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Strategy Formulation and Implementation Individual Assignment

Name: Anurag Mahendra Boob Roll no: 08 Topic: Indian Cement Industry and Value Chain Analysis for Ultra Tech Cement. Course: PGDM Communications Subject: Strategy Formulation and Implementation. Contents Table: Header
Cover Page History Introduction Industry Specifics Value Chain Analysis for Ultra tech Cement Emerging Trends in Industry and Ultra Techs Competitive Advantage in Synergy Conclusion

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History
Firstly in 1889 a Kolkata-based company started manufacturing cement from Argillaceous. Later the industry started getting the organized shape in the early 1900's. India Cement Company Ltd was established in 1914 in Porbandar with a capacity of 10,000 tons and production of 1000 tons installed. The first initial thrust to the cement industry in India was during the World War 1 and then the industry started growing at a fast rate in terms of production, manufacturing units, and installed capacity. This particular stage in the history was referred to as the Nascent Stage of Indian Cement Industry. In 1927, Concrete Association of India was established to create public awareness on the utility of cement as well as to propagate cement consumption. In the year 1956 the Indian Cement Industry saw the price and distribution control system, which was established to ensure fair price model for consumers as well as manufacturers. Later, government authorized new manufacturing units (as well as existing units going for capacity enhancement) to put a higher price tag for their products in the year 1977. After some years, government introduced a three-tier pricing system with different pricing on cement produced in high, medium and low cost plants. In 1982 Government of India introduced a quota system to give impetus to the cement industry. A quota of 66.60% was imposed for sales to Government and small real estate developers. Lower quota at 50% was effected for new units and sick units. The remaining 33.40% was allowed to be sold in the open market. These changes had the desirable effects on the Indian Cement industry. Profitability of the manufacturers increased substantially, but such rising input cost was a cause for concern. Complete freedom to the cement industry was given in the year 1989, to gear it up to meet the challenges of free market competition due to the impending policy of liberalization. In 1991 the industry was de- licensed which resulted in an accelerated growth for the industry and availability of state of the art technology for modernization. Major players invested heavily for capacity expansion and the industry laid greater focus on exports to maximize the opportunity available in the form of global markets. The role of the government has been extremely crucial in the growth of the industry.

Introduction
Indian Cement Industry is the second largest cement producer in the world after China with a total capacity of 151.2 Million Tonnes (MT). Government of India has been giving immense boost to various infrastructure projects, housing facilities and road networks, the cement industry in India is currently growing at an enviable pace. In the coming years more growth in the Indian cement industry is expected to come. It is predicted that the production in India would rise to 236.16 MT in FY11 & expected to rise to 262.61 MT in FY12 in the Cement Industry. The Indian cement industry is dominated by 20 companies, which account for almost 70% of the total cement production in India. The companies all over India have produced 11 MT cement during April-September 2009. The Indian Cement industry plays a major role in the growth of the nation for that case in any country. Industry Cement Industry was under full control and supervision of the government. However, it got great relief at a large extent after the economic reform which made its growth easier. Still government interference, especially in the pricing, is evident in India. In spite of it being second largest cement producer in the world, Indian Cement industry falls in the list of lowest per capita consumption of cement with 125 kg. The reason for this is poor rural people who mostly live in mud huts and cannot afford to have the commodity. The demand and supply of cement in India has grown up over the years. In a fast developing economy as India there is always large possibility of expansion of cement industry. The Indian cement industry is one of the vital industries for economic development. The total utilization of cement in a year is used as an indicator of economic growth. Cement contributes as a necessary constituent of infrastructure development and a key raw material for the construction industry, especially in the government's infrastructure development plans in the context of the nation's socio-economic development.

Industry Specifics
Size of the Industry The Cement Industry in India is the second largest in the world. Cement Industry constitutes of 140 large and more than 365 mini cement plants. The Indian Cement Industry's capacity at the beginning of the year 2009-10 was 217.80 million tonnes. The Indian Cement Industry comprises of 125 units with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum. Actual Indian cement production in 2002-03 was 116.35 million tonnes as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%. Keeping in view the trend of growth of the industry in previous years, a production target of 126 million tonnes has been fixed for the year 2003-04. During the period April-June 2003, a production (provisional) was 31.30 million ton. The industry has achieved a growth rate of 4.86 per cent during this period.

Total Contribution to Economy and Sales The Indian Cement Industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum. The Cement Corporation of India is a Central Public Sector Undertaking which has 10 units. State Governments owns 10 large cement plants. Indian Cement production in 2002-03 was 116.35 million tonnes as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%. The Major players in cement production are Ambuja cement, Aditya Cement, J K Cement and L & T cement

Domestic and Export Share Apart from meeting the entire domestic demand, the Indian Cement industry is also exporting cement and clinker. During 2001-02 and 2003-04 the export was 5.14 million tonnes and 6.92 million tonnes respectively. During 2003 the export was 1.35 million tonnes. The Major exporters were Gujarat Ambuja Cements Ltd. and L&T. It is expected that the cement industry will steadily grow and more than 50 million tons will be produced annually to cater the high demand in the real estate sector. There will be significant increase in the production by around 9 to 10% which will favourably affect the overall Gross Domestic Product of the country

