Brief History
“Businesses need to go beyond the interest of their companies to the communities they serve.” – Rattan Tata (“On Ratan Tata’s 80th Birthday, Some Life Lessons From The Man Himself”, 2018)
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TATA group is one of the biggest multinational conglomerate company in India. The headquarters of the company lie in the financial capital of India in Mumbai, Maharashtra. TATA group started its operations as a trading company when originally founded by Jamsetji Tata in 1986 but today have expanded to 80 different countries across 6 continents. Tata industries employ more than 200,000 employees and working in seven different sectors namely Information and communications technology, engineering, energy, consumer products, materials, services and chemicals. TATA Group is more than 150 years old today and has gone through various organizational transitions such as Rationalization, globalization and are currently in the innovation phase. The diverse sectors that Tata industries specializes in are Tata Motors, Tata Steel, Tata Consultancy Services (TCS), Tata Chemicals, Tata Teleservices, Tata Global Beverages, Tata Communications, Tata Industries and Taj Hotels with a target of achieving of $500 billion in revenue by 2020-2021. (Hill, 2011)
Tata Group Timeline:
1. Founded in 1868 by Jamsetji N Tata great grandfather of Ratan Tata as Trading Co.
2. Diversified to textiles in 1874
3. Established First Luxury Hotel in 1903
4. First Private Steel Company in India in 1907
5. Group opened British office in London in 1907
6. First Airline in 1932
7. The group opened a representative office in US in 1945
8. First Software firm venture in 1968
9. JRD Tenure of 53 years as Chairman starting 1938, 13 Companies in 1938 to 300 in 1991
10. Ratan Tata, JRD’s nephew took over in 1991.
Tata industry had set it sights firmly on the Indian economy before it’s internationalization phase. The demographic catered to was endemic to the geographical and economical environment it encountered back home in India. Various cultural, economic and operational challenges were to be overcome if TATA was to be a global brand. The decentralized nature of the group companies made it hard to define a wide spectrum vision and operational setup that would provide both a united front in terms of strategy and resource pool at least in a tangible asset frame of thought. A field strategy was required to streamline the Tata group portfolio and achieve their goal of establishing a global footprint. A transition in the leadership DNA was needed to suit a growth based model of operation. Another challenge faced was on an economic policy front. The FERA act and other capital controls imposed by the Indian government limited foreign exchange. The limit imposed on net value based foreign investments was limited by the Indian government to a fraction of the net value of the company and as a result made it very hard for TATA Industries to take up international business opportunities. The action plan regarding Mergers & Acquisitions was also a fairly ambiguous one and presented a dilemma to be addressed in the form of utilising the characteristics of the acquired company as opposed to pursuing brand synergy.
(Witze, 2010)
Short history and Internationalisation Process
Tata Group about 150 years old started as Trading House in 1868 by great Jamsetji N Tata, great grandfather of Ratan Tata. It had many first to its credit for being at forefront of Industries in India such as Luxury Hotel, Private Steel Company, first Airline, and first software firm. Tata Sons’ a promoter company which served as groups holding company was 66% held by two charitable trusts funding programs in education, medicines, the arts, scientific research and economic development.
The portfolio expanded greatly by JRD Tata during his Chairmanship of 53 years from 13 companies in 1938 to 300 in 1991 as he encouraged group companies to be independent and entrepreneurial in expansion resulting in overlapping of many group companies.
It established representative offices in London and Usa in 1907 and 1945 but the groups growth was almost exclusive organic and most of the time international business meant exports.
However, some of the IHC Hotel business also happened for London properties but largely internationalization was missing. (Khanna, Palepu & Bullock, 2009)
Internationalization process adopted:
Thought Process of Ratan Tata: Risk is a necessary part of business philosophy and is the ability to be where no one has been before. Thinking big something we did not do previously. Since did in small increments hence lagged behind.
Big Hairy Audacious Goals was a program setup to achieve long term goals and visions in the next 10-30 years, which were further broken down into 3-5 year targets and further into short term yearly appraisals, as well as to re-orient the group companies to perform in the atmosphere of globalisation. To break down journey leadership sets 3-5 years targets and further broken down into annual goals and short term weekly or monthly action plans.
