Business Leadership Award 2012 Case Defense Round Team: CorpCommandos Indian Institute of Management, Indore Team Members: Arun Kumar Tiwari Chetan Zarekar Sandeep Kumar Yogesh Yadav Framework for Group Performance Evaluation & Business Plan for TATA Company Leadership with Trust
This presentation proposes a new framework to evaluate business performance of conglomerate firms and a final matrix score has been developed comprising of "Composite Business Performance Score" & "Overall Risk Score" on which each and every firm of the conglomerate would be mapped to make further business decision.
Its implementation on Tata Group has also been discussed.
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Transcript
Business Leadership Award 2012 Case Defense Round
Team: CorpCommandos Indian Institute of Management, Indore
Framework for Group Performance Evaluation & Business Plan for TATA Company
Leadership with Trust
Business Performance Evaluation
Framework
Existing Approaches:
Our Approach: To Map a Company in portfolio of Group on a graph of Business Performance & Risk Characteristics,
considering correlation with other group companies & then to recommend the Most appropriate Future strategy. Derivation of Two Scores: 1. Business Performance Score - indicate Performance of Company 2. Overall Risk Score – indicate complete Risk accepted by Management in that business
Path for Performance
Evaluation
Final Determinants
Derivation of
For All TATA Group Companies
Company Evaluation
Overall Risk Score
Company-Group Correlation
factor
Business Performance Score (BPS)
Composite BPS
Business Performance-Expectation Matrix:
Co
mp
osi
te B
PS
Overall Risk Score 0 2 4 6
0
4
8
12
Definitions: Business Performance Score (BPS)
It indicates the performance of individual company
Company Group Correlation Factor: It specify how the company is dependent on performance of other TATA Group company & also how it is endorsing other Group Company
Composite BPS: Composite BPS = BPS X Company-Group Correlation Factor
Overall Risk Score (ORS): It states the risk associated with business
Group Performance Index It is weighted average of composite BPS of all companies, considering weights of Invested Capital in companies of Group
Sector Performance Index It is average of composite BPS of all companies in sector, considering weights of Invested Capital in each company in that sector
Group Performance Index (GPI) Sector Performance Index (SPI)
Derivation of Business Performance
Score (BPS)
Business Performance
Score
Business & Market
Assessment
Operational Efficiency
Management Efficiency
Financial Performance
Analysis
Stakeholder Delight
Indicator
Score Value range = 1 to 6; 1= Weak performance; 6= Strongest Performance
Business Performance Score (BPS) Calculation
1. Business & Market Assessment
Business & Market
Assessment
Industry Characteristics
Demand-Supply Gap
Government Policy
Input Related Risk
Extent of Competition
Company Commerce Assessment
Participation in Market
Product/Service Portfolio
Trade Aspects
Geographical Presence
Investment, Business Acquisitions & Joint
Ventures
Technology Implementation
Research & Development
Resultant Price Change Impact on Demand Level Impact on Supply Level
Tax Benefit and Technology Promotion Import Duty, Excise Duty, MAT Rate Union Budget Provision
Ease in Business Development Profit Margin Volatility Skilled Human Capital Availability
No. of Domestic Players & Price war situation Foreign Competition Accessibility to resources
Absolute & Relative Market Share Annual increase in Market share Increase in Market share over last 3 years
Product/Service Offering Diversity Brand Perception Price Level as compared to competition Unique Feature of product Stage of Product Life Cycle and recent innovation
Volume and Sales Growth, Customer Base Increase Concentration of buyers and suppliers Raw Material Availability and Price Securing of prepurchase agreement
Entry in new markets in last years Market share enhancement in new regions Extent of replication of existing skills in new market
Net Investment done in previous years Acquisition and synergy realized Business Alignment & Cost Saving
Additional Latest tech application in business Value generated by Technology addition
New Research Outputs Patents filed in last year Cost Effectiveness due to R&D Better quality output due to R&D
Business Performance Score (BPS) Calculation
2. Operational Efficiency Measurement
Operational Efficiency
Creation of Supply Chain Surplus
Inventory Management Fill Rate, Inventory as Days of Sale,
Response Time
Location Advantages
Infrastructure Facilities, Proximity to Inputs and Market, Presence of
favorable govt. regulations
Distribution Network Delivery Time, IT in network design, E-
