Sunday, January 17, 2010

Niche as a Sustainable Competitive Strategy

Niche is a popular and fashionable term in strategic parlance. Many corporate leaders prefer their firms to be niche players rather than mass players. There is, however, an inadequate appreciation of what constitutes niche, and where niche fits in a firm’s quest for scale and scope, as much as for revenue and profitability. This paper seeks to clear some popular misconceptions and establish some logical foundations for niche strategy.

Porter’s generic strategies

No discussion of strategy can be meaningful without touching base with Professor Michael Porter’s pioneering work on strategy. Porter proposed in the 1980s three generic strategies as three uniquely different approaches for a firm to achieve competitive advantage. These are: cost leadership, differentiation and focus. While each of these strategies has to be defined in terms of the industry context and the competitive forces that operate therein, each fulfills a core purpose. Cost leadership requires a firm to be the lowest cost producer for a given level of quality. The differentiation strategy requires a product or service to have certain unique attributes that the competitor products or services do not have. The focus strategy concentrates on a narrow market segment, and within that achieves competitive superiority through either cost leadership or differentiation.

As with any generic strategy, the supportive assumptions tend to be simplistic. Cost leadership is considered to be an internally focused strategic approach where the drivers are internal process efficiencies, productivity improvements and cost-competitiveness in product development and manufacture. On the other hand, differentiation is viewed as being externally focused in terms of identifying what provides differentiation in the market place. The arguments for focus are similar; internal or external as the case may be. Porter even advocates that firms should resist the temptation of following all the three strategies simultaneously lest one should be stuck in the middle. The reality, however, is that in today’s competitive world which is three decades more mature and more competitive than the 1980s (when Porter first propounded his landmark theories of competitive strategy) the drivers of strategy have simply converged.

Niche; old or new in concept?

There are many interpretations of niche as a strategy. The physical definition of niche is that of a crevice where one can be safely ensconced. The managerial definition of niche is one of a unique product-market segmentation by which a firm can enjoy low competition and high profits. Although oftentimes a product or service is seen to lead to a niche position it is the market segmentation that enables premium pricing and dictates the need for niche products and services. Niche as a concept is not new. From Ferrari, Rolls Royce and Jaguar in the automobile industry to Omega, Rolex and Tudor in the watch industry, niche strategy is as old as the beginning of industrialization and as new as the challenge of competitiveness.

The concept of niche in the olden days was based on developing and manufacturing products with a high level of sophistication, and therefore with a high cost and a price premium which only certain segments of the markets can accept. Niche in the olden days was associated with the pride of ownership of a premium brand. Niche strategy thus involved a significant marketing and promotional input. Niche also came to be interpreted in terms of a differentiated product catering to very specific and narrow segment. Niche strategy in modern times, however, needs to be a much more inclusive concept. It is no longer one of identifying a slot which others would not (or cannot) address but rather is one of retaining invincibility and sustainability despite ingress of intense competition. Niche in modern times is the possession of an ability or set of abilities which most firms in the industry do not have. Apple demonstrates what niche as relevant to the contemporary times can do for corporate strategy and performance.

Apple “i products”; icons of niche

Apple Inc., led by Steve Jobs virtually rewrote the book of strategy as well as the history of consumer electronics, with its pioneering “i products”: the iPod and iPhone. These products are differentiated with features that multiple niche market segments would appreciate and pay for but are also cost-competitive helping most people become the users of the products. The niches that each of the products occupies, therefore, cover almost the entire market place questioning the very definition of niche. The introduction of iPod and iPhone generated so many competitors, yet iPod and iPhone remain the pioneers with an amazing invincibility. The sustainability of Apple products relates to the fact that they ushered in, and successfully maintained a whole new and complete user experience, which could not be matched by any competitor products in totality despite their being superior in parts. They were highly effective products that were reached to customers with attractive ownership options and distinctive retailing formats. The products constituted the core that created the markets, however.

Apple iPod provided for the user, for the first time, a total digital audio-visual experience in the most miniaturized and most elegant form factor, with unprecedented memory levels ranging from 2 GB to 160 GB. First introduced in 2001, iPod emerged as a well-segmented product family of Shuffle, Nano, Classic and Touch, meeting different user needs. The iPod user experience was heightened by the Net based proprietary iTunes which made available thousands of tunes to the music lovers owning the iPods. Apple iPhone provided, for the first time, a total convergence experience for the smart phone user, once again with the most elegant and user friendly form factor, and vastly superior memory levels. The iPhone experience was heightened by a Net based application store hosting thousands of proprietary and third party applications. Apple iPod and iPhone thus represented a unique fusion of state-of-the-art design and manufacturing on one hand and cutting-edge hardware and software on the other. And both the streams of products kept getting continuous enhancements; iPod with touch technology and iPhone with 3G and 3GS, for example.

Niche over time; shifting sand dunes

Niche products and markets are rarely static. They vanish and redevelop over time. In the trucking industry of the 1980s in India, heavy duty vehicles (HDVs), manufactured almost exclusively by Ashok Leyland, constituted a niche product group and a niche market for the company. With the enhancements in freight haulage patterns and improvements in highway network as well as entry of several new players such as Volvo, MAN, Hino and Navistar (besides the incumbent Tata Motors) into the heavy haulage segment, HDVs no longer constitute a niche. In the 1990s, a shopping mall would have been a niche retailing format or a multiplex would have been a niche cinematic experience in India. Today, shopping malls and multiplexes are commonplace with high competition. Dual time, multiple time zone or ana-digi watches could have been niche watch technologies a few years ago. These are now offered virtually by all watch makers. A decade ago, touch technology in cellular phones was a practical impossibility; today it dominates the cellular phones and is now set to extend to note-books and net-books. Today, 3D viewing technology is a highly niche technology whether for cinema or television, but tomorrow it could be more extensively available and highly competed. Such examples are indeed numerous.

Niche products and markets are verily created by innovation in terms of product technologies or marketing processes. However, as follow-on products, analogue products and even enhanced products get developed, and marketing becomes more intense with increased number of competitors, a niche strategy of the present could be commoditized by the time of actual commercialization. It is therefore necessary that firms that aim to follow niche strategy are always at the top of the innovation curve, constantly seeking enhancements in current niche products or exploring the avenues for a new generation of niche products. Even a series of successive niche products would at some point of time face saturation dictating the need for a breakthrough move to a new niche trajectory.

