Tata Steel UK – Port Talbot
Introduction
This paper entails a critical analytical review of a business entity which operates in the United Kingdom and which has recently encountered operational difficulties that have necessitated the formulation of a solution from a strategic management stand point.
The business entity which will be evaluated in this paper is Tata Steel, which has vast interests across the United Kingdom as well as in other parts of the globe. The paper will analyze the problems that the entity currently faces as well as propose viable solutions that will lead to the resolution of these operating issues going forward.
Tata Steel UK Background
The Tata Group is a large Indian conglomerate that operates across various industries and sectors of the economy with a general focus on heavy industrial manufacturing and distribution business entities across the world. The company was originally incorporated as Tata Motors in India, and its core business then was the manufacture of Tata motor vehicles that mainly comprised of industrial vehicles such trucks, buses, motorcycles and earth moving equipment (Tata, 2016).
However as the company continued to grow and expand, it introduced new lines of business as part of its interests in other sectors of the economy such as in the making of steel, iron and other heavy metals. The success of the steel-making division in India resulted in the company`s desire to venture into new markets outside its primary geographic jurisdiction of Asia, and the company subsequently started expanding its steel-making division primarily through mergers, acquisitions and strategic joint ventures with like-minded partners in the countries where it expanded into (Tata, 2016).
As the company`s international steel-making business continued to flourish, Tata Motors Steel set its sights on the European market specifically in the United Kingdom due to the lucrative opportunities that existed there and the high demand for steel products at the time (Tata, 2016).
In 2007, Tata Steel officially entered the United Kingdom market through the acquisition of Corus at an estimated 3 Billion Sterling Pounds. As part of the acquired entity, Tata Steel now owned numerous manufacturing plants and sites such as the Port Talbot plant which is located in Wales (Worstall, 2016). The subsequent performance of the Port Talbot plant is the main focus of the discussion in this case study.
Strategic Issue: Port Talbot plant
According to Worstall (2016), Tata Steel`s UK business initially flourished after the strategic acquisition in 2007 from Corus, who had previously acquired the business operation from British Steel. However, over time Tata Steel`s business began to face significant increased difficulties in the operation of its UK business due to declining demand for steel products across Europe and in the global economy as a whole.
This decreased demand by extension implied that the businesses that operated within this industry started facing declining profit margins as the demand for steel declined gradually due to a of number numerous reasons (Tovey and Marlow, 2016).
The steel industry in Europe was also faced with a different kind of a challenge which proved to be very costly as time went by. This challenge was the influx of cheap imports of steel from China, which meant that the steel being produced within the European Union and specifically in the United Kingdom was now more expensive than the Chinese steel, given the prevailing market valuations (Worstall, 2016).
The implication of the influx of these imports was that companies such as Tata Steel had to face the dual operating challenges of having a decline in the demand for their steel as well as a corresponding increase in competition from the Chinese steel makers (Worstall, 2016).
As the operating environment of the steel business in the United Kingdom became increasingly difficult, Tata Steel`s operations that were initially profitable began to nose-dive, eventually reaching loss making levels due to the unsuitability and unsustainability of the current operating environment (Ruddick, 216).
A strategic evaluation of Tata Steel`s UK business however, revealed that some of its plants had been affected more by the market slump than other operational sites. One such plant which was perceived to have been the most affected was the Port Talbot site (Ruddick, 2016).
According to Worstall (2016), it is currently estimated that the Port Talbot site incurs an operating loss of one million Sterling Pounds per day. This loss is entirely attributed to the changes in the fortunes of the steel market that have taken place over the last few years and have resulted in adverse profitability levels for steel companies in the European Union such as UK Steel. As a result of this massive losses the estimated value of Tata Steel`s UK business has declined from 3 Billion Sterling Pounds in 2007 to 1.5 Billion Pounds as at 2016 according to Ruddick (2016).
Tata Steel`s owners in India are now mulling over the proposal to close Port Talbot and entirely divest their steel interests from the UK Business altogether (Tovey, 2016). The plant requires a cash injection of at least 100 Million Pounds so as to enable it return to profitability and the Indian owners are skeptical about providing such funds.
If these funds are not provided soon, the plant’s operation will collapse leading to massive job losses as the plant currently employs 3,500 permanent workers and a further 1,000 contactors (Tovey, 2016).
Strategic Questions
Should Tata Steel withhold further funding of the Port Talbot plant and instead wind up its operations in order to scale down the losses it is currently incurring there, given the harsh operating environment of the global steel industry?
Which turn around strategies should Tata Steel instead adopt that will avert the closure of the plant and instead result in its return to profitability given the current operating environment?
