strengths: (1) Tata name, success and experience; (2) decisive and leader CEO; (3) global business reach; (4) competent workers from top management to factory floor; (5) investments in research and development, human resources management, and process technologies; (6) strong brand power in India; (7) profitability; (8) Tata Core Values; and, (9) diversification (needs a deeper study on the correlation of the seven business sectors). Weaknesses: (1) high level of risk-taking of management; (2) slow decision-making at several parts of the conglomerate; (3) weak brand image outside India; and (4) potential risks from being in too many businesses that might be similarly affected by the business cycle (e.g., a recession in India could affect several business sectors at the same time, leading to huge losses, in automotive, consumer goods, and services; see Strengths no. 9 above). Opportunities: (1) growing domestic market; (2) India’s high rate of economic growth; (3) growing global market; (4) global economic growth; and (5) its home country is a low-cost production base with a large skilled labour force. Threats: (1) political stability in India; (2) weakening US dollar means lower Rupee revenues, affecting competitiveness of export products; (3) increased competition in several industries inside and outside India; (4) higher petrol prices; and (5) possible global recession. Resources, Integration and Value Chain That Tata’s resources – brand name, assets, experience, people, products and services, etc. – are valuable can be seen from the firm’s increasing profitability despite several of these resources being easy to imitate and not being so rare, such as its people, assets, infrastructure, and long history. There are several business families in India competing with Tata in the same industries. Tata’s profitability is proof of its ability to take advantage of India’s fast pace of economic growth since economic liberalisation in the mid-1990s. However, if Tata is properly structured and employ competent people, it would have a chance to continue being profitable by sustaining its competitive advantage in the sectors where it already has a leading presence. It would also be able to develop its competitive advantage in other sectors where it is either currently absent or unprofitable. Without going into details, the firm’s structure around its seven business sectors with two promoter companies at the top responsible for strategy planning and monitoring provides flexibility to adapt to changes in the business environment. By having CEOs with their own management groups in each of the 98 companies, focus on achieving the Tata Group’s strategic objectives and performance are ensured. The company’s website shows that when subsidiaries are performing poorly as they should, these are sold to create value. Thus, the Tata Group’s value chain is not simply to sell products or services from processed raw materials to mass customers; rather, its value chain consists of companies, either private- or public-owned, that are bought or sold to create shareholder value, by improving its management and increasing its profitability. When the individual company grows in value, Tata Group like any other conglomerate either operates the company to squeeze greater value by increasing sales and cutting down costs or sells the company to the highest bidder so it could buy other companies that are or could be made more profitable. This is basically what it wants to do with its purchase of JLR. This value chain shows several areas of horizontal and vertical integration. For example, Tata makes mobile telephones, owns a telecommunications network, and issues credit cards that customers can use to pay for the mobile phones and their phone bills. It also produces the steel sheets that are used in making motor vehicles. And it can design and build hotels that it owns. This brief historical overview sets the stage for the analysis of the strategic event that is the object of this paper, an example of the strategy to better manage Tata Group’s value chain. The Automotive Industry and the JLR Purchase The impending purchase by Tata Group of JLR could be better understood by looking at the global and Indian automotive industries using a Five-Forces Analysis in the light of Tata Group’s strategic and value chain. Five Forces Analysis The “five forces framework” looks at five threats to the firm: barriers to entry, intensity of rivalry, and the power of substitutes, suppliers, and buyers. These threats affect the firms in the industry, their performance, and how competitors react, helping firms determine the needed strategies to develop competitive advantage. The strategic positioning of Tata Motors is especially considered in each of the five related forces. Barriers to Entry: High. The car industry is capital intensive and, in the case of India, still undergoing a relatively high degree of protection that is beneficial to Tata and its competitors because of their size. The global car industry enjoys an advantage over new rivals like Tata, and the main source of competition are the established brands with their experience and global scope. Tata’s advantage is in its cash flow, low-cost base, and huge domestic market that allow it to maintain leadership at home as it grows in its foreign markets. Intensity of Rivalry: High. Although Tata enjoys an advantage over foreign competitors for mass-market cars, it has a disadvantage in high-end cars because of its lack of experience. Tata is known for its industrial manufacturing expertise, and this is a factor that makes it attractive to labour unions. Its more important business rivals are car companies from Japan, Europe, America, and South Korea. Suppliers: High. Successful car companies have a global supply chain for its thousands of parts. Most of these suppliers are already linked to established major car companies, so for Tata to compete globally, it has to either develop its own supply chain or penetrate the supply chain of its competitors. Tata managers are good at negotiating contracts, so although this may be tough, it would not be much of a problem over time. The problem is: does Tata have time? Substitutes: High. The established car companies are achieving economies of scale that allow them to sell products at more competitive prices. This is a potential problem for Tata, especially if it aims to enter the luxury car market where the established brands have considerable advantage. Another problem is the