Wednesday, January 25, 2012

Desires and Aspirations; Wants and Needs (DAWNs): A New Sunrise for Egalitarian Economics?

Basic economics taught us for decades that the human needs and wants dictated the economic behavior of individuals, societies and nations. At the core are the definitions of human needs and wants. A need is something without which it is not possible for a human being to survive; for example food, clothing, housing and protection from nature. On the other hand, want is something which is nice to have but without which it is possible for a human being to survive; for example, television, car or smart phone. As a society develops and its economy grows, more of needs are taken to be automatically available, and more wants are perceived as needs that are to be sought after as essential for living. This also explains the differential economic behavior across urban, semi-urban, rural and tribal areas in a nation on one hand and between developed nations, developing nations and the underdeveloped nations on the other. The paradox of needs and wants, and the resultant economic behavior is that resources are limited in nature, and do not lead to unlimited fulfillment of needs and wants even as human needs and wants are unlimited in quantity and quality. At the same time, it is the rather unlimited nature of human needs and wants that pushes the envelope of economic development. Typically, as each need is fulfilled, the accent shifts to fulfillment of a better class of need and fulfillment of basic wants. Economics is a social science that deals with the production, distribution, consumption of goods and services and their management. Human needs and wants, and the economics are therefore clearly interrelated.

Within any nation, there tend to be three main economic sectors which comprise the public sector, which includes the government and the government owned entities, the for-profit sector, which is mostly private sector organizations, and the not-for-profit sector. The not-for-profit sector is also called the third sector, nonprofit sector, independent sector or voluntary sector. In India, the public sector has been playing a major role in fulfilling the "needs" of the society by providing such things as roads, schools and public assistance or welfare. The funds providing these services are typically largely in the form of taxes, and cross-funded through public debt and subsidies. The for-profit private sector generally addresses the "wants" of society by producing and distributing goods and services to a portion of the population based on demand. Demand is the ability and desire to purchase goods and services. If there is a high demand, the private sector will supply those wants. Some examples of what the population demands from this sector include products such as luxury cars, expensive restaurants, cosmetic alterations, and so on, and services such as insurance, marketing, service, advertising, banking, accounting, finance, and so on. Equity, debt, profits and dividends provide the growth and reinvestment possibilities for the private sector. The not-for-profit sector is mostly responsible for the "needs" of the society, provided voluntarily with corpuses contributed by government subsidies, tax breaks and funding from the private sector and high net worth individuals. While the organizational principles are by and large common across the sectors, the governments are motivated by a simultaneous need to serve and control, the public sector entities are burdened by a combination of commercial principles and social purpose and the private sector entities are fired by motives of stoking the demand, increasing production of goods and services, and enhancing market capitalization.

The Indian context

The Indian context is a classic crucible for the basic economics of needs and wants. Seventy percent of India’s population is rural and indigent on farming that is subject to vagaries of nature. Despite significant economic progress, over 25percent of the population lives in extreme poverty, living on a measly earning of less than Rs 32 (60 US Cents) per day, which is the government specified poverty threshold. Over seventy five percent of the population lacks access to proper housing, sanitation, education and healthcare, providing another telling index of poverty. In this scenario, the emergence of an affluent middle class and the conspicuous consumption of high net worth individuals further compound the inequities. Leakage of the various benefits and subsidies before they reach the poor defeat the purpose of well-intentioned government sponsored welfare schemes, and eventually aggravate the overall tax burden and public debt burden in the economy. Infant mortality, child malnourishment and micronutrient deficiencies are endemic. Some pockets of some States of India are said to be faring poorly compared to even the underdeveloped world. Viewed in a macro-perspective, the Indian economy is still in a phase which requires massive need fulfillment across the population geographies and strata. It is a paradox of the global order that in the developed world that wants are easily fulfilled and needs are assured for a great majority of the population while in the emerging countries even a minority of the population would require subsidies for subsistence while wants prove elusive for the majority of the population. Without harping on the causative factors, one may still see this as a great opportunity of economic development, provided production, distribution and consumption of products and services are equitably organized.

