Saturday, May 30, 2009

HR Challenges in Integrated and Diversified Business Entities

Human Resources (HR) functions of companies face major challenges today as businesses struggle to remain competitive and retain markets. Companies across sectors are facing the challenges of physical and financial performance. While certain industries may be considered to be relatively insulated from economic downturn, one cannot be complacent as the bottom of the meltdown is perhaps not tested yet. In any case, even in the best of the times being efficient and productive is the only way to have a competitive advantage in the market place.

From a positive side, companies which have a high level of integration or operate in multiple business segments seem to offer continued sustainability. Integrated companies are expected to be more cost competitive, and thus secure market share. For example, an automaker with capability to make its own castings and forgings has higher cost efficiencies. Diversified businesses are expected to demonstrate increased business potential in terms of catering to multiple segments at diverse price points. For example, a hotel chain which has a cluster of hotels from luxury to budget hotels has a greater probability of sustenance than a hotel with only luxury properties. A full-line automotive maker has better chances of growth than only a focused car maker or truck maker. In addition, diversified entities would have the capability to shuffle resources across businesses. At the same time, integration or diversification imposes great challenges in building and managing facility and organizational infrastructure in an environment of economic downturn.

In today’s environment, businesses whether integrated or diversified can grow only based on competitiveness. Competitiveness of a business or an organization is derived from a host of factors such as science & technology, facilities, people and finances. Competitiveness is essentially deriving greater value at lower cost. Organizations typically focus less on value and more on cost, in recessionary times. While such organizations would certainly survive and consolidate during the troubled times, they would be incapable of riding the wave of growth when the economies begin to boom again. The concept of competitiveness which focuses on both the elements of value and cost would ensure that the organizations become not only efficient and productive for today but also innovative and creative for the future.

Going forward, HR needs to be particularly conscious of its role in the game of competitiveness. In this context, HR needs to focus on four important challenges: (i) business, (ii) structure, (iii) talent and (iv) performance.


Integration of manufacturing lines is an enabler for achieving industry dominance with end-to-end connectivity. Diversification of product-market segments is a hedge against recession and an insulation against risk. Yet such strategies carry certain inherent challenges.

The challenge for integrated companies is that such companies run the risk of a significant disconnect between the asset base and turnover scale. Integrated businesses tend to accumulate assets relative to a narrow market base and hence would need to move from being asset-centric to being market or customer-centric, to ensure business profitability. Diversified businesses which are also fully integrated in each business segment would carry maximal asset risk which can be catered to only by maximization of each market opportunity.

The challenge for diversified entities is that any diversification strategy needs to be dynamic. In any good diversification business strategy, with time each business needs to move into the pre-cursor fundamental business thus strengthening the bottom of the business pyramid even as newer businesses enter the futuristic segments. This implies that existing businesses have to be grown and new businesses initiated at a rapid clip.

The common challenge relates to understanding and balancing the two factors that are cost related, both for integrated and diversified companies. One relates to the cost of doing a business and the other relates to the price at which a business can be done. Organizations with integrated or diversified businesses (more so if each of the businesses is a long gestation activity) have to bear huge pre-operative costs before such businesses generate revenues. Such asset-intensive or long-gestation businesses have a cost to operate and the companies should be prepared to bear it. The second relates to the price at which the business can be done. In the final count, a distinct value proposition (quality-cost balance) is required for each product or service offered by the company. Integrated companies face competition from firms which focus only on end-product manufacture and have competencies in outsourcing efficiently. Diversified companies face competition in each of their business segments from leaner and more competitive companies which are more efficient because of lower investments in the respective limited business horizons. Merely being integrated or diversified with world-class assets, may not support high levels of pricing.

There are three compelling lessons from the above in terms of business considerations. Integrated or diversified companies should enable businesses to be revenue and profit accretive as speedily as possible so that there is a virtuous sequence of consolidation and growth in businesses. Organization structure and talent space should be strengthened so that asset capabilities and market needs are closely aligned. Despite being a large corporation, each of the segments has to be appropriately lean, efficient and competitive on a stand alone basis, in respect of each manufacturing line or business segment.


