Strategic Audit of Thales Transportation in China - Assignment Example

? Strategic Audit: Thales Transportation Solutions Strategic Audit of Thales Transportation in China Executive Summary Strategic management helps in learning the surrounding environment of businesses, which in return help businesses to take critical decisions to neutralize the impact of any alteration in the internal or external environment. In this report, Thales Group’s strategic analysis has been carried out in order to outline foreign expansion plan, Thales’ entry in China. The internal analysis has been carried out with the help of SWOT Analysis and to understand the dynamics of external environment in China, Porter’s Five Forces model has been used. In addition the business level strategies and the entry strategy that Thales will be adopting in China is also explained. Thales’ Business Thales Group is a French business group engaged in defense, aerospace, transportation and security markets. A small portion of Thales’ investments also go into its electrical systems building unit. Thales Group is present in more than 50 countries of the world having workforce of around 70,000 employees. Thales’ business’ size can be gauged by the fact that the company makes billion of Euros in revenues and is considered 475th largest business group amongst Fortune500 and is the 11th largest defense contractor (Thales Group, 2011). Competitive Landscape of Railway Transportation Industry in France Major railway transport operators in France are: Thalys Lyria Eurostar Societe Nationale des Chemins de fer Francais Resear Ferre de France (State Owned) Environmental Scan of Railway Transportation Industry in China To carry out the scanning of an external environment in China’s railway transportation industry, Porter’s Five Forces Model will be used. This model assists in scanning the external environment for: Identifying rivalry within the industry. Identifying the risk involved with the entry of new businesses in the industry. Identifying the buyers’ bargaining power. Identifying the threats from substitute to the product or service that a business is offering. Identifying the bargaining power of suppliers (Porter, 2008). Porter’s five forces model is beneficial for businesses that are aiming at expanding their business in foreign markets (Porter, 2008). In this paper, Porter’s Five Forces model will be used to examine the external environment of China’s Railway Transportation Industry. Threat of New Entrants In China’s railway transportation industry, the threat of new entrant is low due to the high entry barriers. Usually it requires a mammoth amount of money to acquire license and enter into a railway transportation business (Wan & Liu, 2006). Not everyone can start a railway transportation business because it is a capital extensive decision which includes capital investments in fixed assets like machinery, railway tracks, platforms, engines, rail-cars, and land and auto-mechanic shops. Although, there is still need for railway tracks and transportation services in China due to its huge geography and increased travelers’ pressure, but the acquisition of license and cost of starting this business in the country is still very expensive. Moreover, the railway transport industry largely operates on economies of scale where the average cost of taking passengers from one station to another decreases as the incoming number of passengers increase (Today Online, 2013). Threat from Substitutes China is amongst those nations of the world who believes on working hard and saving money for the future. The saving trend compels people in China to spend less on luxuries. But in recent 4 to 5 years, it has been noticed that this trend is on shift and Chinese people are looking for quicker travelling options. But still, the traditional Chinese still believes on travelling with cheaper and less time consuming travelling means (Wan & Liu, 2006). Due to the rapid development and financial strength of the Chinese families, they tend to buy cars. Bicycles and motorcycles are another substitute to railway transportation. These substitutes are potential enough to restrict the growth of financial returns to the railway transportation industry and in return cause price pressures to increase and limiting the profits margins (Pitman, 2002). Bargaining Power of Buyers It is anticipated that consumers in China do not enjoy bargaining power over the railway transportation companies as they compare the market prices and not the prices for facilities or the environment provided to travelers in rails. The demand for rail services is moderate in China but still the volume of the population that China possess, the demand is fairly on greater side (Xiao, et al., 2003). Due to this, there is an equilibrium state in sales of Rail transportation services and prices of these services. Also, there are limited rail transportation services available in the market, therefore consumers of these services does not enjoy bargaining power over rail transportation businesses (Wu & Nash, 2000). Bargaining Power of Suppliers The rail transportation industry mainly depends on the final products, i.e. the railway tracks and train compartments and upstream immediate products like parts of engine and compartments along with other components (Song, 2006). Majority of the upstream products are supplied by suppliers in the local market or in the global market. Keeping in view the revenue margins, it would be wiser for rail transportation companies to acquire these parts within China. In addition, the Local Content Requirement regulation imposed by Chinese government on rail transportation companies requires them to purchase a majority of the upstream and final product material within China (Liu, 2003). Although these reasons are enough for suppliers of this industry to impose their desired price on the parts, but the presence of a number of quality suppliers in the country and the volume of business that suppliers do with these companies, reduces the bargaining power of suppliers over rail transportation companies (Wan & Liu, 2006). Rivalry with Competitors There are five big names competing in China’s rail transportation industry. These are Beijing Mass Transit Railway Operation Corporation Limited, China Railway Corporation, Chinese Eastern Railway, Daqin Railway Company Limited and Guangshen Railway