Valuating và Adjusting Strategy For Construction Installation và Industrial Material Company Limited

o express my sincere gratitude to all of my teachers at Solvay Business School and National Economics University for their teaching and guidance during my course. I would like to extend my thanks to the CEO of Cim Co., Ltd who trusted me and shared his information and ideas about the company operating. I am very thankful to all individuals for providing me with the necessary information and supporting me with advice during the period of my data collection for this research study. Last but not least, I would like to express my loving thanks to my parents, my wife and son for their love and encouragement throughout my studying. Table of content Appendix: Finance Report years 2002 - 2008 Business Result year 2002 -2008 List of Figure Figures 1: Revenue of Cim co., Ltd from 2002 to 2009……………………… ...08 Figurers 2: Tariff on foil & rebar from 2001 to 2009…………………………....19 Figures 3: Imported quantity 2009……...………………………………………..23 Figures 4: Top 20 hot plate importers in 2008………………………..………….24 Figures 5: Price of Steel in 2007 (Source: Vietnam GSO)..……………………..25 Figures 6 : Revenue structure of Cim Co., Ltd……..……………………………29 Figures 7: Leverage & liquidity ratios of Cim Co., Ltd……………….…………30 Figures 8: Revenue & liabilities growth of Cim…………………………………34 Figures 9: ROE of Cim from 2002 to 2008…………….………………………..35 List of table: Table 1: Corporate strategy formulation process…..…………………………….11 Table 2: SWOT model……………………………. …….………………………16 Table 3: Opportunities and Threats……………………………………………....17 Table 4: Strengths and Weaknesses of Cim., Ltd………………………………..34 Table 5: Threats and Weakness……… …………………………………………35 Table 6: SWOT/TOWS matrix of Cim, Ltd……………………………………. 37 Table 7: Choosing Strategy……………………………………………….……..38 Table 8: BCG Matrix……..……………………………………………….……..39 Executive Summary Steel industry takes a very important part for any economy, especially for Vietnam - a developing country where begin to build its new cities, infrastructure, shipping, heavy industries… According to statistics of Vietnam Steel Association, Vietnam nowadays has discovered & located over 216 iron ore mines in which 13 mines with the capacity over 2 million tons distribute conceptually in the North. However, investments focus on easier & more quickly making money field. Lacking of planning from Government from the beginning, social resources has dropped foil & iron ore processing industries. In many years from 2000 to 2007, domestic foil producers just supply only around 20% of demand. This rate rose up to 50% in year 2008 with new factories but they themselves facing the same problems of finished-good factories: lacking of input materia. This problem shall be solved by developing iron ore exploiting & processing industry. Because of lacking input material, the only solution of Vietnam steel industry is expected to outside supply - exporting countries such as India, Russia, Korea, Japan, Australia, South Africa and China, the biggest producer and consumer in the world. Input material depending on foreigner resources, the market strongly affected by outside factors not only international supply-demand but also policies of exporter countries. Beside outside factors, Vietnamese market itself affected by internal conflicts between infant policy & monopoly situation. With an unstable environment like above, Construction Installation & Industrial Material Company Limited (Cim Co., Ltd) was born in 2002 with only one business line, it was importing to distribute in domestic market. Its clients are domestic trading companies, mechanic manufacturers, construction contractors, shipping manufacturers…etc. In eight years, the company has amazing growth rate in revenue: 21 times with average growth rate of 140%. The source of this hot growth came from dept. Until 2005, 100% revenue belonged to trading activities. In this very year, Cim Co., Ltd has stood on the edge of bankrupt because of a strongly changing in business environment. This hot growth originates from what and why just in 04 operating years the company has faced to such serious problem. Did the problem come from external or internal factor? Firstly, this study aims to review company’s business, finance statement and organization, to evaluate suitability of the current strategy in context of unstable & changing environment. Secondly, base on technical of Strategy Formulation process including SWOT and BCG analysis this study shall give out the suggestions to adjust CIM Co., Ltd strategy in order to improve Weakness to reduce Threats from changing environment and to take full advantages of Strengths to catch Opportunities. Chapter 1 – Introduction I.1. Background I.1.1 Industry overview Steel is a strategic industry in Vietnam economy, which under early construction process. Its history started in wartime with the first complex in Thai Nguyen province what had small capacity and few kinds of products. In general, steel industry can be described simply as a chain of products as the diagram bellow: End using Finished - good Rebar Construction Mines Sifting Semi-product End using Iron ore Roll Shipping Mechanical Pipe Roofing Mechanical Plates Shipping Electric transportation V-shaped Mild foil Refining Crude material Laminate Diagram1: Steel industry product chain Iron ore in mine, which contains other impurities, after sifting becomes input material for iron refining factories. Through cleaning, chemical, heat processing it shall become crude material for mild foil laminating factories. This processing requires big investment in fixed assets, equipments & technologies. It also takes long