Executive summary




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Tata Group Sustainability Strategy



Mathew Ashley

Bill O’Brien

Rachel Reiter

Kevin Richards

April 12, 2010



EXECUTIVE SUMMARY

Our consultancy recommends that Tata Group (Tata):



  • Refine its internal definition of sustainability,

  • Create a separate subsidiary to coordinate, manage, communicate, and expand sustainability efforts across every business unit, and

  • Establish a market-specific global strategy tailored to the unique challenges and opportunities of each country and business.

These changes will allow Tata to optimally position its economic, social, and environmental sustainability efforts while addressing the company’s growing global presence, the evolving definitions of sustainability, and the increasing demand from stakeholders for measurement and transparency. Internally, the company will develop a concise definition of sustainability and a “Sustainability Credo” to guide corporate innovation and evaluation efforts. A key element of the ten year sustainability strategy recommendation is the creation of Tata Sustainable Solutions (TSS), a wholly-owned subsidiary that will allow the company to centralize disparate initiatives and provide role clarity, financial and measurement transparency for all Tata companies. While the structure of TSS will allow the company to raise additional capital and expand its sustainability efforts, TSS will be closely integrated with every Tata company, ensuring that the culture of corporate social responsibility continues and that the unique perspective and innovations from each company are nurtured and strengthened. This subsidiary will allow Tata to formalize specific initiatives and goals, putting a formal framework in place for leadership and organizational continuity. The organizational structure and operating processes of TSS will be outlined in detail in our recommendations.

The sustainability strategy includes a number of voluntary initiatives tailored to the unique circumstances of Tata’s diverse businesses and its global areas of focus. Our recommendations include a ten year timeline, valuations, and specific implementation strategies for Tata’s core lines of business. Key elements of the strategy include entry into sustainability software consulting, coordination between the Chemical, International, and Motor companies to create End of Life Vehicles (ELV) and Cradle to Cradle (C2C) processes, and expanded and increased measurement of company efficiency efforts.


SITUATION ANALYSIS


Known as progressive and forward thinking in its Corporate Social Responsibility (CSR) initiatives for over 140 years, the Tata Group’s past CSR initiatives have fallen under four pillars: 1) Philanthropy, 2) Emergency Response, 3) Specific Community Initiatives, and 4) Quality Management Practices. Supporting these pillars are a variety of programs that have organically developed over the years to create an internal structure for executing the organization’s sustainability efforts. This situation occasionally creates challenges in measuring effectiveness and economic benefits of CSR, which obscures the return on investment (ROI) and could diminish future funding.

The ten year sustainability strategy is designed to complement the business growth of the organization. This global growth will focus on the following industries: hotels, automobile, steel, software consulting, energy, chemicals, tea, engineering, and communications. It will target the following markets: Brazil, Canada, China, Gulf Cooperation Council (United Arab Emirates, Saudi Arabia, Oman, Bahrain, Kuwait, and Qatar), Germany, the Netherlands, South Africa, Sri Lanka, Thailand, the United Kingdom, United States, and Vietnam. To continue its global growth while maintaining its practiced sustainability, Tata needs to address creating and capturing value, while addressing uncertainty in its global sustainability strategy.


Defining Sustainability for Tata’s Future


In order for the ten year strategy to be developed, the definition of sustainability itself needs to be refinement. Tata’s current definition of sustainability was developed as part of a series of group-wide meetings. Although Tata has had a great deal of success in preserving a culture of sustainability, the rapid global expansion of the company threatened to dilute the power of this working definition. Our team proposes a refined definition of sustainability: “Corporate Sustainability is a local, national, and global endeavor for creating long-term economic, social and financial growth for the enterprise and its stakeholders.” This definition would be easier for Tata employees to internalize and will allow for interpretational flexibility, as there are continually evolving worldwide definitions of sustainability.1

Beyond a basic corporate definition, we recommend Tata promote the continuity of sustainability innovation through a set of guiding principles, a “Sustainability Credo”, that provides employees with a roadmap for evaluating social business practices. The Credo below provides a concrete, measureable way to define the operation and implementation of sustainability initiatives.

