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ARAB ACADEMY FOR SCIENCE, TECHNOLOGY

&
MARITIME TRANSPORT

ADVANCED MANAGEMENT INSTITUTE (AMI)

MASTER OF BUSINESS ADMINISTRATION (MBA)

Strategic Audit

For
Transportation and Engineering Company For Tires

(TRENCO)

Under Supervision of: Prof. Dr. Adel Zayed

Prepared By: Mohamed Aglan Heba Saber


Periham El Missiry Yasmen Tarek
Sherif El Feizy
ACKNOWLEDGEMENT

“ Thanks To God “

We Would Like To Express our Deepest


Thanks And Gratitude To Pro. Dr. Adel Zayed
For His Efforts
And Continuous Encouragement.

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Table of Contents

Page No.
I. Current Situation
4
A) Past corporate performance 4
B) Strategic posture 6
II. Strategic Managers
A) Board of directors 6
B) Top Management 6
III. External Environment
7
A) Societal Environment 7
B) Task Environment 8
IV. Internal Environment 9
A) Corporate Structure 9
B) Corporate culture 9
C) Corporate resources 9
V. Analysis of Strategic Factors 10
A) External Factors Analysis Summary (EFAS) 10
B) Internal Factors Analysis Summary (IFAS) 11
C) Strategic Factors Analysis Summary (SFAS) 12
D) SPACE Matrix 13
E) Review of current mission and objectives 14
VI. Strategic Alternatives and Recommended Strategy 14
A) Strategic Alternatives 15
B) Recommended Strategy 15
VII. Implementation 16
VIII. Evaluation and Control 16
Appendix 1 17

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Introduction
I. Current Situation:
A) Past Corporate Performance
Background
Transportation and Engineering Company For Tires (TRENCO) worked under the
public sector umbrella.
The company has one factory producing passenger car and light truck tires located
in Alexandria.
Products
The company is producing two types of products with different sizes whose can be
classified as follow:
1. Passenger Car Tyres.
2. Light Truck Tyres.

This company is the only company producing pneumatic tires of rubber used on
passenger cars and light-trucks, carrying a brand name called “NISR”.
The company represents the domestic industry as it produces 100% of the domestic
production and is considered the only company producing the subject tires.
Some Information about the Industry:
1. The demand on this industry is a derived from the demand on cars.
2. There is a rapid change in technology in this industry. Not only in the technical
component of the tire but also in the sizes and its alternatives.
3. The economic situation dramatically affects the demand since customers with less
disposable income tend to use the tires even after their safe life-time. Also, few
others tend to buy the cheapest tire, which is usually from the imported dumped
tires.

Thus, this company is nowadays suffering from many problems such as:

 A low perceived quality.


 Competition with the dumped imported tires.
 Poor Management.
 Old Technology Used.

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 The unavailability of the required sizes.
Also, the company has faced a lot of financial problems which are summarized as
follows:
 There is decline in sales.
 Increase in inventory.
 Decline in return investment.
 Decline in wages.
Decline in productivity.
 Negative effects on growth.
 Negative effects on cash flow.
 The low exporting performance of the company.

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B) Strategic Posture
1. Mission
There is no stated mission statement for the company. This can be a kind
of weaknesses for the company as this kind of information show the
purpose of the existence of the company and the business it is already in.
Thus, the absence of the mission statement provide unclear picture for
employees to know their company’s current situation.
2-Objectives
Since there is no mission, objectives are not clear. Their only concern is
to achieve profitability and gain a high percentage of market share.
3- Strategies
A horizontal growth strategy has been followed through building a new
factory, to produce new range of products and penetrate new markets
(horizontal integration).
4-Policies
There are no stated policies but they are looking forward to:
- Reducing Costs.
- More Investment in R&D.
- Enhancement of volume and value of sales.

II. Strategic Managers


A. Board of Directors
- 11 members – 7 outsiders.
- Most of them are public officials working in different sectors in
the government.
- Fundamental skills for top management are in the operation.
B. Top Management
1. Top management promoted from within the company.
2. Very experience in the industry operation.
3. No business background.
4. They are responsible for the current situation.
5. May be too parochial for global industry.

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III. Analysis of the External Environment
A. Societal Environment
1. Political – Legal Environment
 Public sector regulations.
 Customs duties for imported tyres are 30% to protect local
manufacturer.
 Our commitments towards the W.T.O Agreements.
 Our commitments towards our neighboring countries which we
engaged with them in a Bilateral Agreements.
 The integration of the European community.
 The integration of the African countries.
2. Economic Environment
 The company is suffering now from the economic condition
(recession).
 The company is suffering from the devaluation of the Egyptian Pound
against the US$ as most of the raw materials are imported such as
rubber, carbon black, steel, chemicals.
 There is decrease in the GDP growth.
 Increase in inflation rate and unemployment levels.
3. Socio -Cultural Environment
 Most of the Egyptian customers prefer to buy the imported tyres than
Egyptian one.
 Most of customers are concerned about safety measures (NISR tyres
are less safer).
 Lifestyle changes.
4. Technological Environment
 This industry needs huge investments for R&D and
telecommunication infrastructure is required.
 Rapid change in technology.

