And so, it’s slowdown time again as companies, faced with falling revenue, try to at least protect their profits by squeezing costs out of the system and improving efficiency. Many will, no doubt, cut jobs and reduce costs by asking senior managers to fly coach and junior managers to take the train, but the really smart ones will go back to doing what Indian companies did so well in the late 1990s and the early years of this decade—become efficient enough to maintain or even grow profitably on stagnant, even declining revenue.
The news media is likely to be replete with stories on efficient working capital management—one of India’s largest consumer goods companies was often profiled in the 1990s because it had a negative working capital, achieved by getting dealers to pay for products ahead of time—total cost management, total productive maintenance and, of course, the panacea for all problems related to cost and efficiency, business process re-engineering.
It was by doing all this that Indian companies found themselves in a position where they had money enough, and were competitive enough to go out and acquire global firms.
Illustration: Jayachandran /Mint
Over the past four years, however, many of these companies and their promoters were blinded by the boom into believing that the good times would last for ever. Promoters of companies that were listed on the exchanges were lulled into further complacency by soaring stock prices that made them, at least on paper, very wealthy. With revenue and profits rising, companies forgot everything that had helped them reach where they had. Everyone started flying business class. Salaries soared —not just for top performers but across the board. Hubris replaced logic as the strategic currency of organizations.
Most companies in India and many in other parts of the world typically focus on costs during a downturn and people during a boom. And they have convinced themselves and their employees into believing that the two are mutually exclusive.
Will Indian companies learn from the current slowdown? It’s tough to say. Sure, the slowdown and the consequent emphasis on efficiency and costs will engender a new wave of world beaters, much like the previous slowdown did. And at least some of these companies will fall into the hubris trap the same way their predecessors did. Companies need to learn to behave the same way through boom and bust. Cost-cutting exercises never go out of fashion. Nor do efforts to reward and nurture employees.
What can Indian companies learn from earlier slowdowns? Tell us at email@example.com