Tata Motors was established in 1945 with annual revenues in excess of USD 10 Billion, and they are known to launch the first $2000 car of the world (Tata Nano) which has been in world news very recently. They are the first Engineering Sector Company from India to be listed on the New York Stock Exchange. They are the no. 1 vehicle manufacturers (especially cars and trucks) of India and have impressive export records as well. In terms of size, they are much smaller compared to
This dissertation is dedicated to Strategic Analysis techniques of Tata Motors. the strategic valuations like Michael Porter’s Diamond Model, SWOT Analysis, Balanced Score Carding, etc. are of great interest to both internal and external investors.
The Tata Group was founded in 1868 when India was under British Empire. The group formed their textile business in 1874 and Steel manufacturing in 1907. In 1945, Tata Sons Limited started the automotive business with manufacturing steam locomotive boilers after purchasing the shops of East Indian Railways from Government of India, which was under the British Government in that year. After purchasing these shops, the Tata sons decided to establish Tata Engineering and Locomotive Company Limited (TELCO Limited) and establish the primary manufacturing facility in Jamshedpur (an industrial city in Eastern India). This company was managed by J.R.D.
Tata from 1945 to 1973 and by Sumand Moolgaokar from 1973 to 1988. Sumand established the second manufacturing facility in Pune India looking into the boom in the auto market. In 1991 Ratan Tata took over the Tata Empire from his uncle and moved the Tata group out of the sectors where they were not very competitive – like Cement and Textiles. Today, Tata’s largest manufacturing businesses are Steel and Motors after the consolidation carried out by Ratan Tata. As on end of financial year 2008, the Tata Group has an annual turnover in excess of $30 Billion out of which more than $9 Billion is contributed by Tata Motors. TELCO Limited is now widely known as Tata Motors that is among the world’s top five manufacturers of medium and heavy trucks and world’s second largest manufacturer of medium and heavy busses.
Tata possess a strategic engagement with Mercedes Benz for assembling and selling Mercedes Benz commercial vehicles and passenger cars in India. Another strategic tie up that they possess is with Cummins pertaining to their diesel engines through Tata Holset Limited. In fact, Tata Motors contributed to the Cummins Diesel engines by adding turbo chargers on them vide their joint manufacturing operations with Tata Holset Limited.
The only partnership of Tata that didn’t go well was with Rover Group of Britain that went bankrupt in year 2005. Tata tried entering the European markets through a model named City Rover that faired poorly due to its negative publicity, higher price and poor quality compared to the competition.
Ratan Tata is now 70 years old but still presents the image of a dynamic, innovative and revolutionary entrepreneur. He is known for high aggressive moves for the benefits of Tata Motors customers. In 1997, Tata Motors launched its first indigenously developed car named Indica that currently possesses more than 15% of the car market share in India.
The other car models of Tata Motors that are popular in India and some markets of Asia are Tata Indigo, Tata Sierra, Tata Sumo and Tata Safari. In 2008, Tata achieved a global publicity due to two major activities that made headlines worldwide. In the Geneva Motor show they presented their four-seater small car named “Nano” priced about $2500 which is expected to be the cheapest car of the world.
In March 2008, Tata Motors acquired the two globally prestigious companies – Jaguar and Land Rover from Ford Motor Company. It is assessed that Tata Motors did so to achieve a new image of a global automotive company like Ford Motor Company given that their business span has largely remained indigenous within India for a long time.
Strategic Framework of Tata Motors:
Tata Motors is certified as ISO 9001:2000 compliant in Quality Management System and as ISO 14001:1996 compliant in Environmental Management System. Hence, they possess global recognition in best practices that strengthens their branding at a global level (http://www.tatamotors.com/our_world/awards.php). They are known to be very much customer focused and are very conscious about the fitment of their products for customer needs. They believe in continuous innovations as they keep on releasing new innovations in their existing models. Although the indigenous cars of Tata Motors do not compare with the engineering excellence of a global player like Ford Motor Company, they are well suited for Asian conditions where the comfort factor is more important than cruising at high speeds.
