Indian Railways Modernisation

8/13/2019 Indian Railways Modernisation

1/29

CHAPTER

CASE STUDY ANALYSIS

ABSTRACT

This case study deals with the modernisation strategy adopted by the Indian Railways

Corporation.

Indian Railways (IR), which was declared to be heading towards bankruptcy as per the

Expert Group on Indian Railways in 2001, is today the second largest profit making Public

Sector Undertaking after ONGC.

On 15 April 2006, the Washington Times carried a lead story on the turnaround of the Indian

Railways (IR) a departmental organization run by the Government of India (GOI). It

stated few now doubt that Mr Yadav (Minister for Railways) has presided over an

impressive business turnaround. More importantly, hes taken the worlds largest employer

a government giant of 1.5 million employees and boosted revenues by 15.5 percentwithout raising fares (Nelson, 2006:1). Indian Railways has turned around and made an

estimated profit of $2.5 billion in 20052006. What is important, however, is that, unlike

previous ministers, Mr. Yadav has looked upon Railways as a commercial enterprise and not

a social welfare institution. [He] is a hard taskmaster and will ensure his subordinates carry

out the projects

Indian Railways (IR) has been the prime mover of the nation and has the distinction of being

the largest railway system in Asia and the second largest railway system in the World under

single management. IR operates more than 11,000 trains per day of which 7000 are passenger

trains. The railways have played a critical role in catalyzing the pace of economic

development and continue to be an integral part of the growth engine of the country.

IR had its share of financial difficulties in the 1990s, which hampered its growth and

there were concerns on its ability to provide competitive transport services in the future. This

was in large part due to the tradition of seeing railways as an essential public service, the

usage of which cannot be denied even to those unable to pay. Under a tariff regime, where


2/29

freight services continually subsidized passenger services and with IR losing traffic to the

roads steadily, a financial crisis always seemed imminent within the Railways. However,

after being written off as a financially unviable concern by industry watchers and nonchalant

soothsayers, Indian Railways has staged a dramatic turnaround in recent years. The Railway's

renaissance has been engineered by simple entrepreneurial practices, which have evoked the

admiration of internationally renowned institutions and companies alike. In a marked

departure from its legacy, the focus on capacity utilization, reduction in unit costs, and

improvement quality of service has yielded remarkable results.

INTRODUCTION

Indian Railways (IR) has been the prime mover of the nation and has the distinction of being

the largest railway system in Asia and the second largest railway system in the World under

single management. IR operates more than 11,000 trains per day of which 7000 are passenger

trains. The railways have played a critical role in catalyzing the pace of economic

development and continue to be an integral part of the growth engine of the country.

IR had its share of financial difficulties in the 1990s, which hampered its growth and there

were concerns on its ability to provide competitive transport services in the future. This was

in large part due to the tradition of seeing railways as an essential public service, the usage of

which cannot be denied even to those unable to pay. Under a tariff regime, where freight

services continually subsidized passenger services and with IR losing traffic to the roads

steadily, a financial crisis always seemed imminent within the Railways. However, after

being written off as a financially unviable concern by industry watchers and nonchalant

soothsayers, Indian Railways has staged a dramatic turnaround in recent years. The Railway's

renaissance has been engineered by simple entrepreneurial practices, which have evoked the

admiration of internationally renowned institutions and companies alike. In a marked

departure from its legacy, the focus on capacity utilization, reduction in unit costs, and

improvement quality of service has yielded remarkable results.


3/29

The Railways now looks all set to achieve the declared target of INR 20,000 Crores

surplus revenue in the current financial year (2006-2007). Modernization, safety and security

of passengers, replacement and renewal of assets, track renewal, improvement in passenger

amenities, reduced expenditure, increase in productivity and reduction in operating ratio,

computerization of railway systems, induction of new technologies for signaling and telecom

and prevention of leakages of revenue have been the salient features of the overall

development of Indian Railways.

Indian Railways' total cost is dominated by staff cost (44%), depreciation and lease

charges (14%) and fuel (14%) as can be seen from the break-up below: Both staff cost and

fuel expenses are external to the system and have been increasing. In absence of productivity

increases, the unit costs have also increased in tandem.

The Railways' new approach on tariff rationalization, improved wagon turnaround

time and the reverse-flow discounts have helped it to augment its financial performance

significantly.


4/29

THE STRATEGY:

The basic plank of the IR turnaround is its shift towards market orientation and customer

focus. As the then Railway Minister Mr Nitish Kumar said while presenting his 2001-02-

budget speech Railways need to develop market oriented and customer friendly outlook due

to emerging competition within the transport sector. Mr Yadav also underscored this policy

in his first railway budget speech on 6 July 2004. The Minister stated with a commercial

orientation, aggressive marketing and economy measures, the Railways would be

continuously working towards further improving their financial performance (Yadav,2004:1-

2). That he was continuing the reform process already begun by his predecessor can be

vouched from his statement in the same budget as under: Railways have initiated many

policy changes to meet the requirements of its customers, be it freight or passenger services.

