Determining Forces of Organizational Change

Organization as a system, depend on many interdependent factors which influence it’s day to day
functioning, strategic decisions and future action plans for facing the competitive challenges
successfully. These factors can be both internal and external in nature and determine an organization’s
readiness for change as well as it’s preparedness.

External Forces of Organizational Change

The external forces of change stem up from the external environment. These forces have been
described below:

Political Forces: The rapidly changing global political situation and ups and downs in global politics have
led to an equally rapid change in the global economy and presented a number of challenges to the
organization in the form of changes in regulations, policies and economic structures in the form of
globalization. And liberalization.

Economic Forces: Economic forces influence the organization’s change management strategy by

presenting opportunities or challenges in the form of economic uncertainty or increasing competitive
pressures.

Various factors such as changes in the business cycle, prevalent inflation or deflation rate in the
economy, fluctuation in the interest rates, economic recession, changes in the economic policies or tax
structures, import/export duties, fluctuation in the oil prices globally, financial stability of the country
and also loss/increase in the consumer confidence towards the economic conditions of the country are
some of the crucial factors. For example change in the global market, economies create a ripple like
effect and affect the Indian markets too in terms of fluctuations in the capital markets, employment
opportunities and rise or fall in the consumer demand.

Technological Forces: Technological advances and innovations in communication and computer

technology revolutionize organizational activities to facilitate new ways of working and add new ranges
of products / services thus creating the need to build a framework to effectively manage change and
actively respond to challenges.

Advancements in the technological field greatly contribute to the overall economic development in the
country and also the organization’s success or failure in the competitive environment. One of the
glowing examples is Singapore, which has emerged as one of the powerful economies within recent
times in spite of no natural resource availability. With the usage of Information Technology in the
strategic decision making and overall planning, today Singapore holds the status of being the world’s
first completely networked economy in which all homes, administrative offices,
schools/colleges/professional institutions, businesses and government branches are connected
electronically.

Governmental Forces: Government regulations and the amount of intervention can also affect the need
for change. The following government forces are described below which determine the need for
organizational change:

1. Deregulation: Deregulation is associated with decentralization of power or economic

interventions at the state level or lessening of the governmental intervention in the economy.
 For example, as an outcome of deregulation few sectors/industries like insurance, banking,
petroleum and many others which were previously under the direct control of the government,
are now being handed over to the private players or companies.

2. Foreign Exchange: Foreign exchange rates directly affect the international trade, as the
variations in the exchange rates influence the currency payment structure. Issues or constraints
with the foreign exchange rate may compel the government in moving ahead with the
imposition of import restrictions on selected items or deregulating the economies for attracting
the foreign exchange for investment purposes.

3. Anti-Trust Laws: Anti-Trust laws are enforced by most of the governments for

restricting/curbing unfair trade practices. For example, these restrictions have been enforced in
India by enacting an act called Monopolies and Restrictive Trade Practices (MRTP), 1971.

4. Suspension Agreements: Suspension agreements are the agreements which are finalized

between the governments to waive off anti-dumping duties.

5. Protectionism: Due to the growing competitive pressures, most of the governments try to

enforce certain regulations or intervene for safeguarding their threatened industries. For
example, by enforcing certain trade barriers, the Indian government protects the local industries
such as Handicrafts and Textiles. These trade barriers may take the form of either anti-dumping
laws, levy of tariffs or import duties, quantity quotas, and various government subsidies.

Competitive Pressures: Challenges that increase global competition and become effective due to
competitive pressures force companies to change strategies to ensure their global presence. Japanese
majors such as Nissan, Toyota and Mitsubishi are constantly shifting their production as well as
integration into Southeast Asian countries in order to reduce labor costs and gain competitive advantage
in the form of an expensive economy.

Changes in the Needs and Preferences of Customers: Changes in customer needs are forcing companies
to constantly adapt and innovate their product offerings to meet the changing needs of customers.

Internal Forces of Organizational Change

Systemic Forces: An organization consists of a system and various subsystems that work in an
interconnected, just like a human system. The subsystems of an organization are in direct interaction
and also affect organizational behavior. Changes to any subsystem result in changes in existing
organizational processes and relationships as well as complete alignment.

Inadequate Existing Administrative Processes: Each organization operates following a specific

procedure, rules and regulations. With the changing times, an organization has to change its rules and
existing administrative processes, administrative inadequacies can lead to organizational inefficiency.

