The current economic slowdown in India is not just an aftereffect of the financial crisis of 2007. A lot is written of how China and India received only minor bruises from that crisis due to certain structural patterns in which they had opened up their economies in the last two decades. Conversely, many advanced economies caught a cold when America sneezed. But the Indian growth chart does not show minor bruises. It shows deeper cuts. The financial crisis had actually coincided with another severe crisis in India – an utter failure of governance implementation.
The combined effects of the two crises are visible, and the global community is debating whether the India story is over. But there is always something to learn from every adversity. The slowdown shook up the way India Inc. managed its businesses. It made companies develop better strategies to attract clients, bring in best practices, cut the flab, be adaptable and enhance their business models from the earlier golden days. Not everyone succeeded, but many have. It is easy for companies to capture volume during good times, but only the better-managed ones could capture market share during tough times. In short, the economic slowdown brought to forth the better-managed, quality companies – sorted the pearls from the froth.
So how did Corporate India navigate the slowdown? Some attributes emerge from the way the better-managed ones conducted their business in these recent years:
Delivering a specific value: If every firm offers the exact same thing, then there is nothing to remember one specific company by. Creating a value proposition gives clients a reason. It addresses a specific area for clients, something extra over and above the normal. “What is it we bring to the table that others do not?” is the question the better-run companies addressed. This created a branding, and branding created recall. That is a significant intangible asset the successful firms enjoy. It increased the chances of clients sticking with that company in the long-run. It is also believed that such sticky relationships continue even after the crisis is over, and that stickiest relationships typically contribute to the maximum proportion of sales. When volumes shrank as during the slowdown, the value proposition helped gain market share. Delivering a value proposition holds for B2B (business to business) businesses, but is even more critical in B2C (business to consumer) where the client base is generally more fragmented and less bound by long-term sales contracts.
Balancing cost rationalization: Cost-cutting was one way to remain afloat, done with an intention to increase productivity by cutting unrequired flab. Process-mapping of various operations was essential to ensure that the basic and optimal resource level was not compromised upon, since that would negatively impact productivity. That helped ensure the companies did not give up those resources that would actually help it gain business. But companies also had to invest into creating growth, since doing things in the earlier status quo would not take them anywhere. Investing into sales-creating avenues was inevitable. Better-managed companies invested into areas that helped them gain visibility and top- of-mind recall from clients, reduced turnaround times for service delivery and enhanced the delivery experience, reduced overheads in operations and hired experienced talent to guide the company. In short, create operating efficiencies and a launch-pad to grow from as recovery occurred.
Adaptable to address purchasing power capabilities: Companies earned sales ahead of others by being adaptable to address the changes in the purchasing power of clients. Tough economic times impacted the client’s propensity to spend, since incomes are often stagnant together with a climate of inflation. Clients still wanted the product or service, but perceived the earlier price on the higher end now. This impacted their willingness to purchase. Companies reduced the quantum (and packaging) to make the price-point more affordable to clients, and hence still win sales in a tough climate. In services segment, it would necessitate unbundling of services into smaller components and assign separate pricing.
Profitability, ahead of profits: During tough times, there is only that much the industry can do to increase the depressed volumes. Capturing market share within depressed volumes can often take time, and time meant possible bleeding every quarter-end. Absolute profits can be impacted by lower business volumes and proportion of irreplaceable fixed costs. Also, accumulated losses and continued capital calls hampered the growth plans of some companies, especially where the ability to raise that capital in-house was limited. This included over-leveraged companies, many of whom struggled to meet obligations leading to asset quality concerns in certain banks. Hence, maintaining profitability was a way to navigate the rough seas by serving as a yardstick to ensure results were still within some acceptable limits. Maintaining profitability was a fine balance and a tough task, but many better- performers companies were those who delivered consistent profit margins across the cycle.
Investing into new markets for both sales and production: The financial crisis gripped the USA and west Europe, traditional export destinations for India. The recent years necessitated Indian companies (in both manufacturing and services segments) to send out prospect teams and invest into road-shows into new markets. It meant going where the ‘new money’ was, and ‘new money’ was growing in China, Middle East, South East Asia and larger Latin American countries in recent years. But they came with their own cultural challenges. Companies had to understand the nuances in which they did business. Many Indian companies still made significant inroads into new geographies – intention being both to gain export markets and to set up production facilities for global sourcing. It meant hiring foreign managers and training domestic managers who could then take over those operations. These expansions have not been restricted in terms of sectors, but have been visible across sectors.
Staying focused, instead of going beyond core competencies: A hallmark of successful players has been to focus on few segments where it could build specialisation, rather than too many segments where it might not be able to build competency. It was better to be Master of few, rather than Jack of all. Being big might help enjoy economies of scale and spread common costs. But it may not always turn out to be the best strategy, since size often created failure to ensure every segment is run in the best manner. Every company could not always be best in everything, and clients had become increasingly demanding post-2007. They wanted the best service and would switch their loyalty rather than compromise if service-level fell. Companies which focused in few areas and went into them in depth to ensure the best proposition for clients often ended up more successful.
Corporate governance to enhance capital-raising sources: Corporate governance became table-stay, be it when foreign partners are looking to source or invest and moreover during capital infusion. With the ability of some banks to lend impacted due to asset quality stress combined with a depressed IPO (initial public offering) market, private equity emerged as an alternate source of growth capital. But PE (private equity) funds had strict standards of corporate governance, be it in financial reporting, external directors, etc. Corporate governance came at a cost. But it also brought reputation and dependability of those companies as far as raising capital was concerned, and capital was needed by many companies to achieve their next level of growth.
In conclusion, these are few attributes of the better-managed Indian companies that emerge from the observations of the current economic slowdown. For global players looking to source, invest or partner with Corporate India, these attributes might help identify the quality ones.
Image Courtesy: Business Insider India
Originally published in The News International, Jang Media