While continuing the process of reforms..other priority areas will beimprovement in

passenger amenitiescontrol over expenditure and stepping up of measures to prevent

leakages of revenue.

In this case, we present the IRs modernisation strategy under four distinct heads:

Indian

Railway's

Modernisation

Strategy

Retrenchment RepositioningRe-

organisationEnvironmental

Factors


5/29

A: RETRENCHMENT

Cost Cutting Initiatives

This principal strategy consists of several sub-strategies including reviewing parts ofbusinesses that are not value adding, withdrawing from markets where the firm is performing

poorly, selling assets, reducing scale of operations, improving efficiency, downsizing,

outsourcing and such other strategies. The emphasis is on control of costs. In the Railway

Budget speech on 6 July 2004, the Minister outlined his strategy: operating expenses will

in no way be allowed to exceed the barest minimum requiredcost effective use of assets

will be ensured. We assess the financialperformance of the IR against several sub-strategies

that make up this principal strategy.

Reviewing parts of business that are not value adding

The IR reviewed its catering and parcel service business and decided to lease it out.

The Railway Minister stated by leasing out catering and parcel services we have reduced

our catering and parcel losses of more than a thousand crores (Yadav, 2007:13). Similarly,

the IR attracted private investments under thewagon investment schemes and siding

liberalisation scheme. This freed up resources for utilisation in more remunerative activities.

Efficiency improvements

The efficiency improvement brought by the IR can be evidenced from the diminishing

operating ratio (ratio of total working expenses to gross revenue receipts), which was 98.8

percent in the year ending March 2001 and was brought down to 83.2 percent in 2006 and

further to 78.7 percent by 2007.

To improve efficiency the IR adopted following strategies: The IR took several initiatives at

technology up-gradation and modernisation. These include

Introduction of modern signalling and telecommunications technology in order toenhance safety, and enhancing line capacity

Improving operating efficiency of freight transportation through the introduction ofFreight Operating Information System


6/29

The complete computerisation of control office, Coaching Operations InformationSystems and interfacing of both these systems with the National Train Enquiry

System so as to directly benefit passengers and other rail users increased use of

technology resulted in improving technical efficiency in provision of services. In

addition, the IR also focused on the sub-strategy capacity enhancement and ensured

better capacity utilization.

Downsizing

The number of employees, which peaked at 1.652 million in 1991, was brought down

progressively to 1.472 million by 2003, and to 1.412 million by 2006. One of the elements of

retrenchment strategy is to trim off excess staff. The approach that the IR adopted was not to

fill in vacancies created due to retirement or other reasons. This approach commenced

substantially during the term of Mr Nitish Kumar as the Railway Minister and has been

continued by Mr Yadav though at a slower pace. Again, downsizing as a strategy for

reducing costs was initiated when Mr Nitish Kumar was the Railway Minister. Over the years

the IR reduced the staff on payroll from about 1.58 million in 1999 to about 1.41 million by

2006, down 0.17 million or 10 percent. This resulted in the decline of overall expenditure by

at least Rs 2,000 crores in 2006 compared to what it would have been had the staffing levels

been comparable to those in 1999.

Outsourcing

Besides the catering and parcel service activity, the IR also outsourced advertising activity.

In the other business areas of parcel, catering and advertising, the strategy of outsourcing

through public private partnership and wholesaling rather than retailing was adopted

(Raghuram, 2007:10).

The evidence presented above in respect of sub-strategies such as the review of businesses

that are not value adding, efficiency improvements, downsizing and outsourcing appears to

provide support to proposition that retrenchment strategy helped the IR to contain costs

which ultimately helped its turnaround.


7/29

B: REPOSITIONING

Revenue Raising Initiatives

This strategy includes several sub-strategies like focus on growth, product innovation,

product differentiation, re-branding, and all these ultimately leading to capturing market

share. As already stated in the literature review section, the focus of this strategy is on

revenue generation as opposed to cost control. Various measures taken by the IR are outlined

below.

Focus on growth

The focus of policy change effected by the IR was on meeting the requirement of its

customers. Railway customers are primarily of two types those availing freight services

and those availing passenger services. of revenue for the railways are then goods (freight)

revenue and passenger revenue which respectively form about two-third and one-third of total

railway revenue. The IR showed slow real growth under Mr Nitish Kumar and an impressive

growth in freight revenue under Mr Yadav as can be seen from the rising growth rate after

2004. (In passenger revenue, real growth rate was low during 2004 and negative in 2005 but

picked up in 2006 and 2007.There was a steep growth (double digit) in freight revenue after

2004. The turnaround of the IR was mainly freight revenue driven (though it was

substantially helped by an improvement in external environment as disussed later). The

essence of the turnaround was in fact that

(i) Total revenues increased by a significant percentage in the last two years and(ii)The net revenues continued a robust upward trend

The increase in the freight revenue can be traced to three factors

(i) increased axle load(ii) reduced wagon turnaround and(iii) Market oriented tariffs and schemes.