Reviews by Indian Motor sites reveal that the Tata Motors Indica & Indigo models possess sluggish performance of engine in terms of speed and performance but are good in terms of fuel efficiency, maintainability, internal space that are more important factors given the road and traffic conditions in India. This reveals that Tata Motors have focused on the local conditions of the country and have designed cars that are more suitable for customer needs rather than imposing additional but useless engineering on them. Example, there is no point designing a car that can run at 100 miles per hour if the maximum speeds that can be achieved even at best roads is 70 miles an hour.
One of the major success factors of Tata Motors are their supply chain excellence. The entire world is surprised by the launch of Tata Nano that shall be priced at 1 lakh approximately. An analysis by Fogarty, Justin (2009) reveals that Tata Motors could commit this price to the industry due to their excellent backend supply chain network. Tata Motors worked very early with their suppliers in arriving at the cost estimate of the car – to the extent that even the functional specifications of the parts were completed much before even talking about the car to the markets. Tata Motors uses Ariba spend management solution as reported by Business Wire in 2005. Ariba is a software based platform that helps in reducing bottom line costs considerably. Tata Motors is a modest company when it comes to spending because one of their primary objectives has been achieving highest operational efficiencies at lowest costs. Tata Motors extensively uses Information Technology to support their business objectives.
They possess Computer Aided Design and Computer Aided Modeling technologies, Siebel for Customer network management, SAP for supplier relationships and supply chain management, business logistics management, customer relationship management, human resources management and Finance management. They also use BMC Software for business services management under the ITIL and ISO 20000:2005 framework. The IT systems of Tata Motors limited are outsourced to their group company named Tata Technologies Limited. The BMC tools help them to manage IT services management, IT change management and also to comply with critical statutory laws and best practices like Sarbanes Oxley Act, ITIL, and ISO 20000:2005.
Tata Motors do have the fundamentals to play the role of change agent for some of the major changes in the global automobile industry. Historically, Tata Motors have not done well in entering the motor markets in western countries and hence this acquisition presents an excellent opportunity for Tata Motors to establish their presence in UK and European car markets. Jaguar and Land Rover may not have done well in the recent past but they have remained the pride and heritage of Great Britain and are very close to heart of the native British citizens. Tata Motors may just have to apply some technical innovations in these cars and re-price them according to the modern economics and these models for sure will again do wonders in the UK markets. One good thing about this acquisition is that the heritages of India and Britain have many common links including the very establishment of Tata Group that was done during the British rule in India.
The fundamentals of Tata Motors possess many best practices of the British industries and hence the employees of Jaguar and Land Rover will be able to easily correlate the culture of Tata Motors with the original British heritage although these organizations have remained under American influence for so long. The biggest gamble that Tata Motors is currently playing is the Tata Nano targeted at urban middle class that are yet to afford a car and have been moving on Motorcycles. Tata Motors have priced this car at $2500 approximately which itself is a challenge for them to fulfill. They have already made a loss of more than 300 Million Dollars because they had to shift their entire plant for Tata Nano manufacturing from a location called “Singur” in the eastern part of India amidst local disturbances and security problems
The current manufacturing capacity of Tata Nano is 50,000 cars per year whereas Brown, Robin (2009) of motortorque.com expects a booking of 500,000 units in the first lot itself. This means that in the current capacity Tata Motors will take 10 years to fulfill the orders of first lot itself. After the Singur crisis, they are in the process of setting up a new factory such that the combined output of Tata Motors can be 250000 cars per year which again will take two years to fulfill the bookings of the first lot itself. Hence, Tata Nano is going to be a major challenge for Tata Motors whereby they would need to aggressively deploy new plants although they are reeling under cash crunch due to their acquisition of Jaguar and Land Rover in 2008. Hence, overall it is a “do or die” situation for Tata Motors – if they succeed they will attain the status of no. 1 small car manufacturer of the world; but if they fail they would lose reputation in the global markets permanently.
Tata motors one of India’s largest private sector companies with a turnover of over Rs 80 billion, is the country’s leading commercial vehicle manufacturer and has significant presence in the multi-utility and passenger car segments.
Tata motors were established on September 1, 1945, originally for the manufacture of Steam Locomotives at Jamshedpur. By 1954, the company had diversified into the manufacture of commercial vehicles in collaboration with Daimler Benz, Germany. By the time their collaboration ended in 1969, Tata motors had become an independent producer of Medium Commercial Vehicles with a great degree of indigenization. It had also developed the capability of designing, testing and manufacturing such vehicles.