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B. Task (Industry) Environment, Using Porter’s Approach

The corporation must assess the importance to its success of each of these 6 forces:
1-Competition Among Existing Rivals
 There is high competition from the imported tyres from various
countries especially China.
 Although the government imposed high customs duty on imported
tyres, the company has alleged in 1998 that it is suffering from material
injury from the dumped imports from Japan, Korea France and The EU. The
company submitted a complaint to The Anti-dumping, Safeguard & Subsidy
Department in Foreign Trade Ministry.
The Investigating Authority has imposed in 3/10/1999 Anti-dumping duties
to eliminate the injurious effects from the unfair practices on Japan, Korea,
France and The EU.
2-Threat of New Entrants
This industry needs large investment so no new entrants are expected in the
near future. Thus, there is no threat of new entrants.
3-Bargaining Power of Suppliers
There is a strong bargaining power of suppliers due to limited number of
suppliers of raw materials worldwide.
4- Bargaining Power of Buyers
Since there are a lot of types, sizes and brand names of tyres especially the
imported ones, there is a high bargaining power of buyers.
5-Threat of Substitute Products or Services
There are no substitutes for tyres.
6-Relative Power of Other Stakeholders
 The Egyptian government is imposing custom duties on imported
tires and this of course will represent an advantage for the company as a
domestic industry.
 Also the Egyptian government represented in The Anti-dumping,
safeguard & Subsidy Department imposed an Anti-dumping duty on Japan,
Korea, France and The Eu in 1999 which reduced the importation of tyres
from these countries.
 Quality aspects and safety measures has become very important to
the customers.
 Increasing in the environmental regulations and how to get rid of
the used tyres.

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 Labour unions have a weak power.
IV. Analysis of the Internal Environment
A) Corporate Structure
Functional structure.
B) Corporate Culture
Unclear culture, there is no common shared culture between the top management
and employees.
C) Corporate Resources
Marketing
 Lack of sizes of tires' produced.
 Efforts focused on pricing.
 Wide distribution channels.
 Small market share in the domestic market.
 Exporting to some Arab countries (low performance rate).
 Bad image of TRENCO's tires from consumer perspective.
Finance
The analysis of the financial information from the company’s accounting
records from 1999 to 2002 as shown in Appendix 1 is as follows:
 Profits declined by 68 % as the company realizes losses.
 There is an increase in inventory of 43%.
 The production of tires decreased by 32% and the capacity
utilization of the company declined by 36%.
 There is an increase in the negative cash flow by 82%.
 Some key ratios are troubling: such as 65% debt/asset ratio.
R& D
 The company is process oriented with focus on manufacturing
process.
 The company is considered a technology follower.
HRM
 Very good relationship with unions.
 Semiskilled to high skilled labor force.
Management Information System
The investment in the management of information system is minimal. It is
only used in the manufacturing process and in preparing the annual financial
reports and the payroll sheets.

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V. Analysis of Strategic Factors

A) Summary of External Factors

External Factors Analysis Summary ( EFAS )

Weighted
External Strategic Factors Weight Rating Comments
Score
Opportunities
1. Bilateral Agreements with some
0.05 1 0.05
Arab countries.
2. African countries integration. 0.1 2 0.2
3. Custom duties imposed by the
government. 0.15 3 0.45

4.High entry barriers


0.05 2 0.1
Threats
1. Price competition with dumped
0.2 5 1
imports.
2. Commitment towards WTO
0.1 3 0.3
agreement.
3. Unstable economic conditions
0.15 4 0.6
(recession)
4. Restrictions regarding labor laws. 0.1 3 0.3
5. Rapid change in technology. 0.15 4 0.6
6. Devaluation of the Egyptian
0.05 2 0.1
pound.
Total Score 1 3.7

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B) Summary of Internal Factors
Internal Factors Analysis Summary ( IFAS )

Weighted
Internal Strategic Factors Weight Rating Comments
Score
Strengths

1.Wide distribution channels 0.1 5 0.5


2. Skilled labour force 0.15 4 0.6
3. Horizontal integration 0.05 4 0.2
Weaknesses

1. Weak telecommunication
0.04 4 0.16
infrastructure
2. Limited R&D budget 0.05 3 0.15
3. Low perceived quality 0.05 5 0.25
4. Weak financial position 0.06 5 0.3
5. No mission statement 0.25 4 1.00
6. Poor management 0.25 4 1.00
Total Scores 1.00 4.16

