How Tata Steel Made It To The Top Of The World

MANAGING CHANGE

If you were to believe Peter F Marcus, managing partner of World Steel Dynamics (WSD), the steel industry Bible, Tata Steel "is India's only world class steelmaker and one of the few steel companies in the world with such a standing". In fact, the 2001 report of WSD ranks the company No 1 in a field of 12 of the world's best steel companies that includes the likes of Posco of South Korea, Usinor of France, Nucor of the US and Nippon Steel of Japan. Today, Tata Steel is the lowest cost steel producer in the world, but the man who can justifiably claim to be responsible for this achievement would more modestly like to claim that he is among the lowest five. Says Dr Jamshed J Irani, who passed the managing director's baton in July 2001: "We may be the lowest, may not be the lowest, because costs across different countries and currencies are difficult to calculate. But we are within the lowest five, and probably the lowest."

How did Irani and his team at Tata Steel achieve this status? Irani, 66, will be the last one to claim that he did it overnight. In fact, the change has been so steady and incremental, starting from the late eighties, that it had a certain inevitability about it. There were no flashy moves, no spectacular decisions.

Every battle in the war to make Tata Steel a global leader in steel was the result of strategy, followed by effective communication and implementation. For example, the company uses the Balanced Scorecard - a performance management and strategy deployment methodology - to break down strategy into its component elements and track performance from top to bottom, the managing director included.

But more than the use of tools and techniques, Tata Steel's journey to international competitiveness had much to do with the personal commitment and change-oriented leadership of Irani that focused on the 3Cs - Change ("mutate and improve furiously"), Costs ("cut wasteful expenditure ruthlessly") and Customers ("strive relentlessly to build relationships and influence consumption").

Irani says the company knew as early as the late eighties that it would be facing global competition at some point of time and, therefore, decided to start making the changes before they were forced upon the company. Irani's enchantment with quality began when he accompanied a high-level delegation of Indian corporate leaders to Japan in 1988. He had merely gone to see what the Japanese had accomplished through TQM, but one glimpse was enough to convince him that Tata Steel had miles to go "� and there was no time to waste. As soon as he was back, he immediately constituted a group of executives in his office to drive quality in a systematic way.

Beginning with some 11 improvement projects involving 38 persons and saving a tiny amount of Rs 1.3 crore, Tata Steel has come a long way since then. Value engineering was the first technique to be adopted on the way to quality and cost savings. Then came the adoption of ISO 9000, benchmarking, quality improvement projects, ISO 14000, QS 9000, and Six Sigma "� the whole works. The high point of Tata Steel's quest was the adoption of the JRD Quality Value Total Quality Award process in 1995 as an integrated way of carrying the work of constant improvement forward. The JRD Award, equivalent to the US Malcolm Baldridge award, won "� fittingly "� by Tata Steel in 2000, was followed by Irani winning the IMC Juran Quality Medal in 2001.

In a conversation with R Jagannathan of Indian Management, Irani tells the story of Tata Steel's ascent to the top of the world steel industry by becoming one of its lowest-cost steel producers. The accompanying charts tell the story of Tata Steel's achievements by embracing change under Irani and other change leaders. Over to Jamshed Irani...

How did Tata Steel become one of the lowest-cost steel producers in the world? Every major event needs a call, a waking up signal. At Tata Steel, we got that signal much before Manmohan Singh brought out his (reforms) Budget in 1991. Some time in the mid-eighties, it became apparent that we would one day have to fight international competition.

At that moment of time we were totally uncompetitive. We were an old plant, had a huge labour force and had many costs which were internationally unacceptable. We were surviving in that era - and quite profitably - because of protection and the fact that there was no competition within the country - except from SAIL. We were living in an age of shortage. We were distributing steel, not marketing it.

In fact, we were rationing steel. We were in a cost-plus situation; so life was comfortable. We had an engineering division which used to joke that between 1960 and the eighties they had put up 50 different proposals for modernisation of Tata Steel and not one of them was accepted because everyone said that we had no money.

In the mid-eighties, when J R D Tata was still the chairman, I jokingly told him one day that unless we modernise our plant, both you and I will stand at the gates of the company selling tickets saying, "Come and see the steel museum." At that time, Mr Tata said don't keep on accepting what the finance people keep telling you.

Irani's checklist on change management: CEO's must...

