MOD004675 Management and Strategy
Introduction to Organisation and Current Challenges
The aim of the report is to provide a data and analysis to support a recommended strategic plan in response to the challenges faced by the company JSW Steel which is an Indian steel manufacturer. The company was established in the year 1982 and was then known as Jindal Vijaynagar Steel Limited (JSW Steel, 2021a). It currently operates plants in Karnataka, Tamil Nadu and Maharashtra states of India with other operations in several other states. JSW Steel belongs to the JSW Business Group (Mohanty, 2017) and has a market valuation of around $ 24 billion (Money Control, 2021). In this report the main focus will be to analyse the opportunities and threats that the company faces from the external market as well as the strengths and weaknesses stemming from its internal environment. This will help in contextualising the existing position for the group and help in suggesting alternative strategies that may improve the market position and profitability for the company in the future.
JSW Steel’s Vision
The vision and mission for the company have been presented as below (JSW Steel 2021b):
“JSW Steel Limited believes in creating sustainable growth while balancing utilization of natural resources and social development in its business decisions.
It also believes in pursuing its business objectives ethically, transparently and with accountability to its stakeholders across the value chain.
JSW is committed to promote integrated responsible behaviour and value for social and environmental well-being.”
One of the key elements that is instantly visible from the vision and mission statements of the company is that they are more aligned with the how of the business rather than the what of it. The vision statements seem disjointed from the operational goals of the business. As stated in Mintzberg (1994), the vision of the company needs to be deliberately vague and not too precisely articulated, so that it leaves space for intuition and creativity. However, in this case the instead of vagueness, there is a visible omission of any indication regarding operational goals and vision. A more defined vision statement would probably serve the highlight the functional aspects of the business in a clearer light.
JSW Steel’s Values
The key values that the company presents also roll along the same lines as that of its visions but impart a greater deal of commitment towards operations. The main articulated values of the company have been provided as (JSW Steel, 2021b):
“A dynamic leadership
Adherences to core values
A well-articulated Enterprise Risk Management framework
Practices that seek to sustain and enhance the long term competitive advantage of JSW with care for the society and environment.”
In comparison to the vision of the company, the values are more clearly representative of the operational aspects of the business. Values are supposed to inform the external and the internal stakeholders of an organisation regarding the top priorities of the company and the standards of behaviour that the company expects from its employees and managers (Tessema, et al, 2019). In that aspect the values statement of the JSW Steel are completely aligned with its philosophy of cost control and integrated approach to operations.
Key Challenges
Given the nature of the steel industry and the current market circumstances, the main challenge for the company would be two fold. First is to manage the cyclic supply – demand dynamics of the commodities industry in a time when disruptions to the industry are unpredictable in the face of the pandemic. The pandemic impacts not only the demand factor for the company but also the access to major raw materials. This unpredictability also makes cost control a major strategic issue for the company.
