One big battle was to try and change the complexion of the group from a loose confederation of many companies into a closer-knit group.

Ratan Tata takes the veil off India's biggest corporate transformation. The story of how he is reinventing the Tata Group, in his own words.

It is by far the biggest transformation in Indian corporate history. The story of how Ratan Tata is changing a loose confederacy of 300 companies into a cohesive group.

Tata Sons
Tata Sons shareholding in all major group companies is already over 20%. It will cross 26% within two years - a level Ratan Tata is comfortable with

The Group Executive Office
The GEO under Tata Sons will provide group focus and look at restructuring, acquisitions and new forays. It has two full-time executive directors and the hunt is on for 2-3 more.

Business Review Committees
Each Tata company will have a Business Review Committee (BRC) for interaction between Tata Sons and the management of the company. It will meet thrice a year to look at strategy and operational performance. Its recommendations will be sent to the company boards. Already, 12 BRCs have been set up and Tata says he spends most of his time in these meetings.

Underlying these concrete structures are initiatives to integrate the group. Two foray have been created, on Finance and HRD, to align group practices. The JRD QV Quality Award, based on the Malcolm Baldridge Award, and the Brand Equity Fund to which group companies contribute, are other mechanisms to bind the group.

Corporate restructuring doesn't any bigger than this. At 61, Ratan Naval Tata heads India's largest business group with sales of Rs. 32, 000 crore, profits of Rs. 1, 586 crore and over 262,000 employees spread over 300 companies. Just managing all this would be a man-sized task; turning it around would be a heroic one.

Since 1991, when he took over as chairman of Tata Sons from the legendary JRD, Tata has had some success in making this loose confederacy of sultanates into something resembling a corporate group. But his work is far from done and the big wins are yet to take place. It seems the campaign is only beginning.

Over the last few months, Tata and his handpicked team of people in what is called the Group Executive Office (GEO) at Tata Sons - including new executive directors R. Gopalakrishnan and Ishaat Hussain and Directors Manab Bose and Kishore, Chauker apart from N.A. Soonawala - have been taking a relook at the group's business portfolio and charting new growth paths with the idea of doubling turnover every four years and profits every three. Expect the initial corporate weeding out to be over within the next 12 months.

Equally important, they have been putting in place a striking new corporate architecture that will demand far more accountability from operating companies. Think of it this way : from now on, chief executive officers (CEOs) of all major Tata companies will have to present their plans and strategies before Business Review Committees (BRC) which will have GEO executive directors on them. The idea is to facilitate greater interaction between Tata Sons and its operating companies - and greater control. Over the last four months, 12 BRC meetings have taken place and the new structure is falling into place nicely. Is this the end of the Tata group as we know it, and the beginning of the new one?

If the excitement in Bombay House is anything to go by, the answer is yes. Tata finally has most of the pieces he needs in place - the Tata shareholding in major group companies will cross 26% within two years - and pockets of resistance to change have more or less vanished. As the restructuring effort gathers pace over the next few months, and the projects Tata plan get off the drawing board and start getting implemented, get ready for headline-grabbing action. Here we given you a preview of what will follow and the context in which it will happen. Ratan Tata met Business World's Editor Tony Joseph and Assistant Editor Manish Khanduri at Bombay House last month. Excerpts from the interview.

Mr. Tata, you were one of the first businessmen in India, in the eighties, to identify growth opportunities in a range of new areas. But today when you look at the Tatas, do you feel that you could not fully capitalize on those opportunities?
We could not, because at the time we went into those areas I was not in a position to really command the resources. I don't think there was a real belief that these were the areas we should go into. We, therefore, did not embark on those new ventures with the real might that Tatas could have brought to the table.

