Business Performance Evaluation Framework

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

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

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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


2. Operational Efficiency Measurement


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

Demand Forecasting Match

Meeting Sales projections, Overstock/Understock Cost

Waste Management Strategy for Waste Management and Recycle Options Availability

Production Standards Process, Degree of Automation, Standard Certificates Achieved

Ratio Analysis

Capacity Capacity Utilization and improvement

over previous year

Operational Efficiency Operating Margin and change over

previous period


3. Management Efficiency


Innovation

Strategic Launches

New Products/Offerings

Abrupt benefit from Strategic Planning

Strategic Clarity

Awards Awards/Accolades

Organization Culture

Development

Managing Labor Relations

Management-Employee Coordination

Labor Union Relationship

Organization Hierarchy

Workflow Efficiency

Agility


4. Financial Performance Analysis


Analysis

Economic Analysis

Growth Parameters Sales Turnover Growth, EBIDTA/EBIT/PAT

Growth

Value Additions Economic Value Added, Market Value Added,

Cash Conversion Cycle

Other Financial Parameters Cost of Equity and Debt, Discount Rate, Beta of

firm, Retention Rate

Stock Performance 365 days Moving Average, %Change in Stock price in 1 year, Change in P/E ratio

Proportionate Analysis

Profitability ratios

EBIDTA/EBIT/PBT/PAT Margins and improvement over last year; ROA/ROE/ROCE

and improvement over last year; Asset Turnover Ratio

Liquidity Ratios Current Ratio, Quick Ratio, Operating Cash Flow to Current Liability Ratio

Solvency Ratios D/E, CFO to Total Liability Ratio, Interest

Coverage Ratio, Financial Leverage, DSCR, TOL?TNW


5. Stakeholder Delight Indicator

Stakeholder Delight Indicator

Customers

Customer Delight Customer Complaints, Warranty Issues, Repeat

Customers

Offerings Discounts (with no additional Cost to Company),

Additional Features

Employees

Job Performance Revenue per Employee, Employee Cost as a

percentage of Sale

Job Satisfaction Attrition Rate, Variable Component in CTC,

Cashless Compensation, Employee motivation practices

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

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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

Physical Risk Natural Disaster, Terrorism,

Vandalism Risk

Country Risk

Interest Rate Risk, Currency Risk, Regulatory Risk

A Tool for Decision Making

Business Performance-Risk Matrix

0

4

8

1

2

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Overall Risk Score 0 2 4 6

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

Low Risk, Moderate Performance Zone: Focus on Performance Improvement Maintain minimized Risk level

Low Risk, High Performance Zone: Superlative Business Practices Spotlight on Performance Sustainability Maintain minimized Risk level

Moderate Risk, Moderate Performance Zone: Focus on :Performance Improvement Focus on Risk Mitigation

Moderate Risk, High Performance Zone: Focus on Risk Mitigation Strategy :Performance Sustainability

Sector: Chemical Industry: Pesticide /Agro

Sector: Materials Industry: Metals

Sector: Telecomm Industry: Tele-Comm Equipment

Sector: Service Industry: Finance - Investment

Sector: Energy Industry: Power Generation/Distribution

Current Business performance

Of TATA Group

Consideration of Seven Companies of TATA group for Business Performance Analysis

TATA Investment Corporation

NELCO

TATA Global Beverages TATA Steel Voltas

Sector: Consumer Products Industry: Tea&Coffee - Plantation

Sector: Industrial Goods Industry: Engineering Products

Evaluation Metric Scores for

TATA Group Companies (1/2)

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Business & Market Assessment



Financial Performance Analysis


2.73

2.24

2.55

2.17

2.69

Nelco BPS: 2.44

0.00 1.00 2.00 3.00 4.00 5.00 6.00






3.57

3.26

3.10

3.56

3.44

Voltas BPS: 3.41

0.00 1.00 2.00 3.00 4.00 5.00 6.00






3.30

3.43

3.50

3.82

3.62

Tata Investment BPS: 3.52

0.00 1.00 2.00 3.00 4.00 5.00 6.00






4.17

4.28

4.51

4.04

3.99

Tata Steel BPS: 4.20

Evaluation Metric Scores for

TATA Group Companies (2/2)

