Enterprise Risk Management - Tata Motors Limited - Case Study Example

ENTERPRISE RISK MANAGEMENT Every corporate business has a clear set of business aims and objectives. The major goal of every corporate enterprise in every industry is to maximize profits and provide high levels of satisfaction desired by their customers. Profit maximization comes with a huge task of having to monitor the costs and risks involved in the production process. Most manufacturing firms have established systems and mechanisms of assessing the risks they face to mitigate loss. Tata motor Company has to apply sound risk management strategies to maintain a profitable streak, remain competitive, and take the edge off negative potential outcomes to the organization as well. Tata Motors limited is the biggest automotive corporation in India. Its total revenue for the financial year 2013/2014 was $38.9 billion and remains the leading maker of commercial vehicles as well as passenger vehicles in the country. The company employs more than 60,000 individuals, majority of who are Indian citizens. Tata’s mission statement is “to be passionate in anticipating and providing the best vehicles and experiences that excite our customers globally. The company took a strategic step of production in 2005, when it combined its operations with Fiat Group Automobiles. The move saw it increase car and power train sales significantly. Today, Tata’s sales, dealership, spares, and services are scattered around 6600 centres, globally. The company is among those listed in the New York Stocks Exchange (September 2004) and remains a major competitor in the world automobile industry. Enterprise risk management refers to the procedural way of knowing, assessing, and responding to the various risks of a business. Enterprise risk management entails risk identification and assessment (Fraser 2013, p.26). A risk is any uncertain thing whose occurrence is likely to affect the achievement of one or more objectives of an organization, either positively or negatively. Risk Management in Company Operations (2013, p.18) emphasizes that a risk is anything which has the probability of impacting loss to a business and is usually associated with a certain degree of likelihood. Risks are usually linked with a business’ aims and objectives since risks may hinder the attainment of set objectives or goals, upon occurrence. To achieve a deeper understanding of this, detailed research on Tata Motors Limited’s aims, operations, challenges and business environment is crucial. The aim of risk management is to increase the possibility of attaining the enterprise’ set objectives and goals. In the long run, enterprise risk management will help to ensure that the business, its people together with its resources are sustainable. The process of identifying and assessing the risks will cover the major stages discussed below. Major aims and objectives of Tata Motor Corporation Limited The company’s major aims and objectives are: To protect Tata Motor Limiteds image and name To control the effect of raw materials’ price instability To manufacture quality products, which match international standards To implement a comprehensive operating risk management procedure in all operations Major problems Tata Motor Corporation encountered in the past Tata Motors Ltd. In the past, Tata Motor Limited’s motor market reduced to single digits. The organization suffered discredit for recording a shrinking market share whose credit is negative. During the four months that ended on 31st July, Tata’s share of personal car market fell from 11.8 per cent to 8.9 per cent. The company’s share of the commercial vehicles market went down from 56.1 percent to 52.9 percent. The drop in commercial vehicles and passenger cars forced the company to refresh its product line restructure its dealer network. The company’s market share of passenger vehicles dwindled from 17 per cent to 16per cent. Tata also experienced inherent problems with its products, like poor product quality, limited model upgrades and perception that the company’s vehicles are only appropriate for use as taxis (Arora & Information 2010, p.13). Tata lacked any product to drive sales volumes. The major problems encountered by Tata Motor Ltd. are similar to those encountered by other organizations in the same sector in the past. The threats, risks and opportunities of these car-manufacturing companies are closely related. A volatile macro environment, financing risks, wide credit unavailability and unstable global fuel prices are problems common to all vehicle manufacturers in India and globally (Arora & Information 2010, p.65). Strict regulation by the government and stiff competition from other rival firms were common problems for all Indian car producers. Below are the risks that may threaten or enhance the achievement of the