Hidden Strengths of India

Hidden Strengths of  India – 7^th Feb 2016

R.Kannan

India continues to do well in the Global Economy despite there is a big scope for reforms in the various sectors of the Economy. The proposed reforms are work in progress  Once they are implemented India will continue to grow at higher than the present levels.

India has many hidden strengths which are not reflected in the reports , statistics and surveys carried out by experts. By capitalising the strengths, India would be able to realise its full potential of Economic growth.

1. Largest number of entrepreneurs in the world. India has the largest number of entrepreneurs in the world. Most of these entrepreneurs are in the services sectors , especially , trading. Tier 2, 3, 4 cities and villages have entrepreneurs in the areas of trade and related activities. There are more than 20 million entrepreneurs in India and assuming an average house hold size of 5, 100 million people depend on these activities in India.
2. Largest number of small start ups in the world. Traditionally, in India, lot of new start ups, especially in Trading are being created by small entrepreneurs. This is mainly in the areas of retailing and trade. The phenomenon is witnessed not only in Urban areas but also in rural areas.
3. It is very easy to start a business in India, where only the local licenses are required. The businesses which require license from  local body is easy to start. It does not require licenses from District , State and Central government levels.
4. Profitable businesses at high interest rates.  In India, interest rates vary from 0% to 4000% p.a . The small vendors borrow funds at 10% day and they generate 30% returns per day. Despite the rates of interest are very high, the loans are still affordable. Many of the small businesses generate very high margins and they have the best asset and working capital turnover.
5. Availability of funding from various sources. Since the savings rate is very high, there are many sources from which funding for business could be raised. Starting from friends to small money lenders , funding is available from Micro Finance Institutions,  State funding agencies, central government agencies, banks, financial institutions, corporates, Primary market, secondary market , Private equity, FDI, FII’, foreign Hedge Funds and provident funds are available. 
6. High generation of employment in small scale sector. Most of the employees in India are in the unorganised sectors and especially in small scale. Lot of new jobs are being created in the small scale. After the advent of mobile phones and their penetration in the rural areas , lot of employment is generated in the related fields even in rural areas.
7. Very high savings rate. India has a very high savings rate of 30%. This is equivalent to $ 600 bn a year. In a five years, the savings generated will be equivalent to $ 3 trillion. This is three times the requirement of investments required for investment in Infrastructure. If attractive financial instruments are created , it would be possible to meet funding for the infrastructure investment within India.
8. High money multiplier. Since most of the transactions in India are carried out by Cash, the money multiplier is much higher than the statistics on the Indian economy. Since the multiplier is higher, this helps to generate value addition at different levels in the Economy.
9. Very high assets holdings by Government, Government agencies, PSU’s,Banks , Corporates, Religious bodies, NGO’s and Individuals. There are big land holdings, gold holdings in the economy and if the market value of these assets are valued , the debt equity ratio for the above would be much lower than the Economic Statistics. There is a need to capitalise hidden assets by various entities in the economy.

Overnight, the PSU’s can be turned around. Since they hold land in Prime areas. Public Sector Banks hold lots of real estate assets and the market value of investments by LIC is much higher than the cost of investments. Gold is held by many religious institutions and Individuals. Most of the assets are in illiquid form and strategies have to be developed for making them liquid and performing.

