Memo to Cyrus Mistry: Sum of Tata parts may be greater than the whole

Cyrus Mistry, the man steering the Rs 6.25 lakh crore Tata Group, has spelt out his new post-Ratan Tata vision that includes investing $35 billion over the next three years and focusing on four new business clusters: defence, retail, infrastructure and finance. There is also some expectation that the group will pare down some of its exposure in some businesses that aren’t doing too well.

Defence, infra, retail and finance are almost nowhere in today’s scheme of things where three businesses dominate: autos (nearly 37 percent), steel (23 percent) and IT and communications (20 percent). Retail, finance and infrastructure are almost nothing in the current scheme of things.

Vision 2025, spelt out at a closed-door meeting with group CEOs as Vision 2025, also talked about group companies impacting the lives of 25 percent of the world’s population, coming up among the 25 most admired companies, and collectively reaching a market valuation that figures among the top 25 globally.

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This obsession with the number 25 is something one can discount; it is nothing more than a general wish and its achievement will be largely dependent on luck and corporate strategy in individual companies. Reason: success depends on getting individual Tata companies to perform better. It is possible for a Tata Consultancy Services (TCS) to be among the 25 most admired companies in the world or reach a market cap which will put in among the top 25; it is pointless to try and achieve this as a group.

It is not that Mistry does not know this. A BusinessLine story quotes Mistry as saying: “To outperform markets, each Tata company will sharply focus on performance, strive for excellence for global competitiveness, seek to achieve global or national scale, and foster fledgling businesses with a sound evaluation of their growth potential. As a part of this strategy, the group centre will strongly champion companies which are world-class and, where necessary, facilitate creation of new companies. This holistic strategy will also include support to companies, if required, to restructure their businesses which do not have the potential to meet performance and strategic criteria in the long term or benefit from parenting advantages.”

The point one is driving at is this: barring the incubation of new businesses that are unrelated to existing businesses, the group actually has little role to play in strategy. The other group role is capital allocation to individual companies - and this too relates to how much shareholding it wants to retain in which business.

But both these jobs are about what the group itself wants to do and are fairly unrelated to success in any individual company. In fact, the group concept is increasingly going to be irrelevant to corporate success anywhere except in one area: domestic banks are more comfortable lending to groups rather than promoters. There is comfort in group size, even though it is moot point whether a Tata Motor can come to the rescue of a Tata Steel if things go wrong. As for the holding company, its success depends on the individual companies faring well and handing over dividends.

However, even this is changing. Global capital looks not for comfort in size, but the quality of entrepreneurship and the business potential of an idea. The Tata group is too big and bureaucratic to be supplying either entrepreneurship or big ideas from the top. These will happen better at the company level.

In an era where companies soar to success and fail dramatically very quickly (remember, giants like Citibank and General Motors almost bit the dust in 2008, and Lehman Brothers went under), it is only high-quality strategy in specific companies and sectors that yields results. The group does not really matter to success. In India, groups have typically overextended themselves in good times, and many would have gone under without political bailouts.

Consider three of the biggest actions driven by group thinking in the Tatas and how they have fared: these were the acquisitions of Corus Steel, Jaguar Land Rover (JLR), and the decision to invest big in telecom. While JLR is a thumping success for corporate strategy and could not have happened without group support for the acquisition, Corus has left the flagship gasping under oodles of debt. As for telecom, the group acquired VSNL from the government and launched big in mobile services - under Tata Communications and Tata Teleservices. The chances are the Tatas will have to exit the latter - especially now that its partner DoCoMo is seeking its money back (around Rs 7,250 crore).

The real failures and successes are at the company level. Tata Motors’ failures are in domestic strategy (Nano, lack of product enhancement in Indica), nothing to do with the group. Titan’s super success also had nothing to do with the group. Ratan Tata and the group HQ were never enthusiastic about Titan, which got into quartz watches, but this is where the group met its biggest consumer facing success in India. Today, Titan has gone well beyond watches to gold ornaments, bags, sunglasses, perfumes - the works.

The group’s exit strategies have also largely been sub-optimal. The Tatas exited consumer products when they sold soaps and toiletries company Tomco to Hindustan Lever (now Hindustan Unilever). But consumer non-durables have been the biggest growth area after liberalisation in 1991 as a new consumer class got created. The Tatas exited cement in 2004 - which is now likely to thrive as India gets back to investment mode, especially in infrastructure. The Birlas have, meanwhile, been bulking up on cement capacity.

The short point is not that the Tatas made bad business calls (all groups and managements get it wrong sometimes), but that these calls cannot in future be driven by preferences from the group headquarters, given the speed of change in various sectors and the global economy.

Also, thinking group can stunt the growth of promising businesses.

TCS has been an extraordinary success from every viewpoint. Led by the dynamic and sharply focused N Chandrasekharan, the company has scaled new heights after 2008, when the world was looking to India to reduce IT services costs. Even as Infosys dropped the ball in the pursuit of non-linear growth (through IT solutions, consulting and development of platforms), TCS went aggressively after services revenue and is today valued at more than Rs 5 lakh crore (around $84 billion).

TCS is the Tata Group’s cash cow, and its free cash flows bankroll the group’s big debts and financial stability. Some 60 percent of the group's market value comes from TCS. The bulk of Tata Sons’ earnings come from TCS dividends.

However, TCS will face a dilemma in the future as pure labour cost arbitrage options reduce and margins are squeezed by stiffer competition.

Tata Sons can do two things with TCS, in which it has a near 74 percent shareholding: sell the excess above 51 percent to raise cash for investment elsewhere, or allow TCS to use its huge valuations as currency for acquisitions.

Alone among Indian companies, TCS has the unique opportunity of using its market valuation to aim for the top three slots in global IT products and services - currently dominated by IBM (market value: $197 billion), Oracle ($181 billion), and SAP ($96 billion) - followed by TCS at No 4. TCS is clearly in a position to acquire some of the bigger firms below its rank, including the likes of HP ($67 billion), Accenture ($53 billion), Cognizant ($31 billion), or Cap Gemini ($11 billion).

Big ticket acquisitions will give TCS both scale and non-linear revenue growth options. There will be risks in some of these choices (as there was when the group acquired Corus or JLR), but TCS can always calibrate its acquisitions step by step without betting the farm.

But the key to making TCS No 1 or No 2 in global IT is to stop thinking Tata Group and start thinking TCS as separate from groupthink. The group’s target of emerging among the world’s top 25 most valued companies is more likely to be achieved if TCS adopts this goal instead of the group.

But this can’t happen is TCS is to remain a cash cow for the group’s ambitions outside IT. This will make TCS more risk-averse than it needs to be and it has to keep handing out the cast. And what applies to TCS applies equally to Tata Motors or Tata Steel or Titan.

Thinking group strategy and thinking individual company strategy can sometimes be in conflict.

It is time for Cyrus Mistry to let his individual companies set their strategies and not the group. The group should focus on what it needs to divest. Telecom is clearly one possibility.

The Tata group needs to slim down to grow faster and wealthier. Less is more. The sum of the parts may be greater than the whole among business groups.