Too Good to Fail
India’s
Tata, one of the world’s largest conglomerates, is basing an ambitious global
strategy on 142 years of social entrepreneurship.
When India’s Tata Tea Ltd. purchased
Britain’s Tetley Tea Company for US$450 million in early 2000 — at the time the
largest sum ever paid by an Indian company for a foreign acquisition — the
rationale for the deal was clear. Tata Tea would not just gain one of the
world’s most iconic brands. It would also transform itself from a sleepy
farming operation with a core business of barely profitable tea plantations to
a high-margin global distributor of specialty teas and other healthy beverages.
Soon after the acquisition, Tata made another logical move. It sold its vast
plantations in Munnar, a mile-high, economically underdeveloped community in
the Western Ghat mountains of South India, where Tata had been the largest
employer for a century.
But the transaction was anything but
routine. Instead of working out a lucrative deal with eager investment bankers,
bribing local politicians to mollify them, laying off workers, and selling to
the highest bidder, as some other Indian companies shedding a moribund business
might have done, Tata Tea sold 17 of the 25 plantations to its own former
employees. Layoffs were generally limited to one per household, and Tata gave a
group of voluntary retirees enough cash to buy equity in the new company that
was formed. (That company, Kanan Devan Hills Plantation Company [KDHP], still
operates as an employee-owned enterprise.)
Although Tata Tea would henceforth
maintain only limited business interests in the area (including some equity in
KDHP), the company continued its active social role there. It still subsidizes
a range of social services and KDHP employee benefits, including free housing
for plantation workers, a private school, an education center for disabled
children and young adults, and the newly renovated Tata General Hospital in
Munnar. Tata still remains a major customer of KDHP, which helps guarantee a
stable supply of tea at competitive prices.
Such gestures of largesse and
long-term commitment are not unusual for Tata, the massive, mostly Indian group
of companies to which Tata Tea belongs. Roughly 90 companies are part of this
conglomerate, or “family” (as many Tata executives prefer to call it). Each is
led by its own executive team and governed by its own board of directors. But
they are bound together by an interlocking governance structure and a set of
corporate values passed down over 142 years from the founder, Jamsetji
Nusserwanji (J.N.) Tata. As of 2010, Tata is a $70.8 billion commercial
enterprise, employing about 350,000 people in 80 countries, across an eclectic
array of industries — including hotels, consumer goods, mining, steel
manufacturing, telecommunications, trucks and cars (including the
much-publicized $2,500 Tata Nano), electric power, credit cards, chemicals,
engineering, and IT services and business process outsourcing. Not even General
Electric sells such a wide range of products and services.
Since its founding in 1868, Tata has
operated on the premise that a company thrives on social capital (the value
created from investing in good community and human relationships) in the same
way that it relies on hard assets for sustainable growth. With every
generation, Tata’s executives and managers say, they have nurtured and improved
their capability for “stakeholder management”: basing investments and operating
decisions on the needs and interests of all who will be affected. For Tata,
this means shareholders, employees, customers, and the people of the countries
where Tata operates — historically India, but potentially anywhere.
“We may be among the few companies
around the world who think and act first as a citizen,” says R. Gopalakrishnan,
an executive director of Tata Sons Ltd., the privately held holding company of
Tata, and a director of several Tata companies. Indeed, the primacy of
citizenship — a philosophy associated historically with J.N. Tata — continues
to be used as a corporate credo: “In a free enterprise, the community is not
just another stakeholder in business, but is in fact, the very purpose of its
existence.”
If social benefits are one major
goal of Tata’s strategies, another is rapid and continuing growth, in as many
industries and venues as possible, on behalf of both philanthropic and
fiduciary commitments. “We are hard-nosed business guys,” says Gopalakrishnan,
“who like to earn an extra buck as much as the next guy, because we know that
extra buck will go back to wipe away a tear somewhere.”
