TATA Group; A Critical Analysis

TATA Group

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TATA Group

Abstract

            TATA Group is among the largest Indian conglomerates, which has grown immensely over the years to become a well-recognized brand. The company is mostly known for its major businesses including TATA Motors, TATA Steel, TATA Power, TATA Consultancy Services, Titan, TATA Teleservices, TATA Communications and TATA Global Beverages. In this report, TATA’s environment is analyzed to determine internal and external environment factors that affect the company’s performance.

Through the SWOT and PESTEL analysis, the business environment is assessed. The company’s steel business is currently undergoing challenges after British Steel’s closure decision. In this relation, the company must seek alternative areas to invest in to ensure that the business continues to thrive.

Spain and China are suggested as potential countries and these are discussed in regard to their attractiveness. The paper also provides recommendations for TATA based on information collected from the report. By the end of the report, the reader will have a greater understanding of TATA, its operations and factors that affect its performance.

TATA Group

Introduction

TATA Group has developed its niche as a leading multinational company in India and in the world, having evolved from a small family business began 148 years ago. Taking advantage of increasing globalization, the company has expanded its business across borders and increased the types of businesses that it deals with by venturing into different industries. TATA’s success is associated with the favorable macro-environment, particularly in India that helped the company grow significantly.

The company’s commitment to success cannot be underestimated either and it is notable that by leveraging its strengths and market opportunities, TATA has grown its portfolio tremendously. TATA continues to expand its operations internationally through global acquisitions. However, not all its ventures have been successful, owing to country-specific factors that influence its business operations.

Selecting a potential country for further global expansion therefore requires that TATA performs thorough market research to establish marketplaces in which the company is likely to thrive.  This paper seeks to identify factors in the macro-environment, which may have influenced TATA’s success as a leading company in India. It also outlines some of the countries in which TATA could further expand its operations and provides a recommended country TATA’s steel business.

Company Background

TATA Group is considered one of India’s global pillar, whose multinational status has seen it become a major conglomerate in India. The company which was formed in 1868 is headquartered in Mumbai, Maharashtra. TATA owns several companies which are independently operated and has over 600,000 employees. Through the years, the company has made several acquisitions across the globe, further improving its international presence.

The company continues to enjoy a global reach and considerable profit levels, with the latest financial information indicating that the company garnered $108.7 billion in 2014/2015 financial year (tata.com). TATA Group consists of different sub-companies including TATA Motors, TATA Steel, TATA Power, TATA Consultancy Services, Titan, TATA Teleservices, TATA Communications and TATA Global Beverages.

Besides its many sub-companies, TATA’s growth can be attributed to the purchase of various businesses globally including Daewoo Commercial Vehicle Company, Land Rover, Jaguar Cars, Eight O’clock Coffee an Good Earth Corporation among others, propelling it to an internationally recognized organization (tata.com).

Discussion

Macro-environmental factors

SWOT Analysis

Strengths Strong financial performance Brand strength Foreign investment Diversification  Management professionalism and regard to employee welfare International acquisitions and collaboration Corporate social responsibility/ Commitment towards national growthOpportunities Favorable government policies Emerging markets and developing countries Strategic alliances and mergers New product lines Increasing per capita income Changing customer needs
Weaknesses Excessive debt Diversification Management and control Controversy on illegal land acquisition Environmental concernsThreats Rising cost of material and manufacturing Competition Economic and business volatility

Strengths

TATA’s strong financial performance plays a major role in enhancing its performance. Based on its last financial results, the group collectively earned $108.7 billion in revenue and $6.7 billion in profits in the 2014/2015 financial year. The company also owns major assets and property, which further enhance its financial position. Lynch (2012) notes that when a company is financially stable, it is more likely to mitigate any threats within the market place.

Brand strength remains a major boost for TATA. The company is not only well known in India but also internationally, mostly for its motor vehicle and steel business. This means that customers are more likely to trust its products and services.

TATA has invested significantly in foreign markets through direct investment, subsidiaries, strategic alliances and subsidiaries (Au, Ayyagari and Spencer, 2015). This gives the company a strong ground in the global market and also promotes its financial performance. Due to its global presence, TATA has gained tremendous experience on international trade and is therefore capable of enhanced success in terms of internationalization. 

TATA has invested in numerous industries and this form of diversification is of great significance to its portfolio. To begin with, it means that the company can shield itself in times of financial crisis by benefitting from companies that are performing well. In essence, other companies can support the company’s performance in the event that certain industries are affected by business or environmental factors; thus enhancing continuity (Ramachandran, Manikandan and Pant, 2013).

Management professionalism and regard to employee welfare has ensured retention of professional managers and high performing employees. TATA is known for its hands-off approach where managers are allowed to make independent decisions without influence from the owners. This hastens business processes and is therefore considered a major strength for the company. It also provides attractive benefits for its employees and is thereby considered an employer of choice.

International acquisitions and collaboration ensure that the company’s international presence continues to grow. These add to the company’s financial performance and international experience and are therefore of major significance.

