Term Paper, 2015
15 Pages, Grade: 1,3
2 The Tata group and its development into a multinational enterprise
2.1 The evolution from a vision
2.2 The internationalisation process of the Tata group
3 Tata’s competitive advantage and future recommendations
4 Appendix A
5 Appendix B
During the last couple of years India, the world’s largest democracy, has also become an important economy not only concerning the inward foreign direct investments from other countries. According to the Investment Country Profiles report on India (UNCTAD, 2013), the foreign direct investment (fdi) flows abroad have steadily increased since 2000 and peaked in 2007 with US $18.73 billion. In 2011, India reached fdi outflows of US $11.1 billion and most of it flowed to developing economies for example to Africa (UNCTAD, 2013).
This development is due to the increasing internationalisation of Indian firms like Infosys, Wipro or Ranbaxy (Rienda, Claver and Quer, 2014). Yet, there is one Indian conglomerate that has shaped this development more significantly than any other, the Tata group.
It is the largest private group in India in terms of market share and revenues and it has also played a significant role in the economic history of India (The Economist, 2011). Moreover, the Tata group is the leading company in terms of the internationalisation of Indian firms due to some important investments abroad.
The Tata group consist of over 100 companies and each operates independently with its own board of directors (Tata, 2014a). Tata Sons which is the main holding company of the group and also the owner of the name and the trademark has also stakes in all of the Tata companies in order to secure a certain level of control (Witzel, 2010).
This report is going to analyse and evaluate the internationalisation process of the Tata group. Therefore the three major global acquisitions of Tata companies will be examined and evaluated after a brief introduction concerning the history and important chairmen of the group. Following there will be an analysis of Tata’s competitive advantage as well as a recommendation for their future direction in order to sustain these advantages.
The Tata group with its 146 years of history is one of the world’s most renowned Indian business groups that gains more and more global awareness due to its heavy internationalisation during the last couple of years. Today, Tata operates within more than 100 countries on six continents and employs more than 580,000 people worldwide (Tata, 2014a).
Jamsetji Nusserwanji Tata laid the foundation for the Tata group in 1868 when he started a trading company (Tata, 2014b). One year later he made a move into textiles by establishing a cotton mill in the outskirts of Mumbai which he sold after two years for a profit (Witzel, 2010). Once Jamsetji Tata recognised that he could maximise his profit by establishing a mill close to the cotton-growing areas with access to a railway junction, he founded a new company called Central India Spinning in 1874 (Tata, 2014b). This company then built a new mill near the city of Nagpur which met all of those conditions and in 1877 the Empress Mill was opened with some of the most advanced milling technologies that Tata had seen during his visits to Britain (Tata, 2014b; Witzel, 2010). Moreover, in 1887 he converted his trading business into a company called Tata & Sons, which was a partnership with his oldest son Dorab Tata and his cousin R.D. Tata (Witzel, 2010). Tata & Sons, now Tata Sons, “became the vehicle through which the family managed its investments in these various ventures” and it also was “the beginning of the confederation structure which still characterizes Tata today” (Witzel, 2010, p.26).
After the death of Jamsetji Tata his son Dorab became chairman of Tata & Sons. He was the one who turned most of his father’s ideas into reality like setting up the Tata Iron and Steel Company in 1907 and building India’s first iron and steel plant seven years later. Another central figure in the history of the Tata group is J.R.D. Tata who was chairman from 1938 until 1991. At the end of J.R.D. Tata’s chairmanship the group had over fifty manufacturing companies as well as many other subsidiaries, holdings and associate concerns (Witzel, 2010).
In 1991, J.R.D. Tata was succeeded by Ratan Tata who had the task to lead the group into a new era due to the changing business climate in India. The beginnings of the 1990s were dominated by economic reforms and the opening of India concerning their export and import policy.
One of Ratan Tata’s first steps was to rebuild the foundation between Tata Sons and all the other companies of the group. He raised “the level of Tata Sons’ share of each group company to at least 26 per cent, the level which allowed a shareholder to block resolutions at the board level” (Witzel, 2010, p. 62) in order to recover a measure of control. A further explanation on the history of Tata can be found in Appendix A.
Ratan Tata was also the one who recognized that in order to successfully compete against the new market entrants and increased competition from other Indian firms, the Tata group had to focus on important business sectors and extricate itself from weak companies and likewise encourage operations outside of India (Kasbekar, 2007). He started this transformation by exiting all business areas that provided least of the group’s revenues until 2000 and focused on six main business areas: Engineering, Materials, Services, Information Technology and Communications, Energy, Chemicals and Consumer Products (Tata, 2014a).
