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Putting results ahead of resources

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The ownership and deployment of corporate resources will be determined by how critical they are to the accomplishment of a company's core market objectives. G. Ramachandran and R. Vijay Shankar, looking at the Tata Tea and Hindustan L ever cases, conclude that the resources freed by the two majors shedding their status as producers will be a shot in the arm for their operations.

G. Ramachandran
R. Vijay Shankar

FIVE core components of business have begun to redefine global corporate strategy. These are core markets, core brands, core products, core activities and core resources. What is significant about this chain of five cores is that it places core markets at the top of the linear hierarchy, and resources at the bottom.

Globally successful companies are less likely to chart their future courses of action by what they own. What their markets want and what their customers want will determine the resources companies will own or put to use.

Companies will no longer look to find some use for their resources. They will, by contrast, find resources that are unambiguously useful in the accomplishment of corporate objectives in contested markets. That is, companies will find horses for courses. They will put results ahead of resources. They will put profits ahead of property.

Since companies earn their profits from the markets they serve, their corporate objectives will be driven primarily by the characteristics of their core markets. The intensity of competition and the potential for profit determine the core resources that a company acquires and then deploys in its core markets.

This proposition has two important implications. The ownership and deployment of corporate resources will be determined by how critical or vital they are to the accomplishment of the core market objectives.

Companies will apply the criticality criterion to physical, intangible, human and process resources. Resources that are neither critical nor vital to the accomplishment of these objectives will exit from the company's core. Resources that are both critical and vital will enter and remain within the company's core.

Two titans

Tata Tea and Hindustan Lever decided recently to relinquish control over their tea estates. Tata Tea transferred control of its estate operations to employee-owned co-operatives. Hindustan Lever announced its proposal to transfer its tea plantation business to its wholly-owned subsidiaries.

But there is a contrast too. Tata Tea has historically been the largest integrated tea company in the world. Hindustan Lever came to possess tea estates primarily through mergers and acquisitions.

Both Tata Tea and Hindustan Lever are vigorous and successful participants in the intensely competitive packaged and packet tea market.

Tata Tea has a market share of nearly 21 per cent in the Indian packaged tea market. Hindustan Lever's market share is higher, at about 39 per cent.

Together, they can pursue the remaining 40 per cent or so of the domestic packet tea market. India accounts for 14 per cent of world tea consumption. That is a huge chunk. It qualifies to be classified as a core market. It is not surprising that they have put results ahead of resources. More important, they sell more tea than they produce. They are tea marketers that produce some tea and then buy some more.

To accomplish their core market objectives they will have to become dominant and very efficient buyers. They will have to compete for the best teas at the lowest possible prices. They will then have to market their teas well to be very profitable.

Two tough rivals

Tata Tea's tough resolve to stay in the tea business needs to be kept in mind. First, Tata Tea's dominant inside shareholder the Tatas chose to relinquish control over Tata Oil Mills (a soaps, shampoos, detergents and feeds company) to Hindustan Lever in a friendly deal in 1993.

Second, the Tatas then relinquished control over Lakme in 1998 to Hindustan Lever. Third, Hindustan Lever merged its chemical business (Hind Lever Chemicals) with Tata Chemicals in 2003 to form a large fertiliser company.

What these mean is that Tata Tea and Hindustan Lever are not friends who will meet over tea. They are tough rivals in the branded tea market. They have big plans to serve hot and cold tea as well as hot and cold coffee.

For example, Hindustan Lever markets Lipton iced tea. It has allied with Pepsi to distribute a full range of tea, coffee and soft beverages through vending machines a very different resource. It already controls more than 14,000 vending machines, the new core resource.

Old core resource

Tea estates have for long been their principal physical resources deployed in their tea operations. On an average, Tata Tea produced around 60 million kg of black tea from 54 estates and Hindustan Lever produced around 49 million kg of black tea from 14 estates.

But black teas orthodox and CTC leaf and dust are all commodities. The ownership of tea estates is no longer critical to their success and profitability in the packaged and branded tea market. Packaged tea is a consumer product. What is more, the ownership of tea estates is irrelevant to the footfalls and the ringing of the cash machines at their tea fountains.

New core resources

Tata Tea and Hindustan Lever have big plans to excel and outperform one another. Their decisions to let out the old core resources are indicative of how India's proactive companies are reshaping their new core resources to implement core market strategies.

Tata Tea has brought back its flagship tea brand, Tata Premium. It is a very large tea brand in terms of value and volume. Its new base line is taste kamyaabi ka (the taste of success). This is a departure from the previous asli taazgi (the original freshness).

Ms Sania Mirza, India's new teenage tennis icon, endorses the campaign. Ms Mirza is among Tata Tea's new core resources. Tata Tea is a successful Indian multinational company. It promotes six major brands in the Indian tea market and has a presence in 45 countries.

Tata Tea acquired Tetley, the international tea major, in 2001 for £271 million (Rs 1900 crore). Tata Tea and Tata Tetley account for the second largest branded tea portfolio in the world. About 85 per cent of their turnover is from the global market for branded teas.

Unilever has the largest branded tea portfolio in the world. Hindustan Lever, its Indian subsidiary, owns blockbuster brands such as Taj Mahal, Red Label, Taaza, A1 and 3 Roses.

Critical earnings drivers

Both Tata Tea and Hindustan Lever have a need to shed their status as producers and to grow globally as buyers, and as branding and marketing powerhouses. This requires a critical shift in the ownership and control of resources without losing the option to buy teas.

Tea will not be tea without tea. Tea estates will continue to be the sole source of black tea but it will not be necessary for them to own the tea estates. Others can own them. What is more, the new owners will have to compete with other estates to sell teas to the two tough rivals. This will have a salutary effect on productivity, costs and flexibility at the tea estates over the long term. This will be a shot in the arm for both Tata Tea and Hindustan Lever.

The two teapot rivals possess high calibre managerial resources. It would be odd if their best talent will have to continue to tend to tea bushes and tea dryers in a competitive market that will heap lavish rewards for market expansion and domination through brands.

They have both recognised the need to exit from low-yielding, low-risk assets. This will release managerial talent that can grow and harvest high-yielding, high-risk assets. What this means is that managers at Tata Tea and Hindustan Lever will turn to growing revenues through expanding their tea markets and burnishing their tea brands like never before.

(G. Ramachandran is a financial analyst. R. Vijay Shankar is Director of SSN School of Management and Computer Applications. This article is derived from their working paper, `Unbounding growth through unbundling'. Feedback may be sent to indiagrow@yahoo.com or shanksvijay@gmail.com)

(This article was published in the Business Line print edition dated April 19, 2005)
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