TATA steel strategy was to integrate the value chain of steelmaking to aid the growth of Asia’s bubbling construction economy. When presented with the opportunity (financially the government policies made it easier) to gain access to the other markets, they later acquire CORUS which was an established name in Europe, but were not cost effective in their operations (Tarun Khanna, Krishna G. Palepu and Richard J. Bullock, 2009). This acquisition provided them the right synergy by combing the low cost upstream production in India with the high-tech research aspects of Corus and areas like procurement, marketing, back office operations and R&D.
This was also required due to the trends in world steel industry whereby there has been a global consolidation (Tarun Khanna, Krishna G. Palepu and Richard J. Bullock, 2009) as key players look to gain economies of scale, accessing new and growing markets and increasing their purchasing power when negotiating with supplier and buyers (Kimberly Freeman, Suresh Gopalan and Jessica Bailey, unknown). TATA Steel therefore had to acquire Corus or risk being acquired and it also provided with them with the added capability of entering the global supply chain business. TCS on a contrary had a global presence and was considered born global (Charles Schell, Axele Giroud, Rudolf Sinkovics and Mo Yamin, 2013) since 91% of their revenue was from outside India.
The uniqueness of TCS business was that their service could be delivered from India to any part of the world and TCS leveraged on cheap skilled labour via arbitrage, aggregation and adaptation as they had the economies of scales to deliver cheap solution and later on, they started to adapt according to their customers’ requirements across the different industries (i.e. Financial, Aviation, etc). In order for them to increase their revenue and prevent other competitors challenging their position in the market through arbitrage and aggregations, TCS grew organically via undertaking larger projects and at the same time acquiring firms overseas which were focusing on business process outsourcing (BPO) which was an emerging business.
This equipped them with the BPO knowledge and thereby differentiating them from their competitors since they now have the ability to offer their clients a more complete solution to their IT needs (i.e. not only managing their IT equipment, but also providing them with functions like HR, payroll) while at the same time gaining new access to markets which were previously untapped.
This added capabilities also allows them to cross sell solutions to their customers and further embed them into TCS as they become a 1 stop for all IT solutions. Indian Hotels globalisation plan employs a multi-domestic strategy due to a lack of market in India for hotels. Since their products are not highly standardized and were of high quality, they could not employ an economies of scales strategy like TCS.
In-order to maintain their branding, it is vital for them to have controlling stake in joint ventures (JV) and this resulted in them selling minority stakes to strategic partners in their earlier forays in turning global. Instead, they climbed the value chain through management contracts, which helped them developed a global presence in the market while at the same time lowering their CAPEX.
Using the uppsala model (Charles Schell, Axele Giroud, Rudolf Sinkovics and Mo Yamin, 2013) this allowed them to gain the necessary knowledge of operating in a new market through an establishment chain which they later selectively entered "gateway cities” via acquiring properties since their name was established and at the same time catering to the needs of their clientele.
This strategy was also helped to diversify their risks as management contract was less sceptical to revenue and profit volatility but at the same time meeting the demand for their product. They later tried to diversify into new areas of processed food by acquiring Innovative food which they hope to leverage on their retail, food and beverage business in the hospitality space. TATA tea whose plantation was it core business of farming operation was not only barely profitable but at the same time the growth demand for tea was slow.
They therefore had to transform itself into a high-margin global distributor of specialty teas and other healthy beverages and at the same time, looks towards vertical disintegration. Therefore, in knowing the demands of the market and in its attempt to meet it, they therefore acquired Tetley which not only was a brand with global appeal, but at the same time provided them access to the market in both the developed and emerging markets, thereby reducing dependency on one geography.
Through this acquisition they also gained technology to create unique products (i.e. herbal, flavoured tea) which they could offer to the markets which they are already established (i.e. India, Middle East and Russia) and attain cost synergies through the manufacturing of tea and distribution via the global supply chain approach. In its bid to further diversify their portfolio and transform into a beverage company, they later acquired EBI which was sold 9 months later to earn them a profit of $600M. This was not due to the fact of a change in their strategy, but similar to Indian Hotel, they would prefer to have a controlling stake in the company in-order to attain the full benefits of gaining the technology of producing enhanced water and brand control which was lacking due to the fear of knowledge spill over. Overall their focus was on growth rather than cost reduction.
The potential acquisition of JLR will help to reduce its dependency on the Indian market and at the same time establish a global footprint in the luxury market of automobile especially in the US which is the biggest market in the world and China which was a growing market. It also expands their current portfolio ranging from commercial vehicles which were starting to have a global reach to developing cheap passenger cars thereby spreading its business across different customer segments and geographies.
