No stakes are ever higher than those of survival. Poised as it is between extinction and endurance, the Indian business house as a genus is, undoubtedly, endangered. And yet, not every species in it will necessarily be snuffed out. For, a combination of strong genes and acquired adaptability to a hostile environment has equipped some of these houses with the resilience needed for thriving in the new millennium. But just which ones are they? What, indeed, are the crucial qualities needed for survival? It is to answer these questions, after rigorously auditing each and every aspect of the functioning of the country's family business groups, that the BT Business House Survival Index has been constructed, with a mandate for assessing the future of India's 50 largest business houses.
The Indian business house, of course, embodies a quintessential dualism. In most aspects of strategic, operational, and financial evaluation, it can be treated like a collection of individual, stand-alone businesses, each charting its own course, with distinct results. However, the presence of a single rudder-the ambitions and desires of the family that owns the group-also demands an assessment of inter-business relationships in terms of convergence of strategic intent, of synergies in operations, of inter-corporate financial flows. Simultaneously, the existence of a family, with its unique internal dynamics, compulsions, and stability issues, adds yet another dimension to the evaluation of the survival prospects of the business house. These complexities make it necessary to devise and apply an assessment model that must span the entire range of factors between corporate strategy and kinship sociology. Thus it is that the BT Business House Survival Index comprises a set of interlocking assessment modules, gauging the survival potential of a business house along the axes of strategy, operations, and change.THE STRATEGIC SURVIVAL INDEX
Lured into a business with licences or driven by the prospect of growth, without checking the fit between internal capabilities and the demands made by those sectors, the Indian business house has traditionally sacrificed strategy at the altar of opportunism. Thus, a crucial indicator to the likelihood of a business group's survival in the face of competition is the evidence of the emergence of strategy. Applying the well-known five-forces framework of competitiveness created by strategy guru Michael Porter, the generic choice for today's business group is between cost-leadership and product focus as it strives to attain the distinctive, inimitable competitive edge that is the hallmark of corporations that can keep rivals at arm's length. The proof that such a choice is being made for every business improves the prospects of a group. Conversely, the absence of such decisions implies that the businesses in question have no defined distinctiveness, and offer little by way of unmatched value to the customer. Vital too is the assertion of strategic intent in a group's plans. Is it, for instance, going global, or, at least, pursuing global scale? Has it made innovation and customer focus the bedrock of all its activities? Is it weaving speed, flexibility, and quick response time into the very fabric of all its actions?THE CHOICES.
The features that a business house with a clear strategy in place demonstrates are the obvious measures for the group's strategic quotient. Thus, its cost position vis-à-vis rivals, supported by backward linkages to operations, reveal whether or not it is aiming to provide the lowest prices in the marketplace. Alternatively, the business that makes uniqueness its strategic plank must invest in, and deliver, differentiated products that competitors cannot match. Attendant to this choice are factors like technological leadership, economies of scale, marketing skills, and, crucially, core competence-driven focus. Indeed, the extent to which a business house concentrates on its core businesses is a vital measure used by the BT Business House Survival Index. And, most important, the determination to persist with its strategic positioning is visible in its efforts to build competitive advantages at every stage of the value chain.THE PORTFOLIO.
Some, or even the majority, of the individual businesses of a group may survive. But what of the future of the collective entity? The ability of a sizeable proportion of its largest enterprises to overcome competition may be a necessary condition for a business house to thrive and grow, but it isn't sufficient. For that, a suitable mix of businesses is essential, serving the multiple purposes of generating cash for new investments, of targeting emerging high-growth opportunities, of keeping pace with changing trends in consumer demand, and of allowing the group to leverage its core strengths.
- Strategic focus will be a cause for concern for the family business
- Attempts to improve operational performance are gathering pace
- The shift towards divestment in non-core businesses is discernible
- Despite ingenious financing, funding the future will be difficult
- Family instability is posing a serious threat to survival
The higher the contribution to the total turnover made by stable businesses, ideally with high marketshares in low-growth, low-competition markets, the more solid is the foundation of the group for survival in the future. And while a presence in high-growth, high-competition markets and sectors promises prospects for the future, the perfect portfolio will be biased in favour of businesses that have high marketshares in areas where they do not make unreasonable demands on the group's financial and managerial resources.