Environmental Analysis
Macro trend Analysis (PESTLE)
| Factors | Impact* | Uncertainty* | |
| Political | Government Stability
Political Stability Index for India is -0.7 as estimated in 2019 which shows a trend of improving stability from the previous years (The Global Economy, 2021) |
2 | 1 |
| Regulation trends
The National Steel Policy launched by the government of India is aimed at increasing the per capita consumption of steel in the country (Equity Master, 2021) FDI of 100% is allowed in the sector through the automatic route which has led to FDI investment of US $ 13.4 billion in the sector until 2020. |
3 | 1 | |
| Tax Policy
Customs duties on steel products have now been set to a flat rate of 7.5%, down from 12.5% (Afonso, 2021). This is likely to have a negative impact on domestic producers of crude steel like JSW in the short term. |
3 | 1 | |
| Elections
Uncertainty around the election results in several key states along with its implications on chances of lockdowns have also impacted the demand for steel products in the construction industry however, they are likely to be balanced by the heightened capital expenditure by the government in auto production, white goods production and real estate construction (Pathak, 2021) |
3 | 3 | |
| Terrorism
This is an unlikely factor in the current market that would impact the sector in any significant manner. |
1 | 2 | |
| Likely Changes
Recent government policies are likely to change the dynamics of steel import for the domestic companies. So far more crude steel was exported as compared to finished products, however, this trend is likely to change following government interventions (Banerjee, 2021). |
3 | 3 | |
| Average | 2.5 | 1.8 | |
| Economic | Projected Economic Growth
India’s GDP is set to grow at a rate of 12.5-13 per cent in 2021 (Prasad, 2021) which is promising for the domestic industries, especially JSW Steel given a significant portion of its revenues are generated domestically (JSW Steel Ltd., 2020). |
3 | 3 |
| International Trends
Domestic steel prices are getting more in line with the international prices as demand for steel from China is waning (Equity Master, 2021). |
3 | 2 | |
| Inflation
The CPI inflation in the country has risen to 5.52 % by March 2021 (Business Standard, 2021), however, the steel industry is likely to be shielded as a result of measures taken towards cost control by the government. The major issue however, remains the unavailability of labour in some areas and the decrease in demand which led to price hikes by almost all steel manufacturers (Iyengar, 2021) |
4 | 3 | |
| Likely Changes
In the past year, with decline of 13.7 % in the demand for Indian steel, it has been projected that in the coming year the industry is set to rebound by a 19.8 % in 2021 (FE Bureau, 2021) |
4 | 3 | |
| Average | 3.5 | 2.7 | |
| Social | Demographic
With an average age of 26.8 years in the country (O’Neil, 2021) and with more people joining the workforce, the prospects for growth of the steel industry are extremely high especially in light of the infrastructure projects undertaken to facilitate the new entrants into the workforce. |
2 | 1 |
| Consumer Attitudes
A shift towards corporate employment, demand for better infrastructure and increased demand for construction projects is also likely to impact the domestic steel industry positively. |
2 | 1 | |
| Lifestyle Choices
Rapidly urbanising population in the country is also likely to drive the demand for steel in the country. |
2 | 1 | |
| Likely Changes
India is looking to modernize, expand and accommodate the aspirations of a growing population through urbanization and industrialization. Thus, steel consumption growth is expected to rise on account of government expenditure on infrastructure and manufacturing in the long run (Equity Master, 2021) |
3 | 1 | |
| Average | 2.2 | 1 | |
| Technological | Impact of new technologies
Certain process improvements such as beneficiation and palletisation of the iron ore are driving the industry towards higher cost efficiency. (indsteel.org, 2021) |
3 | 1 |
| Likely Changes
Although shift from coal based energy has not yet been envisioned, however, progress towards greener energy sources through electrification is a strong possibility. (indsteel.org, 2021) |
2 | 4 | |
| Average | 2.5 | 2.5 | |
| Legal | Domestic Legislation
The Steel Scrap Recycling Policy aims to reduce the imports and increase dependency on domestic production thus boosting prospects for local manufacturers. (Equity Master, 2021) Industry consolidation through the Insolvency and Bankruptcy Code, is expected to lead to improved discipline in the marketplace and encourage stable pricing. (Equity Master, 2021) |
4 | 2 |
| Environmental regulation
Changes to the existing environmental regulations have been envisioned for the industry for a long time, yet they have not yet materialised in concrete form (PTI, 2015) |
3 | 4 | |
| Likely Changes
Changes to the existing environmental regulations have been envisioned for the industry for a long time, yet they have not yet materialised in concrete form (PTI, 2015) |
3 | 4 | |
| Average | 3.3 | 3.3 | |
| Environmental | Likely impact
There have been identified players in the industry that are still 100% reliant on coal as a source of energy for their furnaces and the government is planning to penalise those companies for non-compliance in a effort to curb the environmental impact of the industry as a whole. |
2 | 3 |
| Likely Changes
Climate change has been a major discussion point among consumers and even though not being a direct to consumer product category, the impact of consumer demand for greener product is likely to impact the industry in due time. |
2 | 4 | |
| Average | 2 | 3.5 |
*1 = Low, 5 = High
Drivers of Change
The following hey drivers of change have been identified in the market.
