Definition

Industrial unrest is the term used to describe activities undertaken by the workforce when they protest against pay or conditions of their employment. Actions may include strikes, sit-ins, slowdowns or work-to-rule. Historically, riots also took place, such as the action taken by Luddies during the industrial Revolution, and other machineswrecking outbreaks.

Causes
unfair termination of appointment wages & salaries issues poor management styles

Introduction
In late 1999, the top management of Titan Industries Ltd. (Titan), India's leading watch, clock and jewelry manufacturer, was surprised when several senior executives threatened to resign. The threats reportedly came after a long period of employee unrest in the organization. The reason behind the unrest was the company's decision to increase the level of outsourcing in its manufacturing activities while limiting production facilities for just assembling purposes. Titan's Vice-Chairman and Managing Director Xerxes Desai (Desai) quickly issued a statement stating that the above was not true. However, this was in sharp contrast to his earlier statements in the media. In an interview to a business magazine1, Desai had remarked, "We will manufacture only if we can do it faster and cheaper than anyone else in the world." Even as the company worked towards explaining its strategies clearly to the employees, analysts could not help remark that Titan was already sourcing a large part of cases and movements, key watch components, from within and outside India. Moreover, the company had always been sourcing a variety of raw materials such as stainless steels, tool steels, engineering plastics, tools, consumables, components and

specialty movements2 for its watch manufacturing operations through vendors spread across 20 countries, mainly in Asia and Europe. The company's management seemed to have realized that global sourcing of certain components made better business sense. Media reports even quoted watch industry officials claiming that companies like Titan had 'no option but to move away from manufacturing and towards trading in the long run.' This was not a very surprising move as it seemed but natural for the company to look for cost effective sourcing options at a time when manufacturing seemed rather costly. Titan's decision was influenced by a host of factors that made the company realize the potential benefits of outsourcing as a tool for holding on to its position in the Indian watches market. The liberalization of the Indian economy and the subsequent removal of quantitative restrictions3 on watch imports in the late 1990s, forced Titan to focus more on marketing efforts rather than manufacturing to retain its competitive edge in the future.

Background Note
Titan was promoted as Titan Watches Ltd. jointly by Questar Investments Limited (a Tata group company), Tata Sons, Tata Press and the Tamilnadu Industrial Development Corporation Limited (TIDCO). The company was incorporated in July 1984 in Chennai, India, in technical collaboration with one of the world's largest manufacturers of watch movements, France Ebauches, a French company. Unlike Hindustan Machine Tools (HMT), the leading manufacturer of mechanical watches at that time, Titan Watches decided to concentrate on manufacturing quartz watches. The company established its first manufacturing facility in Hosur, Tamil Nadu in 1987. The state-of-the-art manufacturing facility, set up with technical know-how from Europe and Japan, had an installed capacity of 3.5 million watches per annum. In 1988, the company established a component manufacturing facility and in 1990, it started a case manufacturing plant, both located close to the Hosur plant. In 1992, the company integrated backwards to manufacture step motors.4 During the same period, it began manufacturing electronic circuit blocks, used in its watch movements. The Rs 2.7 billion watch and clock manufacturing facilities were spread over a built-up area of 42,000 square metres. The company also set up a separate manufacturing facility for solid link, sheet metal bracelets, alarm timepieces and premium table clocks in 1995. In 1995, Titan Watches overtook the market leader HMT by selling 3.2 million watches against the latter's 3 million. The same year, the company changed its name Titan Industries Ltd. in order to change its image from that of a watch manufacturer to that of a fashion accessories manufacturer. Titan also introduced the Tanishq range of 18-carat gold jewelry.