Organization structure is an instrument to translate strategy into performance. An organization structure has to be clearly delineated and dovetailed with the objectives of the business. An integrated company often suffers from a staid and rigid organization structure. A diversified company with a common ownership structure encounters several organizational dynamics, related to multiple business eco-systems. Several organization structures have been experimented from time to time such as product organization, geographical organization, functional organization, business organization and matrix organization in such entities. No individual structure, however, provides comprehensive solutions to all the requirements.

Dilemmas with reference to organization structure are common across companies, in terms of experimentation from time to time. A unique and almost genetic problem is one of overlapping structures and unclear responsibilities. While collective responsibility and accountability are important components of team functioning and delivery, individual clarity and focus are equally important to ensure focused and timely delivery, with due accountability.

HR has the primary responsibility in designing and implementing an organization structure that enables a company achieve its business objectives through a robust business strategy and coordinated execution. The structure also has to recognize the desirable aspects of an organization’s positive culture and also integrate the desirable needs of performance competitiveness.

Given the long value chains that integrated companies have or multiple business segments that diversified companies operate in, structures that enable integrated business responsibility, often called P&L responsibility, or at least integrated resource management, could help companies achieve the business imperatives. In order to guard against excessive individualization of businesses, such business-centric organizations have to be integrated under a group ambit through appropriate mechanisms such as a corporate centre, leadership council or executive board.


Building of cost-effective talent pools is a major challenge in a recessionary environment. The problem increases exponentially in diversified companies. In the past, companies have been able to attract and retain talent on the basis of opportunity and compensation. In some cases, positive culture and professional empowerment have been additional points of attraction. In today’s market, value propositions need to be more discriminating. The enduring talent model that meets the requirements of all economic cycles is paradoxically internally focused.

One needs to refer to the scores of books on Toyota’s legendary organizational capabilities to realize that an unrelenting focus on systems and people has been at the core of Toyota’s success. The Toyota Production System has been accepted as the global benchmark for efficiency in automobile manufacture as it delivers consistent quality at competitive prices. The system demands high capability to operate which in turn demands highly skilled human resource base. Toyota does (and most Japanese companies do) a few things differently. In recruitment stage, specification of people-quality is translated to actual selection of people with high quality. During the training period and in the early years, continuous product and process exposure is provided to employees while regular job redeployment and job rotation are practised in mid-career stages. Business systems are designed in a manner that requires high capability while continuous training of people to better their own benchmarks. Toyota thus integrates every conceivable facet of talent management with a focus on operational excellence through people skills.

Generically, in a typical Japanese corporation, conceptual and analytical processes are standardized in the organization as an intrinsic core capability. Whether it is a legal department or a research department, and whether it is a technical department or a business department, the employees are trained to analyze and solve problems in a particular framework which follows the essential sequence. (i) definition of the problem, (ii) analysis of causes, (iii) development of solutions, (iv) evaluation of alternatives, (v) prioritization and selection of solutions and (vi) evolution of consensus on the chosen solutions. Probably, this unique thinking emanates from the way pedagogy is practiced at the school and college levels in Japan and from the unique participative and consensual culture of the Japanese society. This peculiarity of Japan however should not be an alibi for not following such methodology. Reputed international consulting organizations such as McKinsey also owe their success to the above methodology, at least in terms of the first five points. It is probably time that HR in companies thought about enhancing the conceptual and analytical capability of the employee base individually and as a whole.


Individuals in organizations exist to generate revenues and profits for the company. Some creatively identify opportunities, some execute creditably for the opportunities and some review the opportunity-performance relationship. Some contribute by saving costs and some contribute by building value. Together the organization must tick to execute a sustainable business model that optimizes revenues and profits for the short term as well as for the long term.

Here again, much research has gone into the ideal way to measure the performance of an organization, its sub-units and individuals. From annual performance appraisals to 360 degrees assessment centres no system has been wholly satisfactory. Short term results and individual comfort factors continue to influence how performance is captured, interpreted and rewarded. Very often individual performance and corporate performance on one hand and as well as short term performance and long term viability lack alignment. In this context, the Balanced Score Card (BSC) methodology pioneered by Robert Kaplan and David Norton has been widely recognized as capable of integrating all factors of performance such as efforts and results covering both the short term and long term. It also focuses on aspects which are almost always missed out (for eg., process capability and learning interest). It also uniquely quantifies even apparently qualitative and conceptual factors.

