AMID THE CHATTER of young workers at Titan’s jewellery factory in Hosur, an hour’s drive from Bangalore, a machine silently sorts and packs diamonds into plastic boxes. a group of young women, wearing white aprons to protect their brightly coloured salwar kameez, label these boxes. trained jewellers will later set these diamonds in the company’s branded jewellery.
The machine, introduced in late 2010, has already replaced 20 jobs, and another will make all the diamond sorters redundant. Designed by Titan’s precision engineering division, the patented contraption costs rs 1 crore, and will save the company Rs 80 lakh a year. It's one of the techniques Titan is employing to enhance efficiencies.
In the next two years, Titan will install four more machines, including one that will sort metal parts that go into the 3,000 pieces of jewellery made each day. When all machines are in place, only 16 out of 172 people will remain in the jewellery department. Titan won’t fire its workers, though. It hopes to mechanise its people-intensive gold and diamond jewellery business as it looks at trebling sales in five years.
In London, a think tank of Tata Global Beverages, the company that sells Tetley tea, is mulling over a tough problem. Britain annually consumes as many servings of tea as of Coca-Cola, but tea companies make just 2 pence (Rs 1.64) a serving while the fizzy drink gets 60 pence. Tata Beverages wants to double its price per serving of tea. The answer could come from a product that’s now being test marketed by its Canadian arm—an all-natural tea infusion in syrup form, which dissolves easily in cold water and is claimed to taste better than the existing instant tea powders.
To an onlooker, these examples may look like sporadic, and perhaps discrete, spurts of creativity at India’s largest industrial group. After all, sales from recent big-banner innovations such as the Nano car and Swach water purifier hardly add up to a significant percentage of the group’s turnover. Internal estimates suggest that sales from innovative products and services developed in the last decade will be only 3% of the revenues of listed companies, around Rs 10,000 crore. The Tata companies barely have an R&D budget, and have filed far fewer patents than similar conglomerates around the world. In short, the innovation quotient of India’s oldest group is thin. Says Bhaskar Bhat, managing director of Titan Industries: “Today, there is not much emphasis on the importance of innovation when group companies are evaluated for business excellence.”
But, unknown to many, in the past four years, the Tatas have mounted a quiet effort to change this. R. Gopalakrishnan, who is on the board of the apex holding company, Tata Sons, oversees the group-wide innovation push. Several processes have been implemented to develop new ideas that measure innovation, and create a forum to share knowledge across companies. Study tours have been organised to the U.S., Japan, and Israel for executives to understand how innovation works at companies such as 3M, Raytheon, and Fujifilm. Professors Clayton Christensen (Harvard Business School), who is also on the Tata Consultancy Services’ (TCS) board, Henry Chesbrough (University of California, Berkeley), and Julian Birkinshaw (London School of Business) are holding workshops for senior managers. Gopalakrishnan says the Tatas are “experimenting within the companies to find the right innovative techniques”.
For the first time, TCS, for its quarter beginning January, will report separately income it derives from its intellectual property and annuities from contracts under “non-linear income”. N. Chandrasekhar, MD and CEO of TCS, says: “Going forward, we expect non-linear revenue to be 10% of all incremental revenue.”
The Tatas need bigger ideas to take their companies into the big league. Today, the top 20 positions in the Fortune Global 500 list are dominated by energy, financial services, and retail companies, where Tata group companies don’t have any significant presence. In emerging areas—media and entertainment and personal technology—the group doesn’t have much to show.
In its portfolio of 27 listed companies, apart from TCS, Tata Motors, and Tata Steel, which are in the big league, only six clock above $1 billion in sales. Three multibillion companies—Tata Chemicals, Tata Power, and Tata Communication—are not leaders in their areas. The size of the remaining companies ranges from $5 million to $500 million. To that extent, all these companies are still vulnerable to competitive pressures.
India is emerging as the hot new ground for innovation. Mahindra & Mahindra’s Anand Mahindra has been readying an R&D and innovation centre near Chennai built at a considerable cost. GE is using India to build smart products including portable ECG and cardiac ultrasound machines that are 50% to 70% cheaper than similar products.
Some changes are already visible within the Tata Group. Tata Global Beverages has a new organisation structure, taking into account the fact that it will need to increasingly depend on partners such as suppliers to help it innovate. Manufacturing, logistics, and supply are now under one global head, and its tea infusion unit will rely on partners for packaging.
Then, as Tata Chemicals looked for a cheap and efficient way to filter arsenic from ground water in North East India, it found an answer on the intranet from an engineer in Britain’s Corus. A research team at Tata Steel is now finalising a solution. The company is not willing to disclose details as it plans to file a patent application soon.
Gurus such as Vijay Govindarajan, professor of international business at Tuck School of Business, and Nirmalya Kumar, professor at the London School of Business and co-author of India Inside, are beginning to take note. Says Govindarajan: “Successful innovations like the Nano take the Tatas to the next level.” In an interview with Fortune India some months ago, Christensen said the Tata companies were great examples of Indians innovating.