8/29

The first two managerial actions increased the IRs capacity to move higher volume of

goods (see details given earlier) while the third action market oriented tariffs and

schemeshelped raise the per unit revenue from freight

The major reason for rise in freight revenue was higher loading volume (axle load) through

existing wagons given that augmentation in the number of wagons takes time. In three years

from 2004, the incremental loading achieved was about 170 million tonnes, which exceeded

the total incremental loading of the 1990s by 120 percent. Freight earnings were increased

through carrying increased tonnage by enhancement of loading limits from six tonnes to ten

tonnes.

To reduce wagon turnaround days, cash incentives were offered to freight customers to free

up the wagons faster. Handling capacity of freight terminals was increased; strict control was

maintained over idle wagon capacity through the use of Freight Operations Information

System. To free up wagons users were encouraged to adopt round the clock loading and

unloading of rakes at terminals. Through these measures, the IR was successful in reducing

the wagon turnaround from seven to five days. Simultaneously, the connectivity to ports was

increased to facilitate quick clearance of imported goods arrived at the ports and similarly to

facilitate speedy export of goods. For effective transportation of perishable goods like milk

and vegetables more refrigerated parcel vans were introduced.

The IR adopted several market oriented tariff levying strategies. The tariff schedule for

wagon use by customers was simplified and rationalized. Items in the schedule were reduced

from some 8000 to less than 100. Classification of certain commodities from lower tariff to

higher tariff band resulted in the increase in freight earnings. In addition, the upward revision

in freight rates (shown in parenthesis) was as follows: coal (8 percent), iron ore (17 percent),

cement (4 percent), limestone and dolomite (17 percent), and food grains (33 percent).

The increase in freight traffic and corresponding increase in goods earnings was largely due

to enhanced loading of wagons over and above the carrying capacity by six tonne to ten tonne

as well as upward revision of classification of certain commodities such as coal, iron ore,

cement, limestone, and dolomite and food grains, resulting in overall increase in freight rate.


9/29

The IR adopted two pronged strategy to improve passenger revenue: (a) competitive pricing

and (b) substantial increase in passenger comfort and amenities. To arrest the dwindling

market share in passenger market segment, the IR decided to maintain the level of nominal

passenger tariff as is reflected in Table 6 (see appendix). Therefore, it continued the reduction

in real tariff. The average rate per passenger km in nominal terms has remained around 24.50

paise; while in real terms it has declined from 18.57 paise per passenger km in 2000 to 15.26

paise in 2006. The IR, however, improved various passenger amenities and introduced

additional coaches in areas of high demand. Further, in response to burgeoning competition

from new low cost aviation sector, the IR reduced fares for air-conditioned coaches in

nominal terms. A major concern of the railway passengers was about their safety. The IR

took several measures as follows to address this issue. Yadav (2006) states that the IR created

a Special Railway Safety Fund of Rs. 170 billion to improve safety environment, through

replacement of over aged railway assets, that is, tracks, bridges, rolling stock, signaling gears

etc. The number of accidents have been more than halved from 473 (2001) to 200 (2007).

Use of high technology for passenger safety is also a hallmark of the IR success. In the area

of train safety devices like Train Protection and Warning System and Anti-Collision Devices

were introduced. Railway Protection Force was strengthened to escort passenger trains in

security sensitive areas. Single window service to the customers for providing value added

service was introduced. The combined effect of these measures was an increase in the volume

of passengers by approx 29 percent over the period 2001 to 2007

Product innovation

The IR introduced double stack container trains on diesel route between Pipavav port and

Jaipur. These containers increased the carrying capacity of each train to 2,500 tonnes against

1,500 tonnes, and also reduced line capacity constraint by nearly half and led to saving of

about seven percent on capital cost and 25 percent in operating expense (Das, 2006:1).

Similarly, as stated by the Railway Minister in his budget speech 2007-08, the IR enhanced

the capacity of existing lines and made available wagons designed to suit the specific need of

new cement, steel, and power plants. The IR also developed freight terminals with more than

15 wagons per month handling capacity which enabled the IR to expand its freight traffic.


10/29

Further, it introduced new design of wagons with higher pay load (carrying capacity) but

lower tare weight (weight of the empty wagon) that improved safety features. The effect of

these measures can be seen in higher freight revenue.

Product differentiation

Product differentiation can take many forms. These include differentiating in quality

and price of the product from that of rival firms, differences in product design and features,

differences in availability of product in terms of time and location etc. In order to compete in

the passenger market segment, with other modes of transport viz., road, aviation, coastal

shipping, the IR embarked on a program of improving passenger amenities (discussed

earlier). To win over passengers the IR introduced e-ticketing through Internet from home

which became very popular. Further, it introduced passenger coaches with new layouts that

have significantly high capacity than previous coaches. It also brought about perceptible

improvement in the passenger amenities. While the IR improved

passenger amenities as stated by the RBI after March 2003 passenger fares had remained

unchanged


11/29

C: RE-ORGANI SATION

This strategy involves sub-strategies such as changes in planning systems,

decentralising, human resources planning, organisational culture and such other relatedissues. In the Railway Budget speech on 6 July 2004, the Minister stated Indian Railways is

committed to optimum utilisation of human resources. The IR took several steps in the

direction:

Changes in planning systems

The IR introduced improved accounting and management information systems to

provide financial, operating and management information needed to increase efficiency, meet

emerging business needs and improve commercial orientation. It introduced Long-Range

Decision-Support System and related systems for investment selection on the basis of

expected returns (ADB, 2002:37). To cater to the rising passenger numbers which run into

millions each day, the IR introduced state-of-art passenger reservation system. Similarly, the

freight business was streamlined through the Freight Operating Information System and

Enterprise Resource Planning (ERP) packages were implemented in workshops, production

units and selected zonal railways.