And are you going to make up for lost time?
There is a change that is making this more difficult. The manner in which we grew in the past was through cross holdings. Today, there is a great deal of opposition to that from foreign shareholders and from the financial institutions and we have to look at other means of marshalling the kinds of resources that we need.
And the fact that Tata Sons needs to devote resources to increasing its stake in group companies makes it that much more difficult Yes. That has been a considerable drain on Tata Sons but that will be over soon.

You have been uncomfortable with the Tata holding in group companies. When will you reach a level you are comfortable with?
At 26%.

And how long might that take?
We are now somewhat limited by the creeping acquisition limit that we have. In most of the key companies we are around 20% today. So, assuming that we have this creeping 5% limit, you might say that in two years we would be where we want to be.

And money won't be a problem for Tata Sons, with the profits from Tata Consultancy Services.
That's right.

You made a comment sometime ago that Tata Sons had become more or less an investment company. Has that changed substantially?
I think it has, in the sense that it still an investment company but it has taken on much more the role of a holding company today, exercising its voice in the operating companies to a greater extent than before.

Do you see the Tata Group as an Indian chaebol or an Indian keiretsu? What is the model that you have in mind?
I don't have a model because we are very different from a chaebol in the sense that the ownership structure is different, and the backgrounds of individual companies are different as against a chaebol which is, in effect, the same. And there is no personal ownership and no family ownership. One is not trying to garner financial control. It is really making the group more synergistic than it has been. And towards that one is quite satisfied to see a confederation of companies where you have a greater say in terms of what is demanded of those companies as the promoter or as holding company. But you continue to ensure that the company has its autonomy and its business freedom to operate within a framework.

You have created a Group Executive Office (GEO) under Tata Sons. What is the GEO supposed to do?
There has been no group focus in the group, Tata Sons has been a holding company, or an investment company, whichever you want to call it. But that holding element is holding shares. There was no focal point of looking at the group - its growth, its complexion, new businesses. It was fragmented and very ad hoc. The GEO is in tended to provide that focus on a full-time basis. That will involve looking at restructuring within our group, it will look at acquisitions outside our group, it will look at new business prospects, it will look at our position domestically and internationally. Importantly, we will have for the first time a central human resource development focus.

I understand that the BRCs have been functioning for some months now. How have the operating companies taken this?
The companies initially questioned why this was being imposed. But by and large - and I am not saying this hypocritically - when we had the meetings the companies came even to the first meeting and said what we have had to do for this has been a real eye-opener for us, it has helped us.

What has not yet happened, of course, has been a situation where the company feels that is should go in this direction, the BRC feels it should not go in this direction, it should go in another, and there is a confrontation between the management and the BRC. But the BRC it self, as we have structured it, is predominantly a committee of that company's board and it has members of the GEO on it who will act as the catalyst.

But essentially the BRCs consist of Tata representatives, don't they?
No, no, we have outside representatives also. In fact, we have been careful to have that. It is not an internal Tata board, it is a committee of the company's board.
For example, are there representatives of Financial Institutions (FIs) on that? In some of the BRCs that are.

Have the Fls been concerned about this at all?
Not after being assured that one is not usurping any of the authority of the board. In fact, the Fls were not the only concerned people - the directors of the companies were concerned that this would take away the authority of the board. It is not so. And the BRC will, in fact, finally make its recommendation to the board through this board committee and the board will finally take its decision.

If a situation arises where the BRC takes a certain view which is not in conformity with the view of the operating company, what will happen?
Hopefully, there will never be an issue that will be against the interests of the company because the BRC is not ...Let me just say that the BRC is not focusing on what is necessary for the Tata group. The BRC is focusing on trying to make a company more profitable, more productive. And one issue for the Tata group is the proliferation in the same businesses in other companies. This has to be stopped.
In the past a company had total freedom to go into a business even when there was another company in that area. This will now be debated in a much firmer way than it had been earlier. In its final foir, the BRC has to be viewed as the link between the promoter and the company.

