Growth of Professional Management in India

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Growth of professional Growth of professional Management in India Management in India

Growth of professional Growth of professional Management in India Management in India



Indian entrepreneurship Indian entrepreneurship Indian entrepreneurship Indian entrepreneurship

• Before 1991, Indian business success was afunction of ambition, licenses, governmentcontacts, and an understanding of thebureaucratic system.

• Decisions were based on connections, ratherthan the market or competition.

• Business goals reflected a continuation of the‘Swadeshi’ movement, which promoted importsubstitution to attain economic freedom fromthe West.

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• Pre-1991 policies were inward looking andgeared towards the attainment of self-reliance.

• During this era, entrepreneurship wassubdued, capital was limited and India hadvery few success stories.

• As well, society was risk averse and the

individual looked primarily for employmentstability.

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• In 1991, the Indian government liberalizedthe economy, thus changing the competitivelandscape.

• Family businesses, which dominated Indianmarkets, now faced competition frommultinationals that had superior technology,financial strength and deeper managerialresources.

• Thus, Indian businesses had to change theirfocus and re-orient their outlook outward.

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• A few existing Indian business familiesadapted to the new economic policy whileothers struggled.

• Importantly, a new breed of businesswas born, one that focused on ICT (Information and Communication

Technology) and created wealth forowners and employees.

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• For the old business houses, success hadcome from the close-knit joint familystructure that fosters family values,

teamwork, tenacity and continuity.• Under this structure, generations lived and

worked together under one roof,

reaffirming the Weberian values and trustthat have built successful businesses.

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• Wealth from the businesses supported the joint family by providing a social safety netfor members.

• In the structure, businesses and families wereintertwined though they were also distinctentities with separate rules.

• Hence, survival of the family became

synonymous with the survival of the business.

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• Liberalization, however, changed the verynature of the joint family.

• If large Indian businesses were to succeed,

the family would have to re-orient itself tocompete in a global, competitive environment.• Post liberalization, IT businesses succeeded

because they were customer focused and

professionally managed.

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• The old, family-managed businesses, whichformed the backbone of the economy, neededto evolve and become more institutional, if

they were to extend their life cycle.• Using the Indian mythology trinity of creation,preservation and destruction, I will explainthe changes that family businesses would have

to make.

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Brahma: Creation Cycle Brahma: Creation Cycle Brahma: Creation Cycle Brahma: Creation Cycle

• After liberalization, business opportunities inIndia were manifold.

• A good number of entrepreneurs seized them

and grew from small-scale contractors to largereal estate developers, and from distributorsto manufacturers.

• Success became the result of efficient capital

allocation, strong execution and a customerorientation.

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• Today, businesses have access to venture and growthcapital, provided that their stories and businessmodels are reasonable.

• In the pre-1991 License Raj era, abilities such asmanufacture and deliver products to the market werethe Key Success Factors, without regard for thecustomer and other efficiencies.

• Liberalization also brought in the age of Saraswati

[Goddess of Learning in Indian mythology]; businesseswould now grow because they had knowledge, notbecause of whom they knew.

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• One example is N.R. Narayana Murthy, who co-founded Infosys Ltd. in 1981, with an initialcapital of INR 10,000.

• At Infosys, he and his team designed theGlobal Delivery Model, which also laid thefoundation for the knowledge industry.

• Narayana Murthy’s vision gave a fillip to the

IT services industry, creating and encouragingthe entry of several new IT businesses.

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Vishnu: Preservation Cycle Vishnu: Preservation Cycle Vishnu: Preservation Cycle Vishnu: Preservation Cycle

• To maintain business growth, Indianentrepreneurs needed to segregate operatingcontrol of the business from beneficialownership, mitigating business and family

succession risks.• But, in a male-centric culture, people are

reluctant to relinquish operating control andinstitutionalize processes.

• Consequently, there are few large, structuredand professionally managed institutions in India.

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• Indian businesses need to move from anentrepreneurial-driven, unstructured culture toone dominated by professional managers.

• Management control should rest with

professionals, as they are able to perform moreefficiently; beneficial ownership can continue torest with the owners, who can still provide thevision and connections, and enjoy the fruits

[increase in firm valuation] of efficientmanagement.

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• If a younger generation wishes to take over thebusiness, then clear criteria can be defined todetermine their eligibility to succeed their elders.

• These criteria could include requirements to work in

middle management, work across divisions, work in audit,and have a first-class education.• Succession must also take into account the changing role

of women and their desire to be involved in the business.• If a proper succession plan is not developed and

implemented, nepotism and stagnation will result.

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• Essentially, corporate governance witha lucid ownership structure thatblends effectively with the

professional decision makers [e.g.CEO] can reap benefits for allstakeholders.

• This will allow entrepreneurs to buildlarger institutions.

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• Sunil Mittal, a first generationentrepreneur, identified an opportunity inmobile telecom.