Demand Variability
From the analysis it is clear that the industry operates under the supply demand dynamics of the commodities market. However, the degree of uncertainty in the industry around demand variability is immense especially given the COVID pandemic. As highlighted in the PESTLE analysis the industry was projected to grow at a significant rate, however, with impending nation-wide lockdowns with the increase in COVID cases in India, there is great deal of variability in terms of demand forecasts. The changes in forecasts from the recent events have not been analysed yet, however, the strategic agility of the companies is going to be crucial during these times. Political, Social and Economic parameters are all intertwined in this key driver for the industry.
Government Incentives
The Central government of India has been a key driver of change for the industry. Being a core industry that sources its raw materials domestically as well as largely serves the domestic market, the government of India takes keen interest in its continued success. Various policies have already been rolled out to enable domestic companies to compete in the international market as well. Its investments in infrastructure are also likely to boost the prospects for the industry. Along with that the push for domestic purchase of steel products to local companies can also be a key driver for change.
Inflation and Uncertainty
Inflation combined with the income instability brought by the COVID pandemic can act as a inhibitor for the industry in the short term future. Companies in the sector will need to be able to diversify their market in order to sustain the desired levels of sales in the short term. In this light, the government’s push to reduce taxes and tariff can be a major advantage for the industry to gain international market share especially with decreases in demand for Chinese steel.
Industry Analysis
Porter’s 5 Forces
Threat of New Entry
One of the fundamental barriers to entry for the steel industry is the upfront and operating capital requirement. According to reports, to set up a 1 mtpa capacity integrated steel plant, the cost of setting up operation could be upward of ₹ 25 billion. On top of that, for companies in the sector to gain profitability in the price controlled environment, it is extremely important that economies of scale be established. Further advantage can be gained through vertical integration as it allows companies to source their own raw materials like iron ore and coal (like JSW Steel and Tata Steel). With regards to allotment of resources as well there is an inherent bias towards existing players from the government’s perception which further makes entry into the market difficult. This means that the threat of new entry in the steel industry can be considered low.
Bargaining Power of Buyers
Product differentiation is very difficult in the industry and as such there are several choices for the customers in the same price range. However, the sale is not done directly to the consumer as is most often through intermediaries who influence the customer decision. This means that in integrated companies with established brand reputation, marketing tools can be used to influence customer decision. This reduces the bargaining power of the buyers in this regard. This is even true for companies like JSW Steel and Tata Steel that charge a premium for the brand reputation and quality.
Bargaining Power of Suppliers
There is a distinction that can be drawn in evaluating this aspect. Vertically integrated companies, like JSW Steel and Tata Steel, have their own sourcing and distribution network. This means that they are not dependent on the suppliers for their raw materials and as such the bargaining power of the suppliers is quite low. However, for smaller operations using a non-integrated or semi integrated model, like SAIL, the supplier dependency increases tremendously. This ensures that the bargaining power of the suppliers in that case needs to be considered as high.
Threat of Substitutes
Threat of substitutes is only in the consumer durables segment where the use of aluminium has been increasing. However, considering that the section accounts for only 11 % of the overall steel industry and also the fact that steel cannot be completely replaced in the industry, the threat is quite low. In other areas of application, steel is almost irreplaceable and as such there does not exist any threat of substitution.
Competitive Rivalry
Recently the industry has turned into a net exporter of steel which suggests that the demand in the domestic market is lower than the production output. This would suggest that despite the presence of strong competitors the market can accommodate the existing players and with high barriers to entry the threat of competitive rivalry is also low.
Inferences
Based on the analysis, it can be clearly understood that the competitive forces do not impact the performance of the company significantly in the market and as such greater focus has to be placed on improving internal efficiency and managing external threats.
Capability Analysis
Identification of Capabilities using the value chain framework
Procurement (Vertical Integration)
Raw materials like iron ore and coal are sourced from optimised sources to reduce price volatility. In case of excessive demand for materials, contract options with external suppliers are sought. The provision of backward integration through in-house operation of iron ore mines also allow greater flexibility, independence and cost control ability.
