case study, Strategic Management

Akash Engineering Ltd. (AEL) had achieved sales of Rs. 3440 lakhs during the year 2004-05 against
sales of Rs. 1209 lakhs previous year. The sales this year were highest ever achieved in the history of
the company. Profit before interest, depreciation and taxes were Rs. 642 lakhs as against Rs. 81
lakhs during the year 2003-04, which showed a tremendous increase (8 times) in profitability of the
company. Economic indicators were still positive in the coming year for the company.
AEL was established in the year 1963 at Dediyasan GIDC, Mehsana, Gujarat, India. The Golden
Mills Limited – a flagship company of the prominent Indian Business Group had acquired the
controlling interest of AEL since 1993. AEL, a mid-sized company, was one of the leading in
manufacturing companies process equipments for Chemicals, Petrochemicals, Pharmaceuticals,
Fertilizers, Drugs and allied industries. Attainment of the highest standard of quality and
enhancement of customer satisfaction had been the corporate philosophy of the company. In line
with corporate philosophy, the management reaffirmed its commitment for providing reliable quality
products and services through understanding and fulfilling customer’s requirements, use of prime
quality raw materials, defined process control at each stage of manufacturing, meeting national and
international standards defined by customers, training and motivating employees, professional
approach and implementation of international quality management system standards.AEL had been 7
producing Columns, Heat Echangers-Coolers-Chillers-Condensers, Pressure Vessels, Reactors,
Deaerators, Economizers, Oxygen / Nitrogen Storage Tanks, Dished Ends, Centrifuges, Chlorine and
other allied Gas Cylinders and Expansion Bellows. The product was highly of a technical nature and
AEL was well-known in the market for its prompt response and good quality products. They had
developed import substitute products like rocket buster and spherical pressure vessels. AEL was into
direct marketing and customized services. It had served various industrial sectors and prominent
buyers like ISRO, BARC, IOCL, Kochi Refineries, HPCL, BPCL, British Oxygen, Inox India,
Kirloskar Pneumatic, Reliance Petro, IPCL, Ranbaxy, NTPC, HILL, Godrej, BHEL and J.K.
Till 1993, the top management had 20% stake in AEL and they never took active interest in its
management. In comparison with other companies of Indian Business Group, it was very small.
Since inception, its products were highly technical in nature and AEL was well known in the market
for its prompt response and good quality products. They had also developed import substitute
products like rocket buster and spherical pressure vessels. For initial years, AEL made profits. Then
also, from 1985 to the year 2002, AEL was in trouble because sales declined continuously. During
those years, the company was making losses. It had been, therefore, registered as a sick unit by BIFR
(Board of Industrial and Financial Reconstruction) in the year 2001 under the provisions of the Sick
Industrial Companies (Special Provisions) Act, 1965. Other major issues were related to Human
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Resources. Conventionally, many workers joined through relations in the organization. There was no
performance measurement system for workers and managerial staff in the organization, which had
made them dull and lethargic. Moreover, there was no training program for labors to improve their
efficiency. The company needed to sharpen the skills of the workers. The competition had
intensified with big companies like laser and Toubro Ltd., ISAAC, Vadodara, GMM (Gujarat
Machinery Manufacturer), Vadodara, making their presence felt through their focused approach by
importing the manufacturing machineries from the developed countries. This made machineries of
AEL outdated. Moreover, many small fabricators also had ventured into this area. The research and
development in the company was always lop-sided. The company had never focused on reinvesting
in this area. Its capital investment in R & D was almost nil and recurring expenditure was only Rs.6
lakhs during the Year 2004-05. The profitable customers like, ISRO, BARC had already withdrawn.
Increase in prices of steel and other major raw materials, rise in other input costs, had squeezed
margins. Under tough competition and working capital shortage, the company had become almost
non-performing. The economic downfall, continued recession in the country and the world over had
further added fuel to the fire, making it difficult for the company to survive.
Steps taken by Management
As a measure towards labor problems, the management decided to give the option of Voluntary
Retirement Scheme (VRS) to all its employees. As a result, 278 labors and 34 staff members opted
for voluntary retirement under the VRS facilitating the company to decrease overheads to a large
extent. To fulfill the skilled workers were called back on a contractual basis. Since there was not any
performance measurement and incentive plan, AEL had to lose 3 to 4 good people to its competitors.
The company had now started the performance link bonus scheme wherein monetary benefit of 25
percent hike in the wages and salaries was given. It also started a training program, for its
contractual labors and appointed full time CEO from Arvind Mills. The company also hired a
consultant (who was an employee for more than 20 years at a senior level in Larsen & Toubro Ltd.)
for textile machinery and air handling system. It also made strategic alliances with few of the
renowned consultants, like, Engineers India Limited, Jacob H&G limited, UHDE India Limited,
Toyo Engineering Limited, Linde – West Germany, Monsanto – U.S.A., Kvaerner Powergas India
Limited, Tecnmont ICB India, Dalal Mott McDonald, Project Development India Limited, Chemtex
Engineering Ltd., Tata Consultant Engineers.AEL also developed in house R&D Laboratory –
approved by the Govt. of India and authorized to issue Certificate of Testing carries out. For this, it
imported technology for the manufacture of Industrial Centrifuges from West Germany and through
continuous interaction with R&D, company was able to fully absorb and adopt this technology. The
boost exports in developed countries like US, UK ad other European countries. With this quality
certification, the company felt that they had reaped the result in that very year by getting good orders
from HINDALCO and BHEL,. As a result, the profitability in 2004-05 reached an all time high.
AEL’s turnover had reached the level of Rs. 34.4 crores, which helped them to recover all the debts.
The organizational structure was flat and there were no second line managers. Even the existing
managers were reluctant to pass the information and share their experiences with the new recruiters.
The image of AEL regarding the quality had to be reregistered in the minds of customers.AEL’s
short-term goal was to increase the turnover from current Rs. 34.3 crores to Rs. 150crores. The new
target was set Rs. 500 crores. And for this the management had identified new business divisions
like Textile Machineries, Air Handling System, Duplex Stainless Steel and Super Duplex Stainless
Steel, Aluminium and its alloys, Consulting Division Specialized in Power Plant and Waste water
Treatment and Non-conventional Energy System. Of which, textile machineries, power plan and airhandling
system would work as backward linkage to other companies of Indian business group. The
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management planned to convert the design department as an individual responsible profit centre, to
develop the designs for own business as well as providing consultancy to other businesses. Although
the CEO had a great pleasure in announcing that the company had reached a turnover of Rs. 34.4
crores but was a little bit apprehensive about the bumpy roads towards the Rs. 150 crores target.
1. If you were appointed as a CEO of AEL, Would you like to go for a separate design division?
2. Critically evaluate the future plans of AEL.
3. Do you think the target set by AEL was realistic? Comment.
4. Comment on the management strategies adopted by AEL.
Posted Date: 10/29/2012 6:17:13 AM | Location : United States

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