• In 1994, Mittal successfully bid for atelecom license, and services were launchedunder the brand name AirTel.

• The business model was innovative –IT

management services and hardware(telecom towers) were outsourced tovendors.

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• Fixed costs were converted tovariable costs.

• Mittal was able to professionalize the

organization early, something thathelped him build a larger institution.• As a result, India now has one of the

lowest-priced telecom services in theworld.

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• The Burman Family, which owns Dabur Ltd.(consumer goods company), is a goodexample of a family company thatsegregated management from ownership.

• It has a separate Family Committee thatprovides the vision and direction, but theday-to-day management rests with theprofessionals.

• The family has a formal structure forcommunicating with management.

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• As Indian businesses became professional,opportunities to acquire global businessesincreased.

• In 2006, Corus, an Anglo-Dutch steelmaker

accepted an US$7.6B bid by Tata Steel, the Indiansteel company.• This allowed Tata Steel to become a global leader

in the steel business instead of continuing toremain a large domestic steel manufacturer.

• Once an acquisition target, Tata Steel has itselfgrown into an acquirer.

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Shiva: Destruction (Exit) Cycle Shiva: Destruction (Exit) Cycle Shiva: Destruction (Exit) Cycle Shiva: Destruction (Exit) Cycle

• Owners should exit their business if it is notefficiently managed or if it receives exceptionalvaluations.

• A control-and-hold behaviour will simply not enablesuccess.

• We have seen that a few owners, Ajay Piramal, forexample, in the pharmaceutical industry, hassuccessfully sold the businesses.

• In Sept 2010, he sold the domestic formulations to

US based Abbott for US$ 3.72 billion.• This has been India's largest pharma deal, and onethe top 3 in the Indian context as well.

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• As businesses grow, entropy (lack of order)will only increase.

• The discontinuity will be difficult to manage

if a formal family structure is not in place tomeet the needs of the next generation.• However, if roles and responsibilities of the

next generation are defined, and professional

management (wherever necessary) takesover, closure of the business can be avoided.

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• As it is said, a lack of liquidity canbankrupt a firm; similarly, the lack ofan appropriate family structure can

force a business to close after thefirst generation exits.

• Thus, Indian owners have to make the

transition from being owners toshareholders.

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• As shareholder value increases, the free cash flowcan be invested in new initiatives that enable the newgenerations to apply their skills.

• We need not throw away the characteristics of the

joint-family business – work ethic, ability to deal withdiversity, customer focus — but to blend what hasbeen learned about customer focus and diversity, forexample, into a performance-driven structure.

• Only then can the investment cycle of creation,preservation and destruction continue.

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Risks to India’s growth: Real Risks to India’s growth: Real

but overstated but overstated


but overstated but overstated • The Indian entrepreneurial spirit can only

develop and grow if the Indian economycontinues to grow on a sustainable basis.

• The risks to India’s continued growth areterrorism, political corruption / stalemate,non-inclusive growth that focuses only on theurban rich, and stalled reforms.

• What then is India’s risk premium?

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but overstated but overstated • As the investment cycle strengthens,

foreign businesses can invest in India

independently or through partnerships.• The businesses factor the political,

economic and family risks in their

analysis.

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but overstated but overstated • From an academic’s perspective, the businesses

can either decrease the expected cash flows orincrease the discount rate to reflect riskpremium, though the adjustments are complex.

• However, I view investments in India as astrategic decision.

• In the next few slides let us discuss the risksand our understanding of them.

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Terrorism: India is a stronger Terrorism: India is a stronger

state because of its culture state because of its culture


state because of its culture state because of its culture • As per Wikipedia, “Terrorism in India isprimarily attributable to religious communitiesand Naxalite [militant Communist Group] radical

movements.”• I am not going to elaborate on the causes of

terrorism but I do want to ask if India as acountry will it survive and remain united

despite the nefarious activities of theinsurgents.

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state because of its culture state because of its culture • It can be stated unequivocally that

terrorism creates uncertainty and delays

investments in any country.• However, we need to comprehend acountry’s culture, constitution and itspast response to terrorism to considerand assess its fate.

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state because of its culture state because of its culture • Culture is a broad-based word but a powerful concept.• Culture is rooted in myths, institutions, television,

globalization, upbringing, religion and history.• Foreigners have invaded India, but we have learnt toabsorb and assimilate them into our society.

• India has the second-largest Muslim population in theworld.

• Buddhism and Jainism had their roots in India but onlytraces exist today, as Hinduism absorbed their teachings.

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state because of its culture state because of its culture • The Indian culture is tolerant and can

deal with differences.

• The difference between Europe andIndia is that Europe is a continent withindependent countries while India is onecountry that has united many divergentcountries.

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state because of its culture state because of its culture • The Indian culture is also resilient and able to

respond sensibly to any terrorist activities.