Lead the change process and take personal ownership; the responsibility cannot be delegated

Play role model and be the first to change; personal involvement/time is key to success

Create endless opportunities for two-way communication within the company

Create a sense of urgency (not panic); embrace change even when it doesn't appear necessary

Set up a small hand-picked group to drive change in the organisation; train and empower them

Set key result areas (KRAs) carefully; include themselves in it (the MD's scoreboard)

Ask the question, why not become more modern. It is with that inspiration that we started on our modernisation programme. And 15 years later, we have emerged as the most modern plant in the world and with a cost structure which is certainly among the best the world over. Maybe the lowest, may not be the lowest, because costs across different countries and currencies are difficult to calculate. But we are within the lowest five, and probably the lowest. World Steel Dynamics has recognised us as the lowest-cost producer in the world and also the best steel plant measured on various metrics.

ON OVERSTAFFING

As far as manpower is concerned, I can tell you very easily our defining moment. In the early nineties, Mr Tata and I went out to collect money for our convertible issue internationally - $100 million. And when we made all these presentations, the financial people said your reputation has preceded you. Tata Steel is a good company. But please tell us what business you have keeping 78,000 people on your rolls. And that was when Mr Tata and I said we must do something about our manpower. Till that time manpower was cheap and we kept on adding.

If you see our (employment) tables, in the seventies and eighties we hardly had any increase in production, but we added many thousands of people. It was a matter of largesse, of being good employment generators. Just keep adding because we were a profitable company and manpower was supposed to be cheap.

It was when international investors asked us (about manpower), that we decided that we must look into it. From that moment of time we have chipped away - four, five, seven thousand every year. We are now at 46,000 or so, and I am sure we will go down further. There is no end target. Many a time I was asked, what is your ultimate figure, or your best figure. I said there is no best figure because once you define that figure then that becomes a bargaining point with everybody. We have a moving target, and every year we decide and plan to reduce a certain number. Last year was 2,500 and the year before that was 4,000 and so on. It goes on, and I am sure this year - I am no longer the executive chief - also they will have a programme for reducing (manpower) in Tata Steel. As I said, the defining moment for us on manpower was our discussion with leading international investors.

OTHER COST ELEMENTS

The largest cost in making steel is the cost of raw materials. And these started right from our iron ore. We have very good deposits and we wanted to make full use of them in Noamundi and Joda. Joda was an unutilised deposit. We realised that it had certain characteristics which were better for blast furnace usage. So one of the things we did in the late eighties was develop Joda as the main supplier of iron ore.

We also had very fine ore called blue dust, which till that time was a nuisance. We could not make use of it in sinter and so (at that time) we used to mine ore leaving areas of blue dust alone. We used to calculate the life of our mines only on the remaining ores, not blue dust. We then said no; we must use that. We had a contract with our sinter plant makers - who at that time were Lurgi - and the only condition we made was that they must give us a sinter plant which will use larger quantities of blue dust. We solved the problem and we now have a mining operation that is uniform. Blue dust, which we were avoiding at one time, is also being used.

This was a major change. But, in my opinion, the biggest change for making us a low-cost producer was the introduction of a new coke-making technology. We have been blessed in India with medium coking coal only. As you know, SAIL and other steel manufacturers import very large quantities of coking coal from outside. But we thought that over in the eighties - and this is a campaign which I led myself - and said that we must use our own resources. We must make coke of good quality from our poor quality coal. Such technology didn't exist in the world because the world did not have to sort this problem. They didn't have it. India had this problem and we had to solve it.

So over a period of 10 years, we developed this stamp charging technology through painstaking laboratory tests and pilot plants. We tried it out with great hesitation in one of our coke ovens. The first time was in 1989. We had to be careful for had this technology failed, it would have meant the end of Tata Steel. Because one cannot shift from that to the conventional type of oven.

We tried out tests and were fairly confident it would succeed. But this was the first time in the world - there was a possiblity that we may not succeed. If we had not succeeded, if the oven had failed, then for a period of time, that would have been the end of Tata Steel. Coke is a very important part of a plant. It is not only used for feeding blast furnaces. It also generates gas, which feeds the rest of the plants - rolling mills, steel melting shop, etc. So, had this stamp charging technology not worked, we would not only have had no coke - maybe we could buy that from outside - but also gas.

