Mumbai: On his first visit to India in 1989, Mark Gottfredson debated with the then defence minister K. C. Pan, over dinner, on whether socialism or capitalism was better. Gottfredson, today a partern with consultancy Bain & Co., says he came away from that meeting feeling that Pant believed Americans like him had brainwashed his son, who was then working with firm in Boston, US.
Gottfredson’s 367-page tome, The Breakthrough Imperative, which he wrote with Steve Schaubert, a fellow Bain partner, on how the best managers in the world get outstanding results, does not have a mention of a single Indian company or an Indian product. Quiz him on that, and he says Tata Nano, the low-priced small car from Tata Motors Ltd, if it delivers what it promised, could well be the highlight of his next book. Edited excerpts from an interview:
Critical eye: Gottfredson says firms that are allowed to fail will recover quicker than the bailed-out ones. Ashesh Shah / Mint
Tell us about your first visit in 1989?
I visited India for the first time in 1989, much before the economic reforms. It was very different environment. At that time it was a closed economy. Now, corporates have made a transition to competing on the world stage which is very impressive.
This is an economy that is still very young. In the 1989, 20 years ago, I was here for the first time. At that time, this country was a socialist country. I had a dinner with K C Pant, who was the union minister of defence at that time and his son worked for me, in Bain & Co. at Boston. We spent an hour and half debating socialism versus capitalism. Mr Pant was telling me how socialism was so good for India. I walked away feeling that he believed that his son in Boston was getting brainwashed by capitalists like me. In 20 years, the perspective has changed. India has come out in the open market.
You mention about the conversation with Mr Pant on socialism and capitalism, but your government is now offering bailouts...?
I can make a bold prediction . The US government bailouts will end up being failures. Companies that are allowed to fail will recover much quickly than companies bailed out. The government did it to avoid a domino effect from happening. It is a financial sector driven collapse.
Can you elaborate?
I don’t agree with bailouts. For example for the housing sector or the automotive companies or subsidizing mortgages. I think those will end up skewing the market.
In the US we have a really robust bankruptcy law. Virtually every other US airline has gone through the bankruptcy and emerged on the other side. There is nothing that says that if a automotive company goes bankrupt, (it) will disappear. It is likely that they will not disappear. I know Rick Wagoner (GM chief executive) would say it would be a death of the industry. Customers are used to the idea that bankrupt companies don’t disappear. So bankruptcy will not impact the customer demand for the vehicle very much. But it will give the company the protection in courts with lenders and unions and so on to emerge with a structure that will be globally competitive.
These companies will be much better off to go through a bankruptcy procedure than getting a bailout. (With) the bailout they’ll not do the really hard things they ought to do.
The bailouts will be more painful and prolonged and it would be money wasted by the government.
The Breakthrough Imperative revolves around four laws .. Costs and prices always decline, competitive position determines options, customers and profit pools don’t stand still, and simplicity gets results. How critical are they to run a business in times of recession?
Well, I personally think that the four principles of business are relevant during the good times and bad. But these are particularly relevant as the economy is slowing down and there is recession in many parts of the world. During times of very fast growth, sometimes companies get a little lazy. Things are growing really well. But in difficult times, the water level drops down and we start to see the rocks where there are problems.
This is the time to really pick up on these four concepts and do diagnostics on their business and understand what they stand for and relative to the competition in the eyes of their customers... If they do that, they (will be) coming out of their downturn much stronger than they went in.
In the current scenario, will India come out of a slowdown before the rest of the world?
My guess is it will be less painful here. Because India has a growing middle class which will help the economy (keep) growing. There would be a slowing down here and certainly some impact where India is exporting services to companies, some slowing down of growth and obviously reductions in some contracts as people in the West will not be making decisions as they did in the past.
You’ve been visiting India for some time, but there’s no mention of a single Indian company in your book?
