The Tata Group: Challenges in Managing a Large Portfolio
Managing a portfolio of close to 100 companies is a mammoth task for any business house. Questions over acquiring newer firms and divesting non-performing firms need to be answered on a regular basis. These questions have become extremely important for the Tata Group as they have used the inorganic growth route extensively to scale up their international operations. This article looks at Tata’s inorganic expansion and performs a portfolio analysis for the group identifying potential divestment targets. The analysis leads to the conclusion that it is in the interest of the newer companies to be a part of the Tata Group to leverage on the Group’s brand equity.
The definition of growth has changed quite dramatically from the days when organic growth was considered the primary channel of progress. This is exemplified in the case of the Tatas where inorganic growth, through leveraged buyouts and sometimes audacious deals, has driven expansion over the last decade. With accelerated growth comes the challenge of integration and proper management of the portfolio of companies. The top management has to often answer the question mark over the business house’s role in keeping all these companies under one roof. The following sections contain a look at Tata’s inorganic expansion, a portfolio analysis for the group and an assessment of whether the newer companies should be part of the Tata Group.
Tata Group- A Snapshot
The Tata Group is India’s largest business group accounting for 5.2% of India’s GDP and operates in over 80 countries with group revenue amounting to a whopping USD 62.5 billion in 2008.The group operates in seven broad sectors ranging from steel, automobiles, energy, chemicals, hotels and consumer goods to communication systems with Tata Steel, Tata Motors, Tata Consulting Services and Tata Power accounting for nearly 50% of the group revenue. The group profit has grown at a CAGR of 19.4% over the last decade and a half and the group revenue has grown at a CAGR of 16% over the same time period. Over the last decade, the Tata Group has had a clear focus on internationalization with contribution of international operations to the revenues having gone upto 61%. Today, the Tata Group comprises of 96 companies, operates in 6 continents and employs approximately 350,000 people. Inorganic route has played a major role in this fast growth story.
Inorganic Route to Achieve an International Presence
Over the last ten years, the group’s strategy has revolved around building a very strong presence in international markets. To quote Alan Rosling, Executive Director, Tata Sons � “Internationalization is not a strategy; it is an imperative, a challenge or an objective.” The group has made a conscious attempt to follow the inorganic growth route. Starting with the Tetley Acquisition in 2001 for USD 432 million, the group has made acquisitions in most of the sectors it operates in. The highlight of its international acquisition strategy was the USD 11.2 billion acquisition of Anglo-Dutch firm, Corus (the fourth largest in the global steel industry). Other significant acquisitions include the Tata Motors’ acquisition of Daewoo Chemical Vehicle Company, Tata Power buying a 30% stake in PT Kaltim Prima Coal Prima and Indian Hotels’ acquisition of Ritz-Carlton Hotels.
Internationalization is not a strategy; it is an imperative, a challenge or an objective.
Alan Rosling, Executive Director, Tata Sons
According to Srinivasan and Mishra (2007)1, an M&A might be undertaken for horizontal acquisition to retain/gain market leadership or to get a foothold onto international markets (market entry) or to leverage on synergies. Tata Chemicals’ acquisition of Brunner Mond (the second largest producer of soda ash in Europe) is a classic example of a horizontal acquisition. A market entry strategy can be used to tap the more advanced markets that help the company move up the value chain thereby deriving higher margins. This was the major reason why Tata Steel decided to acquire Corus as it helped Tata Steel enter the value added steel market in Europe. In a merger / acquisition, the Tata Group brings along with it accumulated production experience, cost effectiveness of production processes and ability to differentiate products.
Going forward, the Tata Group is expected to pursue vigorously the M&A route to growth. Some of the markets which the group is looking at for inorganic growth include South East Asia, South Africa, United States and Europe. The group however should be careful about integrating all these companies under one roof. Focusing on methods to facilitate easy integration of companies while preserving the Tata culture will be of paramount importance in future acquisitions.
With accelerated inorganic growth comes the need to optimize the portfolio of companies held. Are there companies in their portfolio that have consistently underperformed as compared to the industry? This is explored using the BCG Growth Share Matrix.
Portfolio Analysis of the Tata Group
The BCG Growth Share matrix uses the dimensions of relative market share and the market growth rate to establish a 2*2 matrix containing 4 main quadrants – Stars (high market growth, high market share), Cash Cows (low market growth, high market share), Question marks (high market growth, low market share) and Dogs (low market growth, low market share). The ideal strategy is to hold on to the Stars and the Cash Cows, divest the Dogs and take a call on the Question Marks (hold/divest).