time to revoke investment capital than finished-goods processing. There are several types of mild foils in different shape or size for each production. After heat & shape formed - processing, output products are rebar, plate, roll or v-shaped rod. Domestic foil producers just supply 28% of mild foil demand so in many years finished-goods producers must depends on imported material, which was a factor creating an unstable market. This problem shall has been analyzed more detail in Chapter III of this study. I.1.2 Current background Although the year of 2009 is regarded as a difficult year for VN economy after crisis but 2010 is really harder time when Government support policies comes to end. Especially, the State Bank allows banks to loan in medium and long term with negotiable interest rate. The interest rate shall increase from ceiling rate of 12% to 18%-20%. This strong change in 2010 surely causes very bad effects to the companies that using much more dept than equity as the case of Cim Co., Ltd. Furthermore this year is the first year Vietnam shall export 500.000 tons steel products whose input materials come from iron ore exploited & proceeded in domestic factories (according to the Development Planning of VN Steel Industry in 2007-2015, considering up to 2025 signed by Prime Minister). In five years from now, when huge steel production complex projects come to operating, Vietnam is going to be a steel exporter instead of being importer currently. The market share of import companies shall narrow by the time. In 2010, CIM Co., Ltd has a strong change in organization from the top. The CEO has been instead of his father to be the Chairman of company, who retired in 2009. This has a deeply meaning to the company in changing the decision making process in direction of power concentrated. The movements of environment and their influences to the business structure of Cim Co., Ltd shall has been more detail analyzed in the “Problem Statement” I.2. Operational Definitions Here below are some explanations of terms in steel industry that using within this thesis: - Civil steel pipe: Steel pipe used for civil construction with diameter 14 to 100 mm - Pre-fabricated steel structure: This kind of building is fabricated in factory and combined at site, which is used for industrial building. - Steel foil: Steel rod with section 100x100 or 120x120 mm were used as input material for many kind of steel product such as: rebar, V-angle rod.. - Rebar: Steel rod with circle section from 6mm-32mm used in concrete structures. - Cutting line: Machine divides bigger steel coin in to smaller steel coins what to be used as input material for pipe production. - Sifting: Process exploiting iron ore as input material for iron refining industry - Refining: processing which from iron ore to make crude material for foil laminating process. - Laminating: Processing which makes mild foil from crude material. - VSA: Vietnam Steel Association I.3. Problems Statement Currently, Cim Co., Ltd has mainly two business lines including Importing & distributing steel product (Trading) & Steel pipe manufacturing (manufacturing). Here under is the revenue of the company from 2002 to 2009: Figures 1: Revenue of Cim Co., Ltd from 2002 to 2009 Trading revenue grew so fast, especially in duration from 2002 to 2004. In three years from establishment, the company revenue increased from 25.9 billions to 513.4 billions, nearly 20 times bigger. The chart above shows that how much “hot” growth was through time going. Revenue grew with amazing speed while equity contribution increasing was not equivalent. In 2004, company equity was 16 billions and the liability was 110. Therefore, dept-equity ratio was 6.8. These figures pointed a thing that revenue grew base on increasing of liabilities. In 2005 affected by changing environment, revenue deeply decreased 40% down to 304 billions. This year, the company got a negative benefit of 41 billions while its contributed capital was only 16 billions. In sort term, depending on dept made the company frequently be in stressful finance statement and faced to solvency losing damages when environment changes in bad trend or a sudden event happens unexpectedly. Besides, burden of loan interest took away most profit. In long term (over five years), the market share shall has been narrowed by two factors: - Harder competition - Imported goods be instead of domestic products which made by huge projects under construction according Government plan. Therefore, Cim Co., Ltd should consider reviewing its business, developing plan under strategy view. The targets that company is directed forwarding are worthy in such risky statement as analyzed above? That are the problems this study aims to solve through answering questions raised in part “Research Questions” I.4. Research Objectives Objectives of the study listed as bellow: - Identify current missions, objectives, strategies of Cim Co., Ltd and valuate the suitableness of strategy in new phase of company life in context of changing environment - Analyze external & internal environment for the company. - Base on the result of above researches, the study will suggest a suitable corporate strategy for the company in the period 2010-2015. I.5. Research Questions Below are the research questions that the study tries to answer 1. What is the current strategy of Cim Co? 2. Dose the company has clear vision, mission and value? 3. Is the existing strategy suitable for company’s development currently and in the future? 4. Is it necessary to adjust the strategy and if yes how the strategy shall be adjusted? 5. How dose the company implement the new strategy? 