Decentralising

The IR decentralised its organisational operations by creating more zonal centres. The

number of zones was raised from nine in 2003 to 16 in 2005 which helped faster Turnaround

of the Indian Railways decision making and provided better customer service. The CAGI

(2006) states the IR decentralised procurement through the introduction of Vendor

Management System which considerably raised vendor satisfaction due to the transparency,

fair play and equal opportunity it providedsomething that was missing in the earlier system.


12/29

Human resources initiatives

As fatigue enhances probability of accidents, several measures were initiated by the

IR to improve working conditions of drivers and guards. Crew friendly drivers cabins and

brake vans were designed. Another initiative was the establishment of International Railway

Strategic Management Institute in 2005 under the aegis of International Union of Railways. It

is a premier institute to serve the training needs of managerial staff. To increase participation

of railway employees in management, regular dialogue with the officers and the staff

federations through a specially constituted forum called Participation of Railway Employees

in Management (PREM) was established. The IR was also in the forefront of taking

affirmative action. It ensured that adequate representation is given to disadvantaged sections

of the society and to physically challenged people as required under the relevant legislations.

Suitable sports facilities were also made available to the employees and the IR sports team

won several laurels at national and international level. More effective use of manpower led

to improvement in staff productivity. Multi-skilling of staff was emphasized. These strategies

resulted in doubling of the staff productivity compared to the productivity in the 1990s

(Yadav, 2006:7). Revenue per staff witnessed a rise by 68 percent (2001-2006) as against 49

percent (1996-2001).

Changes in organizational culture

Probably the most significant cultural change witnessed by the IR in recent years is

the philosophical change from politicized decision making to commercial, business oriented

decision making.

For Example: The IR has responded to the enhanced competition from the aviation sector,

with improved information for passengers through the creation of enquiry call centres and

regular updating of current vacancy positions. Several customer friendly actions taken by the

IR have been discussed earlier.

The above evidence appears to support proposition 3 that the reorganization strategy helped

the IR improve its overall organisational culture and employee participation leading to


13/29

positive impact on turnaround. It is obvious from the above discussion that the managerial

strategies for turnaround (retrenchment, repositioning and reorganisation) did help the IR

turnaround. In addition, several macro-economic environmental changes also contributed to

its turnaround, principally among these was the general growth of the Indian economy. In

paragraphs that follow, we describe how these factors impacted on the IR turnaround.

D: ENVI RONMENTAL FACTORS THAT AIDED MODERNISATION

Change in the macro-economic conditions

The general improvement in Indian macroeconomic conditions helped the IR turnaround.

This growth environment offered an opportunity for the IR and had a significant impact on

the. The average growth rate of the Indian economy in the years since Mr Yadav took over as

Railway Minister was 8.5 percentclose to twice that recorded for the preceding four years.

This heightened growth in the economy raised the demand for freight and passenger services

which is reflected in the higher revenue earned by the IR.

Rise in demand

The rise in freight revenue - the main plank of the IR turnaround - was

facilitated by the increased domestic demand for coal (for electricity generation), for cement

(for construction) and pig iron (for steel plants) due to economic growth. There was also an

increase in the iron ore for exports (mainly to the Chinese market). In 2006, China bought

more than 74 million tonnes, accounting for about 84 percent of Indias total iron ore exports

(Sanyal, 2007: 1). The IR used the favourable international demand reflected in substantial

increase in iron ore price by raising the freight on iron ore. As stated earlier freight on iron

ore was raised by 17 percent.


14/29

Impact of the Pay Commission

The major changes in the salary scales of Indian public service employees (including

Railways) are determined by the Pay Commissions that are appointed by the GOI. The

implementation of the Fifth Pay Commission in 1997 increased the total wage bill of the IR

by 34 percent during 1997-98. This wage rise does not include the increase in pension costs.

The share of pensions in working expenses rose from around 4.5 percent in 1980 -81 to

nearly 14 percent in 2003-04 (Malik, 2005: 2). By the time the present Railway Minister

took over, the impact of this pay rise and pension liabilities had been absorbed by the system

through increased redundancies. The adverse impact of Sixth Pay Commission will hit the IR

in a couple of years time.

Decline in the financial cost

The decline in overall interest rates and liberalisation and expansion of financial

markets helped the IR to raise external resources with ease. Also the IR is required to pay

only 6.5 percent dividend on the GOI investment in it, which naturally reduces the overall

financial cost to the IR and puts it at an unfair advantage vis--vis the road sector which is

required to borrow at commercial rates. Similarly, the finance that is raised from the market

by the IRFC is available at a lower rate as compared to the prime lending rate of State Bank

of India (see below); because of GOI guarantee for such finance.