Tata must first seek parity and sustainable best practices across their collective group of companies. Points of parity must be established to measure the success of sustainability efforts over the next ten years. The Tata Group must leverage its areas of expertise across all businesses going forward to enable the sustainable development of the entire group. These efforts include consistent employee equality and management training programs, centralized innovation practices that look at all major businesses, formalized water and waste conservation policies for companies operating in particular regions, Leadership in Energy and Environmental Design (LEED) certification for all new construction, and energy efficiency initiatives for all existing buildings.

Figure 1: Tata Group Sustainability Credo




DECISION ANALYSIS


A thorough consideration of the impacts of the new TSS structure and its initiatives on both internal and external stakeholders was conducted in the development of the recommended ten year sustainability strategy. The current structure and coordination of sustainability initiatives was a starting point for our analysis. After reviewing the current structure and discovering a lack of continuity across business units in sustainability tracking and reporting, our consultancy identified several options for creating a structure that would allow implementation of the sustainability strategy. These options included: 1) scaling back social initiatives, while focusing on the environmental efforts, 2) maintaining current structure in India but giving directly to charities in expansion markets, and 3) creating a subsidiary that houses the communications, tracking, and long-range sustainability efforts while allowing individual business units to maintain ownership of short-term projects with an Economic Value Added (EVA).

Critical issue consideration included ensuring leadership continuity, appropriateness for global growth, sensitivity to shareholder reaction, meeting coordination challenges across the entire enterprise, maintaining the corporate culture and commitment to sustainability from the employee level through leadership, fostering innovation, and leveraging core competencies. External considerations were also considered including impact on the ability to raise capital, relationships with local governments and regulating bodies, Non-Governmental Organizations (NGOs), and local community members.


Figure 2: Decision Analysis Matrix


A strategy suggesting elimination of social initiatives would be contrary to Tata’s vision but would address short-term investor ROI concerns. This option would still address Tata’s need to meet previously set climate change goals by diverting the focus from social to environmental issues. Our consultancy concluded that one of Tata’s core competencies is its CSR leadership, thus the first option was eliminated. The second option included philanthropic giving directly to charities and has several advantages; this approach would raise Tata’s profile with local NGOs and allow for seamless global expansion. However, this option fails to leverage Tata’s leadership and expertise in CSR. Reporting and measurement metrics would still be an outstanding issue with this approach as individual charities may or may not have the capabilities to quantify their impact. The recommended option, development of a wholly-owned TSS subsidiary, addresses the internal business challenges while remaining sensitive to Tata’s external stakeholders.


PROPOSED TEN YEAR STRATEGY

Creation of “Tata Sustainability Solutions” (TSS)


Tata currently has four “pillars” of sustainability within the organization – Tata Trusts, Tata Relief Committee (TRC), Tata Council for Community Initiatives (TCCI), and Tata Quality Management Services (TQMS). Tata also has individual “think tanks” (such as the Tata Chemicals Innovation Center) and initiatives each business silo, with annual groupwide meetings devoted to sharing best practices. The individual responsibilities of TCCI and TQMS overlap, although TCCI’s functions are more organic and less rigid than the TQMS process. This organizational structure can be rightly credited with maintaining Tata’s cultural core values. However, much of Tata’s sustainability measurement is ad hoc. An all-encompassing sustainability report is not currently being produced, leaving uncertainty around the funding and returns of Tata’s sustainable investments. Finally, this loose “four pillar” structure is likely to become harder difficult to maintain and navigate as the company’s global growth continues.

