“It is a time to adopt a different perspective on managing business functions. When times are uncertain, survival and risk management are more important than extracting the maximum out of a market or system. The system needs to shift focus from maximization to optimization,” stresses Alagu Balaraman, Director & Founder, Augmented SCM and MD, CGN Global India.
Our world is changing. The Indian mindset is often very insular. Except for some sectors, we tend to see ourselves cut off from the world. It is startling to consider that our total trade, adding imports and exports, is over 40% of our GDP. We are inextricably linked with the global economy. So, while our exports are much less than China’s, our ratio of total trade to GDP is higher. So, what happens in the world affects us much more than we realize, believing that we are somewhat cut off.
When an economy has many points of linkages with the global economy, it is understandable that global shocks are as impactful as local ones. This can create the impression of constant and unexpected surprises in the business environment. Companies have been accustomed to a long period of steady growth. Though the rate of growth might change, it has been one of the longest such periods in decades. During that time, businesses tend to focus on growing scale, share and profits. Companies frame strategies, structures and policies to maximize these parameters.
BUSINESSES NEED TO CHANGE GEARS
In the last few years, the world economy has very different characteristics from one of steady growth. Political, generational and climate-based factors are hotly debated in societies. Change, when it happens, is often abrupt causing shocks to systems. For example, trade wars have become very common, with rapid changes and roll backs in tariffs. The US and China traded customs tariffs of the magnitude of 10 to 25% in a matter of weeks. They rolled them back in months. Each time, supply chains must forecast demand, set up vendors or renegotiate contracts continuously and will struggle to realign at that speed.
National policy in many countries is highly polarized, leading to dramatically different economic agendas that are decided in polls. When policy changes, it is often overnight. Natural disasters have become more frequent and severe, disrupting lives and businesses across the globe.
It is a time to adopt a different perspective on managing business functions. When times are uncertain, survival and risk management are more important than extracting the maximum out of a market or system. The system needs to shift focus from maximization to optimization. Though these words are often used interchangeably, that is incorrect. At a personal level, when the stock market is uncertain, you aim for safer returns rather than the highest returns. Unfortunately, most leaders have built their careers during the period of steady growth and changing gears to being prudent instead of pushing for the “big prize” is not always easy.
CLOUDED BY COST FOCUS
In the last year, the Indian economy saw growth rates tapering off. After 6 consecutive quarters of decline, the growth rate had fallen from 7.95% in Q1 of FY2019 to 4.5% in Q2 of FY20. This economic slowdown (not recession) threw the plans of many companies off track. It was estimated that sales growth fell from 13.5% to 4.6% in the same quarter. At about the same time, capacity utilization had finally reached a 6-year high of 76%, triggering the need for fresh investments, when the anticipated growth levels were not met, and it dropped in the middle of last year. Managers have to scramble to realign revenues, costs and investments.
Towards the end of last year, there was a debate among a group of supply chain leaders on the best way that they could contribute. The group focused almost exclusively on cutting their logistics costs, an area directly in their control. Given that the logistics cost of most distribution intensive companies is anywhere between 5-10% of total cost, these savings would have been a minor contribution at best. In the meanwhile, sales had dropped by a much larger factor. In the period from Apr to Jun 2019, car sales fell 14%, two-wheeler sales fell 11.7% and tractor sales fell 14.1%. Given the lag between production, distribution and sales, the small saving anticipated with a pure cost focus was not going to significantly help. Moreover, the core problem was not cutting costs, it was improving sales. However, that was not considered a major topic.
Why this narrow world view of business impact? Most companies measure performance in terms of availability and cost metrics. However, when push comes to shove, the cost metrics are more important. This is to be expected. For the period from 2007 to 2015, business leaders believed the top supply chain challenge was reducing operational costs (see Figure 1). And, today’s leaders became successes by addressing this most important business challenge and often continue to focus primarily on cost.