The widely successful Tata Indica, an Euro 2 compliant vehicle, is the country’s first indigenously designed, developed and manufactured passenger car. Tata Motors followed that up with the Tata Indigo, a sedan that was launched in December 2002. The company also makes several other passengers vehicles, including the Safari, Sumo and Sierra.
The company’s products have received wide acceptance not only in India but also in the Middle East, Asia, Africa, Australia, Latin America and Europe.
TELCO is into the business of manufacturing and selling medium, heavy and light commercial vehicles, multi utility vehicles and passenger cars.
Its major product line can be basically classified into three broad categories. There are various sub-brands and products in these categories:
OBJECTIVES OF THE RESEARCH
Research Methodology :-
In the modern business world, company valuation is not only needed for mergers & acquisitions but also to present the strengths and fundamentals of the company to the stake holders and investors. The stock markets in many companies use such valuation data to assign ratings to a company – starting from “very risky to invest” to “very safe to invest”. These analytics are published after carrying out structured mechanisms of company analysis as would be presented theoretically in the Literature Review. These mechanisms can be demonstrated by analyzing practical scenarios which shall be carried out by presenting the case studies of Tata Motors based on the published valuation reports of by these companies as well as multiple third parties.
The reports of the case studies shall be analyzed to present conclusions about the strengths of the company and the risk factor from the perspective of prospective investors in the stocks of the company or potential buyers of the entire company.
However the perspective shall be academic and may not be applicable for professional purposes. The outlook of the next five years for the chosen companies shall be done based on academic understanding of Strategic and Financial valuation techniques. It is assumed that all the analytics techniques shall be applicable in excel sheets and no special software tools shall be required. Not all valuations are of interest to everyone. We assume that Internal Investors may be interested more in DuPont Analysis, Book Value, Replacement Value, Liquidation Value, Replacement Value, etc. while the External Investors may be interested more in Economic Value Addition, Weighted Average Cost of Capital, Discounted Cash Flow, Market Multiplications, etc. Also, Balanced Score Carding and Michael Porter’s Diamond Modeling may be of interest of Internal Investors while external investors are interested in SWOT analysis.
The proposed data sources are:
(a) Websites of Tata Motors
(b) Parquets UMI
(c) Academic Papers written by Students and Professors
(d) Books by Michael Porter and Kaplan & Norton
(e) Motor Industry Analytics websites
(f) And other CBS Library resources
Analysis and Interpretation :
5.1 SWOT Analysis of Tata Motors:
Having presented the SWOT analysis of Ford Motor Company, we now analyze the SWOT framework of Tata Motors. As mentioned above, Tata Motors prioritizes opportunities and builds their competencies around them. Their announcement of Tata Nano is an excellent example where they have launched the model and opened bookings much ahead of building their manufacturing competencies to meet the demand not caring about the issue that they will end up accumulating a huge backlog of customer orders [Brown, Robin (2009)].