TATA is known for its commitment to corporate social responsibility, having undertaken numerous projects to promote living standards in India. TATA has invested in education, research, art, sports and cultural endeavors and is well known for its philanthropy. In 2007, TATA received the Carnegie Medal of Philanthropy (Carnegie, 2015). Corporate social responsibility is hailed in the business world as an efficient way to create a strong brand by creating community trust (Grant, 2016).

Opportunities

Favorable government policies have ensured that TATA conducts its business effectively. The company has received major support from the government of India and this has to a great extent enhanced its performance. TATA has also been well received in other countries where it operates. This is an opportunity that the TATA could utilize by investing more in its business.

Emerging markets including rural areas and developing countries present a good opportunity for TATA to exploit. The company should therefore work towards reaching these markets before they are exploited by others.

Strategic alliances and mergers are still a lucrative approach towards enhancing the company’s global market. It is notable that many companies across the globe are seeking companies they can collaborate with to achieve various goals including technological innovation. Companies considering buy-outs due to financial difficulties are also increasing and TATA could take advantage of such opportunities for growth.

TATA Group can enhance its performance through diversifying into new product lines. This will enhance their performance and hence promote is global position.

Weaknesses

TATA operates numerous companies and is constantly engaging in investment activities that require large amounts of money, such that it has accumulated a significant level of debt. These are repaid from its business proceeds and this means that in the event that business is affected by unforeseen risks, it may be difficult for the company to effectively repay the loans (Boone and Kurtz, 2012).

Diversification is considered a positive aspect of business performance. However, it may also present difficulties in management, such that the company fails to ensure optimal performance for each product (Boone and Kurtz, 2012). This could threaten TATA’s performance.  

The TATA family is no longer managing the group of companies and this has been delegated to independent companies, which work under the board. Management and control issues could therefore be experienced if the respective managers are not as committed to success as the owners.

Controversy on illegal land acquisition has tainted TATA’s image to a significant extent. The company was a victim of public uproar on land grabbing accusations. This has affected TATA Tea and TATA Steel in India, where communities have claimed ownership of land possessed by TATA. 

Environmental concerns have also emerged, with the company being accused of encroaching natural endowments and polluting the environment (Masani, 2015). This may affect the company’s reputation and thus limit its performance.

Threats

The rise in the number of businesses globally cannot be underestimated and TATA therefore faces stiff competition from emerging and existing businesses.

Rising cost of material and manufacturing is affecting the company’s productivity, given that it has to contend with lower profits than it would if the conditions remained the same.

TATA like any other company faces a major challenge in the form of economic and business volatility. According to Grant (2016), the world economy is highly unstable and components including interest rates, inflation, availability of credit, per capita income and customer demand keep changing. This is a major risk for global companies such as TATA.

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PESTEL Analysis

Political Factors

These refer to factors in the political environment in which a company operates. India enjoys a generally stable political environment that is suitable for business. TATA is however exposed to changes in government regimes that may influence the business environment through new regulations and policies (Beneke et al, 2013).

An example of a new law that is bound to affect TATA is the new rule on corporate social responsibility, where companies may be expected to give 2% of net profit earned towards community development. Given that TATA operates in different countries, the risk of international trade regulations is eminent. An example is the adoption of policies aimed at protecting local organizations, which is bound to affect international companies in a significant manner.

Economic Factors

The global economic conditions in recent years have been volatile and this to s significant extent affects company performance. The global economic crisis for example hit most companies, affecting their profitability. The collapse of British Steel following market factors is also a demonstration of economic impact on the business. India’s steel market remains among the largest in the world and this has ensured that TATA’s steel business grows steadily.

Social

The community in which TATA operates has influenced the company’s operations both positively and negatively. As the company expands, there are greater expectations from the company to give back to the community (Masani, 2015). This is further exacerbated by competitive pressure. TATA must therefore invest more in community social responsibility in order to create a good name for itself. Globalization has led to changes in indigenous culture and this has prompted TATA to invest in activities aimed at preserving the Indian culture.

Technological

            In a world where technology is evolving rapidly, TATA is faced by the need to keep investing in newer technology. Customers are increasingly demanding highly sophisticated products and TATA is affected through increased expenditure for these products. In car manufacturing for example, the acquisition of Jaguar and Land Rover presents the company with a daunting task in terms of innovation, which will ensure that these cars maintain their class. The company must therefore be in touch with advances in technology to maintain its competitive position (Masani, 2015).

Environmental

There is growing pressure for companies to preserve the environment through exercising safe environmental practices; including the preservation of natural resources and reducing pollution. The company is striving to protect the environment through taking specific measures such as producing low fuel consumption cars and reducing gas emissions.

The company also participates in activities aimed at reducing industrial pollution, such as “Green Earth” campaigns; and preventing deforestation (tata.com). In the past, TATA has received criticism over river pollution, air pollution through gas emissions and natural resources encroachment.