We did try to be balanced. We have a lot of international examples in the book. We tried to cover as many industries as we could and cover as many countries as we could for as many examples of the four laws as we could. India is one that obviously we didn’t get. It’s not because we saw something wrong with India or Indian companies, but a function of if we did get all the examples in, we would have had a book that was three times the current size.
The book mentions about Ford Mustangs and Chrysler’s minivans, do you think Nano could do that for the Tatas?
I think the Nano is a brilliant concept. It is fabulous that somebody came up with it. If they can manufacture the cars, there will enormous demand for cars. If these cars are reliable and don’t require huge maintenance then it can entirely create a new market in India. There are couple of things I like about the Nano. They developed it pretty quickly.. they developed it relatively inexpensively.. and it is an inexpensive car. It meets the criteria and a great example for other auto companies who are way too sluggish in product development... have no vision on what can be accomplished. Its not even in the comprehension of the big three in the US to do a $2,500 car. When I was in discussion with one of those companies, there was a discussion of a $5,000 car. It was viewed as a ridiculously impossible and they couldn’t even do the engineering.
If Nano is a success, would your next book have a mention of an Indian car and an Indian company?
Absolutely. If that car is a success that would surely be one of the highlights in my next book.
Do you see any Indian companies straddling the global stage? Off late, some companies have grown through acquisitions such as the Tata group in several sectors, and some like Reliance Industries have gone for greenfield projects?
There are interesting things happening in Indian companies. Let us take Law 4 on complexity for example, which is what I see with Indian companies. Take a company like Tatas, they are in a broad range of industries. But if you look around the world what you find is that the most successful companies are not in a huge broad range of industries. They tended to focus all the time. If you look at South Korea they began to see an evolution there.
You are referring to the erstwhile Chaebols?
Yeah right.. Chaebols in Korea and and the Zaibatsus in Japan. These companies have tended to get more focused and that’s a natural tendency. It’s going to happen in India and companies that are more focused are going to do more better. There is a great example in Mexico. A group considered like the Tata group is called the Alfa group and they were the biggest business group in Mexico. They broke into four companies. Alfa pursued a different strategy. The other splinter group companies focused better and grew the most and made international acquisitions in the core businesses. Alfa which was diversified struggled and from being the largest company in Mexico is today only the 10th largest company in the country.
They’ve really fallen behind because they weren’t very focused.. One piece of advise that I would give companies in India is to focus on capabilities that you can make a difference in. Don’t overdiversify.
What’s wrong in the strategy to diversify into different sectors?
Because you can find that companies fail that over-diversify. What tends to happen is that when one part of your portfolio struggles all your management time goes into the struggling part of your business and then you are not focusing on businesses that are doing well and pretty soon they are struggling too. Suddenly you find yourself drowning. The business complexity probably needs to come down in Indian companies.
In India, many businesses are consolidating as conglomerates and they have succeeded thus far in their strategy?
I don’t know those companies well enough yet. The basic question to ask is what are your capabilities. Right now their capabilities historically have been that they have access to capital and to government and licences. They could get into everything and they could dominate. I don’t think those capabilities would be sufficient in the future. Right now we have a tight capital situation because of the recession but it will pass. Capital will be a lot freely available again and as the economy gets diversified and competitive the connections with the government will not be all that important.
So these companies really have do an inventory (check). What are we really good at and where are we the lowest cost in the world, where are we good at understanding the customers need. Put emphsasis on looking at their portfolios and prune some and double other things.
Are you saying that it is inevitable for Indian conglomerates to downsize?
I have a strong opinion on that topic. At the end of the day, focus matters. You can do much better on what you can do than on being all over the map.
Nothing wrong in the holding company model. You could think of a private equity firm as a conglomerate. But the problem is that most of these conglomerate companies cant exercise a lot of control on all their businesses. It is simply impossible to allocate capital appropriately.. If you have a retail business and engineering and heavy manufacturing.. I can say that return on capital on the two businesses may be the same, but the way you allocate capital to these businesses is very different.
