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.
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.
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 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.
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.
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.
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