The other reason for an extreme cost focus is based on reward structures. Shareholder value has held primacy in business for the past 3 decades. For publicly traded companies, the average period an investor in the NYSE holds a stock has declined from over 5 years in the 1970s to about 8.3 months in 2016 (see exhibit 1). Are shareholders really concerned about the long-term? Do they form a deep understanding of the business to take a call on its strategies and operations?
The second challenge with reward structures is executive compensation. To align management and shareholder interests, executives are rewarded for profitability and share prices. However, as executive terms become shorter, there is a stronger focus on generating profits today, instead of preparing for an unknown future when someone else will be in charge. The average CEO tenure in India has been reducing and is at 4.1 years in 2019. Globally the trend has been stable or growing. Considering that the average transformation exercise in a large company takes about 3 years, a CEO typically has one shot to try something out. So, few want to leave with moderate results and would prefer to make big bets. At the same time, more than half the companies attempting a transformation fail to achieve the desired business results. So, these big bets often don’t work out.
While those behaviours were acceptable in stable times when growth covers up all mistakes, it does not work as effectively when uncertainty increases. Today, it is important to take a long-term view and act with short term agility. This is not impossible.
KEEP YOUR EYES ON THE CUSTOMER AND…
Business history is replete with examples of how companies failed because they stuck to what they knew and let competitors take over. From Casio and the Swiss watch makers to music streaming and the CD industry. Or, more recently, the belief that ride hailing apps are driving down passenger vehicle sales.
Business leaders now need to focus on the customer and on competitors who change the game. The most powerful levers in the Indian market have historically been price points and availability. That’s not going away. However, customers are also looking for ease of doing business and innovation. In one example, a young couple needed to replace one of their cars. The choice of the brand they bought was made simply because it was difficult to park at one dealership versus another. A significant purchase decision was based on the availability of parking.
The consumer electronic industry has clearly imprinted in the mind of people that new things are superior to old ones. Also, new things come more frequently - often than one model release in a year. Today, Indian consumers even take medical care decisions based on how new the hospital and the equipment in it are. Traditionally, it was only the reputation of the doctor, but now it is more than that. So, it’s not enough to meet the customers standards in one or two areas, but to be significantly superior to competition in all critical areas.
In addition to improving on cost and availability, it is vital to relook at the other parameters that today’s customers expect. When we look at them, it’s not enough to do better than what we did last year. We need to do better than what our competition will do next year.
Indian companies have done competitive benchmarking in the past. Much of it has been for product features and product cost. That’s not enough. We must look at competitive benchmarks for business processes that deliver what is valued by the customer.
Every business believes in the mantra of being customer focused. It is usually the first line of the vision or mission statement. The problem is what companies believe customer focus stands for. A few decades ago, making products available to customers was the most important thing. Indian customers were starved of supplies in the License Raj era. Then came liberalization. With bottom-of-the-pyramid thinking and huge scale opportunities, price points became critical. Today, we are twenty years away from the start of that period. Indian customers expect more. Businesses need to focus hard on what their customers will value. The lazy way is to ask customers what they value. Often, customers don’t know that themselves. It’s the job of the business to figure that out and it will vary by industry, market and positioning within that market .
A scan of the writing of future gazing pundits shows some common themes. Despite hiccups arising from the financial sector clean up and the current COVID-19 pandemic, it is likely that the Indian customer will continue to grow and upgrade their interests. What’s the best way to respond to this? A report tabled by Bain & Co at the World Economic Forum ends by saying – Firms will thrive by innovating for India and embracing a “founder’s mentality”. Going beyond replicating Western models at lower cost, they need to localize and personalize products and services. The founder’s mentality refers to greater entrepreneurial thinking and agility.
Supply chain leaders will need to go beyond rolling out global templates and help shape these templates. They need to get a deeper understanding of what their external customers need. They need to change the way their functions work and how they interact with other functions to deliver superior value to customers.