Business, Distribution Network Penetration, Transportation Cost
Shareholders Monetary Benefits Percentage increase in EPS, Dividend Offering,
Stock Return in a year
Society Benefits
Environment Conserve Actions
Green Initiatives, Promotion of Environmental Cause
Serving Bottom of Pyramid Exceptional beneficial idea for Low Cost Segment,
General Awareness Programs
Calculation of Company-Group
Correlation Factor
Company-Group Correlation Score
Trade relationship with other Tata Group Companies
Customer of Group Companies
Supplier of Group Companies
Shareholding Pattern
Shareholding of Group’s other Companies
Share Allocation to Group’s other Companies
Distribution Network Sharing
Dependency on Group’s other Companies
Allowing use of own to Group’s other Companies
Financial Support Loans & Advances from Group’s other Companies
Loans & Advances to Group’s other Companies Company-Group Correlation factor = =1+ (Correlation Score )/6
Computation of BPS
& Group/Sector Performance Index
Business Performance Score: It is calculated on basis of weighted performance of underlying metrics score, having weights as shown in graph -> Significance of Scores
Score – 1 to 2 => Red Zone Need urgent attention
Score – 2 to 4 => Orange Zone Need improvement in system
Score – 4 to 6 => Green Zone Sustainability Measures
ManagementEfficiency
OperationalEfficiency
StakeholderDelight
Indicator
FinancialPerformance
Analysis
Business &Market
Assessment
* 15% 25% 10% 25% 25%
0%
5%
10%
15%
20%
25%
30%
We
igh
ts A
ssig
ne
d
Composite BPS: It indicate business performance in relation with other Group company relationship
Composite BPS = BPS * Company Group Correlation factor Composite BPS range = 2 to 12 ; 2 – Low company prospective , 12- Highest Company Supremacy
Company – Group correlation factor : Value Range : 1 to 2 Score 1 = None relationship with other group companies Score 2 = Strongest relationship with other group companies
Group Performance Indicator: Average Score of composite BPS, with weights of invested capital in Group Sector Performance Indicator: Average Score of composite BPS, with weights of invested capital in Sector
Overall Risk Score (ORS)
Calculation
Overall Risk Score
Business Risk
Industry Risk
Company Business Risk
Product/Service Portfolio Diversity in Product/Service offering, Stage of Product Life Cycle,
Substitute Product Risk
Geographical Presence Presence Across Different Regions, Global Presence
Trade Risk Concentration of Buyers & Suppliers, Ease in raw material availability
and their price impact, Securing Prepurchase Agreements
Financial Risk
Cost of Capital Discount Rate, Cost of Debt & Equity, Beta of the firm
Credit Risk
Liquidity Risk Current Ratio, Quick Ratio, Operating Cash Flow to Current Liability
Ratio
Long term Solvency Ratio D/E, Interest Coverage Ratio, Financial Leverage, DSCR, TOL/TNW, CFO
to Total Liabilities Ratio
Trade Payment Ratio Account Receivable Turnover, Day Receivable Outstanding, Account
Payable Turnover
Operational Risk
People Related Risk
Workplace Safety Risk Employee Safety Risk, Work Location Risk
Risk in Process & Delivery Impact due to Data Entry, Product Loss risk in Delivery, Technology
risk, Transaction risk
Labor Relation
Internal Fraud Misappropriation of facts, Bribery, Intentional Mismarking of positions
External Fraud Theft of Information, Hacking Damage, 3rd Party Theft * Forgery
High Risk, High Performance Zone: Focus on Risk Mitigation Strategy Performance Prolongation approach
High Risk, Moderate Performance Zone: Focus on Risk Mitigation Strategy Need to Focus on Performance Hindering Parameters
High Risk, Low Performance Zone: If Past Business Performance Score(BPS) is consistently low, then Need to Divest If Risk is temporary, then try for Risk Mitigation points
Moderate Risk, Low Performance Zone: Need of Performance Improvement Focus on Risk Mitigation
Low Risk, Low Performance Zone: Urgent Need of Performance Improvement Maintain minimized Risk level
Possible Exit: If Nelco perform consistently in “High Risk, Low Performance” zone for 1 more year, then we will be recommend to detach Nelco. Possible Entry: If Sector performance index (SPI) for a particular sector is consistently greater than 8 for continuous 3 years, then we urge Entry in a sector, with company of low Risk profile
Objective: To develop the business action strategy for TATA Steel on basis of Business Performance – Risk Matrix, in relation with internal Qualitative & Quantitative Factors of Matrix
TATA Steel – instate in
“Moderate Risk, Moderate
Business Performance zone “
Key Facts & Figures of TATA Steel: Revenue = Rs 30746.45 crore Net Profit = Rs 6865.69 crore Market Cap = Rs 33438.42 crore (21 Dec ) Revenue GAGR of last 5 years = 14.54%
