Business Today

Mantras of management success

The best managed companies are also very successful companies, but the opposite is not always true. A Business Today and Ernst & Young study identifies what leading practices India's best companies adopt to outperform industry and competitors.

Noor Chawla        Print Edition: March 23, 2008

It was the best of times, it was the worst of times”— Charles Dickens’ description in A Tale of Two Cities perhaps best describes the scenario facing Indian companies today. On the one hand, unprecedented growth in the Indian economy has led companies to post record revenue and profits. On the other hand, the spectre of a world recession threatens to play spoilsport.

At Ernst & Young, we have been studying corporate performance over many years. Our research tells us that while businesses go through cycles of boom and bust, some companies are successful in riding the boom periods and defying the periods of bust.

These companies consistently outperform the market and deliver superior results on an ongoing basis. These successful companies cut across industries, have disparate backgrounds, some are mature and established, others are newer and younger.

 

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These companies are more successful because of the quality of their management processes. As we conducted a study of India’s best managed companies, our aim was to identify what is it that makes one company better managed than another and what are the leading practices that India’s best companies adopt to outperform industry and competitors.

Our study revealed several common threads that run through India’s best managed companies. We summarised these as ‘10 mantras’ of management success. Many companies focus on one or some of these mantras, but when practised together, these mantras churn out a “best managed” company.

Mantra #1: Be audacious in your vision

Sam Walton once famously said, “Capital isn’t scarce; vision is.” However, looking at the best managed companies of this year, there seems to be no dearth of vision. In fact, these companies have displayed a boldness of vision that was quite unimaginable for Indian companies a decade ago. If one were to select the leading beacon for its vision, it would undoubtedly be Tata Motors. Who would have thought that a company, which started making passenger cars barely a decade ago, could even think of making the world’s least expensive car, and that too at half the price of the cheapest car available in the market. But this should not come as a surprise. Over the past few years, Tata Motors has time and again set out to achieve targets that skeptics have proclaimed to be unattainable. But every time it has delivered on these promises—be it the Indica or the Ace.

ITC is another interesting case in point. A strong vision not only helped it recover from not-so-successful forays into finance, trading and real estate but also galvanised the company to brace for a new round of growth. It set itself an ambitious target to become India’s biggest FMCG company and then went on to launch a product blitzkrieg, unleashing a new product in the India market every quarter. Today, after successfully competing against the FMCG majors in the foods arena, ITC is entering the highly-competitive personal care market with a new-found confidence.

This new approach of Indian industry is perhaps best summed up in Ratan Tata’s modest words: “We rescaled our thinking in terms of growth and we just forced and cajoled our businesses to make this happen.”

Mantra #2: Focus on what you know best

In a rapidly expanding economy like India’s, diversification into unrelated but highgrowth sectors becomes a tempting proposition for companies. However, if one looks at the best managed companies, they have largely achieved growth by leveraging their value chain inter-relationships or through geographical expansion. The classic example of growth through backward integration is Reliance Industries.

Starting with textiles in the late ’70s, Reliance pursued a strategy of backward vertical integration—in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production— to be fully integrated along the materials and energy value chain, while also emerging as a leader in each of the industries it entered.

On the other hand, a remarkable case of sharpening focus through divesture is L&T. In 2003, L&T’s cement business accounted for more than a quarter of L&T’s turnover, but it was still proving to be a drain on resources that could otherwise have gone into growing the core businesses. As L&T’s top boss A.M. Naik says: “It was only because of cement that the company’s financial parameters were depressed. L&T could have grown much faster without the cement business.”

 
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Finally in 2004, L&T bit the bullet and divested its cement business and decided to focus on engineering. The success of the measure was evident in the financial results of that year when, despite the divestment, the company’s revenues saw a minor dip and the profits actually grew by 23 per cent.

Mantra #3: Trim flab to achieve operational excellence

For the best managed companies, cost efficiency is more than a source of competitive advantage. This has pervaded the companies’ philosophy to become an ongoing exercise. Innovative solutions are helping the best managed companies reduce costs without compromising on quality.

Through a blend of backward integration, competitive sourcing strategies and efficient systems, these companies have managed to significantly rein in costs. The best managed company in the materials sector, Grasim Industries, is the lowest-cost producer of viscose staple fibre in the world. According to the management, the company is the most-integrated fibre producer, with the chain stretching right from forest to pulp to fibre to yarn. Almost all the intermediate inputs are captive. Besides, Grasim’s in-house engineering division enables the company to grow in the most cost-effective way.

Other winning companies are also undertaking several initiatives to trim the flab. Tata Motors’ landmark exercise conducted in the wake of a Rs 500-crore loss in 2001 helped it return to the ‘black’ and gave it the confidence to produce the world’s cheapest car. Tata Steel has long maintained its position as one of the lowest-cost producers of steel in the world. ITC’s e-Choupal initiative has revolutionised the agricultural supply chain, creating value not only for the company but also for the farmers.

