Growth of professional management in india

Growth of professional Growth of professional Management in IndiaManagement in India

Indian entrepreneurshipIndian entrepreneurship• Before 1991, Indian business success was a

function of ambition, licenses, government contacts, and an understanding of the bureaucratic system.

• Decisions were based on connections, rather than the market or competition.

• Business goals reflected a continuation of the ‘Swadeshi’ movement, which promoted import substitution to attain economic freedom from the West.

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Indian entrepreneurshipIndian entrepreneurship• Pre-1991 policies were inward looking and

geared towards the attainment of self-reliance.

• During this era, entrepreneurship was subdued, capital was limited and India had very few success stories.

• As well, society was risk averse and the individual looked primarily for employment stability.

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Indian entrepreneurshipIndian entrepreneurship• In 1991, the Indian government

liberalized the economy, thus changing the competitive landscape.

• Family businesses, which dominated Indian markets, now faced competition from multinationals that had superior technology, financial strength and deeper managerial resources.

• Thus, Indian businesses had to change their focus and re-orient their outlook outward.

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Indian entrepreneurshipIndian entrepreneurship

• A few existing Indian business families adapted to the new economic policy while others struggled.

• Importantly, a new breed of business was born, one that focused on ICT (Information and Communication Technology) and created wealth for owners and employees.

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Indian entrepreneurshipIndian entrepreneurship• For the old business houses, success

had come from the close-knit joint family structure that fosters family values, teamwork, tenacity and continuity.

• Under this structure, generations lived and worked together under one roof, reaffirming the Weberian values and trust that have built successful businesses.

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Indian entrepreneurshipIndian entrepreneurship• Wealth from the businesses supported the

joint family by providing a social safety net for members.

• In the structure, businesses and families were intertwined though they were also distinct entities with separate rules.

• Hence, survival of the family became synonymous with the survival of the business.

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Indian entrepreneurshipIndian entrepreneurship• Liberalization, however, changed the very

nature of the joint family. • If large Indian businesses were to succeed,

the family would have to re-orient itself to compete in a global, competitive environment.

• Post liberalization, IT businesses succeeded because they were customer focused and professionally managed.

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Indian entrepreneurshipIndian entrepreneurship• The old, family-managed businesses, which

formed the backbone of the economy, needed to evolve and become more institutional, if they were to extend their life cycle.

• Using the Indian mythology trinity of creation, preservation and destruction, I will explain the changes that family businesses would have to make.

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Brahma: Creation CycleBrahma: Creation Cycle• After liberalization, business opportunities

in India were manifold. • A good number of entrepreneurs seized

them and grew from small-scale contractors to large real estate developers, and from distributors to manufacturers.

• Success became the result of efficient capital allocation, strong execution and a customer orientation.

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Brahma: Creation CycleBrahma: Creation Cycle• Today, businesses have access to venture and

growth capital, provided that their stories and business models are reasonable.

• In the pre-1991 License Raj era, abilities such as manufacture and deliver products to the market were the Key Success Factors, without regard for the customer and other efficiencies.

• Liberalization also brought in the age of Saraswati [Goddess of Learning in Indian mythology]; businesses would now grow because they had knowledge, not because of whom they knew.

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Brahma: Creation CycleBrahma: Creation Cycle• One example is N.R. Narayana Murthy, who

co-founded Infosys Ltd. in 1981, with an initial capital of INR 10,000.

• At Infosys, he and his team designed the Global Delivery Model, which also laid the foundation for the knowledge industry.

• Narayana Murthy’s vision gave a fillip to the IT services industry, creating and encouraging the entry of several new IT businesses.

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Vishnu: Preservation Vishnu: Preservation CycleCycle

• To maintain business growth, Indian entrepreneurs needed to segregate operating control of the business from beneficial ownership, mitigating business and family succession risks.

• But, in a male-centric culture, people are reluctant to relinquish operating control and institutionalize processes.

• Consequently, there are few large, structured and professionally managed institutions in India.

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• Indian businesses need to move from an entrepreneurial-driven, unstructured culture to one dominated by professional managers.

• Management control should rest with professionals, as they are able to perform more efficiently; beneficial ownership can continue to rest with the owners, who can still provide the vision and connections, and enjoy the fruits [increase in firm valuation] of efficient management.

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• If a younger generation wishes to take over the business, then clear criteria can be defined to determine their eligibility to succeed their elders.

• These criteria could include requirements to work in middle management, work across divisions, work in audit, and have a first-class education.

• Succession must also take into account the changing role of women and their desire to be involved in the business.

• If a proper succession plan is not developed and implemented, nepotism and stagnation will result.