• As evidence, Indian’s response to theNovember 26th 2008 terrorist attack inMumbai was balanced and restrained.

• I am confident that, given India’s history and

behaviour, we will remain united as a country.

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state because of its culture state because of its culture • At the same time, Indian businesses have shown the

entrepreneurial skills and flexibility to grow despitethe challenges.

• For instance, an Indian entrepreneur in Afghanistan isassisting the government to develop that country’sinfrastructure.

• C&C Construction Ltd, incorporated by a group ofprofessionals in 1996, ventured into Afghanistan in2002.

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state because of its culture state because of its culture • It has built 700 km of roads, and works

closely with USAID, the World Bank and

the Asian Development Bank.• C&C Construction will also work closelywith the Indian Government to build theAfghan parliament building.

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Political risk: Uncertainty will Political risk: Uncertainty will

remain remain


remain remain • India is a complex country with myriad castes, religions andlanguages.

• The political parties have evolved to address their needs and givethe minority groups a platform and a voice that are heard at thenational level.

• The foreseeable future will be characterized by coalition politics.• It is unlikely that either of the two major political parties – BJP

or Congress – will win a majority.• This is a reality, but India has the experience to manage the

political processes and differences

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remain remain


remain remain • It is evident that a coalition government slows the reformprocess.

• However, it is a positive development, that, irrespective of thecoalition government (lead by either BJP or Congress), we have

stayed the path of liberalization.• There are no major differences between Congress and BJP as faras economic policies are concerned, and both favour economicreforms.

• And, as India’s middle class grows, the importance of religion andcaste will diminish; the focus will be only on growth.

• Economic progress will change India’s political landscape for thebetter and further improve political stability.

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Economic reforms need to Economic reforms need to

continue continue


continue continue • Growth needs to continue and India needs “… anotherdose of reform, aimed at markets for inputs, fromelectricity to labour and land …

• The [1991 reforms] freed markets for products.” [TheEconomist, July 2011].• If we are to continue to maintain the growth

trajectory, the market for inputs needs to beliberalized.

• These are difficult political decisions and coalitionpolitics will make the process slower and difficult.

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continue continue


continue continue • It will be easier for the government to addressand repair old infrastructure through publicprivate partnerships.

• India is going through a structural — not acyclical — change; hence, the process is slowand driven by the political process.

• We need investments in power, roads, portsand bridges.

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continue continue


continue continue

• An important area of reform is the powersector, as no industry can achieve asuccessful transformation withoutsufficient power.

• This is why the Indian government needsto push through the reforms on power

generation, transmission and distribution.

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continue continue


continue continue

• Corruption could be viewed as one of thereasons for the slow pace of economic reforms.

• Overspending on the Commonwealth Games and

the Department of Telecom’s under-pricing of2G spectrums resulted in heavy losses for theexchequer.

• Indians’ frustrations were channelled through

the Gandhian leadership of Anna Hazare.

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continue continue


continue continue

• The peaceful protests were successful and the countrywill get an independent ombudsman, the Lokpal(protector of the people), who will investigate allegedcorrupt practices of politicians and bureaucrats.

• This demonstrates the fact that we have theinstitutions, leadership and most importantly, the grassroot activism to effectively mould decision-making at anational level.

• This will create a positive environment for furthereconomic reforms.

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continue continue


continue continue

• We also have the positive experience of thepast decade, for which both political parties,the BJP and Congress, were responsible.

• However, future reforms have to be inclusiveand supportive of the economicallydisadvantaged.

• The Left parties do not support economic

reforms.

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continue continue


continue continue

• Their thoughts are focused inward on howIndia can continue to grow economically on itsown.

• As the Left parties are a minority on theIndian political scene and the Congress and BJPpolitical parties are supportive of the economicreforms, it is unlikely that the reform process

will be derailed.

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continue continue


continue continue

• What then is India’s risk premium?• I believe that it varies according to one’s

viewpoint.

• Politics is an important factor that impacts theinvestment cycle.

• Hence, it is essential that the Indiangovernment address issues of corruption andcontinue with the next phase of reforms toaccelerate the decision-making process.

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continue continue


continue continue

• Reform will continue but at its own pace.• I have observed that companies that

have taken risk and stuck to a soundbusiness plan succeed in India.• They have both sold their wares

domestically and exported talent andproducts.

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continue continue


continue continue

• It is difficult to dampen the Indianentrepreneurial spirit.

• It has grown and competed in the global market

despite the controls of the Indian government.• Entrepreneurs have shown their ability to

adapt to the changing economic environmentand deal positively with the uncertainties in the

market place.

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continue continue


continue continue

• Yes, the joint family structure – thespawning ground for entrepreneurs –

continues to evolve and competeeffectively in the world market.• But if that success is to be sustained,

the economic reforms will also have to

continue.

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Thank you Thank you

Growth of Professional Management in India

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