The Fortune 500, Indian Industry, and Growing the Right Way
India is seen as an emerging economy having registered impressive growth rates for over a decade. The services sector has been doing very well and manufacturing has not performed poorly. What must come as a sobering thought to a nation of a billion people is that the latest Fortune 500 list has just 7 Indian companies. Of these, five are state owned – four in the petroleum sector that is showing high revenues thanks to oil being on the boil and one bank. Only two companies are in the private sector – Reliance Industries and Tata Steel.
Reliance Industries would have been a much bigger player but for the split in the family that saw two brothers unable to see eye-to-eye on where the group should be headed. Tata Steel figures in the list primarily due to its acquisitions and not because of internal growth.
This brings us to the central question – what is the best method for growth and how far is it desirable for an organization to grow through acquisitions? While there cannot be a single or best answer to the question, some trends appear rather disturbing:
· Indian companies, perhaps in a hurry to make it to the big leagues, appear to be taking the acquisition route. The funds required for these acquisitions are largely from debt and very little from internal generation. Initially, this was confined to sectors like IT, biotechnology, and pharmaceuticals but is now spreading to commodities. IT companies have quadrupled revenues in a year through acquisitions. In the process, their share prices have tumbled down. Information today is ubiquitous; shareholders can easily see the dangers that a heavy debt burden can bring in its wake and are unforgiving of organizations that take this route. A similar trend can be expected in other sectors as well.
· Even more disturbing is the apparent lack of enthusiasm for R&D investments and for embracing concepts such as TQM and TPM. Although the concept of total quality was pioneered in the USA by the quality gurus starting with Deming, Japan was more agile in adopting the practices, and the country of origin label that was an embarrassment was soon transformed into a synonym for quality and reliability. Even with the problems that Japan has faced in the last few years, it is still commendable that 64 of the 500 largest companies emanate from the relatively small country. In a study conducted over a 11 year period, Ruth Lumb found (Indian Journal of Economics and Business, March 2006) that the perception of US consumers about Indian products was that they were technically less advanced; had a more common than exclusive image; were more for the middle and lower class than for the upper class, even while scoring better on reliability and recognizability.
· Despite having one of the largest pools of scientists and engineers, the concept-to-market cycle is too long for comfort. On the one hand, the Indian Space Research Organization recently celebrated the feat of placing a record number of satellites in orbit. On the other, the Light Combat Aircraft has been under development for over 20 years and by the time it is operational, the technology might be obsolete. The lack of a clear focus on policies affecting the nation and the consequent isolation from the rest of the world in areas of high-end technology have been primary drivers in this classic example of lethargy.
It is time that Indian industry woke up to the realities of a semi-globalized world and indulged in some serious introspection. In particular, the following dimensions are worth addressing in an accelerated time frame:
· Efficiency and capacity utilization: the waste levels for most industries are a cause for concern. Capacity utilization in key sectors is way below 70%. New capacity is not being created in vital sectors like energy.
· Quality: to be globally competitive, Indian companies must adopt the best practices in design, manufacture and services. Merely harping on the cost advantage may not take us far for long.
· Innovation: investment on R&D may hold the key to whether we remain an emerging economy or move on to be a developed country.
· Customer responsiveness: the lack of sensitivity among producers and service providers shows that we are yet to wholeheartedly accept the market economy concept.
· While acquisitions make sense during the shakeout stage of an industry, the desirability of this method as an engine of growth at other stages through debt requires serious reconsideration.
Organizations need to look at expanding their customer base and providing superior offerings if they wish to be significant players in the global arena.
When will we see 30 Indian companies on the list? Take a guess.
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B V Krishnamurthy is the Director and Executive Vice-President of Alliance Business Academy in Bangalore, India, where he is also the ASI Distinguished Professor of Strategy and International Business. An engineer with post-graduate degrees in industrial management, systems engineering and business administration, and a doctoral degree in strategy, he has worked in corporations in Europe and Asia for 23 years (his last stint as CEO of a consortium) before entering academia in 1998. BVK also teaches in business schools in the USA, France, Switzerland, The Netherlands and Russia.
Comments
“IT companies have quadrupled revenues in a year through acquisitions. In the process, their share prices have tumbled down”,
The above conclusion ignores several other reasons for ‘tumbling down’ of IT share prices. How can the IT companies remain unaffected during the crash of the share market itself? Can one ignore the adverse impact of the slow-down in the world economy in general and the USA economy in particular?
The Indian industry is quite well aware of the “realities of the semi-globalized world” and some (a few of them from the first generation in the industry) are giving tough time to the renowned MNCs.