One solution that would allow Tata to continue sustainability in its rapidly-expanding operations is the creation of a company subsidiary devoted to social and environmental stewardship. This subsidiary, TSS, would function like any other Tata business unit (Tata Motors, Tata Chemical), except that it would operate at first as a cost center/support function rather than a profit center. TSS would centralize a number of company functions, including educational trusts, TRC, and TCCI. The subsidiary would have a number of key functions (see Exhibit 1 in Appendix), including internal (and eventual external) consultation support for sustainable initiatives, a division for social projects that do not meet traditional definitions of EVA (as determined by TQMS), intra-company knowledge sharing and training functions, a cross-functional “innovation center”, a financial reporting & analysis and auditing unit (which would produce an annual sustainability report), and an internal/external fundraising team. Some advantages of this arrangement would include:



  • Centralized Consulting Support for All Business Units. TSS would have a heavily staffed and funded group ensure that sustainability opportunities are promoted, monitored, and cross-utilized between Tata businesses. In the medium-to-long term, this same consulting function could be used externally to provide the same services as consulting firms such as Blu Skye and Domani, effectively monetizing a Tata core competency and providing funding for future internal sustainable initiatives.

  • Increased Transparency. TSS’s reporting function would utilize outside auditors and consultants to validate its numbers. Its social and environmental metrics would cross all Tata organizations. Capitalization and financial information would be key to providing outside stakeholders (especially shareholders) with a transparent view of funding and returns for sustainability projects.

  • Financial Independence. The new subsidiary would be funded through a “pool of funds” approach. This is analogous to US bond covenant contracts for dividend payments. Just as bondholders want to control how profits are paid out of the firm, shareholders who are skeptical of financial returns on sustainability would contract with Tata’s management to ensure that cash is infused into the subsidiary after certain profit and dividend/stock buyback criteria are met. This would continue the movement towards transparency in finances and satisfy all shareholder groups (those who want the company to focus on sustainability regardless of profit and those who are concerned about firm use of excess funds) and would ensure funding reserves for sustainability in recessionary times.

  • Management Development. Management development would involve a significant rotation in this subsidiary, and training on relevant sustainability practices and measurements would be provided. This would not only ensure top managerial talent in the group but also continue to spread ideas and best practices throughout the organization after employee rotations are complete.

  • Fundraising Ease and Scalability. Tata has established itself as a forward-thinking company that has often predated the Indian government (a major Tata shareholder) in key worker protection policies. With the increased transparency of TSS, Tata could organize funding from employees, outside investors, and government agencies. This fundraising power could help TSS duplicate the rapid growth of Tata’s other lines. TSS management ability, knowledge, and continued success help other donors maximize the social and environmental impact of their contributions.

  • Strategic Continuity. Creating a separate business subsidiary and a document with shareholders/stakeholders that details the funding and reporting processes for TSS would ensure that the company’s sustainability initiatives themselves are clear throughout the organization and allow for quick implementation in the event of a CEO leadership transition.

  • Consistency of Business Practices. Tata will need to maintain clear and consistent treatment of employees, business partners, and NGOs in all of its worldwide markets. TSS would maintain these standards and modify them with the Group Executive Office (GEO) and Group Corporate Center (GCC).


Local Sensitivity with Global Reach


Once the new company’s sustainability support structure is in place, business unit management (in collaboration with TSS) can begin exploring initiatives that reflect each unit’s target market need, their unique business expertise, and the future direction of sustainability within the community. Although these initiatives will be tracked in aggregate by TSS, the vast majority of the initiatives (with the exception of certain “Social Works” projects) will reside on the books of each business and must pass the same EVA analysis as any other project. The determination of what constitutes and EVA-supported initiative versus traditional social philanthropy will be determined by the TQMS process.

Our group has several project proposals for Tata management to consider when implementing the ten year plan. These projects resulted from a global opportunity analysis of Tata’s twelve target markets (see Exhibit 2 in Appendix). The unique sustainability needs of each region were considered in our proposals; for instance, the US and Europe already have numerous social welfare programs in place, so the focus in those areas was placed on environmental opportunities. The political risks and barriers involved in certain initiatives were weighed as well (for instance, the Chinese government reaction to a heavily-advertised worker rights program must be carefully considered).