Over the years, the Hosur facility went on to become one of the largest integrated watchmanufacturing units in the world, employing around 3500 people. The facilities in Hosur included a computer aided design (CAD)5 and prototyping unit, a comprehensive tool room with capacity for manufacture of precision tools and die-sets. Besides, Titan had a wide range of computerized numeric control (CNC6) machines. Gold was refined and alloyed inhouse at the Hosur plant, but the design center for jewelry was located in Bangalore. From the very beginning, Titan had used cost cutting as a means to achieve competitiveness and improve profitability. It realized that sustained advantage in the marketplace could be achieved only by keeping costs low and launching innovative/technologically superior products. To improve productivity, quality and safety, Titan automated select manual and semi-automatic operations in movement and case manufacturing. Titan had always implemented World Class Manufacturing (WCM) practices that helped keep costs under control. As part of the WCM initiatives, Titan implemented practices such as Just-In-Time Manufacturing, Total Productive Maintenance and Total Quality Control. In 1996, Titan increased the Hosur plant's capacity to cater to the growing domestic and international demand from 3.5 million to 4.18 million units per annum. In 1997, the company launched its own range of table clocks to cash in on the fact that there were no branded players in the segment. In the same year, it began to manufacture watches for several prestigious international brands. In 1998, Titan decided to discontinue the joint venture arrangement with Timex due to certain differences. In the same year, it increased the capacity of the Hosur plant to 5 million watches. Titan sold its products through a network of exclusive Titan showrooms called, 'The World of Titan' and 'Time Zone,' a multi-brand watch showroom selling premium domestic and international brands, in addition to over 5500 dealer networks across 1400 towns in India. In its efforts towards developing its export markets, Titan started selling its products in over 40 European, West Asian and South East Asian markets through its subsidiaries in London, Singapore and Dubai. In 1998, the company decided to move out of the lower segment of the clocks business. The same year, Titan instituted the 'PQCD world class-manufacturing program' that placed renewed emphasis on Productivity, Quality, Cost control and Delivery on time. This program emphasized greater focus on customer satisfaction and profitability. In order to cut costs, the company indigenized its components. It was able to increase the proportion of indigenous components from 44% in 1994 to about 75% in 1998. The company also implemented SAP Enterprise Resource Planning on the advice of Coopers & Lybrand consultants, to improve the utilization and planning of resources, lower lead time and inventories. Over the years, Titan became one of the most successful and respected Indian brands. The company was ranked sixth among the world's largest watch manufacturers. It was given the credit for revolutionizing the Indian watch industry in India through constant innovation, better product design, heavy branding and good distribution. The advertisement campaign for Titan watches with the signature tune adapted from the 25th Symphony of Mozart

became a landmark Indian advertising's history (Refer Table I for key statistics of the Indian watch industry).

TABLE I INDIAN WATCH INDUSTRY - KEY STATISTICS Market Market Shares (in %) Production Size Year (in 000 (in Rs Titan HMT Timex Others nos) crore) 1993 29401.6 516.3 37 47 3 13 1994 30648.4 465.5 49 22 10 19 1995 20918.6 587.4 45 22 12 21 1996 24726 766 41 23 13 23 1997 36480.7 797.3 45 21 10 24 1998 36717.5 746.3 48 22 10 20 Source: www.indiainfoline.com The company's tryst with outsourcing began in 1999, with the changes in India's foreign trade policies. Earlier only watches worth Rs 35,000 and above could be imported. The new EXIM policy7 freed the imports of watches of any value under a special import license. The import duty was also set to be reduced gradually in the future. According to analysts, this removal of restrictions could cause international players to make a beeline for marketing their products in India. Titan, which hitherto had only the low-profile, failing HMT as the main competitor, realized the financial muscle and technological superiority of the MNCs. In order to be able to meet the challenges of the changing market dynamics, outsourcing became an imperative for the company.