The Indian context is notable for the peculiar nature of public, private and non-profit entity objectives. The Indian socialistic model which was antagonistic towards the private sector and the so called big business from 1947 to 1990 saw to it that the government departments and the public sector undertakings (PSUs) got into production and distribution of industrial goods and consumer goods even as the private sector was limited from producing more goods and services for the general population through controls on licensing, equity and debt funding and technology imports. As a result, governments, central and state, could not invest as much as they ought to have in their primary areas of responsibility of social services and infrastructure, and also by default, through the control and command economy model, limited employment generation, technological modernization and demand globalization. Given the skew in public-private participation the non-profit organizations had to move into core areas of social services rather unsuccessfully in contrast to niche areas of service where they would have been more successful. The production-distribution system in India until the economic liberalization of the 1990s sub-optimized the need-want fulfillment. Unfortunately, even after the economic liberalization, however, the liberalized production-distribution system continues as an imbalanced need-want system at the bottom of the social pyramid while a new desire-aspiration driver at the top of the social pyramid has emerged, leaving also a huge uncared for middle portion in the social pyramid. The Indian economy, even before it could cross the trajectory of need-want fulfillment has begun to try leaping on to a more challenging, and even diversionary, trajectory of desire-aspirations pursuit.

Desires and aspirations

Desire is a higher form of want which is accompanied by longing and craving. Influences of social esteem distinguish desires from wants. Aspiration is an even stronger form of desire, tinged by ambition, a potential sense of achievement, and a strong feeling of ego fulfillment. As opposed to needs and wants which are somewhat personalized and stand-alone, desires and aspirations are comparative and are sparked by the cognitive window that an individual possesses. In the Indian economic policy milieu that struggled to cope with “need-want” basics, economic liberalization and globalization brought in “desire-aspiration” as new drivers of economic growth. Indian markets are now home to the top brands of the world in almost all consumer-touching areas such as watches, perfumes, apparel, automobiles, writing instruments, jewels, electronics, home interior products, international travels and scores of other luxury items and services. Aspirations assume an even a larger canvas of social and economic behavior. In contrast to needs, wants, and even desires which are all, by and large, product and service specific, aspirations tend to be life-centric. For example, ambitious young executives no longer desire just a flashy car or a smart phone but instead crave for a total millionaire lifestyle. There is overtly nothing wrong in having aspirations of good to great life but when the socio-economic price of luxury-spend shoots through the roof and contrasts garishly with the stark reality of millions not having two square meals a day, one would wonder if desires and aspirations have arrived too early into the Indian psyche to be of any benefit for orderly economic development.

The issue with the creation of islands of luxury living and proliferation of luxury brands in an inequity stricken emerging economy is that it distorts deployment and use of scarce resources. This inequity gets enhanced when the luxury brands are import dependent, and even more when they are imported as completely built units. According to estimates, a typical luxury product could have an inbuilt premium of 100 to 500 percent, compared to a more functional product, in each category. For example, a luxury car would have almost the same level of component fitment and processing activity as a normal sedan car would have. Even with some allowance for premium accessories and trim for a luxury car, a luxury car requires almost the same employment hours but consumes two to five times higher consumer dollars. From an economic point of view, each dollar spent by the consumer, and invested by the producer, on luxury and super luxury products creates less employment than normal consumer dollar. The possibility of employment dollars dwindles even lower when the product is imported completely as a fully finished product. In a globalized economy, barriers to trade are, of course, an anathema to neo-economists. Yet, one cannot ignore the compulsions on resource strapped developing economies to ensure that each investment Rupee or consumption Rupee is spent for the maximum possible economic benefit.

Archaic socialism, or orderly capitalism?

The inability of the socialist economies to reach full potential in the second half of the 20th century is attributable to State controls which stifled free enterprise. India was a classic example. Surprisingly, State capitalism practiced by China gave astounding results. The 21st century, however, ushered in significant changes in the world economic order, especially over the last five years. Free market economies with unbridled financial systems posed systemic risks and caused global economic meltdown. Welfare economics funded by public and global debt without productivity driven economic growth has caused in part the Euro Zone crisis. Given that State capitalism has been uniquely and inimitably only a phenomenon of China, and in addition is antithetical to democratic cultures, there do not seem to be many choices of alternate economic paradigms that can be followed by emerging economies such as India. Rather than despair, it would be appropriate for the Indian polity to leverage the historical socialist roots fused with contemporary free market enterprise to generate a new model of orderly capitalism. The need for such orderly capitalism is dictated by the continuing inequities juxtaposed with the economic benefits of free market enterprise.

