15th March 2006, ECONOMIC TIMES
Five Well-Known But Easily Forgotten Ideas
We thought of writing this piece when recently, we were seated adjacently at a national chamber of commerce meeting. The mood was euphoric and kudos is due to our economic policies, the corporate sector and to those selling the India story. Ministers Lalu and Chidambaram have both delivered their magical budget acts, sending the mood index to stratospheric levels.
We think that companies need to take a holistic view during such a unique growth phase. In doing so, we seek to merely recall what a company should do when times are good so that it is well prepared for the inevitable tougher times to follow.
The world is passing through strange times, not seen for a long time. The ‘rest of the world’ has huge savings and America is the biggest borrower. The IMF has few ‘bop-imbalanced’ clients; it is America that has the world’s biggest bop problem! Most parts of the global economy have experienced the longest peace-time boom e.g. Sub-Saharan Africa (SSA), which includes South Africa, with a GDP base of half of India, has increased its growth rate from 3 percent in the 1990s to 5 percent currently. Indeed ten out of twenty four emerging markets are growing at 7 percent plus, with Pakistan, China and Argentina in the 9 percent growth range. Huge liquidity has kept interest rates low. The borrowing rates of the global corporates are close to the ‘lesser’ ones. L&T or Tata Steel, for example, can borrow cheaper than General Motors today.
India’s performance has been impressive with the last three years’ growth averaging above 7 percent. The water level has risen all round, and, in fact, everybody seems to be swimming strongly. It is only when the tide ebbs that it will be clear who is the excellent swimmer. Experts point to the major global risks to watch–economic ones like the American deficit, Chinese currency, housing and oil prices, and non-economic ones like global security and pandemic flu.
We are neither clever nor foolish enough to make forecasts. However, we think it is important to be uncompromisingly watchful, perhaps even cynical. Being over-prepared is important, especially when times are good. Here are five easily forgotten ideas for top managements.
Operational improvement focus:
Four years ago, we heard a lot about cost and productivity improvements—voluntary separations, supply chain restructuring, organizational de-layering, and interest cost reductions. In fact, 8 percent reduction in borrowing costs by itself accounted for a substantial part of corporate cost reductions.
There is surely more ‘juice’ to be extracted. Recall how the Indian auto companies had lopped off huge chunks of cost in 2001-03, and then the steel prices rose enough to negate all those cost reductions! Company directors can ask ‘is the management driving those ideas just as hard or is there a cooling-off?’
When Steve Jobs returned to Apple in late 1996, he focused not only on developing iMAC and other new products, but also improved inventory days from 35 to 2 days, customer-order-to-delivery time from 10 to 5 days and cash cycle to negative 15 days. In Profit Beyond Measure, the authors H. Thomas Johnson and Anders Broms, refer to the inspired and continuous improvements achieved by Toyota and Scania.
Cash reserve focus:
During the last few years, the cost of money has been benign, although there are recent signs of change. The smart ones have raised cheap money. During the last three years, Indian firms have raised $ 13 billion in the domestic market by way of equity, and an equivalent amount from foreign markets through convertible instruments and ADR/GDR. This three year record has not been equaled even in any ten year time span before.
Such cash should really be used as a war-chest to be deployed at short notice when a chosen strategic opportunity arises. The easy cash regime is likely to have made many companies less restrained in the internal cash allocation process.
Two board-level questions are ‘is the management sticking to its investment plan with single-mindedness?’ and ‘is there a tendency to park funds into other ad hoc opportunistic ventures that arise?’
Priority focus:
When times are good, company managements tend to lose focus by going for diversifications and acquisitions.
In developed economies, conglomerates became fashionable during the post war economic boom. In 1968, of the top 200 US companies, 181 were in at least ten different manufacturing categories. The management heroes were conglomerate leaders like Harold Geneen. It was only after the first oil crisis in 1973 that the sustainability of conglomerates started to be questioned, becoming a shrill crescendo subsequently.
So too with acquisitions, the 1970s hero being Sir Arnold Weinstock. By now, there is evidence that about two thirds of acquisitions fail to deliver their benefits. India Inc is on a global shopping spree with overseas investments of $ 7.1 billion during the four year period 2002 till date. The mundane, post acquisition routines should be occupying the attention of managements as much as the glitz of the acquisitions themselves.
It is easy for companies to lose priorities in the present environment.
Future focus:
Industry after industry is changing structurally, forcing companies to alter their way of doing business. The most dramatic is telecom, another interesting example being retailing. Since the future is foggy, prudent managements explore emerging opportunities through planned experiments e.g. entering new markets, establishing joint ventures, funding new ventures etc. If a management does nothing to explore the future opportunities, it is a problem; it is also a problem when there are too many unfocused experiments.
We see some players experimenting, learning and growing, while others announce large, well-researched projects. It is an open question as to which approach will succeed.
History might favour the evolutionary approach while entering brand new lines of business, but that is not a given. After all, when you are driving on a foggy mountain road, you do have to feel your way around by moving on the lower gears, not just stepping on the accelerator.
Leadership focus:
It is, above all, a leadership challenge. What is the implicit message from the firm’s leaders? Does the company benchmark itself with global players or does the leadership compare progress with its own past record? If the leaders are perceived to be satisfied or complacent—and it is amazing how easily the folks down there can get that message—then the organizational environment will be oriented that way. If there is an explicit message of urgency and dissatisfaction, then there will be a more prepared management.
Based on the view that crime is the inevitable result of disorder, author Malcolm Gladwell points out in The Tipping Point, “The impetus to engage in a certain kind of behaviour does not come from a certain kind of person but from a feature of the environment.”
Therefore, the issue is one of how the company environment is being shaped by its leaders. Creating a balanced company environment amidst the present euphoria, a bit like the Prime Minister seeks to do in the country, must be very important.
