SUSTAINABILITY PLAN [2010]

PREPARED BY: NICHOLAS ANASINIS MARIA ISMAIL PATRICIA JURCA LEI YANG

ASPEN INSTITUTE CASE COMPETITION 2010

EXECUTIVE SUMMARY

At the crossroads of becoming a truly global company, the Tata Group is faced with the challenge of managing international growth and expansion while sustaining the values of the ‘Tata way,’ which has made it an exemplar for corporate social responsibility in India. Because of Tata’s long history of corporate social responsibility, they are well positioned to leverage their capabilities within a slightly redefined understanding of sustainability within a global context.

Achieving clarity in the connection between purpose and profits and demonstrating measurable value of sustainability initiatives is going to be increasingly important under the greater pressure from external stakeholders, particularly shareholders. Although Tata has been involved in a number of sustainability initiatives and has even incorporated measurement systems like GRI, carbon mapping, and the Sustainable Human Development Index, the demonstration of the financial value creation of these initiatives has not been evident. The recommended ten year sustainability plan outlines the three most important objectives, along with providing economic rationale for undertaking those initiatives.

The three key strategic objectives recommended to make sustainability a driver for Tata’s global expansion are:

Establishing business practices that dictate a holistic approach to sustainability

Building a global Tata brand that embodies the Tata values

Incorporating sustainability into Tata’s acquisition strategy.

These strategic initiatives were determined based on the changing needs of the stakeholders in the wider global landscape (Appendix 1). The recommended strategy will improve the Tata Group’s ability to raise capital as well increase the stability of its valuation in market swings. In addition, Tata will be able to enhance the brand value and increase its access to stakeholders globally.

The specific action plans associated with these strategies will leverage Tata’s current capabilities through TQMS (Tata Quality Management Services) and TCCI (Tata Council for Community Initiatives) as well as the skills and expertise of its various business units.

The ten year sustainability strategy outlines the action steps to achieve these objectives while attaining a positive EVA (Economic Value Added) over the period specified. This is done through taking into account the impacts of sustainability initiatives on various value drivers of the business.

Implementation of these strategies will require a leader who has sound understanding of the global economy and is deeply committed to the pursuit of sustainability.

DEFINTION OF SUSTAINABILITY Moving forward, the Tata Group will have to evolve its current definition of sustainability to incorporate a more holistic approach to sustainable value creation. A holistic approach, by being cognizant of the challenges and opportunities of globalization, will provide a deeper understanding of sustainability as it applies to the Tata Group. Having a holistic approach would dictate:

Being mindful of the business, social and environmental impact of products and processes throughout their lifecycles; being mindful of all the externalities involved (always answer the question: is solving one problem creating another), and resolving the tension between its values and requirements of this approach (which might conflict with Tata’s traditional approach of not dictating its values to others).

Emphasizing combining business skills with sustainability as opposed to philanthropy.

Consistent application of sustainability standards across different companies within the group.

KEY STRATEGIC OBJECTIVES FOR SUSTAINABILITY

The Tata Group must make sustainability the strategic driver for their global expansion. Sustainability should not just have “feel-good” benefits, but must create measurable value. By understanding the relationship between sustainability and the business value drivers (Appendix 2), Tata’s economic viability will improve. The recommended strategy will improve the Tata Group’s ability to raise capital as well increase the stability of its valuation in market swings. In addition, Tata will be able to enhance the brand value and increase its access to stakeholders globally.

Tata’s Sustainability strategy will center around three key principles:

1. Establish business practices that dictate a holistic approach to sustainability

As Tata expands into the global marketplace, it will face increasing pressure from external stakeholders to demonstrate how sustainability affects various aspects of its business. More developed countries like the U.S. may have stakeholders, specifically consumers who demand a whole-system perspective on social and environmental concerns. For this reason Tata will need to implement a comprehensive life cycle approach to its value chain. It has already begun this process through its climate change initiatives.

Inculcating the concept of sustainability in the everyday operations of the business would allow these businesses to leverage their unique capabilities to address sustainability issues pertaining to their area of expertise. This would enhance employee skills as well as improve employee morale. This would lead to the development of a business model in which corporate social responsibility is not only an act of philanthropy, but actually acts as a value driver. The abatement strategies resulting from Tata’s climate change initiatives have already demonstrated that new business opportunities exist and arise when a sustainability perspective is applied. Tata will need to ensure that all business units undergo this change.