Niche is narrow; but needs a broad base

The development of skill-sets and competencies required for a niche strategy, in turn, require a broad operational base in an industry. A niche strategy which by definition tends to be exclusive to premium market segments may provide robust profitability but not necessarily huge revenues. The Swiss watch industry, especially the hand-crafted watch segment, was an example of a niche-driven industrial operation; where the niche was in terms of elegance, precision and quality. However, in terms of scale and scope the Swiss watch industry became a marginal player in the 1980s and 1990s relative to the more nimble, more efficient and more diversified Japanese watch markers. Only after the Swiss industry integrated new research and manufacturing technologies with its traditional niche of elegance and precision with quality that the industry became a global force again.

Firms and leadership teams that pursue a niche strategy cannot build business and operational models only on niche. An ability to develop and manufacture a broad range of products, in fact, helps the firm to support niche technology not only financially but also organizationally, with a scale that can attract the highly talented professionals who can deliver a niche platform. In several circumstances, niche emerges as an apex capability of a pyramid of normal, organizational competency hierarchy. The ability of Toyota to develop clean hybrid cars (for example, Prius) is a result of its ability to have a large and broad spectrum car manufacturing capability. On the other hand, a pure electric car manufacturer is unlikely to have either the scale or scope sufficient to support a sole, narrow niche strategy. Even a leading fragrance manufacturer such as Elizabeth Arden positions designer and premium fragrances on a base of hundreds of finely segmented cosmetic and perfumes base.

Value chain fragments; deceptively niche

Niche does not define industry; nor does industry determine niche. Yet many strategists fail to view niche and industry in proper perspectives. A full-fledged integrated pharmaceutical player may view an independent, drug discovery entity as a niche operation. Such a view is based wholly on the very special capabilities required to invent and develop new pharmaceutical products. On the other hand, a drug discovery entity which is broad based may consider a similar discovery entity which is specializing in just one therapeutic area as a niche player. Conceptually, each segment or sub-segment of an industrial value chain may appear to be a potential niche segment. Analytically, however, a strategy based on fragmentation of value chain fragment would qualify more as an optic of industry definition while a strategy based on competitiveness of specialization would be more reflective of a true niche.

By corollary, moving up the value chain of a product group does not necessarily confer a niche position. A manufacturer of value added steel products need not necessarily be a more successful niche player than a steel producer who has mastered the customization of basic steel specifications to a wide variety of applications. If at all, the broad based yet customized basic steel producer could have a better position as successful a niche player. To cite another example, while industrial biotechnology (classic fermentation) is commoditized, evolution of biotechnology in terms of mammalian cell culture and later plant and other DNA based developments led to a reinvention of the basic biotechnology value chain. To be a niche player, therefore, one has to look beyond industry or value chain definitions and focus more on the fundamentals of science, technology and management that make a product or service truly unassailable.

Niche is not strategy; it is a competency

Niche strategy is neither a product strategy nor a marketing strategy. It is in essence a competency. The examples cited throughout this discussion demonstrate that a sustainable niche strategy requires a series of successive innovative products which are proactively and competitively produced and are differentiated in the market place in terms of their user experience. At some point of time, even successive product enhancements would need to leapfrog into a totally new configuration. For example, after a series of successive improvements in both iPod and iPhone, the next wave could be in terms of an iTablet for a totally new technological and user experience. This sort of evolution and transformation in niche positioning requires a complete end-to-end capability in terms of nimble product development, lean manufacturing and aggressive marketing. Also implied in a niche strategy are several other attributes such as the ability to globally source the best technologies and components, to project-manage the processes of concurrent engineering and targeted product launch and to network with various collaborating partners.

Ability to innovate and differentiate on a product-market dimension with low cost global supply chain capabilities, high-end manufacturing efficiencies and broad-spectrum marketing capabilities requires a set of organizational competencies that are industry leading in each of the domains. A niche strategy should be enduring based on competencies that can deliver sustainable value. A niche strategy needs to be therefore seen as a comprehensive strategy encompassing and integrating all the three generic strategies proposed by Porter. In an industry, while there would be players following one of the three generic strategies proposed by Porter, the few real niche players would be the ones that would consciously develop the three types of generic competencies required for a niche strategy.

Industry leadership; sustainable niche

What constitutes a true industry leadership is a question that lends itself to several answers. At a simplistic level, scale is a major reckoner of leadership. However, as demonstrated by the virtual bankruptcy and the governmental bail-out of General Motors, once global leader in automobiles, scale without profitability and sustainability has little meaning. Neither is a classic niche product positioning of relevance in today’s scenario as demonstrated by the travails of Jaguar and Land Rover which led to a sale of those marquee brands to Tata Motors. Industry leadership occurs with a broad spectrum positioning that caters to a full market with as many products and with as much cost efficiency as possible, while creating unique niches based on innovation in each product-market segment. The objective of industry leadership is thus predicated upon combining scale, scope and niche into one business model.

Some firms are in a position to drive up, in a largely monopolistic manner, all the parameters of product performance (and hence the user experience) by themselves. Intel is a good example of monopolistic product positioning; it is able to dominate the industry with its successive generations of processors. Similarly, Microsoft is able to dominate the software industry with its successive releases of operating systems. These are however exceptions rather than the rule; and even such firms seek to expand their footprint as expansively as possible (for example, Intel manufacturing processors for all digital applications and Microsoft extending its Windows operating system to mobile phones, regardless of price points). Most firms in contemporary times, from Sony to Samsung, ABB to Siemens or Toyota to Renault are under pressure for maximal product-market coverage while also seeking appropriate niches. These firms have, however, developed their own sets of unique competencies to enable their own unique models of expansive niche strategies (for example, the well-known Toyota Production System and not so well-known but equally effective Toyota Development System, also called Set Based Concurrent Engineering at Toyota).


The prescription for a firm seeking sustainable industry leadership would be in terms of combining product or service variety with innovation, and excelling over other competitors in terms of unique user experiences in each case. Cost competitiveness and differentiation require to be fused into an integrated sustainable niche strategy, the conceptualization and execution of which calls for a very special competence on the part of a firm. An extremely inventive, creative and integrated research-manufacturing-marketing paradigm that is enhanced by industry leading capabilities in all the supportive functions is the essence of niche as a firm level competence.

Posted by Dr CB Rao on January 17, 2010

Thursday, January 14, 2010

Nano to Mega Entrepreneurial Spectrum: Need for Financial Entrepreneurs

Enterprises emerge from entrepreneurial energy. Entrepreneurs fight against odds to create entities that can convert ideas into products or services. An entrepreneurial journey involves several challenges including, but not limited to, the conceptualization of the entrepreneurial initiative, arrangement of finances, assembling of the team, establishment of the project, delivery the product or service and finally earning of reasonable returns to please the shareholders. These core, critical steps in the journey of an entrepreneurial enterprise also need to be consistent with the capabilities and potential of the entrepreneur. There is little clarity on when and how the challenge for entrepreneurial journey ends and the quest for enterprise sustainability commences.

