Domain Corporate Strategy

Name of the Case: Growing in adjacent businesses at Tata Steel

Sponsor:

Introduction

The Board meeting was over a couple of days back and Diwali was around the corner.
That Friday, except Disha and Rohit, rest of Itishree’s team was either already on leave
or working from home. Itishree (Chief Corporate Strategy, TSL) thought of taking them
both out for coffee to a recently opened café close to their office. Both Disha and Rohit
were MBA graduates and had joined Tata Steel only four months back. As they were
discussing TSL’s long-term strategy over coffee, Disha asked, “Why don’t we foray into
adjacent spaces to our business the way Amazon, Tesla and Apple have done? It will
help accelerate our growth strategy”. Itishree replied, “We have started to.. through our
New Materials Business, Services & Solutions etc. But we are watchful and would like to
get into the right adjacencies – leveraging what we do well as a path into new areas.”
“But with evolving customer expectations and market trends, there are a number of white
spaces we can consider growing in..”, Rohit commented. “Agree. Why don’t we explore
this further and put a detailed proposal to our CEO Bhaskar? It is an important aspect
that will help shape our long-term strategy”.

The next few weeks Nisha and Rohit were busy; enthusiastically understanding merits of
getting into adjacencies and figuring out the possible adjacent areas for TSL to foray into.

Background

Established in 1907, Tata Steel Group today is the one of the world’s most geographically
diversified steel producers and is recognized as the hallmark for corporate citizenship and
business ethics. Tata Steel operates with a completely integrated value chain that extends
from mining to finished steel products. With a relentless focus on innovation and cutting-
edge technologies, it is building a sustainable business enterprise.

Strong demand from the Indian market, availability of skilled manpower and adequate raw
material reserves for steel-making provide favorable conditions for Tata Steel to grow in
India. However, volatility associated with sensitivity to economic cycles, long lead time for
project execution, stringent norms around environmental clearances and regulatory
approvals are ongoing concerns. Added to these are high cost of capital and complex
logistics. All these challenges deter rapid pace of growing in steel business.

An understanding of spaces adjacent to steel and that which don’t have inherent
challenges as above will help create a powerful, capex-lite approach for tapping new
revenues for TSL.

Market adjacency – leveraging what you do well as a path into new areas.
If growth is an imperative for a business to survive, then entering adjacencies has become
the growth strategy du jour. Illustrious brands like Amazon, Apple, Tesla and Nike speak
of the successes of getting into adjacencies. While companies often favor this growth
strategy, empirical data shows that roughly three in four of market adjacency expansions
actually fail; making it a high-risk option for growth – particularly as companies attempt to
leapfrog further away from their core in a single bound in search of “breakthroughs.” Once
the promise of growth proves illusory and the company returns to their core business for
growth, often it is in a much weaker position than they it had occupied before its adjacency
moves. Therefore, entering into the right adjacent area is important for a business.
The hallmark of right adjacencies are the areas where one can beneficially make use of
organization’s existing core competencies or capabilities that have been developed
through deep engagement with stakeholders and decades of thoughtful nurturing of
various parts of its value chain. The outcome will be the organization’s ability to draw on
its skilled resources to meet new market challenges in the adjacent areas.

Problem Statement/Challenges Faced

Tata Steel has, over the past 5 years, started the journey into adjacent businesses through
different entities like New Materials Business, Services & Soulutions etc. (Refer
https://www.tatasteel.com/investors/integrated-report-2018-19/we-innovate.html for more
info). However, it is watchful of getting distracted from its core business, missing growth
opportunities in its backyard while looking outside its boundaries for new sources of
growth.

Like any other organization, Tata Steel has options of foraying into different types of
adjacencies like - adjacent new products & services, new business models, adjacent new
distribution channels, adjacent geographies, new customer segments or adjacent ‘white
spaces’ around a strong capability. However, to drive sustained, profitable growth, Tata
Steel needs to choose the ‘right’ adjacent spaces.

Critical Case Questions

Our ask to you is to help Disha and Rohit to prepare the proposal document for Bhaskar
titled ‘Growing in adjacent businesses at TSL’. As guided by Itishree, following questions
need to be addressed to structure thoughts

a) Do you think it is important for TSL to grow in adjacent businesses, or TSL should
maintain focus on growing in core steel business? Why?
b) How would you define adjacencies for TSL – within steel, materials, others…?
c) What are the boundary conditions for identifying the right adjacencies for TSL to
get into?
d) Therefore, what adjacencies would you recommend TSL to get into and why?
e) What would be your advice on an optimal capital allocation strategy (refer to TSL
integrated reports for financial data)?