Five Industry Issues
The following are the five main industry issues that affect Suzlon. This report further analyses them in the section below under the PESTLE analysis. The first issue is political; the existence of positive policies for encouraging the growth of renewable energy section. This is a positive aspect that ensures continuous growth of the market.
The second issue is economic, which is about the increased competitiveness of wind energy compared to other sources of electricity in developed and developing countries. The third decisive issue is increased stakeholder involvement in the ownership and development of wind energy infrastructure.
It arises due to the collaborative nature of establishing wind farms in private lands across the world and sufficient government involvement to facilitate private firms’ deployment of wind power solutions.
The fourth issue negatively affects the cost of production because technology advancements force manufacturers of different components to keep investing more in research and development, which reduces the overall positive margin for the sector. The last issue is bureaucracy, which negatively affects the time taken to approve and complete projects. It makes companies suffer opportunity costs.
Industry Analysis: PEST
Political
Most of the global markets where Suzlon is focusing on have an accommodating political climate. In addition, they have constructive policies for promoting renewable energy. As a result, Suzlon has a high potential for growth in the markets where it is targeting (Prdhan 2008).
Economic
The wind energy market is increasing in size. There is a positive focus on the wind energy market, with a forecasted increase of 155 percent as of 2012 (Pradhan 2008). The trend will continue as more countries embrace renewable energy. Wind as a resource is available for free, which ensures companies investing in the sector only have to consider the costs of equipment and limited running costs (Balogun & Hope Hailey 2008).
Social
There is an increased appreciation of wind energy as a clean form of energy that enhances the sustainability of environments. However, installations of wind turbines in rural areas face an uphill task of convincing residents to allow their placement in their farms.
The presence of turbines with smaller generating capacities makes it possible for institutions to generate their power, instead of relying on grid electricity. This trend will continue to support the increase in the overall demand for wind turbines across the globe (Pradhan 2008).
Technological
There are sufficient developments in technology by the companies serving the global wind turbine market. For example, Suzlon has the S52 engine, which is an engineering marvel. It occupies a small space, allowing it to be deployed in varied environments.
In addition, it uses affordable materials that end up reducing its overall price and making it conducive for small business to take up as part of their long-term energy investment (Sehgal 2011). Designers and manufacturers of wind turbines like Suzlon must invest more in research and development (Frynas & Mellahi 2011).
Porter’s 5 Forces Analysis
Suppliers’ power
Suzlon would find it hard to get a different supplier from the current ones. The company relies on the in-house production of various turbine parts. The company has also been making strategic acquisitions that allow it to retain a firm foothold on operations that determine the cost of equipment along its value chain. Therefore, it does not face a significant threat posed by external suppliers (Daum 2012).
Bargaining power of buyers
The number of buyers of wind energy equipment and wind energy power is limited in different markets. Therefore, they have the capacity to influence their purchase price. However, consumers face various limitations to bargaining. They have to work with existing suppliers for them to qualify for subsidies and other government sponsored programs (Pradhan 2008).
The threat posed by substitute products
The main alternatives for wind energy and turbines are oil and hydroelectric power, as well as their power generating equipment. Clients have a choice to pick the alternatives or go with a wind turbine. However, given that most wind power clients are fulfilling policy directives of their respective countries, they do not have a choice of going to non-renewable sources of power.
In this regard, only hydroelectric power or solar may pose a significant threat to wind power equipment producers like Suzlon. The hindering element is the switching cost. It is almost impossible to switch to other power sources without suffering significant losses of the investment (Bensoussan & Fleisher 2013).
Threat of industry rivalry
The main players in the industry are focusing on increasing their capacity for innovation and scaling their businesses. The failure of a company to invest in growth will render it uncompetitive in the medium-term.
The costs are going down, while turbine and other technologies are increasing their efficiency and becoming lucrative for clients. Acquisitions are also bringing down the cost of products as they allow companies to mass produce new technologies.
Threat of new entrants
Companies wishing to join the industry must come up with large capacity operations to enjoy immediate economies of scale for them to compete effectively. They have to invest heavily in research and development and market relationships with the existing distributors to achieve the required economies of scale and enjoy sufficient competitive capabilities.
Companies like Suzlon that already have a well-established global presence face limited threats from new entrants. Additionally, new entrants are likely to target emerging markets where the existing players have not invested (Pradhan 2008).
Organisational Specific Analysis
Value chain
As an integrated wind turbine maker, the company provides all the essential components of wind turbines and provides the same value proposition to its clients (Suzlon 2014). It offers high-quality equipment, the latest technology, affordable packages, and competitive pricing. It also provides market-specific products that make a worthy investment for clients located in different parts of the world.
However, the company only offers medium to high capacity wind power generators, with the majority of its equipment being suitable for small and medium scale wind farms (Suzlon 2014). The company has cemented its market position for manufacturing turbines, rotor blades, gearbox, generator, control system, tower, foundry, and forging (Pradhan 2008).
Resource-based analysis
Suzlon enjoys an organisational culture that helps it to deliver quality products. The company focuses on reducing stress and increasing the power quality of its equipment. It also seeks to make its installations attain high performance. Its sources of competitive capabilities include a highly skilled workforce, which is also affordable.
The network of production facilities in India allows the company to react to market-specific change within the short-term. These capabilities provide it with a significant medium-term advantage as they are valuable, rare, not easily imitable, and organisable by the company (Grünig, Clark & Kühn 2011).