6. How is a schedule of the implementation? I.6. The importance of the research Depending deeply on liabilities, the company’s leaders seem to ignore serious problems at the strategy level to flow target of growth as fast as possible. Therefore, the outcomes of this study aim to warn them about the future risks as well as to support them to adjust the company’s strategy for more safe & stable statement in a changing environment. I.7. Scope of Limitation Because limitation of time and ability to approach update company’s information, this study just focus on business activities of Cim Co., Ltd in the North in duration from 2002 to 2008. Steel is a very wide industry including exploiting, processing crude material, semi-product manufacturing, finish-goods manufacturing. In this study, the concept of industry juts is narrow in fields that the company’s business concerned: crude materials what are inputs for finish-goods manufacturing. Concept of market and competitors also are limited in the North of Vietnam. I.8. Structure of Thesis Chapter 1 describes background, industry concept definition, statement problems, objectives, research questions and scope of limitation. Chapter 2 describes theory framework and model used in the study. Chapter 3 describes analysis external environment using PEST and 5-force model to identify Threats and Opportunities which company must to face or could catch at the present and in the future. Chapter 4 describes analysis internal factors such as finance resource, human resource, management process, technology, business line, manufacturing effectiveness, investment activities, relationships to identify Strengths and Weakness of company. This chapter also analyzes the current strategy of company, point out current vision, mission and value. Chapter 5 describes adjusted strategy for the company and implementation plan Chapter 6 Conclusion, further researches and thanks words Appendices and Bibliography/ references are listed at the end of the report Chapter 2 – Theory review II.1. Theoretical framework The concept of strategy is not a new one. It appeared from ancient history and strongly adhered to wars, where strategy meant to win over the enemy, to keep the land from invasion, or even to expand the country successfully. Later on, strategy has not only become a war terminology but also been well connected to many other fields including economy, politics and society. In economy, strategy has become very important to business organizations. II.1.1. Corporate strategy & role of corporate strategy in organization Corporate strategy Corporate strategy is mainly about broad decisions for the total organization's scope and direction. When creating corporate strategy, managers should consider what changes should be made in the company’s growth objectives and strategy for achieving those objectives, the lines of business that company plan to involve, and how these lines of business cooperate together. Corporate level strategy includes three components: (1) growth or directional strategy (what should be the growth objectives, ranging from retrenchment through stability to varying degrees of growth and how the company accomplish this), (2) portfolio strategy (what should the portfolio of lines of business with regard to how much concentration or diversification we should have), and (3) parenting strategy (how the company allocate its resources – where should the company put special emphasis, and how much does the company integrate to different fields of business). Roles of corporate strategy in organization Many people start their business with a small amount of money but become successful thank to a correct strategy. However, there are a lot of big firms but due to applying a wrong strategy, become bankrupt in a short period. It is obvious that nowadays, strategy become more and more important in organization. - Corporate strategy could be seen as the direction for organization in the long term and the sound basis for all activities of organization. Firms operate without corporate strategy or unclear corporate strategies will loose the direction easily. They cannot link the current issues with the long-term view and see the business in one side, not overall activities of enterprise. - Corporate strategy helps the organization to see and utilize the opportunities as well as prepare to deal with threats in business environment. - Corporate strategy is the key for organization to best employ the resources, enhance the position of enterprise and sustain development. - Corporate strategy assists the board of managers to make decisions in accordance with the move of market. It will be the basis for RD & D, humane resource, product development… II.1.2. Corporate strategy formulation It is useful to consider strategy formulation as part of a strategic management process that comprises three phases: diagnosis, formulation, and implementation. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates. Within the scope of this thesis, the author will only concentrate on Diagnosis and Formulation phase which are summarized in table 3.1 below: Table 1: Corporate strategy formulation process COMPONENT DIAGNOSIS FORMULATION Basic question Where are we? Where do we want to be? Output Understanding of the organization & its environment, therefore, address the critical issues Corporate strategy recommendations to ensure success & address the critical issues Process 1. Identify current mission, objectives and (especially) strategies 2. Analyze data about external & internal environment to evaluate performance and identify SWOT * External: competitive environment (5-force model), societal environment (political/legal, technological, economic, socio-cultural) -> identify opportunities and threats * Internal: financial, marketing, production/operations, technology, organizational -> identify strengths and weakness 3. Address critical issues: SWOT analysis 1. Identifying directional strategy (grand strategy) for the company 2. Identifying portfolio strategy for the company. 