5.1.1 – Tata Motors Strengths:
Excellent brand equity and strengths in Indian Market
Legacy and Dignity of Tata brand heritage which is almost as old as Ford Motor Company
Sound global recognition in light trucks and buses
Sound fundamentals in turbo diesel engines that they developed in joint venture with Cummins
Sound presence in Asian Markets
Ownership of the heritage of British motor brands – Land Rover and Jaguar
Strategic tie up with Mercedes Benz which is one of the hottest cars in premium car market segment in India
World class quality accreditations (ISO 9001, ISO 20000, ISO 14001)
Excellent cost management framework (Ariba Spend Management)
Excellent Supply Chain Management using the SAP framework
Experienced, high quality, productive and low cost work force
Ownership of some of the largest automobile manufacturing plants of the world
Diversification strengths due to other large businesses of Tata Group
Excellent financial strengths – close to $10 Billion of annual revenues
Sound Parent Group support – Tata Group annual turnover is in excess of $30 Billion
5.1.2 – Tata Motors Weaknesses:
Never done well in US, UK and European car markets (although done reasonably well in light trucks and buses) – as presented earlier, they failed miserably in their City Rover launch in Europe Not yet prepared fundamentally to handle the global markets of Land Rover and Jaguar Weak technical competencies when compared to companies like Ford Motor Company Current Manufacturing capacities not adequate to meet the demands of Nano – already taken a risk of over commitment and under delivery pertaining to the Tata Nano economy-car. Perceived as too Indianized – it will take them a long time to establish a global branding Do not possess localization skills outside India markets – this is one of the primary reasons for their failure in the City Rover venture Focus is more on cost – thus their car models lack advanced features that are common in western markets
5.1.3 – Opportunities for Tata Motors:
Gain control over UK and Europe markets by re-enforcing the heritage of Jaguar and Land Rover
Deep roots of British style manufacturing processes given their own heritage of the British rule in India – can help them do better with Jaguar and Land Rover Introduce Asian variants of Jaguar and Land Rover by promoting their “Power Icon” branding – this may work very well with Asian politicians, Capitalists and Bureaucrats Develop more joint ventures like Tata – Mercedes Benz and introduce their cars in the Asian markets Tata Nano has taken the world by surprise whereby many economy car manufacturers of the world are yet to even think of such a cheap car Excellent test drives and experience reports of Tata Nano can invite attention of urban middle class at global level – if they build their manufacturing and supply chain effectively, they have the opportunity to virtually capture the market segment which doesn’t even exist in the world – a market of $2500 cars (many bikes are more expensive than this car which is spacious enough to accommodate four six feet tall people)
5.1.4 – Threats for Tata Motors:
Jaguar and Land Rover requires lot of funds initially which may strip down the company to cashless levels.
The Singur crisis has already hit their manufacturing backbone for Tata Nano cars –the company has not yet come out of the draining down of cash in excess of $300Million. Urgency in shifting the Singur plant to alternate place has hit their supply chain very badly – a large number of suppliers had established plants in Singur to support Tata Motors – many of them may not be having enough cash to shift to new location of Tata Motors Nano plant. Many companies across the world are busy developing their own models of Economy Cars – they may launch in competition with Tata Motors giving them tough time in the market that currently seem to be monopolistic in favor of Tata Motors.
5.3- Analysis of Tata Motors as per Michael Porter’s Five Forces
Model that shape Industry Competition.
In 1980, Michael Porter presented the five forces that shape competition in the industry for any business organization as – Rivalry among existing competitors, threats of new entrants, bargaining power of suppliers, bargaining power of buyers, and threat of substitute products or services. These forces determine the competitive position of organizations in the markets of their operations. We hereby introduce a brief introduction about this model and then determine the competitive positioning of Ford Motor Company and Tata Motors with the help of this model.
Figure 4: Porter’s Five Forces Strategy that Shape Competition
One important observation that Michael E Porter made about these forces is that if these forces are intense then almost no company gains distinct competitive advantages and earns attractive returns on investments. The threats of new entrants and substitute products and services are prevalent in industries where major innovations are underway that can potentially cause creative destruction of the existing products and services. New entrants always enter the markets with a desire to capture market shares quickly and hence tend to put lot of pressure on product pricing thus capping the profit potential of the market.
Hence, the existing players in the market benefit out of the barriers to entry of new players that essentially comprise of – supply and demand economies of scale, supplier switching costs to customers (especially when the customers have invested heavily in solutions compliant with supplier’s technology or are very much used to the same), capital requirements, access to distribution channels, restrictive government policies, etc. The other two balancing forces are bargaining power of suppliers and buyers. The bargaining power of buyers shall be lesser if competition is less given that customers will not have many choices for purchasing products. However, the bargaining power of suppliers is higher in case of lesser competition given that lesser competition will not develop the supplier network (and their mutual competition) and hence they will tend to have more bargaining power.
Ferrier and Smith et al (1999) stated that companies that pose complacency in their approach tend to lose market shares to their more aggressive and active counterparts. They observed that some industry leaders tend to erode their own market shares through new innovations that carry out a typical Schumpeter’s creative destruction of their existing product market shares. This is carried out to ensure that they reinforce their market shares with new innovations and improved customer value before new entrants tend to do so.