If there were a real conflict in terms of the direction the company wants to go and if its board supported it, obviously Tata Sons would have to ask itself whether it wants to continue its holdings in that company. So, in the ultimate confrontation, there could either be an insistence on its view being held, not because of what it does to the Tata group but because it believes that's the right thing for the company, or its would exit the Company.

Is the GEO now fully staffed?
We decided that we would build the GEO as we got the right people. So the GEO is not its final size.

How big will it be?
It will probably have four or five executive directors. Currently is has two full-time executive directors. There's also Mr. Soonawala, who is also the financial coordinator of the group and who, like the other two, is an executive director of Tata Sons, but he is not just for the GEO.

When will the GEO be complete? I cannot tell you because I do not have people all identified. But it would be reasonable to say that in the next eight to nine months we probably will have a fuller GEO than we have today.

When and how did the Idea of the GEO and the BRCs come about?
The present GEO structure was recommended by McKinsey
When it did a study for us. But in the early 80s when we did a strategic plan, we also had looked at something akin to the GEO except that the GEO looks at companies and that earlier thing looked at businesses. There were also groups then, but there would have been, let us say, an engineering group that might look at ourselves in the engineering business, rather than look at Tisco and Indian Tube and so on as portfolios. That has been the change.

What is the downside of having such a superstructure?
Is there a danger of companies losing some of their freedom? No, none whatsoever because, as I said earlier, we have tried to ensure that the autonomy of the company is maintained. There will be one change : the managing director will need to present his thinking to a group that is going to focus its time on listening to that thinking. Many of our companies have had managing directors who did their own things and presented what they were proposing to do in a very cursory way to their board. I do not believe that if we have trust and confidence in each other we will take away any of the creativity or the sense of entrepreneurship. But there will be greater answerability.

Can you give some idea of how the BRC exercise has shaped up? What kind of issue have come up?
We started the exercise by giving the company a fairly extensive check list of what we wanted. And one of the major issues has been presenting a business plan, not only for the year but for five years and backing that up with reasons or back-up data. The second has been demanding that the company present itself against competition on the one hand and spend some time defining the competition. And the third was to endeavour to benchmark itself against others in that business and rate itself. Then also to talk about its new thinking as it moves forward and present itself in terms of profitability and return on capital employed against some goals that have been set by the group.

How often are BRC meetings supposed to happen?
The BRC meetings may take place three times a year. We have created board committees that will do most of the nitty-gritty and, I think, the BRC should confine itself to the most strategic issues and the direction issues of the company and not, in fact, be questioning its monthly MIS. Those are functions of the board committees.
Harvard professor Krishna Palepu recently argued that in developing markets diversified conglomerates make business sense but the supervisory structure for these should be more like those in a venture capital firm or a leveraged buyout firm. In a way this is not dissimilar to a venture capital structure, with one exception. In the venture capital structure the venture capital firm has a representative on the board of that company. Here also we have the same.

But the BRC is a review, which again is by a committee of the board but is separate from a board meeting; it might be considered a committee meeting. It is not very different from the venture capital structure. I have a little bit of experience in the US on the venture capital structure and it is not too dissimilar.

How big an exercise is portfolio restructuring going to be? What criteria will you choose in deciding what to keep and what not to?
Multiple criteria. One is certainly going to be: can we be in the first three in that industry in the country? Secondly, are we willing to continue to put money and managerial resources into that industry to have it continue to be that way? The third is a more serious one, as to whether that particular company or that particular business will provide us with the returns that we are expecting, or the growth that we are expecting. And for the first time, we are putting some measurement criteria in place. This doesn't mean that those that fall outside that will be lopped off. But there is a threshold in terms of company's performance, which has not been there before.

Do some of the companies know that they may not be part of the Tata group?
Some of the companies are indeed concerned about whether their businesses fall within the core businesses or whether, with their performance criteria falling short, they will be considered or not considered.

