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
expansion
STRATEGI
C
OBJECTIV
E ACTION STEPS
Establish Governmental Product differentiation,
Supply Chain Tim Tim Tim
business Initiatives & Industry Product Development,
Initiatives e e e
practices Standards Innovation
that Identify companies within
dictate a Understand regulatory the Tata group which are
Identify best
holistic environment and leaders in sustainability
practices across 3-4 2-3 0-1
approach industry standards in oriented product and
business sectors
to target markets process differentiation and
sustainab innovation
ility Establish business
Identify
practices to exceed the
strengths/capabilities that
Develop criteria for most stringent
4-5 3-7 make that differentiation 0-2
supply chain audit regulatory
and innovation
requirements and
possible
industry standards
Supply chain 3-4 Apply these superior 7… Develop a replicable model 2-3
mapping: identify Tata standards for product differentiation
all suppliers consistently across and innovation which
different Tata includes a filter for being
 mindful of possible
externalities from different
perspectives when
companies
articulating solutions to
unmet social/environment
needs in target markets
Identify and leverage
opportunities to
Utilize this model to
partner with
improve product
Conduct supply government for policy
5… 7… differentiation, 3…
chain audit development
development and
incorporating Tata's
innovation
superior environmental
and social standards
Encourage suppliers
to adopt best 5-7
practices
Mandate suppliers to
7…
adopt best practices
TQMS, Individual TQMS, Individual Tata
Tata Companies & Companies, Target
Entities their respecitve market governments, TQMS, Individual Tata
Involved suppliers Lobbyists Companies
STRATEGI
C
OBJECTIV
E ACTION STEPS

Internal External Leadership

Identify a major issue
Design 'Employee within each target
Sustainability market and focus on
Programs' aimed at which issue can be Identify a successor to
the local community addressed with current Ratan Tata to take the
of different target 3-5 0-2
Tata capabilities (utilize Tata group global while
markets to engage model for embodying its values
Tata employees product/process
there and achieve innovation &
cultural allignment differentiation)
Build a
and shared value
global Identify and engage Continue to have
entrenchment in
Tata strategic partners commitment to
Tata's global
(business, NGO, sustainability and
brand employee base
government) to affect embodiment of the
that 5-8 0…
change by providing leadership protocol as key
embodies Provide employees 3…
access to required criteria in succession
opportunities to
the Tata resources/capabilities planning for all key
work on self-
values in the target market positions
identified
sustainability Develop and execute
projects, on paid sustainability training
company time, programs for key
which are alligned executives that promote a
Celebrate success of
with their unique holistic approach to
sustainability initiatives
technical skills and sustainability and address 7-
in the target markets 8…
competencies the implications and 10
through brand building
opportunities of truly
advertising campaigns
Celebrate employee making Tata a global
success brand from learnings of the
sustainability stories initial sustainability
strategies
 Communities in target
markets, TCCI,
Employees at all Strategic partners, Human Resources,
Tata Companies, Management of Tata Leadership at all levels
Entities TCCI. Human Group, Individual Tata within the Tata Group and
Involved Resources Companies companies
Post Acquisition
Criteria to evaluate 'sustainability fit' of the
Sustainability
target acquision
Implementation
Find sustainability exemplers by sector
Identify strengths/capabilities that make that
sustainable model work
Incorpora Compare these strengths/capabilities with the 0-3
te stregths of an equivalent Tata company Implement post-acquision TQMS
sustainab Identify the gaps to highlight the strengths needed and TCCI processes/initiatives to
ility into by the Tata company to improve the acquired company e.g.
Tata's Develop and implement benchmarked practices in established frameworks to
acquisitio the company measure sustainability impacts
n - Identify challenges faced in implementation such as the Tata Index for
3-5
strategy - In hindsight, identify what sustainable human development
features/characteristics of the company played a key or abatement strategies for
role in making this implementation challenging climate change
Use these features/characteristics as a screening
criteria for future acquisitions in that industry
5…
- Learn with each subsequent acquisition and refine
'sustainability fit' criteria
Entities TQMS, Individual Tata Companies, Management of TQMS, TCCI, Individual Tata
Involved Tata Group 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 - Cultural alignment and value

the company 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 - Brand knowledge?- would Tata brand have

- Customer loyalty 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 - Don’t enforce the values on others - Need visibility of the whole supply chain
Partners - Aware and familiar with values - Likely to be held accountable for any part
within (Nestle’s Kit Kat)
+ Opportunities to learn from best practice
in the supply chain
Tata 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
Tata's Nano and Tata Swatch are existing examples of these
Product pathways to value. By applying a sustainability lens to the various
differentiation businesses within the Tata Group, allowing them to leverage their
Product development existing business capabilities, more opportunities like these will
Revenue Innovation emerge to boost revenue growth.
Growth 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
Brand reputation units to create a price premium.
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
Margin
Efficiency costs and, often, improve environmental performance.
Growth
Build employee morale through the Employee Sustainability
Staff motivation and Programs that utilize and enhance employee skills, reducing costs of
retention employee turnover and increasing productivity.
Reduce Leverage the existing capabilities of TQMS and increase its role in
Capital the Tata Group to identify, promote and replicate best practices
Expenditur Asset efficiency and globally that are focused on reducing unncessary demand for fixed
e effectiveness assets, improving productivity and environmental performance.
Establish supply chain practices that dictate a holistic approach to
sustainability keeping in mind the business, social and
Security and quality environmental impact of product and processes throughout their
of supply chains lifecycle.
Mitigate risk by identifying most stringent regulatory requirements
Risk Reduced regulatory and industry standards in all target markets and exceed these
Reduction risk standards across all business units.
Reduced risk to Negative publicity, consumer boycotts, investor pressure and risk
reputation from regulatory changes.
Maintain legal and informal acceptance for how the company makes
profit. Tata is already an exemplar in this regard in India. It must be
License to operate even more conscientious of these issues when going global.
Market shaped to
company's advantage
Early mover on By focusing on exceeding the most stringent government
Duration emerging strategic regulations and industry standards, Tata can define new and
of issue advanced industry standards which would act as barriers to entry.
Competitiv Attract high-quality employees through enhanced reputation
e Recruitment globally.
Advantage Enable company to maintain or increase access to key resources:
Access to key financial captial, commercial and non-commercial partners, planning
financial resources approvals, suppliers and source market, markets for sales, M&A
and markets targets.
Reduced Reduce tax payments through superior sustainability performance,
Cash Tax Reduced payments to for instance through avoided carbon taxes, particularly in Tata's
Rate government Energy, Chemical and Materials business sectors.
Reduced Achieve a lower risk rating in capital markets leading to improved
Cost of Reduced cost of access to finance at a lower rate by undertaking risk reduction
Capital financial capital strategies (from above).

Adapted from ForumForTheFuture.org, Pathways to Value