According to an analytical study by the National Council for Applied Economic Research (NCAER) and Centre for Macro Consumer Research (CMCR) just about 1 percent of India’s households have an annual income of Rs 1.25 million (USD 25,000). This is far lower than the income threshold of top 1 percent in the US of USD 500,000 to 700,000. The US figure is 20 times that of the Indian threshold, and is 10 times more even after adjusting for the purchasing power parity. On the other hand, the minimum wage guaranteed by the Central Government under the National Rural Employment Guarantee Act (NREGA) is just Rs 100 (USD 2) per day, guaranteed for only 100 days in a year. Considering the millions of indigent households, the inequities between the USD 400 annual income at the bottom end and the USD 125,000 annual income minimum threshold for the top 1 percent households are strikingly disheartening. Do the rural households need more Xylos and Safaris or more tractors and bore wells, and do the urban households need more Audis, BMWs and Mercedes Benz’s or more buses and monorails are questions difficult to answer non-emotionally. If progress is pursued without rational economic allocations there could be more progress surely but with more inequities. On the other hand, if free market enterprise is pursued with caveats of inequity reduction, potentially the benefits could be synergistic.

Optimized DAWNs: A new sunrise for egalitarian economics

The development of human race has for centuries been predicated upon creation, discovery, development and utilization of an ever increasing array of products and services, based on ever expanding frontiers of research in science and technology. This is an inexorable trend, which requires people, money and business processes to be available on an increasing level. A developed society has all of an emerging nation’s wants and desires fulfilled as basic needs. The more the wants and desires in an emerging nation the more would be the development compulsions as well as development triggers. Yet, resource generation and distribution have to be at adequate levels to support continuous growth. India is fortunate in this context. India would be adding 10 million of educated manpower each year over the foreseeable future. Many of the infrastructure projects, despite the current delays, would be energized over the next few years. High speed trains and super highways are likely to be funded well by infrastructure bonds. The oil and gas sector is likely to see induction of more modern exploration and drilling practices with foreign collaboration. With the power of talent, the torque of transport, the spring of oil and gas, and the energy of electricity, India could hope for sustainable growth. To boost infrastructure development, PSUs are allowed to issue infrastructure bonds of Rs 30,000 crore in 2011-12.

As India starts benefitting from this vast resource pool, India must also start planning for universal fulfillment of basic needs of healthcare, housing, food, education and sanitation. Planning and resource allocation indigenization of luxury to bring desires to the level of wants. Relative priorities must not be lost sight off. A spend of Rs 2 crore on a chauffeur driven imported luxury car, for example, is equivalent to an investment on 6 buses which can transport 300 people daily. The more the level of sunk investments with lower economic productivity the more cash strapped the economy and the society would be in the pursuit of the needs, wants, desires and aspirations, which are surely required to trigger and sustain an economic boom. However, by recognizing that less could actually be more (as even the luxury car makers such as Audi and BMW seem to have discovered!) and resolving once again that India should be in the forefront of indigenous manufacture of all classes of goods, policy planners and industrialists of India can usher in a new economic model for India. An optimized DAWN model which seeks to provide the vast Indian population with needs and wants at superior levels but desires and wants at basic levels, would position India on a sustainable path of high economic growth with social equity. On the occasion of the 63rd Republic Day of India, this great nation with its fascinating social fabric could have no better republican resolution than this!

Posted by Dr CB Rao on January 26, 2012

Wednesday, January 18, 2012

Knowledge, Expertise and Enterprise (KEE): Key to Leadership Development

Management development and leadership development have so many theories, practices, principles and tools that prescribe a plethora of ways for students to become young executives, for executives to become managers and for managers to become leaders. As a result, the young executive as well as his or her superiors and the heads of personnel are at a loss to come to grips with what constitutes successful management and leadership development. The performance appraisal forms which keep growing in the number of factors for assessment and development by each appraisal cycle are proof of the sophistication and complexity that have taken control of this vital area. There is every need to reduce the complexity and develop prescriptions that are simple to absorb, easy to roll out, and amenable for monitoring. Unfortunately, educational institutions, technical or business, seem to have become part of the complexity rather than proponents of simplicity.

To answer this need, we need to first of all simplify the objectives that are expected of management and leadership. Theories are galore which view management as a complex socio-technical science that covers everything from planning and execution of projects to optimization of resources and domains. Leadership is imbued with even more esoteric characteristics of envisioning, strategizing and leading companies to new futures consistently. As opposed to management, leadership is said to be the preserve of relatively fewer professionals who have exceptional skills of transformation. None of this, however, does justice to the fundamental objectives of management and leadership. Educational institutions are themselves at a loss to instill the values of technical or business leadership in students. Typically, no institution or entity is willing to admit that at the most fundamental level the objective of management and leadership is “To Deliver”; and nothing less or nothing more.

