Taking a new ROAD to growth

 

How India Inc. can prosper in a changed world

Report | June 2016 | Kanvic Grey Matter

by Deepak Sharma, Ravindra Beleyur, Vlad Flamind, Gehan Wanduragala, Guillaume Santesmases

  • In recent years India Inc. has struggled with stagnant growth and falling profits.

 

  • Through a unique multi-year study of India’s top 1,000 companies, we take a closer look at performance across industries and identify the key challenges for growth in today’s changed world.

 

  • Based on the extensive insights generated in this study and our ongoing interactions in India’s C-suites, we set out the four milestones every business leader must pass to get on the new ROAD to growth.

Overall profitability has been in decline at India Inc.

 

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.

 

From 2010-2015 the net profit of India’s leading companies as a percentage of GDP more than halved from 4.1% to 2%

 

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.

However, companies that have grown aggressively have improved their bottom lines

 

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.

 

The last five years have seen a remarkable shift in corporate profits in India between industry sectors.

 

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.

 

Companies that grew their revenues aggressively between 2010 and 2015 were more likely to see  profits increase

Three factors have profoundly changed the business environment in India

 

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.

 

Three key factors require India Inc. to take a very different path to growth in the years to come.

 

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.

The new ROAD to growth has four fundamentals of success

 

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.

 

Reset your assumptions

 

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.

 

Leaders need to reset assumptions about the external environment, the growth outlook, and the competitive threats.

 

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.

Organise for the future

 

The second point on the ROAD to growth is organising for the future. To respond to the varied and unpredictable challenges of today’s world and seize new opportunities as they emerge, leaders will have to build a very different type of organisation. Most importantly, India Inc. will need to transition from traditional hierarchical approach to more fluid structures, that encourage collaboration and foster faster adaptation. They will also need to engage and empower the new cohort of millennials that is re-shaping the workforce in India, and who have profoundly different attitudes and expectations to earlier generations.

 

India Inc. needs to transition from a hierarchical approach to more fluid structures that support collaboration.

 

Furthermore, as markets become more unstable and product life-cycles get shorter, companies will need to cultivate a culture of experimentation in their organisations to support faster innovation. To encourage this cultural shift companies will need to take a new approach to performance management. This will require a move away from annual performance reviews and toward frequent appraisal and recognition. Similarly, the nature of role progression in organisations will need to transition away from rewarding longevity through experience based promotion, and toward elevating those with the most relevant expertise for the journey ahead.

 

Advance with Agility

 

The third milestone on the ROAD to growth is agility. In a fast-changing world companies will need to quickly seize opportunities they may not have envisioned and respond to new threats from unexpected quarters. Agility requires that an organisation is capable of sensing signals, interpreting them correctly, and then acting promptly. To become agile companies need to develop a sharp organisational antennae to monitor activity on the periphery and sense the weak signals that could indicate new competitive threats or market shifts. They then need to put in place the processes to screen these signals.

 

Agility requires an organisation to sense signals, interpret them correctly and act promptly.

 

Once the signals are detected, an agile response requires the right interpretation. For this to happen companies need to move out of the mode of denial and objectively consider the threats and the opportunities that a potential change might present. Here contingent thinking is a valuable tool. It shifts the focus away from trying to predict an outcome and instead examines different scenarios and how they might impact the business.

 

Lastly, a rapid response is critical to success in an era where new entrants are able to achieve the scale of incumbents in a matter of years. Companies must overcome inertia and acquire a bias for action in both offensive and defensive moves.

 

Digitalise your business

 

The fourth and final point on the new ROAD to growth is digitalisation. Every Indian company, whatever the sector, will need to put digital at the core of their future strategy.

 

To do this, businesses should first ask five critical question to set the right digital direction:

 

  • how does digital bring opportunities and threats for our business?
  • what stage of maturity has the organisation reached in digital?
  • which areas need the most attention to build digital capabilities?
  • what are the ambitions for the short and long-term?
  • what challenges will we need to overcome?

 

Every Indian company will need to put digital at the core of their future strategy.

 

After answering these questions based on their unique circumstances, India Inc. can take initiative in three areas to get started in the digitalisation process:

 

First, they can adopt the principle of start small, fail fast, to rapidly test digital initiatives and identify the ideas to which they should commit further resources.

 

Second, they can review their existing data assets and identify how they can be developed and leveraged to deliver a strategic advantage for the business.

 

Third, India Inc. will need to identify the critical digital talent inside and outside their organisation that will be essential to implementing digital initiatives. They will also need to bring these digital champions into the heart of the company’s strategic conversations.

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