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Betting big on disruption

Decline in aggregate EBITA margins for Indian companies in 14 out of 16 sectors may seem worrying, but it doesn't have to be. Disruption could also be a two trillion-dollar opportunity for Indian businesses.

Anindya Basu        Last Updated: January 2, 2019  | 18:19 IST
Betting big on disruption

The period between March 2017 and 2018 saw a decline in aggregate Earnings Before Interest, Taxes and Amortization (EBITA) margins for Indian companies in 14 out of 16 sectors, with major industries like Communications, Life Sciences, Consumer Goods and Automotive witnessing a decline in profitability in the range of 100 to 600 basis points. Large businesses are evidently under pressure, and our analysis of 2000 Indian companies confirms that this will continue. In fact, our study found that $1.8 trillion of enterprise value at risk of displacement due to disruption.

This may seem worrying, but it doesn't have to be. Disruption could also be a two trillion-dollar opportunity for Indian businesses that acknowledge, prepare for, and harness it.

Reliance's big bet on Jio is a case in point. Since its launch in 2016 Jio has captured more than 20 percent of the market, and its impact on the industry has been far reaching, driving customer centric innovations and mergers and buyouts. Similarly, in the banking, financial services and insurance (BFSI) sector, the regulatory thrust for better liquidity, digitization and incursions into traditional businesses by new fintech entrants is forcing financial institutions to approach their businesses differently. For example, HDFC Bank is now using analytics and artificial intelligence to enter new market segments it wouldn't have considered a few years ago.

Emulating Reliance and HDFC Bank requires companies to embrace the potential of technology based innovation. There are many ways of doing so, but big bets are key, because incremental innovation can only get you so far. According to our research, nearly 90 percent of Indian companies plan to increase their spending on innovation by more than 25 percent by 2022. Yet, only 30 percent of Indian companies focus a majority of their investments on disruptive innovation - the kind that involves new commercial or scientific advances that create new markets, with the potential to disrupt entire industries. In contrast, 70 percent of Indian companies focus most of their investments on incremental innovation, the kind that helps enhance features of an existing product or service.

The desire to preserve 'what is' rather than invest in creating 'what will be' prevails, for several reasons. A small group are afflicted with short sightedness and are unaware of the risks facing them. For many the challenge comes from pressure to perform to market expectations which forces them to prioritize short-term goals over long-term needs. Another notable reason is a lack of understanding of disruption. Industry disruption can seem nebulous, an all-encompassing macro-trend which is tough to navigate. Yet our research shows that disruption can be decoded and prepared for. More specifically, it follows a pattern which we describe in terms of four distinct stages - durability, vulnerability, volatility, and viability. These stages are based on the current level of disruption facing an industry and its susceptibility to future disruption.

Let's take for example, industries that fall in the durability stage. Here companies witness disruption, but the situation isn't life threatening. Mature industries, where large businesses own established brands, proprietary technology and control distribution channels typically fall in this category. Businesses still deliver consistent performance. This offers the best opportunity to use the strong position to transform the core business instead of preserving it. The Automotive sector falls in this category. It has a tough road ahead as multiple disruptive forces reshape the market, and companies in this sector have an opportunity to make strategic bets today. Recently, Kenichi Ayukawa, managing director and chief executive officer (CEO) of Maruti Suzuki said that the company may have to re-invent itself and "start again from zero," in preparation for the future shaped by electric vehicles. This reflection comes even as Maruti continues to dominate the Indian market.  Suzuki Motor Corp. its parent company is now collaborating with Toyota to make small and affordable electric cars in India to stay ahead.

There is no silver bullet - an approach or a new technology that can make a company immune to disruption in the digital age. What's key is for businesses to not let complacency set in. Instead they must develop the foresight and courage to start creating their future, before others do. Those companies that pivot to new businesses wisely today, on their own terms have a better chance of becoming the leaders of tomorrow.

(The author is Geographic Unit, and Country Senior Managing Director, Accenture India.)

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