And it is very different for one management team at the centre to allocate the capital right. And if you have a diversified portfolio one of the things go bad and you focus all your attention there..and then business that did well will lose traction because of a lack of attention. Those are the big challenges for conglomerates.
It is proven the more successful conglomerates are those who have over time have put the bets on few places as opposed to spreading their portfolio and then they the only reasonably successful conglomerate in the developed world is General Electric. They are in six sectors. There are Indian companies that have 12 or 18. GE is a rare example. And they are beginning to struggle and the reason for that is because they are not very focused. They are losing focus.
In organised retailing, your book mentions about Walmart and also about the competition between Sainsbury and Tesco, and how they got it right. But Indian retailers have got it wrong thus far? What went wrong with them?
I have studied other markets. It is a classic mistake people make when they think of themselves as a global or a national company and they get into retail... they decide to go on a national scale. So they open a few stores in every city. In retail, that’s typically a very bad strategy. The right strategy would have been, let’s say open seven stores in Mumbai and get the advertising and supply chain right. Let us not try an out of the box strategy to be a national retailer overnight. Let us try and dominate one city instead and once you dominate a city then figure out the right moves and then move to another city.
Most retail businesses the economics are driven by local market shares and not national or global.. That’s why one needs to focus on a cluster. Most conglomerates miss that insight. That’s the key thing.
But is there hope for organized retailers in India?
The thing that’s happening in India is the emergence of the large middle class. So in the past when a vast majority of people could only buy the lowest priced product and the basic utility, they are now able to demand more value. So watching the customer migration and products that are offering more value .. I met the CEO of Cavin Kare yesterday he’s been really been an innovator in hair products .. I think that’s the terrific example of a company that has come out and really understood some customer needs and its been innovative in customer needs and those kind of opportunities exist all over the market in India right now.
Breakthrough... mentions about Polaroid not getting it right after a time, and how San Disk got it right with their memory chips. Do you see in this era of recession there is a chance of many established names disappearing and in their place new companies emerging out of the blue?
These kind of things happen all the time. One business model doesn’t work and a new business model takes it place. For example, the music industry and the recording industry is struggling because the business model in the music industry is becoming an online model. The compact discs are disappearing. The recording industry took the wrong approach from the beginning. It was clear that people were downloading songs illegally because there was no legal mechanism for doing it. For the recording industry rather than creating a legal mechanism for doing it, they tried to stop the customers from what they demanded.
That is a gross violation of Law 3 in our book: customers are moving and you see that their needs and wants are moving. The recording industry should have moved swiftly to create a business model to suit customer needs. Why did they wait for somebody in the electronics industry (like) Apple Computers to come up with a business model for that? It was a failure to track what is happening with the customers. These things happen all the time. There was a customer chain that went bankrupt recently called Bennigan’s Restaurant Chain. Their food was good today as it was when they started. But the customers were tired of the concept. They never came up with a change the customer wanted. I think it happens all the time..
Any company should watch where the profits are moving and how the customer needs are changing and move in that direction.
General Motors, Chrysler and Ford got it wrong. What will you tell them?
One of the big challenges that the US automakers face is that they actually did not manage the experience curve from the Second World War to the mid-eighties. It was only later they started managing their costs.
They have many legacy costs. You have to work with labour unions on that and you have to scale back your production capacities. Take the worst case scenario, and capasitize for 90% of that. The auto makers experience this all the time. When they don’t have excess capacities, for example, in the early part of this decade when SUVs sales were strong the reason why they were making money was they didn’t have that much capacities as the market was demanding. For 90% of their car lines they just build way too much capacity.
Will these auto majors be around in another five years?
I am going to predict that Chrysler will be absorbed by somebody; maybe the Chrysler brand and the Dodge brand will continue to exist. I suspect Ford will survive and GM will in a smaller form will survive.