poor reputation of JLR vehicles under Ford, although as the Economist and Times have recently reported, product quality has been improving. Perhaps, the timing of Tata’s purchase of JLR is just right. Buyers: High. The car industry is also suffering from a supply glut: there are too many of them and so buyers have several options to choose from depending on price and other emotional considerations that affect the car purchasing decision, e.g., image, fuel economy, and after-sales service. Tata has to ensure that it manages well these important aspects of the business so that its products are bought by the right customers. The brand equity of JLR products is still high, despite the disastrous experience under Ford, and if Tata provides the proper management, it could speed up the recovery of JLR as to regain its former glory. Summary: Tata and Mahindra are two Indian automotive companies bidding for JLR, and both enjoy more or less the same competitive advantages. Although Tata has a slight edge in automotive industry experience, Mahindra (a manufacturer of tractors) has quietly entered into joint ventures producing automobiles and SUVs and building a global automobile supply chain. Besides, the British labour unions at JLR have favoured Tata over Mahindra, and although this seems to be important, it does not automatically mean that Ford would sell JLR to Tata. Another important question is why Ford is selling JLR as one package when only Jaguar is losing money whilst Land Rover is profitable. The answer seems to be Ford’s financial problems and its realisation that it has been poor at managing upscale luxury brands. With its flagship brand losing equity and financial losses increasing, Ford is under severe pressure to regain focus in the highly competitive industry and sees JLR as a distraction it could not afford. Strategic Fit: Tata, Ford, and JLR The question why Ford is selling JLR is obvious: Ford needs the cash and the focus to revitalise its ailing car brands. Thus, it bundled two luxury brands into the sale, a losing Jaguar and a profitable Land Rover. This seems to be the only solution it sees to its more important problem so that it does not lose the whole company, whilst making the dual package attractive to the potential buyers. The question of why Tata Group is buying is rather more difficult to answer, although the strategic and five forces analyses provide a hint: Tata sees the purchase as a good fit to its growth strategy; it has the resources and capabilities, and perhaps even a sentimental or historical dimension that links Britain to its former colony, India. The impact of this move could produce benefits that are difficult to quantify, that of a former subject growing up to save its former master. In addition, helping an American automotive icon has tremendous strategic value: Ford could help Tata penetrate the American market in the future. The purchase may not necessarily be good for Tata, more so if Jaguar continues to bleed cash, Land Rover stops being profitable, and JLR customers move to other brands because of quality problems. However, it sends a very powerful message to India’s automotive industry similar to what happened between Japan or Germany and America after the war. This same message allowed luxury car products from Japan and Germany to beat American products in the late 20th century, which is perhaps a similar effect that India wants to achieve, first in Britain, and much later in the rest of the world. Tata wants to capitalise on Ford’s current weakness in its financials brought about by the mistakes of past management. Tata can bring into this deal its long years of experience in manufacturing. At the same time, what is perhaps of highest strategic value for its Tata Motors subsidiary and for the Tata Group in general is the amount of profitability that could be generated from the luxury brands that it is buying. The JLR brands have built-in value in them that would allow Tata to generate higher profits if it brings in its manufacturing and cost management power, its vertically and horizontally integrated processes, its global reach, and its competent management team. Having an exceptional CEO due to retire soon is an added plus, despite the deal’s egocentric undertones. With the purchase of JLR, Tata would enjoy benefits such as the upmarket brand image, advanced R&D technology, access to high-end customers, and in Rover’s case, a very profitable range of products. However, there are also some costs, such as the amounts needed to update JLR’s existing infrastructure, major investments required to develop new products in the future, and costs attached to the pensions of high-cost British workers numbering over 15,000. Should Tata succeed in buying JLR, its biggest benefit would be the upscale image that the wide range of Tata products could begin to enjoy, from its commodity teas to steel products and, more importantly, to its own automotive products that it sells to its huge domestic market. After all, Tata’s biggest market is within its borders and right next door (China). JLR’s purchase would change the company’s image from a producer of cheap cars to a designer of high-end products. The potential profits from selling to customers in two of the fastest-growing markets in the world – India and China – and learning important lessons from the experience are two important opportunities that Tata Group and Tata Motors find highly attractive and that fit its business purpose, its vision, and its resource capabilities. Tata can do it; the benefits seem to outweigh the costs, so Tata should go ahead and buy JLR. Bibliography Buckley, C. (2007, November 24) “Unions back Tata as lesser of two evils in sale of luxury marques.” London: The Times. Economist (2007, November 22) “Not for the faint-hearted: Why Tata Motors is favourite to buy Jaguar and Land Rover.” London: The Economist. O’Connell, D. (2007, November 25) “Tata in home straight for Jaguar and Land Rover.” London: The Sunday Times. Tata Group (2007) Corporate website. [Online]. Available from: http:///www.tata.com [3 January 2008]. Wharton School (2007) “Tiger by the tail: The Tatas are closing in on Jaguar and Land Rover.” IndiaKnowledge@Wharton. Pennsylvania: Wharton School. Figures Figure 1: Tata Group Human Resources Distribution (2006) Source: Tata Group website (2007) Figure 2: Tata Group Sales (2006) Source: Tata Group website (2007) Figure 3: Tata Group International Sales (2006) Source: Tata Group website (2007) Read More