Family Business & Entrepreneurship - Case Study Example

Family business and entrepreneurship A report on The Tata Group HQ: Mumbai, India UK Address: Tata Limited Dr. David Landsman, executive director 18, Grosvenor Place London SW1X 7HSc Phone: +44 (20) 7235 8281 Fax: +44 (20) 7235 8727 Email: tata@tata.co.uk Website: www.uk.tata.com Student name: Course: Date: Total words (excl title, references and appendices): 1605 words. Table of contents Content Page No. 1. Introduction 3 2. About the company 3 2.1. The Tata Group 3 2.2. Point of study 3 3. Analysis and critique 3 3.1. Theoretical perspective 3 3.2. Current ownership 4 3.3. Rise of stewardship at Tata Group 4 4. Recommendations 5 5. Lessons learned 6 References Appendices 1. Introduction: Family business and entrepreneurship contributes to significant proportion of total revenues in national and international markets. While there are millions of family businesses, a few thousands have been able to successfully sustain through ages and expand throughout the world. One such is the India-based multinational corporation, Tata Group, which is more than 150 years old. The current study focuses on understanding this family business from theoretical perspective while associating its current status with recently reported profits and areas of concern before making some suitable recommendations. 2. About the company: 2.1. Tata Group: In brief, Kuratko describes the Tata Group as “a well-known and one of the oldest family businesses in India, with its presence in more than 100 countries. Tata Group was founded in 1868 as a family business in textile industry and has expanded into various other sectors such as textiles, communications, software, engineering, materials, services, energy and consumer products”(2013, p.559). Some of Tata companies include Tata Steel, Tata Motors, Tata Consultancy Services, Tata Power, Tata Chemicals, Tata Teleservices, Titan, the Taj group of hotels etc. The total revenues of Tata Group are around $ 80 billion, most of which come from Tata companies outside India. While much can be said about the Tata group, the most noticeable point of argument is its future performance in the native and international markets after the appointment of new Chairman, Cyrus Mistry, who is part of Tata family through marriage and as largest shareholding member. 2.1 Point of study: Within the Tata Group, Tata Motors has been the point of attention both for the company and the media in recent times, especially after their acquisition of Jaguar and Land Rover (JLR) from Ford Motors, under the chairmanship of Mr Ratan Tata, following Ford’s failure to generate profits in the European markets. Reports indicate that Tata Motors, which was running in losses during this acquisition, closed the last quarter of 2013 in impressive profits in their European subsidiaries under the chairmanship of Cyrus Mistry (Sahu, 2014). While this is good news for the Tatas in European markets, their Indian business continued to report losses and weak demand with a 36% fall in volume and 27% fall in revenues. To understand how family members’ commitment to the business translates into growth and profits, it is important to understand the nature of entrepreneurship exercised at the Tatas. This will also probably highlight underlying factors responsible for losses in the Indian auto market. 3. Analysis and critique: 3.1 Theoretical perspective: While literature lists four main theories to explain the nature of family entrepreneurship, such as the systems theory, agency theory, resource-based theory and stewardship theory, Tata Group can be associated with stewardship theory as well as resource-based theory based on its current operating procedures. However, their shift from an agency relationship to a stewardship relationship post entry into international markets cannot be ruled out (Ghose, 2012). 3.2 Current ownership: The current chairman of Tata Group, Cyrus Mistry, succeeded Ratan Tata due to the Mistrys’ largest shareholding in Tata Sons, and that Cyrus Mistry will be interim Chairman of Tata Motors, as indicated in TNN (2014). Cyrus Mistry, without the name of Tatas, is a family member through marriage within Tata family (see Appendix 1). This shows that shareholding in the Tata Group is still retained within the family, which also dictates control of family over the Group. It can be said that Ratan Tata’s takeover has brought a sea change in the Tata business. Due to the conflicting interests arising in agency relationship, which views managers as self-centered and prejudiced and that they are bound to act according to the principal’s interests, agency relationship utterly fails in the international contexts (Imbach, 2012). On the other hand, stewardship theory believes in empowering managers through corporate governance (Kazmi, 2008). The explanation provided by Hernandez (2012) about stewardship aptly fits with the Tata group’s current working model, which is validated by the group’s corporate governance procedures. Hernandez (2012, p.174) defines stewardship as “the extent to which an individual willingly subjugates his or her personal interests to act in protection of others’ long-term welfare.” 