STRATEGIC PLAN IMPLEMENTATION & TIMELINE


Specific EVA and Net Present Value (NPV) supported initiatives for consideration include:

  • Leveraging Tata’s CSR core competency into a sustainability software consulting practice,

  • Increase Tata Tea’s competitiveness by formalizing sustainability efforts through Rainforest Alliance Certification,

  • Efforts to reduce energy usage through conservation efforts in the hotel chain and through supply chain management, and

  • ELV initiatives for Tata Motors.

The framework needed for successful sustainable expansion will include the new Sustainability Credo, the creation and staffing of TSS, and management of internal sustainability practices in Tata offices and businesses across the Tata Group. Our action plan to implement the ten year sustainability strategy includes short and long term steps to reach our goals (see Exhibit 3 in Appendix for assumptions, additional sources, and financial projection).


Present


  • Implement the new Tata Sustainability Credo through a multi-faceted corporate communication process including CEO and business unit communications/ training in town-hall meetings, allowing for employee engagement and input.

  • Legally establish TSS as a separately capitalized corporate subsidiary. Draft rules governing the excess profit criteria from each business unit that will fund TSS expansion in future years. Collaborate closely with key shareholder blocks on these rules.

  • Form a cross-company task force, including senior executives, to validate that all internal sustainability opportunities have been identified and explored.

    • In collaboration with senior management, establish rules for equitable employee treatment across all countries of operations, building on current TCCI initiatives. Standards may not be equal across all countries, but should be favorable compared to local standards, especially in the case of less developed countries.

  • In partnership with the Taj Hotel chains in the US, Europe, Sri Lanka, Malaysia, and South Africa establish a long-term plan to move beyond the current goal of EARTH Certification. Immediate conservation steps can and should be implemented in the targeted hotel locations, with a two year or less payback period. Conservation areas include heating/cooling modification for vacant rooms, warm wash linen cleaning, florescent lighting, and water and solid waste conservation.

  • Expand pilot program to reduce carbon footprint to additional steel plants beyond the Port Talbot plant site. Add five plants per year in order to achieve 20% carbon reduction goals by the year 2020. Conservation efforts can be rolled out in current and emerging markets.

    • Years 1-5: India and Europe

    • Years 5-10: Expand to include Asia, Thailand and others

Year 1


  • Upon establishment of TSS, Tata’s social philanthropic efforts should be given continued prominence in the new organization. Possible areas for expansion include water reclamation projects in new markets, cell phone recycling and donation programs through initiatives with key consumer facing partners, and driver safety outreach programs to complement car insurance businesses. These initiatives can be further developed through TCS’s new sustainability software initiative beginning in the second year.

  • Implement the Tata Tea Group’s new global strategy, including the transparent reporting of ethical sourcing through the Rainforest Alliance Certification for both its Western European and North American tea products over the next five years to remain competitive with industry leaders. “Nine in ten Americans say that the words conscious consumer describes them well and are more likely to buy from companies that manufacture energy-efficient products, promote health and safety benefits, support fair-labor and fair-trade practices and commit to environmentally friendly practices.2

    • In the effort to become leaders in the sustainable packaging of tea, Tata Tea must compete with industry leaders, such as Green Mountain Coffee Roasters’ Life-Cycle Analysis, through their tea product, which is sold in a portion pack made from renewable materials.

  • Tata Power should consider diversifying its energy mix and develop strategies to meet the expanding demand for power over the next ten years, as coal currently provides 68% of the electricity.3 Unfortunately, the pay-back period for coal alternatives cannot be addressed in a ten year span due to unpredictable renewable energy technology improvements and government regulatory barriers.4 Tata Power must begin working with government stakeholders and exploring the possibility of developing alternative energy technology. Central to this effort are carbon footprint reduction opportunities through the use of nuclear, wind, solar and hydro.

Year 2


  • European Union (EU) standards have expanded to include mandatory ELV processing for vehicles. Anticipating this trend in other countries, Tata Motors should undertake the development of a complete ELV system in India and Asia. Tata would partner with Tata Chemical and Tata International to create this process, splitting the proceeds with consumers.