Growing fuzziness

In line with the growing complexity and volatility of the economic environment, multiple prescriptions are being sought after to incorporate the best of leadership and management in corporations. From schools of business and institutes of development to thinkers of management and gurus of leadership, every entity or thinker is in this complex maze of management and leadership development, trying to resolve one level of complexity with another. In the 1970s, theories were rather minimalist and tools were admittedly mathematical. In the 1980s, thanks to Michael Porter, a wave of strategy has overwhelmed theories of management with competitiveness as the focus. Elegance of Language and sophistication of semantics had since taken over the domains of management and leadership, which remain unabated to date. Data based analytics and experienced based guidance became secondary.

The Indian management and leadership have, not unnaturally, taken to the growing complexity of the Western management and leadership theories. Despite the suggestions from thought leaders like C K Prahalad to focus on core competencies, the theory and practice of management and leadership have become more complex and perplexing over time. From challenges that postulate that “managers and leaders are borne and not developed” to exhortations that “managers and leaders can be actually developed but with indoctrination of myriad success traits”, the maze is now complete. A young executive who enters this maze is bound to be perplexed by what he or she would see as the unforgiving reality of live performance and the intoxicating myth of thought jargon. If the objective of managers and leaders is as simple as “To Deliver”, the success factors for achieving the objective also ought to be equally simple and effective.

KEE Trilogy

There are three essential factors that shape a professional as he or she evolves over the career span. These are knowledge, expertise and enterprise. These are essential because without these no professional can ever hope to deliver. Knowledge is the basket of academic learning, practical experience and the whole set of data, information and insights that one accumulates as one progresses in one’s academic and professional life. Expertise is the ability of the individual to apply the knowledge contextually to a situation to identify issues and problems perceptively, and provide options and solutions on the ground, facing anticipated and unanticipated environment. Enterprise is the passion of an individual to seek an opportunity or challenge proactively and motivate himself or herself as well as the team consistently. Enterprise is entrepreneurship redefined and integrated in every aspect of individual behavior in an industrial or business setting.

KEE is a trilogy of factors that are also self-reinforcing. Expertise does not occur without knowledge. And, knowledge need not necessarily be only academic knowledge gained through formal degrees but also knowledge gained through informal channels, within or outside institutions. Knowledge without expertise to apply in practical situations or to develop new practice is an asset wasted. Both knowledge and expertise cannot be leveraged to the full potential without the enterprise to take risks, seek opportunities and challenges and provide solutions. Enterprise without knowledge and expertise would be a veritable leap in dark. It is easy to see how each of the three factors is important, individually and together synergistically, to help individuals, teams and organizations deliver. KEE, as a model, is clear, concise and impactful. Without any of the jargon and verbosity that abounds in the plethora of management and leadership theories and constructs, KEE provides a very natural, logical and time-titrated pathway for managers and leaders to develop themselves. KEE also is the fountainhead of several attributes and metrics that define delivery in an organizational perspective.

KEE leaders

It is important to recognize that all pioneering leaders who developed created new markets and industries around innovative products reflect the KEE model in one way or the other. All great innovators of the world, from Graham Bell to Akio Morita and Konosuke Matsushita to Bill Gates, Steve Jobs, Larry Page and Mark Zuckerberg combined knowledge, expertise and enterprise to become pioneering leaders. Knowledge includes organized laboratory research of Graham Bell that discovered telephony or practical industrial development of software operating system as Bill Gates could do. Expertise is what Steve Jobs achieved in calligraphy which translated into the elegant designs, layouts and fonts of Steve’s Apple products. Expertise is what helped Japanese automobile manufacturers to channel the available Western car technologies to better efficiency and productivity. Enterprise is what motivated knowledge experts to take to business, leveraging their knowledge and expertise.

Over a period of time, several top innovative firms discovered and developed models of KEE at enterprise level. Such organizations, as diverse in industry characteristics as IBM, P&G, RIM, Toyota, BMW, Bharti, Infosys, 3M and GE started focusing on pooling of holistic knowledge in the organizations, buildup of expertise through collaborative and open innovation, and instilling of risk taking and entrepreneurial behavior in teams. Yet, a major criticism of the development models based on visible corporate leaders is that the successes of various small business enterprises based on KEE model are ignored. Just as an example, for one Apple product such as iPhone, there are thousands of applications that are developed by individual developers with their own knowledge, expertise and enterprise models. Even in traditional areas such as automobile industry, for one automobile there tend to be hundreds of component manufacturers. In fact, both in developed countries and in emerging ones, it is the mass of individual leaders who embody the KEE model that provide the durable base of the industrial and business pyramid.