The popular appreciation of entrepreneurial effort tends to be limited to first generation enterprises which have achieved scale and scope, with high visibility in media. Despite such enterprises achieving a significant success relative to the starting milestones, the pressures are ever higher on them to grow beyond boundaries, in a virtually limitless process. In this endeavor, the true creative spirit of an entrepreneurial venture gets overwhelmed by the clinical intellect and aggressive force of such companies pursuing scale and scope. Pursuit of scale and scope no doubt transforms the entrepreneurs heading such firms into global business leaders but also limits them from institutionalizing their intellectual talent on a wider entrepreneurial base, as a national comparative advantage.

Infosys insight; foresight for growth

A brief study of Infosys Technologies Limited, India’s leading information technology corporation, and their founders offers certain unique insights and possibilities in this complex interplay of enterprise and entrepreneurship. Infosys was founded in 1981 with a very modest capital of USD 250 by a team of seven software engineers, led by the founder N R Narayana Murthy. The company was in many ways a pioneer in leveraging Indian software talent for providing global information technology solutions. With a singular focus and a creative global delivery model, Infosys never had to look back in its growth journey. Today, Infosys is a NASDAQ listed global IT and Consulting Services corporation with 105,000 employees, revenues of US$ 4 billion and market capitalization of approximately US$ 27 billion.

Of the seven founders, N S Raghavan retired from the services of Infosys in 1999 as its joint managing director and went on to become a mentor for several entrepreneurs. N R Narayana Murthy continued to nurture Infosys into a global corporation as its chairman, and more recently as its chief mentor. Logically, a large global corporation such as Infosys with excellent revenue and profitability would have the ability to encourage entrepreneurial entities all across its value chain, and possibly would have created platforms for various entrepreneurs dock in with the company. Yet, N R Narayana Murthy has recently set up a Rs 6 billion (USD 133 million) venture capital fund called Catamaran Investment Pvt Limited, headed by him to encourage entrepreneurial venture, across sectors.

The establishment of the Murthy-Catamaran venture implies that even a global company cannot do more than encourage ancillary entity development in its own value chain, while an entrepreneur who grew such a company can possibly contribute to more broad-based entrepreneurial development as an entrepreneur rather than as a corporate honcho. Indications are that Catamaran would be sector and scale agnostic while investing, which is an encouraging sign. Going beyond Infosys and N R Narayana Murthy, however, one needs to recognize that entrepreneurial development could occur in different configurations and formats. Entrepreneurs who tasted success have now the opportunity and option to provide a discrete institutional structure, distinct from the firms that they founded and grew, to provide a genuine and powerful thrust to entrepreneurial development in the country.

Scaling and scoping; pathway to growth

Any enterprise emerges and grows on only two fundamental dimensions: product (service included) and market (geography or customer segment included). Depending on the product range and market spread enterprises get positioned in terms of scale and scope. The modernization of the corporation on a number of collateral and enabling factors such as technology and organization has to only serve these two fundamentals. While the entrepreneurial spirit of discovery of product and market niche has always been an integral part of social and economic development, the emergence of the modern corporation has sought to substitute that spirit with systematic quest.

It is imperative that entrepreneurial effort is viewed independent of scale and scope as the overwhelming factors on one hand, and technology and organization as the differentiating factors on the other. India has traditionally given considerable importance to the development of cottage and small scale industries, essentially through investment and tax incentives. Evolution of large scale industry has been seen as a logical pull for further development of such smaller enterprises. Yet, the whole cottage and small scale enterprise movement has got grounded over the years due to the enterprises failing to appreciate the product-market interplay. There is a need to redefine the enterprise hierarchy to identify where and how different generations of entrepreneurial effort fit best.

From nano to mega; a wide enterprise spectrum

Entities which cater to one product group and one small homogenous market segment are best termed as nano enterprises. We see nano enterprises all around us but fail to appreciate how the entrepreneurial effort is surviving despite lack of attention to it by the formal economic system. The vegetable cart vendor who serves the neighborhood homes, the tailor who meets the clothing needs of the location and the corner grocery shop which provides the food and family items, for example, constitute nano enterprises. A nano enterprise is usually operated by only one individual, the founder or the owner.

A printer who prints multiple products for multiple clients with a printing machine and a small team of assistants, a restaurant which provides multiple cuisines for a multi-ethnic population, a boutique which caters to multiple clothing styles constitute the next level of micro enterprises. When these are upgraded to a network in each case with better technology and logistics support for larger multi-location coverage they become small scale firms; a desktop networked printer, a chain of restaurants and a designer clothing studio cum boutique, for example.

A publishing cum printing house, a pan-Indian fast foods restaurant and an apparel manufacturing company all of which in modern times require modern technologies, trained work force and capable management represent medium scale enterprises. All listed national companies with highly organized research, manufacturing and marketing capabilities are the typical large companies; for example, a multimedia corporation with core competencies in print or television media, a ready-to-eat foods company and an end-to-end textile and apparel company. Blue chip companies and giant corporations in diverse industrial segments corporations, with global scale and scope, constitute mega corporations.

The efficiency with which each enterprise operates (for example, the number of households the vegetable vendor can cater to in a day) and the speed with which a firm can morph from one stage to the next higher stages (for example, leap from being a cart vendor, grocery shop and tailor to becoming a retail chain) is a function of entrepreneurial energy, duly supported by finance and management. The indigent nano entrepreneur, if equipped with a semi-motorized cart, can cover more neighborhoods. Finance and management can make an aggressive local retailer become a national multi-brand retail chain.

Idea to enterprise; passion to performance

From the yesteryears’ business magazine idea to yesterday’s direct-to-home television, true entrepreneurial effort is not one of a product or service whose time has come but of an idea which has been thought of ahead of its time. With the explosion in knowledge levels and the implosion in customer needs there exist today far more product and service ideas than at any point of history. Mentorship and financing are two critical inputs which can help the nano, micro and small enterprises get established first, and later become medium, large and mega enterprises. While large firms have the necessary track record and competencies to raise resources for new entrepreneurial ventures in their quest for growth, nano, micro and small firms need explicit, dedicated and empathetic support.