Company. These companies hold a strong hold on the market and share a fair chunk of market share between them. The increasing demand for rail services maintains the demand at optimum level and not one company can claim that it holds a dominating market share (China Travel Depot, 2013). This is because of peoples’ preference for quality of service, luxury while travelling and cheaper fares, and when competitors fail to deliver these three, people tend to shift to other available options. Therefore: in order to avoid fierce competition and outmatch all the rivals in China’s rail transportation industry, a company should maintain quality and deliver services at minimum possible costs which are possible by achieving economies of scale. Still, it can be inferred that the rail transportation market in China is still competitive and concentrated (Renner & Gardner, 2010). SWOT Analysis SWOT is a structured planning matrix which enables businesses to identify components of internal and external environment. The internal factor examines the internal components, i.e. businesses’ strengths and weaknesses and external components, i.e. opportunities and threats. The SWOT model was proposed by Albert Humphrey. He incorporated the concept of strategic fit for an organization into SWOT matrix, which implies that the gap between the points at which businesses’ internal environment matches the external environment of the business is called strategic fit. SWOT is defined in literature as: Strengths: Assets and components of the business that gives it an edge over competitors. Weaknesses: Assets and components of the business that expose it to risk or place the business at a disadvantageous place as compare to competitors. Opportunities: Elements in the external environment that a business can exploit for its benefit. Threats: Elements in the external environment that may cause trouble to the business in future (Pahl & Richter, 2009). Thales Group’s SWOT Analysis Strengths Skilled and experienced senior management in home country, i.e. France. Strong support from government in home country as it holds majority shares in the company. Thales possess robust technological expertise and skills. Present in almost all over the world. Strong financial background and returns each year. Provides economic yet safe and powerful solutions to clients. Comprises of 70000 skillful workers around the globe. Considered as being possessing best available management in France and Europe. Possess huge maintenance and servicing workshops across 5 continents of the world. Provides eco-friendly travelling solutions to the markets in around 50 markets of the world (Market Line, 2012). Weaknesses The industry in which Thales Rail Transportation is involved usually require high investments in the beginning. Quality research and development facilities are not available in all the markets in which Thales Rail Transportation operates. Thales is highly exposed to the high cost and time required for the manufacturing and assembly of train engines and carts. Instable management structure in few of the countries where company is operating. Company is over dependent over few customers and markets (Market Line, 2012). Opportunities Further acquisition of businesses would help the company grow rapidly. There is an increasing demand for rail services due to increasing population and declining purchasing power of the customers in target markets. Other countries where modern mass transit systems are not functional, they are taking keen interest in installing modern rail transportation mechanism. Chances for expansion in new markets and serve new customers (Market Line, 2012). Threats Taxation policies on rail transportation and aw material are getting tough day by day due to economic decline. Governments are now imposing higher taxes on this industry. The cost of using alternate energy, on which Thales’ majority of the rail projects run, are also getting higher. Fierce competition in the international rail transportation industry, especially in Europe. Unfavorable trends in the rail transportation industry in the world (Market Line, 2012). Thales Rail Transportation in China From the internal and external assessment of the environment surrounding Thales group, it is clear that an investment in China’s rail transportation system would be beneficial. But keeping in view the amount of investments involved and the highly peculiar behavior in the Chinese market on customers’ and governments’ side, it is advised that the company should shift major focus of its strategic thinking mechanisms towards this venture. The core competency of Thales group is its management, experience, skills, financial background and support from French government. It should use these resources to overshadow the influence of competitors in the target market and take a first hand advantage of the opportunities in China’s market. Moreover, to over the weaknesses, Thales is advised to rectify those before entering into China, as a later stage rectification would cause mal-function or even confusion amongst the work force in China causing the investment to fail. Another element that Thales should focus on exploring is to look for alternate energy sources in China to overcome its overdependence on diesel. Last but not least, China’s rail transportation market is still in its preliminary stages and requires education, therefore; it is an opportunity for Thales to conduct behavior change communication sessions with its staff regarding how they should treat and guide travelers about the company and train travel. Business Level Strategy Business level activities are the businesses conduct and actions towards satisfying customers’ needs and gain competitive advantage over competitors by exploiting the core competencies. Business level strategies also define the positioning of the business within the industry. There are five kinds of business level strategies that a firm may adopt keeping in view the market conditions, advantages and disadvantages of the strategy in a particular market and different other attributes of the market. These strategies are: 1. Cost Leadership: Organization operates at economy of scales by lowering the price of the product and increase demand for its products or services, in an attempt to capture a larger market share. 