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C) Summary of Strategic Factors
Strategic Factors Analysis Summary ( SFAS )

Weighted
Strategic Factors Weight Rating Comments
Score
1- Custom duties on imported tires. 0.15 4 0.6
2. Commitment towards W.T.O
0.1 3 0.3
Agreements.
3. Price competition with dumped
0.2 5 1.00
imports from China.
4. Unstable economic condition.
0.1 4 0.4
5. Rapid change in technology 0.05 5 0.25
6. Skilled labor force. 0.05 4 0.2
7. No mission statement. 0.25 3 0.75
8. Poor management. 0.1 4 0.4
Total Score 1.00 3.9

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D)The Strategic Position and Action Evaluation
(SPACE) Matrix Of TRENCO

Internal Strategic Position

Financial Strength ( FS ) Rating


- Negative cash flow increased by 82 % +1
- Production of tyres decreased by 32% +1
- Increase in inventory by 43% +1
- Profit declined by 68% +1
Total value of (FS) Factors +4
Average Value of (FS) +1
Competitive Advantage (CA) Rating
- Lack of types and sizes of Tires' produced -5
- Wide distribution channels -2
- Low perceived quality -5
Total value of (CA) Factors -12
Average Value of (CA) -4

External Strategic Position

Environmental Stability (ES)


Rating
- Rapid change in technology -3
- Price competition with dumped imports -4
- High entry barriers -2
- Unstable economic conditions -5
Total Value of (ES) Factors -14
Average Value of (ES) -3.5
Industry Strength ( IS ) Rating
- Decline in capacity utilization +2
- Decline in growth rate +1
- Weak financial stability +1
Total Value of (IS) Factors +4
Average Value of (IS) +1.33

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RESULTS
External Strategic Position Factors Internal Strategic Position Factors
Environmental Stability ( ES ) = -3.5 Financial Strength ( FS ) = +1
Industry strength ( IS ) = +1.33 Competitive Advantage ( CA ) = -4

Directional Vector Coordinates of X axis = (IS) + (CA) = (+1.33) + (-4) = -2.67


Directional Vector Coordinates of Y axis = (FS) + (ES) = (+1) + (-3.5) = - 2.5

Determination of Strategy
Using Graphical Presentation of Results
Of
The Strategic Position and Action Evaluation (SPACE) Matrix

Conservative FS Aggressive
+6
+5
+4
+3
+2
+1
CA -6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6 IS
-2
-3
-4
-5
-6
Defensive ES Competitive

Conclusion
The Graphical representation of results indicates that the company is in a
weak financial position, poor management and suffering also from the
dumped imports from China. Therefore, the company should adopt a
defensive Strategy.
E) Review of Current Mission and Objectives
1. The company must state a clear mission.
2. The company must review its objectives toward the
company, employees and society.

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VI. Strategic Alternatives and Recommended Strategy
Based upon the above analysis, TRENCO should follow the following strategies:

A) Strategic Alternatives
Growth strategy through building new plants in the same industry.
1 Pros: product/market synergy created.
Cons: TRENCO does not have the financial resources to play this game.
2 Pause strategy to consolidate its efforts and make only incremental improvements
until a particular environmental situation changes.
Pros: The company needs more financial resources.
Cons: Unless the company finds a quick solution, it will suffer from the weak
financial position.
3 Sell out divestment strategy
Pros: It’s the best solution if the company finds a good price and the employees
can keep their jobs.
Cons: The company will lose its current market share.

B) Recommended Strategy
We recommend that the company should:
1. Follow pause strategy, at least for one year, to consolidate its
efforts and solve the financial problems.
2. Invest more in R&D to solve quality problem.
3. Investigate the possibility of carrying out a licensing contract
with one of its competitors in the tyre industry of famous brand names all
over the world.

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VII. Implementation
1. Chairman and employees with more global business experience should be
recruited with an eye toward the future, especially with expertise in
marketing and exporting to International markets.
2. R&D needed to be improved to improve quality.
3. Marketing needed to be improved to produce new sizes of tyres on line
quickly.

VIII. Evaluation & Control


1. MIS needed to be developed for faster evaluation and control.
2. Systems, production processes and manufacturing plant should be developed.
3. The employees and the top management should share the company’s values
and mission.
4. Find a solution to change the image of TRENCO's tires from the consumer
perspective.
5. Engaging in contracts and expanding in the current contracts with the car
assembling manufacturers in Egypt to provide them with TRENCO tyres after
resolving the unbalance problem.
6. Resort to the Anti-dumping, Safeguard & Subsidy Department in Foreign
Trade Ministry to submit a complaint due to the allegation of the dumped
imports of tyres from China.

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