10. Self supporting local communities.  Since India is very large and dominance of rural areas, many rural communities are still immune to what is happening globally and they can sustain their performance irrespective of the global economic developments . The small economies can be protected from high volatility.
11. Higher competition between states. Now each state government behaves like an entrepreneur and there are initiatives in each state to attract more investments and each state has set up a target to grow the economy at a faster rate than the Indian economic growth. The initiatives in three to four states alone can lead to higher economic growth levels in India , when the programmes are implemented .
12. The real GDP. Since there is a big parallel economy  in India, the real GDP is much higher than the GDP reported . Most of the risk funding, where returns are not certain, comes from funding sources from Parallel Economy. Parallel economy is also helping to sustain the higher level of economic activities in India.
13. Indian Diaspora. Their asset holdings in other parts of the world are very high. Now, many of the economies in the Globe are becoming unattractive, many of them are looking at the investment in opportunities in India. As and when , the conditions become favourable for their investment, more funds would come to India from Diaspora.
14. India’s consumers. In India, as per the Income classification, we have the maximum number of customer segments in India. There is a constant movement of consumers moving from lower category to next higher category. This creates demand for all types of goods. For e.g., there is a demand for the cheapest car to the costliest car in the world. 
15. Attractiveness of Investment. The reports released by various agencies in the world does not reflect the reality. The ranking is given on small data of variables and it does not represent the reality. The situation is not as bad as reported. As per the survey done by World Economic Forum this year, India ranks top amongst all the countries in the world for the attractiveness of investments.

India has all the strengths, as outlined above and we have to develop strategies and action plans to capitalise the hidden potential. The action plans developed should not disturb the existing eco system which is favouring creation of entrepreneurs. The action plans should add to the present strengths. In 1700’s and before, India was one of the leading economies in the world contribution to a significant portion of Global GDP. This will add 2% to our GDP ,India can regain its status of the leading country in the world.      

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Business Excellence and Strategy

Speech delivered by R.Kannan

30^th January 2014 at National Stock Exchange

On the Business Excellence – Annual Day

I am very pleased to be here today and would like to thank you for inviting me to be part of this  Business Excellence day and annual celebrations.

We are living in a VUCA world, where things are vague, uncertain, Complex and Ambiguous and the challenge for organistions today is to bring predictability to the performance from operations. This has become a major concern for Governments and corporates after the  2008 financial and economic crisis. Every thing  done well within a company is not a clear recipe for success since the developments in the environment have a major impact on performance of companies. Developments in the environment including the hyper competition,  challenge the proven business models and companies have to be agile and nimble to address the emerging challenges with fast response.   The businesses which were very attractive five years back had become unattractive today. The viability of many of the business models is being tested in this uncertain world and new models of doing business are emerging and in a continuous, evolution mode. To address these challenges , it is necessary to build a business excellence frame work spanning the entire organsiation.

The organisations which emerge as leaders in their field have Visionary leadership,Customer focus, robust strategy, appropriate organisation structure, scientific allocation of financial resources, sound HR policies,excellent business systems and good corporate governance practices. The combination of above factors will go a long way in creating and preserving the competitiveness of organisations.

Jack Welch Says . “A strategy is something like, an innovative new product; globalization, taking your products around the world; be the low-cost producer. A strategy is something you can touch; you can motivate people with; be number one and number two in every business. You can energize people around the message.” GE is a great organisation which introduced the latest management principles on Strategy and competitiveness and these models are being adopted by corporates and management consultants in strategy formulation across the world. GE as a company went through many business cycles and witnessed many economic crises during its existence of more than hundred years and it  continues to perform very well even today. The company is a good example for large corporates to adopt the best practices in strategy formulation and implementation.

Strategy development will be at two levels, one at the corporate level and other at the business level. In a corporate level, the decisions regarding What business to enter, what business to grow, what business to maintain and what business to divest are taken.

In Business level Strategy, it is the strategy to be adopted within a business and Strategy is all about positioning an enterprise in the minds of the target customers. The battle of companies and the leadership happens in the minds of the customers. Companies can adopt Strategies like Cost leadership, Differentiation or combination of both to achieve a competitive position in an industry. The strategy adopted by NSE is integrated and combination strategy. In any industry , there will be companies adopting one of the above strategies and the companies creating competitiveness do different things from others or adopt different methods to do the same thing. The best strategy which provides the long term competitiveness of an enterprise is the one, which is able to offer quality products and services at affordable and reasonable costs. The companies adopting these strategies emerge as market leaders and achieve margins which are much higher than the rivals, which is evident from the experience in many industries.