Recent Corporate Actions of TATA Steel Launched FPO in Jan to raise US $778m Raised US $506m by Corporate Hybrid Securities in Mar & May Sold Teesside Cast Products plant for US $469m Signed definitive agreement with KHC to induct as a strategic partner in Tata Refractories Ltd Declared dividend of 120.00% amounting to Rs 12 per share 0.00 1.00 2.00 3.00 4.00 5.00 6.00
Business & Market Assessment
Operational Efficiency
Management Efficiency
Financial Performance Analysis
Stakeholder Delight Indicator
4.17
4.28
4.51
4.04
3.99
Business Performance Metrics Score
Business Overview
of TATA Steel • Tata Steel has won `The Businessworld Most Respected
Company Award 2011’ in the Metals category • Setting up of a 6 mtpa integrated steel plant worth Rs
30500 crores in Kalinganagar, Odhisa • Company wide focus to ensure casualty free operations • Capacity utilization below pre-crisis level, in spite of
improved demand
Tata Steel Shares: 2006 – 11 Steel Use and Capacity Utilization
Iron Ore Fines, US $/tonne
Hard Coking Coal, US $/tonne
HRC Spot Price, US $/tonne
Business & Market
Assessment
Industry Characteristics
Demand-Supply Gap
Government Policy
Input Related Risk
Extent of Competition
Company Commerce Assessment
Participation in Market
Product/Service Portfolio
Trade Aspects
Geographical Presence
Investment, Business
Acquisitions & Joint Ventures
Technology Implementation
Research & Development
High Supply by Brownfield expansion & Greenfield expansion, Lower Demand due to Economy Slowdown, Derived Demand
Gross Budgetary Support (GBS) of Rs.118.00 crore has been provided for promotion of R & D
High prices of Iron ore & Coking coal, High Volatility, Less Contract durations
High Competition to focus on Volume strategy due to Consolidation in industry
37.5% Market share , Market Leader
Diversified Products for Automotive, Construction, Consumer Goods, Packaging, Lifting & Excavating, Aerospace, Ship Buidling etc.
Increase in Sale by 18%, Shifted focus towards Niche Customers, Less impact of RM price volatility due to Captive mines
Operations in 26 countries & Commercial Presence in 50+ Countries,
Acquired NatSteel in South East Asi & Millennium Steel in Thiland , Synergy take up phase for Corus acquisition
BOF based integrated plants, LD steel making process technology
In a phase of Value appropriation through 4 R & D centers of acquired Corus
Being currently lower side of business cycle, more focus on Cost saving & optimization to keep bottom line intact
Focus on R & D deployment , which in turn create better quality products with low cost
Backward integration for critical input materials, probable Long term contracts
First move in case of New Customer Segment, Scheme for boosting Customer relationship
The Exact specification requirement offering to customer can promote market share
Swing towards High value added steel products meeting customer specifications, Products of Lighter metals & stronger alloys
More focus on Pre purchase agreement, High duration future contracts with suppliers
potential acquisition in developing countries of growing per capita steel consumption
Acquisition for Backward integration can help in securing raw materials of high capacity of TATA steel
Joint Venture & Technology Transfer agreement with Global Players
Research in process enhancement to reduce cost, Possible Collaboration with Other players to reduce cost
TATA Steel - Business Performance Development
1. Business & Market Assessment Current Situation Future Plan of Action
TATA Steel - Business Performance Development
2. Operational Efficiency
Operational Efficiency
Creation of Supply Chain Surplus
Inventory Management
Inventory as days of sale = 40
Above average fill rate & moderate response time
Location Advantages Geographically present in Central and
South parts of India
Distribution Network Special subsidiary – TATA steel
processing & distribution Ltd. focused on Retail & B2B sale
Demand Forecasting Match
Most proportion of derived demands of customer sector growth, Moderate
overstock & under stock cost
Waste Management Enhanced production efficiency
through waste reduction, Recycle steel scrap
Production Standards
Well established Standard Operating Procedures, Modest degree of
Automation, Matched government norms of CO2 emissions
Ratio Analysis
Capacity Current Capacity of 28 MTPA , further capacity expansion of 2.9 MT,to start
in FY2013
Operational Efficiency High capacity utilization rate of 86% ,
Operating margin of 34%
Shift towards Just in Time approach
New expansion at location of proximity to inputs / market, & favorable Govt. regulations
Chase strategy in aggregate planning
Cost effectiveness mode to enhance Operational margin
Continuous Improvement approach, Kaizen system Increase in degree of automation
Steel being 100% recycle product, focus on scrap collection & faster recycling