Saturday, January 3, 2015

Multi-polar Strategic Management for Unlimited Growth: The “Scale-up with Start-up” Model for India

Theories of strategy and execution are replete with exhortations of how focus and specialization help deliver growth and value to corporations. There are, of course, several examples of companies trying to do too much by way of diversification and achieving too little by way of sustainability. Such eventuality is almost akin to one individual being inadequate as a hero for all occasions and events. This criticism of doing more for achieving less is often made against Indian firms which have a strong urge for growth and an almost obsessive compulsion to get into any field which happens to be the flavor of the season. Such critics point to the example of Apple which has a leadership position with a focus on just five product lines and only one or two products in each product line, even cumulatively over a period. The implication obviously is that by focusing so sharply and executing so perfectly, a firm can achieve industry leading growth.

Apple, however, is an exception rather than the rule. One has at the other end of the spectrum 3M which believes in a continuous flow of innovative products every year. Professor Michael Porter tries to tackle the conundrum by hypothesizing that once we define an industry we operate in, there could be a slew of generic strategy options that the firms in the industry can successfully pursue. He says that diversified firms can be as successful as focused firms. However, even Porter does not answer if unlimited growth is indeed possible for any firm and a law of diminishing returns from excessive expansion or diversification does exist as a hard fact of industrial economics. Many business leaders opt for either cocooned specialization or wild diversification without applying appropriate logic. This blog post proposes that multi-polar strategic management which pursues multiple business lines is possible, and is indeed relevant for India, if a ‘scale-up with start-up’ model is adopted.

Limits to growth

There are certainly limits to growth but there also exist limitless options for growth, especially in India. Natural resources in the planet are finite; be it land space, ores and minerals, oil and gas or water and vegetation. These determine the limits to growth. At the same time, there are natural resources that are abundantly or seasonally available be it solar power, rain water, natural winds and there are usable resources than can be recycled, including all man-made products. By focusing on which resource can be prudently leveraged human ingenuity can continue to push the limits to growth at progressively higher levels. Over the years, alternative materials and products have been discovered, adapted and commercialized. The emergence of shale gas an alternative to conventional crude oil and solar power as an alternative power source are just two examples. 

Steering clear of the nature’s limits to growth, there are various other limits to growth that operate through disingenuous corporate or human behavior. The first is aspiring to grow without understanding economic, demographic and technological fundamentals which generate the basic demand. The second is seeking to grow without having the patience to last through an economic cycle. The third is pursuing growth without a sustainable competitive position within the industry. The fourth is pursuing growth in an industry which is already well catered to by several firms. The fifth, of course, is a risk-averse organizational culture. The fifth factor is important because all growth entails risk and the risk taking ability of an organization determines the gearing for growth. The sixth factor is one of leadership myopia with leaders failing to see a broader vision and accordingly failing to develop multiple leaders who can establish and scale up multiple businesses,   

Opportunities for growth

In an emerging market like India, opportunities for growth far outweigh limits to growth. The very basic needs of infrastructure of various sectors (transport, housing, education, water, sanitation, power, water, oil, healthcare, banking and food, to name a few) are enough to trigger mammoth growth in infrastructure and a host of downstream industries. If we add to this the desirable goal of getting these to international service standards, the growth opportunities would be even higher. An economic environment that supports growth is all that is required because unlike Japan or US, India has a huge domestic market that needs to be satisfied while providing more affordable products and services for other global markets. India’s own growth story, however halted it may have been at the Hindu rate of sub-5 percent growth, illustrates this fact.

In a growth paradigm, nothing succeeds like success. India’s first industrial revolution, in the post-independence period of 1950s and 1960s, of heavy industries and massive river dams has created the first profile of a middle class that can be benefitted by economic development. The later stage green revolution of the 1970s and 1980s brought some uplift to the rural population even though it was skewed in favour of the landed class. India’s Information Technology boom of late 1990s and early 2000s, post-economic liberalization, has created a whole new youthful middle class with significant purchasing power and a capability to stimulate the growth of various sectors such as housing, automobiles, consumer durables, consumer goods and apparel. Social and economic infrastructure development from now on would provide an even more powerful and more multipronged opportunities for growth in India between 2015 and 2030, by the end of which period India should be the third largest economy of the world.