Earlier companies adopted one of the above strategies, competing in a few product market segments. The emerging trend is that  companies are trying to compete in all price points and cater to different customer segments . Starting point of successful strategy is right positioning of the product which will attract the targeted customers.

Strategic management has two phases. The first phase in which the formulation of strategy takes place ; the Vision, Mission and Objectives and overall direction are decided. In the implementation phase, allocation of resources, adapting the organisation structure  / systems and procedures in line with the change in strategy , performance monitoring and implementing course correction are adopted. The methods like Balanced score card are being utilised by many organisations today in the strategy formulation and strategy implementation stage. The same process is being adopted to evaluate the performance of employees at all levels to decide the  incentives, bonuses and promotions.

For effective strategy implementation, adoption of business excellence model goes a long way in achieving the intended goals of an organisation. Business excellence is one of the main pillars of good strategy implementation. The difference between organisations which succeed and fail is mainly determined by how well the formulated strategy has been executed and seamless execution depends on the excellent practices adopted across the enterprise in organisations.

Perfection is what every visionary leader wants to achieve. According to Aristotle, “Perfection is not attainable, but if we chase perfection we can catch excellence.
Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.”

The companies use business excellence framework to attain and maintain competitiveness. Business excellence process by itself is not  strategy but a process by which effective strategy implementation takes place. The framework covers the entire organisation .

Unlike in Strategy formulation wherein only a few in the organisation are involved, the strategy implementation involves every one in the organisation. In this respect, the business excellence framework has to be a company wide exercise and covering all the employees. Each employee has a role to play in bringing out the best in the organisation. It is a combined effort.

It had been empirically proven that the organisations which adopt business excellence frame work report much better performance than those who do not adopt this frame work. According to a Mckinsey study, internal processes in an organisation leads to variation in performance to the extent of 50% compared to the peers.

One tool that can help organizations strengthen their management systems and processes holistically, is the internationally-benchmarked Business Excellence framework. It provides standards for managing people, innovation and service, which are key enablers of business excellence.

 The BE framework helps organisations to assess their performance, identify gaps, and take action for improvement. It encourages a systems-based approach to management, with the adoption of a robust measurement system, to assess and monitor performance. Measurement allows organisations to compare and benchmark their performance against the best-in-class in their industry.

Employees play a key role in an organisation’s journey towards higher productivity and business excellence. The business excellence journey of every company is anchored by its employees. It is, therefore, important to align employees’ aspirations and efforts with the organisation’s goals.

Your branding of this effort, ACE ( Attitude, Customer and Excellence  is very apt.) The business excellence initiative should start with a positive and favourable attitude from every employee. An effective implementation of identified strategies depends on the favourable attitude from all the employees. Every employee in the organisation has to understand the Vision , Mission and overall objectives of an organisation and align his /her personal objectives with the organisational objectives. Their activities should be channelised towards excellence in whatever they do. The attitude towards company’s vision,mission, objectives, colleagues and customers should be in alignment with the overall organisational efforts in achieving the overall objectives of an organisation.

Customers decide the future of an organisation . It is essential that companies understand the customer expectations well and develop products and services which meet their needs. Today customer awareness is very high and customers expect a fair deal from the companies and they support companies which are very fair to the customers delivering the expected value for the price paid.

In my career I had an opportunity to work in companies where new business excellence initiatives were undertaken. Especially after the  liberalisation the competition in industries increased and the need for developing formal strategic plans and excellent business processes became very important , to sustain the competitiveness.