India does not have angel investors. The financing and investment eco-system in India is not specifically geared to spot entrepreneurs and help them translate their ideas into enterprises or organized activities. Established venture capital firms and private equity funds cater to large firms, and only occasionally to medium firms. In India, nano, micro and small firms can emerge and survive only based on conservative bank priority funding. India therefore needs a wholly new genre of entrepreneurial financing, whether it is a uniquely Indian type or an established Western type. There is a need for a new breed of financial entrepreneurs to emerge to lead a whole new entrepreneurial revolution in India. Several alternative models, all of them, relevant to different types of entrepreneurial initiatives need to be simultaneously considered.

(a) Individual financing model

The ability to finance nano entrepreneurial ventures exists among all earning members of the society, especially the high net worth individuals (HNIs). The investment required for a vegetable vendor to acquire a modern cart, for a tailor to add a multi-purpose sewing machine and the corner grocery shop to have its own brand of home foods would not exceed Rs 10,000 in each case, which amount is entirely within the means of any earning individual with high savings potential. HNIs more particularly could keep a target of creating a nano-entrepreneurial venture each year and leave their stamp on the history of entrepreneurial development. Even retired personnel can reinvest a small part of their retirement proceedings to set up their own nano enterprises, be it a corner shop or a core service for the community.

Extending the concept further, gated communities and apartment associations which would have a larger access to collective resources and provide a captive user need basket can help establish nano-entrepreneurial ventures that meet the community needs effectively. From a security service to a mechanized laundry and from a library service to a documentation service, opportunities for creation of nano ventures by residential communities are indeed plenty. As these gated communities develop into new suburbs and mini-cities the nano and micro foundations of business can indeed grow over time.

(b) Corporate catalyst model

Major corporations, given their organizational infrastructure and market reach as well as their financial capability can contribute impressively to the entrepreneurial movement directly and indirectly. The logical way, as discussed in an earlier post, is to convert or let go fragments of their value chain or operational spectrum as nano- or micro-entrepreneurial ventures. This is a natural and economical way of creating entrepreneurial value while enhancing cost-competitive position of the company. Each function or domain of a firm, for example, research, manufacturing, marketing, supply chain, human resources, accounting, information technology and clinical trials offers scope for creating entrepreneurial outfits for outsourcing of fragments of such domains.

Yet another way is to leverage a corporation’s resources to reach out to wider population, create awareness and harness passion, in association with Non-Governmental Organizations (NGOs) and Not for Profit Organizations (NPOs). The success of the Teach India 2009 campaign organized by the Times of India media group in association with select NGOs in bringing together educated experts to teach underprivileged children is proof enough. Corporations can undertake equal aplomb entrepreneurial initiatives utilizing their resources. In addition to individual corporations industry associations such as FICCI, CII and ASSOCHAM can play a catalyst role by creating divisions for entrepreneurial projects.

(c) Not-for-profit organization model

Not-for-profit organizations (NPOs) headed by passionate leaders can spur and support entrepreneurial initiatives. Bharat Yuva Shakti Trust (BYST) is a trend setting model in this context. BYST is a non-profit organization headed by Lakshmi Venkatesan and set up for providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans, mentoring, networking and marketing. The young micro-entrepreneurs are nurtured until they reach a level where they are not only self-sufficient, but they in turn make a valuable contribution to the society through creating wealth and employment.

Nationally, BYST has supported 1900 micro-entrepreneurial ventures, employing over 20,000 people and providing training to over 75,000 people. BYST has both rural and urban training programs covering six major regions of India. The Confederation of India provides the infrastructure and administrative support to BYST. BYST is also networked with international organizations that are aligned to similar objectives. A high point of BYST is its ability to bring business and industry experts into its programs of mentorship for the micro-entrepreneurs. This “beyond the financing” strategy provides the requisites competencies to the micro-entrepreneurs and enables sustainability to their ventures. For a country as large as India, there is potential for many more NPOs organized on the model of BYST to support nano and micro enterprises.

(d) Microfinance corporation model

The Grameen Bank was founded by Muhammad Yunus in Bangla Desh to provide tiny loans for the poor to enable self-employment. The success of the Grameen Bank and the global recognition it secured is reflective of the potential of directed micro credit. Over a period of 12 years, the Bank created over 6 million active borrowers disbursing over 900 million in tiny loans. The pioneering work in employment generation touching the lives of the poorest of the poor fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006. Today the Grameen Bank has become more diversified in its product offerings, leading to greater generation of wealth for its customers.

Extending the concept further, a bank dedicated for creation of micro-entrepreneurial enterprises can lead to creation of millions of micro enterprises in India. Potentially, banks and specialized institutions such as Small Industries Development Bank of India can lead this micro-enterprise initiative by transforming their respective priority banking arms into divisions of nano finance and micro finance for appropriately scaled entrepreneurial enterprises, with a new direction. While rural banks did get set up in India even decades ago, their inability to lead an entrepreneurial revolution is related to adoption of policy driven big bank mores rather than entrepreneurial risk taking approaches. A new format and approach for micro finance corporations is called for in India.

(e) The Murthy-Catamaran model

The Catamaran Venture Capital fund was set up by Infosys founder, NR Narayana Murthy and his wife Sudha Murthy by selling their shares constituting a small part of their shareholding in Infosys to raise Rs 6 billion (USD 133 million). This amounted to 0.43 percent of the total capital of Infosys. The move by Narayana Murthy is a trend setter for successful entrepreneurs to share their wealth and expertise to reinvest in others’ entrepreneurial ideas and create wealth for others and the society. The companies listed in the National Stock Exchange of India have a combined market capitalization of over USD 1 trillion. A sale of even 0.5 percent of the capital could lead to a massive USD 5 billion fund that could be set up to several Catamaran style venture capital funds.

Assuming that promoters have on average over 25 percent of the overall capital structure of the listed companies, successful entrepreneur heads of Indian corporations have in their hands a huge funding potential to support millions of micro, small and medium scale entrepreneurial enterprises. It is hoped that the entrepreneur-heads of all listed companies, including public sector undertakings would dedicate at least 0.5 percent of their respective companies’ shareholding to support entrepreneurial ventures. When this scale of finance is coupled with their personal commitment to mentor budding entrepreneurs a sea change would occur on the entrepreneurial scene. It is to be hoped that several other successful entrepreneurs as well as corporate group heads would replicate or improve upon the Catamaran model.

(f) Western venture capital model

Venture capital firms entered the Indian industrial scene in the 1990s in a big way along with the economic policy liberalization. Their entry was pursuant to a decision of the Government of India to allow foreign finance companies take stakes in the Indian companies. Taking small stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies, venture capital firms enabled a number of first generation enterprises strengthen their equity structures and also list themselves on the bourses. Venture capital funds enable companies achieve the crucial leap from a modest beginning to a modern era, accessing technologies or markets through their financing. As companies are not typically listed at that stage, venture capital firms take stake based on stock pricing negotiated with the promoters.