0.00 1.00 2.00 3.00 4.00 5.00 6.00






3.75

3.56

3.85

3.05

3.79

Tata Global Beverage BPS: 3.55

0.00 1.00 2.00 3.00 4.00 5.00 6.00






3.52

3.69

3.58

3.31

3.64

Tata Power BPS: 3.53

0.00 1.00 2.00 3.00 4.00 5.00 6.00






3.69

3.42

3.70

3.58

3.67

Rallis India BPS: 3.59 Company

Company-Group Correlation Factor

Composite BPS

Overall Risk Score

Tata Steel 1.604 6.74 1.94

Nelco 1.434 3.50 4.91

Voltas 1.417 4.83 3.44

Tata Investment Corporation 1.458 5.14 3.27

Tata Power 1.438 5.07 3.62

Tata Global Beverages 1.438 5.10 3.34

Rallis India 1.563 5.61 3.17

Mapping of Companies on

Business Performance Risk Matrix

0

4

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0 2 4 6

Co

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Overall Risk Score

Tata Steel (1.94, 6.74)

Nelco (4.91, 3.50)

Voltas (3.44, 4.83)

Tata Investment Corporation (3.27 ,5.14)

Tata Power (3.62, 5.07)

Tata Global Beverage

(3.34, 5.10)

Rallis India (3.17, 5.61)

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

Strategic Business Plan

for TATA Steel

Business Performance Score (BPS) = 3.84 Company-Group Correlation Factor = 1.60 Composite BPS = 6.15 Overall Risk Score (ORS) = 2.6

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






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


Trade Aspects


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


2. 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

Steel Demand Growth (%) = 2.5 + 0.2*GDPGrowth % + 1.7*IIP Growth % Analysis by Statistical Tools,

Move towards e-business for faster administration Setting up plant close to captive sources

Current Situation Future Plan of Action


3. Management Efficiency

JV & acquisition on perspective of a single value loop in business model

Focus of campaign in countries having considerable market share

Dedicated Talent Management centre

Introduction of 360 degree feedback

Family insurance schemes for workers,

Cultural Event, sport competitions organization for workers

Efforts for Nomination in Foreign / Global awards

Capital raise for optimized Capital structure



Innovation

Strategic Launches

Investment in development of Dharma Port, JV with L & T with aim of reducing transportation cost

Campaign - “Value Stronger than Steel” Campaign – ValueAbled.com

FPO of 5.7Cr shares issued in

Jan 2011

Awards

Business world most Respected Company award 2011, 1st prize in Udyog Mela 2011

Organization Culture

Development

Managing Labor Relations

Cooperative Labor Union Relationship

Helping to Polytechnic & ITI institute to train student which interns are hired by company

Organization Hierarchy

Promoting teamwork, nurturing talent, enhancing leadership qualities & acting with pride, passion & pace

A well defined Human Resource Manual focused on Individual recognition


4. Financial Performance Analysis


Analysis

Economic Analysis

Growth Parameters

Sale CAGR of 12% in last 3year

EBITDA CAGR of 13% in last 3year

Profit CAGR of 15% in last 3year

Value Additions

Economic Value Added = 1264 Crs

Market Value Added = 845 Crs

Cahs Conversion cycle = 19 days

Other Financial Parameters

WACC = 15%, Beta of firm = 1.3

Retention rat e= 77 %

Stock Performance % change in stock price in 1 yr = -44%

Change in P?E ratio = -22%

Proportionate Analysis

Profitability ratios

EBITDA margin = 39%

Improvement in EBITDA = 100BP

ROE = 16.36%, ROCE = 16.68%

Liquidity Ratios Current ratio= 1.82, Quick ratio = 1.42

CFO to current liabilities ratio = 55%

Solvency Ratios Debt to Equity ratio = 64%

Interest coverage ratio = 6.8

Leverage on Brand image for sale improvement

Sustaining Low level of Cash conversion cycle

Maintain moderate retention ratio of foster growth

Low valuation due to economic slowdown, but it will be lucrative in near term future