Inbound and Outbound Logistics (Centrally Managed)
The company maintains a centralised logistics management to ensure end to end integration. In addition to that the company invests in strategic infrastructure spending to optimise logistical operations. Shift to transport through sea and rail has also been started to allow greater cost efficiency.
Manufacturing (Scale of operations, Technology)
The main highlight is the scale of the manufacturing operations that are supported by state of the art technologies. Energy management and gas recovery have been major initiatives that the company has undertaken.
Applying VRIO Criteria
| Capabilities | Valuable | Rare | Inimitable | Organised | Competitive Impact |
| Vertical Integration | Yes | Yes | Yes | Yes | Sustained |
| Centrally Managed | Yes | Yes | No | Yes | Short Term |
| Scale of operations | Yes | No | No | Yes | Parity |
| Technology | Yes | No | No | Yes | Parity |
Based on the above analysis, the strengths and weaknesses of the company will be presented below.
| Internal Weaknesses | Comment |
| Lack of International operations | Given the demand variability in the domestic market the company should look to expand into international market especially given that the price parity with international products can be achieved. |
| Inefficient use of existing capabilities | Given the capabilities available to the company, including integrated business model, government support, well organised logistics and distribution network the company should be well positioned to have high profitability, however, ROE and ROA for the company have been declining over the past two years (Money Control, 2021) |
| Internal Strengths | Comment |
| Corporate support | Allows a great deal of financial stability to the company even during turbulent times such as this. |
| Brand recognition | This allows the company to charge higher prices for value added products when compared to competitors. |
| Integrated business model | Allows cost efficiency and reduces supplier dependency for the company. |
| Centralised Logistics | Allows more efficient management of logistical operations while providing greater control |
| Scale of operations | Allows greater scope for profitability. |
Proposed Strategy
SWOT Analysis
| Strengths | Weaknesses | Opportunities | Threats |
| 1. Corporate support | 1. Lack of International operations | 1. Government policy support | 1. Demand Variability |
| 2. Brand recognition | 2. Inefficient use of existing capabilities | 2. Competitive parity with international companies | 2. Unsure market growth in the short term |
| 3. Integrated business model | 3. Rapid urbanisation means new infrastructure work | ||
| 4. Centralised Logistics | |||
| 5. Scale of operations |
TOWS matrix
| Strengths | Weaknesses | |
| Opportunities | (1-2) Invest in developing consumer base in international market especially given demand for Chinese products is decreasing. This will allow countries to diversify their supply chain while providing the company with additional revenue stream to stabilise domestic instability/ | (1-1) Invest in developing international consumer base
(2-3) Seek private partnerships for long term supply contracts in major metropolitan areas to reduce demand variability. This will allow clients to get products at lower prices while ensuring better understanding of demand for the company. |
| Threats | (2-1) leverage brand reputation to secure long term supply contracts with contractors and builders. | (1-1) reduce dependency on domestic market and invest in international market development.
(1-2) avoid over investment of resources in excess inventory development (2-2) Reduce scope of operations in the short term for domestic market to enable over spending on resources. Invest in marketing and networking to evaluate demand. |
The strategy proposed as stated above in the TOWS matrix has three major elements:
Operation: In terms of operation the company in the short term needs to reduce the scale of production to better identify the demand trends in the domestic market. This will enable the company to save on resource expenditure while market volatility is high. Inventory management is also key in this regard.
Marketing: marketing focus domestically should be on identifying strategic supply deals to ensure greater demand estimating ability. Identifying market trends to track changes in demand on a dynamic basis is also needed. Finally, market development in international market to reduce dependency on domestic market also needs to be undertaken.
Sales: Finally, market development in international market to reduce dependency on domestic market also needs to be undertaken. Sales in international market can reduce the impacts of volatility in the domestic market. Price sensitivity is also lower in international markets which could allow better profit margins internationally.
Conclusion
In conclusion, based on the above analysis the above mentioned recommendation have been forwarded for the company. They help in solving the key challenges of demand variability and market uncertainty identified for the company.
References
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