Individual/Group Speculations: In anthropological terms, it is understood that man is a social animal

whose desires and requirements keep changing with the changing times, which result in differences in
individual as well as group expectations. Various aspects of the positive front such as how ambitious an
individual is, achievement drive, career growth, personal and professional skills and negative factors
such as own fear, complexity and insecurity some interpersonal as well as interdisciplinary factors affect
an organizational functioning and its overall performance on a daily basis.
Structural Changes: These changes change the existing organizational structure as well as its overall
design. Structural changes can be considered as a strategic step on the part of the organization to
increase profitability and maximize spending benefits. These changes can take the form of downsizing,
work redesign, decentralization, and so on.

For example, IBM for introducing reforms in its existing system and procedures and for achieving cost
effectiveness has enforced downsizing strategy.

Changes in the Technology: Within an organization, technological changes can take the form of changes
in work processes, equipment, levels / degrees of automation, work order, etc.

People Focused Change: In this context, the main focus is on people and their existing skills, human
resource planning strategies, structural changes and employee reconstruction and replacement of any
worker which means transferring a worker to a different workplace where his skills are best suited. May
be involved in establishing recruitment policies and procedures.

Issues with the Profitability: This can be one of the primary factors that forces an organization to
reorganize (downsize or resize) or redesign itself. The company may have a profitable problem due to
loss of revenue, low productivity or loss of market share.

Resource Constraint: Inadequate resources can be a powerful force for change for the organization.

Competitive Pressures: Challenges that increase global competition and become effective due to
competitive pressures force companies to change strategies to ensure their global presence. Japanese
majors such as Nissan, Toyota and Mitsubishi are constantly shifting their production as well as
integration into Southeast Asian countries in order to reduce labor costs and gain competitive advantage
in the form of an expensive economy.

RAK ceramics has the advantage of not having local competitors, but the ceramic industry has large
amounts of fixed costs involved; therefore the industry is capital intensive, making it an entry barrier
that limits potential threats of new entrants. In addition, the need of automation and large investment
in technological advances pose as further entry barriers.

There has been significant growth in the demand for ceramic products over the years and countries such
as Bangladesh that enjoy cheap labour, ease of access to raw materials needed coupled with duty free
exports to countries in Europe due to lack of quota restriction from a generalised system of preference,
increasing the gap between demand and supply, it poses a threat of entry to the international ceramic
market.

Imports of ceramic products coming from countries such as China also pose a threat of new entry due to
low import costs as they have manufacturing plants of their own that produce large quantities of
ceramic goods, sacrificing quality.
Competitiveness: RAK Ceramics Bangladesh Ltd is the leading producer of ceramics products locally &
internationally. For business potentiality in the local market some giants are investing now a days in this
sector which eventually creates threat to the existing companies. The management of RAK Ceramics
expressed their opinion regarding the matter as manageable as the potential competitors may face huge
barriers because of the nature of production and market of ceramic products in Bangladesh. The
production oriented investments i.e. fixed assets & machineries are costly with long production run style
leads the company an advantage over their competitors. Despite of that if there appears any high
competition in the future that drives the prospect of the company down, it will go for Mergers &
Acquisitions in the later future to minimize such risks.

The company is focusing on improving standalone profitability by optimising the product mix and
through various cost-cutting measures such as reducing employee costs, traveling costs and other fixed
costs. Besides, ramping up of operations in the joint ventures (JVs), GRIS Ceramics LLP (Gris; commenced
in 2018) and Gryphon Ceramics Pvt Ltd (Gryphon; 2019) will support revenue growth in 2021 and also
enable significant improvement in profitability as these entities have operating margins of 13-15% and
23-25%, respectively, supported by their locational advantages. Consolidated revenue should grow by
15-20% per fiscal in the medium term and the operating margin improve to 7-9%.

The ratings continue to reflect an established market position and brand in the vitrified tiles and sanitary
ware segments in India, and the strong operational, business, and financial support received from the
parent, RAK UAE. These strengths are partially offset by an average financial risk profile, vulnerability to
fluctuations in fuel cost and raw material prices, and exposure to intense competition and to end-user
cyclicality.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profile of RAK, Gris and
Gryphon. Further CRISIL has also factored in the strong operational, business, and financial support
received from the parent, RAK UAE.

Please refer Annexure - Details of entities Consolidated, which captures the list of entities considered
and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

* Strong operational, business and financial support from the parent:

RAK, being a subsidiary of RAK UAE, continues to benefit from the parent's established market presence
in addition to business and financial support. The parent is one of the world's largest ceramics
manufacturers with a reputed name in the industry. In 2019, RAK UAE had revenue of Emirati dirham
(AED) 260 crore (equivalent to about Rs 5,291 crore) with an operating margin of 16.4%. The gearing
was 0.7 time as on December 31, 2019.