Before the 1990s, when Indian
businesses were protected from outside competition but also limited by tight
government controls, Tata’s domestic expansion and diversification positioned
the group as one of the two or three largest companies in India. Since 1991,
the group has grown dramatically, stimulated by an aggressive $20 billion
international acquisition campaign. Revenues and profits rose from $5.8 billion
and $320 million, respectively, in fiscal year 1992 to $62.5 billion in
revenues and $5.4 billion in profits in fiscal year 2008. Approximately 35
percent of sales in fiscal year 2009, which were equal to roughly 2 percent of
India’s total GDP, were generated at home.
Tata’s international acquisitions
have transformed it from a company deeply grounded in India into one of the
world’s most visible conglomerates. In 2007, Tata Steel acquired the
Anglo-Dutch steel giant Corus Ltd. for $12.1 billion; that same year, Tata’s
Indian Hotels Ltd. company paid $134 million for the venerable Ritz-Carlton
hotel in Boston and startled the city’s elite “Brahmins” by renaming it the Taj
Boston. In 2008, Tata Motors’ $2.3 billion takeover of Jaguar Land Rover (JLR)
received much press and analyst attention.
At the same time, in part as a
result of its overseas spending spree, Tata’s strategy has been called into
question. In recent years, the group has had to borrow more money, float more
equity, and dip more deeply into internal funds than ever before in its
history. The timing of its overseas purchases, especially the highly leveraged
Corus and JLR deals, couldn’t have been worse in terms of immediate financial
returns; the worldwide recession of 2008–09 slashed profits, hitting autos and
steel hardest. In response, the Corus unit launched a major efficiency program
that reduced operating expenses by more than $1 billion.
To many observers, Tata’s strategy
contradicts the conventional wisdom about conglomerates: that they are innately
unfocused and sluggish. Indeed, a 2002 Fortune magazine profile
characterized the group’s labyrinthine corporate structure, unwieldy mix of
businesses, and low profitability in every sector (at that time) except
computer services, referring to Tata as “one of India’s most beloved companies
[and] a mess.”
Moreover, as Tata has outgrown
Indian capital markets, it has sought more financing from global investors, who
are generally less patient than those in India. In today’s competitive world,
the group’s community-oriented generosity can seem as outmoded and unrealistic
as the “company town” paternalism of Andrew Carnegie and Henry Ford.
To justify their decisions, Tata’s
group-level leaders argue that their emphasis on “family values” represents a
critical aspect of their corporate culture. It is strong enough, they say, to
hold Tata’s family of companies together as it diversifies and expands outside
India. It is also essential to the group’s sustained financial success.
Moreover, Tata’s corporate image, as measured by independent groups such as the
New York–based Reputation Institute, is viewed more favorably than that of
Google, Microsoft, GE, Toyota, Coca-Cola, Intel, and Unilever. And, as billions
of people move up from the bottom of the pyramid (as writer C.K. Prahalad calls
the economic milieu of the poorest third of the world’s population), the
group’s combination of developing-country experience and socially progressive
business values may give it a distinctive edge.
In short, Tata’s leaders believe the
group can survive on the world stage only by being both too big to beat and too
good to fail.
“We had set ourselves certain
goals,” noted Tata Sons chairman Ratan N. Tata in a 2006 interview, “chief
among which was to go global — not just to increase our turnover but also to go
to places where we could create a meaningful presence [and] participate in the
development of the country.”
Past
as Prologue
Like that of many long-running
family businesses — Sainsbury, Toyota, and S.C. Johnson come to mind — Tata’s
culture can best be understood as a reflection of the founder’s beliefs and
ingenuity, honed through generations. J.N. Tata studied to be a priest in the
Parsi religion (also known as Zoroastrianism), but pursued a commercial career
because he believed he could do more for more people that way. As a fervent
nationalist and entrepreneur, he sought to amass enough wealth and influence to
elevate the Indian people and their communities, helping to prepare them for a
struggle against British rule. Although he eschewed the priesthood, Tata
remained loyal to the tenets of the sect. The bedrock of this tiny religion —
there are only 23,000 Parsis in India and 100,000 worldwide — is the notion
that a life well lived must dedicate itself to charity and justice.