Having Right people doing right thing right.
Regd. Trademark of Jim Collins and Jerry Porras
Ratan Tata initiated a move to make the group a more unified entity and institutionalized stronger sense of group through organizational adhesives. Group companies were made to pay for use of Tata brand name. An increase in Tata Sons’ stake in-group companies beyond 26% to get veto rights was initiated with the aim of using the proceeds for group promotion projects .
Tata also scrutinized its own portfolio carefully, divested some of the companies and organized others into seven sectors: Information Systems and Communications, Engineering, Materials, Chemicals, Consumer Products, Energy and Services making each of its business Economic Value Added positive and earning right to grow.
Tata became sought out partner of foreign investors due to Indian regulations requiring many foreign firms to have tie ups with domestic companies. This resulted in partnerships with AT&T, Mercedes Benz, IBM, Silicon Graphics, Cummins Engines, Honeywell etc. which helped in building capabilities to compete in global market.
Tata has Two centralized management organizations: Group Executive Office (GEO) and Group Corporate Center (GCC) created from existing executives and new hires, to better coordinate strategy and advantage combined with fiscal strength and reputation to face competition and business environment. It Later on added Tata Business Excellence Group (TBEG) which was founded as TATA Quality Management Services and changed its name in 2015. (2018)
Tata group exploited opportunities of opening of Indian economy and liberalization from 1991 to internationalize after the replacement of FERA by FEMA (Foreign Exchange Management Act) increasing the cap on Foreign Investments by the RBI to 400% of net worth. The opening up of financing options from 2005 of borrowing from domestic banks for FDI and acquisition, Boom of the Indian Securities market, growth of Indian economy, international interests in FCCB’s (Foreign Currency Convertible Bonds), ADR’s (American Depository Receipts), GDR’s (Global Depositary Receipts) issued by Indian Companies. Private External flow increase to Indian Companies all contributed to increased foreign investment.
Pragmatic Approach to Internationalization taken by Tata:
Tatas pragmatic approach for internationalisation included improving competitiveness of its operating companies first by streamlining the group portfolio from 300 companies to 100 by divesting the some and organising the rest under 7 main sectors: Information Systems and Communications, Engineering, Materials, Chemicals, Consumer Products, Energy and Services.
Ratan Tata first focused on revamping the steel sector arm of the group by benchmarking the production cost against its international competitors and for domestic expansion, they de-integrated strategy for supply of indian sources raw material and semi-finished product to finishing facilities closer to consumer end markets. Backward integration of raw material sourcing ensured that they could locally source raw materials to circumvent market fluctuations. They also considered the production of downstream products to increase industry versatility standards.
Tata motors needed a big turn around as it was bracing losses of $105 Million, Tata motors internationalisation was the need of the hour due to intensified foreign competition in domestic market. The approach tata group adopted for internationalisation of Tata Motors was to focus on different market segments and product ranges to make strategic mergers and acquisition to in turn gain the technological know how from these deals and better suit its product for customer offering. Tata motors focused on reducing its cost of production so that the commercial vehicle products cost could be brought down which they were very well able to do due to the Strategic pricing of spares bearing in mind the life cycle costs of trucks.The use of integrational HR, operation and resource channeling techniques helped align the entire set of group companies with an overall global outlook. A combination of Brand Equity schemes, minority stakes and resource pooling helped adjust finances to support a business strategy of M&As and Group based funding schemes. The organizational stability ensured that long standing executives and prominent hires oversaw the globalisation process. M&As were not pursued solely to benefit the group company but also all group companies and the inorganic growth of the organization as a whole. Another key point to note is the use of Indian economics in terms of it’s currently liberalising nature to combine entities, establish partnership with global name brand companies and increase overseas investment. Certain standalone M&As with Tetley, Corus and Indian security companies during the Indian security boom helped build a bigger cash flow system to leave room for future investment ventures.