We have conducted a detailed analysis (using the BCG Matrix) of the portfolio of companies in the Tata Group. This involved analyzing the sectors in which the Tata group operates as well as the companies in the Tata Group within each sector. We studied the operational and financial performances of each company to understand their growth stories. Special emphasis was laid on identifying the organic and inorganic growth routes pursued by each of these companies under the Tata umbrella. The conclusions drawn about these companies are based on analysis of the global strategy of the Tata group and on detailed conversations with top executives in the Tata Group.
The analysis reveals that Tata Steel, Tata Power, Tata Motors and Indian Hotels emerge as clear Stars (high market growth, high market share). Hence, they should be retained and the investment in these companies should be increased. Tata Chemicals and Tata Tea emerge as the Cash Cows (low market growth, high market share) and should be held on to for the time being. Some of the Question Marks (high market growth, low market share) are Tata Teleservices, Voltas and Tata Communications. These results are shown in Exhibit 1 below.
Portfolio Analysis of the Tata Group using the BCG Matrix
The profitability of the Tata Group in the telecommunication sector has shown a consistent decline from 10% in 2003 to 4% in 2006-07. Despite the telecom boom in India, the question on the presence of the Tata Group in the telecommunications sector warrants further discussion. For the Tatas, the broad objective behind entering any sector is to be among the top 3 in that sector. Despite having had a presence for many decades in the consumer durables segment, the Tatas have been unable to capture the leadership position in the segment through Voltas. Moreover, the growth registered by Voltas over the past few years has also been far from impressive which necessitates the need to critically evaluate its performance in this segment.
In addition, the question of operating so many companies under the Tata Group needs to be looked into. Does it make sense to have so many companies in the first place? Should there be a relook into the question marks like Voltas, Tata Communications and Tata Teleservices? These are hard questions that need to be answered as the group keeps going forward. With close to 100 companies under one roof, the question arises whether all of them should be under the Tata Group or should some be spun off.
Is There Any Advantage of Being a Part of the Same Business Group?
According to Khanna and Palepu2 (2008), business groups can add significant value. Firstly, business groups use funds and management talent from existing operations to start new ventures (thereby negating the need for venture capital firms). Secondly, large business groups can nurture in-house management talent that can be shifted across individual group companies. Thirdly, business groups create value by developing a common group brand that stands for world class quality and customer service. According to R Gopal Krishnan, Executive Director, Tata Sons; “The estimated value of the Tata brand is about INR 100 billion.” For an individual company to use the Tata brand name, they need to meet a set of quality standards and business values. Hence, it is in the interest of the individual firms to be a part of the Tata Group to derive advantages from the Tata brand.
As the Tata Group continues to follow the inorganic route to growth, the challenges of integration need to be carefully dealt with. It is necessary for the group to take a look at some of their question marks like Voltas, Tata Teleservices and Tata Communications. Finally, given the brand equity of the ‘Tata’ name, it is in the interest of newer companies to remain under the Tata Group.
In the course of time, the group is expected to make many more acquisitions across the sectors it currently operates in, particularly in South East Asia, Europe and the United States. Given the relatively brighter prospects about the Indian economy compared to other developed economies, the future strategy also calls for a definite focus on the Indian market in sectors like steel, automobiles and infrastructure.
The future strategy of the Tata group has been summarized quite elegantly by Ratan Tata in the following statement:
“We have two guiding arrows. One points overseas, where we want to expand markets for our existing products. The other points right here, to India, where we want to explore the large mass market that is emerging – not by following but by breaking new ground in product development and seeing how we can do something that hasn’t been done before.”
Sourav Mukherji is an Associate Professor in the Organisational Behavior & Human Resource Management Area at IIM Bangalore. He holds a B.Tech Degree from Indian Institute of Technology, Kharagpur & has obtained his doctorate from IIM Bangalore. He can be reached at firstname.lastname@example.org
Saurabh Bhansali (PGP 2007-09) holds the Chartered Accountancy Degree & is a Commerce Graduate from H.L.College of Commerce, Ahmedabad. He can be reached at email@example.com
Sandeep Das (PGP 2007-09) holds a B.Tech in Computer Science Engineering from R.V.C.E, Bangalore and can be reached at firstname.lastname@example.org
Strategy, India, Conglomerate, TATA Group
- R Srinivasan and Bibek Prasad Mishra, 2007, 'Why do Firms Merge/Acquire: An Analysis of Strategic Intent in Recent M&A Activity among Indian Firms', IIMB Management Review , December 2007.
- Tarun Khanna and Krishna Palepu, 2008, ‘The right way to Restructure Conglomerates in Emerging Markets’, Harvard Business Review , July-Aug 1999.