Further, the bonds of IRFC are tax free so these can be offered at lowering interest

rate which reduces the borrowing cost. The softening of interest rates in international markets

also helped in lower interest cost. A combination of such favourable factors led to lower

overall borrowing cost.

Taking advantage of the soft interest rates during 2003-04 judiciously, .an overall weighted

average cost of incremental borrowing at 5.59% for the year 2003-2004 and .the previous

year weighted average cost of 7.00%, the overall weighted average cost of funds for the year

worked out to 5.70% p.a. (IRFC, 2004: 3)

As against this, the prime lending rate of State Bank of India was 10.25 percent in

2004. The softening of the international interest rate environment helped IRFC to raise larger


15/29

amount of debt at lower cost. The global interest rate and credit availability has tightened in

the after math of the US subprime crisis which may raise the financing cost of the IR.

It can be seen from the above discussion that several environmental factors have made

significant contribution to the turnaround of the IR. It will be incorrect, therefore, to ascribe

the IR success to managerial leadership alone. The exact impact of contribution of some of

these strategies to revenue or cost, however, could not be determined in the absence of data

availability. The favourable impact of environmental factors supports the argument that good

luck also helped the IR turnaround. Though the IR has showed a spectacular progress in its

financial position, we are not convinced about the sustainability of the turnaround.


16/29

CONCLUSION

The kudos heaped on Mr Yadav by the international and domestic media were

somewhat excessive. Both good management and good luck helped the Indian Railways

turnaround from a low performing organisation to a high performing one in about five years.

The foundation for the turnaround was laid during the tenure of Mr Nitish Kumar, which the

present Railway Minister, Mr Yadav, implicitly accepted in his first budget speech. It goes to

the credit of Mr Yadav that he not only continued those policies (though initiated by a rival

political party member) but importantly ensured that they produced results.

This demonstrates that the organisation moved away from past malaise of

politicisation of decision making processes and policies, to a more corporate minded

commercial focus. It adopted three major strategies for a turnaround. Through the

retrenchment strategy it was successful in reducing the operating cost. It focussed on dynamic

pricing and customer centric sub-strategy within the overall repositioning strategy to

significantly increase revenue in particular the freight revenue. Reorganisation strategies

like human resource development initiatives and achievement of efficient outcomes through

decentralisation of authority and responsibility aided the IR modernisation. But a substantial

part of the IR turnaround can be attributed to favourable environmental factors. Though the

impact of these factors is not quantifiable at this stage, nevertheless it is reasonable to

conclude that the net operating surplus is likely to decline.

The Indian Railways may need to explore some of the sub-strategies which they have

not utilised so far which may help lift the surplus. The implication of our study is that an

organisations turnaround success needs to be put in a much wider context. It could be due to

good luck and not due to good management alone as most of the extant literature tends to

suggest.


17/29

JOINT HINDU FAMILY BUSINESSES IN INDIA MODERNISE TO

CONTINUE TO HAVE MARKET SHARE:

Tucked away on a narrow street in Mumbai, Chandu Halwai sells traditional Indian sweets. It

is a small shop with a modern look, but the recipes here are over a century old. The shop was

first set up in Karachi in 1896, and moved to Mumbai after the partition of India and Pakistan

in 1947. The photographs of its founders hang on one of the walls. Bharat Bhushan Bahl, 71,

currently heads the business. His grandfather founded it, and his sons Sachin and Nitin now

help manage it.

The family is integral to Indian culture and business. Nearly 85% of all companies in the

country are family businesses - and these include big conglomerates such as Tata, Reliance

and the Wadia Group. You are born into the business, you live in it and you die in it says

Bharat Bhushan Bahl Head of family business, "In other businesses, what is important is

competence and profit. That is the measure of success. But in family businesses it's different,"

says Mr Bahl. "What is important is that you are together, that you're working together and

living together.You care for the reputation, you care for the principles of your forefathers

and success or profit or that kind of yardstick is not paramount."

Although Sachin and Nitin are both engineering graduates, they decided to go back to the

family business rather than pursue independent careers. "We wanted to keep our options

open, so we chose to study something else," says Sachin. "But the business is something we

discussed over meals, what we've seen ever since we were children, so in the end we both

wanted to help grow it." Currently the two are focusing on increasing exports and bringing

new varieties of sweets to the shop. When there is a big decision to be taken though, it is to

their father they turn.

Sachin Bahl studied engineering but chose to return to the family business He admits there

are difficulties running a family firm. "In the corporate world there is hire and fire. In this


18/29

business the question doesn't arise. You are born into the business, you live in it and you die

in it," says Mr Bahl. "There are times when the question of efficiency is raised, even [with a]

lower performance you can't replace your son with another executive who might perform

better. "He's your son! He's not replaceable by an executive."