aims of the organization. The potential opportunities that could enhance Tata Motor Company Limited’s performance include: Sustained improvement of roads The development of roads infrastructure has taken an upward trend in the recent decade. It is expected to rise even further in future times. Improved roads are known to boost the sale of vehicles. The North South East West roads (NSEW) have been finished, and the country connectivity has been increasing correspondingly. It is expected to widen the markets and supply sources taking part in the general economic growth. Improvement in road infrastructure would facilitate the faster transportation of goods and passengers, and would in turn create demand for safer, reliable and faster vehicles. Tata will benefit from the same as it has a wide range of goods and passenger transportation vehicles (Tata Motors Ltd. Corporate Sustainability Report 2007/08, p.22). High car diffusion of cars in India In the previous budget, there is a provision for lowering of excise duty levied on all ‘small cars.’ It is expected to escalate the diffusion of automobiles in the country from 7 for 1,000 people compared to a higher diffusion level in developed and developing markets. A huge two-wheeler market India constitutes about 60 million two-wheeler market and a yearly sale of more than 7.2 million two wheelers. The Company believes that the gap between two wheeler prices and the present level entry for car prices will provide a big opportunity for inexpensive, secure and comfy small cars having attractive design and features. The hope is that the Tata Nano will tackle this great prospective in demand. International business India is still one of the most cost effective sources for the automotive industry worldwide, for both automobiles and vehicles components. The country’s manufacturing foundation will profit from such economies of scale and technological enhancements. Currently, Tata Motor Company’s exports comprise 9.8% of the total sales value and have opportunities to improve considerably (Sauvant 2010, p.78, 79). It is likely to increase with the modern product offerings in commercial vehicles and passenger cars. Tata is also applying manufacturing footprints in foreign lands, which would mix these benefits with local activities and bringing in such markets. An increasing consumer culture There is a growing culture of demand for a better lifestyle among the consumers of automobiles in India. It has improved consumption rates and quickened growth in various aspects (Agrawal 2006, p.2). Tata has a wide portfolio and, therefore, it expects to profit from the enhancement in lifestyle and higher aspiration levels. Tata Motor Company aims at responding to risks, opportunities and threats found in its surrounding by implementing proper risk control actions. The motor company‘s manner of addressing these elements are discussed in the following section. The potential risks and threats that could hinder Tata Motor Company Limited’s performance include: The unstable Macro environment The macroeconomic environment in India has been quite fragile. In the previous financial year 2013/ 2014, the economy went through tough times. The various forms of austerity measures were under implementation all over India and Europe. It affected the demand for motor vehicles in Tata’s major markets, like India, Europe, and Africa. The result was a reduction in the consumption of Tata’s products by 10% as compared to the financial year, 2012/2013 (Agrawal 2006, p.2). The Indian economy reduced significantly with the interest rates shooting up and affecting the consumption levels and capital investments. Due to the risky macro-environment, Tata Motor Company is implementing a comprehensive operating risk management procedure in all its operations. Unfavourable industrial cyclical changes The automotive industry is prone to cyclical changes coming from issues like increased capacity, regional demand, and supply imbalances. According to Tata Motors Ltd. Corporate Sustainability Report (2007/08 p.19), the volatile economic environment worldwide has made Tata Motor Limited to experience only a marginal demand increase in 2012. The capacity utilization rates in the sector are below 80 percent worldwide, and excess capacity remains a great worry in the automotive sector, especially in China and Europe. Growth Projects Tata Motor Company is following its growth strategy, especially in India where it has key market opportunities. The company is finishing various expansion projects in its facilities, which are likely to increase its capacity every year. The company has started work developing the plants in the states of India and Odisha (Sauvant 2010, p.61). It has the required land and operation permissions for two of its construction phases. Tata Motor Company Limited has set up plants in