Usha Martin: Competitive Advantage Through Vertical Integration - Case Study Example

Since its inception in 1960, Usha Martins has grown in size and market share to become one of the leading steel enterprises in the world (Kachru, 2009). It produces steel and steel products such as wire rods, wire stands, bar, bright bars and steel cords. With its five manufacturing units in Ranchi, Agra, Silvassa, Jamshedpur and Hoshiarpur and three others in Bangkok, United Kingdom and Dubai, the organisation has established a wide network in the global arena. It products are currently being sold in Netherlands, United States of America, United Kingdom, Vietnam, Indonesia, Australia and Bangladesh (Hitt, Ireland & Hoskisson, 2007). Over the years, the organization has relied on its vertical integration strategy to increase its sales and market share. The strategy has also given it more control over its supply chain thus minimizing the fluctuations that are usually associated with the supply side of a business. This paper analyzes the financial, environmental, competitive and internal resource aspects of the organizations to determine whether it is in a sound condition or not. TOWS Analysis The external and internal factors that have affected the operation and financial position of Usha Martin over the years can be understood through the use of the TOWS Analysis tool. This is a strategic management tool that evaluates the internal and external environments that an organization operates in by looking at the threats, opportunities, weakness and the strengths of the organization (Gorgenlnder, 2007). The factors are placed in that order to help in highlighting and emphasizing the problems solving aspect of the tool. From the case study, Usha Martin’s main threat has been the growing competition from other enterprises that specialize in steel item production and distribution the various regions that the organisation operates in. The shifting focus of other big players such as Tata Steel and SAIL into the wire and wire cord products has increased the competition intensity in the sector. The new trend has impacted negatively on the sales and profitability of Usha Martin. The other threat is the anti-dumping laws in some of the countries that the company operates in. Such laws have affected its raw material supply side thus impacting negatively on its vertical integration strategy. The final major threat is the fluctuation of steel prices which has affected the sale of its wire cords. Based on the facts and information available in the case study, it is apparent that Usha Martin has several weaknesses that are affecting its operations, financial performance and profitability. One of the weaknesses is the cynical nature of the industry in which it operates. The steel industry is not only competitive but also prone to external factors such as coal and oil price fluctuations. The nature of the industry has made it difficult for the organization to ensure constant revenue flow. The second weakness is the capital intensive nature of the venture. In the various acquisitions that the company has made, the capital involved has been significantly high. This has been the same case with the expansion and plant building initiatives that Usher Martin has initiated. The capital intensive nature of the industry has impacted on the organization’s yearly returns and at times made it impossible for it to get into some regions. The final main weakness that has affected Usha Martin the partial government interference in the export and steel pricing decisions. In some of the nations like the Thailand, the governments influence the export of steel products like the wire cord. The government influence has directly and indirectly impacted on the operations of the organization in such markets. Opportunities are basically the various factors and aspects that the organization can exploit to deal with its weaknesses (Kachru, 2009). New markets are considered among the major opportunities that the organization can exploit to grow its market share and enhance profitability. In China, Usha Martin is still contemplating on the best approach that it can use to increase its market share. The company is still undecided on whether to acquire exiting steel companies or get into strategic partnerships with the domestic steel industry players. The second opportunity is the new markets. Initially, Usha Martins focused its operations in India. However, through partnerships and acquisitions, it was able to get into newer markets. The company can still expand further to exploit other new markets in Europe and Africa. The final element in the TOWS analysis is the strengths. These are generally the aspects and factors that gives the company a competitive edge in the market. The strengths can be exploited to counter the threats in the market. The first strength that was identified from the information in the case study is the organization’s sales and distribution network. Usha Martin has one of the best steel distributions channels and networks in Asia and Europe. The network has allowed the company to meet the demand of its customers. The distribution and supply network has been supported and strengthened by the use of a backward and forward integration approach. Secondly, the company has a strong working relationship with the Indian government. By working with the government is big projects, Usha Martin has been able to establish a good working relationship with different government agencies. The third major strength is the company’s financial position. The revenue stream in the last ten years has been very attractive. It has given the enterprise a strong financial foundation for its expansion initiatives. Usha Martin has focused on specialty steel items and products in the regions where it operates. According to Bourgeois, Duhaime & Stimpert (2000) when an enterprise focuses on a given market segment or product, it is able to come up with innovative items that meet the specific needs of its clients since there is a better understanding of the customer requirements. This is something that Usha Martins has perfected in all the countries where it has established its steel product subsidiaries. Environmental analysis The steel industry is a cynical industry that is governed by two main factors. One side of the industry is influenced by the demand related factors (Tewari & Augustine, 2013). These factors are generally reflected in the state of the economy. The high growth rates in the sector have been as a result of the high demand of various steel products. In the long run, it has pushed the prices higher. The second main factor which affects the environment in which steel product manufacturing companies like Usha Martin operates in is the increasing capacity to meet the high demands. In