But as more and more multinationals enter the country, family firms have had to adopt a

more corporate culture to keep up with the competition. Continue reading the main story

Over the past two decades, many of India's business families have parted ways. One of the

most high-profile splits was that of Reliance, India's largest private company with interests in

chemicals, telecoms, retail, oil and gas among others. Dhirubhai Ambani, the company's

founder, died in 2002, and a few years later his sons Mukesh and Anil divided the business.

Global surveys have shown that only about a third of family-run companies survive in the

second generation, and even fewer in the third. This is a trend also seen in India, but some

have managed to stay together.

Videocon is one of the country's most famous consumer brands. It started with manufacturing

home appliances and electronic goods, but is now also involved in oil exploration and

telecoms. It is run by three brothers of the Dhoot family and their sons. Venugopal, Akshay

and Anirudh Dhoot Venugopal, Akshay and Anirudh Dhoot Akshay Dhoot, 22, has only

recently joined the business formally but has interned with its various companies since he

was 15. "We live together, we take vacations together, and since we also work together, we

end up discussing the business a lot," he says. "All this makes it easier to communicate our

ideas."

"There are debates sometimes and some views do differ," says his older cousin Anirudh

Dhoot. "If we can't reach a consensus, we go to the head of the family, as is done in the

Indian system."


19/29

However, faced with fierce competition from foreign companies, Videocon has moved away

from functioning like a traditional family business and towards a more corporate set-up. "We

have to keep the CEO, COO and board of directors [happy]," says Venugopal Dhoot,

chairman of Videocon. "So sometimes you have to be very tactful to address the family

member and to run the show also. "Nowadays most of the firms are going to the stock

exchange and regulation has become very strict - so the family also has to behave as a

company."

In fact, many of India's business families - big and small - have realised the need to get

professional help. Catering to this demand, business schools around the country offer MBA

programmes designed for family firms. The Welingkar Institute of Management in Mumbai

runs an 18-month course for those who own companies. Family business MBA class at

Welingkar Institute of Management Those who run their own business but also want to gain

an MBA may have various reasons for doing so "Initially I faced that friction where people

did not have confidence in me. I could feel it. So to gain that confidence I needed proper

guidance," says Amogh Desai, a student at the school who runs his family's photography

training business. "When I joined this course I got to learn a lot of things regarding

management, finance and people management."

Another student, Rajesh Sorap, who makes water heaters, says: "My company's got great

potential because we've got great products, so I want to take it global. That was the main

reason I felt I need to gear up." He is not alone - many Indian companies harbour global

aspirations. Family values and hierarchies though are deep-rooted in society here. How they

are managed could determine whether they act as catalysts to success or hurdles in the path of

growth.


20/29

CHAPTER

INFORMATION TECHNOLOGYMODERNISATION

IT modernisation refers to major changes in a companys technology infrastructure,

applications and overall operations to replace legacy systems. It requires new technologies,

skills, operational practices and capabilities that are intended to improve how a company does

business. While it may occur in an iterative form, it is different from isolated upgrades of

applications and hardware. Legacy systems are those that still function but no longer support

and deliver optimally against the organisations operational and strategic goals.

All organisations, regardless of size, industry or location, face the constant challenge of

maximising the contribution of their information technology (IT) infrastructure and

applications to achieving their business goals. To do so, organisations must often fi gure outhow to use existing systems more effectively, or modernise them to better perform the tasks

at hand. At times, this requires replacing legacy systems that no longer meet the needs of

evolving business practices and expanding markets.

IT is an important part of any organisation and a well-planned and executed modernisation

strategy is often crucial to the rapid evolution of the IT systems and skills that support

strategic business functions. In order for companies to stay competitive and better serve their

customers, their IT systems must also be competitive, leading to simpler and more

streamlined business operations, saving money and time.

A survey conducted in February 2009 by the Economist Intelligence Unit, sponsored by

Oracle and HP, shows that in most companies both the business functions and the IT function

understand the potential benefi ts of modernisation. But that does not mean that most


21/29

companies know how to do it right. The process itself can be complex, and requires adequate

analysis of business needs and an understanding of existing systems and applications. Some

of the same mistakes that have dogged IT departments for decades still undermine effective

IT modernisation strategies. And perhaps the most debilitating mistake is improper alignment

of IT modernisation efforts with strategic business goals.

The global economic downturn is putting pressure on organisations and their investment

strategies. Survey results show that many companies are cutting back or delaying IT

modernisation projects, and demanding faster and higher returns on their investments. Yet

now is the time for companies to position themselves competitively for the longer term, and

an effective IT strategy may contribute to that goal. The companies that are most successful

with IT modernisation projects are those that let market forces drive the project, focusing on

gaining new and keeping existing customers. And they let the business own and direct the

project, to ensure there is alignment between IT and business strategy.

The computer systems and applications that constitute todays information technology (IT)

pervade every part of every business in every industry. ITs rapid evolution challenges

businesses to extract the most benefit from their systems and applications, and to update them

as the organisations needs evolve. When they embark on a modernisation project, companies

must have business needs clearly in sight, and carefully align their IT strategies with the

broader corporate business strategy.

Global business executives recognise the strategic value and importance of IT modernisation.