“The culture of the Tatas comes from
decades of leadership that espouses a set of corporate values that is quite
extraordinary for any company,” says Tarun Khanna, the Jorge Paulo Lemann
Professor at Harvard Business School and an expert on the company.
At age 29, J.N. Tata founded the
Tata business as a small trading company. It prospered, and in 1877 he
converted an old oil mill in Bombay (now Mumbai) into a textile factory and
financed it with stock issued in India’s first private placement. After making
a small fortune in textiles, he developed a plan for his family’s long-term
role in India’s future. Starting with industrial infrastructure, he designed
and planned India’s first domestic steel plant, to be located about 800 miles east
of Mumbai. This meant taking on the racial prejudices and dismissive attitudes
of the British colonial viceroys, whose approval was needed.
Then he moved on to expanding and
improving education opportunities for Indians. In 1892, he created one of the
world’s first charitable trusts, the J.N. Tata Endowment for Higher Education.
This scholarship program sent bright young Indians of limited means overseas
for training in science, engineering, law, government administration, and
medicine. One early grant recipient, a woman named Freny K.R. Cama, would go on
to become India’s first gynecologist. It was especially important to Tata that
Indians be admitted to the civil service, which was closed to them under the
British Empire; this would show that they were capable of governing themselves.
By 1924, with some restrictions lifted by the British, one out of every five
Indians in the civil service would be a J.N. Tata Scholar. (Today, the same
scholarship is one of the most prestigious education awards in the country.)
In his final years, in a series of
letters to his son Dorab, J.N. Tata laid out his vision for a new type of
industrial community to be built near his steel factory (which was still under
construction). He wanted widely available electric power; wide, tree-lined
avenues; beautiful parks; and housing for workers that featured running water —
then nearly unimaginable, and even today uncommon in India. Meanwhile, back in
Bombay, he planned and built the Taj Mahal Palace, a hotel as luxurious as any
of its European counterparts. A devotee of architecture and design, Tata chose
the decor himself. On a trip to Paris, he picked out the wrought iron pillars
that still stand in the hotel ballroom.
After J.N. Tata’s death in 1904,
Dorab assumed the title of chairman. He and Ratan Tata (namesake of the current
chairman) took over the leadership of their father’s company, which they
renamed Tata and Sons (later, Tata Sons) in his honor. They spun out other
industrial companies, making such products as tin plate, steel tubes, and
vehicles. (The Tata Engineering and Locomotive Company later became Tata
Motors.) These and other new businesses were set up to supply some commercial
good or service that India didn’t yet have. Tata made paper, cement, and soaps;
sold insurance; and printed and published books. India’s first airline was Tata
Airlines, which took flight in 1932; by 1953, it had been nationalized and
renamed Air India.
Most of the managing directors (CEO
equivalents) of these companies were not members of the Tata family. But the
chairman of Tata Sons has always been a relative by marriage or blood. Dorab
and Ratan Tata (who were both later knighted by the British Indian Empire)
carried out their father’s commitment to economic development and community
welfare. In 1912, they completed the steel mill begun by J.N. Tata and built
the town he envisioned (later named Jamshedpur after their father), and
eventually powered it with India’s first hydroelectric plant.
Also in 1912, they expanded J.N.
Tata’s notion of community philanthropy to include the workplace. Dorab
instituted an eight-hour workday, ahead of just about every other company in
the world. In 1917, he invited the famous British labor social scientists
Beatrice and Sidney Webb to recommend a medical-services policy for Tata
employees. The company would be among the first worldwide to institute modern
pension systems, workers’ compensation, maternity benefits, and profit-sharing
plans.
