Too Good to Fail Ann Graham
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OX foRD LE ad ER S H I P J ou R nal SHIFTING THE TRAJECTORY OF CIVILISATION January 2011 • Volume 2, Issue 1 SUBSCRIBE Too Good to Fail Ann Graham 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. WHEN INDIA’S TATA TEA LTD. PURCHASED BRITAIN’S margin global distributor of specialty teas and other TETLEY TEA COMPANY for US$450 million in early 2000 healthy beverages. Soon after the acquisition, Tata – at the time the largest sum ever paid by an Indian made another logical move. It sold its vast plantations company for a foreign acquisition – the rationale for in Munnar, a mile-high, economically underdeveloped the deal was clear. Tata Tea would not just gain one community in the Western Ghat mountains of South of the world’s most iconic brands. It would also trans- India, where Tata had been the largest employer for a form itself from a sleepy farming operation with a core century. business of barely profitable tea plantations to a high- But the transaction was anything but routine. Reprinted with permission from the Spring 2010 issue of strategy+business magazine, return to index | share | comment published by Booz & Company. Copyright 2010. All rights reserved. www.strategy-business.com Instead of working out a lucrative deal with eager IN A FREE ENTERPRISE, THE COMMUNITY IS NOT investment bankers, bribing local politicians to mollify JUST ANOTHER STAKEHOLDER IN BUSINESS, BUT IS them, laying off workers, and selling to the highest IN FACT, THE VERY PURPOSE OF ITS EXISTENCE. bidder, as some other Indian companies shedding a moribund business might have done, Tata Tea sold over 142 years from the founder, Jamsetji Nusserwanji 17 of the 25 plantations to its own former employees. (J.N.) Tata. As of 2010, Tata is a $70.8 billion commer- Layoffs were generally limited to one per household, cial enterprise, employing about 350,000 people in and Tata gave a group of voluntary retirees enough 80 countries, across an eclectic array of industries – cash to buy equity in the new company that was including hotels, consumer goods, mining, steel manu- formed. (That company, Kanan Devan Hills Plantation facturing, telecommunications, trucks and cars (includ- Company [KDHP], still operates as an employee- ing the much-publicized $2,500 Tata Nano), electric owned enterprise.) power, credit cards, chemicals, engineering, and IT Although Tata Tea would henceforth main- services and business process outsourcing. Not tain only limited business interests in even General Electric sells such a wide the area (including some equity in range of products and services. KDHP), the company contin- Since its founding in 1868, Tata ued its active social role there. has operated on the premise that It still subsidizes a range of a company thrives on social social services and KDHP capital (the value created from employee benefits, including investing in good community free housing for plantation and human relationships) in workers, a private school, an the same way that it relies education centre for disabled on hard assets for sustain- children and young adults, able growth. With every and the newly renovated Tata generation, Tata’s executives General Hospital in Munnar. and managers say, they have Tata still remains a major nurtured and improved their customer of KDHP, which helps capability for “stakeholder manage- guarantee a stable supply of tea at ment”: basing investments and oper- competitive prices. ating decisions on the needs and interests Such gestures of largesse and long-term of all who will be affected. For Tata, this means commitment are not unusual for Tata, the massive, shareholders, employees, customers, and the people of mostly Indian group of companies to which Tata the countries where Tata operates – historically India, Tea belongs. Roughly 90 companies are part of this but potentially anywhere. conglomerate, or “family” (as many Tata executives “We may be among the few companies around the prefer to call it). Each is led by its own executive team world who think and act first as a citizen,” says R. and governed by its own board of directors. But they Gopalakrishnan, an executive director of Tata Sons are bound together by an interlocking governance Ltd., the privately held holding company of Tata, structure and a set of corporate values passed down and a director of several Tata companies. Indeed, the primacy of citizenship – a philosophy associated WITH EVERY GENERATION, TATA’S EXECUTIVES historically with J.N. Tata – continues to be used as a AND MANAGERS SAY, THEY HAVE NURTURED AND corporate credo: “In a free enterprise, the community