Competitive advantage

KEE, as a model, can build core competencies in organizations, whether of one person or multi-person, and single business or multi-business, and provide competitive advantage to a firm. Competitive advantage, as one can understand, stems from both cost leadership and value leadership. The former arises from efficiency and the latter from innovation. Both require KEE as a driver. The firms which have unassailable core competencies and competitive advantage in certain sectors derive that from their extensive knowledge and deep expertise, coupled with early enterprise. For example, Fanuc, the Japanese global leader in robots, machining systems, and industrial automation derived its leadership position through three capabilities; knowledge of electrical, electronic and mechanical systems, expertise in tailoring it to live industrial situations, and inspired enterprise to substitute manual work by robotic work as a business model.

KEE is not a static model. All companies start in some way or other on KEE lines. Eastman Kodak, the pioneer of photography had knowledge, expertise and enterprise when it discovered photography but failed to update its knowledge to the changing dynamics of a digital age, lacked the expertise to tweak its products and was less than enterprising in its responses to the changing environment. There is the need for every KEE modeled company to update, and when necessary transform, its KEE profile every few years to stay ahead of the competition. Keeping KEE dynamic is a matter of choice too. Many specialist biopharmaceutical startups which are set up on specific target based drug capabilities prefer to be acquired after peaking their platform skills rather than transform their KEE capabilities to the next level.

Development pathways

Aspiring leaders and managers have their task cut out if they embrace the KEE model. The model is simple but challenging. Knowledge usually has no limits. For each knowledge nugget that is learnt from the dated syllabi of educational institutions, there tend to be scores of practical pearls of wisdom that can be learnt in an industrial setting. An academic institution may teach a couple of experimental methods but the industry teaches multiple experimental techniques. A combination of practical product, process and business technologies can convert such wider knowledge into industrial expertise. In order to equip the students with requisite knowledge and expertise, educational institutions must emphasize laboratory work to a much greater degree than currently practiced. The normal 85:15 ratio of class room and laboratory work must be shifted to 50:50 ratio. Similarly, the industry level project work which usually is confined to the last semester in part or in full needs to be integrated from the starting semester itself.

In terms of enterprise, it is not sufficient to be inspired just by the studies of current leaders alone. Donovan A. McFarlane sums this up well in his article “ The Great Entrepreneur-Leader Model in MBA Programs: Impracticability and Change”, Journal of Business Studies Quarterly
2011, Vol. 3, No. 2, pp. 84-92. Today’s business environment is highly complex with more intricacies and connections than ever before recognized in trade and commerce. Doing business successfully is no longer guaranteed by simply having proven key success factors endemic to certain professions and industry. Entrepreneurs today need to have a much broader set of knowledge and skills, as well as more dynamic and diverse frames of references in order to adequately understand and adapt to changes and grow in the complex and uncertain, unpredictable business environment of the 21stcentury. The new business environment represents and requires radically different approaches and mindsets than previously possessed and applied in reaping the wealth that forerunners such as Jack Welch, Warren Buffett, Steve Jobs, Wayne Huizenga, Bill Gates, Donald Trump, Michael Dell and others who have become the exemplars of corporate and entrepreneurial success did in a less competitive arena, and continue to do in today’s hypercompetitive world.

Institutionalizing KEE

Much hope is laid on the postgraduate programs of education like MS and MBA to instill KEE competencies in professionals, as direct full-time degree programs, part-time degree programs or continuing education programs. Yet, even Ivy League institutions seem to fall short in this respect. The field of knowledge management is a highly ignored branch of management in
schools and colleges, and even in MBA programs. Graduates of these institutions, as well as aspiring entrepreneurs, leaders and managers are rarely taught how to manage their personal knowledge before they can take stock of what is needed to be successful in organizations and business ventures. Effective knowledge leaders and managers should first be able to manage their own skills set before they are able to manage or direct those of others to create value. Personal knowledge management is a set of skills and abilities that allows an individual to absorb, archive and organize knowledge to be able to manage complex and changing organizational and social environments. Beyond this, institutions have to traverse to the next level of building expertise in their students to convert their knowledge into expertise that can meet the organizational missions amid varying scenarios.