Financial support has been forthcoming from the parent -- RAK UAE ' who infused Rs 50 crore equity and
is expected to extend loans of Rs 90 crore in 2020. In 2013, RAK UAE converted Rs 137 crore of loan to
equity, thus strongly benefiting RAK's capital structure. Further, the parent infused Rs 45 crore in 2017
for investment in JVs. Moreover, most of the personnel from the senior management team have been
deputed by the parent. RAK also receives continuous support from the parent in terms of technology
and launching of new products.

The parent also extends operational support by procuring tiles from its Indian counterpart in case of any
inventory build-up and slowdown in the domestic market. In 2019, RAK is estimated to have generated
Rs 80-100 crore of its revenue from exports to the parent.

* Established market position and brand in the vitrified tiles and sanitary ware segments in India

The company commenced commercial operations in June 2006. Its market position is driven by the
established presence of RAK UAE in the vitrified tiles industry spanning over two decades. Within the
short span of 10 years, RAK has stabilised its operations and become a leading player in the organised
ceramics market in India, and has set up a marketing network of over 400 dealers. The company is
planning to expand its network in India in 2020 and set up more showrooms to sell high-margin
products. While RAK is a reputed brand, particularly in the premium segment, the ceramic tiles industry
is highly competitive and renders the company susceptible to competitive pressures during down cycles.

Weaknesses

* Exposure to intense competition:

The ceramic tiles industry is highly competitive and dominated by the unorganised sector, which has a
market share of around 50%. Additionally, companies face competitive pressure from low-cost Chinese
imports. Also, in the organised segment, RAK faces intense competition from other reputed players such
as H&R Johnson (India) Ltd, Somany Ceramics Ltd ('CRISIL AA-/Stable/CRISIL A1+'), Kajaria Ceramics Ltd,
and Asian Granito India Ltd. The ability to command a premium in the market will depend on the
competitive advantage that RAK derives from RAK UAE's expertise in this business.

* Exposure to cyclicality in the end-user industry

Fortunes of the tiles industry are primarily driven by the real estate market and the economic scenario.
For instance, the tiles industry had modest growth in fiscal 2018 due to slowdown in the real estate
market. Even during fiscal 2017, post demonetisation, the real estate sector was impacted, which in turn
affected demand for the tiles industry. RAK is likely to remain susceptible to cyclicality in demand from
the major end-user industry, real estate.

* Vulnerability to fluctuations in fuel cost and raw material prices

The ceramics industry is highly power intensive; power cost constitutes up to 20% of the total cost
depending on the type of fuel used for the manufacturing process. Consequently, most of the industry
players have manufacturing operations in Morbi, Gujarat, which has adequate low-cost fuel in terms of
natural gas to power the plants and is also in proximity to raw materials. However, RAK, with its
manufacturing plant in Andhra Pradesh, is exposed to shortage of natural gas to power its plants. For
instance, the operating margin was impacted during 2011 and 2012, as it resorted to liquefied
petroleum gas for fuel requirement in the absence of natural gas supply. Besides, given the competition,
players also remain vulnerable to any steep fluctuations in prices of key raw materials (clay, feldspar,
silica, kaolin, and carbonates).

Changes in the Technology: Within an organization, technological changes can take the form of changes
in work processes, equipment, levels / degrees of automation, work order, etc.

RAK Ceramics is a pioneer in introducing hi-tech innovations that are a breakthrough in the industry. A
wide range of technologies are used at the company’s state-of-the-art plants including digital printing
technology, big slabs, slim, anti-microbial, glow in the dark, double charge, roll feed and other advanced
technologies such as granitech, technoslate, twin press, dry glaze and waterjet to name but a few.

The company also won a number of international Business Stevie® Awards in 2015, winning a silver
award for ‘most innovative company’ and a bronze award for ‘health, safety and environment
programme of the year’. RAK ceramics has also been awarded ‘Brand of the Year’ at the prestigious
World Branding Awards 2015.

RAK ceramics have the most advanced production facility for producing tiles and sanitary ware. They
have one production plant for tiles which covers all the production activities. RAK also have a Design
Development Program under R&D department which helps to create new design for the customers. In
this department, RAK have invested a huge amount to gain advantage over competitors in designing.
They are using SACMI technology in their production plant which comes from Italy. SACMI is the most
advanced technology used is ceramics production. RAK’s production plant is fully automated and
computer operated which helps to reduce the chance of error. SACMI’s machineries are sensor based in
which it is assigned the specific tasks to be performed with minimum error. In every step of production
there is a parameter that is being checked for insuring good quality by ensuring size, moisture; pressing
power etc