1. Our Group is a family managed Enterprise. The group gives full independence to the Executives who are in charge of different businesses and the involvement in the group is more in Strategy formulation level and the budget finalisation is done at board level. Once the budget is decided and allocation of resources is decided,  there is a complete independence to the CEOs on operational matters and  the CEO’s have the freedom of choice to change their tactics according to the emerging market dynamics. There is an effective  performance measurement and management system which is in operation which contributes a lot to the value addition to the overall performance of companies. The best practices adopted by a company within the group is being shared with other companies and group companies encouraged to adopt the best practices in all their operations. Balanced score card frame work has been used for Strategy formulation, implementation and performance appraisal. Business excellence frame work had been introduced in a few companies in the group and it is being introduced in phases across the group companies.
2. ICICI bank redefined the paradigm of banking in India.The banking business in India  today is totally different from the way banking was done 20 years ago in India. Under the Visionary leadership of Shri.K.V.Kamath, intensive automation of processes and reduction of manual intervention in operations enabled the bank to scale up the growth very fast. Several new initiatives were taken under Operational Excellence Initiative and Sig Sigma initiative, which helped the bank to acquire customers faster than others and enabled cross selling of products. The importance of  fee income had become equally important as that of core income and existing branch and IT infrastructure was effectively used to sell more products and services to the existing and new customers. The diversification into new geographies helped the bank to gain leadership in remittances business and cross border mergers and acquisitions. The creation of trading platform under ICICI securities helped the company to gain the leadership in the retail stock trading business. All this was possible through involvement of all employees and eliciting the best ideas from employees. There was a   reward system for the innovative ideas given by the employees. It was enabled by establishment of an Intranet which helped in knowledge sharing, training and transfer of best practices .

3. Thai Airways in Bangkok ,benchmarked its performance , systems and processes with the Airlines like Qantas, Singapore Airlines and Cathay pacific and fine tuned the strategies to become  more competitive. It has started hedging its fuel requirements and monitoring the performance of each flight operation. This helped the company to prune some routes, increase flights to routes where there was more traffic and optimise the use of fuel. This has improved the overall performance of the company.

NSE is a world class organisation led by a Visionary and committed leadership. The Forbes had acknowledged this fact and the leader of your organisation has been ranked among the top 15 leaders in the world and among the top three leaders in India.  NSE had set the global bench marks and redefined the way the securities trading was happening in this country with high transparency, good governance, robust processes and high quality standards. It ranks among the top three in volume in all its activities in the world and continues to improve its performance and if the pace of the Indian Economic growth continues, NSE will become the leader in all its activities in the Global arena.  Despite achieving an invincible leadership in the near term and far ahead of the competitors in all the performance parameters, the business excellence process has been identified as a key enabler for sustaining the competitiveness of the enterprise in the long run. This is the articulation of desired outcomes by your leadership  and the focus was not just on immediate opportunities and challenges, but also on building capabilities for the future.     

Business Excellence is a Journey and am sure every one of you is working towards the excellence in your organisation.

I would like to congratulate this year’s award winners and all those who are here on the Excellence journey. You serve as an inspiration for all other colleagues to continue the journey of  business excellence. I wish you all the best and   and have an wonderful evening.

Thank you.

Value Creation - Strategies

One of the challenges for corporates today is creating value out of  operations and once having created the value , sustaining the created value going forward. There are many examples in the world where companies created value and not able to sustain it for a long time. The good examples are Sony, Nokia, RIM in the recent past and there are several examples and many companies which created value ,  not able to sustain the value for a long time. The following strategies need to be adopted to create and sustain value.

 1.The value creation starts with a Competitive strategy. Every company has a strategy but the strategy adopted by a company should help in creating a competitive advantage over others. This should result in faster growth and higher profitability compared to the competition.

 2. There are five strategies available to create a competitive advantage. A) Cost Leadership b) Differentiation  3) Focussed cost leadership 4) Focussed Differentiation and 5) Integrated  Strategy ( cost leadership as well as differentiation). Depending on the technology and marketing capability ,cost structure and competition in the particular product segment, one of  the above strategies and combination of them have to be chosen. The objective should be to minismise the impact of competition on growth and profitability.

3. Keeping the age of the product portfolio young. To ensure a sustained good performance , there is a need to introduce new products at regular intervals and keep the average  age of the products very. Low. This does not assure sustenance in cases where there are technology break throughs . Hence, apart from age of portfolio , it is necessary to make sure that there is an adoption and absorption of emerging and new technologies. The focus for new products should be the segments where there is a good potential for growth, less competition and good profit potential.