With the economy and business environment having undergone a major change, corporate strategies and objectives also require matching changes to remain competitive. Also, quite apart from operations and facilities, corporate functions and shared services also require their own scorecards. In a typical company, one can conceptualize hundreds of initiatives covering multiple domains spanning the four BSC dimensions of Financial, Customer, Internal Business Process and Learning & Development. It is indeed a full-time responsibility for a business and execution savvy team to do justice to the BSC initiative, particularly in a diversified company, which has to cater to multiple business characteristics and talent needs.

HR has major challenges from a business perspective in the current turbulent times, more so in highly integrated and / or diversified entities. There are several strategic and operational perspectives that are relevant for HR to effectively fulfill its role in such entities. Fundamentally, HR would need to be an integral component of all key business processes, given the complexities of business management in such entities. HR’s contribution to business competitiveness would be immensely enhanced by itself being an organizational role model of understanding and enabling business competitiveness.

Posted by Dr CB Rao on May 31, 2009

Priming the Indian Economy:Suggestions for Dr Manmohan Singh Government

Undoubtedly, India has managed its economy well amidst the global gloom and turbulence, relative to several advanced and emerging countries. Nevertheless, given our growth aspirations, the lower GDP growth rate (even if it went beyond the muted expectations) and the reduced level of investor confidence need to be addressed quickly by the new administration. In particular, the sharp decline in growth rates of the manufacturing and construction sectors is a cause for worry due to the likely cascading effect.

The positive vote received by the Congress Party and the UPA Government led by Dr Manmohan Singh reflects the desire of the people of India to build on the robust management of the economy for higher growth. Given that the previous Government desisted from unveiling a major economic stimulus plan possibly due to impending elections, and given also the unfinished economic reforms agenda there is a great potential for the new government to trigger major positive changes in the economy. This note summarizes the elements of a grand stimulus plan to take the economy to a double digit growth track.

Transportation Infrastructure

There can be no two views that the infrastructure in India is woefully inadequate, in terms of spread, scale, scope and efficiency. There is an urgent need for massive building of rail stations, bus stations, airports, sea ports, roads and bridges and waterways across the nation, spanning urban and rural areas.

India also lags the emerging economies such as China in terms of fast and economic transportation. Huge and productive investments need to be made in bullet trains, elevated rails, public transport buses and freight trains to ensure high productivity in transportation of men and materials in the country.

Together, the fixed infrastructure and mobility infrastructure should be the core of the economic stimulus package for the new Government. These investments will have positive cascading and multiplier effects across all industrial sectors and create millions of jobs, quite apart from enhancing productivity of life, and driving down the transaction costs.

Energy Infrastructure

Energy security is one of the critical needs of the economy. Energy shortages frequently cripple industrial and social activities in the country. The economic stimulus package will not be effective without a major thrust on energy. Building of new oil and gas rigs, greater exploitation of on-site and off-site energy sources, acquisition of overseas energy sources, building of nationwide oil and gas pipelines should merit urgent attention. These again will have significant cascading impact in terms of power and energy equipment manufacturing sector and construction sector. Within the energy sector, setting up of a whole new infrastructure for nuclear energy should form a discrete strategy. A mix of all sources of energy; conventional and non-conventional covering hydel, wind, solar, thermal and nuclear energy options need to be vigorously pursued.

Sunrise Infrastructure

Distinct from the core infrastructure is the sunrise infrastructure, which would be the Green Technologies. Alternative sources of energy, clean vehicles, green buildings, energy-efficient equipment are capable of priming a totally new wave of research and manufacture. They will help in the creation of a new genre of industries which will minimize energy consumption and enhance harmony with environment, while at the same time creating jobs from the most advanced research layers to the most needed basic foundations.

