Strategy Review Of Smrt Corporation Ltd Economics Essay

SMRT established in 1987 provides light rail, subway, bus and taxi services to about 1.3 million commuters a day. Mass rapid transit (MRT) unit is the major revenue contributor for SMRT. It’s MRT unit operates on 90 kilometre distance which constitutes 50 stations. MRT unit also rents some of the space in the MRT stations for commercial activities and also earns money through ads placed on taxis, buses and MRT’s (Hoover’s Inc., 2012a). SMRT provides engineering services and has projects outside Singapore. SMRT’s only competitor is ComfortDelGro Corporation Limited (Hoover’s Inc., 2012c).

Table 1: SMRT Products / Operation Sales(Hoover’s Inc., 2012b)

PRODUCTS / OPERATIONS PERCENTAGE

MRT 54

Buses 26

Taxis 9

Rental 5

Engineering & Other services 3

Advertising 2

LRT 1

Total 100

The public transport market operates in a duopoly market structure dominated by SMRT and SBS and both operating on different independent lines. SMRT and SBS have monopolistic powers over the routes during the contract period. Thus public transport means SBS and SMRT. Any positive effect or negative effect on public transport will affect both (SBS & SMRT). So in this coursework if something is mentioned as “public transport”, literally it can be taken as SMRT.

2.0. EXTERNAL ENVIRONMENT CONDITIONS

To analyze the external environment conditions faced by SMRT, PESTEL analysis and Poter’s Fiver Forces analysis are performed.

2.1. PESTEL ANALYSIS

In PESTEL analysis political, economic, social, technological, environmental and legal factors affecting the SMRT are analyzed.

2.1.1. Political

SMRT’s major shareholder (54.3% share) is Temasek Holdings (SMRT Corporation Ltd 2008-2012). Temasek Holdings is owned by the Singapore government (REACH 2012).

The government encourages public to take public transport in order reduce traffic congestion. In order to encourage public to take public transport the LTA is now integrating Bus stations and MRT stations with shopping malls thereby giving the public the chance to ride and at the same time do their purchase rather than separately travelling to area from the bus stations or MRT stations to do the purchase (Singapore Budget 2012 2011).

Thus the Government’s initiative in encouraging public to take public transport and Temasek Holdings having major share in SMRT shows that SMRT has lot of political favour and support.

2.1.2. Economical

Singapore’s expanding economy demands more workforce that Singapore population is unable to fulfill, so more and more foreigners flock to Singapore to work. Singapore’s stable government and many other factors has helped Singapore to be ranked at 14th place in best place for FDI. Expanding economy due various factors like FDI has increased the foreigner population to about 36.4% (Yeoh & Lin 2012) of the total population. Thus expanding Singapore’s economy expands the Singapore population which is in great need of public transport as it is the cheapest form of transport.

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With current economic expansion the daily trips by 2020 is estimated to be 14.3 million. The solution to this the huge number of trips per day for a small country like Singapore is public transport. Thus any increase in ridership due to expanding economy will also benefit SMRT.

2.1.3. Social

The average daily ridership (‘000 passenger-trips) for MRT is 2295, LRT is 111, Bus is 3385 and taxi is 933 (SINGAPORE LAND TRANSPORTSTATISTICS IN BRIEF 2012). Growing population, exponentially growing CEO prices, growing MRT line coverage area, sophisticated bus services, high reliable MRT system are some of the factors that increase ridership. Thus any increase in the ridership affects positively the SMRT.

2.1.4. Technological

SMRT Institute which is a subsidiary of SMRT provides educational programmes to meet and grow the technological advancements in the land transportation. Nitec in Rapid Transit Technology programme jointly developed by the Institute of Technical Education and SMRT Institute provides strong foundation for students in the railway technology. This is programme is first of its kind in Southeast Asia (http://www.smrt.com.sg/DoingBusiness/SMRTInstitute.aspx).

SMRT International Pte Ltd, a WOS (wholly-owned subsidiary) of SMRT so strong in technology offers PM (project management), O&M (operations and maintenance), engineering and consultancy services road to rail and road transport owners around the world. SMRT International Pte Ltd services clients in various parts of the world and they are China, the Middle East, India, Taiwan, the Philippines, Thailand and Vietnam (http://www.smrt.com.sg/DoingBusiness/SMRTInternationalEngineering.aspx).