2. Differentiation: Organization focuses on differentiating its product from competitors and ensures high quality because of which customers are willing to pay higher prices. Businesses adopting Differentiation strategy depends on innovating new ways of producing and delivering differentiated products or services. 3. Focused Cost Leadership: Organization focuses on producing and deliver products of high quality at lower prices. 4. Focused Differentiation: This type of business level strategy is adopted by businesses that aim at focusing and serving a niche sector of the industry with the help of specialized products and services at a high price. 5. Integrated Cost Leadership: Businesses adopting integrated cost leadership strategy aims at serving current customers and adding more customers to its customer base by providing them with a similar product as competitors but with additional benefits and advantageous features (Ireland, et al., 2010; Hill & Jones, 2012). Thales Rail Transportation’s Business Level Strategy Keeping in view the scope of the business and the industry in which Thales Rail Transportation will be carrying out its business level activities, it is recommended that the business should adopt an integrated strategy as it will allow the company to operate at narrow costs integration and deliver superior quality services in order to gain more customers. Market Entry Approach China is considered as being the most rapidly developing nation in the world. The strategies and regulations prescribed by Government of China regarding business level activities in the country makes it a hub of global businesses. The investor friendly policies and abundance of resources in the country also lures multinational businesses to invest in this country. On top of that, the huge population, which is still increasing at the fastest pace in the world also attracts businesses specially those in the transportation sector to invest in China and make a fortune. In this perspective, it is recommended that Thales Rail Transportation should make foreign direct investment (FDI) in the country and start from the scratch due to the long-term approach usually selected by such businesses. The company should hold a central office in Beijing which could also be served as regional headquarters in South and East Asia. On the other hand, businesses making foreign direct investment in any sector of China are considered as being the allies of the government in the country and expose businesses to greater benefits as compare to those who do not make direct investments in China. Acquisition or Merger Keeping in view the opportunities available in the market and the environment of its respective industry, Thales Rail Transportation is advised not to acquire an existing business or merge its business with an existing rail transportation business in the country. Thales should establish itself as an independent entity in the China as it will not help the company to embark growth but also help the company to introduce other products of its line in to the country. Thales Rail Transportation is an established brand of Thales Group and is popular amongst individuals and masses in more than 50 countries of the world, therefore; the group would not achieve any benefits by merging or acquiring another business and setting up distribution channels with quality vendors in China. Justification for Proposed Strategy In the beginning of this paper, author used Porter’s Five Forces Model to define the environment of the rail transportation industry in China. The analysis helped the author which business level strategy should Thales adopt while entering into China. Where Porter’s model has 4 competitive forces mentioned, Abell introduced the sixth force which has a potential impact on the business level strategies of a business. This additional force compliments the other forces and cannot be gauged. In Abell’s point of view, businesses should introduce ideas to compliment customers and increase sales with the help of: Maintaining customer relationship Customer service Retention of customers Complimentary giveaways and collaterals Government policies In the light of above findings from review of available literature, it is suggested that Thales Railway Transportation should enter China’s market by making foreign direct investment. The rich background of the company, strong support from French government and excellence in service delivery all makes Thales an ultimate choice of consumers not only in China and USA but also globally and the intended venture in China would also become a success story. List of References China Travel Depot, 2013. Rail Transportation. [Online] Available at: [Accessed 29 July 2013]. Hill, C. W. L. & Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach, 10th ed.: An Integrated Approach. NY: Cengage. Ireland, D. R., Hoskisson, R. E. & Hitt, M. A., 2010. Understanding Business Strategy Concepts Plus, 3rd ed.: Concepts Plus. NY: Cengage. Liu, G., 2003. Pondering, Exploring and Developing a High-Speed Electrification Railway. Journal of Railway Engineering Society, Volume 1, pp. 122-125. Market Line, 2012. Company Profile Thales SA, NY, London: Marketline. Pahl, N. & Richter, A., 2009. SWOT Analysis - Idea, Methodology And A Practical Approach. Norderstedt: GRIN Verlag. Pitman, R., 2002. Chinese Railway Reform and Competition: Vertical or Horizontal Restructuring?, Washington: US Department of Justice. Porter, M. E., 2008. Competitive Strategy: Techniques for Analyzing Industries and Competitors. NY: Simon & Schuster. Renner, M. & Gardner, g., 2010. Global Competitiveness in the Rail and Transit Industry, Washington D.C: Worldwatch Institute . Song, J., 2006. Discussing the Necessity of Electric Reconstruction of the Beijing-Kowloon Railway Line. Journal of Railway Engeneering Society, Volume 1, pp. 75-78. Thales Group, 2011. Annual Report, Neuilly-sur-Seine: Thales Group SA. Today Online, 2013. China to pump S$681b into railway industry. [Online] Available at: [Accessed 29 July 2013]. Wan, Z. & Liu, X., 2006. Chinese Railway Transportation: Opportunity and Challenge, California: Institude of Transportation Studies, University of California. Wu, J. & Nash, J., 2000. Railway reform in China. Transport Reviews, 20(1), pp. 25-48. Xiao, X., Yu, S. & Yuan, L., 2003. Analysis of Price Regulation Model in ChineseRailway Industry. Journal of Dalian Railway Institute, 24(1), pp. 84-87. Read More