In an increasingly globalised playing field, operational excellence, as the best managed companies adequately illustrate, has become a necessity. Cost efficiencies are instrumental in helping these companies defend their turfs from foreign players. More importantly, these companies are now taking the war abroad by effectively wielding the cost advantage to emerge as a serious threat to global incumbents.

Mantra #4: Good governance makes business sense

Corporate governance has become a priority for a world recovering from the shocks of scandals such as those at Enron and Worldcom. In India itself, Clause 49 of the listing agreement, which contains the corporate governance requirements, has been revised at least four times in six years. Most Indian companies have been struggling to comply with the mandatory requirements of this clause.

However, we noted that the winning companies go much beyond what is mandated by the law. All but one of these companies has a documented Corporate Governance Policy and also a Whistleblower policy. Most of these companies provide formal training to their Directors and have instituted mechanisms to track the performance of their Boards.

The Tata Group stands out as the leading practitioner of good governance. It claims that adherence to ethical business conduct is rooted in the vision of its founder, Jamsetji Tata, for whom the ‘end’ of entrepreneurial triumph was always secondary to the ‘means’ by which it was achieved. It is this very reputation for honesty and integrity that has helped the Tata Group immensely in its bid to grow internationally. This was reflected at the time of the Corus acquisition, when Jim Leng, the Chairman of Corus, went on to call Tata the right partner at the right time for Corus shareholders and employees alike.

Mantra #5: Develop leaders from within

A common feature across the best managed companies is that their leaders have grown from within. A.M. Naik started his career as a Junior Engineer with L&T in 1965. Y.C. Deveshwar, the CEO of ITC, began his career as a management trainee in the company in 1968. K.M. Sheth joined Great Eastern Shipping in 1952. B. Muthuraman started off as a graduate trainee with Tata Steel.

 
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The list goes on. These companies have made a conscious effort towards creating talent pools within the organisation and grooming employees for leadership positions.

L&T has launched a company-wide endeavour covering more than 4,000 managers to enable them to hone their abilities in people management, and translate those skills into effective leadership and motivation. To ensure quality and depth of leadership, L&T has linked the leadership process with consistency of performance.

Select employees are also sent to premier business schools and management institutes to gain experience and knowledge through their Advanced Management Programmes. Another best managed company, Grasim, believes in identifying and grooming management talent as also undertaking leadership development across levels through various initiatives such as a ‘Competency Honing and Leadership Development’ programme at Gyanodaya, the company's Institute of Management and Learning.

Henning Holck-Larsen, the co-founder of L&T, couldn’t have been more correct when he said: “If you want to belong to a country that is becoming a nation, you have to keep the economy growing by creating jobs. And you can only do that by investing in tomorrow, and tomorrow is made by people.” Quality and commitment of the workforce can make a significant contribution to the company’s success.

India Inc. is becoming well aware of this and is making an effort to take care of people through initiatives that range from providing better facilities at offices, regular trainings and developmental programmes as well as liberal leave policies. Findings from the survey reinforce this trend: 67 per cent of the best managed companies have specifically documented policies offering sabbaticals to employees and 78 per cent of the best managed companies have institutionalised ‘Fast Track’ programmes to recognise high performers.

This year’s best of best winner, L&T, has been the recipient of a number of awards for its innovative HR practices. One such initiative is the Hitori Yatai Seisan or the Single Workman Station, at L&T’s electrical engineering division. Employees are challenged to take complete responsibility for a product instead of letting them work on individual components. “Ever since we introduced the concept of the Single Workman Station, our productivity has increased, as the employee has a sense of ownership for the final product. This is a great motivation,” said R.N. Mukhija, President (Operations), L&T.

Best managed companies use a variety of approaches to reach out to their employees and go beyond the conventional offering of responsibility, security and salary. They create work environments in which their employees can flourish and dream the organisation’s dream.

Mantra 6: Forge stronger partnerships with your supplier base

The top companies in India realise that their performance is inextricably linked with that of their partners. As one of the CEOs put it, “The strategic vision of the company must get absorbed and assimilated across the entire value chain.” To this end, companies are increasingly sharing their vision with partners and seeking active participation in realising their growth objectives. Our study shows that the best managed companies in India view development of vendors as a key investment towards value creation.

It was interesting to note that each of the best managed companies conducts quality audits at vendor sites and has structured systems for vendor performance appraisal. Indian companies are also actively partnering their suppliers in planning, procurement, research and development, quality assurance mechanisms and process improvement initiatives. Two-thirds of the best managed companies are actively investing in enhancing the technology of their vendors.

 
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Bharti Airtel exemplifies this mantra in that it has integrated the partnership approach in its business model. Deviating from the conventional model wherein telecom companies owned network equipment, Bharti strategically outsourced the entire network infrastructure to its vendors and incentivised the arrangement by offering 1 per cent of the company’s revenues through SLAs. To allay vendor concerns regarding sustainability of the business, the company further outsourced network management to vendors.

The results that the partnership approach can yield are perhaps best visible in the case of Tata Motor’s breakthrough car, the Nano. Auto component suppliers played a key role in the development of the car and ensured that it met the cost target.