The need for accelerating the growth to see 30 or more Indian companies in the Fortune list cannot be overemphasized. The intellectuals, scholars and academics have a great role to play in the strategy to achieve such goals. They should, like Deming and Juran develop complete and practicable solutions. The tremendous response (even from the CEOs and heads of large business groups) to seminars of experts like C K Prahalad indicates the keen interest in new ideas. The workshops on TRP by Japanese experts also evoke excellent response.
It is indeed time that Indian intellectuals woke up to the realities of the industry needs.
- Posted by S S Patil
July 10, 2008 1:40 PM
In a majority of Indian companies, efficiency is not being achieved because scale economies have not been exploited. Quality is still considered a luxury and not a necessity. One would be surprised to find the number of managers who believe that higher quality means higher costs. R&D is considered as an expenditure not an investment. Customer responsiveness - what is it? When airlines can delay flights by hours without so much as offering an apology, we have a long way to go before the customer can become central to business. Given these facts, it is no wonder that only two Indian companies (private) figure in the list. When can we have 30? If industry can address these issues, maybe within 10 years. If not, maybe not even by 2050.
- Posted by Dinesh V K
July 11, 2008 9:22 AM
The quandry of "the best method for growth" and "how far is it desirable for an organization to grow through aquisitions" may lie in the social-political realm. India has many divergent national political parties. While the majority appear to be capitalistic, democratically oriented, many lean toward socialistic, communistic ideals. One might ask how a government can be functional with different foundational viewpoints present.
Can the "disturbing trends" be attributed to this situation? Five of India's 7 companies on the fortune 500 list are state owned. Should these industries be turned over to the private sector? (efficiency and capacity utilization dimensions) If the largest companies are state owned and operated what type of message does this send to the business community?
Disturbing trends in R&D can also be attributed to this phenomenon. R&D and science flourishes under free market capitalism. If the government "ruling coalition" does not provide a firm capitalistic foundation and incentive for innovation, lethargy is bound to exist.
Customer responsiveness, innovation, and quality dimensions can all be tied to the responsiveness of the government to "wholeheartedly accept the market economy concept."
Japan has a unity of direction and a better government structure that appears similar to the U.S. A strong foundation in the market economy concept certainly lies at the foundation of Japan's success.
Currently, India is experiencing a increasing debt and rampant inflation. Perhaps business are following the government's example of taking on exceeding debt? Aquistions and growth through debt may be a result of business following the governments lead.
The answer to the "central question" lies in a unity of direction for the Indian people and government. I doubt we will see many more Indian Firms on the Fortune 500 list until the country is totally united under capitalism. If the Indian government continues to keep doing what it has always done, it will no doubt continue to keep getting what is has already got. At the end of the day, the situation will turn out like the downfall of Reliance Industries: "brothers who fail to see eye to eye on where the group should be headed."
- Posted by P.S. Evans
July 12, 2008 6:58 PM
The indian industries shoud come forward to face the competition from the world.It has to improve its competitive ability.The COMPETITION Law has given the guide lines and many have not come forward to implement these ideas.
The customer care has to be fully developed.
The quality concept is not found in all industries.
Reduction of price, improvement of quality, better customer service,accountability,Empowerment of all employees and corrupt-free practices can improve Indian industry.
S.Prabakaran,Princeton
- Posted by S.Prabakaran
July 15, 2008 7:15 PM
Indian companies are more conservative in spending on R&D rather than anything that gives returns much later. Companies do not have deep pockets or courage to take big risks & invest in R&D. Even in case of expanding in export markets the companies spend meagerly.Market research is very expensive to conduct and many of them prefer to go by their guts.
But Indian companies are not alone to be blamed.The goverment regulations and the policies have not really encouraged Indian firms to invest in R&D through collaborative working with research organisations funded by govt. Most of the research done Indian research institutions are not relevant for industry and there is neglible effort to market the patent. As a result even home grown patent lay unused.
Next is the mindset of Indian corporate owners to share the profits with the key innovators and top executives in whole hearted way. Some of them offer such incentives at the time of joining but quietly withdraw the benefits or make the top executives leave the firm after the firms reap the benefits
N.Sushil Kumar
- Posted by N.Sushilkumar
July 16, 2008 11:40 PM
Reference: The Fortune 500, Indian Industry, and Growing the Right Way, Posted by B V Krishnamurthy on July 10, 2008 9:39 AM
Thanks to the author for his article, informing us that there are only 7 Indian companies out of total Fortune 500 companies.