the various countries that Usha Martin has erected manufacturing plants, it has taken an average of two years for the plant to be build and all the processes put in place for efficiency and effectiveness to be achieved. The company’s current capacity is basically due to the past economic trends and outlooks which has forced the company to continuously balance demand and supply. In the long run, it has resulted in volatility in products made of steel. In Indian for example, Usha Martin witnessed such trends between 2002 and 2008. The large capacity expansions that it had planned in anticipation of high growth did not fully materialize because of the volatility in the steel prices. The steel environment is also characterized by high customer diversity. According to Tewari & Augustine (2013), customer diversity has been used by Usha Martins to hedge against certain risks factors. The organization’s products are currently being used in general engineering, offshore oil and gas operations, ports, bridges, elevators, railways, fishing, ports, construction and automotive applications. To the automobile and construction industry, the company supplies strands and wires. To the oil and gas sector, it manufactures and supplies wire ropes and customized wire products for lifting and anchoring. Competitive analysis Wire ropes and wire products contribute to 65 percent of Usha Martin’s total revenue (Tewari & Augustine, 2013). In the Indian market, the organization faces stiff competition from Tata Steel which also deals ion wires. Competition from other sectors has not affected the demand of the company’s products in the domestic market. In the global market, it faces competition from other international steel manufacturers. Its major competitors in the Asian market include SAIL, Monnet Ispat, JSW, Essar Steel, Ispat Industries and Bhushan Steels. In an attempt to deal with the intense rivalry it has focused in producing safe and quality products from the global market. The fact that Usha Martins has been able to acquire other steel manufacturing and distribution entities in different countries is a proof that it has managed to somehow deal with the intense rivalry. In the UK for example, the company bought the second largest steel products distributor as it entered the market. The acquisitions and strategic mergers allow the organization to get more control in the market and command a significant market share. Internal resource analysis The vertical integration model which is used by Usha Martin in its operations is heavily reliant on the effective use of internal resources. One of the major areas that the organization has focused on is controlling the mines. Controlling the mines has significantly reduced the raw material costs. In India, the company controls the iron ore at the Vijay –II Mine in Badajamda. The company has also received a lease for mining town coal blocks in Lohari and Kathuatia. Controlling the mines reduced the cost of producing the raw materials thus reducing the capital and resources used in the manufacturing processes. Usha Martin is also reap the benefits of its vertical integration since the ores that it controls remove the dependence on scrap mental which is a costly raw material. The significant reduction in the cost of various key inputs like coal and ore has reduced the operation cost. The capital expansion has driven sales growth at Usha Martin. The resulting increase in capacity has been visible in the last five years in the high production volumes. Although this is the case, there is the possibility that the organization may not benefit from its extended capacity fully because in some areas like Europe, the new establishment are yet to fully pick up. For the organization to continue benefiting from its internal resources, it will be imperative to sustain the capacity building initiatives until the new venture pick up fully. Financial Analysis Generally speaking, Usha Martin’s performances has been impressive. Between the years 2004 and 2011, the company recorded increased sales in most of the countries where it operates. Profits have also gone up because of the successful operation of plants, vast distribution networks and the growing customer base. The company’s revenue growth is expected to rise with increased backward integration. According to Kachru (2009) one of the main approaches used in the steel industry to reduce cost is gaining control over the production of raw materials. Usha Martin participates in almost all the processes in the raw material production chain and this has lowered its production cost compared to its peers. In the long run, it is expected that the approach will further help increased its yearly profits provided that all the other factors remain constant. Recommendations From the analysis done in this paper, it can be concluded that Usha Martin is a healthy company. However, it must use its strengths to tackle its weaknesses and exploit new opportunities for the good financial status to be maintained. One way of doing this is by using forward and backward integration approach to continue lowering the cost of low materials. The approach will ensure that the company lowers the cost of key inputs in the manufacturing process. Secondly, Usha Martin needs to increase its capital expenditure in initiatives and plans that are meant to ensure raw material security. This will entail investing in power generating units and supplying the coke needed in its facilities through its subsidiary firms (Gorgenlnder, 2007). Such initiatives will not only help in strengthen vertical integration but also create diversification avenues. In the long run, Usha Martin stands to gain by increasing its production and revenue. The implementation of the above recommendations need to be done after carefully analyzing the economic trends in the markets where the company operates. This way it will be possible to match the organization’s production capabilities and the steel products demand. References Bourgeois, L. J., Duhaime, I.M., & Stimpert, J.L. (2000). Strategic Management Concise: A Managerial Perspective. San Diego: Harcourt College Publishers. Gorgenlnder, V. (2007). A Strategic Analysis of the Construction Industry in the United Arab Emirates: Opportunities in the Construction Industry. Hamburg: Diplomica Verlag. Hitt, M., Ireland, D., & Hoskisson, R. (2007). Strategic Management: Concepts and Cases. Mason: Cengage Learning. Kachru, U. (2009). Strategic Management: Concepts and Cases. New Delhi: Excel Books India. Tewari, R. N., & Augustine, O. (2013). Wasteland Development and Environmental Management Through Community Forestry. New Delhi: Natraj. Venkataratnam, C., & Verma, A. (2006).Challenge of Change: Industrial Relations in Indian Industry. New Delhi: Allied Publishers. Read More