 3. Many companies develop good strategies but there is a poor implementation due to slow decision making, organisational inertia and  poor discipline in implementation. Allowing so many exemptions from the planned strategy leads to slippages and not continuously monitoring the performance and taking course correction leads to poor results compared to the plan.

4.Good corporate governance. The starting point of value creation is good corporate governance. The books of accounts should be closed on time every month. The actual performance should be compared with the plan and reasons for variance in performance should be identified and without much delay the course correction should be put in place. There should be a fit administration which looks into the governance discipline and adoption of best practices in each functional area of operation. Many companies do not have well defined SBU’s ( Investment Centres ,Company within companies ) , Profit centres and Cost centres. This is the starting point for good corporate governance. There is a need to review whether the organisation is well structured and appropriate organization structure and robust systems and procedures are in place.

5. Good governance and good performance creates a good image in the minds of all stakeholders ( investors, bankers, customers , suppliers ). .The market gives a premium to the quality of governance and company starts commanding good multiples. It is true for even unlisted companies, wherein it would be possible to command good premium for the products and achieve above average profits..

6. In Capital intensive industries and where there is hyper competition , scope for collaborating with the competitors should be explored. This is a general practice in electronic hardware industry . telecom , auto and financial services.  This provides a full flexibility to an organistion to adapt to variations in economic performance.

7. It is essential in general the companies should be able to maintain market leadership. But there are cases, where, even smaller companies command a high premium. Good example is HDFC’s market cap is higher than ICICI and SBI. The bank had given a sustained performance over the years, which helped to keep its P/E ratio at the highest levels, ever since the bank allowed FII’s to invest in the bank. So far, the bank was able to maintain its lead.

8. The companies / groups which have created a big value, generally grow at a CAGR of 25% . The stretch target of 25% CAGR is very stiff but it is better to keep this target and identify opportunities for faster growth. ( It has to be a combination of old product – old market , old product – new market , new product –new market , new product – old market , new technology – old market , new technology – new market ). Both organic and inorganic routes to be pursued.

9. Reputation. When one of the companies  came for an IPO, the inherent value of the stock was even less than Rs.10 per share and  no project was on. Since the group was known for creating value for shareholders, the investors were ready to pay Rs.500 per share for the stock. Cognizant technologies was able to win more projects and have become the number one software provider in US over taking  TCS. This was mainly on account of Cognizant is seen as a US company and it is parent was Dun and Bradstreet corporation. Further the company adopts an integrated strategy which is helping it to over take others in Revenue growth and it reinvests any surplus amount which is more than 20% margin in the core business.

10. Constant Restructuring. At any point, only a few industries grow and some industries decline and some industries are at a maturity stage. The fortunes of industries change and the portfolio of a corporate should be well balanced to generate enough cash and sustain the growth levels. The strategy is not only about growth but also about keeping the portfolio healthy. The portfolio should be churned to ensure that the businesses generating negative cash flow and where scope for future revival is limited should be removed from the portfolio through divestment and sale. Many a times, the poor performance of corporates is due to keeping the businesses where there are continuous cash losses. There should be well defined criteria for entry  in a business and criteria for exiting a business. GE is a role model for corporates in this respect and this is the secret of GE’s survival for more than hundred years.

11. Not Succumbing to herd mentality. The high growth businesses after the entry of few players start attracting many new investors. This results in overcapacity in the industry and the players who enter late find it difficult to adopt the cost leadership or differentiation strategy. In a few cases, new entrants come up with new business models and redefine the industry. If the industry is overcrowded and there are many players, then the best form of entry in the industry is through acquiring a company which is doing very well in the industry rather than starting a green field venture. In many industries, the feature of herd mentality leads to entry of many entrants  and those who are not able to create competitive advantage report poor performance affecting the overall performance of an  industry.