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• Essentially, corporate governance with a lucid ownership structure that blends effectively with the professional decision makers [e.g. CEO] can reap benefits for all stakeholders.

• This will allow entrepreneurs to build larger institutions.

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• Sunil Mittal, a first generation entrepreneur, identified an opportunity in mobile telecom.

• In 1994, Mittal successfully bid for a telecom license, and services were launched under the brand name AirTel.

• The business model was innovative –IT management services and hardware (telecom towers) were outsourced to vendors.

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• Fixed costs were converted to variable costs.

• Mittal was able to professionalize the organization early, something that helped him build a larger institution.

• As a result, India now has one of the lowest-priced telecom services in the world.

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• The Burman Family, which owns Dabur Ltd. (consumer goods company), is a good example of a family company that segregated management from ownership.

• It has a separate Family Committee that provides the vision and direction, but the day-to-day management rests with the professionals.

• The family has a formal structure for communicating with management.

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• As Indian businesses became professional, opportunities to acquire global businesses increased.

• In 2006, Corus, an Anglo-Dutch steelmaker accepted an US$7.6B bid by Tata Steel, the Indian steel company.

• This allowed Tata Steel to become a global leader in the steel business instead of continuing to remain a large domestic steel manufacturer.

• Once an acquisition target, Tata Steel has itself grown into an acquirer.

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Shiva: Destruction (Exit) Shiva: Destruction (Exit) CycleCycle

• Owners should exit their business if it is not efficiently managed or if it receives exceptional valuations.

• A control-and-hold behaviour will simply not enable success.

• We have seen that a few owners, Ajay Piramal, for example, in the pharmaceutical industry, has successfully sold the businesses.

• In Sept 2010, he sold the domestic formulations to US based Abbott for US$ 3.72 billion.

• This has been India's largest pharma deal, and one the top 3 in the Indian context as well.

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• As businesses grow, entropy (lack of order) will only increase.

• The discontinuity will be difficult to manage if a formal family structure is not in place to meet the needs of the next generation.

• However, if roles and responsibilities of the next generation are defined, and professional management (wherever necessary) takes over, closure of the business can be avoided.

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• As it is said, a lack of liquidity can bankrupt a firm; similarly, the lack of an appropriate family structure can force a business to close after the first generation exits.

• Thus, Indian owners have to make the transition from being owners to shareholders.

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• As shareholder value increases, the free cash flow can be invested in new initiatives that enable the new generations to apply their skills.

• We need not throw away the characteristics of the joint-family business – work ethic, ability to deal with diversity, customer focus — but to blend what has been learned about customer focus and diversity, for example, into a performance-driven structure.

• Only then can the investment cycle of creation, preservation and destruction continue.

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Risks to India’s growth: Risks to India’s growth: Real but overstatedReal but overstated

• The Indian entrepreneurial spirit can only develop and grow if the Indian economy continues to grow on a sustainable basis.

• The risks to India’s continued growth are terrorism, political corruption / stalemate, non-inclusive growth that focuses only on the urban rich, and stalled reforms.

• What then is India’s risk premium?

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• As the investment cycle strengthens, foreign businesses can invest in India independently or through partnerships.

• The businesses factor the political, economic and family risks in their analysis.

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• From an academic’s perspective, the businesses can either decrease the expected cash flows or increase the discount rate to reflect risk premium, though the adjustments are complex.

• However, I view investments in India as a strategic decision.

• In the next few slides let us discuss the risks and our understanding of them.

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Terrorism: India is a Terrorism: India is a stronger state because of stronger state because of

its cultureits culture• As per Wikipedia, “Terrorism in India is

primarily attributable to religious communities and Naxalite [militant Communist Group] radical movements.”

• I am not going to elaborate on the causes of terrorism but I do want to ask if India as a country will it survive and remain united despite the nefarious activities of the insurgents.

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its cultureits culture• It can be stated unequivocally that

terrorism creates uncertainty and delays investments in any country.

• However, we need to comprehend a country’s culture, constitution and its past response to terrorism to consider and assess its fate.

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its cultureits culture• Culture is a broad-based word but a powerful

concept. • Culture is rooted in myths, institutions, television,

globalization, upbringing, religion and history. • Foreigners have invaded India, but we have learnt to

absorb and assimilate them into our society. • India has the second-largest Muslim population in the

world. • Buddhism and Jainism had their roots in India but

only traces exist today, as Hinduism absorbed their teachings.

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its cultureits culture• The Indian culture is tolerant and can

deal with differences. • The difference between Europe and

India is that Europe is a continent with independent countries while India is one country that has united many divergent countries.

