Implications for corporate India

Implications for corporate India
The Hindu Business Line, April 8, 2009, Page 6

Opportunity-risk imbalance: Implications for Corporate India

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The high growth environment of the last decade trivialised the need for a systematic identification of opportunity and a comprehensive assessment of risk. With the environment now turned on its head, companies need to reassess strategies and take clear stock of risks, says V. RAMAKRISHNAN.
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Business is a fine balance between opportunity and risk. In an ideal world the entrepreneur identifies a new opportunity, a product, a process or a service that would increase user satisfaction. Successful businesses identify opportunities early, and ride a wave, at minimum risk, to deliver sustained growth and profitability. Bad or incomplete identification of an opportunity or an inadequate understanding of risk can destroy businesses.

The last 18 months have seen a significant number of businesses destroyed all over the world. Opportunities available to Indian firms eight months ago are now history; risk has increased manifold. The high growth environment and the go-go nature of growth in the last decade trivialised the need for a systematic identification of opportunity and a comprehensive assessment of risk. The pie was so big and growing so quickly, that almost anything made sense and money.

Indian firms expanded capacity, market footprint, acquired firms in high-cost regimes, increased exports as a component of the sales and profit, salaries and wages rocketed and there was an opportunity for every stakeholder at seemingly no risk. All and sundry began to think of themselves as world-beaters. Now that they have been beaten by the world it is time to reset the approach to avoid a Ctrl-Alt-Del situation.

OPPORTUNITY MANAGEMENT

Identifying and seizing opportunities requires a profound understanding of markets and customer expectations. Product, process and service has to be tailored to the ‘emerging’ customer need rather than the current need. The new paradigm is: What can we make that you want to buy as against — we have a product you have to buy!

Indian corporates need to develop products and services that are needed around unmet needs of customers and go out and market, rather than sell, them. This requires understanding market reality, shifts and drivers on an ongoing continuous basis. Indian firms need to invest in understanding factors critical to their success — the physical, political, economic, social, technology and trade frameworks that will drive the competencies they need to acquire to leverage an opportunity.

This requires a realistic estimate of the value chains that deliver results at least risk and their own strengths and weaknesses to manage and mitigate the risks while making the most of the opportunity.

The iPhone is an excellent example of this approach. In a commoditising market Apple identified the needs that users, young, old and mid-age, wanted and produced a user-friendly product. The factor critical to its success is its ease of connectivity, high-speed download off the Internet and elegant looks, not to mention superb feature list. The least concern for the user is the phone attributes, which, in any case, are good!

In contrast, all the leading players of two years ago are now playing catch-up with iPhone, which, incidentally, offers a limited range of models, in contrast to the dizzying array and colours from other phone-makers! A good risk reduction exercise.

UNDERSTANDING RISK

Risk needs to be understood in its totality. Risk, defined as the possibility that events may not turn out as planned or expected, has many dimensions to it, much of it ignored in a high growth era, and all which become relevant and rear up when least desired, in difficult times.

The primary risks Indian corporates need to contend with is strategic risk — the ability to identify and seize an opportunity and allot resources to ensure delivery. It is sad to see the ‘retail revolution’ leaders of mid-2008, languishing in sour deals. The closure of 20 per cent of these ‘modern format stores’ is a telling commentary on the poor assessment of strategic risk. Minimising strategic risk increases the competitiveness of the firm.

The second major risk facing Indian corporates is operational risk; Indian productivity remains way behind global standards. And corporates have not even begun addressing them. The garment industry is a case in point. On average, an Indian garment-maker produces 7-10 garments per machine per day. The world standard is 23-25!

No wage differential can mask the harmful consequences of this depth of under-performance. Remove the subsidies and the garment industry will sink like a stone. Reducing operational risk increases asset and resource productivity.

Capacity utilisation is a good mitigator of operational and strategic risk; and both of them could do with significant streamlining. With increasing profitability Indian firms have been diversifying — a nice, but risky way, to seek opportunities. Real estate is littered with firms which saw ‘opportunity’, created land banks and are now sitting ducks.

MANAGING CAPITAL

Capital management is another significant but unrecognised mitigator closely related to cash flow management; an easy task when banks were generous, business good and mood upbeat but frightfully difficult when banks are running for cover and opportunities have dried up. Operating cash flows, while much improved in recent years, still lag the best in global class substantially.

The suddenness of the melt down has caused immense difficulties as cash flows were planned on an eternal upside. One only has to see the plight of the major suppliers to truck majors! While there are many more aspects to risk like forex management, governance, legal, statutory and regulatory risks, two key issues need to be addressed by Corporate India in a hurry. The need to understand market and customer and the imperative to enhance employee productivity is high. The former is more than market research. It is about creating a systematic approach to identifying emerging needs.

The story goes that the Boeing Dreamliner started when a major new plane was presented to a whole group of prospective buyers who just shunned the offering. Boeing had the courage to admit that they needed to stay relevant to what their customers need tomorrow rather than focus on the money and time lost in developing a product nobody wanted in the first place.

The need for employee productivity cannot be understated. The value added per rupee of employee cost is the basis of the firm’s profitability. The correlation is high, very high. In a downturn, corporate India has to come to terms with increasing value-add while reducing employee cost. In a situation as grim as the current one, the opportunity to increase value-add is limited; the risk to a business is infinite if it cannot get its employees to produce more per rupee earned.

A forward-thinking industrialist was recently telling me of his plans — half the manpower, twice the output. While this has far-reaching consequences for employment in India the downside of not doing it could be even riskier.

India is at the threshold of becoming a high quality manufacturing hub, to supplant its success in the services space. This can be sustained only if assets — and people are the major ones — and resources are at least as productive as our main contenders.

Corporate India needs to take a hard look at its past practices and set in place a set of good practices that will work well when the economy gets going, as it undoubtedly will. The opportunity dimension is transforming, possibly forever; the risks, in the near term are different and higher. The revised equation has to be identified; and solutions innovated.

QED.

(The author is a Singapore-based enterprise performance consultant. blfeedback@thehindu.co.in)