Positive Globalization

Globalization has come to stay; yet it is under threat due to a rising wave of protectionism in advanced countries. Positive globalization has three parts; (i) the globalization of value chain with a fair share for emerging markets based on factor competencies (not merely labor cost advantage), (ii) harmonization and opening up of all markets (in terms of customer access and transparent regulatory systems) and (iii) continuous churn of new technologies in the developed markets (leveraging the fundamental university competencies and funding strengths). The way China and Japan have collaborated in such globalization is an instructive model for other combinations of advanced and emerging markets.

India must participate in positive globalization by developing products for a wide spectrum of needs. Even as one generation of products is extensively globalized across the world, a new generation of products must take root. In such a model, products get developed in line with multiple market needs and purchasing power slabs, allowing whichever country is the inventive country to hold technological leadership in the new generation of products. India, of course, must play for inventive niche areas quite apart from becoming the manufacturing hub for the world.

University and Laboratory Innovation

In spite of all the failures that have come the way of advanced countries, these universities still remain the bedrock of science, technology and management, with the potential to trigger new waves of innovation and creativity. India has indeed a long, long way to go before university-led innovation becomes a national comparative advantage as in the US or Japan. It is necessary for the new government to step up investments in universities in frontier fields such as nanotechnology, stem cells, recycling, solar energy, biofuels, energy-efficient equipment and so on.

As in the case of National Institutes of Health in the US, it would be appropriate to set up new national institutes not only for health sciences but also for each of such sectors, if needed in 50:50 public-private partnerships.

Main Street and Dalal Street

One of the most profound observations made by President Obama in US is that there cannot be a thriving Wall Street without a thriving Main Street. It is indeed a universal truth for the modern times. The Main Street itself rests on a trio of education, industry and social services. Markets for products and services have to continually expand based on innovative and cost competitive products and services so that corporates can maximize wealth generation and the Dalal Street can then take a share of the wealth.

The core of the strategy should therefore be in terms of enhancing industrial and business competitiveness. All tools, from more efficient design to value engineering, from manufacturing productivity to supply chain efficiency and from information technology to artificial intelligence would need to be deployed to commercialize constantly new waves of products and services. Tax breaks for genuinely innovative R&D and manufacturing productivity, whether politically correct or not, appear to be economically justified.

Simultaneously, the Main Street corporates have to be released from the tyranny of Dalal Street (whether it is of quarterly guidance, analyst calls or rating scrutiny) as much as subject to competition from more competitive global companies. In the absence of such of thin and balanced approach, CEOs and CFOs would only be emphasizing the short run revenue and profit maximization to the detriment of long term innovation and strategic strengths of corporates. SEBI and the Ministry of Corporate Affairs must examine alternative reporting systems which focus on long term sustainability of businesses and corporates.

Affordable Healthcare

Healthcare continues to be a major concern in India. Cheap generic drugs provided some relief until recently due to India following a different patent regime. With harmonization of product patent regime that advantage has disappeared. The Indian society which is in any case faced with inadequate hospital infrastructure is now faced with high cost of medical treatment, whether domiciliary or hospital-based.

In this background, the unique “Arogya Sri” policy of the Government of Andhra Pradesh has served to revolutionalize healthcare for the masses in the state. This coupled with the state-wide emergency 108 service, has brought healthcare closer to the masses in Andhra Pradesh. Much more can be done in this area under such a progressive strategy, with public-private participation. The Arogya Sri concept needs to be reinforced and expanded on a national-wide basis by the new regime.

Simultaneously pharmaceutical firms need to be enabled to generate profits that can help them discover new drugs and manufacture high quality products. Pharmaceutical, medical and clinical research should be provided with liberal grants and tax breaks.

Tax and pricing breaks for industrial research

It is important that innovation in industrial research is continuously encouraged. It is disconcerting to see in this context that Indian firms have been unable to build critical mass of research. India is perhaps ranking lower both in technology innovation as well as technology imports (and absorption). These short-sighted approaches are clearly meant to manage the short run profit pressures. The new government should positively consider tax breaks for firms which invest in new product developments; each additional product domain entitling the company for a higher weighted average reduction of R&D investments.


A multi-pronged strategy of boosting investments in infrastructure, education and research, healthcare and positive globalization will constitute a grand economic stimulus which India needs to become an economic power-house in the years

Posted by Dr CB Rao on May 31, 2009