The inspiration comes from the top. Though Gopalakrishnan says there’s no explicit mandate from the chairman to drive an innovation programme across the group, Ratan Tata’s instincts are fairly well known. He has a nose for technology and loves trying to do things differently. “The idiot inventor”, as he once described himself to Fortune India, is happiest wandering around research labs of universities such as the Massachusetts Institute of Technology, seeking smart solutions to big challenges (cheap transportation, pure water, etc.)—all hallmarks of an innovative mind. The Indica, which taught Tata Motors how to build a car, was always Tata’s project. Insiders point out that though he did not overtly push its IT services company TCS to change its successful offshore delivery model, he has always wished to get royalties from its intellectual property, like IBM does, rather than outsourcing contracts. (Tata was not available for comment.)
With Tata stepping down by the end of the year, will heir Cyrus Mistry be as keyed up about innovation?
MISTRY’S IDEAS For shaping the $80 billion (Rs 4.23 lakh crore) conglomerate aren’t known yet, even within. He has only just begun his apprenticeship under Ratan Tata, and this will last till December. He goes to the group’s Bombay House headquarters every day, and uses the room that former Tata Sons director J.J. Irani occupied, on the same floor as Tata. Though Mistry was not available to comment, insiders say his responses will be fashioned by his idea of the big issues.
His predecessor’s two-decade stewardship can be broken into a few broad periods. When Ratan Tata took over in 1992, he first asserted the primacy of Tata Sons over the group. Then he prodded a large set of complacent group companies to measure up against the best in the world. This was accompanied by widespread, often ruthless, efficiency drives. Tata then pushed his managers to think big, and go global in a meaningful way. (Of the eight Indian outfits on the Fortune Global 500 list, two are Tata companies.) Finally, he turned to innovation. Some of these phases overlap, but each builds on the achievements of the last. There have been periodical disruptions (such as Tata Motors’ troubles in the late 1990s), but Tata held firm.
Mistry’s circumstances are markedly different. Tata Sons’ position is secure, and the group’s companies are large and efficient. Arguably, as chairman of the holding company, Mistry’s role will be overarchingly strategic, more than Ratan Tata’s was in the first phase of his chairmanship. Sure, there are problems, such as fixing Tata Communications. Mistry may also look at profitability, and perhaps try to implement something similar to the GE business model. There’s still a debt burden from the acquisition of Corus and Jaguar Land Rover. But, as analysts argue, much of these will also be for the heads of individual companies to fix.
Govindarajan believes that “younger leaders are more open to experimentation, which speeds up any innovation process”.
Darius Pandole, partner with private equity firm New Silk Route Advisors, who went to school with him, says Mistry is a quick learner and a good listener. “That’s going to be useful in the context of taking over a group as large and complex as the Tatas and understanding the various businesses and how the dynamics operate.”
Mistry’s biggest challenge will be to keep reinventing his companies so that they are relevant in an era where technology will radically alter the corporate landscape. And seek new ways to grow. So, rather than rent out data cables running across the world, Tata Communications will need to become a solutions provider which can hook up offices across the world and solve security issues for companies using external networks. Think of how IBM moved from being a hardware company to a technology consulting giant.
Tata Chemicals’ new R&D laboratory on the outskirts of Pune will have to work on alternative fuels and nanotechnology, and TCS will need to focus on increasing revenue per employee rather than just adding manpower to grow.
Govindarajan feels that even a company such as Tata Motors will need to innovate to survive the next 20 years. Tata Motors holds a pre-eminent position in the commercial and passenger vehicle space in the country. But its commercial vehicle business lags behind several European companies in scale and technology, and passenger cars is a niche business. Tata Motors is still very small compared with, say, Honda, which makes 3 million vehicles a year. To survive and break into the top league, Tata Motors will have to do much more, perhaps figure out building cars that don’t depend on fossil fuels.
The CEO of a large Indian firm, who closely watches the group, points out that in such circumstances Mistry will have no alternative but to focus on innovation. Indeed, that will perhaps need to be his most important agenda. As Nirmalya Kumar says, in recent years, companies from emerging markets, including Embraer, Samsung, HTC, LG, Haier, and Huawei, have transformed themselves by being innovative. No Indian outfit has reached such levels yet. The Tatas, with their range from software to engineering to manufacturing skills, combined with sheer size, have the best shot at it. In many ways, innovation is the final frontier for the Tatas to cross over and be seen as truly global.
WHILE MUCH OF WHAT’S been written on Mistry so far emphasises his quantitative skills, those who are really familiar with the gadget-loving 43-year-old paint a different picture. “He is a sleeves-rolled-up kind of guy,” says one. As a young man, Mistry used to drive his car (then a Porsche 911, now a Honda CRV) to the family-owned United Automobile Garage for tune-ups. He was one of the few owners there; most people sent their drivers.
Nawshir Khurody, who has been on the board of AFCONS Infrastructure, a Shapoorji Pallonji (SP) Group company for over three years now, says he has interacted with Mistry, the managing director of the company, and also knows him through his role as an advisor to the SP Group. “In his room, the first thing that you notice are the books—on strategy, risk management, wealth creation, India, China—everywhere.”