3.3. Rise of stewardship at Tata Group: Another interesting feature about the Tata Group, as noted by Piramal (1997), is that the family members’ shareholding in the major Tata companies is almost zero whereas the promoter of all Tata Group companies, Tata Sons, serves as the key decision making body and ensures synergy among group members through corporate governance programmes introduced by Ratan Tata; this was an important step towards stewardship. Ratan Tata is known to have worked at various roles within Tata Group of companies for extended periods with regular performance reviews by his superiors, which has given him great insight and learning about the business that he would later take over, as noted by Piramal (1997). Such rich learning experience helped Ratan Tata to change Tata Group’s agency-relationship to stewardship business considering the challenges from international and national markets. The Tata Group employs more than 50% of independent directors that work with transparency and accountability. There was a time when the Tata Motor’s passenger vehicles sales in India grew to 28% compared to industry standards of 17%, and was at second position in this industry during 2005 under the chairmanship of Mr Ratan Tata (Kazmi, 2008). Branzei (2010) analysed that the Tata Group’s indigenous efforts had helped them survive the 2008-2009 recession even outside India, and their efforts were focused towards value creating activities and deals, leadership driven by ethics, and sustainable growth amidst immense competition, economic struggle in international market and changing expectations from stakeholders from all over the world. However, the scenario and performance of Tata Motors has significantly changed, as seen in Sahu’s (2014) report. In fact, Tata Motors’ main bet was its world’s cheapest car, Tata Nano, which could not meet their sales projections due to issues with quality, advertising and distribution networks (Beckett & Choudhury, 2012). On one hand stewardship is regarded as a rewarding form of entrepreneurship for large family businesses, such as the Tata Group, it also brings with it challenges such as dilemmas and selfishness of empowered non-family professionals; personal agendas over business agendas; thinking, habits and likes distinctive from the family. However, Hernandez (2012) asserts that the responsibility that stewardship bestows towards the company’s betterment and the psychological ownership that it instils in the directors of specific units helps in earning their commitment and internal drive to protect their companies. The competitive challenges faced by large family businesses, such as the Tatas, are multi-dimensional. Some of the challenges include immense competition and costs, shrinking product life cycles, rapid changes in external markets, lesser family-orientation of newer generations and their new thoughts related to business functioning etc (Poza & Daugherty, 2013). Business-first families usually focus on the growth and betterment of the business, often at the cost of familial relations. The Tatas were no different considering that the control of family members was limited and that sustenance of business was paramount. 4. Recommendations: Considering the success story of the most prestigious Tata Group, it is important for current owners to retain the family values that were infused into the business. For instance, the main challenge is shrinking product life cycle at Tata Motors, characteristic of family businesses, which can be addressed with some innovation and better quality to adapt to target markets while giving strong attention to competitors. An advantage to this new approach that Tata Motors has is the brand image that is highly revered in the Indian markets plus the grooming that Mistry received from his predecessor, as reported by the Hay Group and Team Entrepreneur (2014). Tata’s priced innovation, the world’s cheapest car, Tata Nano, needs more attention in terms of advertising and some improvement in its quality. While the interim Chairman, Mistry, is focusing on Tata Motors’ business in European markets, it