While venture capital firms serve a valuable purpose their emphasis on growth and exit at attractive valuations, through listing or further sale to other strategic investors tends to distort orderly growth of companies. Typically, venture capital firms help establish medium scale enterprises with their investments ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on sunrise and entrepreneurially driven sectors. India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments. Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology, nanotechnology, healthcare, education, alternative fuels and clean technologies, providing confidence to entrepreneurs move into such sectors. That said, unless the Western venture capital funds tie up with Indian groups the ability to take risks relevant to the Indian scenario could be weak.

(g) Global private equity model

While venture capital and private equity funding is seen to be synonymous, private equity funds tend to favor listed companies for their investments. Most private equity firms enter established firms through preferential allotment of new shares to themselves at prices that reflect market valuations or reflect specific premiums based on their insights into business plans. While venture capital firms provide growth capital, private equity players provide funding for a variety of purposes including growth capital, capital for retiring debt, mezzanine funding and acquisition war chest. With investment ranges from USD 50 to 200 million, private equity firms can truly shape medium scale enterprises become large corporations. However, the global economic downturn of 2008 and 2009 saw the weak foundations of organized venture capital and private equity industries.

The established private equity industry has global investors. Their investments are subject to returns to their investors, some of them extremely large and powerful ones such as global pension funds. In good times these private equity players are nation, and sector agnostic, seek a diversified investment portfolio and display a penchant for globalization of their portfolio firms. In difficult times, however, they tend to be extremely cautious. It is time that Indian financial institutions, gratuity and pension funds, mutual funds and provident funds as well as large public and private sector groups created India’s own private equity behemoths.

(h) State as super equity player

As large firms grow larger, many grow beyond the reach of even large private equity players. Large firms and private equity players manage the situation be creating subsidiaries for newer activities and channeling equity flows. In countries such as India where government owned public sector undertakings (PSUs) occupy commanding heights of the economy State has to assume the role of a super public equity player or venture capital player, with respect to the PSUs. Several corporations in infrastructure sector have emerged due to such public investments by the Government of India. These, in turn, have led to creation of new strengths in the economy, which the private sector or the overseas players would have considered to be either beyond their means or their risk profile.

While a school of thought questions the efficiency and appropriateness of a large PSU sector, there is no denying that but for such investments many mega corporations in oil, gas, refining, power, power equipment, locomotives and other investment intensive sectors would not have been established. The induction of new technologies and establishment of new industries with uncertain commercialization opportunities requires massive investments which only governments are willing to make. The Government of India’s disinvestment plans could unlock e easily USD 10 to 20 billion depending on the PSUs chosen for disinvestment and stake sale levels. Though the Government plans to dedicate the proceeds to social service programs it would be equally logical to channel at least 50 percent of the proceeds to setting up new PSUs in long gestation, high technology sunrise sectors. Such an approach would provide technological assurance and employment security to the nation. An alternative could be for the listed PSUs to issue additional shares at premium to strategic investors and initiate such new generation enterprises.

(i) Government policy liberalization

Indian Government has helped the growth of medium and large scale sector by the policies of economic liberalization initiated in 1992. Despite continued prevarication over the last few years, further liberalization is expected with a special focus on infrastructure sectors, supporting high capacity entrepreneurial investment by Indian and foreign corporations. Yet, liberalization policies in projects of social infrastructure continue to be bureaucratically governed with the objectives of supervising quality, eliminating exploitation and protecting public safety. Projects in sectors such as education, transport, healthcare, banking and retail are singularly affected by such policies. There is a need to find new liberalization formats that support entrepreneurial spread.

The new Companies Bill is expected to give a fillip to entrepreneurial activity with the One Person company provisions. This laudable reform in company law may not result in the desired boost to entrepreneurial activity if social infrastructure sectors are rigidly governed by bureaucratic barriers to entry. Much of the liberalization responsibility in this sphere rests on the State Governments as well. The governments need to establish single windows to facilitate setting up of One Person companies in a host of fields. The objectives of ensuring quality and safety are better served by establishing technology bodies to supervise quality and safety rather than by controlling entry.


Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope. From nano to mega, enterprises can be positioned and grown depending on the applicable product-market scope in each case. While there are several financing models available to finance varied types of entrepreneurial ventures, the new Catamaran venture capital model being pioneered by N R Narayana Murthy, the founder of Infosys is of great significance. This model involves successful investors raising money by selling a small portion of their holdings to set up venture capital entities which will offer not only finance but mentorship by the successful entrepreneurs. Individuals and corporations can also play catalytic roles in enabling entrepreneurial ventures in different capacities. Also relevant are financing models of not-for-profit type and microfinance corporation type. At the other points of spectrum established venture capital funds and private equity players have to rework their models and become more entrepreneurial by themselves. Indian mutual funds, pension funds and provident fund organizations as well as corporate groups have to set up India’s own venture capital and private sector funds. At the apex level the Government has to rediscover its role as a super venture capital investor, gaining additional financial capability from the envisaged PSU disinvestment program. Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano, micro, small, medium, large and mega entrepreneurial entities in India.

Posted by Dr CB Rao on January 14, 2010

Monday, January 11, 2010

National Entrepreneurial Culture: Systemic and Mindset Factors

Widespread industrial and economic development of a nation is triggered by entrepreneurial initiatives in the country. India which is recognized today globally for its educated and hard working human resource base needs to focus its sights on harnessing entrepreneurial spirit for enhanced economic and social development. This paper discusses several approaches to ignite the entrepreneurial spirit with widespread positive impact for India.

Entrepreneurship defined

An entrepreneur is someone who starts his or her own business, especially when such activity involves risks. The risks relate primarily to market acceptance of business proposition, arrangement of requisite capital, creation of organization and uncertainty of financial returns. An entrepreneur mitigates the risks by developing a unique proposition for his venture in terms of product or service innovation and / or cost arbitrage relative to a larger organization. The combination of innovativeness and competitiveness that is implicit in an entrepreneurial activity acts as the key trigger for broader industrial and economic development.

A study of industrial history points out that each and every global corporation has had its roots in entrepreneurial activity; from Henry Ford’s Ford Motor to Akio Morita’s Sony. That said, it has also been a natural phenomenon for established business houses to start their own entrepreneurial initiatives through diversification projects. While such initiatives lack the main ingredient of a typical entrepreneurial activity viz., personal risk-taking of a promoter, such growth initiatives do involve risks on other multiple dimensions, and contribute in an equal measure to accelerated industrial and economic development.