3. Define new mission, goals for the company II.1.2.1. Diagnosis Diagnosis phase include - Reviewing the current key objectives and strategies of the organization. - Performing analysis of the internal environment of the organization including financial resources, physical resources, human resources, technological resources… to identify major strengths and weaknesses; - Analyzing the organization's external environment, including macro factors (political, economic, social technological factors) and micro factors (rivalry level, threat of substitute, buyer powers, supplier powers, barrier to entry) in order to identify major opportunities and threats. - Identifying the major critical issues, which are a small set, typically two to five, of major problems, threats, weaknesses, and/or opportunities that require particularly high priority attention by managers. Reviewing current missions, goal and strategy of firm Before formulating a new strategy for the company, it is necessary to check whether the firm has any strategy or not. In case company already have a business strategy, should evaluate the current strategy: its strong points, weak points and the necessity to formulate a new strategy. External environment analysis A scan of external environment in which the firm operates can be expressed in term of societal environment analysis (political, economic, social technological factors) and industry analysis (rivalry level, threat of substitute, buyer powers, supplier powers, and barrier to entry) * The Societal Environment Analysis The societal environment composes of general forces that influence the long-run decisions of the organization. They are economic, technological, political-legal socio-cultural forces. Therefore for a garment firm, its societal environment is the situation of economic, technological, social and political force in Vietnam and in customers’ countries Political factors include government regulations and other legal issues and define both formal and informal rule in which the firm must operate. The political factors can be tax policy, labour law, environmental regulations, trade restriction and tariffs, political stability. For a garment companies, above factors have a very strong influence on company’s operation and development. Economic factors affect the purchasing power of potential customers and the firm cost of capital. Economic factors are economic growth, interest rates, exchange rates, inflation rates… Managers must consider the state of the economy when formulating strategies. In 2010, with the recover of the world economics, Vietnam garment companies can expect to increase the exporting turnover. Social factors include the demographic and cultural aspect of the external macro environment. These factors affect customer need and size of potential markets. Some factors include: health consciousness, population growth rate, age distribution, career attitude, emphasis on safety… Each of these influences how management accomplishes its job. Changes in social environment can have major impact upon managerial decision making. Technological factors can lower barrier to entry, reduce minimum efficient production levels and influence outsourcing decision. Some technological factors include R & D activities, automation, technology incentives… In garment firms, management must decide the appropriate level of technology for the company and how new level of technology should be introduced. * Industry Analysis: Analyzing Task environment Porter (1985) states that corporation concerned mostly on the intensity of competition within its industry. The level of intensity is determined by major competitive forces as threat of new entrant, rivalry, threat of substitutes, bargaining power of supplier and bargaining power of buyer. Rivalry is the intensity of the competitive environment consists of those whom an organization must "compete" in order to obtain resources. Hamel, (1993) stated that knowing your rivals is a key ingredient in building effective strategies, and analyzing the competitive environment is a underlying challenge to management, In the traditional economic model, competition among rival firms drives profit to zero. The intensity of rivalry is different in each industry. In garment business, the intensity of rivalry is influenced by the following characteristics: (1) A large number of firm increase rivalry because more firm must compete for the same customers and resources. The rivalry intensifies if the firm have similar market share, leading to struggle for market leadership. (2) Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market. (3) High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high level of production lead to a fight for market share and results in increased rivalry. (4) Low switching cost increases rivalry. When a customer can freely switch from one product to another, there is a greater struggle to capture customers. (5) Low level of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. (6) High exit barriers place a high cost on abandoning the product. High exit barrier cause a firm to remain in an industry, even when the venture is not profitable. A common exist barrier is asset specificity. When the plan and equipment required for manufacturing a product is highly specialized, these assets