If we want to see more indian companies finding place in Fortune 500 companies, I think, following changes are required:
1 Conducive atmosphere to encourage more entrepreneurship, without hinderance of red tape/ bureaucracy. Ensuring & encouraging corruption free working of the industry.
2. In order to supply quality human resource for the industry/ for the administration/ for governance, this great Nation needs to prepare & nurture this talent through Quality Education System (including primary, secondary & higher education system).
3. For the above to be successful, we require a corruption free political system, which has good intentions, determination to take bold & correct decisions in the interest of the nations.
4. In order to run the kind of political system mentioned above, we require the right kind of people in politics to Govern our country. I believe, high quality of political & governance system is the Most Important for any country which will have influence on many things like, the Culture of the Nation, Work-practices, Socio-Economic conditions, Peace & Amity, Law & Order situation, relationship of the country with the outside world etc.
5. Suggested group of people, who would be more fitting to come forward to join politics & run our country effectively, could be
preferably the ones who have retired from active service in following fields & who have excellent track record during their work period.
Excellent & blemish less Track record during their work and working at High & Responsible positions could be the 2 very important eligibility criteria, to find place in this kind of political party.
(i) Retired judges from higher courts
(ii) Retired officers from Defence services
(iii) Retired well known academicians
(iv) Retired bureaucrats
(v) Retired Scientists
(vi) Retired Industrialists who have done well in industries
(vii) People from other fields which form the fabric of our society, like farmers, artists etc., who have got recognition for performing well in their fields.
This is not the exhaustive list, there can be more group of people who deserve to be there.
Such group of people can come forward to form a political party. I have a feeling that this kind of political party will get tremendous support from the people of the country. Industry can come forward to support this kind of political party.
Performance of the individual politicians & the political party can be evaluated objectively. More systems can be put in place to have effective checks & control on the individual politicians & the political party as a whole.
If the above can happen, then only things can change for better in this country. Then only we can expect a corruption free place to live in. Then only violence & discrimination in the name of religion, region, caste, creed etc., can stop. Then only we can live together in peace as brethren & sisters. Then only more Indian companies will find place in Fortune 500 companies & economy can grow still further.
Then only we can perform better & win medals in Olympics. Then only we as individuals can contribute better for this Nation & the Nation can contribute for the World.
Then only, we can be proud of contributing for the Humanity at large and be called Global Citizen in real sense.
My Best Wishes for our Great Nation- The India.
Dr. Shubhasheesh Bhattacharya
(A humble teacher in this country)
INDIA
E-mail: sbhattacharyaibs@rediffmail.com
- Posted by Dr. Shubhasheesh Bhattacharya
July 17, 2008 2:05 AM
I think the question here is not of competence and expertise but of vision , passion and willingness. As the TATA Nano has proved that we do not lack in innovation and if supported by the above mentioned factors we can produce best in class products . Hence the requirement here is for visionary business leaders (Narayan Murthy and Ratan being two such) who have the vision and the daring to tranform that vision into reality . The mentioned business leaders have fought against the system multiple times during their checkered careers but it is their passion which has kept them on track .
Mayukh
- Posted by Mayukh Ghosh
July 17, 2008 2:37 AM
We need to address two major issues to reach the list of Fortune 500 companies:
1. Literacy base - all corporates need to form a group to impart education at the primary level to at least 100 children/adults(porter, daily wage earner) with full funding. Include the progress of the group as an incentive in their KRA
2.Public whipping of the 'Corrupt' politicians and beurocrats.. to weed out corruption.
- Posted by Animesh Dasgupta
July 17, 2008 3:29 AM
We need to address two major issues to reach the list of Fortune 500 companies:
1. Literacy base - all corporates need to form a group to impart education at the primary level to at least 100 children/adults(porter, daily wage earner) with full funding. Include the progress of the group as an incentive in their KRA
2.Public whipping of the 'Corrupt' politicians and beurocrats.. to weed out corruption.
- Posted by Animesh Dasgupta
July 17, 2008 3:30 AM
While this is true that the Indian IT companies have been on a spree of acquisitions, the industry has also witnessed the takeover of a large number of Indian SME (small and medium enterprises).
The dip in the stock prices is largely due to the US recession, which has had an adverse impact on the Global IT spending. US is the largest market for IT services to India holding a whooping 61% of the market share. Being an export dominated industry ,the fluctuation in the exchange rates have played a pivotal role in the volatility of the IT stock prices.
Studies have also proved that inorganic growth (especially M&As) does lead to an initial fall in the stock prices of the acquiring company. This is due to the apprehensions in the minds of the investors.
- Posted by Meera Kohli
July 29, 2008 3:31 PM