Top Leading Companies


Ultratech Cement Century Cements Madras Cements ACC Gujarat Ambuja Cement Limited Grasim Industries India Cements Limited Jaiprakash Associates JK Cements Holcim Lafarge Heidelberg Cemex Italcement

Indian Cement Industry at Glance (FY 11-12) The demand for cement mainly depends on the level of development and the rate of growth of the economy of the country. There are no close substitutes for cement and hence the demand for cement is price is elastic as far as India is concerned. For the FY 2011 - 12 (Apr Oct), MT 97.84 was consumed form the 98.91 MT produced. During the first half of the year, there was marginally poor off take in cement demand due to passive construction activity, which led to excess supply, thus putting downward pressure on realizations. This has been coupled with rise in input costs, especially prices of coal and petroleum products. As a result, both the top line and bottom line have been affected. This demand supply mismatch scenario is expected to prevail for quite some time in the years to come. Good infrastructure development will support demand.

Value Chain Analysis of Ultra tech Cement


UltraTech's Sources of Competitive Advantage The key players in the cement market are Holcim Group, Lafarge Group, ACC and J K Cement. ABG that possessed the Grasim cement unit acquired management control of L&T cement in the year 2003. The acquisition of L&T Cement (later named as UltraTech) turned the group into one of the largest players in the market. Value chain analysis helps in identifying sources of competitive advantage in a systematic manner, and thus we use this framework. The cement industry value chain comprises (1) Sourcing of raw materials and fuel from quarries and mines (2) The manufacturing process, and (3) Distribution of the product to the markets. The Sources of Competitive Advantage identified for UltraTech are: Sourcing of Raw Materials: UltraTech's greatest strength is its raw material sourcing. Limestone quarries are usually leased from the government on a long-term basis (usually at least 25-30 years). UltraTech's capabilities in identifying, and leasing, higher quality raw material quarries results in significant cost savings for them. This source of long-term competitive advantage is due to their people skills which aid in identifying the sources and their terms of leasing which lock in these resources for the long term. Clearly, this resource is valuable and rare. Fuel used in Manufacturing Process: The manufacturing process offers no distinct competitive advantage to UltraTech or its largest competitor ACC, though ACC enjoys lower fuel cost. However, this is not sustainable, and since UltraTech has already started switching to coal, ACC's advantage is likely to be neutralized in the near future. Financial and Human resource advantage: UltraTech, being a part of the Aditya Birla Group, has access to the deep pockets of its promoters, as well as human capital of the highest quality. While financial resources may be rare and inimitable, non-substitutability is debatable. Evidence suggests that in the long term others like the Holcim group can match the financial resources of ABG.6 Higher quality of human capital might be more valuable in the long run, and given their astute knowledge of the Indian market, ABG might be able to leverage this resource better than their foreign counterparts.
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Higher Operating Leverage: A final point to note is that UltraTech has higher operating leverage than ACC. This by itself is neither a source of competitive advantage nor a disadvantage. In the long run, the gains during the 'up' years will be smoothened by the 'down' years of the cement cycle.

Emerging Trends in Cement Sector and Ultra Tech Competitive Advantage


We look at the trends emerging in this sector and analyse how UltraTech can leverage these to its advantage in the light of its competitive advantages. Cost leadership: Striving to become a cost leader by means of setting up captive power plants, and/or upgradation of technology to enhance productivity, is increasingly becoming critical for large cement players in this sector. Rising Exports: Due to the increasing construction activity in the Middle-East, exports will constitute a major sales driver. Hence, the coming years would see companies scrambling for bases on the Western coast to minimize their export transportation costs. Retail Stores: A unique concept, which Ultra Tech is experimenting with in recent times, and one that is important for the future, is to continue setting up retail stores. Other companies like Asian paints, and most recently Tata Steel have tried a similar concept. Relationship Management: UltraTech should focus on managing its relationships with importers, exporters, distributors, warehouse providers, wholesalers, retailers and dealers for their long-term profitability. Synergies with Grasim: The two companies under the ABG banner can exploit operational synergies in raw materials procurement, manufacturing, common branding, dealer networking, logistics, and exchange of key personnel. Ready Mix Concrete: Finally, one of the recent trends in this sector is the focus on ready-mix concrete. Therefore, an early technology and capacity building in this area would determine the strategic moves of cement companies in the future.
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Conclusion
Thus we have succinctly analysed the present state of affairs at UltraTech cement and thus identified its strengths and problem areas through a variety of tools. 1) UltraTech's capabilities in identifying, and leasing, higher quality raw material quarries results in significant cost savings for them. 2) While its raw material sourcing, financial and human resource pools are sources of competitive advantage, UltraTech has to improve in terms of fuel costs in order to beat ACC to the top position in the low margin industry. 3) This can also be achieved by leveraging futuristic trends like branded retailing, exports and new products like ready concrete mix.

References
1) Report by ICRA Ltd, Publications titled "The Indian Cement Industry", Published March 2008 2) http://indiatoday.digitaltoday.in/content_mail.php?option=com_content&name=print &id=1814 3) http://www.cogeneration.net/certified_emission_reduction.htm 4) Company analysis report by Research arm of ENAM Securities Pvt. Ltd. Company: Grasim. 5) http://www.equitymaster.com/research-it/sector-info/cement/Cement-Sector-AnalysisReport.asp

6) http://www.worldcement.com/news/cement/articles/Cement_India_demand_price_ca pacity_160.aspx

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