IMPROVED THEIR CAPABILITY FOR “STAKEHOLDER is not just another stakeholder in business, but is in MANAGEMENT”: BASING INVESTMENTS AND fact, the very purpose of its existence.” OPERATING DECISIONS ON THE NEEDS AND If social benefits are one major goal of Tata’s strat- INTERESTS OF ALL WHO WILL BE AFFECTED. egies, another is rapid and continuing growth, in as • Oxford Leadership Journal | Shifting the trajectory of civilization 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.” Prior to the 1990s Indian businesses were protect- ed from outside competition but were also limited by tight government controls. In that environment, 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 rose from $5.8 billion in 1992 to $62.5 billion in 2008, and profits grew from “WE ARE HARD-NOSED BUSINESS GUYS WHO LIKE $320 million to $5.4 billion over the same period. In TO EARN AN EXTRA BUCK AS MUCH AS THE NEXT fiscal year 2009, approximately 35 percent of sales GUY BECAUSE WE KNOW THAT EXTRA BUCK WILL were generated at home – roughly two percent of GO BACK TO WIPE AWAY A TEAR SOMEWHERE.” India’s total GDP. Tata’s international acquisitions have transformed corporate structure, unwieldy mix of businesses, and it from a company deeply grounded in India into one low profitability in every sector (at that time) except of the world’s most visible conglomerates. In 2007, computer services, referring to Tata as “one of India’s Tata Steel acquired the Anglo-Dutch steel giant Corus most beloved companies [and] a mess.” Ltd. for $12.1 billion; that same year, Tata’s Indian Moreover, as Tata has outgrown Indian capital Hotels Ltd. company paid $134 million for the vener- markets, it has sought more financing from global able Ritz-Carlton hotel in Boston and startled the investors, who are generally less patient than those city’s elite “Brahmins” by renaming it the Taj Boston. in India. In today’s competitive world, the group’s In 2008, Tata Motors’ $2.3 billion takeover of Jaguar community-oriented generosity can seem as outmoded Land Rover (JLR) received much press and analyst and unrealistic as the “company town” paternalism of attention. Andrew Carnegie and Henry Ford. At the same time, in part as a result of its overseas To justify their decisions, Tata’s group-level leaders spending spree, Tata’s strategy has been called into argue that their emphasis on “family values” represents question. In recent years, the group has had to borrow a critical aspect of their corporate culture. It is strong more money, float more equity, and dip more deeply enough, they say, to hold Tata’s family of companies into internal funds than ever before in its history. together as it diversifies and expands outside India. The timing of its overseas purchases, especially the It is also essential to the group’s sustained financial highly leveraged Corus and JLR deals, couldn’t have success. Moreover, Tata’s corporate image, as measured been worse in terms of immediate financial returns; by independent groups such as the New York–based the worldwide recession of 2008-09 slashed profits, Reputation Institute, is viewed more favourably than hitting autos and steel hardest. In response, the Corus that of Google, Microsoft, GE, Toyota, Coca-Cola, unit launched a major efficiency program that reduced Intel, and Unilever. And, as billions of people move operating expenses by more than $1 billion. up from the bottom of the pyramid (as writer C.K. To many observers, Tata’s strategy contradicts the Prahalad calls the economic milieu of the poorest third conventional wisdom about conglomerates: that they are of the world’s population), the group’s combination of innately unfocused and sluggish. Indeed, a 2002 Fortune developing-country experience and socially progres- magazine profile characterized the group’s labyrinthine sive business values may give it a distinctive edge. Volume , Issue 1 • January 011 • In short, Tata’s leaders believe the group can is quite extraordinary for any company,” says Tarun survive on the world stage only by being both too big Khanna, the Jorge Paulo Lemann Professor at Harvard to beat and too good to fail. Business School and an expert on the company. “We had set ourselves certain goals,” noted Tata At age 29, J.N. Tata founded the Tata business as a Sons chairman Ratan N. Tata in a 2006 interview, small trading company. It prospered, and in 1877 he “chief among which was to go global – not just to converted an old oil mill in Bombay (now Mumbai) increase our turnover but also to go to places where we into a textile factory and financed it with stock issued could create a meaningful presence [and] participate in India’s first private placement.