Taking a new ROAD to growth
Report | June 2016 | Kanvic Grey Matter
The last five years have been challenging times for India Inc. The country’s business leaders have had to steer their organisations through a period that has been both unexpected in its harshness and unprecedented in its longevity.
Since the turn of the century India’s corporations had become used to a steady upward trend in economic growth and corporate profits. Despite the shock of the global financial crisis in 2008, the short-term recovery of the Indian economy led many to assume that the years of high growth and expanding profits would continue.
However, these hopes have not been realised. Economic growth has yet to return to its earlier highs and from 2010 to 2015 the net profit of India’s leading companies as a percentage of GDP more than halved from 4.1% to 2%. In the same period EBITDA at these companies declined from 8.7% of GDP in 2010 to 7.2% in 2015.
Closer analysis of the performance of India’s top 1,000 companies tells a more nuanced story than one of across-the-board decline. Firstly, over the last five years there has been a remarkable shift in corporate profits in India between industry sectors. Today’s top five most profitable industries captured a little under 39% of total corporate profits in 2010 but this share leapt to almost 75% in 2015. The automotive, auto-component, healthcare, utilities and IT sectors have all made outsized gains in profitability despite the challenging growth environment.
Secondly, looking within sectors, there are companies in every industry that have seen good growth over the last five years. Even in the worst performing sectors like construction, there are companies that have grown above the median rate of the best-performing industries.
Most interesting of all, our study found that there is a strong correlation between companies’ growth rates over the last five years and their profitability. Those companies that grew their revenues most aggressively between 2010 and 2015 (i.e. at more than their industry’s median growth rate) were more likely to see their profits increase.
These findings have two important implications for India Inc.: 1) that growth and improved profitability is possible in every sector despite the challenges and 2) that the pursuit of higher growth is essential if companies are to improve their bottom lines.
While the growth imperative may seem simple and obtainable, the reality is that the environment for growth has never been more challenging for India Inc. Through a multi-year analysis of the diverse trends impacting different industries, we have identified three key factors that will require India Inc. to take a very different path to growth in the years to come. These factors are: the volatile and uncertain environment, digital disruption, and the debt trap.
Firstly, today’s volatile and uncertain environment is not a temporary anomaly. It is a ‘new normal’ that has changed the context for business. Since 2010, India Inc. has had to contend with large swings in GDP growth, as well as unprecedented volatility in exchange rates, commodity prices and inflation. As India becomes more closely integrated into the global economy, its exposure to such volatility is only set to increase.
Secondly, across industries, we have found that India Inc. is being subject to the forces of digital disruption, the impact of which will only spread and intensify in the years to come. The country is now home to the third largest number of technology start-ups globally and in 2015 the sector received 50% of the combined investment of all previous years.
Whilst digital disruptors are most advanced in sectors like media, retail, and transportation, no sector is immune. What makes these digital players unique is the distinct ways in which they compete. They can quickly insert themselves between existing players and their customers, capturing both the customer relationship and their data, which they can quickly leverage through the latest analytics tools. Thanks to their emphasis on platform, digital players can also quickly aggregate unorganised suppliers (a large constituent in India’s economy) to build scale rapidly. Their absence of legacy costs and infrastructure allows them to adopt new technologies quicker and expand faster at a lower cost than incumbents.
The third factor that necessitates a new route to growth for India Inc. is the highly indebted state of many companies. Our study found that the financial health of almost one-third of India’s top companies is either in a critical or vulnerable state. This means they are either highly leveraged and/or have low interest coverage. Furthermore, the proportion of companies stuck in the debt trap is still rising. This makes it even more challenging for businesses to withstand the shocks of a harsh external environment and invest in the drivers of future growth.
The combination of these three factors means that the growth strategies pursued by India Inc. in the past will be inadequate for the journey ahead.
Based on extensive research over the last two years, Kanvic has identified four fundamentals of success for the changed world that India Inc. has entered. These are: resetting assumptions; organising for the future; advancing with agility; and digitalising the business. Together they form the new ‘ROAD to growth’ that India Inc. must travel along if they are to find their way to sustained and profitable growth.
The first waypoint on the ROAD to growth is the need to reset assumptions. Any strategy a company makes is based on certain assumptions they hold about how their market will evolve and the nature of the competition they will face. Given the profound changes that have occurred over the last five years, many of these assumptions are now redundant. Business leaders need to reset their assumptions about the external environment, the growth outlook, and the competitive threats they face.
However, the process of resetting is not easy because existing modes of thinking often become entrenched at the individual and organisational level. A successful reset requires leaders to engage in open strategy conversations with their teams. These conversations should include dissenting voices and allow existing assumptions to be challenged. Throughout this process leaders must be aware of their own biases that may colour the process and distort the outcome. They also need to develop their mental flexibility so that they can quickly adapt previously held beliefs to rapidly changing circumstances.
Finally, in order to succeed, executives embarking on the new ROAD to growth also need to reset their assumptions about the role of leadership. In this regard they can learn from the example of CEO 3.0 - the new generation of executive that has broken with many established norms of leadership to build the businesses that are winning in today’s changed environment.
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