More specifically, Tata will need visibility of the social and environmental practices of every supplier within the supply chain. For instance, as Tata rolls out its carbon mapping to all businesses, it should also include all the members of its supply chain for each business to calculate the true carbon footprint. In the past, Tata has not imposed its values onto business partners. However, over time Tata will not only need to gain a deeper understanding of the values of a more diverse stakeholder group, but it will need to be cautious of how practices of a supplier will affect the value of the entire company. It is likely that Tata will need to be more demanding and critical of its supply chain. Initially, Tata may only ask suppliers to achieve specific criteria, but long term Tata will most likely need to mandate that all suppliers meet stricter standards.

Similarly, Tata must identify the regulatory environment and industry standards of every market it is targeting. Rather than just meeting requirements as needed, Tata should strive to exceed those regulations and standards and apply them universally within each relevant business sector. This will provide Tata with flexibility and increased speed to new markets. Meaning, if Tata’s business sectors are setting the industry standard, time will not be spent trying to achieve compliance when entering a new market. Tata may also be able to pursue tax-savings for their sustainable initiatives. Although Tata has not traditionally taken this approach, it will also be beneficial for Tata to identify and leverage opportunities that drive policy development. Tata’s business units will also need to devise an approach that accounts for possible externalities when addressing perceived social and environmental needs and problems. This capability will help Tata minimize potential backlash and may even result in even more disruptive innovations. This approach may have aided Tata in responding to critics of the Nano who accused Tata of contributing to emissions and congestion.

2. Build a global Tata brand that embodies the Tata values. In India, Tata is a familiar and well-respected organization. As Tata enters into the various target markets it will need to build its reputation and brand recognition. A highly valued brand identity will create value for Tata by not only driving revenues, but also by reducing risk as referred to in The Pathways to Value (Table 1).

When Tata enters new markets it must build its reputation internally with the new employees. These employees may not be familiar with Tata’s social initiatives in India and may not understand the value of those initiatives within the Tata Group. Tata must be proactive in fostering a culture where employees care about a larger purpose as well as feel that Tata’s values align with their own. TCCI (Tata Council for Community Initiatives) and TQMS (Tata Quality Management Services) will play a critical role in facilitating this cultural and value alignment.

Tata will need to create a multi-pronged approach for external brand building. Since Tata has built its reputation in India on addressing local community needs, a similar tactic should be applied to foreign markets. When addressing this need, Tata should develop strategic partnerships with other businesses, NGOs and government agencies that will provide credibility and positive brand affinity. Tata can then use the success stories created by these activities as the messaging behind a traditional marketing and advertising campaign.

Identifying the right successor to Ratan Tata will also help the Tata Group build a global brand that embodies its values. The future chairperson of the Group must understand the more holistic definition of sustainability and be able to execute Tata’s strategy globally. Because the global sustainability strategy requires a change in the execution of the Tata values, the new chairperson must also have a global, community based perspective. 3. Incorporate sustainability into Tata’s acquisition Strategy

Acquisitions have been an important part of Tata Group’s growth strategy. Because of this, it is important for the Group to incorporate criteria for ‘sustainability fit’ into their existing acquisition strategy to help screen target companies. This would ensure lower post acquisition integration costs in collective sustainability initiatives or mandates as well as reduce risk to reputation.

TEN YEAR SUSTAINABILITY ACTION PLAN

10 year sustainability strategy: Making sustainability the strategic driver for Tata's global expansionSTRATEGIC OBJECTIVE ACTION STEPS

Establish business

practices that dictate a holistic

approach to sustainability

Supply Chain Initiatives Time Governmental Initiatives & Industry Standards Time Product differentiation, Product

Development, Innovation Time

Identify best practices across business sectors 3-4

Understand regulatory environment and industry standards in target markets

2-3

Identify companies within the Tata group which are leaders in sustainability oriented product and process differentiation and innovation

0-1

Develop criteria for supply chain audit 4-5

Establish business practices to exceed the most stringent regulatory requirements and industry standards

3-7Identify strengths/capabilities that make that differentiation and innovation possible

0-2

Supply chain mapping: identify all suppliers 3-4

Apply these superior Tata standards consistently across different Tata companies

7…

Develop a replicable model for product differentiation and innovation which includes a filter for being mindful of possible externalities from different perspectives when articulating solutions to unmet social/environment needs in target markets

2-3

Conduct supply chain audit 5…

Identify and leverage opportunities to partner with government for policy development incorporating Tata's superior environmental and social standards

7…Utilize this model to improve product differentiation, development and innovation

3…

Encourage suppliers to adopt best practices 5-7

Mandate suppliers to adopt best practices 7…

Entities Involved

TQMS, Individual Tata Companies & their respecitve suppliers

TQMS, Individual Tata Companies, Target market governments, Lobbyists TQMS, Individual Tata Companies