About Outsourcing
Simply put, outsourcing means getting those things done outside that were hitherto provided for internally. According to the Outsourcing Institute, "Outsourcing is nothing less than a basic redefinition of the organization. Outsourcing suggests an organization focussed on a few, well-chosen core competencies supported by long-term outside relationships for many of its other activities and resources." An organization can outsource many functions of its day to day operations - manufacturing, marketing, human resources management, information technology services to name a few. It is thus a type of make-or-buy decision, wherein typically an earlier 'make' decision is altered to a 'buy' decision. Earlier, when competitive pressure on companies was not very severe, cost management in manufacturing usually resulted in backward integration and gaining ownership of a large range of manufacturing and subassembly facilities. However, more and more organizations began moving towards outsourcing manufacturing for a lot of reasons. Outsourcing helps a company become flexible enough to terminate an operation if it does not meet the business goals without being concerned about various human resources, separation, or litigation issues. It is not necessary to build a fixed overhead infrastructure and the company can acquire and leverage customer acquisition expertise easily when it outsources certain activities. As customers increasingly demand quick delivery, companies have discovered the importance of optimizing the supply chain activities. Moreover, with the markets changing

rapidly, there has been an increase in the investment risk in new technology, machinery and other equipment. This has necessitated flexible production systems in manufacturing concerns throughout the world. Most importantly, organizations have also realized that it is in the best interest of the company to concentrate its resources on its core competencies only. The benefits of outsourcing can be summarized as follows: Provides flexibility and versatility to in-house staff. Frees up capital and cash for other activities that are the company's core competencies, such as R&D or marketing. Helps shorten the 'time-to-market' by focussing on core activities. Provides access to industry leading process development expertise and manufacturing technologies. Helps avoid long-term investments in potentially under-utilized production capacity or excessive inventories. The materials management department coordinates the outsourcing initiatives in an organization. This covers the complete cycle of material flow from the purchase and internal control of production materials to the planning and control of work-in-progress and distribution of the finished product. Before deciding in favor of outsourcing, it is essential for organizations to identify, exploit and protect their core businesses. They should retain or insource those manufacturing functions that are critical to the product and those the company is distinctively good at making. Thus, only those manufacturing functions should be outsourced in which the suppliers have a distinct comparative advantage, for instance in terms of greater economies of scale, a fundamentally lower cost structure or stronger performance incentives. Most importantly, it is necessary to use outsourcing proactively through a stronger focus on internal core business areas, as a way to improve manufacturing performance by generating employee commitment at all levels (Refer Table II & III for the essentials and perils associated with outsourcing).

TABLE II THE ESSENTIALS OF OUTSOURCING Understanding company goals and objectives Having a strategic vision and plan Selecting the right vendor Ongoing management of relationships Having a properly structured contract Communicating with affected individual/groups Getting senior executives' support and involvement Paying careful attention to personnel issues Having short-term financial justification Using external expertise Source: www.salience.com

TABLE III THE PERILS OF OUTSOURCING Loss of control Exposure to supplier risks and issues of quality control Suppliers can reap undue advantages by imitating product/technology Product degradation because the supplier pays less attention to it The change from collaborative to opportunistic behaviour of the supplier (or the buyer) over a period of time Difficulty in measuring the actual costs of the supplier, which are typically above baseline costs because of the experience curve Potential problems associated with taking the function back or substituting the supplier when the outsourcing agreement terminates Possibility of being tied to obsolete technology Source: ICMR Many leading global companies such as Volvo and HP have been reaping the benefits of outsourcing manufacturing. The practice has been particularly popular among companies in the automobile and pharmaceutical industries. Titan was one of the first Indian companies from the consumer electronics business to have opted for outsourcing its manufacturing activities as a strategic exercise. Titan's entry into the clock segment in the mid 1990s failed badly because its clocks could not face the competition from cheaper imports from China. Moreover, the design of Titan's clocks was also found to be faulty. To correct these problems, the company decided to stop manufacturing clocks, instead it decided to import them from Hong Kong. The only input in this 'virtual manufacturing8' setup from Titan's side was in the form of design, branding and distribution. The company converted its clock plant into a plastic watch-manufacturing unit to make alarm and travel watches. Outsourcing activities were further strengthened in the next few years due to the problems Titan was facing with the gray market. The gray market has always accounted for a substantial part of the Indian watch industry (Refer Table IV). TABLE IV THE INDIAN WATCH INDUSTRY IN 2001 Indian watch Organized Unorganized industry Sector Sector* 16-18 million Volume 20 million units units 9 Value Rs 10 billion Rs 3-5 billion Premium 15% Segment-wise Mass 40% N.A. breakup Mid 45%