This deal will not leverage on economies of scale in one product, but looking towards offering their clientele a broader range of products to choose from both their established market as well as penetrating into new markets which would otherwise require many years to penetrate as the brand equity will provide them with instant recognition and credibility across the globe.
Also, with the intensifying competition provided by foreign firms, they need to have a product to consolidate their market share in the domestic Indian market and at the same time have a glimpse into the future through the experience which they will gain from the developed markets previously inaccessible to them. Also, this contrast the acquisition of Daewoo commercial vehicle unit which was more complimentary to its existing capabilities and helping them to accelerate their development of heavier trucks.
The synergy which could be attain via the JLR acquisition would also provide access to engineering capabilities which they could implement across their current portfolio of products, and strengthens the relationship with TATA steel thereby shielding them from the fluctuation of raw materials and lowering their operating cost since steel is a primary component and also providing advanced market distribution channels. This coupled with TCS who is able to provide engineering design manufacturing solution and sourcing services whom have customers like Ford on board provide a good synergy between the 3 companies.
From the experienced gained in managing manufacturing companies in England and Europe, specifically with Corus they will be able to better manage the supply chain effectively and also better at retaining management talent in JLR while managing any cross cultural issues which could be surface. Also from the successful Tetley and Corus acquisition they would have experience in cross-border acquisitions and manufacturing-based acquisitions which they could effectively transfer some of that learning to TATA Motors.
Furthermore, to reduce their risk further, Ford will continue to supply JLR with key components and are also committed to providing engineering support which includes R&D, IT, accounting and other services. To retain local knowledge management in the market, they should leave the day-to-day management in the hands of executives in England who whose experience and expertise are vital in helping grow the business.
Due to the gradual liberalization in their home markets by the government and increased competition from foreign companies which has threaten their domestic dominance, they are forced to be more cost competitive and producing quality products which can be accelerated through acquiring companies whose incorporation will not only added synergy to the company but generate added value to the group as a whole through learning and leveraging on new technology and engineering capabilities.
Also, after experiencing the Asian financial crisis, there was a need to globalise to help spread their risk and could only be attained through penetration into other markets. The financing options available also offered them low interest rates which they had easy access to and couple with the rapid growth within India due to the economy boom in Asia, TATA therefore had the spare cash to invest abroad which will not only transform their local engineering excellence into innovation on a global scale, but being able to compete effectively against the foreign firms by quickly close gaps in technological capabilities and at the same time gain valuable market insights which they previously had no knowledge.
The acquisition when combined with the production cost advantages in the home country due to their access to natural resources and abundance supply of cheap skilled labour at home would provide them a cost competitive edge against the foreign firms not only in their home country, but at the same time establishing a global presence which will elevate the TATA brand from being local to global. Without these acquisition, their growth would be hindered as breaking into developed countries based on organic growth would take far too long due to their lack of brand equity and needless to say if they were to build these capabilities, it would be inferior to those of foreign firms due to their lack of incentive to build technological capabilities in a closed economy in the earlier years.
These acquisition also helps TATA to move up the value chain where the margins are bigger and through the enhanced distribution network and global supply chain it will allow them to further reduce their operating cost as they could leverage on certain backend functions across companies within the group and. Furthermore, the acquisition will exposed them to best international practice and encouraged their managers to hone their skills thereby spurring them to seek growth abroad to compensate for the lost in market share at home.
As seen in acquisition of Corus, it would not only help them to attain economies of scale to dominate the market which could be seen as defensive, but in the long run could prove to be a strategic move to gain competitive edge not only in cost but perhaps have the ability to form a cartel like the OPEC and dictate pricing which would have a rub on effect in proving TATA motors the upper hand against its competitors since steel is a primary component in vehicle manufacturing. Through the creation of a global network of alliances with local partners, this is another important strategy to enable them to be effective at local market adaptation in their globalisation quest and at the same time limiting their risk since they do not have sufficient knowledge of the market.
Once sufficient knowledge has been gained and they feel that they are in a better position and there could be more benefits to be reaped from being wholly owned, they could proceed to acquire the firms. In general, there is no 1 strategy fits all which can be applied to the companies in the TATA group. There is a need to have a deeper understanding of the business needs, the political risk, the local market adaptations and at the same maintaining synergies between the companies to prevent conflict of interest which would be detrimental as it would create unhealthy competition within themselves thereby denying each other from value lessons learnt which could be applied across the TATA group.
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Mohit Chandra (2010) Emerging market acquisitions in developed economies. KPMG LLP
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Kimberly Freeman, Suresh Gopalan and Jessica Bailey (unknown) Achieving Global Growth through Acquisition: Tata’s Takeover of Corus. Journal of Case Research in Business and Economics