Mapping the global market landscape of motor industry, the threat of new entrants is extremely high because there are a large number of high quality regional motor manufacturers across the world that are working towards entering new markets across the globe. The phenomenon of Japanese companies entering US markets and giving tough times to native players like Ford Motor Company is witnessed by people all across the world. The Japanese companies like Toyota have introduced substitute products in the US, UK and European markets and have eroded market shares of Ford Motor Company given that they (probably) were more aggressive and innovative than Ford Motor Company in these markets. Tata Motors is one such company that is all set to enter global markets and pose threats to the local market players with their new innovations (like Tata Nano). Their Nano models can kill local competition of low cost cars in many countries if they are able to maintain the engineering excellence that they have been able to demonstrate in the test drives.
They have largely been able to control the bargaining power of suppliers by virtue of excellent supply chain management in the backend and hence are able to offer unbelievable prices to their customers not letting any room for them to bargain. Currently, Tata Motors are facing some barriers to their entry in many markets – like the emission norms of European Union – but they are gradually working on the remedies without comprising much on their local cost advantages
5.4 – Ansoff Analysis of Tata Motors.
Ansoff, H I (1958) developed a matrix to analyze the product marketing strategy of an organization when designing a model for diversification. Following is the image of original sketch of the matrix drawn by Ansoff himself:
A simpler form of Ansoff product marketing strategy is presented below:
Simplified view of Ansoff model
Each of these quadrants describes a specific product marketing strategy as detailed below:
Existing products to be marketed in existing markets – market penetration strategy New products to be marketed in existing markets – product development strategy Existing products to be marketed in new markets – market development strategy New products to be marketed in new markets – diversification strategy
In order of risks, the strategy based on existing value chains of organizations possesses lowest risks while the strategy requiring deployment of altogether new value chains by organizations possesses highest risk.
Thus marketpenetration strategiespossesslowestrisksassociatedwith the implementation but diversification possesses highest risks associated with the implementation. If we take a closer look at the strategies of Ford Motor Company and Tata Motors and map with Ansoff matrix, we can easily conclude that the Ford Motor Company is applying strategies having lowest risk although they are paying highest price for the same whereas Tata Motors is applying strategies with highest risks and hence is in a make or break mode. We present the following analysis for justifying this conclusion:
Tata Motors is currently implementing high risk strategies given that they have attempted to enter two new markets where they do not possess any expertise – UK and European premium car markets with the help of Jaguar and Land Rover and the $2500 Nano car that may altogether develop a new car market globally. If things favor them, they have the potential to become the next Ford of the world but if the happenings do not favor them (like the Singur crisis witnessed by them), then they can suffer losses that will take decades for them to repair.
5.5 – Balanced Score Card Analysis of Tata Motors.
Kaplan and Norton (1996) developed the balanced score card strategy to assess the performance of businesses by virtue of their internal competencies measured through key performance indicators (KPIs). The balanced scorecard is presented in the figure below:
The Balanced Score Card System for Vision and Strategy
The strategy is based on four primary factors that balance each other in a strategic framework – Customer, Financial, Internal Business Process and Learning and Growth. The Customer and Financial perspective is the way the company appears to the customers and the Stake Holders whereas the Internal Business Processes and Learning and Growth perspective is the way the company appears to the internal employees and managers.
This dissertation will result in detailed financial perspective of Financials and Customers and hence we will revisit the Balanced Score Card later in the dissertation.
The internal business processes and learning and growth perspective has been quite sound in both Ford Motor Company and Tata Motors but the perspectives have been entirely different. Ford Motor Company has focused on localization of products at a global platter whereby they keep their parts supply chain centralized and assemble cars as per the local requirements of a region after studying the needs. This has resulted in they able to deliver different variants of cars as per the requirements of different countries using the same spares supplied by their centralized supply chain vendor. Hence, the internal learning and growth of Ford Motors has been very comprehensive with localized knowledge captured from various countries and the benefits of global knowledge and experience effectively mixed with the localized knowledge.
Tata Motors appear to be far behind this strategy as compared to Ford Motors but they appear to be taking the same path towards globalization. They have developed Nano as per Indian conditions to start with but are ready to match the localized conditions required at the global level – like the stringent emission norms of Europe. They already have their small trucks (Tata Sierra) operating in UK which must have developed their knowledge on UK and European market requirements. Moreover, after the acquisition of Jaguar and Land Rover their knowledge will be strengthened further. They already have the basics in place to apply the knowledge in Nano and it may be just a matter of time that they will be able to achieve compliance for Nano against the regulations of Europe and other countries that they are targeting.