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its cultureits culture• The Indian culture is also resilient and able

to respond sensibly to any terrorist activities.

• As evidence, Indian’s response to the November 26th 2008 terrorist attack in Mumbai was balanced and restrained.

• I am confident that, given India’s history and behaviour, we will remain united as a country.

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its cultureits culture• At the same time, Indian businesses have shown

the entrepreneurial skills and flexibility to grow despite the challenges.

• For instance, an Indian entrepreneur in Afghanistan is assisting the government to develop that country’s infrastructure.

• C&C Construction Ltd, incorporated by a group of professionals in 1996, ventured into Afghanistan in 2002.

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its cultureits culture• It has built 700 km of roads, and

works closely with USAID, the World Bank and the Asian Development Bank.

• C&C Construction will also work closely with the Indian Government to build the Afghan parliament building.

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Political risk: Uncertainty Political risk: Uncertainty will remainwill remain

• India is a complex country with myriad castes, religions and languages.

• The political parties have evolved to address their needs and give the minority groups a platform and a voice that are heard at the national level.

• The foreseeable future will be characterized by coalition politics.

• It is unlikely that either of the two major political parties – BJP or Congress – will win a majority.

• This is a reality, but India has the experience to manage the political processes and differences

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Political risk: Uncertainty Political risk: Uncertainty will remainwill remain

• It is evident that a coalition government slows the reform process.

• However, it is a positive development, that, irrespective of the coalition government (lead by either BJP or Congress), we have stayed the path of liberalization.

• There are no major differences between Congress and BJP as far as economic policies are concerned, and both favour economic reforms.

• And, as India’s middle class grows, the importance of religion and caste will diminish; the focus will be only on growth.

• Economic progress will change India’s political landscape for the better and further improve political stability.

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Economic reforms need to Economic reforms need to continuecontinue

• Growth needs to continue and India needs “… another dose of reform, aimed at markets for inputs, from electricity to labour and land …

• The [1991 reforms] freed markets for products.” [The Economist, July 2011].

• If we are to continue to maintain the growth trajectory, the market for inputs needs to be liberalized.

• These are difficult political decisions and coalition politics will make the process slower and difficult.

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• It will be easier for the government to address and repair old infrastructure through public private partnerships.

• India is going through a structural — not a cyclical — change; hence, the process is slow and driven by the political process.

• We need investments in power, roads, ports and bridges.

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• An important area of reform is the power sector, as no industry can achieve a successful transformation without sufficient power.

• This is why the Indian government needs to push through the reforms on power generation, transmission and distribution.

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• Corruption could be viewed as one of the reasons for the slow pace of economic reforms.

• Overspending on the Commonwealth Games and the Department of Telecom’s under-pricing of 2G spectrums resulted in heavy losses for the exchequer.

• Indians’ frustrations were channelled through the Gandhian leadership of Anna Hazare.

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• The peaceful protests were successful and the country will get an independent ombudsman, the Lokpal (protector of the people), who will investigate alleged corrupt practices of politicians and bureaucrats.

• This demonstrates the fact that we have the institutions, leadership and most importantly, the grass root activism to effectively mould decision-making at a national level.

• This will create a positive environment for further economic reforms.

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• We also have the positive experience of the past decade, for which both political parties, the BJP and Congress, were responsible.

• However, future reforms have to be inclusive and supportive of the economically disadvantaged.

• The Left parties do not support economic reforms.

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• Their thoughts are focused inward on how India can continue to grow economically on its own.

• As the Left parties are a minority on the Indian political scene and the Congress and BJP political parties are supportive of the economic reforms, it is unlikely that the reform process will be derailed.

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• What then is India’s risk premium? • I believe that it varies according to one’s

viewpoint. • Politics is an important factor that impacts

the investment cycle. • Hence, it is essential that the Indian

government address issues of corruption and continue with the next phase of reforms to accelerate the decision-making process.

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• Reform will continue but at its own pace.

• I have observed that companies that have taken risk and stuck to a sound business plan succeed in India.

• They have both sold their wares domestically and exported talent and products.

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• It is difficult to dampen the Indian entrepreneurial spirit.

• It has grown and competed in the global market despite the controls of the Indian government.

• Entrepreneurs have shown their ability to adapt to the changing economic environment and deal positively with the uncertainties in the market place.

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• Yes, the joint family structure – the spawning ground for entrepreneurs – continues to evolve and compete effectively in the world market.

• But if that success is to be sustained, the economic reforms will also have to continue.

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Thank youThank you

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Growth of professional management in india

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