But we succeeded and that gave us the confidence to change other batteries also. Throughout the nineties we have successfully changed these. Now, 100 per cent of the plant has changed over to the new technology and it is going on well. That gives us the edge. India has very low cost medium coking coal. We are using that to make low-cost coke. I would say that is the number one reason - far more than our manpower or using iron ore - why we have reached the position of being a low-cost producer. It's because we have a low-cost fuel, which is coke.

SUSTAINABLE ADVANTAGE

Is this a sustainable advantage? Absolutely, because we have unlimited supplies of this medium coking coal and the (coke oven) batteries are all there. Batteries require changing every 20-25 years. We have just changed over in the 1990s; so when in the 2020s and 2030s you want to build new batteries, you can build it to the same design. We have now absorbed the technology through our sister company TRF. So we don't have to go to anyone to get this technology.

TRF is the one which can gives us these machines and we have marketed it. Don't ask me why this technology is not being used in the rest of India. We have tried to sell it to SAIL and others many a time. They don't want to take the risk. In a way we are happy because that gives us a handicap. We start the race against them with a handicap (advantage).

As far as (other) economic advantages are concerned, one very important thing is we have made our plant totally self-sufficient with regard to fuel. There were days when were importing fuel from one of the refineries - things like low-sulphur heavy stock (LSHS, light diesel oil - LDO) and so on.

We no longer import any oil. We don't need it because we have made our plant energy-efficient and the only liquid fuel which comes into our plant is the fuel that we use in our cars and trucks. Otherwise everything else is managed by fuels we generate ourselves. The LD gas we clean and use, the blast furnace gas we clean and use, the coke oven gas we clean and use. It is an integrated system and no liquid fuel is required to keep Jamshedpur. This is a major reason for our low cost.

COMMUNICATING WITH UNIONS

The first thing we did was to convince the unions. I have always believed in giving full facts to all unions. We never hold anything back. After Mr Tata and I came back (from the roadshows for the convertible issue), we took a decision that we must reduce our force. For a year or two (after that) we just kept on giving examples (to the unions) of the type of productivity we had, which was very low for India. The same message was repeated again and again and finally we even sent some of our unions leaders to steel plants in South-East Asia and Japan. Everywhere, they could see for themselves how productivity was.

Earlier, Tata Steel very proudly used to assure an employee that if he worked for 25 years, his son or nominee - daughter may be - would be given employment in Tata Steel irrespective of whether we needed that person or not. It was his right. I told the unions that this was no longer possible. But I gave them the assurance that every vacancy we have will be filled by your child. That means only our people will be employed, but we will take them only if there is a vacancy.

At one of the meetings held by our personnel people to discuss the state of the company with employees, one of the fellows stood up at the back and shouted: "All this is fine, but you have taken away the right of my child to get employment in Tisco. When will my son get employment?" The personnel man shot back: "I am not worried about your son's employment, I am worried about your employment. Because unless we do this, both you and I will be out of a job. So forget our sons. It is our employment that we are worried about." And that gave the message to the whole group. And that message was given repeatedly.

I (often) had discussions with people at what we call JDCs (joint departmental councils) - around 50 times a year. And I gave exactly the same message every time so that people clearly understood. And now, I must say, the unions themselves do that (give the same message). We have a system where we hear questions and answers from our people. The union committee fellow speaks first and then I speak. These people would demand something and I would say yes or no. Nowadays, these people are telling their own guys what is to be done and by the time the management person has a chance to speak he has nothing more to say. The unions are now exhorting the people that we must have better productivity, better safety, etc. They are speaking the language of management, so to speak.

I share every information with the unions, including cost. There is nothing that we hold back. And I think that's a matter of credibility. They know that what the management is saying is what is happening and they will ultimately do what they are saying. No question of pulling a fast one. We absolutely treat them on par.

DEMONSTRATING TOUGHNESS

In certain departments, like the tubes division, even in the mid-nineties they were having restrictive trade practices. The attitude was "I will do so much in my shift and no more". I went and told them quite plainly that if this continued for a year or two we would shut them down. There were three separate units and after three years, I went and shut down one unit (the seamless tubes unit). That had never happened in the company (before). And 300-400 workers were affected. They were given voluntary retirement and so on. But they realised that we meant business.

Something similar happened in our collieries. Our coal mines had for long been our weak links. I said that unless the cost of coal comes down we will import and we will close you down. There was no impact. There were six-seven collieries and we closed down two of them. They were the worst operating. Its amazing how when there's fire behind your back you tend to run very fast. You get speed in your legs which you didn't know existed.