2.1.5. Environmental

Singapore is one of the smallest country in the world. Roads in Singapore occupy 12% of the Singapore total land area when compared to 15% occupied by housing.) – (PUBLIC TRANSPORT OPERATORS IN SINGAPORE SHOULD REMAIN AS PUBLIC LISTED COMPANIES AND OPEN FOR MORE COMPETITORS). Since already roads have occupied considerable amount space in this small country, future roads will be underground, already rails have gone underground.

Government is convinced that as the roads are increased the drivers on the roads will also increase. Thus the road expansion in terms of underground is not a solution for traffic congestion. So the government is thinking of improving and extending the public transport to a great extent that more and more population will opt for public transport.

2.1.6. Legal

SMRT has 30 year lease agreement with LTA so the recent faults can be rectified and lessons can be learnt from this failure. As the road to success is working hard and learning from failures. SMRT has a learnt a lot and would make use of this learning as a stepping stone for success.

The image of the SMRT can be recovered. Since SMRT is a under Temasek Holdings so legal conditions will be in favor of SMRT.

2.2. PORTER FIVE FORCES

A

2.2.1. Threat Of New Competition

Singapore¿½s public transport market operates in a duopoly market structure. First, two large firms dominate the industry. SMRT and SBS operate on different lines independently. The ¿½competition for the market¿½ model allows companies to bid for the right to operate a route, gaining monopolistic power over that route for a contractual period. Currently, SMRT is operating the E-W line, N-S line and Circle line while SBS is operating the N-E line. They essentially act like a monopoly over their various routes.

Second, there are significant barriers to entry (BTE). Singapore¿½s public transport market is arguably a natural monopoly with the incumbent firm being able to reap substantial internal economies of scale with long run average cost falling throughout entire range of market output. With marginally efficiency scale occurring at a high output, firms can enjoy huge cost savings and produce at lowest cost. Due to high fixed infrastructure cost, the entrance of more firms may result in higher costs, wastage and duplication of resources, reducing consumer welfare. Hence, high BTE in the form of high fixed cost prevents new entrants from entering the market to erode the current operators¿½ supernormal profits.

2.2.2. Threat Of Substitute Products Or Services

SMRT major business is in MRT while SBS major business is in Bus. So the main product is MRT of SMRT, substitutes available are bus and taxi. Both cannot increase speed and increasing speed is not encouraged in order to avoid accidents. But in the case of rail throughout the world speed is increasing at a level unheard hence rail still have very good future.

2.2.3. Bargaining Power Of Customers

Bargaining power of the customers is very low because the market operates in a duopoly market structure.

The firm concentration ratio is very high and SMRT gains monopolistic power over that route for a contractual period.

Customer’s degree of dependency is high because the public transport is cheap and also MRT unit’s reliability is very high.

Bargaining leverage of the customer is very low because SMRT is a public transport. Anyhow mass protest on fare hikes will threaten the government or government will lose it popularity among population thus making the winning probability less in the next election.

For buyer switching cost is high as they need to buy their own car for which the CEO prices are rising exponentially.

Availability of existing substitute products is low as they need to get COE. COE is limited.

2.2.4. Bargaining Power Of Suppliers

2.2.5. Intensity Of Competitive Rivalry

3.0. INTERNAL ENVIRONMENT

A

3.1. SWOT Analysis

A

3.1.1. Strength

A

3.1.2. Weakness

A

3.1.3. Opportunities

A

3.1.4. Threats

A

4.0. CORPORATE LEVEL STRATEGIES AND COMPETITIVE ADVANTAGE

5.0. RECOMMENDATIONS

SMRT corporate strategy should focus more on MRT units.

The SMRT should focus on MRT unit because it is more eco-friendly which is the one the whole world is expecting – Use the following points to answer this point.

Rails are more eco friendly when compared to road transport. or in other words carbon foot print to transport 100 persons by road transport is very huge when compared to rail. The government should focus on trains, which have higher fuel efficiency and require less road usage per passenger. That said, a long term solution would be to better design a comprehensive rail and bus network, which would reduce the need for taxis.

Urban transport is a significant contributor to climate change

(Better Public Transport for Europe through Competitive Tendering – 2003)

(Pollution level in Singapore that to due to public transport like car Vs. bus and bus Vs. MRT)

Kyoto protocol and pollution level accepted to reduce by the public transport for Singapore

Public transport is the most efficient mode of transportation in terms of space consumption per traveller and is currently the best answer to mobility needs in densely populated areas.

(Better Public Transport for Europe through Competitive Tendering – 2003)

6.0. CONCLUSIONS