Week 4: Tata Group
Do you recommend India’s Tata Group should focus its growth strategy primarily on geographic
diversification in existing products or home country diversification into unrelated industries? Explain
why, including how this is influenced by the Indian business environment. What are the risks and
trade-offs of your choice?
Why Geographic Diversification of existing products?
-Accessing larger market to allow for specialization and economies of scale
-Gain strength at home by affiliating with foreign institutions and customers
-Gaining general strength by:
✓ Competing with the world’s best
✓ Taking on challenges of different institutional and cultural contexts
✓ Accessing global markets for talent, capital, knowledge/ innovation and other key
inputs
Tata’s Case:
Pros:
1. Ability to take advantage of powerful brand name to seek opportunities abroad
- Tata has become so well-known in India till it can fight with general motors and other
international brands
- Tata’s structure has been useful in the past for entering markets
o Size helped it to raise capital when it was scarce and to lobby government
2. Ability to deal with institutional voids presents an advantage overseas
- Institutional voids: absence of specialized intermediaries, regulatory systems and contract
enforcing mechanisms
- When MNCs from DCs explore business opportunities in emerging markets, they must
confront the same institutional voids local companies face. But because MNCs are used to
operating in economies with well-developed infrastructures they are ill-equipped to deal
with such voids
- Hence Tata claims that it is easier for Indian companies to compete in Western markets
than it is for Western ones to adapt to the complicated demands of developing markets
3. Building on familiarity with resources aids in performance overseas
- Emerging giants like Tata are able to exploit their knowledge about local factors of
production to serve customers at home and abroad in a cost-effective manner
✓ Tata Consultancy Services (TCS) have excelled in catering to the global demand for
software due to India’s education system that produced many engineers and
technical graduates and hire them at much lower salaries
4. Emerging giants with businesses built around raw materials are usually global from their
inception because they are part of the global value chain
, ✓ 1) As factor markets at home become saturated and thus more expensive, these
businesses look for other developing countries that offer similar resources
✓ 2) These companies move up the value chain, selling branded products or offering
solutions to niche segments
✓ This is what Tata is doing: after establishing itself as a reliable provider of IT
services in India, they moved to US then to Latin America and Asia
✓ By setting up operations in developing countries such as China and Russia, they
have started exploiting large pools of talent in those countries
✓ Also acquired small consulting firms in US and Europe, thereby enhancing ability
to develop high-end solutions for customers
5. Saturated Indian market over certain products makes it feasible to look for market
opportunities overseas
- India’s crowded Telecoms market → best to relocate Tata’s Teleservices to other
emerging markets whose Telecom services may be weak
Cons:
1. Challenges of other institutional and cultural contexts
- Local politics within other markets are impossible to ignore → firms with local political ties
can secure protections that are difficult to acquire through formal channels as politicians
tend to provide protection to companies they favour (Who Cooks the Books in China, and
does it pay? Toby Stuart, Yanbo Wang)
o Local industries already has a leverage over a foreign firm like Tata
- Furthermore, it takes costs, time and some level of local experience to understand the
local needs of new markets as well as their distribution channels
- This can be especially difficult if the market you are heading towards has head-on-head
competition (China and India are rival countries seeking to dominate); or countries with
bad political ties with one another (history of conflict between India and Pakistan); or
markets that are already saturated with the product
Why Home Country Diversification into unrelated industries? (product diversification)
-Macroeconomics: generally, higher growth rates, market demand, and first mover
opportunities
- Substituting institutions: relevant for elite firms with scarce non-market resources (eg,
political connections)
- Business group affiliation has positive performance effect across unrelated industries in
emerging markets
Tata’s Case:
Pros:
, 1. Ability to cope with institutional voids within India
- Institutional voids: absence of specialized intermediaries, regulatory systems and contract
enforcing mechanisms
- Due to these institutional voids present in India, lack of research regarding consumer
tastes and distribution networks makes it tough for MNCs to serve anything but India’s
global tier of consumers.
- Meanwhile, smart local companies such as Tata can make use of their knowledge and
familiarity of the local market to design products that can serve the glocal, local and
bottom-of-the-pyramid tiers
- Being able to capture majority of Indian market share makes it advantageous to stay at
home and refocus on fast-growing India
2. Reliance on star-performer is not sustainable
- Currently only 2 of Tata’s main businesses stand out: Tata Consultancy Services (TCS), an
extremely well-run IT services firm and JLR, which Tata rescued from a period of
mismanagement by Ford
- However, it is not possible to simply rely on these 2 businesses due to changing
environmental conditions
- As the IT outsourcing industry is getting tougher, TCS’ growth has been slowing in recent
years
- The business model that propelled TCS to its current heights such as using a lot of skilled
but cheap Indian IT engineers to maintain their clients’ computer systems is also evolving
rapidly as clients turn to automated solutions
- Henceforth, it is best to seek unrelated product diversification to scout and establish niche
in other areas
Cons:
1. Further dilution of the business
- Currently Tata operates in a wide array of industries, among them IT, steel, beverage,
shopping chains, hotels, teleservices, aviation and many more
- Tata also remains active in 100 different business lines
- By opening itself to further product diversification, it creates further dilution of Tata’s
image.
- Furthermore, given its disappointing financial performance, the costs to market, promote
and maintain the new brands simply dampens its profits.