Mistry likes getting to the crux of a matter. “He’s after knowledge ... the true knowledge that lies within a business, and in his boardroom interactions he will question a matter until he’s satisfied that he knows everything there is to know about it,” says Khurody.
In the late 1990s, a few years after Mistry joined the SP Group, he tried to bring in systems and processes. His first step was to get an ISO 9000 certification for the business. Back then, construction companies were certified only for specific projects, but Mistry wanted to bring in systems on the construction delivery side.
Later, as manufacturing companies installed ERP systems, Mistry got a small company, Algorithm Software, to build one to his specifications, connecting every site and process in the company. Says an ex-SP Group employee: “He created a robust platform that could handle the future growth of the company.” Algorithm later tweaked and sold a version of this package to other construction companies.
Around 2006, Mistry replaced his father Pallonji Mistry on the Tata Sons board. He reckoned that for a construction firm, as in a software company, the trick lay in using the knowledge base over and over again. So, when the SP Group was building a pagoda on an island off Mumbai, Mistry put in a web-enabled knowledge management system to capture how a special scissor lift was designed to hold and transport the stone blocks used to build the pagoda. Later, when the group began building some of Mumbai’s tallest buildings such as Imperial Heights in Tardeo, Mistry sent engineers to Taiwan to study its tallest building, Taipei 101. It had an expensive aluminium framework system that reduced construction time on the higher floors from 21 days to eight. The SP Group implemented it in Mumbai.
In the late 1990s, Mistry decided to construct an IT park on 200 acres in Hingewadi, near Pune. Senior members in the group thought this was a great risk, as Pune, unlike Bangalore, had not picked up as an IT destination. Mistry pushed ahead saying that if Pune was a knowledge destination for the youth in Maharashtra, there was no reason it couldn’t be a successful IT centre. The IT park has since grown far beyond 200 acres and hosts some of the world’s biggest companies.
Satish Reddy, MD of Hyderabad-based Dr Reddy’s Laboratories, remembers when Mistry wanted to set up a biotech park in Hyderabad. “What stood out was the fact that he did not approach the business like a real estate CEO. He wanted to know more about the biotech business,” says Reddy. Mistry ultimately set up the 300-acre Shapoorji Pallonji Biotech Park, the biggest such park in India. After a slow start, slots in the park have nearly sold out.
Sanjay Dutt, CEO (business), Jones Lang LaSalle, who has known Mistry since 2000, says he is a smart guy who is constantly learning. “He’ll view the technological impact of cement quality in the same manner he would approach the latest software for a TCS consulting project,” he adds.
THE INNOVATION MACHINERY THAT Mistry will inherit went into top gear recently. In 2010, at Innovista, an annual function run by Tata Group Innovation Forum (TGIF) to recognise and reward innovations, there were 3,200 innovations from 75 Tata companies, up from 300 from 47 companies in 2007. TGIF adopted Birkinshaw’s model to study the state of innovation in the companies and the forum comprising CEOs and innovation leaders of member companies conducted “Innometer” studies on 20 companies.
It’s been slow going. While some companies within the group have participated in the study, TCS has kept away from formal innovation exercises as TGIF learns its practices from the company. Over the years, TCS has built 29 innovation labs to address specific sectors such as aerospace and retail. A senior Tata executive says that though they are part of TGIF, they don’t want to be fettered by formality in the innovation process since they have been innovative all along.
Managers at Tata Global Beverages in London echo this sentiment. In 2010, the company integrated its R&D facilities in Bangalore, Montvale in New Jersey, and London. In April 2010, it launched a jelly-based drink, Sukk, in Britain to replace the fizzy drinks and chocolate that people snack on. In six months, the team had developed a product that contained fruit juice, vitamins, green tea, and fibre.
Titan’s jewellery division declared 2011 its year of innovation. Twenty youngsters from the company came up with weekly programmes around innovation and invited CEOs from other companies to speak at the Hosur factory. Titan has also set up an Innovation School of Management, which runs a six-month course for employees, involving three-day classroom sessions. Students get four hours a week to come up with innovative ideas. Over time, Titan hopes to train 200 innovators to face challenges that arise on the manufacturing floor. The company also sent 40 highfliers for a two-week innovation training at Indian Institute of Management Bangalore. The programme was co-created with Erehwon, a Mumbai-based creative consultancy. L.R. Narasimhan, Titan’s head of manufacturing, says: “There is now a culture of innovation in the company and all employees realise the value they offer.”
As Apple has shown, innovation ultimately allows a company to punch way above its weight. Given India’s fast growing economy and the attendant purchasing power, Mistry can use the dominant local position of his companies to grow the Tata group. He can beat global companies with products designed for emerging markets, where the growth will be in the next three decades. “The biggest disadvantage for multinational companies is the inability to keep their superior image out and compete with smart companies in the emerging markets,” says Govindarajan. That’s the opportunity Cyrus Mistry should be eyeing.