Europe and is equipped to meet the local demand arising from its domestic customers. The safety of raw materials and volatility of prices Some of the most crucial raw materials for car production have had serious price instability. Steel, iron, aluminium and coal prices keep increasing annually, due to high demand and scarcity. In the previous financial years, the prices of these key elements have risen significantly (Shah & Ramamoorthy 2010, p.88). Such price volatility can have significant impacts on the attainment of the company’s key objectives and should, therefore, be mitigated. Controlling the effect of raw materials’ price instability is a major objective of Tata Motor Company. The company is, therefore, setting up many growth schemes in Canada, Africa, and India. The goal is to create new resources. Risks associated with technology Tata Motor Company Limited faces the task of ensuring that its operating system is fitted with the latest efficient technology. It will allow the manufacturing of products that are for value addition (Robson 2012, p.91). The company, therefore, faces a challenge of ensuring that all its operations utilize the most efficient technologies. The aim is to manufacture vehicles with high value and high market competitiveness. Currently, Tata’s aim is to enhance its existing production system and products and increase the customers’ satisfaction generations of steel products. Financing risks Tata Motor Company’s strategy of development depends on the inner cash creation levels and the potential to have the outer capital for supporting its projects. Funding for the company’s projects is an exact risk to the Group given the volatility in the global financial markets and the availability of credit. Recently, the company has attained financial closure for its most of its projects (Nevin 2009, p.1). Additionally, Tata Motor Company is benefiting from the favorable credit and liquidity situations by raising more revenue yearly. Forex, Credit and Liquidity risks Tata Motor Company operates in various countries globally. It means the company participates in various currencies worldwide. Operating in various currencies may have an adverse effect on the outcome of commercial transactions and bring trading problems (Das 2011, p.90). Tata Motor Company Limited is implementing foreign exchange hedging strategies to secure its sales and production margins against quick and important foreign exchange activities. Risks associated with various regulations and Compliance Obligations The Motor Company operates in many regions, and this compels it to adhere to the compliance obligations in all these regions. Most of these regions have tight rules and regulations that are also diverse (Barry 2014, p.43). Tata faces a serious risk of having to mitigate the impact of operating in such diverse, complex regulation systems globally. The company aims at reducing such risks through understanding every region’s compliance requirements and determining the probability of success while operating in such places. It is usually part of the evaluation, which is conducted at the initial stages of investment. Threats Increasing scarcity of credit Many banks are tightening the liquidity position of vehicle financing. It is likely to have an adverse effect on the automobile business (Nevin 2009, p.1). Tata has always implemented sound in-house vehicle financing. The Company still faces the challenge of offsetting the fall in credit accessibility from external sources. Inflation and hardening of the interest rates Today, the consumer interest rates in India are increasingly being hardened. The practice is likely to have an adverse effect on the automotive industry. Rising inflation may also affect vehicle sales in the local market negatively. Volatile fuel prices The prices of crude oil in the international market have been rising consistently, every year. Initially, the global fuel price levels were $62 per barrel. It rose to $100-110 from each barrel towards the close of the fiscal (Tata Motors Ltd. Corporate Sustainability Report 2007/08 p.17). Increased hardening of fuel prices may affect the automotive sales adversely. Strict regulations by the government The government places strict emission and safety standards for all automobile firms operating in India. The move is likely to bring more difficulties and increment in costs for the automotive industry, and this will affect the Company’s business. According to Tata Motors Ltd. Corporate Sustainability Report (2007/08 p.23), Free Trade Agreements and other related rules may increase the market competition among the local car producers. Stiff competition worldwide India has always been an attractive market for other/ foreign continues to be an attractive destination for the global automotive players. The global automotive manufacturers