I have mentioned publicly to the companies that if they do not meet the profitability criteria or the returns criteria, no snap-shot view would be taken, in the sense that if in the year 2000 if they weren't in, then they were out.
We needed to be satisfied that they would grow into that position, not as a pipe-dream but in reality, and that we would work with those companies to have that happen.

How long will this process of weeding out take? The initial weeding out may take maybe 12 months, but the restructuring is an on-going exercise. You may spin off something that you has as part of one company into something else, you may sell, you may acquire. Even GE is going through acquisitions and divestments all the time.

You have set a target of doubling group turnover in four years and doubling net profit in three years. Where will this kind of growth come from? From your existing businesses? Yes, it can. In fact, we tried to show everyone (when we first shared this internally) that we have been doing that, though not consistently. And within the group the call on companies will be, it's great if you can do it in good times but you must do it in hard times.

Have you started being tougher on managements with regard to performance?
At present we have just set out the measurement criteria and, in fairness, everyone has to gear himself to them. Right now, we are getting a lot of denial: we can't do it, it can't be done. So, it's working with those people to say, yes, it can be done.

You say that you want this kind of return or...
Yes. There are many managers saying it can't be done, it can't be done in this business and we're saying yes, it can be done, you come back with a methodology to do it. No, we have not got to the stage where one says that if you can't do it. We will find someone to do it for us.

Among some of the people who joined the group in recent times, there is a feeling of frustration at the slow process of change. Do you get that sense?
To some extent it exists. You have to accept it's there because we are not one consolidated company, we don't represent control ownership, we are bucking a strong tradition and we are doing it at a time when our companies are going through challenges in the market place. So, yes, there can well be this, but I don't believe that is an on-going thing.

Has the image of the Tatas suffered in the battles that you had to fight to create a group?
Maybe, maybe not. It is difficult to say. Certainly some of the internal battles which have taken place - and one won't go into describing them - have dented the external image of the group. At the same time they - whether one wants go accept that or not - were not power struggles. They were either battles of governance, or battles of issues relating to business ethics or whatever, And so they may continue to take place from time to time. Because they have not taken place in Tatas in the past, they have become big issues. But if a Jack Welch wants to part company with Mr. X it happens overnight and it is done. In our context it does not happen and so these have become issues and they have unfortunately dented the image of the group.

If you were to redo some of these things, would you do them differently?
Yes, probably. We would have done it differently. In fact, in fairness, one tried.
Do you get a sense of relief that the pieces that you want to use are all finally in place and the opposition to your plans for the group has more or less died down? I don't think I have a sense of opposition but there is certainly resistance in many areas and you did get the feeling that there was questioning as to why you needed this, it was not necessary. So to that extent I would say that the board is a younger board and is more amenable to the need for change.

Did the priorities you had in mind when you took over in 1991 change as you went along?
No, by and large, no.

Was one of the major issues when you took over pulling the group together?
Yes. One big battle was to try and change the complexion of the group from a loose confederation of many companies into a closer-knit group. We had a number of companies that were Tata companies when they needed to be and were not when they did not need to be.

For example, when a company would go to its bankers, it was part of the Tata group; when it went to seek a new collaboration, the literature spent a long time talking about the Tata group of which it was a part. But after those situations had been achieved - either they had got their lines of credit or had a new partner - the issue of being a member of the Tata group sort of slipped into a lower grade. It also happened when it went to the shareholders or raised capital in the market. Then it was a Tata company - but thereafter it was not necessarily promoting itself as a Tata company.

Four years from now when you lay down your executive positions, the chairmanship of Tata Sons will be a far, far more powerful office than it currently is. Is that a correct assessment?
Yes. I think it would be. But I would not like say that the Tata Sons chairman will be more powerful... Tata Sons will certainly be more powerful.

In the Tata Sons board itself, did the fact that you used to have people who were not fully in tune with your concepts of change slow down the process of change?
Not really. There was more debate on the need for change than we may have in the future. But I wouldn't say that it slowed things down. There was much more need to explain, much more need to debate than what one is doing today. And as it had not happened for many years, there was a greater resistance.

