Economic Value -- in IndiaAbout a week ago, a friend lent me Antoine van Agtmael's recently published book, The Emerging Markets Century: How A New Breed of World-Class Companies is Overtaking the World . There is considerable food for thought in this account of the rise of global businesses that are based in developing countries.
During four years working as an investment banker in Thailand, van Agtmael
observed the astonishing rapidity with which local firms absorbed international lessons, from raising chickens or producing textiles to assembling cars, and how they often managed to add their own local innovations to the mix.1Upon finishing van Agtmael's book, I decided to look for additional examples of how emerging-market companies were incorporating practices of the developed-country firms in their own strategies and operations. I was particularly interested in anything I could discover relating to training.
The most interesting example I've come upon so far is adoption of economic value added (EVA) as a key performance indicator by the Tata Tea Group, headquartered in Kolkata (Calcutta) and with a presence in over 40 countries around the world. Sales in 2006 sales came in at $700 million, making the company #2 in the branded tea products industry. (Tata Tea has also owned tea plantations in India and Sri Lanka, but they are in the process of divesting these.)
Tata Tea's adoption of EVA was part of an initiative by its parent, the Tata Group, which is aimed at making all the Tata companies globally competitive. Himi Khusrokhan, Tata Tea's managing director, explained the rationale:
An organisation that measures business performance purely in accounting terms will fall into the trap of taking decisions on the basis of 'impact on profit', a myopic way of running a business, rather than 'impact on wealth', a measure that forces one to think of the long-term consequences of every decision made.2It was in order to do a better job of creating wealth that Tata Tea decided to embrace EVA. By monitoring EVA, Tata Tea can gauge whether its current strategies are producing satisfactory growth. If not, the strategies are re-examined.
Tata Tea's experience is that implementing EVA was no cakewalk.
They needed to change mindsets and beliefs that were once held dear. For instance brands became "captive to plantations" and the choices open to the company were narrowed down. Dependencies were created between plantations and brands, and these became difficult to sever.Training was the first-line tool used to move employees toward the habit of thinking in terms of value creation. In addition to the challenge of eliciting a new mindset, there was also the challenge of developing business management skills among employees, such as finance personnel, who had not previously been expected to contribute to the company's strategic decision-making.
However challenging, the training was essential for equipping the Tata Tea organization to continue growing in the face of intensifying global competition.
1 Source: An excerpt from Antoine van Agtmael's book that you can read here.
2 Source: A Tata Tea webpage describing their use of EVA. To project the impact of decisions on wealth, EVA takes into account projected changes in revenue, costs, and capital cost. The aim is to generate value for shareholders by ensuring that a company earns a return on capital greater than the cost of capital. Increases in EVA are achieved by a combination of revenue increases, and cost and capital cost reductions.