Across the board, companies are actively engaged in modernisation efforts. Some have

recently completed and others are in the midst of such projects; still others are planning to

modernise their systems. In fact, just 17% consider it sufficient to upgrade their systems and

only 5% of companies say they have no plans to modernise.

The vast majority of companies currently engaged in IT modernisation are satisfied with theresults, according to the survey. Outward-facing factors such as improvements in quality of


22/29

service (chosen by 67% of respondents) and revenue-generating capabilities (50%) top the

list of benefi ts. Inward-facing factors, such as simplification of the infrastructure and

applications environment (22%), are also important but rank lower. The bottom line is that IT

modernisation is well understood, widely in use, and can bring concrete results if executed

properly.

Why modernise? Carol Rizzo, a technology consultant and former chief technology offi cer

(CTO) of Kaiser Permanente, AIG and Citibank, equates the IT unit that does not modernise

to a family living in a 200-year-old house: The next new appliance you plug in is likely to

short circuit the whole house.

Although the value is apparent, IT modernisation is not without its challenges. For one thing,

these projects can be costly and complex. They require a great deal of planning and co-

ordination, and can take many months to bring to fruition. In addition, the return on the often

sizeable investment sometimes takes time to kick in, and in these tough economic times that

can put a strain on resources.

To some, IT departments should constantly upgrade their systems, incrementally improving

and adapting them as the business needs change. But the reality is quite different. There are

dozens of ways that IT systems can become suddenly and irrevocably out of date: software

vendors go out of business or are acquired; global market trends shift, as with outsourcing or

globalisation; and businesses are bought and sold. Iterative upgrades simply cannot keep up

with the rapid pace of business change. What ends up happening is you modify your existing

applications to meet new user demands, says James Riley,director of indirect client services

at Wilmington Trust Corporation, a Delaware-based bank with US$36bn under management.

You bolt something on here, you patch something up there, but everyone knows that you

cant keep that up forever.

When reality finally does catch up, a thoughtful and thorough IT modernisation effort is theonly solution. But our research shows that the single most important criterion that must be


23/29

met for an IT modernisation project to be a successalignment between IT and the strategy

business direction of a companyis elusive. The need for alignment is not newit has been

a challenge since IT entered the business world. For the most part, however, it remains

unresolved. Both the survey and interviews with business executives show that if an IT

modernisation effort is not properly aligned with strategic business imperatives, it is likely to

fall short. We believe this alignment to be the single most important prerequisite for IT

modernisation success.

CHALLENGES WHILE IMPLEMENTING IT MODERNISATION:

When done right, IT modernisation is valuable. It is even more valuable when driven by

market forces. At large, IT projects are not driven by initiatives such as cost cutting or

increasing productivity, although they often yield these improvements as well. They are

instead for outward facing, strategic business motives.

Either you make these investments in IT modernisation and beat the competition, or youre

going to lag behind and have to invest even more to catch up, says Robert Ke efe, senior

vice-president and chief information officer (CIO) of Mueller Water Products, a US$1.8bn

manufacturer of water infrastructure and flow control products based in Atlanta, Georgia.

Internal drivers are opportunity costsif Im saving within the IT budget, thats always

nice. But if my company can come out of this in better shape than the competition, thats a

much more compelling argument.

It is easy to understand why costs and productivity top the list of concerns. These are fearful

economic times, and big capital expenditure projects carry an extra burden. Its difficult to

talk sensibly about long-term strategic issues right now, says Peter Whatnell, CIO of

Sunoco, a petroleum and petrochemical products manufacturer and marketer based in

Philadelphia, and president of the Society for Information Management. Every dollar of

capital expenditure is being scrutinised now, so its not unreasonable that IT projects mustalso stand up and be counted.


24/29

For some companies, however, a global economic slowdown can be seen as a reason to

modernise. This is a once-in-a-lifetime opportunity to use a real crisis to think about our

business and how IT supports it, notes Jeff Neville, CIO of Eastern Mountain Sports (EMS),

a retailer of outdoor gear based in New Hampshire.

But what about all those expected benefits from IT modernisation, such as increased revenue?

And what about the fact that survey respondents rank poor customer service and falling

behind the competition as the top two risks of not modernising? This disconnect between the

benefits of IT modernisation and the costs of implementing it reflects a much deeper, morefundamental disconnect between the IT function and those who decide the strategic direction

of an organisation. The alignment gap occurs when IT is not considered an integrated,

strategic part of the business, and is not managed as such.


25/29

WHY DO COMPANIES NEED MODERNISATION:

The need for modernisation generally arises because of competitive pressure or to create

competitive advantage on a pro active basis. The objective in both cases is to improve

customer satisfaction and generate better value to the customers. Nowadays, firms adopt

modernisation strategy either in the field of technological upgradation or product line

upgradation in order to face competition in the market. In todays competitive market, no

organisation would be able to compete effectively without resorting to modernisation in some

or the other form

However, it is noted that modernisation strategy involves costs, and therefore, before the

introduction of modernisation, the company should undertake cost benefit analysis of such

modernisation strategy. If the benefits outweigh the costs not in the short term but in the long

term, then the company must adopt this strategy.