But it wasn't in the Tata Sons board, but at the company level and that may still remain. In Tata Sons, the kinds of issue that might have faced resistant to change (would have been): Do you need a new corporate image? Why do we need to do those kinds of things? But otherwise I wouldn't say there has been any deterring from what we wanted to do.

What do you spend most of your time on now?
Right now, I feel I am not spending enough time on anything. No, I'd say it is a toss-up between Telco and the GEO restructuring kind of thing and the various things that come of it. (Smiles) Right now I think the correct answer to your question will be that I am spending most of my time at Business Review Committee meetings, in terms of the hours of the day.

You've always had the image, correctly or wrongly, of being somewhat of a reluctant businessman. Has this changed over the years? A reluctant businessman?
Yes. No, it has not changed. I don't live, sleep and every waking hour and every sleeping hour think about business.

What's the larger visions of the group that keeps you goings?
A great deal of loyalty to the group. As I said, it is not through personal ownership, it's through a sense of loyalty, I cherish what the group has stood for. It's never been my vision to be the head of this group. It's not something that I had as a gameplan. I really want to see this group retain the premier position it had and, above all, to do it by adhering to the value system that has been there through the years.

There is also a great deal of frustration because you see the national fabric eroding around you, and you wonder whether such a view is realistic and I hope one can prove it somewhere down in history that is was worthwhile clinging to those ideals rather than letting them go.

What is it about the erosion of the national fabric that worries you?
What worries me is that the threshold of acceptability or the line between acceptability and non-acceptability in terms of values, business ethics etc. is blurring.

Has this erosion that you refer to worsened in the last seven or eight years?
Oh, yes. What at one time, or in another country, may be an unacceptable way of doing business, today is almost the order of the day.

If you were to sum up your achievements or your failures in the last eight years, how would you do it?
I have two three things to say. I was made the head of an organization that was very traditional. We had a very visionary chairman before me but organizationally it was still very traditional. In many cases we were resistant to change.

In many cases, we were in businesses that were sellers' market businesses. Therefore, there was un unwillingness to really agree that there was a need for change other than for the sake of change. And therefore for some years changes was fettered by a lot of resistance. The increasing competition in the market place has helped me (unfortunately a little later than earlier) in making it clear that there is a need for change. So, I would not consider myself to have been tremendously successful or as having failed tremendously. I would say I have been moderately successful because there have been changes. The real framework of change is something that we put in place a couple of years ago.

Tata on Tata Companies
Why won't you make TCS a separate company?
I know, the profits from TCS is what helps you make the share acquisition. Yes, because then Tata Sons will just be a non-performing shell.

Does that put a constraint on the growth of TCS?
No, I don't believe it puts any constraint on TCS' growth. The constraint will be its people.

Is there a feeling that TCS has not moved up the value chain?
Yes, Moving up the value chain for a very large organisation like TCS is also difficult. But that is something we are addressing. It will have to be more oriented towards breaking itself up into more definable areas of products, and do more creative work than it has been doing. It would need to be more solution oriented in terms of offering first-rate solutions to its clients. Not that it is not in that business today, but by and large it is still an implementing agency... It would need to gain vertical industry expertise in the industries in which it is operating and that is something TCS at the present moment does not have. There is a unique opportunity to obtain this from within the Tata group; to get industry experience and go out to provide solutions. That's what this is all about. We've been in silos all along.

Are you looking at restructuring the IT businesses?
The IT businesses require to be restructured, not necessarily by merging all together but by trying to ensure that all of them are not trying to be all things to all people and that there is a focus on an area of excellence. And even if multiple IT companies are involved one can be a prime bidder and call on the others, rather than try to create all that capability within itself.