Entrepreneurship in curriculum

The Indian education and social system is typically geared towards secured jobs, particularly in large organizations. Educational streams are pursued based on potential employment opportunities, regardless of the aptitude and flair of the students. Very few, if at all, of the students are tuned towards starting their own business enterprises. It is important therefore that Indian curriculum from the early schooling days incorporates entrepreneurship as a core subject of curriculum. History has instances of brilliant inventors, whether Alexander Fleming who discovered Penicillin or Graham Bell who discovered telephone, laying foundations of great business empires. The Indian educational system needs creative economic historians who can interpret the history of industrial innovations and business creativity across generations, and identify core entrepreneurial initiatives that transformed business and economy over time.

As a student progresses from a school to a college and later to a professional institution and a university, it becomes appropriate to inculcate the entrepreneurial approach through specific projects. The project work that needs to be undertaken by a student in a real life or in a business setting in partial fulfillment of the graduate or post-graduate study requirements provides an important avenue for entrepreneurial development. Unfortunately, this system has been reduced over time to a grudgingly tolerated formality by both the academic institutions and business undertakings. There is a clear need to revitalize and redefine the system of project work to fulfill a larger entrepreneurial purpose that it can truly deliver.

A reputed business school in India has recently initiated a process by which some of its students could work with industry icons as their understudies. This practice, the school felt, could enable them gain valuable insights into leadership styles. What is perhaps even more urgently required is a system by which graduate and post-graduate students are encouraged to work on establishing pilot scale industrial or business projects based on co-guidance from the academic institutions and business enterprises.

Teams of people from technical and managerial disciplines from within an institution as well as from different technical and business management institutions (say, from IITs and IIMs, to start with) can combine to undertake such projects. This methodology would, of course, require a sea change in how the institutions approach the project work as part of their academic curriculum and how they would provide credits to individual and group work. A revitalized academic industrial initiative of entrepreneurial projects would prepare the students exceedingly well on the entrepreneurial journey.

Entrepreneurship at work

Much has been written about how an executive, manager or leader in an established undertaking also could be entrepreneurial at work. It is possible and desirable for one to be an entrepreneur at work notwithstanding the fact that one is bound by structure, systems and processes in taking decisions and executing them. Being an entrepreneur does not mean being all alone, taking all decisions individually or taking risks all upon oneself. Even an entrepreneur would need to create a vision, strategy, structure and process with a team and raise finances through articulation of the concept to the potential stakeholders. The challenge for an executive at work to undertake new developments, construct new projects, introduce new products or foray into new markets is no different. The challenge even for a corporate executive is one of identifying a new domain based on one’s own experience, expertise, risk-taking ability and communication skills. Entrepreneurial executives can help companies expand and diversify their businesses, reaching higher career heights in the process.

Entrepreneurship at work does, however, require an appropriate organizational eco-system. Entrepreneurially vibrant organizations, in fact, are distinctly differentiated from bureaucratically pedestrian organizations. Leaders and managers in entrepreneurial organizations tend to encourage scientists, technologists and other professionals take risks in setting up new projects or venturing into new domains. There exists palpable latitude in such organizations towards forgiving genuine mistakes or accepting unanticipated outcomes. This objectivity nurtures the ability of people to undertake risky but potentially rewarding projects. Such organizations balance the rigidity of structure and process with the flexibility of innovation and creativity. This requires an organizational culture in which the entire leadership team is committed and aligned towards being entrepreneurial at work. Usually, such total entrepreneurial alignment within the top leadership is not possible given the multiple backgrounds from which various leaders come from. As an alternative, organizations could create entrepreneurship councils as a formal means to encourage executives, managers and leaders take entrepreneurial decisions, as distinct from those related to regular operations and normal business continuity projects.

Entrepreneurship at the helm

One would imagine that having an entrepreneur at the helm is one of the best ways to promote the continued entrepreneurial growth of the corporation that he helped to conceptualize and grow. One may even conclude that an organization which has an entrepreneur-founder at the helm as the Chief Executive Officer (CEO) would be the most entrepreneurial, always exploring new avenues. Unfortunately, however, several entrepreneurial organizations as they grow larger tend to become deliberative, if not bureaucratic. They tend to take strategic decisions (for example, integration, diversification, divestiture and acquisition) in a structured manner within the defined industry boundary. The entrepreneur who is also the CEO in such organizations gets bound by accountability to his shareholders and investors and finds it difficult to take apparently radical business and investment decisions, especially if they are unrelated to the current business, in an entrepreneurial manner. Getting stuck as an entrepreneur at the helm of a corporation is possibly not the best way to replicate, in broader domains and with greater resources, what the same entrepreneur could achieve in a much narrower domain and with a much smaller resource base.

The logical solution for the entrepreneurial plateau in decision making seems to lie in each entrepreneur making a decision on continuing to be an entrepreneurial leader vis-à-vis a professional leader. Whether to head and manage his corporation or remain a mere investor turning over the reins of his corporation to a full-fledged professional is a healthy dilemma which every entrepreneur must face from time to time. Remaining as an entrepreneur, choosing to move away from day to day management, would help the entrepreneur to refocus his energies and resources on newer entrepreneurial ventures. The business models, investor regulations and economic system that dominate the Indian business system are unfortunately not conducive to entrepreneurs to establishing newer ventures. In addition, the Indian entrepreneur tends to get emotionally and physically attached to the company he created, often failing to see the larger role he could play in national wealth building. The American culture, on the other hand, is one of entrepreneurs creating value, monetizing it and moving on with new business lives. The American entrepreneurial culture has clearly led to a continuous creation of newer and more challenging businesses of greater value in the US economy. This is perhaps a more appropriate model if India has to utilize effectively its scarce entrepreneurial talent. A true entrepreneur would need to be a serial entrepreneur rather than a static entrepreneur in this model.

Entrepreneurship as CSR

To provide a sustainable fillip to the entrepreneurial movement in the country, corporations need to take up development of entrepreneurs as a corporate social responsibility (CSR). Apart from encouraging induction of entrepreneurially trained graduates and post-graduates into companies, and enabling entrepreneurship at work, corporations need to take up molding of entrepreneurs as a core social responsibility. This could occur in two ways, both of which are mutually supportive to each other. In the first method, each corporation vows to develop at least a few entrepreneurs out of its workforce or from the general public by outsourcing some of the tasks which it has been doing by itself. For example, a company which has been doing all its equipment maintenance itself may choose to let its maintenance chief form an entrepreneurial venture that maintains facilities and outsource the activity to him. There are similarly several possibilities for large companies to outsource their broader supply chain management activities (including materials planning, procurement and logistics activities) or corporate services activities (including recruitment, accounting, audit, customer relationship management) to entrepreneurial ventures led by their own executives. While such activities may run the risk of breeding collusive cronyism, true entrepreneurial spirit should see such ventures break free of their sponsors and growing on their own sooner than later.