Conversely, too many low-marketshare businesses in low-growth areas are obviously going to prove a drag. Vital, too, is a balance between businesses that will generate funds, and those that will demand investments, with a skew on either side weakening the survival potential. And the Strategic Survival Index culminates with an evaluation of the group's awareness of its competencies, measured in terms of the extent of focus on, and divergence from, core businesses, and its sensitivity to the regulatory environment when packing its portfolio.THE OPERATIONAL SURVIVAL INDEX
I t is in the quality of their processes that Indian business houses tend to display the greatest differences among themselves. While many of the older groups have been unable to shake off practices that were state-of-the-art when they were born, but are antediluvian now, others have succeeded in revamping their processes and systems continuously. The quest for operational efficiencies, aimed at squeezing every drop of redundancy out of the organisation in a bid not only to contain costs, but also to optimise product quality, is an on-going one around the world. As Indian business houses strive to compete with global corporations, this ability is going to be a clear differentiator between those who survive and those who fall by the wayside.
When it comes to gauging the effectiveness of a business house at improving its operations, it is both the effort and the results that count. First, the use and frequency of techniques like benchmarking, total quality management, justin-time inventory management, business process reengineering, supply chain management, or customer and employee surveys are essential indicators of attempts to sharpen operations. However, precisely because such initiatives often lead business into a cul-de-sac that offer no benefits to the bottomline, the BT Business House Survival Index also takes into account the actual consequence, measured through the change in operating costs as a percentage of turnover over five years, as well as the turnover per employee. Thus, evaluations of effort and outcome have been combined.FINANCES.
The lifeblood of the business house for survival, essential for circulating strategies and capabilities, is, of course, the ability to bankroll posterity. Transcending the balance-sheet and the profit-and-loss account, which provide annual snapshots of performance evaluated in rupees and paise, the financial depth of a business group is really a measure of its competence for making new investments when necessary, for ensuring healthy cash-flows year after year, for having the capacity to withstand hard times without having to put its assets into hock. The real muscle that proves financial strength, therefore, is the potential of the business house for raising and servicing capital. The barometers?
Principal among them is the debt-equity ratio, which is a clear indicator of how much the group can borrow in future. Almost as important is the felicity with which the group has serviced its capital in the past, gauged through the Return On Capital Employed (ROCE). The next step: satisfying investors by offering them sizeable returns, which, naturally, is a function of the post-tax profits that the group has at its disposal for distribution to shareholders, and for shoring up its net worth. That makes profitability-measured as the ratio of profit-after-tax to sales-a crucial indicator of latent financial vitality. Finally, the usage of other resources at the disposal of the group-measured in terms of the ratio between assets and turnover- indicates whether its crown jewels are paying for their upkeep, or merely rusting in the throne-room. The BT Operational Survival Index considers the current performance on these parameters as the launching pad for financing the future. THE CHANGE SURVIVAL INDEX
The one characteristic that tomorrow's survivors among the country's business houses will share is that they will not be held hostage by history. For, only those groups that successfully break with the past-in strategy and structure, processes and products-will be able to adapt themselves to the demands made by the eco-logical niches which they occupy. These changes will manifest themselves in the form of responses to the external environment as well as internal compulsions. Nor can this adaptation be a one-off affair: as the environment changes continuously, so must business.
Spotting candidates for survival, therefore, involves identifying those business houses that have prepared themselves for continuous change. A formidable challenge for any corporation operating in any kind of market, acquiring the ability for instant and unrelenting transformation-often in anticipation of, rather than as a reaction to, external change-is doubly difficult for the business group which tends to be hobbled by anachronisms, prejudice, and irrational drivers like blind ambition untempered by strategic intent.ADAPTABILITY.
Just how does this willingness for constant makeovers manifest itself? Telling clues lie in the extent and frequency of changes undertaken over the six years of liberalisation, and, especially, the speed with which the first transformation following the sweeping economic changes of 1991 was wrought. For, only a business house that has acquired a certain momentum of change will be able to sustain it in future. The revealing signs of change can be seen at the level of structure-in the form of the restructuring of businesses, the reconfiguration of companies and enterprises, acquisitions and divestments et al.
They can be seen at the level of operations- through the introduction of, inter alia, reengineering, quality movements, productivity initiatives, new shopfloor practices, and new manufacturing technologies. And, of course, they can be seen at the level of strategy-visible through the use of new strategic planning techniques and templates, of new initiatives in entering new markets and growing new products, of boosts in R&D expenditure, of new practices in managing people, and of attempts to build learning organisations. The BT Change Survival Index equates the spatial and temporal density of such evidence of transformation with the likelihood of a business house's adapting to external changes. STABILITY.