The company has a vertical integration that enables it to provide different services pertaining to its industry. This capability limits its competitors to allow the company enjoy significantly higher profit margins compared to the industry standard (Pradhan 2008).
Financial analysis
The company enjoys a positive financial performance. Its order book position is promising. It had significant orders for the year 2008, which represented a 61 percent in growth (Pradhan 2008).
As a low-cost producer, the company can keep costs low without compromising on quality and technologies, which eventually translates to a higher profit ratio. In addition, a balance of domestic and international business interest ensure that revenues are well balanced.
However, the company is increasingly depending on new markets in Australia, China, Brazil, Italy, and Portugal, which are exposing it to additional market dynamics that can affect its future earning potential. Moreover, recent acquisitions threaten to drain Suzlon’s margins and cash flows.
This will limit the company’s response to its rivals’ innovation and growth in market share and might hamper additional growth prospects for the company (Pradhan 2008).
Specific and Possible Strategic Options
Relevant issues
Suzlon should continue to consider backward integration so that it has sufficient competitive capabilities. It also needs to sustain its market share growth to increase its other advantages, such as economies of scale. The company has to evaluate its supply chain to ensure that it can keep the costs of production low as it increases its manufacturing capacity (Stringham 2012).
A strong vertical alliance between Suzlon and its new acquisitions, such as RE Power allows Suzlon to develop its core competency in equipment manufacturing and wind farm installations (Pradhan 2008).
Supporting issues
Suzlon requires more capital to finance its growth, as the current pace threatens to drain its financial resources. Moreover, there is an increasing focus on the competitiveness of wind energy compared to other sources of electricity, such as thermal and hydroelectric sources.
SAF Criteria
Suitability
Continued expansion is suitable because it provides the company with a strategic position so that it is capable of taking advantage of growth opportunities. Many governments are increasingly enacting laws that force energy producers to increase their percentage of energy sourced from renewable sources.
As a result, the regulations are causing more firms to demand wind energy and create business for the wind energy value-chain. The European Union enforces a 20-percent target for the region’s energy to come from renewable sources before the year 2020 (Pradhan 2008).
There is sufficient room for expansion of Suzlon to cover the emerging markets and increase its presence in the existing markets because the wind energy market is still in its growth phase.
Acceptability
The company has not encountered severe restrictions on its expansion plans, other than cautions on its profit margins. Shareholders have been confident about market growth opportunities and support expansion. Many stakeholders of the company will welcome investments in integration of its value chain. Wind energy reduces emissions in cases where it replaces fossil-fuel derived electricity (Pradhan 2008).
In addition, the nature of the investment in the wind energy infrastructure allows many people to become stakeholders of a sustainable environment, as they can be farm owners, wind turbine installers, owners, and operators (Sehgal 2011).
Vertical integration will help Suzlon get in a good position to take up emerging trends and benefit from any growth opportunities. It will also be able to influence stakeholders, such as governments to consider it over other companies that do not provide integrated solutions.
Feasibility
The resources and competencies outlined previously allow the company to maintain an expansion strategy that involves deeper integration and acquisitions. In addition, newly acquired companies provide it with sufficient market growth to compensate the cost of acquisition. The financial outlook of the company is good and shows a sustainable trend in profitability.
The company will have an easy time seeking external funds for expansion. At the same time, it is possible to use internal cash reserves or equity propositions to make additional acquisitions that will cement the company’s position in its market.
In addition, the entire value-chain of wind energy provides growth opportunities. The core activities of different business units are supplementary and will allow the company to retain its strategic position for growth.
Recommendations
Suzlon has to focus on its expansion strategy through acquisitions of capable competitors throughout its value chain. However, the company should invest most in the generation and installation of wind farms, as that is where most rivalry in the industry exists (Henry 2011).
In addition, it should invest in research and development to come up with a larger product range beyond the 1.5 – 2.0 MW so that it can capture new markets and increase its order book. The company should maintain its manufacturing base in India. It should also focus on finding another affordable manufacturing destination to limit its exposure to market disruption risk in India.
Most competitors will likely use the Suzlon approach to gain entry or safeguard their existing market share. They will vertically integrate and expand at any available opportunity. In addition, some companies may benefit from government subsidies and favourable policies for local companies. This can allow them to enjoy additional competitive advantages over Suzlon.
Based on the above reasoning, Suzlon needs to enter into strategic relationship with state owned power utility bodies. It can also form alliances with local energy companies, especially those that are handling wind energy infrastructure developments in host countries. This will allow Suzlon to bypass many restrictions that could face foreign companies.
Reference List
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Bensoussan, BE & Fleisher, CS 2013, Analysis without paralysis: 12 tools to make better strategic decisions, Pearson Education Inc., Upper Saddle River, NJ.
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Frynas, JG & Mellahi, K 2011, Global strategic management, 2nd edn, Oxford University Press, Oxford.
Grünig, R, Clark, A & Kühn, R 2011, Process-based strategic planning, 6th edn, Springer, New York, NY.
Henry, A 2011, Understanding strategic management, Oxford University Press, New York, NY.
Pradhan, D 2008, ‘Suzlon Energy Ltd: Making foray abroad‘, London Business School. Web.
Sehgal, V 2011, Supply chain as strategic asset: The key to reaching business goals, John Wiley & Sons, Hoboken, NJ.
Stringham, S 2012, Strategic leadership and strategic management: Leading and managing change, iUniverse, Bloomington, IN.
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