* Estimates. Source: Business Line, December 6, 2001. During the early 1990s, when the import duty on watches was reduced to 25% from 50% and import licenses became easier to obtain, as much as 55% of the demand was met by small players from the unorganized sector. Since Titan faced stiff competition from these players on the price, it decided to concentrate on building a strong distribution and support network. This worked well for the company and soon it became the undisputed market leader in the watches market. However, the variety and range available in the mid segment increased dramatically after 1999, with the changes in the EXIM policy. Though the segment itself grew in size, new entrants began to threaten Titan's market share.

Outsourcing at Titan Contd...

The company's management was also aware that outsourcing was the accepted norm in the global watch industry and many leading global watch brands were not manufactured by the companies that owned them. Kurien said, "We have to think global, not Hosur. Putting up plants and buying equipment is clearly not the answer to competing in the new environment. And as we find suitable vendors for full watches, we will opt for them increasingly." He added, "In the old days it would have made sense to put in huge investments in new technology because it was a protected market. But that is no longer the case." According to analysts, Titan's multibillion investment in manufacturing facilities were proving to be a real drain on its profitability in the changed industry. Moreover, since the company relied heavily on its marketing finesse than operational excellence, these investments were deemed to be too high. Though the company had consistently posted yearly profits, in the first quarter of 1999-00, it reported a loss of Rs 52 million. This loss was due to the high overheads, excise duties and marketing spending in 1999-00, which increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47% to Rs 146.4 million in 1998 from Rs 275.7 million in 1996 (Refer Table V). Company watchers partly attributed this to the heavy investments in the manufacturing setup. TABLE V TITAN - KEY STATISTICS 1999- 200094-95 95-96 96-97 97-98 98-99 00 01 Sales Volumes (nos. in lakhs) Watches 325.8 387.5 394.5 435.3 511.1 585.4 667.6 Jewellery 0.9 2 3.7 12 16.8 30 72.1 Table Clocks 6.7 36.4 30.5 43 32.9 16.2 Sales Income 2824.9 3507.2 4085.2 4420.6 4820.4 6303.3 6969 Expenditure 2239.3 2761.9 3207.3 3572 3934.8 5506.2 6141.9 Interest 218 342.2 564 529.6 519.2 508.8 478.4 Depreciation 131.1 156.8 165.2 188.2 201.4 204 209.3 Operating 236.5 246.3 148.7 130.8 165 84.3 139.4

Profit Other Income Profit Before Taxes Taxes Profit After Taxes Equity Div. (%)