Tata believed that Central push down is against the ingrained corporate culture of group and Alan Rosling observed it is like pushing water uphill. Thus instead of simultaneous institutionalization as in GE things were launched through global intranet for all group companies in bid share information across companies and coordinate common initiatives.
The current Chairman of Tata Sons’ N. Chandrasekhar (Earlier CEO TCS) appointed February 2017 in place of Cyrus Mistry removed in Oct.2016. Appointed Nupur Mullick as HR Chief of Tata Sons in place of S. Padmanabhan, who would continue until retirement in May 2018 from overseeing ethics and sustainability following the exit of Mukund Rajan, and is Chairman Tata Business Excellence Group (TBExG). Would continue to be on board of Tata companies as non-executive Director until the age of 70. (Zachariah, 2018)
Lessons Learnt:
The global economic integration which occured in the 1990s and early 2000’s presented Tata Industries with an economic framework to leverage their strengths globally. It helped them form partnership with companies like AT&T , merc, ibm, silicon graphics and Honeywell as a result of the Indian economy’s pursuit of free market ideals.This in-turn helped tata build the strategic profile needed to compete in the global market even during the initial slow down of the Asian Financial Crisis. Globalisation proved more challenging than what Rattan Tata had expected primarily due to overestimation of business and consumer markets globally.
The availability of domestic loans for foreign direct investment from 2005, streamlined investment routes with lower interest rates and the change in the status of sovereign debt to investment worthy has taken Indian industries further down the path of globalisation. In 2007, standard and poor joined other international agencies raising india’s sovereign debt rating to investment grade which made international borrowing for indian companies even easier. (Nam & Bhat, 2018). This changed the circumstances of cash flow injection into multiple Indian corporates and increased TATA industry’s spending power in a country characterized by low GDPs and poor public spending.
For reference list.
TATA industries were afforded significant economic protection measures pre 1991 by the Indian government. This was due to them being one of the biggest Indian industries in a closed market that catered to a primarily Indian demographic. With the advent of a more open Indian market operating on the principles of a globalised economy, TATA Industries had to consolidate its resources to maximise spending power. The key to achieving this was a combination of a business strategy integration process overseen by Ratan Tata coupled with the internalization of core operational processes such as HR, M&As and production.
Tata sons main strategy for internationalisation was FDI, they have struck 114 deals in 37 different countries across the globe. Rattan Tatas strategy of mergers and acquisition helped Tata make 59 acquisition and 55 greenfield investment between 2000 to 2010 but the 3 main investments which changed TATA’s global outlook were the Tetley deal which was followed by the major acquisitions of british steel company Corus seven years later and the Jaguar and Land Rover deal. ”This strong corporate brand and their corporate social responsibility are Tata’s main competitive advantages compared to many western companies, alongside with its operations in highly diversified industries as well as a complex structure and a shared history that holds all those different companies together” (Schmiedl, 2015)
When TATA acquired UK based international tea brand tetley in the year 2000, the Indian market was still on it’s way to becoming a mature market and predictably TATA’s share price dropped by 1.58% due to the fact that the profitability of Tetley was still in question in the mind of the shareholders.When TATA motors acquired Daewoo Commercial vehicles and Hispano Carrocera, the latter was more successful as the deal was made during a time when the demand of supply for buses was increased in India due to various local governments and travel companies revamping their operational structure.TATA steel willingly took drops in share price during acquisition transition periods in favour of their long term visions and goals due to their belief in the use of improved infrastructure, procurement and production techniques to maximise productivity.IHC made safe investments as seen in their acquisition of high end hotels groups such as the Ritz Carlton in Boston and W Hotel in Sydney. These acquisitions were made with the sole aim of building chains with low equity takeovers.