Legal

            TATA operates in different countries where varying laws governing business operations and issues such as taxation, employment and environmental responsibility among other factors (Beneke, 2013). The company has also been exposed to various legal battles during its existence, including legal cases challenging land ownership such as the Kerala Government law suit. In this case, TATA Tea was accused of grabbing 3,000 acres of government land in Munnar.

Potential international marketplaces for TATA foreign acquisition

            As the world becomes increasingly interconnected following globalization, TATA may choose to invest in other countries, which also demonstrate great potential for business. Some of the countries in which TATA could invest in are discussed below.

Spain

The Forbes Magazine ranks Spain as the second-best country to invest in (Rapoza, 2015). This is based on its stable economic environment and the business environment has improved tremendously. The government recently reduced corporate taxation from 30-28% and tax rate on income from 56-47% (Rapoza, 2015). Tax on savings has also decreased, meaning that disposable income among consumers is bound to increase.

These conditions are favorable for the company and TATA should therefore consider investing in Spain. Currently, Spain’s GDP per capita is $1.7 trillion. At more than 3% per year, Spain’s economic growth can be considered strong; having recovered from the property boom effects. The country is highly ranked 16th in terms of purchasing power parity globally. TATA could therefore benefit significantly through investing in Spain for its steel business due to market availability.

China

            China has been considered an attractive market to invest in, mostly based on its vibrant economic growth and the low cost of inputs and resources, including cheap labor. China has in the recent past attracted major investors who seek to capitalize on the favorable business conditions and government policy aimed at attracting foreign direct investment (Jalil and Feridun, 2011). The country also enjoys a stable political environment. It is notable that China is slowing down in terms of inward foreign direct investment and increasingly favoring alliances (Davies, 2013). This is therefore a great opportunity for TATA to leverage on.

In recent years, China has witnessed increased economic strength. Until 2015 when India overtook China as the fastest growing economy, China was taking the lead and this still presents the country as a lucrative marketplace to invest in. The country’s growth has averaged 10% over the last 30 years and its GDP per capita was $19.392 trillion in 2015 (IMF, 2016). The GDP growth in 2015 was recorded at 6.9%.

            Preferred international marketplace for TATA Steel

TATA Steel faces a major challenge as British Steel heads for closure. Based on the discussion of potential global marketplaces where TATA could seek further acquisitions in China is recommended as the preferred location to further internationalize its steel making business. This is based on its favorability in terms of investment environment, government policy and steady economic environment.  Johnson et al. (2014) notes that in order to make a decision on investment, the macro-environment within the country must be effectively studied to ensure that it will enhance business performance.

One of the first indicators of a conducive business environment is the economic environment, which should favor business growth and continuity. In this case, it can be established that the company is performing well and that potential for growth is high. Secondly, government accommodation towards foreign companies is also an important consideration for TATA to consider (Au, Ayyagari and Spencer, 2012). The survey on China indicates that the government policy supports foreign direct investment and TATA can therefore invest with confidence.

China’s government is on a mission to promote economic performance and reduce poverty; which has resulted in aggressive approaches aimed at increasing investment within the country. According to the Five-year Plan for 2016-2020, China aims at eliminating poverty and enhancing China’s development through creating a ‘new normal’, where China will no longer be viewed as a ‘cheap’ hub but an established economy (Hong, Cheung and Sit, 2015). One of the major ways this will be achieved is through promoting innovation investment, which TATA could leverage.

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Conclusion

            This report explores TATA Group and its environment, establishing that it is influenced by various factors in its internal and external environments. It can be established that the company is performing exceptionally and that its current approach of managerial independence has contributed to its growth.

Owing to the high level of diversification, the company’s risks are spread across many sectors and this creates financial security. The company like any other company faces stiff competition and factors in the environment affect its operations. An example is British Steel which has been affected by economic factors, threatening its closure. In order to further expand its operations to other international markets, TATA could choose between Spain and China.

These two countries present perfect opportunities for the company, although China is considered as having greater potential for growth. This is because of its high economic growth and the fact that its steel industry has grown significantly.

Recommendations

TATA faces significant threats as established in the SWOT analysis. To address these challenges, the company needs to capitalize on its major strengths and opportunities to recover from such threats. An example is utilizing its strong financial position to invest more in new technology and innovation to create a competitive edge.

            Continued diversification efforts by TATA need to be managed in order to ensure that they do not overwhelm the company. As noted in Masani (2015), too much diversification may hurt the company’s prospects and it is best that it engages in only what is achievable.

            The need to protect the company from legal issues is imperative. This means that TATA should seek to refrain from activities that expose the company to such, including environmental degradation. In this relation, it should get more vigilant in terms of environmental conservation.

In its quest to invest more in the international market, the company must ensure that a thorough background is conducted to ensure that the country will accommodate the company.

Secondly, TATA needs to determine the possible unforeseen risks that may emerge in the market and thus develop a risk mitigation plan that can be applied in such a case.

References

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