14.4 250.9 250.9 30%

29.4 275.7 275.7 33%

129.3 278 35.8 242.2 33%

31.6 162.4 16 146.4 25%

24.1 189.1 18.7 170.4 26%

130.1 214.4 21.6 192.8 26%

116.3 255.7 20.9 234.8 26%

Source: www.titanworld.com Taking into account the above factors, Titan had no other option but to settle for outsourcing. Around the same time, Titan decided to change its focus to generating more volumes rather than value. This was because the growth in the premium segment of the watch market, which was Titan's mainstay, had been below its expectations. The company wanted to build up a base in the lower value segment and extend its reach. According to company estimates, outsourcing worked out be around 30% cheaper than manufacturing in-house. Another reason why Titan wanted to reduce its focus on manufacturing was the high employee costs - 11.2% of its revenues in 2000. This was because in the days when the company had no other option but to manufacture, the Hosur factory had a huge worker base. In 1997 and 2000, the company entered into various wage agreements with the workers' union. As a result, even a low-skilled blue-collar worker at the company earned as much as Rs 10,000 per month. This increased overall employee costs. According to analysts, this was alarming because since 1996, Titan had neither made any fresh recruitments nor replaced close to 200 supervisory and managerial-level employees who left in the same period. However, the biggest factor that swung the decision in favor of outsourcing was the fact that Titan was not being able to meet the onslaught of the unorganized sector for the first time. Since the company decided to focus on generating volumes from low-end mass products, it had come in direct competition with players in the unorganized market. With cheaper Chinese imports flooding the Indian market, Titan realized that the complete technology of making watches, from hand-plating technology to manufacturing cases, was easily available at prices much lower than what the Hosur factory could ever deliver. According to a former company manager, "The extra costs in the system aren't helping in differentiating the brand. Today, even unique elements of design are being easily copied at a lower cost." These factors eventually led the company to announce that it would be outsourcing in the future. Commenting on the move, Bhaskar Bhat, Chief Operating Officer, watches business unit, said, "There will be no more big investments in manufacturing. Wherever we find it is more competitive to outsource as against manufacturing it in-house, we will go ahead and outsource it." However, the management had not expected the trouble with employees. To put to rest the employee unrest issues, Desai released a memo stating that, "I want to correct a misapprehension that Titan had inadvertently succeeded in creating that the company was turning to external sources of supply because in-house production is expensive." The Chief Manufacturing Officer of the watch business unit, M.S. Shantharam also tried to put to rest the doubts of the employees, "Whatever we can buy at a cheaper price we will, but not at the cost of underutilization of the factory." He further added, "The message to perform is clear to every employee. The workers are fully apprised of the competitive scenario and they realize the urgency of better productivity." As the employee unrest settled down, Titan

began to focus on implementing its decision to outsource. In 1999, the company outsourced close to 1 million movements from suppliers in Hong Kong and China. All the components for the Dash range of children's watches that was launched in July 1999 were outsourced from local and global vendors. Workers at the Hosur plant only assembled these watches. According to Titan sources, new range of watches typically took some time to generate volumes. Therefore, it was priced on the higher side. By opting for outsourcing, the company could launch the watches for just Rs 250-395. If it had to manufacture the range, it would have had to invest at least Rs 2.5 million just for the machinery to make the moulds for the watches. Similarly, the Fastrack range of digital watches was also priced in the range of Rs 650 to Rs 1500, keeping in mind the target segment - youth in the 15-24 age group. Titan could price the range so attractively because the watches were completely sourced from Hong Kong and Taiwan. Kurien admitted, "We are able to offer the watch at this price only because of the sourcing model." Though the company had initially thought of developing the technology for the watches on its own, it dropped its plans after it realized that the costs involved would be too high for the volumes it was expecting in the initial stages. However, the outsourcing decision did not indicate in any way that Titan had decided to forego its earlier focus on enhancing operational efficiencies. Titan had also put in place various measures to enhance the productivity of employees and the machinery, including measures to facilitate better buying and negotiating, locate better vendors, locate alternative sources, and salvage non-moving components. Through process reengineering efforts, Titan managed to reduce the overall watch assembly time from 17 days to 10 days today. In addition, surface treatment time i.e. time take for a process to improve the finish of the watches, was reduced from 62 hours to one hour. Titan began working towards reducing its cost of operations with the help of Andersen Consulting through an e-commerce initiative.

The Future
Dash proved to be a runaway success for Titan with 50,000 watches being sold within the first two months of its launch. The Fastrack range grew by almost 100% in terms of volume and it established itself as the largest youth brand in the country. The line was extended to the digital watch market with Fastrack Digital, positioned on the fashion platform. According to company sources, the success of these two watches was due to the fact that they were outsourced. By 2001, with revenues of Rs 7 billion and net profit of Rs 235 million, Titan emerged as the country's largest watchmaker with a 25% marketshare of the total domestic market and a 50% share among nationally recognized brands. However, in December 2001, while the income from the watch division increased by 4%, the figure was 10% for the company as a whole. This was because Tanishq, the jewellery division had posted a 32% growth. It was clear that the company needed to work towards strengthening the watch business in order to reap the full benefits of its marketing and outsourcing efforts. Moreover, analysts said that Titan will not have things so easy in the future due to the increasing competition in the watch industry. Premium international watch brands such as Swatch, Esprit, Tissot, Longines, Citizen, Rado and Omega entered India in the late 1990s and catered to the super-premium segment of the market. However, during 2001-02, some of these brands such as Citizen, Esprit and Swatch entered the mid-priced segment, posing stiff competition to Titan's brands in this range (Refer Exhibit I for Titan's product profile in 2002). The company's marketshare in this segment was 75%, which contributed nearly 65% to the Titan brand's value and one-third of the company's entire watch business. With