Mantra #7: Pursue quality with zeal

Best managed companies use quality to do what they do best— create value. These companies devote significant efforts towards achieving the highest levels of quality. Our study confirms that quality is a concept that pervades all sectors and each business. Each of the best managed companies had process quality certifications and 78 per cent of these companies had undertaken organisation-wide Six Sigma exercises.

Importantly, all of these companies’ strategic plans include targets for process improvements. At ICICI Bank, increasing customer grievances and service lapses made the management set up an Organisational Excellence Group (OEG) in 2002. Its aim was to engage in building, sustaining and institutionalising quality in the bank by facilitating development of skills and capabilities in various quality frameworks.

In the industrial products sector, L&T’s Heavy Engineering Division is focussing on improving manufacturing operations through automation, TPM, Six Sigma and IT- enabled re-engineering. Tata Steel’s focus on quality led it to launch the ASPIRE programme, incorporating best practices of different improvement initiatives such as TOC (Theory of Constraints), TQM (Total Quality Management) and Technology. Unrelenting commitment to quality, which is a defining feature of each of the best managed companies, creates that all important value among stakeholders—trust.

Mantra #8: Innovate to create value for customers

L&T’s definition of technology “as the springboard for the future and a bridge between aspiration and accomplishment” typifies the new-found attitude of businesses in India. The new mantra is to indigenise technology, which is evident from the increased R&D expenditure incurred in better managed companies. Companies are increasingly emphasising on R&D for reducing costs and developing new products. A case in point is Tata Motors, whose new business strategy is focussed around the development and production of technically-advanced commercial vehicles and passenger cars of world-class quality.

The recent launch of the first-of-its-kind goods carrier, Ace, and its passenger-carrying variants, is the result of the company’s aggressive new product development programme. Innovations in products and services have helped ICICI address the needs of various customer segments. A recent example is the introduction of an end-to-end technology solution in rural geographies that provides customers with biometric-enabled smart cards.

To sustain strong growth rates, companies need to look for creating know-how in new areas by building inhouse technological expertise, and the best managed companies are constantly working towards this very goal.

Mantra #9: Give back to the society

Corporate social responsibility (CSR) in India can probably be traced back to when the Tata Iron and Steel Company was floated in 1907. The Jamshedpur plant today can be described as a mammoth social outreach programme that covers 600 villages in and around its manufacturing and raw materials operations through initiatives in the areas of income generation, healthcare and education. A good example of linking business goals with a larger societal cause is ITC’s e-Choupal initiative, which has proven to be a digital revolution and has been reshaping the lives of farmers in remote Indian villages. The Aditya Birla Group believes that CSR is textured into the group’s value systems. The group has created a whole parallel organisation to focus on CSR under the stewardship of Rajashree Birla. Its vision is “to actively contribute to the social and economic communities in which we operate. In so doing, build a better, sustainable way of life for the weaker sections of society and raise the country’s human development index”.

L&T believes that the true and full measure of growth, success and progress lies beyond balance sheets or conventional economic indices. It is best reflected in the difference that business and industry make to the lives of people. Today, it views itself as a company engaged in the higher cause of nationbuilding. In the case of Tata Motors, Singur was chosen by Ratan Tata as the location of the new plant because he believed that Eastern India should not be deprived of the economic development enjoyed by the rest of the country. His decision may not have been an economically-prudent one, but it was backed by a strong commitment to the cause of social development.

The CSR agenda of Indian companies, indeed, borders on the extraordinary in vision. The leading Indian companies do not view CSR as an instrument of enhancing their reputation; instead they display an earnest desire to give back to society and contribute to the nation’s progress.

Mantra #10: The Indian edge

Management thinkers have often talked about the differences in management philosophies and practices as developed in the US, Europe, Japan and even China. Of late, there have been calls to identify what can be termed as the “Indian approach to management”.

While we cannot venture to define the Indian approach to management here, we noted one key difference that distinguishes the approach of Indian companies from those of others. This difference lies in their inclusive nature and manifests itself in the way Indian companies deal with their stakeholders. Today, as companies the world over struggle to show their more humane face and find the balance between profitability and social responsibility, Indian companies are comfortably partnering with their stakeholders to create value for society. Our companies often allude to their business partners as part of the larger corporate family. Employees are treated with respect and hardly any Indian company hands out pink slips in times of difficulty. Indian companies often engage in societal upliftment and nation-building projects, not due to any regulatory pressures but from a natural sense of duty.

It is this attitude of inclusiveness that is giving Indian companies a strategic advantage in areas where other companies fail. Indian companies are far more successful in reaching out to vastly different customer segments—rich and poor, urban and rural. As they endeavour to globalise, they gain easier acceptance across diverse countries. The support they get from their extended organisation multiplies their capabilities. Their strong talent pools power them to successfully compete with the best companies in the world. The mutually-beneficial relationship that the companies have with the community preempts conflicts and ensures smooth conduct of their businesses.

We believe that the inherent trait of inclusiveness that Indian companies possess, in addition to the “10 mantras”, could well be the defining factor of their tremendous success in the years to come.

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