How Ratan Tata’s bold moves created a strong foundation for the Tata Group

Between two big initiatives—the shoring up of Tata Sons’ equity stakes in group companies and the BEBP agreement (Brand Equity and Business Promotion agreement, which gave group companies the right to use the unified Tata brand)—Ratan Tata laid the foundations of a cohesive Tata group within the first decade of his tenure as chairman. With the first initiative, Tata Sons reinforced its right to manage its companies and also protected them from possible hostile takeovers. With the second, Tata Sons ensured that the companies knew exactly what obligations they had to discharge and what standards of excellence they had to meet for the privilege of using the Tata name.

There was one more step that Ratan took to ensure a cohesive group. Through the introduction of a well-structured retirement policy, he ensured that powerful satraps such as Russi Mody, who were running individual Tata companies somewhat like their own empires, gave way to leaders who were far more aligned to a Tata group where unity mattered as much as diversity.

Doing the right thing through such comprehensive restructuring of an established organization is inevitably fraught with resistance to change. In this case too, the going was not always easy. Ratan’s battles with satraps like Russi Mody and Ajit Kerkar have been well-documented in many other publications, and so in the interest of brevity, I will choose not to repeat these stories here.

Similarly, the BEBP agreement ran into opposition in some quarters and had its share of critics as well before it was eventually approved by the boards of all major Tata companies. Pause for a moment and consider the immensity of what Ratan Tata had achieved here through these major acts of restructuring. These were not just big moves, they were fundamental to the continued existence of a strong, unified and coherent Tata group.

Personally, I feel that the Tata group as we know it today would not exist had these bold actions not been taken by Ratan way back in the 1990s. In 1997, I was a young marketing and sales manager at Tata Tea. One morning, my colleagues and I were called in for a session to talk about a new framework: the Tata Business Excellence Model (TBEM). I recall that session vividly. It focused on how each of us should work towards ensuring the consistent quality of processes within our business, whether they be customer-facing processes or internal processes such as strategy formulation or people development.

We were introduced to seven different categories under which our business processes and results would be assessed. We were also informed that our business would be assessed and scored by an independent team every year under all these heads. This was the first time I had heard of TBEM, which would soon become a strong backbone of excellence within the Tata group. The clear objective of this framework was that each Tata company should gear up to deliver market leading performance on a sustained basis, for which robust processes in every area of business were essential.

Within a couple of years, I was invited to a Tata group meeting called the Annual Group Management Meeting. We were, I recall, around 400 of us in the conference hall. On the dais were Ratan Tata and members of the Group Corporate Centre of Tata Sons, all of them senior directors.

Ratan Tata then stood up to address us. His primary focus was the need for us to pull up our socks and ensure excellent business performance. He laid out three clear objectives: every business had to be within the top three in its industry in terms of market share and profits, had to deliver positive EVA (economic value added), and had to build size and scale commensurate with its sector. We were asked to prepare business plans with these three objectives in mind and bring them for review to a Business Review Committee (BRC) which had been constituted for this purpose.

Immediately thereafter, this planning exercise began in right earnest. I recall being part of the team at Tata Tea which was tasked by our then CEO to work on our company’s five-year business plan. To the best of my knowledge, this was the first such formal long-term planning exercise in the company with clear objectives laid down, and it was an intensive effort which lasted several weeks. Many new perspectives and fresh ideas emerged during these discussions, including new horizons for profitable growth and new investments that would be required to make this happen. At the Tata group, the push for performance and for becoming future-ready had begun in right earnest.

To understand the background in which all this happened, we should rewind a few years to 25 March 1991, when Ratan Tata was appointed chairman of Tata Sons. Just four months later, on 24 July 1991, Manmohan Singh, who had been appointed finance minister of India, presented his maiden budget where he quoted Victor Hugo’s famous words: ‘No power on earth can stop an idea whose time has come.’ This landmark budget, perhaps the most important in the history of independent India, put forward a framework for liberalization, privatization and globalization—in effect, opening up the Indian economy to the world at large. It also removed several restrictions on Indian companies and, very importantly, eliminated the need for licensing in most sectors of the economy, thus creating, in one stroke, multiple opportunities for growth.

Ratan Tata quickly grasped the significance of this budget and its possible impact on the Tata group. He knew that foreign firms would soon enter India since the economy was now far more open. The Tata companies had to be strong enough to withstand this new era of global competition. He also knew that if the Tata companies had to leverage the new liberalized economy, they needed to be ready for a very different future. In this context, he saw that there was only one path to doing the right thing for the group that he was leading: He had to make Tata future-ready.

It was a tough path, which required a lot of soul-searching and remedial action. He engaged the services of the global consulting firm McKinsey to assess the state of readiness of the Tata companies and also to suggest what the group should do to grow rapidly in the new liberalized economy. McKinsey submitted a candid report which recommended significant restructuring of the group, with a focus on a few core sectors. The report also said that many Tata companies were totally unprepared to cope with the future and were in substantial danger of falling behind their competitors. This was the reality that Ratan Tata now had to address.

Excerpted with permission from Penguin Random House India.