Tata Motors is relatively new to vehicle manufacturing business and also has been recently listed on NYSE. They are not yet known for global innovations but possess a strong indigenous market in India that they are trying to use as a foundation to establish themselves into the global markets. They possess a strong, efficient & low cost supply chain network localized in India but practically no supply chain at global levels. Just like For Motor Company, Tata Motors also possess brand heritage in the form of Tata Group which is one of the oldest & most successful industrial house in India. Very recently, Tata Motors made headlines by acquiring Jaguar and Land Rover from Ford Motor Company and launching the world’s cheapest car called Tata Nano. However, in their local Indian market they faced a major setback due to political disturbances when their Tata Nano manufacturing plant at Singur (a place in West Bengal which is an eastern state of India) was shut down. This setback has raised questions on the delivery Commitments of Tata Motors against the orders that they have booked indigenously and globally.
Currently they are at least one year late in meeting commitment of delivery of Tata Nano and hence have already opened room for new entrants in this business which may prove to be disastrous for them. Their financial outlook is appearing to be strong with profits made every year and dividend payments made regularly. However, their cash flow forecast places them at slightly riskier position even at nominal discount rates although they are bound to be discounted at higher rates for time being due to lesser information available on their market beta analysis. Overall, they are largely equity financed but 2009 needs to be watched closely to analyze changes in their Capital Structure. One of their major challenges is to meet European safety & emission standards on Tata Nano because they have already failed once in the European market and are not yet known for developing global cars and hence have not yet built a sound global brand equity. Hence, currently they appear to be an overambitious company whereby an effective market campaigning of Tata Nano has brought them at a global platter but it appears that end of the day they may just end up capturing their local Indian market.
After a long spell of analysis, it is now time to conclude the dissertation. As indicated in the beginning, the objective of this dissertation was to evaluate various strategic analysis techniques and company valuation techniques and then apply them on the case studies of Ford Motor Company and Tata Motors.
The analysis started with history of the company and thereafter the strategic analytics based on SWOT analysis, Ansoff matrix, Michael Porter’s Five Forces Model, Michael Porter’s Diamond Model, and Balanced Scorecard Strategic framework have been carried out. The strategic framework helped in viewing in-depth strategic & management framework of the company. This analysis helped in arriving at an analytics that presented the broad perspective of their internal and external factors in the company.
Thereafter, the various valuation techniques have been presented in this dissertation. First the valuation metrics have been presented without going in depth into the valuation techniques and then an analysis of various theoretical analysis based on empirical generalizations have been carried out. The theoretical analytics have been carried out to arrive at arguments on the capital structure of both the companies, their financial ratio valuations, their net present value analytics and some conclusions on the cash related challenges of both the companies in the next few years.
After these analytics, the various valuation techniques have been introduced and a general argument presented on which technique is suitable for both the companies given their current scenarios, their standing in the market and the market dynamics. The theoretical literature help substantially in establishing a sound theoretical foundation of a dissertation which can be later used to fine tune the though process in the data collection, analysis of case studies, presentation of results, critical discussions and conclusions. Moreover, the empirical generalizations apply very well in theoretical foundation of the entire analysis.
They have been elementary in reaching logical conclusions against the strategic analysis as well as valuations. In this research, the selection of the two companies was done based on some headlines that had rocked the UK and the entire world largely – the sale of Jaguar & Land Rover by Ford Motor Company to Tata Motors. This news actually gave us a clue that there shall be multiple links between these two organizations which shall be evident once the strategic analytics are carried out effectively.
Strategic Analysis and Company Valuation are not easy tasks for a student given that they are very complex even for seasoned practitioners. The task became even more complex as the two companies chosen are altogether from different geographies with completely different business models and target markets. Tata Motors have largely developed products as per Indian conditions and have not done very well in their attempt to enter European markets although they have been doing well in small sized trucks (Tata Sierra) in the UK markets.
Comparisons of strategic analysis and valuations of these two companies faired to be very difficult given that multiple data sources needed to be consolidated to reach standardized information framework. It finally has been successful only because of support from databases, money sites, third party independent analytics and past scholarly articles, researches & dissertations from the university library.
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