STRATEGIC OBJECTIVE ACTION STEPS

Build a global Tata brand

that embodies the

Tata values

Internal External Leadership Design 'Employee Sustainability Programs' aimed at the local community of different target markets to engage Tata employees there and achieve cultural allignment and shared value entrenchment in Tata's global employee base

Provide employees opportunities to work on self-identified sustainability projects, on paid company time, which are alligned with their unique technical skills and competencies

Celebrate employee success sustainability stories

3…

Identify a major issue within each target market and focus on which issue can be addressed with current Tata capabilities (utilize model for product/process innovation & differentiation)

3-5Identify a successor to Ratan Tata to take the Tata group global while embodying its values

0-2

Identify and engage strategic partners (business, NGO, government) to affect change by providing access to required resources/capabilities in the target market

5-8

Continue to have commitment to sustainability and embodiment of the leadership protocol as key criteria in succession planning for all key positions

0…

Celebrate success of sustainability initiatives in the target markets through brand building advertising campaigns

8…

Develop and execute sustainability training programs for key executives that promote a holistic approach to sustainability and address the implications and opportunities of truly making Tata a global brand from learnings of the initial sustainability strategies

7- 10

Entities Involved

Employees at all Tata Companies, TCCI. Human Resources

Communities in target markets, TCCI, Strategic partners, Management of Tata Group, Individual Tata Companies

Human Resources, Leadership at all levels within the Tata Group and companies

Incorporate sustainability

into Tata's acquisition

strategy

Criteria to evaluate 'sustainability fit' of the target acquision Post Acquisition Sustainability Implementation

Find sustainability exemplers by sector

0-3

Implement post-acquision TQMS and TCCI processes/initiatives to the acquired company e.g. established frameworks to measure sustainability impacts such as the Tata Index for sustainable human development or abatement strategies for climate change

Identify strengths/capabilities that make that sustainable model work Compare these strengths/capabilities with the stregths of an equivalent Tata companyIdentify the gaps to highlight the strengths needed by the Tata company to improveDevelop and implement benchmarked practices in the company - Identify challenges faced in implementation - In hindsight, identify what features/characteristics of the company played a key role in making this implementation challenging

3-5

Use these features/characteristics as a screening criteria for future acquisitions in that industry - Learn with each subsequent acquisition and refine 'sustainability fit' criteria

5…

Entities Involved TQMS, Individual Tata Companies, Management of Tata Group TQMS, TCCI, Individual Tata Companies

Notes: Time is in years with '…' representing continuity in future years till year 10 i.e. 2010

VALUATION

An action plan must be aligned with shareholder values in order for it to succeed, especially in the global market. The link between purpose and profits must therefore be clearly defined. Sustainability, as with any other strategic initiative sets the course for achieving shareholder value. The link between purpose and profit for a sustainability strategy can thoroughly be articulated through Economic Value Added (EVA), or the economic profit gained to shareholders from the pursuit of a project or implementation of a strategic initiative.

Economic value added is the best approach for valuing the effect and magnitude of a strategic initiative. EVA valuation takes into account the people, system of resources and performance metrics, and strategy to measure the effect of value retention and creation. It is the integration of these value spheres that ultimately determines the overall benefit of the strategic initiative. EVA is the measure that is most closely linked to shareholder value. Specifically, EVA empowers employees and makes them feel like owners. When instituting sustainability initiatives, people and culture become as important as net present value or discounted cash flow calculations.

Tata’s action plan over the next 10 years aims to increase return on net assets and decrease their cost of capital. Based on reasonable assumptions derived from the 10 year action plan, we can see from the below charts that Tata’s sustainability initiatives will create shareholder value.

- Economic Value Added (EVA) = [(EBIT x [1 – Tax Rate]) / Net Assets – WACC] x Net Assets- In order to calculate total EVA for Tata Group, Tata's public companies were used as a proxy for Tata Group, as they provide the only

obtainable data. The weighted-average contributions of each sector were applied to Tata Group’s EBIT margin and net assets as a percentage of total assets. To obtain the appropriate sector values, the weighted-average contribution of each public company was applied to its sector to obtain EBIT margins and net assets. EBIT margins and net assets were calculated using a 5-year historic average.

- Tata Group’s tax rate was assumed at India’s flat corporate tax rate of 34%.- Weighted-average cost of capital (WACC) is initially assumed to be 18%, based on comparable WACC values of similar size and business

practices with an added premium for risk associated with the emerging market, country-specific risk.- Aggressive: Cost savings, revenues, synergies, and reduced risk exceed expectations, and/or accelerated implementation of strategic

initiatives. Tata will achieve 10% WACC in 10 years to make them more competitive in global market.- Conservative: Minimum cost savings, revenues, synergies, and reduced risk expected from strategic initiatives.

