Ratan Tata will hand over charge of the Tata group to Cyrus Mistry this week. He leaves behind an impressive legacy, despite a few immediate problems. The car business that is so dear to him has not made the sort of progress that Tata had hoped for, as he revealed in a frank speech at the Tata Motors shareholders meeting in August. The telecom business is struggling. One of his global acquisitions, the steel maker Corus, continues to burden group financials, though the purchases of Tetley and Jaguar Land Rover have been more successful.
However, what is more important is the overall record since he took the top job in 1991. Tata inherited a sprawling business empire with little overall strategic direction. The individual companies were run by powerful satraps who were not completely under the control of Bombay House, the group headquarters. Those were difficult years, as the economic reforms of that year opened a new world of possibilities but also forced protected Indian industries to compete in open markets.
It was a time for tough decisions. Tata sold businesses that he thought had no future, reallocated capital to more dynamic businesses, took bold bets such as entering the passenger car market and went in for leveraged global acquisitions so much so that international revenues now account for more than half of the $100 billion group turnover. Tata has also taken risks, one indication of which is that he has usually avoided safe annuity businesses that offer low but stable cash flows. He steps down with a well-deserved reputation as one of the most successful Indian business leaders, despite the occasional controversy.
The signs of intent were on display early on. Tata did the usual training routine at a few group companies, but got a formal leadership role only in 1981 when he was given charge of Tata Industries, which had been set up in 1945 as a managing agency but had no distinct role once managing agencies were banned in 1970. Tata rebuilt Tata Industries as a vehicle for the group to enter new areas such as information technology, financial services, auto components, advanced materials, telecom hardware and telecommunication services.
He also got personally involved in crafting a strategic plan for the Tata conglomerate, trying to identify which businesses should be sold and which needed more capital. The very assumption that such decisions should be taken at a group level rather than by individual companies was implicitly a question about the loose federation that the group had become under the great J.R.D Tata. The big decisions taken more than a decade later had their origins in that strategic plan. It identified services and technology as growth drivers for the future, prescient given the subsequent growth pattern of the economy.
Such strategic thinking was fundamentally ahead of its time since corporate expansion was controlled by the government and competition was minimal in a closed economy. Tata was a member of a generation of Indian business leaders who had to adapt to the massive changes in the country after 1980. Not all were successful. Most traditional corporate groups had grown by grabbing licenses rather than with a clear strategic plan, a legacy of misguided socialism. They were caught on the wrong foot after 1991, and went into irreversible decline.
Tata was one of a newer generation that saw the future. There were a few others like him. Aditya Birla had made the first serious attempt to globalize his business. Dhirubhai Ambani chose backward linkages rather than aimless diversification, and tried to build manufacturing scale. Some of them, including Tata, were tempted at one point of time by the protectionist appeal of the Bombay Club, but they soon saw the opening up of the economy as an opportunity.
Tata went against the global fashion of core competence, preferring to run a diverse business portfolio. The lack of deep financial markets in India ensured that capital allocation by groups such as the Tatas funded emerging businesses such as telecom and retail. Tata is also testimony to the fact that business families have had more freedom to take big bets compared with professional companies focused on quarterly results.
Tata steps down at a time when Indian business faces two challenges. First, public anger against crony capitalism could metamorphose into a wider backlash against business. Second, the domestic policy logjam means that businesses prefer to either sit on cash or invest abroad. These are issues that the next generation of Indian business leaders—many of whom are already in the corner office —will have to grapple with. Both in the manner in which he ran his companies as well as in his ability to take risks, the Ratan Tata legacy offers useful lessons to the new generation of Indian business leaders.
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