  • Expand current supply chain management initiatives to include additional trucks and trailers in growth markets to decrease diesel fuel consumption and meet carbon footprint, utilizing Tata International expertise.

  • The sustainability software consulting market predominantly revolves around Enterprise Carbon Accounting (ECA) software. Tata Software Consulting should develop a strategy to enter this market, engage its existing customer base, and consider expanding this market to include social sustainability measurement (a Tata core competency). The ECA market is estimated to be $7 to $9 billion with the highest concentration in North America and the EU.5 TCS should determine whether the software should be developed internally or purchased externally.

Year 3


  • The three year old TSS organization should seek to monetize its sustainability implementation best practices by looking for opportunities to serve as external consultants.

  • Pursue longer-term, higher cost sustainability certifications including LEED building standards and Fair Trade certified products and standards.

Year 4-10


  • The goal of this longer timeframe is to get high value sustainability certifications for Tata’s businesses.

    • Compared to sustainability reporting leaders Green Mountain Coffee Roasters Tata Tea does not adequately address how they source their raw materials in an ethical manner. Tata’s competitor, Lipton, has certified all its Yellow Label tea bags sold in Europe by Rainforest Alliance. Tata Tea’s long-term goal for the last five years of their ten year strategy should be to reassess their supply chain in order to get Fair Trade Certification for their products. The increased use and reporting of Fair Trade goods will allow Tata to measure, manage and report on the scope of ethical methods in their sourcing.

    • LEED certification for all Taj hotels.

    • C2C certification for Tata Motors, enhancing the existing ELV processes discussed earlier.

    • After the TSS is established, revenues can be used to support long term development initiatives including water purification, education, and health projects in developing markets.

VALUATION


All of the costs associated with the creation and staffing of TSS, along with the costs and benefits associated with our specific global strategy recommendations, have been incorporated into a ten year valuation model. The assumptions in this model were necessarily broad, as many of these initiatives are new ideas in new markets with uncertain demand. However, empirical research and reports were used as sources whenever possible, and in all other cases assumptions are documented in relation to financial projections (see Exhibit 3 in the Appendix). Two key assumptions in the financial modeling should be clarified; given Tata’s conglomerate nature (both in geography and line of business), Company-wide required rates of return estimates were not feasible and our analysis uses a range of discount rates in order to gauge the sensitivity of that particular assumption. In addition, the brand enhancement of Tata is a key assumption. Rather than randomly choosing one of the many brand valuation techniques available (revenue multiples, % of advertising spend, marketplace share of voice), we estimated the brand valuation needed to achieve break-even financials at key points in the ten year timeframe. In this way, a management “gut check" of the brand value’s reasonableness can be conducted. (see Figure 3 below and Exhibit 3 in the Appendix)

Figure 3: Strategic Plan Timeline



Figure 4: Key Risks of Recommendation



CONCLUSION


Our strategic recommendations for Tata are intended to address all of the organizational, cultural, strategic, and operational considerations that a ten year sustainability strategy would necessitate. Specific sustainability initiatives need strategic support to flourish, and the creation of TSS would be useless without innovation and creativity to fuel its growth. With a new definition of sustainability, a framework for growth and transparency, and specifically tailored global strategies, Tata will be ideally positioned for the next ten years to sustain its culture and evolve.

APPENDIX

Exhibit 1: Organizational Chart (Current & Proposed)





Exhibit 2: Timing, Difficulty, Impact, & Market Risk



Exhibit 3: Valuation Model




1 University of Reading, http://www.ecifm.rdg.ac.uk/definitions.htm.

2 Makower, Joel. Strategies for the Green Economy. 2009.

3 World Nuclear Association. http://www.world-nuclear.org/info/inf53.html. March 2010.

4 Lusk, Phillip. Nuclear Power Plant Electricity. http://www.nirs.org/neconomics/nuclearpowerplantelectricitycostslusk.pdf. April 2009.

5 http://techcrunch.com/2009/09/08/charts-ibms-software-led-margin-expansion/



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