CONCLUSION

Until now, Tata group’s community investments were not viewed as paying off for twenty to twenty five years. As Tata increases its global presence, the pressure to generate positive economic value in less time will rise. By establishing business practices that dictate a holistic approach to sustainability, building a global Tata brand that embodies the Tata values and incorporating sustainability in Tata’s acquisition strategy, Tata group can ensure a strong and lasting connection between purpose and profits. Executing the recommended ten year sustainability strategy will result in an increase in the economic value added of the Tata Group over the ten year period through the effects of sustainability initiatives on various value drivers of the business.

APPENDIX 1: STAKEHOLDER ANALYSIS

Stakeholder Current Future

Employees - Loyalty, ownership, commitment to the company

- Cultural alignment and value entrenchment (TPS)- Unions/labor issues (new and unique)- Volunteerism passion-- ??- HR Policies/benefits+ More access to skilled human capital+ Opportunities to learn

Shareholders - Patient capital - Pressure for short-term gains

Clients/Customers - Brand knowledge- Customer loyalty

- Brand knowledge?- would Tata brand have same impact globally?

- More demanding sustainability impacts/initiatives+ Sophisticated demand- Porter’s diamond model

Government - Ahead of regulations - More regulations (likely in developed countries)- Trade policies/barriers- Tax laws/subsidies+ Opportunities to partner with gov’t for sustainable

policies Community - Local Indian initiatives - How do you define community in other countries?

- Will be much more diverse (different needs, priorities, cultures)

+ Encourage positive trends+ Impacting more people

Suppliers/Business Partners

- Don’t enforce the values on others- Aware and familiar with values

- Need visibility of the whole supply chain- Likely to be held accountable for any part within

(Nestle’s Kit Kat)+ Opportunities to learn from best practice in the

supply chainTata Management - Strategic clarity and vision- dilution

- Increased management complexity+ Building a global management team

APPENDIX 2: PATHWAYS TO VALUE

Value Driver Pathways to Value Description

Revenue Growth

Product differentiationProduct developmentInnovation

Tata's Nano and Tata Swatch are existing examples of these pathways to value. By applying a sustainability lens to the various businesses within the Tata Group, allowing them to leverage their existing business capabilities, more opportunities like these will emerge to boost revenue growth.

Brand reputation

Having a consistent approach and commitment to sustainability across the Tata Group to make sustainability a stronger value driver of the brand reputation. Building the brand reputation protects market share, attracts new customers and/or allows Tata business units to create a price premium.

Margin Growth

Efficiency

Leverage the existing capabilities of TQMS and increase its role in the Tata Group to identify, promote and replicate best practices globally. This would result in increased efficiency to reduce unit costs and, often, improve environmental performance.

Staff motivation and retention

Build employee morale through the Employee Sustainability Programs that utilize and enhance employee skills, reducing costs of employee turnover and increasing productivity.

Reduce Capital Expenditure

Asset efficiency and effectiveness

Leverage the existing capabilities of TQMS and increase its role in the Tata Group to identify, promote and replicate best practices globally that are focused on reducing unncessary demand for fixed assets, improving productivity and environmental performance.

Risk Reduction

Security and quality of supply chains

Establish supply chain practices that dictate a holistic approach to sustainability keeping in mind the business, social and environmental impact of product and processes throughout their lifecycle.

Reduced regulatory riskMitigate risk by identifying most stringent regulatory requirements and industry standards in all target markets and exceed these standards across all business units.

Reduced risk to reputationNegative publicity, consumer boycotts, investor pressure and risk from regulatory changes.

License to operate

Maintain legal and informal acceptance for how the company makes profit. Tata is already an exemplar in this regard in India. It must be even more conscientious of these issues when going global.

Duration of Competitive Advantage

Market shaped to company's advantageEarly mover on emerging strategic issue

By focusing on exceeding the most stringent government regulations and industry standards, Tata can define new and advanced industry standards which would act as barriers to entry.

Recruitment Attract high-quality employees through enhanced reputation globally.

Access to key financial resources and markets

Enable company to maintain or increase access to key resources: financial captial, commercial and non-commercial partners, planning approvals, suppliers and source market, markets for sales, M&A targets.

Reduced Cash Tax Rate

Reduced payments to government

Reduce tax payments through superior sustainability performance, for instance through avoided carbon taxes, particularly in Tata's Energy, Chemical and Materials business sectors.

Reduced Cost of Capital

Reduced cost of financial capital

Achieve a lower risk rating in capital markets leading to improved access to finance at a lower rate by undertaking risk reduction strategies (from above).

Adapted from ForumForTheFuture.org, Pathways to Value