is also important to improve its Indian business by focusing on quality and product segmentation and introducing cutting-edge technology in consumer-vehicle segments that will also help in changing perceptions towards Tata cars in Indian markets. For this, Tata Motors will have to specifically focus on quality of steel used besides engine technology, all of which can be sourced from Tata companies that will also significantly save capital costs. As the group’s chairman, Mistry is also at a better position in taking decisions related to betterment of Tata Motors while seeking assistance from other businesses in the group. However, it is also important to earn the trust and commitment of independent directors of other Tata businesses like Tata Steel and Tata engineering. 5. Lessons learned: Lesson derived from this study is that the best business model for established conglomerates such as the Tatas is the Stewardship model introduced by Tata Group’s ex-Chairman, Ratan Tata. The stewardship model fosters better accountability and relationships between the owners of different businesses within the group as well as stronger commitment towards achievement and growth. Another important lesson learned from this study is that family businesses are constantly subject to challenges from external and internal environment. These challenges are intense during changes in the top management, which can affect the business. While family businesses have the advantage of lesser capital investment and established brand image, their products also need to be at par with market and that these established family businesses are more vulnerable to competition and changing customer expectations. Members at the top are accountable not only for the business outcomes but also to uphold values and principles imbued in the business by previous family members in order to ensure credibility of the family business and established brand image. References A section of the Tata family tree. N.d. Tata central archives. Available from http://www.tatacentralarchives.com/history/family_tree/family_tree.pdf (Accessed 14 March 2014). Beckett, P and Choudhury, S., 2012. Tata Chairman assails early Nano sales efforts, business. The Wall Street Journal, 5 January. Available from http://online.wsj.com/news/articles/SB10001424052970203513604577142072569802382 (Accessed 14 March 2014). Branzei, O., 2010. Tata: Leadership with trust.Ivey Publishing, London. Abstract available from http://hbr.org/product/tata-leadership-with-trust/an/910M25-PDF-ENG (Accessed 14 March 2014). Ghose, S., 2012. A look into corporate social responsibility in Indian and emerging economies. International journal of Business and Management Invention, 1(2); 22-29. Available from http://ijbmi.org/papers/Vol(1)1/C112229.pdf (Accessed 15 March 2014). Hay Group and Team Entrepreneur, 2014. Why family businesses don’t make it beyond third generation. Entrepreneur India. 2 January. Available from http://entrepreneurindia.in/ (Accessed 16 March 2014). Hernandez, M. 2012. Toward an understanding of psychology of stewardship. Academy of Management Review, 37(2); 172-193. Available from http://faculty.washington.edu/morela/Hernandez%202012.pdf (Accessed 15 March 2014). Imbach, M, 2012. India’s conglomerate captains: Top management team composition and internationalization at the Tata Group. Working paper series, University of St Gallen School of Management. Available from http://verdi.unisg.ch/www/edis.nsf/SysLkpByIdentifier/4089/$FILE/dis4089.pdf (Accessed 15 March 2014). Kazmi, A. 2008. ‘Case 2: Maruti Udyog Limited: The competition ahead.’ In Strategic management and business policy. 3rd ed. New Delhi: McGraw-Hill & Co. ( 551-569). Kuratko, D.F. 2013. ‘Harvesting the entrepreneurial venture.’ In Entrepreneurship: Theory, process, practice. 9th ed. Mason, Ohio: Cengage/South Western Publishers. ( 541-570). Piramal, G. 1997. Business Maharajas. New York: Penguin Group. (363-406). Poza, E and Daugherty, M.S., 2013. Family business. 4th ed. Mason, OH: South-Western Cengage Learning. Sahu, R.P., 2014. JLR vrooms even faster, drives Tata Motors performance. Business Standard. 10 February. Available from http://www.business-standard.com/article/opinion/jlr-vrooms-even-faster-drives-tata-motors-performance-114021001266_1.html (Accessed 14 March 2014). TNN, 2014. Cyrus Mistry interim head at Tata Motors. The Times of India. 7 February. Available from http://timesofindia.indiatimes.com/business/india-business/Cyrus-Mistry-interim-head-at-Tata-Motors/articleshow/29964838.cms (Accessed 15 March 2014). Appendix 1 A section of the Tata family tree Adopted from Tata central archives. Read More