You once mentioned the need for Tisco having a second line of business...
All I was trying to say is that we need to recognize that the steel business is very capital intensive, the return on capital is going to be low, and we will need to do one of two things; either accept that position, in which case the ability of Tisco to generate capital to grow will be restricted, or look at new business lines in which capital has to be invested and Tisco does not grow in the steel industry but grows in some other business.

Tisco Just got out of cement. So what other business do you have in mind?
We got into cement because we had a by-product which was a raw material. We didn't get into cement because it was a business. If we wanted to get into cement as a business, we would have had to invest large amounts of capital, undertake investments in different parts of India and accept that cement was a business we would be in. The next issue is that the business cycle of cement and the business cycle of steel are one and the same, maybe with a little lag.

What business could be synergistic with steel?
It may be synergistic or it may be totally diverse.

What future do you see for Telco? Is it true that Daimler - Chrysler will increase its stake in it?
No, there has been no talk of a higher stake. That I can categorically state.

Has hiving off the car division been seriously discussed?
No, it has not been seriously discussed. If the situation warrants it. - I am not going to sit here and say we will never do it - If it makes sense to the organisation, if it makes sense to the business, we will certainly consider it.

When will it become necessary for Telco to introduce new models?
Once you have taken a decision to be in the car business, you cannot be a one-model car company. So, several variants of the Indica are in the works today and other products will follow.

When can one hope to see the next model?
Hopefully, you will see something as a model at the next auto exhibition in Delhi.
A bigger version? (Smiles) Why don't you wait and see?

When you launched the Indica, you said the price would be critical for it to be competitive with the Maruti 800.
What I have always said is that the largest market is at the low end, which has been dominated by Maruti and we propose to challenge that.

Today the Indica is in competition with the Zen does that alter it's economics?
One model competes with the Zen but another is definitely in competition with the Maruti 800 except that the quantity, or its availability, is low so you might say that the model we have pushed for in popularity is closer to the Zen - in competition with the Zen but with a lower price than the Zen.

The break even for the Indica is 60,000 cars at the profit before depreciation, interest and tax level. What is it at the profit before tax level?
I think 85,000 or 90,000.

What is the logic of Tata Tea's Tetley bid, as big as the Indica project cost?
Our bid is still pending with Tetley. So, I wouldn't want to say much except that the primary reason was to gain an international brand on the back of which we will be able to increase our business in those countries.

Fighting Recession and Internal Resistance

• Ratan Tata's larger vision has been revealed in bits and pieces over the last one and a half years. The sale of Tisco's cement division to Lafarge, the launch of the Indica, restructuring at Telco, a reconstituted board at Tata Sons, top level recruitments, the Tata Code of Conduct and Tata Logo, and BRCs have all come in that time, So has Tata Tea's hunt for a L280 million acquisition of Tetely, the global tea brand. If the acquisition comes through, it will cost the Tatas slightly more than what Indica did.
• His larger vision of a tightly-knit, cohesive Tata group may be realised, but numbers tell the story of a difficult battle during the transition. The eight years since Ratan Tata took over as chairman of Tata Sons have been a period of struggle - against internal resistance to change, the worst recession in recent memory, and above all, globalisation. Peak duty rates in steel have declined over the period from 140% to 25% , and almost every foreign automobile manufacturer has arrived in India. On the face of it, the numbers look good. Since 1991-92, the group's sales have increased by more than 140% and net profits by 102%.
• But masked behind the topline growth is the ravage of the recession in the business of steel, automobiles, chemicals and hotels, In 1991-92 the average net profit margin of the listed Tata companies was 5.73%, second highest out of the list of India's five largest family run groups. By 1998-99 the figure has come down to 4.81%, the lowest. Return on capital employed (ROCE), in the meantime, slipped from 7.63% to 4.66%.
• Most individual Tata companies have shown declining or stagnating return on capital employed figures. The most glaring differential is in the case of the Telco which has gone from an ROCE of 32.87% to 6.88% . That explains the new emphasis on tighter performance measures and accountability.