Growth deliverers

The Government of India with its belief in a public sector led self-reliant socialist economy delivered the first wave of growth. A more agrarian oriented Government with the goal of food self-sufficiency delivered the second wave of growth. A largely private sector led information technology revolution that moved from a start-up scale to a globalized scale delivered the third wave of growth. The prospective infrastructure led growth wave would now require a powerful combination of the big business houses, established public and private sector corporations and intellectual think-tanks to deliver epoch making growth, progressively by 2030. The concern in the current scenario, however, is that the big, established entities seem to have lost the flair and passion to grow adventurously and aggressively as they did only a few years ago (just to recall a few examples, Tata Motors, Tata Steel, Ashok Leyland, Mahindra & Mahindra and L&T at a company level and Ambanis, Hindujas, Jindals, Dhoots and Birlas at a business house level set scorching paces of growth from the 1970s in spite of the licensing limitations of the period).
In addition, a host of public sector companies expanded and diversified aggressively all through the 1960s to the 1990s while certain government wings provided growth impetuses significantly during the same period; for example, SAIL, BHEL, ONGC, GAIL and IOC as companies, and oil, power, banking, steel and space as sectors. Growth in this context connotes not merely increase in revenue but scaling up of new product lines and business lines as well. In contrast to India’s own past performance and the current air of global expectancy on India, all of the entities seem to have lost the mojo to grow through diversification. It is worrisome if the mantra of focus continuously articulated by management gurus has resulted in the current cautious approach. With the unveiling of new initiatives such as NITI Aayog (National Institution for Transformation of India) by the Prime Minister Shri Narendra Modi, hopefully the impetus would return. However, large corporations, whether private, public; and Indian-owned or foreign-owned, and business houses must start owning up leadership perspectives that enable multi-directional business growth. 

Diversity beckons

India is a land of development opportunities. There is no reason why Tatas need to be content with just one aviation initiative; the group by itself can initiate and compete for a number of other infrastructure projects too. In collaboration with other related groups like Shapoorji & Pallonji, Tatas can form a collaborative alliance to tackle the challenges of resources for infrastructure development while leveraging the capabilities of existing group entities. When Ratan Tata can bet on e-commerce initiatives through personal investments, there is no reason why Tata group cannot bet on e-commerce. There is also no reason why Indian software giants cannot diversify into electronic hardware. The only reason that can be attributed for such big groups not being as entrepreneurial as they should be is the management logic that focus alone would pay at a standalone corporate level, and core and non-core distinctions must be made at group levels.

There is another school of thought that says that being ‘asset light’ makes better economic sense. That may be true for developed nations but India needs productive assets to generate wealth creating activities. India needs to create huge capacities in multiple areas to lead development. Banking and financing paradigms must be restructured to encourage asset heavy investments that are long term value generators. Banks must be allowed to capitalize with cheaper foreign capital and backload the repayments and interest payments from the Indian infrastructural investments. Among the established Groups, probably Virgin Group of Richard Branson is a role model for entrepreneurial diversification of large scale enterprises. Virgin venturing into commercial spaceflight is an example. The only tenable argument for large companies and groups being non-entrepreneurial is that their structures and processes no longer allow the nimble-footed competency which a new start-up activity demands.

Start-up to scale-up

India is in the throes of a start-up culture. More graduates of premier institutions are willing to opt for start-up careers. Directors of Indian Institutes of Technology and Indian Institutes of Management are of the view that the shift towards start-up culture is what the country needs. A closer look at where the start-up culture is shaping up points to services and e-commerce sectors than anywhere else. It seems to be another needless flight of technical talent to areas less warranted. Over and above that, infrastructure is hardly the domain in which individual start-ups can gain a toehold, let alone grow. If India is to be infrastructure-endowed there is no alternative to big groups and big companies launching their own infrastructure start-up units. The need for infrastructure start-ups is dictated by the need to combine entrepreneurial spirit (which only a start-up organization can provide) with infrastructure financing (which only big business can provide).   

India’s own tryst with some of the biggest infrastructure successes proves the point that when large establishments start up big infrastructure projects with entrepreneurial leadership and processes there is a greater chance of successful infrastructure development. Konkan Railways, Delhi Metro Rail, Mumbai Metro Rail, IRCTC, Airport projects in Hyderabad, Bengaluru, Delhi and Mumbai are examples. Many times, some of these projects are cited as successes of privatization. The real reason for their success, however, is the power of big business combining with a start-up entrepreneurial culture to start small, and scale up rapidly. There are 500 top companies in India with annual revenues upwards of Rs 1500 crore, and reaching as high as Rs 500,000 crore, covering both public and private sectors. If each of these companies, on an average, establishes 10 infrastructure start-up companies, thus totaling 5000 start-ups in total, and progressively scale up with their resources, India’s infrastructure would be dramatically upgraded.

Posted by Dr CB Rao on January 3, 2015