Over the years, Tata’s complex,
interwoven governance structure evolved to ensure that profits would be
reinvested on behalf of stakeholders, especially customers and local
communities. Each new Tata company was set up independently, with its own board
of directors; some sold shares publicly, while others maintained private
ownership. All paid fees to use the Tata name. Tata Sons, which remained
privately held, kept equity stakes in nearly all the group businesses; today,
it provides investment capital and sets overall group strategy. In its history,
there have been only five chairmen of Tata Sons, all family members: J.N. Tata;
his son Dorab; J.N.’s nephew Nowroji Saklatwala (who also pursued a career as a
professional cricket player, even during his tenure as chairman); J.N.’s second
cousin, Jehangir Ratanjani Dadabhoy (J.R.D.) Tata; and current chairman Ratan
Tata, the founder’s great-grandson, who joined the group in 1962.
(There is no clearly acknowledged
successor to Ratan, who turns 73 in 2010. One candidate may be the only other
Tata family member working for the group: Ratan’s half-brother Noel, the
managing director of Trent Inc., a Tata retail company in India.)
J.R.D. Tata, who was chairman from
1938 to 1991, is generally credited with expanding the group’s success in India
after the country gained independence. He nurtured its reputation for integrity
and innovation, and continued exploring new technological domains. In 1968, for
example, Tata established Tata Consultancy Services (TCS), which became the
first Indian provider of offshored IT services. TCS is now one of the largest
IT service providers in the world and India’s largest company in this
business. Other individual businesses came and went over the years (soaps and
toiletries, for example, were sold to Unilever), but the same “big five”
industries represented the core sources of revenue through the 2000s: steel,
motor vehicles, power, telecom, and IT services.
Service
without Sin
Perhaps the most unorthodox aspect
of the overall Tata structure is the central role of the 11 charitable trusts
that together own 66 percent of Tata Sons and that are intimately involved in
its governance. (Family members own only 3 percent.) No other company of this
size and visibility has placed its charitable arm at the controlling nexus of
the business. The trusts fund a variety of projects (for example, in clean
water delivery, literacy, and prenatal care); they founded and still support
such cherished institutions as the Indian Institute of Science (a premier
research university), Tata Institute of Fundamental Research, the National
Centre for the Performing Arts, and the Tata Memorial Hospital, an innovative
cancer treatment center in Mumbai. Each Tata company, in turn, channels more
than 4 percent of its operating income to the trusts, and every generation of
Tata family members has left the bulk of its wealth to them. This makes the
Tatas noticeably less wealthy as individuals than their counterparts at other
Indian family-owned megacompanies.
All Tata businesses annually earmark
part of their operating expenditures for social, environmental, and education
programs. For example, Tata Steel sets its budget for social services in the
community as a percentage of pretax operating income. In good years, it might
be 4 percent, and in lean years, 18 percent, but the absolute amount does not
change. At Tata Steel, money goes to employ doctors, teachers, rural
development experts, athletic coaches, geologists, social workers, and others —
often known internally as members of corporate sustainability teams — in
ongoing community service activities in Jamshedpur and the surrounding rural
villages.
The group’s social expenditures add
up to millions of dollars annually: $159 million in fiscal year 2009 for all
the trusts and businesses. The Tatas regard this spending as an operating
investment. “For us, [community support] is a fixed cost of manufacturing,”
says Partha Sengupta, vice president of corporate services at Tata Steel. In
2008, this unusual level of community involvement helped the steel company win
Japan’s prestigious Deming Prize for quality — the first Indian company to do
so.
Even Tata’s innovations — its
efforts to find new markets through the launch of products and services — tend
to have a social benefit component. The $2,500 Nano car, for instance, was
conceived (with Ratan Tata taking part in many of the brainstorming sessions)
as an affordable and safe family car designed to wean Indians off their
dangerous motor scooters, and provide them with a symbolic entry into the
middle class.
“Ratan’s main objective with the
Nano was to demonstrate to the automotive industry that it is possible to
cost-effectively make a vehicle that is so small,” says Elias Luna, CEO of Luna
& Goodman, an international corporate finance advisory firm.