Advantages:

Modernisation involves the process of upgradation of physical facilities like plant and

machinery, equipment, plant and processes. The modernisation results in improvement of

quality of products so that they can offer better quality to consumers, thus generating

customer satisfaction.

1. Productivity:

Modernization helps to generate higher productivity. Since modernization involves

upgradation of technology and processes which provides better value to the customer.

It helps to improve over all production, as well as quality of production. The output

can be improved both in terms of quality and quantity.

2. Full Utilization Of Plant Capacity:

Modernization helps to fully utilize plant capacity successfully. This is because

productivity improves quality of production, which in turn provides better customer

value. This results in increased sales in the market, which in turn helps to fully utilize

plant capacity.


26/29

3. Helps To Face Competition:

Modernization helps to face competition in the market. In the era of liberalization,

Indian companies will have to compete in the same market with foreign markets.

Foreign firms use sophisticated technology, and therefore, their quality of products is

far superior than that of most Indian companies. Therefore Indian companies need to

opt for modernization which will help them to produce better quality of goods and

also, at the same time reduce costs. This will helps them to effectively compete in the

market.

4. Enhances Corporate Image:

Modernization helps to build corporate image in the market, not only in domestic

markets but also in the overseas market. This is because of better quality of products

as a result of modernization.

5. Increase In Profits:

Modernization helps to improve quality and to reduce costs. This in turn helps to

boost sales in the markets as consumers can avail better quality of products at lower

cost. As a result of increased sales, the company may be in a position to gain higher

profits.

6. Higher Efficiency:

Modernization enables to generate higher efficiency in the organization. Employees

performance improves due to installation of sophisticated processes and machines in

the organization. Employees are not only motivated to operate sophisticated

machines, but such machines also reduce stress and strain in the employees


27/29

7. Research and Development:

Modernization encourages research and development in the organisation. Newer

technologies and systems are made available in the organization. The organization is

at par with other firms in the market, and can acquire the latest technology. Research

and development show their benefits in terms of increase in quality and quantity and

reduction in costs.

8. Economy in Production:

Modernization helps to reduce costs. Due to the use of sophisticated technology, the

cost of production can come down over a period of time. Again, the wastages are

reduced due to operational efficiencies of sophisticated machines. Therefore, there

can be economy in production due to modernization.


28/29

CHAPTER

CONCLUSION

There are various challenges that the firm might face while implementing modernisation. IT,

plant and machinery equipment have often had to fight to be seen as an integrated, strategic

part of a company. In the best of times, IT and equipment modernisation has a seat at the

strategic table. In the worst, it is seen as a cost centre.

Modernisation is intrinsically expensive, complex and time consuming. It is exactly the kind

of endeavour that gets close scrutiny in challenging economic times. But when carefully

planned, modernisation can be an opportunity, not a burden. It is a chance for the firm to ask

questions about what they do and why they do it. Modernisation is an opportunity to shape

the companys future, to identify or re-affirm our reason for being, and decide what the

company really wants to be great at.

To get the most from their systems and applications, companies should:

Under difficult economic conditions, keep an eye on the longer term and structuremodernization plans to provide a competitive advantage when the upturn begins.

Let the business lead modernisation to ensure a proper strategic alignment. If amodernization project originates from a particular department, it has a greater chance

of failure. All modernization should directly support a business need, and be owned

by the business, not the function.

Keep communications between business functions constant is constant. Theseprojects are lengthy, and in a dynamic economy business strategy can change over

the course of the job. Building flexibility into the plans from the start, and constantly

checking back with the business will help to mitigate instant obsolescence.

Address market-facing needs like revenue generation and customer service, ratherthan internal concerns like maintenance costs. Those companies that let external

forces shape and drive their modernization efforts are more likely to succeed.


29/29

Highly efficient and competitive organizations understand that an effective IT and equipment

is a major pillar of their success. Unfortunately, these environments are often weighed down

with legacy components that are costly, risky, and slow. The resulting imbalance between IT

and equipment, and business creates an execution gap that keeps these infrastructure systems

from successfully supporting ongoing business requirementsrequirements that are being

driven by customers, competitors, and demands for compliance.

The solution for this execution gap? Infrastructure and IT modernization.

Modernization is the continuous evolution of an organizations existing application and

infrastructure software, with the goal of aligning them with ever-shifting business strategies.

Modernization implies the acquisition and deployment of modern technologies, skill sets, and

capabilities to replace legacy environments. These modern technologies must be based on

open standards and must provide an open, complete, and integrated environment that is both

economically efficient and able to support an organizations strategic business goals. I

Modernization can be done as quickly or as slowly as an organization requires: strategies and

road maps can span multiple years, but must align with the organizations business priorities

and budget constraints. Typically, organizations will need a combination of approaches for a

complete modernization solution.

Planning a modernization effort includes defining a strategy and developing a plan that maps

the current legacy environment to the desired state. The planning process also includes

identifying target architecture, acquiring required software, and creating a multi-phased

execution plan

Indian Railways Modernisation

Documents

Transcript of Indian Railways Modernisation