Teaching Note
In determining the most ideal strategic management solution to Tata Steel`s current operating issues, two strategic evaluations will be undertaken in relation to the business. These evaluations are the PESTEL Analysis and the Porter`s Five Forces Analysis (Hasan, 2013, pg. 16).
PESTEL Analysis
Once implemented, these policies and measures will portend an improvement in the operating environment for the UK Business and thus, Tata Steel should contemplate keeping the operations of Port Talbot running based on these commitments.
According to Kayumi (2014, pg. 1) the second factor under the PESTEL framework is the evaluation of the current economic environment. In this regard, the closure of the Port Talbot plant will result in the loss of over 4,000 jobs and the ripple effect will be felt across the economy.
The UK Government is cognizant of such an adverse effect on the economy and it has pledged to assist Tata Steel with the resources that it needs to keep Port Talbot running. Based on this good will, Tata Steel should subsequently shelve their plans to shut down the plan and it should instead provide it with the capital it needs to maintain its operations running (Rao, 2010, pg. 499).
Victor (2011, pg. 32) notes that social consideration is the third factor under the PESTEL analytical framework. In the case of Port Talbot, Tovey and Marlow (2016) estimate that the plant employs more than 4,000 people directly, with up to 25,000 livelihoods being affected directly by the Port Talbot plant.
Its closure would consequently imply a huge negative implication of the social structure of Port Talbot area as thousands of people`s livelihoods would impacted adversely if the plant closed. On the basis, of this social consideration (Miriam, 2011, pg. 13) Tata Steel must keep the plant open at all cost so as to guarantee the welfare of the society as a whole.
Technology is the fourth factor under the PESTEL framework according to Webster (2010, pg. 100). According to Worstall (2016), part of the losses at the Port Talbot plant are attribute to its use of archaic operating technology which is expensive to maintain and which has been replaced by modern cost-efficient operational technology. Based on the technological consideration of the PESTEL analysis (Barrows, 2011, pg. 255), Tata Steel should overhaul its technology at Port Talbot to make it more cost efficient and effective rather than wind up the operations of the plant entirely.
According to Zanono (2011, pg. 41), environmental consideration is the next factor under the PESTEL framework. Ruddick (2016) notes that steel is gradually being replaced by other metals that are environmentally-friendly such as aluminum due to the fact that it can easily be recycled unlike steel.
Consequently, if push comes to shove, Tata Steel UK should instead convert the Port Talbot plant into aluminum-making facility as there exists a ready market for aluminum based on its environmental consideration (Rudolf, 2015, pg. 90).
Lastly, Legal factors is the next consideration under the PESTEL framework according to the Management Association (2015, pg. 697). In this regard, the closure of the Port Talbot plant may result in class action suits by the employees against Tata Steel UK on the basis of unwarranted summary dismal leading to incurring of further costs from a legal perspective (Nabyla, 2014, pg. 34), Tata Steel should instead keep its Port Talbot plant running and adopt the turnaround proposals that have arisen based on the PESTEL analysis.
Porter`s Five Forces Analysis
According to Dobbs (2014, pg. 37), the first consideration under the Porter`s Five Forces framework is bargaining power of suppliers (Marshal, 2013, pg. 216). In this regard, Tata Steel maintains an advantage over its suppliers since the adverse operating environment has not shifted its power away from the company in favor of its suppliers. Consequently, the company should keep the Port Talbot plant open on the strength of this key strategic advantage.
According to Roy (2011, pg. 500), the second consideration under the Porters Five Framework is the bargaining power of the customers (Andreas, 2012, pg. 22). Based on the current operating environment which has seen the influx of cheap Chinese Steel imports, this bargaining appears to have shifted in favor of the customers at the expense of Tata Steel. However, the company should keep its Port Talbot plant open the back of the proactive steps that are being taken by both the UK Government and the EU Commission to rid the market of these imports and to subsequently turn around the fortunes of the UK Steel industry.
According to Miller (2001, pg. 61), the third consideration under the Porter`s Five Forces is the threat of new entrants into the market (Walder, 2013, pg. 8). Currently, Tata Steel UK does not face any significant threats of new entrants beyond that posed by the existing cheap Chinese imports. This assertion is based on the capital intensive nature of the steel business that makes it difficult for new players to enter into the market.
According to Varga (2010, pg. 17), the fourth consideration under the Porters Five framework is the threat of substitute goods (Porter, 2013, pg. 399). Whereas the Tata Steel Company faces threats from substitute products such as aluminum, this should not be used as the basis of closing the Port Talbot plant. As previously mentioned, if the worst does comes the worst, the company could instead convert the pant into an aluminum factory so as to tap into the market opportunities presently offered by this product, when compared to steel.
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