It is often thought that the MBA programs make a good job of inculcating enterprise or entrepreneurship. While many individuals choose the academic-professional path toward entrepreneurial, leadership and managerial success via the MBA program, there are many examples of entrepreneurs and successful businesspeople that are not formally educated in business, leadership and management. The completion of an MBA is no certain guarantee of success in the corporate world and business school professors and educators must be responsible in teaching this fact. More than ever, individuals must recognize the changing world around them and quickly adapt to these changes using creativity. True enterprise lies in using creativity for evolving national and cultural situations and not mimicking the Gates (Microsoft) - Jobs (Apple) models or Ambani (Reliance) - Agarwal (Sterlite) models. Each individual has to have his or her repertoire of Knowledge, Expertise and Enterprise to navigate today’s hypercompetitive business environments set against the backdrop of uncontrollable macro-environmental factors.

Posted by Dr CB Rao on January 18, 2012

Sunday, January 15, 2012

Market, Innovation, Technology and Enterprise (MITE): Corporate Longevity for Indian Enterprise

Wall Street Journal has published an interesting article on January 7, 2012 by Spencer E Ante on corporate longevity. This is based on a study of more than six million firms by management professors Charles I. Stubbart and Michael B. Knight who conclude that, In fact, only a tiny fraction of the huge stock of companies in America reach the age of 40. "Despite their size, their vast financial and human resources, average large firms do not 'live' as long as ordinary Americans," the authors concluded. Ante makes the case that the classic strategies of product focus and manufacturing scale offer little insulation against corporate mortality if they are not accompanied by integration of emerging technologies and businesses. Ante argues that corporate longevity would seem to be at stake as organizations grow large and become bureaucratic. Reviewing the histories of several companies, Ante proposes that a willingness to forsake seemingly successful products with newer emergent technologies, diversifying into new technologies and businesses, and ensuring innovation through organic effort or niche mergers and acquisitions offer the right recipe for corporate longevity.

Even more sobering is the thought that with the increasing pace of technological change even 40 years could be a long period unless firms are innovative and agile. In particular, it appears that pioneers or innovators themselves could be at risk of technological change. Eastman Kodak is a striking example of a company that pioneered photography failing to keep pace with technological transformations in core photography as well as in social networking through photos. In contrast, IBM is an equally striking example of a company that pioneered personal computers selling off the business yet succeeding to grow beyond 100 years by embracing emerging products and businesses. HP pursued scale in its core business of personal computers with the acquisition of Compaq but found that scale in hardware needed to be matched by skills in software and timeliness. Apple, in contrast, has been ever eager to let its new innovative products cannibalize the established products, which were equally innovative at the time of their introduction, and ride the waves of growth with waves of product innovation.

Another aspect that has been discussed in the article relates to mergers and acquisitions as a tool to grow. The acquisition of You Tube and Android, and more lately that of Motorola's mobile phone business are cited as powerful examples of companies acquiring new skills and capabilities to continue to grow. This strategy needs to be differentiated from certain other types of mergers, especially in the healthcare sector, which merely aimed at achieving scale, augmenting pipelines or saving costs. While acquisitions that are prompted by acquisition of emerging technologies and businesses do mean that the start-up companies that have vibrant and innovative technologies have actually low longevity, their role in enhancing longevity of the major acquiring companies cannot be overemphasized.

The Indian context

The Indian context has been dramatically different from what obtains in a free market economy in that easy exit, closure or liquidation of businesses and legal entities has never been an easy option. In fact, prior to economic liberalization such options did not even exist. Added to that, the fact that almost all private entities in India are promoter-driven with a lot of emotional attachment and family succession makes economics of growth secondary to sentiments of survival. As a result, despite lack of product renewal or financial strength, Indian entities tend to stay on in a gamely fashion. As a corollary, despite the growth opportunities that ownership changes and mergers could bring about, Indian entities are highly reluctant to consider such options.

The economic liberalization has, no doubt, brought in a shift in mindset that recognized the relevance of industrial and business restructuring to phase out non-sustainable activities and integrate developmental strengths externally. In a sharp shift, Indian companies began to exercise such growth and longevity options in the global arena. A few examples that illustrate this trend are: Tata Steel (Corus), Tata Motors (Daewoo, JLR), Tata Tea (Tetley), Tata Chemicals (British Salt), Fortis Healthcare (Quality Healthcare), Mahindra & Mahindra (Ssangyong), Bharti Airtel (Zain ), and others. Similarly, many global companies have aimed at Indian companies to support their longevity needs. However, similar activity between companies in India has been much less prominent.

Longevity drivers

In the Indian context, the drivers of longevity are still not economic. The entry barriers that characterize the Indian markets have ensured longevity in some cases despite repeated threats of new entry. Manufacture of commercial vehicles is a classic example of the country-specific requirement in India. The need for service and spare parts infrastructure in every nook and corner of the vast country has enabled the established truck and bus manufacturers, Ashok Leyland and Tata Motors, erect unassailable entry barriers. In some other cases, regulatory policies have enabled longevity at the cost of economics. All sectors which limited or prohibited foreign investments such as media, aviation, benefitted from an insulation that by default also enabled longevity.