present in India have been expanding their product portfolio and enhancing their production capacities (Barry 2014, p.78). To counteract the increasing worldwide competition, Tata Motor Company is attempting increase the quality of its products to match international standards. It aims at making the products match the value of other foreign rivals in the automotive industry. It does this by exercising a low-cost product development advantage. Increasing consumer awareness There is a high level of consumer awareness about vehicles, and this is quickly increasing what they expect from car manufacturers. Most consumers today understand what they want from the car making companies as regards to world class features and technology. Tata Motor Company will benefit greatly from this. An increase in the Mass Transportation Systems Tata Motor Company’s domestic passenger vehicle demand is likely to be influenced by the expansion of road and rail based mass transportation systems. However, Tata Motor Company would get certain profit advantages from the road-based mass transportation system because it has a wide variety of commercial passenger transporters. The research evidence discussed above is used to populate a standard format risk register, using the overleaf below. It is a critical assessment of the relative threats or opportunities the risks pose for the organization. All the identified risks are then scored for frequency using the following criteria; (1 [low] – 5 [high]) and impact (1-5). The risk score is obtained by multiplying these ratings. The acceptable risk threshold refers to the risk level, which a business or person is willing and able to accept. According to risk threshold, refers to the level of effect at which an investor may accept a particular interest. Below the risk threshold, the business will tolerate the risk. Above the risk threshold, the business will not be willing and to accept the risk. The risk threshold is an additional step in risk tolerance because it measures the risk tolerance with an extra exact number. The acceptable risk threshold represents the boundary past which the company will not be willing or able to tolerate the risk (Usman 2014, p.5). In choosing the risk threshold for this study, a definite figure 6 has been used. The acceptable risk threshold for Tata Motors Ltd. in this register is, therefore, 6. Any risk rating above this is considered to have an adverse impact on the attainment of the company’s objectives and is thus unacceptable. Any risk rating below this is considered to have no adverse impact on the attainment of the company’s objectives, and is thus unacceptable. Risk Register for Tata Motors Ltd. Risk Source Likelihood (1 – 5) Impact (1 – 5) Risk rating (Likelihood* Impact) Above acceptable rating Mitigation actions 1. Increasing scarcity of credit 4 3 12 Above acceptable rating Implement sound in-house vehicle financing 2. Volatile fuel prices 3 2 6 Acceptable rating Remodel vehicle engines to be more cost effective 3. Inflation and hardening of the interest rates 2.5 2.5 6.25 Above acceptable rating Ensure consistency in its sales by manufacturing quality products. Diversify operation to foreign markets 4. Financing risks 2 2 4 Below acceptable rating Raising more revenue by increasing the inner cash creation levels 5. Risks associated with various regulations and Compliance Obligations 1 3 3 Below acceptable rating Understanding and assessing the efficiency of the compliance policies and standards in the foreign economies where they plan to invest Bibliography Agrawal, S 2006, TATA, Full speed ahead , retrieved 30 March 2015, . Arora, A & Information, G 2010 The Indian automotive industry, [ICRA Limited]: New Delhi. Barry, J 2014 Operational Security Management in Violent Environments, Good Practice Review No. 8, Humanitarian Practice Network (HPN), Overseas Development Institute London Original work of Van Brabant, K. (2000) Das, K 2011 Globalization and standards: Issues and challenges in Indian business. Fraser, J, 2013 Enterprise Risk Management: Todays Leading Research and Best Practices for Tomorrow’s Executives, John Wiley & Sons Inc., Hoboken, New Jersey..Top of FormBottom of Form Nevin, J 2009, Tata group faces FCCB problems, Rediff India Abroad Limited, retrieved 31 March 2015, . Risk Management in Company Operations (2013) Nuclear Future, p.18-18. Robson, G 2012 Jaguar. Oxford: Osprey Publishing. Sauvant, K 2010 The rise of Indian multinationals perspectives on Indian outward foreign direct investment, Palgrave Macmillan: New York. Shah, S & Ramamoorthy, V 2010 Soulful corporations: A values-based perspective on corporate social responsibility. Tata Motors Ltd. 2007 Corporate Sustainability Report, Mumbai. Usmani, F 2014, Risk Appetite, Risk Tolerance, and Risk Threshold, PM Study Circle, retrieved 31 March 2015, Read More