Tata sons main strategy for internationalisation was FDI, they have struck 114 deals in 37 different countries across the globe. Rattan Tatas strategy of mergers and acquisition helped Tata make 59 acquisition and 55 greenfield investment between 2000 to 2010 but the 3 main investments which changed TATA’s global outlook were the Tetley deal which was followed by the major acquisitions of british steel company Corus seven years later and the Jaguar and Land Rover deal. ”This strong corporate brand and their corporate social responsibility are Tata’s main competitive advantages compared to many western companies, alongside with its operations in highly diversified industries as well as a complex structure and a shared history that holds all those different companies together” (Schmiedl, 2015)
Tata motors approached globalisation primarily with a strategy of diversification, which was successfully implemented in the production of LCVs and buses in addition to the manufacture of auxiliary parts and a multi-phased internationalisation process. A series of successful mergers and acquisitions with companies like Daewoo, Hispano Carrocera and FIAT formed a key part of this internationalisation process. Nevertheless, the pragmatism of the leadership was indicated in the reluctance to enter the lucrative Chinese automobile market due to the policy of over-regulation that characterized the chinese market.
An opportunity presented itself when US based Ford motors considered selling two of it’s brands, Land Rover and Jaguar. They were considering this course of action on the pretexts of the losses incurred by the brands in 2006 and the fact that they were in the middle of restructuring their business. Jaguar was a British based luxury car brand that was acquired in 1989 by Ford. It failed to perform profitably. Similarly Land Rover, which Ford acquired in 2000, was a manufacturer of mid-range and luxury SUVs which were popular amongst farmers and even militaries. The PAG – which consisted of Jaguar, Aston Martin, Land Rover and Volvo- had posted pre-tax losses of $4.8 billion in 2004-2006. The largest proportion of which were attributed to Jaguar.However, the leadership at TATA motors deemed this a risk worth taking and proceeded to acquire Jaguar and Land Rover.
Jaguar and Land Rover brought well known global brands, new technologies and advanced market distribution channels to the Tata motors portfolio.The acquisition model contrasted that of multiple Korean automobile companies which preferred to move up the value chain through internal development. Ironically the acquisitions made by Tata motors presented high risk scenarios to achieve the company’s aims of globalization, which in turn were supposed to mitigate risk.
Tata Steel was a conglomerate of TATA industries that bore the sharp blade of the sword that was the liberalising Indian economy and found itself in a rough spot due to it’s transition from an industry that enjoyed the support of economic protectionism.But a serious attempt at waste reduction and cost cutting left TATA steel with a positive EVA and record low steel prices. This was achieved through a series of steps involving domestic expansion, use of finishing facilities to reduce transport distance, acquiring companies in advanced markets, raw material security, production of downstream products and re-engineering logistics. Moreover, the acquisition of Corus industries ranked TATA at 6th in the world in the field of Steel production and brought along with it a boost in TATA steel’s supply chain services.
TCS had to follow the idea of globalisation of its services at a fast pace due to the nature of industry and limited demand. they had saturated the indian market and to maximize shareholders value they had to move out of india to build a business of significant size. Their strategy was following their expanding circle of customers and locating service delivery operations in the client country. From 2001, TCS used m&a to acquire new targeted technology and to enter new markets.The company built its business around IT service export(bpo, consulting services) to North America and Europe with delivery centres in India, Brazil,Australia, China, hungary, Japan, Mexico and Uruguay. In ’06-’07 fy, TCS received 91% of it’s 4.7 billion revenue from abroad. TCS was one of the TATA SONS company which benefited most from its globalisation process as they were able to create internal staff capabilities and contributed to almost half of the tata sons market capitalisation(27.8 out 59.5 billion dollar as of august 2007)
TCS market capitalisation is more than its next 4 closest competitor combined. TCS’s has become the first indian company in the IT industry to cross $100 Billion market value, which helps accentuate its success in the globalisation epoch.
(“TCS Becomes India’s First Tech Company To Cross $100 Billion Market Cap”, 2018)
Conclusion:-
It is very apparent that mergers and acquisitions have played a big role in the globalisation process of TATA industries. Even though in the Finance scheme of things, the portion of the budget that M&As account for is not very large, the mobility of funds that these activities provide allow a lot more room for investment. As a result, this coupled with a leadership intent on establishing TATA industries as a global organization is what has helped TATA industries become the company it is today.