the company planning to focus all its energy to meet competition in the lower as well as higher ends of the market, the watch industry seemed to be all set for an interesting battle.

Questions for Discussion

1. Explain why Titan had to decide in favor of outsourcing its manufacturing activities despite having a state-of-the-art manufacturing set up. 2. Explain the concept of outsourcing and the reasons for its growing popularity in the manufacturing industry. Briefly comment on the pros and cons associated with outsourcing the manufacturing function. 3. Evaluate the benefits Titan derived as a result of outsourcing the manufacturing function. Does outsourcing render Titan a low-cost producer? 4. Is outsourcing a viable option for Titan? Does the operational strategy contribute to competitive advantage? How far is outsourcing likely to help Titan face competition in the domestic as well as international markets?

Exhibit
Exhibit I: Titan - Product Profile

Honda Motor Co looked set to resume building cars in China on Friday after a supplier of exhaust systems contained a labour dispute, but workers at another parts maker remained on strike.

Japan's No.2 automaker and iPhone maker Foxconn International Holdings have been the most prominent companies hit by a lengthening string of labour disputes in China between workers resentful of large income disparities and employers trying to cap rising costs. Strikes are usually stamped out quickly in China over government concerns about social unrest. But more disputes have been erupting lately, as workers in the world's manufacturing hub are emboldened by the concessions made by the likes of Foxconn, owned by Taiwan's Hon Hai Precision Industry Co. Honda, which sold 17 percent of its cars in China last year, has idled its four local factories on and off since May 24, since a first strike at a wholly owned transmissions maker in the southern city of Foshan. A second strike, at a maker of exhaust pipes and other parts, also in Foshan, ended late on Wednesday, and the plant's Japanese parent said that with production back to normal, shipments to Honda's suspended factories should return to normal on Friday. Honda spokesman Yoshiyuki Kuroda said the carmaker hoped to announce a restart from Friday once a final decision was made. Honda had halted production at two assembly plants, which build the Accord, Fit, Odyssey and City, on Wednesday and Thursday. But the settlement of the two earlier strikes was overshadowed by a third one, at a factory in Guangdong province run by unit Honda Lock, where about 85 percent of the 1,400 workers entered a second day of strike on Thursday. A Honda Lock official in Japan said shipments would be unaffected for at least a day or two, with enough locks in stock. But he added that negotiations were ongoing, and a prolonged dispute could disrupt the flow of supply to Honda's car plants. "We're still gathering information, and we don't know when the negotiations will end," Honda Lock's Hirotoshi Sato said. NOT SO FAST? It was also uncertain whether workers and management at the Foshan exhaust systems factory were on the same page, with one employee saying negotiations would continue. "We still have to discuss many conditions," the worker told Reuters by telephone, declining to be identified. "They've only agreed to a small number of terms including a very small pay rise that's far less than what we wanted." He said that workers were returning nevertheless because they were seeking a peaceful settlement. "For us, we're doing all this simply because our wages are too low. But our strike seems to have caused a negative impact on society and trouble for local officials. We don't want this ... so some of us have decided to go back to work," he said. Some executives conceded that demands for higher pay were inevitable as China's economy booms. "We had far worse labour strife in Japan when our economy was booming decades ago," Mitsubishi Motors Corp President Osamu Masuko told Reuters this week.

"It's natural for China to go through this phase as its economy expands. Even so, you don't see anyone pulling out of China -- that's not an option because of the market's growth." Honda shares ended morning trade down 0.8 percent, while the Nikkei average gained 0.3 percent.