12 Constant interactions with the Investor community. This is the one way; the value created could be taken to higher levels. One of reasons for faster growth of Infosys compared to its peers  few years back was due to early listing of the stock in a market where most of its customers were coming from . Whenever analysts brought out analysis on companies growing fast and reporting higher profits, Infosys was always coming on top of the table in USA. This has created awareness among the CXO’s in US who were the decision makers and investors in the stocks. Since the company was growing very fast and profits were growing faster, inventors felt the company was well managed. So when bids were opened for awarding assignments, even when Infosys quoted 10% higher price compared to competition, they were willing to pay the premium , despite the competitors were as good as Infosys. But Infosys lost this advantage , after listing of TCS and TCS moving away from the strategy of cost leadership to differentiation like Infosys. Cognziant also started growing fast which had reduced the attraction for this stock.

 To create and sustain value, a corporate has to use the combination of above strategies to achieve a sustained competitive advantage.

Interest Rates and Competitiveness

Interest rates prevailing in an Economy determines the competitiveness of a Country, Companies and the purchasing power of Individuals. Low interest rates in an Economy provides a conducive climate for the growth of an Economy.

In India , lowest interest on any product or service is the Current account offered by banks , where there is no interest. On the other extreme, the people who borrow small sums on a daily basis pay up to Rs.10 on Rs.90 borrowed, which works out to more than 4000% interest per annum. The interest rate in the Economy ranges from 0 % to 4000%.

The rate of interest by itself does not decide the competitiveness of different customer segments in the society but it is the particular segments’ affordability to pay the interest charged determines the competitiveness.

The starting point of high Economic growth was the steps taken by government in liberalizing the economy but this gained momentum when a private bank started offering low interest rates to various segments of its customers. When the loans became affordable, various customer segments started availing the loans for investment and consumption needs. This gave a big fillip to the economic growth. Then we witnessed a very low interest rate environment in the Economy as a whole which has also stimulated the consumer boom in the country.

The IT has enabled the banks in the country to penetrate the rural areas and offer affordable interest rates to the rural population. In many areas, where the banking penetration has improved the quality of life has improved for many people they were able to start and run viable rural enterprises. This is one of the main reasons why demand in rural areas continue to be strong. When we visit our villages today, we witnessed a sea change.

There is a need to keep the interest rates at a low level in the Economy so that the potential for higher growth can be realized to the full extent. The low interest rates increases the affordability and purchasing power resulting in higher economic growth.\

Benefits to the Government :

Government is the largest borrower in the Economy. The low interest rates help to reduce the interest expenditure for the government . This results in lowering the fiscal deficit and the need for additional borrowing and increasing the sources of other revenue. Low interest rates help the government to manage the fiscal position of the economy better and keep the tax levels in the Economy lower. Lower taxes in the Economy also helps to improve the competitiveness of enterprises.

Benefits to the Corporates :

Corporates in Government/Private sector borrow for Working capital and projects. The interest component  for corporates on the total income today stands at more than 10% of the income . Any further increase from the present levels will affect the viability of enterprises in a big way. The impact will be more in project related activities of corporates , especially when they implement long gestation projects. In such cases, they have to capitalise the interest which increases the overall cost of the projects , thereby affecting the overall project viability.

Benefits to the individual customers :

The low interest rates and the concept of EMI has changed the customer behaviour in the Indian Economy in the last few year. Most of the individual customers buy homes, cars and consumer durables on EMI basis. A small change in interest rate , makes a big difference in EMIs as well as the tenure of repayment. This in turn affects the affordability of individual consumers. If interest rates are at a high level many of the individuals lose an opportunity to buy many of these products which in turn affects the demand for these products.

By keeping the interest rates low, all the sections of the society benefit immensely and there is a strong case for keeping the interest rates at a very low level in the Economy. The concerns regarding inflation are well justified but by managing the demand supply situation for products and services inflation can be kept at manageable levels in the Economy. By focusing on demand , supply and reducing the mismatch in demand supply, we can have low interest rates, moderate inflation and higher economic growth.