There have, however, been firms with customer and society facing characteristics, and also with technological and operational robustness, that consistently grew, and in the process achieved longevity. Nirma, a small scale maker of soaps and detergents which challenged MNC hegemony in soaps and detergents, and became a multi-million dollar enterprise is a classic example. Several foreign and Indian firms, on the other hand, also have seen unprecedented longevity in India by focusing on the expanding needs of a growing population. Hindustan Unilever is a striking example of this facet. This list includes firms like ITC, which recently completed 100 years in India by transforming itself from a tobacco and cigarette making company to a diversified giant in consumer, industrial and hospitality domains.

Longevity examples

As India liberalizes further and as global markets face greater turmoil, Indian entities can no longer look towards regulatory, market, and other India-unique enablers to achieve longevity by default. Instead, companies should focus on strategic and structural factors that enable longevity in the entity form to the maximum extent, failing which at least the going businesses. To achieve that, however, principles have to be developed differently for different companies in different types of businesses. Focusing on six of the growth industries in India, this blog post attempts to synthesize four critical factors that would determine corporate longevity in a model called MITE.

Heavy industrial corporations

India has, even from the pre-independence days, focused on the development of heavy industries. These represent a very wide spectrum; from “declined but supported by the government” entities such as Jessop, Garden Reach and Air India to growing and profitable corporations such as BHEL and ONGC, and several others. The determinants of longevity for such companies also vary significantly; from massive restructuring of unprofitable companies to mammoth investments in new technologies and additional capacities for growth. The longevity of the companies is linked to growth in infrastructure and industry and the influx of competition from other major emerging countries such as China. Given the massive infrastructure shortfall in India, heavy industry could be a growth industry but the challenge lies in the governments and companies securing finance for infrastructure and heavy industry.

Consumer corporations

Consumer oriented corporations, mostly as subsidiaries or franchised brands of multinational corporations, have been in existence from the pre-independence days but have faced sub-optimal growth due to pre-liberalization government policies that controlled entry licenses and production capacities. Despite this, several Indian companies such as Nirma and CavinKare could establish and grow themselves into multi-million corporations from humble beginnings. Today, a level playing field exists that allows Indian and MNC subsidiaries to benefit from the rapid growth of the Indian economy, and the middle class and affluent class social segments. Corporate longevity should not be a question mark for the consumer companies but competitiveness would surely determine the differential rates of survival and growth of such enterprises.

Information technology corporations

The Indian software companies have been in the forefront of India’s globalization from the 1990s in particular. The vast Indian talent pool has enabled the Indian Information Technology (IT) companies successfully conceptualize a global delivery model based on a combination of offshore and onshore software services. The model further extended to IT enabled services (ITES) such as Business Process Outsourcing (BPO). The successes of the IT and ITES companies has prompted global giants such as IBM, Accenture, KPMG, Cap Gemini, Ernst & Young and Deloitte to set up and expand IT, ITES and other related knowledge service bases in India, and thus protect and grow their global service businesses. This field, again, is an interesting case of level playing field of competition among entities of diverse national and ownership patterns. Given the geo-political realities of retaining jobs in the Western and Emerging worlds Indian companies in these domains are now challenged to seek a different globalization model to continue to grow. Equally challenging has been the inability of Indian corporations to turn out branded products and businesses.

Pharmaceutical corporations

Like the IT industry, the pharmaceutical industry has been a great intellectual asset, and a competitive sweet-spot of India. India has been the home to the largest number of bulk drug and formulations facilities approved by the US FDA, UK MHRA and other international regulatory agencies. The global generics industry is verily dominated by the Indian bulk drug and formulation products. While the growth of the industry has so far been excellent, and any shakiness caused by the harmonization of intellectual property regime was overcome with the double digit growth of the domestic pharmaceutical market, the prognosis from a corporate longevity point remains challenging. Firstly, the Indian pharmaceutical industry is highly fragmented with scores of large scale players, hundreds of medium scale players and thousands of small scale companies. Secondly, the space that the Indian industry operates in is the generics space which is not only a tail end play but also has a declining pipeline of generic products. Equally challenging has been the inability of the select Indian pharmaceutical firms that took to drug discovery to come up with any new chemical or molecular entities that have gone through all the phases of clinical trials and international regulatory approvals for global commercialization.