Until 1991, the Tata group only had little operations outside India, namely some co-operations with foreign partners such as Daimler Benz, which was due to the governmental restrictions (Goldstein, 2008). But in the financial year 2013-2014 67.2% of their overall revenue was coming from businesses outside of India (Tata, 2014a). Many of their companies have achieved a global reputation like Tata Steel which is among the top ten best steelmakers in the world (Tata, 2014a). Thus, Tata also gains increasing international brand recognition.
According to Wall, Minocha and Rees (2010) one can differentiate three broad categories of methods for the internationalisation of a firm: export-based, non-equity-based and equity-based. Those methods all imply different levels of risk and hence a different levels of reward if undertaken. The export-based method where a company produces its products in the home market and exports a certain amount of their output abroad can be divided into indirect exporting through an intermediary and direct exporting. It is considered to be the least risky process due to the fact that it does not involve any kind of direct investment (Wall, Minocha and Rees, 2010). Therefore, export-based internationalisation is a common way for a firm to start international business although it has the lowest reward.
Besides exporting its products, a company can also invest in a foreign market either by using non-equity-based or equity-based methods. In the non-equity-based way of international expansion, firms “sell technology or know-how under some form of contract” (Wall, Minocha and Rees, 2010, p. 43). This mostly involves intellectual property rights like trademarks or copyrights. Franchising, licensing and other types of contracts based on those intellectual property rights like technical service agreements are examples for this method. It is supposed to have a medium level of risk and therefore a medium level of reward.
The most risky but also most rewarding ways of internationalisation are the equity-based methods that refer to the use of foreign direct investment (Wall, Minocha and Rees, 2010). The acquisition of an existing firm, ‘greenfield’ investment and joint ventures are forms of this method and share some major advantages compared to the other methods of internationalisation. On the one hand, the company is able to keep a major level of control over its operations as well as its sensitive information to secure its competitive advantage. On the other hand, the company does not have to share its profits with any intermediaries.
The motives for a firm to expand their activities across their country borders are diverse and depend on various factors like the sector a firm operates in. According to Dunning (1988, cited in Jain, Lahiri and Hausknecht, 2013, p. 268) there are four important types of motives for multinational firms to internationalise: resource-seeking, market-seeking, efficiency-seeking and asset-seeking motives. Given that firms from emerging economies such as China, India or Russia do not have as many firm-specific assets as multinational companies from developed countries, market-seeking and asset-seeking motives are the most important ones in order to acquire and augment assets as well as gain access to new markets and networks (Athreye and Kapur, 2009). Another reason for companies from emerging markets is the desire to “steal a march over domestic rivals” (Athreye and Kapur, 2009, p.9).
According to a study conducted by Rienda, Claver and Quer (2014) on 91 Tata group companies, they have undertaken 114 foreign direct investments in 37 countries between 2000 and 2010 which can be seen as the group’s main activity of internationalisation. Those included 59 acquisitions and 55 ‘greenfield’ investments (see Appendix B). Also the pace of foreign investment has grown dramatically since Ratan Tata became chairman (The Economist, 2011). Nonetheless, there are three major global acquisitions that changed the brand image and international perception of the Tata group.
In 2000 Tata Tea made the first of several bold investments abroad. It acquired Tetley, a British company, through a leveraged buyout for £271 million in 2000 which was the largest takeover by an Indian company at that time (Goldstein, 2008). This investment was mainly market-seeking because Tetley was much bigger and globally known compared to Tata Tea. This also the reason why Tata Tea did not try to imprint its brand name on Tetley during the acquisition.
Seven years after this, Tata Steel acquired a British steelmaker, Corus, that made them move from rank 56 to rank six of the world’s largest steelmakers (Noronha, 2007). They spent £6.7 billion for this takeover of Corus, which was Europe’s second-largest steelmaker at that time, and therefore again made the largest acquisition by any Indian company (Noronha, 2007; The Economist, 2011). This acquisition was market-seeking as well because it brought access to the European markets, “especially in higher-value quality steel products” (Goldstein, 2008, p.99). Moreover, Tata Steel was thus able to avoid the import tariffs on steel products.