Now, in fact, the collieries are turning out coal at much lower cost than five or six years back. And though we do import some coal, we are mining more coal and sell it to SAIL plants. They are very happy to get it and we make a profit on it. The colliery, far from being a cost centre, has become a profit centre.

At one time we while making our budget we used to think that out of so much profit the collieries will mean that much ghata (losses). Now in fact they are adding to profits. The same is the case with the tubes division. We are selling to third parties. The tubes division was always making a loss. Last year they turned in a profit for the first time after so many years. So all our profit centres are now actually making profits.

Upto a certain stage there was a feeling (in some divisions) that since the mother steel plant is making a profit it is okay to make losses. But with one or two very clear examples - the seamless plant in the tubes division and one or two collieries - we said that if you cannot contribute (you may be closed down). I always give the example of a bowl - every department has to come and put something into the bowl so that the kitty grows. No one must have the gall to think that they can get something from that bowl.

Others are contributing and you are taking something out. No, if you are taking something out, then it is better that you are not there. And it is even better if you start putting something in. The message has got through. All major divisions are contributing. People are happy.

SPREADING PERFORMANCE CULTURE

Another thing we did was announce a different culture. About (performance) bonuses and so on. I first thought that in Jamshedpur it may be difficult after almost 100 years to start a new culture. So we planned a certain way of staffing for Gopalpur (where the company planned a new cold rolling mill - CRM). But unfortunately Gopalpur never came about and we got the CRM to Jamshedpur. I said let's make an attempt.

We even went to the extent of fencing off the CRM to say "New plant" creating a physical barrier between the new plant and the old and to create a new culture. And the people there were selected specially. They had different layers and a profit-sharing type of bonus.

Everything was different. I told the union to hold off and let them develop. After they saw what was happening in two to three years at the CRM, they themselves (different departments ) started asking us to give them the same system. It was like planting a seed in a patch which was not so well cultivated. And rather than the weeds killing the seed, the seeds grew and other parts got deweeded.

I have always found that the unions adapt, if you treat them well, to ideas faster than lower levels of management. Because the lower levels of management have problems with areas of turf, authority, etc. Everyone wants to have 10 people under him when they could deal with five and so on. The union people, on the other hand, realise the advantage of five instead of 10 because the five earn more than the 10 through incentives and so on.

Top management has, of course, to be committed (to any idea) and they usually are very devoted. But the unions are the second ones which convert fast. There is always a layer of management - a hard crust (that resists change). I have said that you have to punch through that quite ruthlessly. If some people don't conform they have to leave. It's not a maa-baap-ka business.

Is the strong backing of the union specific to Tata Steel or can it be generalised? I think it can be generalised. Unfortunately, quite a few managements look at unions with suspicion. I think there is an adversarial type of relationship. It should not be so. It should be partnership. We have always looked at unions as our partners. Never adversarial. You think they are not so well educated, and that some of them may be illiterate. But they have that sense of judgement and inherent intelligence to recognise a good thing when they spot it.

I think the important thing is that you have to have their trust and credibility. One suspicious act can ruin several years of carefully negotiated relationships. In Jamshedpur, when we used to talk to these people, sometimes some fellow will start arguing. But some union fellow will shut him down. Saab bol raha hai, to theek hai. Aap bait jao. The majority had that confidence in me.

ON QUALITY There was a clear signal, a wake-up call. In 1988 I went with the CII to Japan. We went through a course and saw how they were executing quality. And the difference was so huge. For example, ISO 9000. We had not (even) heard about it at that time. But now in India there are thousands and thousands of companies adopting ISO. It was actually the CII which took the lead and formed a quality division.

We at Tata Steel subscribed to that. We started with certain systems, then integrated them into our company. Then we went on to the next one and now we have a series of eight, maybe 10, good practices. All of them were not taken up at the same time. Only one at a time. Value engineering was the first.

After that ISO 9000. After that, the JRDQV process (which leads to the JRD Tata Quality Value Total Quality Award, equivalent to the US Malcolm Baldridge award). After that, Six Sigma and so on. Each system was integrated into the company. It's like a meal where you don't eat everything together. You eat one thing, you digest it into the system, you get strengthened by it, and then you go on to the next course. So that everything stays within you and you don't replace one thing with the other.