Automobile corporations

The Indian automobile industry is a fascinating example of stupendous growth from ‘rags to riches’. From around 40,000 vehicles, of extremely obsolete designs, in the 1970s to over 4,000,000 vehicles, of contemporary designs, in 2011 (100 fold increase in just 40 years), the industry has achieved an amazing rate of growth. The growth has been equally amazing in terms of the variety and technology of vehicles, covering two-wheelers and four-wheelers as well as three-wheelers, tractors and construction equipment. Amongst the various growth industries, however, the automobile industry has been the most import dependent. Yet, the saga of Tata Motors and Mahindra & Mahindra in multiple product lines, and that of Ashok Leyland in truck and bus segments illustrates that Indian technologies could also achieve global level innovation and competitiveness. In particular, the design and manufacture of Nano small car and turnaround of Jaguar-Land Rover by Tata Motors is indicative of the competitive capability and the growth potential for Indian automobile firms. The challenge, however, lies in the ability to innovate in premium segments and in designing cars that suit Indian road and driving conditions. The limited road infrastructure that could constrain the growth of the Indian automobile industry is also another challenge in the context of its low export competitiveness.

Electronics corporations

If the Indian IT, automobile and pharmaceutical sectors have been the high points of growth, the electronics industry has been a relative laggard. India’s deficiency in electronics development and manufacture is in stark contrast to the global dominance that China and Taiwan as well as South Korea (in a more pioneering fashion) have achieved in the domain. That said, the recent progress of India in the manufacture of telecommunication equipment, especially mobile phones, tablet computers, television sets and certain other electronics gear is reflective of the capability of the Indian electronics industry to develop new competencies and grow. Like automobile industry, the Indian electronics industry needs strong market-linked collaborative strengths to attract new product and manufacturing opportunities to the country. Accuracy of manufacture, finish of the products and low manufacturing cost seem to be the primary factors for success of the electronics industry in China, independent of the availability of local market. Apple products constitute a good example of the global conquest through Chinese manufacture.

MITE as a longevity model

The above discussion of the six growth industries of India helps formulation of a corporate longevity model. For the Indian enterprises, the key to longevity lies in understanding the importance of the four key factors of market, innovation, technology and enterprise (or, entrepreneurship). Firstly, India itself offers a huge market, but the enterprises must be savvy to identify the markets and develop them aggressively with appropriate products and services. In addition, the international markets are all available for the Indian companies to be won on the basis of competitiveness. All the six industries discussed above teach us that markets are eager to be served by the Indian companies. Secondly, the concept of level playing field has come to stay. Companies need to compete on factor advantages rather than on policy advantages. Yet, access to global factor advantages is also becoming possible to all global corporations. This implies that only those firms that are consistently innovative can be more competitive and enjoy the benefits of longevity. Startup innovation provides the toehold but continuous innovation alone can provide sustained growth. Thirdly, technology would be the core of competitive advantage. Those companies which deploy technology on an end-to-end basis, across the total value chain, would be more competitive than firms which deploy technology only in some areas, be it manufacturing or R&D. Fourthly, every company should remember its basic enterprising spirit and its entrepreneurial roots. Firms as they become large must preserve and foster entrepreneurial spirit as an organizational DNA. As the WSJ article observes, the board rooms of high growth and high longevity corporations tend to be as entrepreneurial as those of successful startup companies.
On a holistic basis, all the four factors are equally important but entrepreneurial spirit probably provides the fundamental corporate genetic impact to stay hungry and keep growing. As the companies become larger nationally and internationally, growth is often accompanied by bureaucracy, with multi-layering and multi-reporting. Firms fail to customize themselves to diverse markets and their needs, and instead attempt to find solutions in globally standardized products and services as well as business processes. The experience of the six growth industries suggests that an ability to customize and innovate across markets has helped certain industries such as information technology and pharmaceutical industries to take part in global growth while certain globalized industries such as automobile industry could achieve tremendous local success in India by customizing their products to local conditions. The strategies of even luxury car makers such as Range Rover, BMW and Audi to offer crossover vehicles such as Evoque, X1 and Q3 respectively to India indicates the recognition of the need for local customization, covering both urban and rural markets. Indian enterprises committed to global longevity must first internationalize their organizations to understand the markets, innovate on their products for customization and build the technological base in the value chain to manage product variety with productivity. The MITE model of corporate longevity provides the might to Indian enterprises to seek and achieve perpetual growth.

Posted by Dr CB Rao on January 15, 2012