- To increase shareholder returns, it is better to sell some of Tata’s weakest existing
businesses such as Tata Teleservices and concentrate on improving the returns of others
Do you recommend India’s Tata Group should focus its growth strategy primarily on geographic
diversification in existing products or home country diversification into unrelated industries? Explain
why, including how this is influenced by the Indian business environment. What are the risks and
trade-offs of your choice?
Why Geographic Diversification of existing products?
-Accessing larger market to allow for specialization and economies of scale
-Gain strength at home by affiliating with foreign institutions and customers
-Gaining general strength by:
✓ Competing with the world’s best
✓ Taking on challenges of different institutional and cultural contexts
✓ Accessing global markets for talent, capital, knowledge/ innovation and other key
inputs
Tata’s Case:
Pros:
1. Ability to take advantage of powerful brand name to seek opportunities abroad
- Tata has become so well-known in India till it can fight with general motors and other
international brands
- Tata’s structure has been useful in the past for entering markets
o Size helped it to raise capital when it was scarce and to lobby government
2. Ability to deal with institutional voids presents an advantage overseas
- Institutional voids: absence of specialized intermediaries, regulatory systems and contract
enforcing mechanisms
- When MNCs from DCs explore business opportunities in emerging markets, they must
confront the same institutional voids local companies face. But because MNCs are used to
operating in economies with well-developed infrastructures they are ill-equipped to deal
with such voids
- Hence Tata claims that it is easier for Indian companies to compete in Western markets
than it is for Western ones to adapt to the complicated demands of developing markets
3. Building on familiarity with resources aids in performance overseas
- Emerging giants like Tata are able to exploit their knowledge about local factors of
production to serve customers at home and abroad in a cost-effective manner
✓ Tata Consultancy Services (TCS) have excelled in catering to the global demand for
software due to India’s education system that produced many engineers and
technical graduates and hire them at much lower salaries
4. Emerging giants with businesses built around raw materials are usually global from their
inception because they are part of the global value chain
, ✓ 1) As factor markets at home become saturated and thus more expensive, these
businesses look for other developing countries that offer similar resources
✓ 2) These companies move up the value chain, selling branded products or offering
solutions to niche segments
✓ This is what Tata is doing: after establishing itself as a reliable provider of IT
services in India, they moved to US then to Latin America and Asia
✓ By setting up operations in developing countries such as China and Russia, they
have started exploiting large pools of talent in those countries
✓ Also acquired small consulting firms in US and Europe, thereby enhancing ability
to develop high-end solutions for customers
5. Saturated Indian market over certain products makes it feasible to look for market
opportunities overseas
- India’s crowded Telecoms market → best to relocate Tata’s Teleservices to other
emerging markets whose Telecom services may be weak
Cons:
1. Challenges of other institutional and cultural contexts
- Local politics within other markets are impossible to ignore → firms with local political ties
can secure protections that are difficult to acquire through formal channels as politicians
tend to provide protection to companies they favour (Who Cooks the Books in China, and
does it pay? Toby Stuart, Yanbo Wang)
o Local industries already has a leverage over a foreign firm like Tata
- Furthermore, it takes costs, time and some level of local experience to understand the
local needs of new markets as well as their distribution channels
- This can be especially difficult if the market you are heading towards has head-on-head
competition (China and India are rival countries seeking to dominate); or countries with
bad political ties with one another (history of conflict between India and Pakistan); or
markets that are already saturated with the product
Why Home Country Diversification into unrelated industries? (product diversification)
-Macroeconomics: generally, higher growth rates, market demand, and first mover
opportunities
- Substituting institutions: relevant for elite firms with scarce non-market resources (eg,
political connections)
- Business group affiliation has positive performance effect across unrelated industries in
emerging markets
Tata’s Case:
Pros:
, 1. Ability to cope with institutional voids within India
- Institutional voids: absence of specialized intermediaries, regulatory systems and contract
enforcing mechanisms
- Due to these institutional voids present in India, lack of research regarding consumer
tastes and distribution networks makes it tough for MNCs to serve anything but India’s
global tier of consumers.
- Meanwhile, smart local companies such as Tata can make use of their knowledge and
familiarity of the local market to design products that can serve the glocal, local and
bottom-of-the-pyramid tiers
- Being able to capture majority of Indian market share makes it advantageous to stay at
home and refocus on fast-growing India
2. Reliance on star-performer is not sustainable
- Currently only 2 of Tata’s main businesses stand out: Tata Consultancy Services (TCS), an
extremely well-run IT services firm and JLR, which Tata rescued from a period of
mismanagement by Ford
- However, it is not possible to simply rely on these 2 businesses due to changing
environmental conditions
- As the IT outsourcing industry is getting tougher, TCS’ growth has been slowing in recent
years
- The business model that propelled TCS to its current heights such as using a lot of skilled
but cheap Indian IT engineers to maintain their clients’ computer systems is also evolving
rapidly as clients turn to automated solutions
- Henceforth, it is best to seek unrelated product diversification to scout and establish niche
in other areas
Cons:
1. Further dilution of the business
- Currently Tata operates in a wide array of industries, among them IT, steel, beverage,
shopping chains, hotels, teleservices, aviation and many more
- Tata also remains active in 100 different business lines
- By opening itself to further product diversification, it creates further dilution of Tata’s
image.
- Furthermore, given its disappointing financial performance, the costs to market, promote
and maintain the new brands simply dampens its profits.
- To increase shareholder returns, it is better to sell some of Tata’s weakest existing
businesses such as Tata Teleservices and concentrate on improving the returns of others