The most recent and maybe also best-known takeover of a Tata group company was the acquisition of Jaguar and Land Rover (JLR) from Ford by Tata Motors in 2008. With this deal, costing $2.3 billion, Tata Motors finally became an international car manufacturer (Bruche, 2010). The deal was financed through a rather short-term bridge loan and it almost doubled Tata Motors overall revenues (Bruche, 2010). The motivations behind this acquisition were versatile but mostly market-seeking and asset-seeking because they gained access to many new markets JLR already operated in as well as modern production plants and know-how (Bruche, 2010).
But at first it was not sure if this takeover would be a success or a fail. On the one hand, Jaguar had cost Ford some $10 billion during the 18 years it belonged to the company and had a declining sales figure (The Economist, 2008). On the other hand, Ford sold JLR only because of a crisis in their operations in North America. Moreover, the takeover was at the same time as the world financial crisis and therefore Tata Motors got into serious refinancing difficulties (Bruche, 2010). Those were overcome with support from Tata Sons that raised its stake from 30.7% to 39.1% from 2008 to 2009 (Bruche, 2010) and the quick recovery of the JLR sales. Despite all of these circumstances the acquisition can be rated as a success because Tata Motors was instantly able to enter a new international market in the segment of premium class cars and now has most of its assets abroad (Bruche, 2010).
All those acquisitions and ‘greenfield’ investments and especially those three helped the Tata group significantly to grow beyond India and most of those global deals are repaying themselves. However, throughout this process there have also been some critics about their fast internationalisation process. Moreover, some western investors still associate Tata “with unreconstructed tradition and messy family politics” (The Economist, 2011) although this is not the case. There was also the critic that Tata had overpaid for its acquisitions of Corus and JLR and those suspicions were strengthened during the financial crisis but that still could not damage Tata’s growing brand reputation (The Economist, 2011).
Due to the Tata Code of Conduct that every company and subsidiary as well as every acquired firm has to sign and implement, the whole Tata group has a united corporate culture and philosophy that was mainly shaped by Jamsetji and J.R.D. Tata. Jamsetji Tata always believed in returning the company’s wealth to the society in India. Today Tata Sons is “66 per cent owned by a series of charitable trusts” (Witzel, 2010, p. 8) that have been set up by previous chairman. Therefore, two-thirds of Tata Sons’ income received from the holdings in other Tata group companies goes to charity (Witzel, 2010) and has created several national institutions for research and technology as well as projects for health and education in India (Shah, 2014). Besides, many Tata companies also support charitable funds and projects that encourage the social and economic development in the countries they operate in (Goldstein, 2008).
Moreover, the Tata group relies heavily on a relationship based on trust with its customers, shareholders and employees as well as the whole society. Their five core values, integrity, understanding, excellence, unity and responsibility, aim at building and developing these levels of trust (Shah, 2014). The Tata group has done well over the past decades to maintain a unity between the values and ethical standards they communicated to the people and their actions (Witzel, 2010).
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. In addition, the Tata group tries to produce high-end products for developed countries and at the same time frugal products for the low-income consumers in India and other emerging economies (The Economist, 2011).
This two-sided approach to reach as many customers as possible over the next couple of years could turn out either as a success or a fail for the group. Tata has to prove that they are equal to the task to successfully produce on both ends of the scale. Tata Motors for instance is a good example as it produces Tata’s best known frugal product, the Nano, and has acquired the premium class car maker Jaguar Land Rover on the other hand. Besides, in order to compete with multinational companies from developed countries, Tata has to foster and pursue innovation in order to “cater for the rising masses of the emerging world and shake up markets in richer places” (The Economist, 2011).
Another challenge that Tata might face at the moment or during the next couple of years is the effective integration of acquired companies into the group. According to Goldstein (2008) an insufficient integration is the reason for the high failure rate of acquisitions across borders. Due to the fact that the acquired companies have to live up to the values of the group and even have to implement the Tata Code of Conduct, this phase is even more important for Tata group companies.
Master's Thesis, 83 Pages
Master's Thesis, 132 Pages
Seminar Paper, 18 Pages
Bachelor Thesis, 93 Pages
Project Report, 30 Pages
Bachelor Thesis, 101 Pages
Research Paper (undergraduate), 26 Pages
Term Paper (Advanced seminar), 15 Pages
Term Paper, 8 Pages
Seminar Paper, 40 Pages
GRIN Publishing, located in Munich, Germany, has specialized since its foundation in 1998 in the publication of academic ebooks and books. The publishing website GRIN.com offer students, graduates and university professors the ideal platform for the presentation of scientific papers, such as research projects, theses, dissertations, and academic essays to a wide audience.
Free Publication of your term paper, essay, interpretation, bachelor's thesis, master's thesis, dissertation or textbook - upload now!