cannot be sold to other buyers in another industry. Threat of substitute: In Porter’s model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product’s demand is affected by the price change of a substitute product. A product’s price elasticity is affected by substitute products – as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise price. - The threat of substitute comes from products outside the industry. The price of paper bag is constrained by the price of poly bag. The poly bag is substitute, yet they are not rivals in the poly bag industry. Buyer power: The power of buyers is the impact that customers have on a producing industry. Buyer affect an industry through their ability to force down the prices, bargain for higher quality or more service, and play competitors against each other. Buyer are weak if buyers are fragmented (no buyer has any particular influence on product or price) or producer threaten forward integration (producer can take over own distribution/ retailing) or producer supply critical portions of buyers’ input or products not standardized and buyer cannot easily switch to another product. Supplier power: A producing industry requires raw materials, labour, components and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry profits. Suppliers are powerful if suppliers are concentrated, credible forward integration threat by suppliers or significant cost to switch suppliers. Suppliers are weak if there are many competitive suppliers while product is standardized, credible backward integration threats by purchasers or concentrated purchasers. Barrier to entry/ threat of entry: It is not only current rivals that pose threat to a firm in an industry but also the possibility of new firm enter the industry. In theory, any firm should be able to enter market and if free entry and exists then profit should always be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barrier to entry. Barrier to entry are unique industry characteristic that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm’s competitive advantage. Barrier to entry arise from several sources: government regulations, patents and proprietary knowledge, economies of scale... Internal environment analysis The elements within the organization that are available to be used in the accomplishment of its goals are organizational resources. They are physical, human, technological and financial resources. Financial resources: All organizations require resources to provide for ongoing operations and to fund growth. Retained earnings refer to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. This source of funds is often inadequate to fund the desired level of growth so other source must be utilized. In order to secure needed financial resources, management can look outside the organization for sources of funds. There are 2 general sources for business: debt and equity. Debt is the money that company borrows to fund its businesses. Debt can include bank loan, lines of credit and corporate bonds. Equity is the money company get from selling the stock. When selling its stocks, the company is giving out its ownership. In general, the major financial task confronting management are to acquire necessary funds by some combination of retained earnings, debt and equity and allocate the acquired financial resources for organizational use. The accounting profession, through its record and procedures, provide management with a financial perspective on how funds are being used and strategy indicate the needs for financial resources for operation in the future. Physical resources: The physical resources of company include plant and manufacturing equipment, distributing facilities and raw material. Management periodically evaluates the manner in which the physical resources of company being acquired and utilized. These resources are the tools for management to improve productivity and ensure profitability. Human resources: The people who work in the organization are its human resources. In order to have effective business, company should recruit and develop necessary skilful workforce. It is very important for any company to manage well this resource. The first task of human resource management is to acquire the necessary workers through recruiting or training. The second task is to place the correct employee in the right jobs. The third task is to motivate effective performance which will lead to the high productivity. The final task is evaluating correctly the employee performance. Technological resources: Technological resources refer to the level of applied technology within the firm. Management must decide the appropriate level of technology for the company in term of its goals and workers’ skill. From internal analysis, internal factors to the firm can be classified in to strength (S) and weakness (W). A firm’s strength is its resources and capability that can be used as a basis to develop the company’s competitive advantage. The strengths can be a strong brand name, good reputation among customer, cost-advantage from propriety know-how… The absence of certain strengths can be viewed as weaknesses. For example, each of following can be considered as weakness: lack of paten protection, a weak brand name, poor reputation among customer, high cost structure SWOT analysis A firm should not necessarily pursue more lucrative opportunities. Rather, it may have a better chance at developing competitive advantage by identifying a fit between the firm’s strength and upcoming opportunities. In some case, the firm can overcome a weakness in order to preparing itself to pursue an opportunity Table 2: SWOT model STRENGTHS - Huma._.