Another Tata project brought
together engineers from TCS, Titan Industries (Tata’s watch manufacturing
company), and Tata Chemicals to develop a compact, in-home water-purification
device. Launched in 2009, the Tata Swach (the name means “clean” in Hindi)
costs less than 1,000 rupees ($21), with filters that last about a year for a
family of five. This makes it affordable for millions of Indians who have no
other access to safe drinking water in their homes. The Swach was inspired in
part by the 2004 tsunami, which left thousands of people without clean drinking
water.
TCS also designed and donates an
innovative software package that teaches illiterate adults how to read in 40
hours. “The children of the people who have been through our literacy program
are all in school,” says Pankaj Baliga, vice president and global head of
corporate social responsibility for TCS. In these cases and others, Tata
follows a philosophy of providing some of the poorest people in the world with
devices that improve their prospects (and those of their children) at price
points they can afford, often with enough profit margin to keep the company
competitive.
Tata’s culture of service was on
display after the November 26, 2008, terrorist attack in Mumbai, which badly
damaged Tata’s flagship Taj Mahal Palace hotel. The hotel was repaired and
reopened less than a month after the attack. Indian Hotels, Tata’s hospitality
company, directly oversaw the medical treatment of injured staff members and
paid generous health and school tuition benefits (including the assignment of a
“counselor for life”) to the families of all slain individuals, including railway
employees, police officers, and passersby who had had no direct connection with
the hotel before the attack. “The organization would spend several hundred
crore [tens of millions of dollars] in rebuilding the property,” noted Dileep
Ranjekar, a management speaker who met with Tata Hotels senior executive vice
president H.N. Srinivas after the attack. “Why not spend equally on the
[people] who gave their lives?”
The founder’s Parsi beliefs continue
to exert a strong influence on Tata’s culture. Historically, most of the inner
circle of Tata company leaders have been Parsi, and there are many lifelong
employees whose modest backgrounds fit naturally with the company’s
self-effacing style. “They are extremely modest,” says Ruth Kattumuri, a
codirector of the India Observatory at the London School of Economics. “They
have sponsored several events for us in India, often without wanting any
publicity.” Tata is known for hosting lavish celebrations, but in general it
rewards employees less with giant salaries and bonuses and more with a sense of
belonging to an elite organization with an impact on the world.
This blue-chip attitude is
reinforced by strict standards for integrity and ethical conduct. For example,
Tata companies have always carefully avoided any activities with even a
tangential link to “sin” industries — a term that for the Tatas encompasses not
only tobacco, liquor, and gambling but also motion pictures, given the
association in India between Bollywood and organized crime.
In the mid-2000s, the leaders of the
group’s publishing company tested this stance, asking for funding to start a
film division. “They said, ‘Everyone else is making money in this, why
shouldn’t we?’” recalls Jamshed J. Irani, vice chairman of Tata Sons. “The
inner circle discussed it and decided that this was not acceptable.” The
publishing company’s management team made plans to go ahead anyway with a movie
production unit using outside investors. In response, Tata sold its shares in
the company and removed the Tata name.
“That gave them second thoughts,”
relates Irani. “They told us, ‘We don’t want to leave the family.’ But it was
too late.”
Global
Stretch
The “expansion” era of Tata’s
history (as it is called on the group’s website) began in 1992, one year after
the Indian government lifted foreign investment and exchange controls and
eliminated many restrictions on outside companies. Suddenly, multinationals
such as Sony, Philips, Ford, and Toyota entered India, exposing the quality
problems of many local companies and using their marketing prowess to outpace
popular domestic players like Tata.
Ratan Tata and other company
executives concluded that they would have to revitalize their businesses and
move outside India’s borders. All Indian companies faced the same pressure to
globalize, but Tata moved fastest and furthest. The new strategy kicked into
high gear in 2004, when Ratan Tata hired Alan Rosling, chairman of Hong Kong’s
Jardine Matheson Group (an investment bank with large holdings in Tata
Industries) and former director of a Jardine–Tata automotive joint venture, as
an executive director of Tata Sons. Rosling later said that his personal
admiration for Ratan Tata had compelled him to take the job.