The second way of corporate entrepreneurial responsibility is to reach out to the wider society and enable members of the society to set up their own enterprises. Corporations adopting their neighborhoods can help the citizens set up a slew of social and economic ventures based on their capabilities. From simple social activities like tailoring and retailing to more involved infrastructure activities like education and business, corporations can, through their corporate social responsibility arms, contribute to an indigent society evolving itself into an entrepreneurial society. As industrial firms seek to expand aggressively through new industrial campuses and economic zones, the need to support the society with more sustainable means than one-time cash remuneration for the acquired land is self-evident. Typically, companies undertake varied corporate social responsibility activities only. Upon securing of their business models and operations as is evident by the contributions made in this sphere by established companies. However, by integrating corporate entrepreneurial responsibility as part of their entry strategy in new green field projects the companies can seek synergy between industrial development and social equity.


With over ten million graduates, post-graduates and research scholars graduating annually from colleges, institutions and universities of higher education in India, the potential to develop and unleash the entrepreneurial energy of the vast educated work force is immense. Even if a small percentage of the educated human resource base opts to establish its own entrepreneurial ventures, the employment and development triggers for the Indian economy would be immense. This, however, requires significant systemic and mindset changes. From ingraining self-reliance and entrepreneurship as an early family and educational ethic to the development of an industrial and economic system that encourages entrepreneurship both at work and outside work a host of systemic and cultural changes are required to achieve the full potential of a highly literate and highly entrepreneurial educated India.

Posted by Dr CB Rao on January 11, 2010

Friday, January 8, 2010

The Challenge of Leadership Development: From Disablement to Enablement

Leadership is not merely about creating vision, strategy and action plans but more specifically about translating them into tangible corporate accomplishments. Much has been written about what constitutes the right leadership competency for an organization. Despite companies having leaders who fulfill broad parameters of leadership capabilities the collective competency is rarely translated to corporate performance to the fullest extent. This article discusses the parameters of leadership processes that sub-optimize leadership delivery in most corporations and lays out certain methodologies to enable top-notch leadership performance.

Leaders and leadership

The author in his blogpost “The Cubic Model of Leadership” (Strategy Musings:April 20, 2009) outlined a three dimensional model of leadership which focuses on results, processes and competencies as the three primary dimensions on which leadership gets identified. There being no single universal metric of leadership, the post also discussed three sub-dimensions on each of the primary dimensions. Revenue driving, profit driving and value driving on the dimension of results, envisioning, strategizing and execution on the dimension of processes, and mentorship, communication and networking on the dimension of competencies exemplify leadership variances. The post also highlighted how three iconic leaders, Jack Welch, Bill Gates and Carlos Ghosn, each highly successful in different backgrounds, represented unique combinations of the multiple leadership dimensions.

General Electric continued to post continued stability and growth even after Jack Welch retired. Microsoft revitalized itself even though Bill Gates moved into a passive oversight role. Renault-Nissan continues to be steered exceptionally well under the most trying market conditions for automobiles globally. Leadership in such companies is an institutionalized phenomenon rather than a uniquely personal identity. This lesson is evident from a review of several other well run companies internationally and in India. For example, Toyota, Pepsico, Kellog, Apple and McKinsey internationally and Hindustan Unilever, Tata Steel, Tata Motors, Infosys and L&T in India illustrate how such corporations prospered through successive leadership transitions. Clearly, the ability of a leader to nurture several potential leaders is the primary enabler for companies to benefit from total leadership potential. 

Business canvas and leader count

Leadership occurs at functional, business or corporate level depending on the scale and scope of the corporation. It is almost axiomatic that the linear growth or diversification of a corporation tends to be a function of the number of leaders in the corporation. Leaders typically seek excellence and recognition by developing their functions, businesses and the companies they head to ever higher levels. Many management experts therefore recommend organizing a company in terms of clear and focused functions or businesses so that leaders can own them and drive their performance. The organizations that are listed above for continued performance excellence across several generations of leaders have benefited from such structural and strategic clarity.

That said, it is difficult to a priori determine the optimal number of leaders for a company. In an integrated, functionally organized company true leaders who can optimally head a company tend to be few. This is because leaders in a functionally organized company are often not provided the requisite business exposure. An integrated company which is organized under a strategic business unit concept has better potential to develop potential leaders. On the other hand a corporation that is a diversified conglomerate is naturally better disposed to throw up a larger number of leaders with overall corporate potential. Clearly, this is a Catch 22 situation with business growth requiring leaders and leadership development requiring business canvas.

Leadership and corporate context

When companies benefit from broader economic growth rather than competitive positioning leaders fail to see the need for robust leadership teams that can manage economic vicissitudes. Smug with economic prosperity, such organizations and leaders alike often fail to look beyond the current leadership challenges. Boards, internal organizational experts and potential leaders often fail to address squarely the issue of leadership development, let alone succession. This problem is more pronounced in functional organizations and is relatively infrequent in diversified conglomerates. It requires leaders to be as visionary about their own successors as they tend to be about the businesses they seek to grow. A review of worst-performing US corporations such as AIG, Fannie Mae, Freddie Mac, General Motors, Citigroup, Merrill Lynch, ConocoPhillips, Ford Motor, Time Warner and CBS does reveal that a fatal combination of strategic misdirection, operational failure and leadership vacuum contributed to the horrific performance of such corporations in recent times.

On the other hand, the most admired corporations such as Apple, Berckshire, Toyota, Google, Johnson & Johnson, Proctor & Gamble, FedEX , General Electric, Microsoft and Wal-Mart reflect an ability to handle economic vicissitudes through leadership depth. It is instructive that these corporations are essentially driven by innovation, competitiveness and globalization which require, as well as provide, perfect opportunity for leadership development. These corporations typically put forth leadership talent ahead of business development and thus institutionalized a virtuous cycle of corporate growth and leadership development. In this process, diversified companies, for example General Electric, had an even better edge with structured business evaluation processes and leadership development institutions. On the other hand, integrated companies, for example Microsoft, had to rely on external talent to an extent to top up leadership talent to handle the impact of the Internet and Cloud Computing.