The one dimension along which the business house differs radically from other corporations is that of stability. After all, the family in business is prone to splits arising from battling siblings, between feuding fathers and sons, between warring uncles and cousins-each intent on pursuing their own ambitions-leading to one or more cases of fission in the empire. The involvement of daughters' husbands, a grey area in the matrix of family relationships, is also widening the fault lines. Indeed, history reveals that no family business house has survived in its original form beyond the third generation. And even as the relationships between individual members of the family impact the stability of the business, so do the structures of the group, which can either hinder or hasten a split. Several factors, then, contribute to the likelihood of a business house staying undivided as it marches into the future. The composition of the family-which generation it is in, the number of brothers and sisters, the presence of heiresses, the nature of their interaction in their personal lives-is, naturally, the starting point when assessing stability.
Accompanying them are probes for the presence of formal systems of succession planning and grooming, which make messy internecine feuds less likely after the patriarch hangs up his boots. The presence of a holding company-or a chain of investment companies-or significant cross-holdings between different companies obviously makes it more difficult to cleave the group. And the third component of the BT Survival Index is the measure of horizontal strategies-often visible in the form of sharing of resources-within the group, which ensure that the benefits that the family derives from being part of a single group outweighs the costs of that affiliation.LEADERSHIP.
Unlike the streamlined, unidirectional, single company, a business group is of necessity a flotilla sailing in many different directions. A second important difference: while the corporation, whether it encompasses one business or a dozen, is managed by a CEO whose responsibility is to increase shareholder wealth, the family group is headed by one or more people with personal ambitions of building business empires. That makes the owner-driven leadership of the business house both qualitatively and quantitatively distinct from the manager-directed leadership of the standalone company. The former must provide not only what the latter does-viz., vision, inspiration, motivation, and a sense of direction to disparate activities- but also the binding cohesiveness that will knit the group into a monolithic entity in terms of culture, values, ethics, and objectives. Most important, top-class leadership of the business house, designed to chart out a survival course for the next 50 years, can only come when the promoters convince the people working in the group that they are leaders by prowess, and not merely by the accident of being the owners.
After all, while professional CEOs usually climb to the top by dint of merit, the CEO of the family business is to the manor born, making it all the more important for his leadership qualities to prove worthy of the responsibility thrust upon him. But what are the qualities that will distinguish the leadership of a business house that survives from that of one which goes under? Speed and efficiency of response, the articulation of an over-reaching but cogent vision, and the charisma to rise above the role of the feudal head are crucial components. So is the propensity for championing change, being forthright and decisive, and the ability to resolve conflicts. And, most of all it is the aptitude for conducting a group of diverse managers into an orchestra playing a single melody that makes for quality leadership in the BT Business House Survival Index.
Using this framework, the individual assessments of the survival prospects of the country's 50 largest business houses operate at two levels. A qualitative analysis traces the progress made by each of the houses along the axes over its past in general, and the post-liberalisation years in particular. Simultaneously, a quantitative assessment-The BT Matrix-seeks to capture the present standing of each of the 50 houses. This assessment covers the qualitative parameters, and includes two more: a measure of the value added by a group's listed companies to shareholders; and a gauge of investorfriendliness, calibrated by the stockmarket performance of each of the 50 business houses (see The Methodologies for the details of the scoring system).
The aggregate of the scores under the nine parameters measures the survival prospects of a business house in the future in terms of a snapshot of its present strengths, summarising the results in the form of the intensity of the survival signal it's emitting: Powerful (corresponding to a survival score of over 800). Strong (between 650 and 799). Medium (between 550 and 649). Weak (between 450 and 549).
Very Weak (between 350 and 449). Or Feeble (less than 349). And the qualitative assessment projects the future of each group from its post-liberalisation track-record. Of course, like every model that attempts to impose patterns of predictability on complex events, the BT Business House Survival Index, too, is a generalised framework for assessing unidentical institutions. Ideally, each group should be evaluated with a customised model, and the one-size-fitsall model used here does try to generalise some nuances. Nor can it be denied that its results necessarily represent only a moment of each group frozen in time, and not an on-line profile of its changing competitiveness. Even so, in extrapolating the future from the past, these results offer a powerful pointer to the destiny of the Indian business family.