In the acquisition strategy that
Rosling designed, Tata has sought two types of companies: prestigious consumer
brands like Jaguar, Eight O’Clock Coffee, and Good Earth tea; and critical
industrial enterprises. The latter include Corus; the soda ash mining companies
Brunner Mond and General Chemicals; and Tyco Global Network, an undersea
fiber-optics asset once held by the disgraced Tyco telecommunications company.
One way that Tata hopes to quickly
turn around its overly leveraged units is through equity offerings, once global
investors are willing to participate. In mid-2009, for example, Tata Motors
used about $1 billion in financing from fresh stock and asset sales to whittle
down its 10-to-one debt-to-equity ratio. It remains to be seen how the
broadening of Tata’s investment base will affect its magnanimous corporate culture.
But global expansion increases the pressure on Tata to provide rapid returns,
and it could diminish the family’s ability to fund philanthropic projects in
India or elsewhere.
Ratan Tata himself, when asked in
2007 whether the company’s social spending levels could be maintained on a
global scale, answered, “I can’t ensure this will survive.... [We] could turn
it into a more conventional company. But you would have great discontent.”
Another type of challenge has arisen
with the success of the Nano. Originally conceived only for emerging markets
like India, Latin America, Southeast Asia, and Africa, this car was being
called a trendsetter for the global automotive market even before it went on
sale in July 2009. Suddenly, company leaders were compelled to plan, finance,
and develop a Nano line that would be acceptable for the U.S. and European
markets. “They have the possibility here for a very important vehicle, but they
have to work hard convincing everybody in the U.S. and Europe they can produce a
safe car in a timely manner. The longer it takes, the greater the financial
burden,” says Luna.
Tata Motors also faces other types
of labor and management issues as its percentage of non-Indian employees grows.
Managers are learning by trial and error to become less hierarchical and more
nimble, and to apply their labor relations expertise, which is sophisticated in
India, to other parts of the world. When Tata closed a Jaguar Land Rover
factory and laid off workers at a Corus steel mill in the U.K., the company
reacted slowly and awkwardly to denunciations from union leaders and
politicians.
“Over the past decade,” says
Nirmalya Kumar, codirector of the Aditya V. Birla India Centre at the London
Business School, “Tata has thrown off some of its sluggishness. But
globalization is a learning game; it takes time to learn to manage a
multinational organization, operate in diverse cultures, and integrate foreign
acquisitions.”
Many Tata executives profess to take
all these challenges in stride, and they are bolstered by the fact that they
seem to be coming out of the financial crisis relatively unscathed in the stock
market. They know they could appease some skeptics by scaling back their
aggressive growth ambitions. But they are adjusting instead by reducing costs,
putting some acquisitions on hold, and investing heavily in breakthrough
innovation in a wide variety of endeavors: supercomputers, carbon footprint
reduction, and manufacturing of new materials (such as lightweight steel) among
them. And they are trying to figure out how to bring their social innovation
experience and ideas to other parts of the world with emerging economies,
especially Africa and Latin America.
In the end, Tata executives stick by
the familiar argument that doing well by doing good is simply good business.
And if the group’s unique business model proves to be financially sustainable,
it could provide a lasting example for other companies that — like Tata — seek
to serve new markets, build a more solid reputation as global citizens, maintain
growth, and above all fulfill their own sense of purpose.
“We do business the way we do,” says
Gopalakrishnan, “not because we have clear evidence it has a better chance of
success. We do it because we know no other way.”
- Ann Graham is the editorial director of the Conscious Capitalism Institute at Bentley University in Waltham, Mass., and a cofounder of ANDVantage LLC, a strategy consulting firm that focuses on the interdependence of financial and social sustainability. She is a former deputy editor of strategy+business.
http://www.strategy-business.com/article/10106?pg=all
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