Ageing and leadership development 

Clearly, there is no substitute prescription for leadership development. The process of leadership development, in fact, needs to be as assiduously instituted in integrated corporations as it is naturally experienced in diversified conglomerates. This requires the leader to look beyond him or her to power future growth. Leadership perpetuation, often built on the past or present successes of the leaders, is a fallacious concept and constitutes a disabling threat to sustainable growth of a corporation. Progressive companies such as Tata Group in India have tackled this problem by establishing transparent and objective criteria for leadership succession. The policy requires that all executive directors retire by 65 years of age and non-executive directors by 75 years of age. Typically, executive directors move into non-executive director positions for the same company or for other companies within the group after the prescribed age. Companies such as Infosys have followed a policy of creating leadership vacuum by design to transit other highly capable leaders move into apex leadership positions.

While it is ideal to have structured retirement policies as in the case of Tata group or Infosys it is not always possible for companies to be time-titrated in leadership development. Voluntary and proactive efforts of the apex leaders and the boards should be channeled to develop a talent pool which not only drives the business but also exerts pressure to identify appropriate channels to utilize the leadership energy. Leadership development has fuelled the growth of several companies into new geographies and product lines. Monolithic companies have established structures such as leadership councils, management committees and executive boards to provide exposure to, and experience in, strategic business management to functional leaders. Some companies have also encouraged functional leaders to become entrepreneurs by letting them establish ancillary companies. Whatever the policies adopted, proactive development and timely utilization of leadership talent has differentiated the firms that have grown more aggressively than others even in single industry situations. 

Courting young and counting right

The process of leadership development starts with catching potential leaders young. Many blue chip companies in India have over the decades institutionalized the process of inducting graduate, post-graduate and management trainees through campus requirements. More progressive companies within the blue chip group have, in addition, established in-house leadership training institutes to hone the leadership skills of potential leaders. These measures, coupled with processes of job rotation and entrustment of challenging assignments, have led to an appropriate recognition for leadership talent. Promising officers of several reputed public and private sector undertakings in India have started as such trainees and moved into chief executive positions in their companies or other companies. For example, AM Naik of L&T, S Ramadorai and N Chandrasekaran of TCS, SK Roongta of SAIL and 01 B Muthuraman of Tata Steel all joined their respective companies as engineers and rose to CEO positions. It may be hypothesized, at least in the Indian context, that such structured recruitment procedures could serve as an enabler for high quality leadership development even as their absence could act as a major disabler.

Having the right count of the potential leaders is yet another challenge of leadership development. Like the macro organization, leadership hierarchy is reflective of a pyramid that is broad at the base and sharp at the top. The progress across levels in competitive organizations happens in a deliberate manner, surmounting challenges, demonstrating performance and benefiting from well-planned selective leadership initiatives. Infosys, India’s leading IT corporation, has created a compelling norm in this process. For one CEO, the company has at any time four full time directors who are completely capable of becoming CEOs and four hundred potential leaders across the company, covering various hierarchy levels. The “1-4-400” principle, covering a multi-geographic, multi-service global corporation is certainly a trendsetter for corporations seeking orderly leadership development. The ability of companies such as Hindustan Unilever, Infosys and Tata Steel to retain equals at the top in anticipation of, and despite, leadership selection is a unique attribute that deserves to be imbibed by aspiring blue chip corporations. 

Differentiating while integrating  

Leadership is all about achievement and differentiation. Business or functional leaders in competitively positioned corporations often exert to demonstrate superior performance. While functional performance is rather easily judged performance of business units is harder to judge. The lead times involved in successful commercialization of novel technologies, for example, makes it difficult to differentiate the performance of sunrise sectors vis-à-vis mature segments. The judgments could, in fact, move either ways depending on the biases that evaluators bring. Adding to the complexity are aspects like interdependencies of functions or businesses, and the expedient business practices that could spur or depress performance in certain markets. For example, it is hard to complain against a business leader if the performance of his business is constrained by the inability of corporate human resources department to recruit the right talent. Similarly, it is inappropriate to praise a business that has been built around ingratiation to opinion makers.

It therefore emerges that while differentiation is important it is also critical to assess performance independent of factors that unnaturally spike or depress performance. In this context, integration of a value-driven ethical platform in the conceptualization and operation of business models assumes importance. Progressive companies lay significant emphasis on ethical business practices as a cornerstone of doing business. Progressive companies also believe in constituting leadership councils and bringing issues of business performance into open discussion. Integration of distinct functions or businesses with transparent policies and objective metrics helps proper assessment of differentiated performance. Groups like Tatas, Proctor & Gamble and Unilever have established global business metrics, including robust financial oversight, to ensure value based performance. Irrespective of scale and scope, companies should institutionalize value-filtered performance management systems from the very inception.   

Decision Rights with outcome responsibilities

Leadership is often exemplified and enabled by the clarity, intensity and correctness of decision making. Clearly, a true leader should have the ability to seek and utilize decision making space. Many companies and even leaders fail to appreciate the need for genuine decision making space. Some companies attempt to address the problem through a rigorous budgeting process whereby businesses are allocated budgets as per potential. That is, however, only a partial solution. The real pathway for establishing and enabling leadership potential lies in defining clearly the decision rights of a leader. A business leader should have clarity about the extent to which he can use the levers of operational and business management. A leader who has aggressive business enhancement goals should, for example, be free to take material sourcing, product licensing and inorganic growth decisions to be able to jumpstart the growth. Decision rights are a synergistic combination of strategic paths and budget allocations placed at the disposal of a business leader.

Decision rights, however, have to coexist with outcome responsibilities. A business or functional leader who earns his degrees of freedom through well defined decision rights must also assume responsibility for the outcomes of his decisions. In talent-scarce economies it is not uncommon to see aspirant leaders who assume positions seeking decision rights, making random decisions and exiting for other positions when decisions go awry. Responsible leaders, on the other hand, make balanced decisions and in addition subject themselves to objective evaluation of outcomes. Leaders who make ambitious decisions of divestitures, mergers and acquisitions, in particular, must last long enough in corporations to either make a success of their decisions or bear the cross for their faulty decisions, or ineffective execution. Leadership longevity is an essential prerequisite for responsible leadership.

In summary, successful leadership development is an institutional process which places high responsibility on the leaders as well as aspirants. It is contextual as well as contributory to the business canvas. Poorly led corporations tend to be careless about the process deficiencies that disable leadership development through perpetuation of faulty leadership. Well-led corporations, on the other hand, tend to be respectful about the six critical factors of positive leadership development viz., capturing leadership talent at young age and preparing requisite aspirants early on, differentiating based on performance while integrating based on value systems, and enabling leadership through decision rights while holding it accountable with outcome responsibilities. 

Posted by Dr CB Rao on January 8, 2010