These are extraordinary times no doubt. Even if all that happened in 2008 was that Bear Sterns went bankrupt, we would be talking about 2008 as an extraordinary year. Imagine, a great company like Bear Sterns went bankrupt. But Bear Sterns was just an “appetiser” in a long, arduous meal which still appears to be far from over. Things will and should get better. CEOs must accept reality, but proceed with confidence.
India has a very long history of over 5,000 years but its economic history is rather short. India’s economic history can be divided into three phases: Prior to 1990, from 1990-2008, and 2008 and beyond. Prior to 1990, Indian corporations were not considered to be efficient because if you could produce under the government license for a restricted production customers were lining up to buy. Firms were able to pass on their inefficiencies to consumers. Post liberalization, Indian Companies registered impressive growth primarily due to becoming more efficient, cutting unnecessary costs, reverse engineering business models invented in the West, and benefiting from cost arbitrage. This “efficiency” based game is over. Going forward, innovation will be the key to unlocking growth in India. Solving India’s many problems – energy, health, water, and education would require fundamental business model innovation.
The current global economic crisis will change the picture for India in the next 25 years. Sure, the Indian economy will be severely affected in the short term because we are globally integrated. But the long-term still looks promising. India is a guaranteed-to-happen, long-term story. India’s long-term potential is possible because, as a country, we are so resilient. India as a country is so capable of bouncing back and moving on with life.
Our suggestion for 2009 is that Indian companies should take a “zero base” approach to all their costs and become as cost competitive as possible. A goal of maintaining the same operating margin with 20% drop in sales is realistic for 2009. That would call for fundamental re-examination of the cost structure in all aspects of the company. One possible area is sourcing. Indian companies should re-evaluate all the earlier supplier agreements and re-negotiate. We are in a deflationary period. All input costs are coming down. We know what has happened to the commodity prices in the recent past, be it steel or oil. Tools like value engineering should help with strategic cost management.
At the same time, Indian companies must look at their innovation pipeline and be absolutely sure that they are funding enough projects that will ensure future growth. The global economy as well as the Indian economy will rebound in 2010. Only companies that invest in the downturn stand to reap the benefits when the economy improves. During downturns, assets are cheaper and talent is available at attractive prices. Indian companies should actively look for strategic targets for acquisitions.
More importantly, Indian companies should make three changes to their organization to support innovation. First, they should change the scorecard and metrics for innovative projects from short-term financial measures to leading indicators. Second, they should encourage collaboration and cooperation across functions, products, and businesses. After all, innovation can thrive only by combining capabilities across businesses. Third, companies should not punish managers for taking risks and possibly even failing – a critical requirement for innovation. During these turbulent times, innovation is more, not less, important.
There is a need for different types of leaders going forward. Leaders should be transparent, for communication and accountability will be critical. Leaders should embrace simplicity, for complexity hides problems but by simplifying the systems and processes, leaders can detect problems early and take actions faster. Leaders should be self-confident, because only crisis tests leadership, confident leaders can in turn build confidence in the rest of the organisation. More than anything else, the global financial crisis has exposed the spiritual bankruptcy of many corporate executives – excessive focus on personal financial gains and not enough concern about making a positive difference to society. Spiritually rooted leaders do not see a conflict between the profit mission and the social mission. If the year 2008 achieves nothing more than the eradication of that kind of leader, all the pain would have led to some gain.