How Ratan Tata's strategies panned out for Tata Steel

In the first quarter of 1992-93, when Ratan Tata was still new to his role of Tata Steel chairman, the company had posted a meagre profit. If it continued, the year would end with a loss of Rs 180 crore. Over a sombre dinner meeting with some senior executives and the board of directors at Taj Chambers of Taj Mahal hotel in Mumbai, a goal was set. Tata Steel would have to reduce cost by Rs 500 a tonne, which translated into 7.5% of the cost at that point in time. 
 

At that time, Tata Steel ran in three different well-defined watertight silos: the raw materials division, the marketing and sales division, and the works. But, all the divisions had to come together to achieve the target. 
 

“The target sounded impossible. It was so stiff that only a cohesive team could achieve it. Everyone had to innovate, break away from the past and come up with a new way of thinking. It required determination to achieve the impossible,” a former senior executive recalled. 
 

In less than six months, Tata Steel executives conveyed that they had managed a cost reduction of Rs 350 a tonne. At a cost meeting that stretched till two in the morning, a disappointed Tata said, “Your promise is with me; you don’t have to make another promise. What is at stake is your prestige and reputation.” It took Tata Steel less than three months to bring down the cost to Rs 500 a tonne. The resultant impact: 1992-93 was a profitable year for Tata Steel with profit before tax of Rs 127 crore on revenues of Rs 3,423 crore. 
 

“Ratan Tata transformed Tata Steel. The late 1990s were a difficult time for the company. But by 2001, Tata Steel became the lowest cost producer in the world,” the executive added. 
 

In 2001, Tata Steel topped the World Steel Dynamics chart of lowest cost steel producers in the world, a position it retained for five years.
 

In keeping with Tata’s dream of having global manufacturing facilities, in 2007, Tata Steel acquired Corus in a $12-billion acquisition, in what was the biggest foreign acquisitions by an Indian company. 
 

The strategy, as chalked out by Tata, was to have one virtual organisation with two legal entities. But, Tata Steel and Corus remained as two separate entities, officials close to the development explained. 
 

The existing Corus management was given a freehand to decide the course of the company. Decisions were made by the Corus board, only if there was a note of dissent, was it referred back to the Tata Steel board. The idea was not to conquer the company but partner it.
 

If Tata was able to bring about cohesion in Tata Steel and make it one integrated company, in Corus, just the reverse happened.
 

The fact that Corus had a quick change of CEOs, did not help matters either. 
 

In any acquisition, it is important to look at the cultural, social and location issues that are much broader than just business aspects, explained Malay Mukherjee, who has handled several acquisitions as a board member of ArcelorMittal till 2008.

ArcelorMittal has a team of 25-30 people to handle such issues.
 

“It is also important to gauge the attitude of the current management,” he said. 
 

Corus had legacy issues, which had pulled down the company prior to the acquisition. “To make it work, a complete overhaul of the way it operated was required,” said officials close to the development.  
 

The Corus group was formed out of a merger between British Steel and Koninklijke Hoogovens in 1999. To say that there was a cultural mismatch would be stating it mildly. Reports indicated that Corus group's market value in 1999 stood at $6 billion (at the time of the merger) and fell to $230 million in 2003. Integration was the major stumbling block.
 

“Tata Steel is now keen on trying its hand to turn around UK operations, a reverse of the strategy that it had been pursuing. A course correction and better integration might make it work,” said officials close to the development.