One thing I learned from Japan is that the chief executive himself has to lead it (the quality movement). It cannot be delegated. And the second thing is that to move it into the organisation - the bigger the organisation the more difficult it is - you need a core team with you. So I appointed about six people from all over the plant who reported to me directly. They still exist. The people keep changing but the concept is there. It's next to the MD's office. They guide the whole process.

We trained them in Japan. They are now the trainers. So the first thing (in quality) is to train the trainers and then let them loose, and give them full authority. If anyone short-circuits what they are trying to say, you tell them that as far as you are concerned, he is the MD.

GETTING UNIONS TO BUY IN

For the unions, we had to win them over. At first, when we started showing the yellow Q on a blue background (the quality symbol), and we started asking everybody what it meant to them and what were they doing about it, the union representative came to me and said "We work for eight hours a day. As soon as we pass the gate of the company and we come inside, we are supposed do everything on quality. But we spend 16 hours a day outside. What about quality there?" So I said, all right, name one thing which you will appreciate most. They had confabulations among themselves and then they said "roofs". "We have 25,000 quarters, and the roofs of our quarters are leaking. You are not doing anything about it. Maintenance is poor and quality is poor." So I said okay. I gave them a special budget of Rs 3-4 crore. I said after one year not one roof will leak, and we did that. The people realised that quality was for them also.

Then we have Quality Circles (QC). Only last year we reached a stage where each employee of ours, illiterate or not, is a member of at least one QC and we recognise them (for it). We don't give thousands of rupees or something like that. We give them certain emblems. Something which will show you to be a quality man. It's a membership of an elite club. Once again, this is something which I learnt from Japan.

In a steel plant I visited, they were giving out tokens for some special work done on quality. I thought it would be fantastic. I asked what its value was. I was told "You have to collect five such tokens to collect one bottle of Coca-Cola free!" So obviously the value was nothing. But the fact that each one was being given a token in front of his colleagues meant that he was being recognised. So it was a matter of pride. We didn't do it with Coca-Cola but something similar.

By recognising him as the Man of the Month, putting his photo on a notice board and saying that Mr A did this and therefore is being granted this recognition, brings out the pride in the person and makes him feel that he belongs to the organisation. I have always told them (employees) that the managing director and his people cannot tell you how to work better. You are the guys who know how to work better. We cannot tell you, but we can help you. If to work better you need some facilities, some guidance, have no money, you tell us and we might provide you with those. That way people felt that they had their destiny in their own hands.

ON WHAT HAS BEEN ACHIEVED

Right in the beginning of the nineties, we had drawn up a plan. Tata Steel was then a very old plant. All our steel melting shops, rolling mills were old and we had to spend money. We spent something like Rs 8,900 crore and we knew that by the turn of the century - that is now - we would have a modern plant. We have done this very economically.

In steel everything doesn't grow obsolete within a matter of years and I personally feel that for (the next) 10 years Tata Steel does not have to spend so much in Jamshedpur. Normal maintenance, yes, but thousands of crores, no. Maybe in another 10-15 years we will have to go through another phase (of investment), but the window of time is now available to us. We must properly milk the facilities we have to make profits and invest that money in many ways. Unfortunately, steel is a cyclical industry and we are now no longer immune from the international cycle.

When the steel cycle is down in India, it is down in South America, it is down in Russia, it is down in the US. You cannot have a steel plant in the US which is doing well this year when you are doing badly here. So, one view is that we should be in another industry which balances this cycle.

As far as Tata Steel is concerned, we have used downcycles to invest. We built our CRM and HRM (cold and hot-rolling mills) during downcycles. We got them cheap. The CRM we got at a fraction of the price. The new blast furnace came at a throwaway price. After our most recent blast furnace is completed (we are doubling capacity), Jamshedpur will be beautifully positioned to go on for the next five years without making any capital addition. As for the profits we generate now, we'll have to see (where to invest).

At one time the thinking was we'll go into telecom, but at this point of time Tata Sons and Tata Power have gone ahead in telecom and we have not. A lot of discussions are taking place. We may acquire another steel plant. On the other hand, we may go into another industry. It depends on what adds value.

Should we put up more steel capacity? No. Because the country has to require that much steel - or the world should. Just now to put up any new capacity is madness. But you can buy the capacity. We are here to increase in size without putting in new capacity. That's the name of the game.

(This article appeared in the June 2002 issue of Indian Management magazine) .