Cost saving approach

Maintaining Optimal current ratio

Optimal capital structure



5. Stakeholder Delight Indicator



Customers

Customer Delight Less customer complaints, Less warranty issues, High degree of Repeat customer

Offerings Less discount to customer due to High cost environment, Customized product supply

Employees

Job Performance Industry comparable Revenue per employee, Moderate employee compensation

Job Satisfaction High Level of job satisfaction indicated by less attrition rate

Shareholders Monetary Benefits Negative return on stock prices

Dividend payout ratio = 24%

Society Benefits

Environment Conserve Actions

Less CO2 emission than competitor SAIL

Serving Bottom of Pyramid

Own TATA steel rural development society

Better quality products and Service

No Discount as per current short term outlook

Employee motivation practices – Goal setting, Equity Theory

Employee awards, Job enrichment as per performance

Considering current economy slowdown, Need to maintain status quo

Promotional activities for Environment cause Green Initiatives

Maintaining Low cost to extent possible

Company-Group Correlation Factor

Trade relationship with other Tata Group Companies

Suppliers of TATA companies in Automotive, Engineering Sectors as TATA Motors, TATA autocomp system

Moderate raw material purchase through

Shareholding Pattern

Major Promotor : TATA Son (26%), Minor Promoters: TATA Motors, TGB, TATA Chemical, TATA investment Corp, TATA AIG

Investment tin TATA Ryerson, TATA Refractories, TATA sponge iron, TATA Metaliks, TATA Pigments, TATA BlueScope steel etc. TATA NYK

Distribution Network Sharing Low overlap in distribution network between TATA steel & other group companies

Financial Support

No loan from group companies

NO Loan to Subsidiary, Group Associate company

Current Situation

TATA Steel Company-TATA Group

Correlation Factor

Overall

Risk

Score

Business Risk

Industry Risk

Company Business Risk



Trade Risk

Financial Risk

Cost of Capital Discount Rate, Cost of Debt &

Equity, Beta of the firm

Credit Risk

Liquidity Risk

Long term Solvency Risk

Trade Payment Ratio

Operational Risk

People Related Risk

Workplace Safety Risk

Labor Relation

Internal Fraud

External Fraud

Physical Risk Natural Disaster, Terrorism,

Vandalism Risk

Country Risk

Risk in Process & Delivery

High Interest rate, High inflation environment

Below average risk due to strong product portfolio

Risk of Global economic slowdown

Moderate risk due to concentration of buyers & less impact due to PPA

15% discount rate – reflect higher risk

Less risk due to availability of sufficient current assets

Moderate risk due to comparatively higher financial leverage

Moderate risk due to ordinary receivable parameters

High due to work place nature

Moderate – reduced due to automation in process

Less probability

Less Probability

Moderate

Future Plan of Action Current Situation

Business Plan for

TATA Steel Risk aspect Mitigation

Focus on niche segments

Expansion in less impacted Developing Economy

Chase for more customer

Optimum Capitals structure

Optimum cash availability

Optimum Financial leverage

Try for reducing Account receivables

Safe SOP

Safety enabled Work flow

Self ownership sense building Organization culture

Hierarchical Authentication Procedures

Safety Precautionary Equipments & Guidelines

Hedging Strategies

Time line for TATA Steel

Business Plan Action

Economic Movement Prediction

Global Slowdown

Recovery Phase

Growth Resurgence

Development Ride

Market Maturity

2013 2014 2015 2016 2012

R & D boost with foreign collaboration

Indentifying Niche customer segment

Focus of De integration

Backward Integration of low valuation

Client consultancy for new component

Recommended Business Plan across Timeline

Commodity to High end solution provider

Focus on volume for economy of Scope

Sector focused B2B & Retail Saleteam

Focus on Recycling

Strong branded Product portfolio

Leadership & Management

Business Performance Evaluation Framework