Digitalizing business is crucial for Indian firms
The corporate sector’s road to growth is built on four fundamentals of success, says Kanvic
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Profitability at Indian companies has been on a downhill path for the past five years as companies have struggled to deal with the ‘new normal’ of increased volatility and uncertainty, high indebtedness and the rising impact of digital disruption. This is according to a study on the performance of India’s top 1,000 listed companies over the past five years by Kanvic Consulting.
Despite India’s status as the fastest growing large economy, corporate performance has fallen far behind. Drawing on the Kanvic Performance Navigator, a tool which analyses over 50 different performance variables of companies, the study found that between 2010 and 2015 Ebitda as a percentage of GDP fell from 8.7% to 7.2% while net profit more than halved from 4.1% to only 2%.
Although the overall trend has been downward, there has also been a marked divergence in performance between industries in recent years. Today’s top five most profitable sectors captured a little under 39% of total corporate profits in 2010, but this leapt to almost 75% in 2015.
The big winners have been sectors like automotives and auto components whose share of profits have risen almost three-fold. They have gained on the back of strong consumer demand fuelled by rising income growth. Similarly, information technology and healthcare (which is dominated by pharmaceuticals) have more than doubled their share of the profit pie thanks to their ability to deliver lower costs to export clients around the world. Utilities have also seen steady gains in profit.
In stark contrast, industries like capital goods, construction and metals and mining have seen massive falls, plummeting to losses at the sectoral level. They have been hit respectively by the slowdown in industrial growth, a cooling in the real estate sector and the cessation of coal mining.
However, the study also found that there are companies in every industry that have managed to prosper over the same period, expanding both their top and bottom lines.
“The common factor among these winners was that they pursued aggressive growth,” says Kanvic’s director of strategy Deepak Sharma. “Those companies that increased their top line by more than their industry’s median over the last five years were more likely to see profit growth, whereas those who grew below the median were more likely to see a profit decline.”
Factors that have changed the business environment
Firstly, as the Economic Survey of India 2016 stated, “the newest normal for the world economy is one of turbulence and volatility”. This reality has been reflected in the dramatic fluctuations in GDP growth since the 2008 financial crisis, along with higher volatility in commodity prices, inflation and the exchange rate.
For example, the standard deviation in the INR-USD rate was more than twice as extreme between 2010 and 2015 than it was in the previous five years. As India becomes more closely integrated with the global economy, the level of volatility and uncertainty will only grow.
Secondly, a new force in the shape of digital disruption has upended the traditional formula for growth and is now impacting every industry. In 2015, Indian technology start-ups received over $9 billion in investment, 50% of the combined investment the sector received in all previous years.
The third factor that has changed the environment for growth is the high level of indebtedness of many companies. The Kanvic Performance Navigator finds that almost one-third of Indian corporates are stuck in the debt trap, meaning they have high leverage and/or low interest coverage.
Kanvic’s four fundamentals of success
Kanvic’s Sharma observes how through conversations in the country’s boardrooms and analysis of the latest industry trends, Kanvic identified four milestones which together form a new framework that they are calling the ROAD to growth. This comprises of Resetting assumptions, Organizing for the future, advancing with Agility and Digitalizing the business.
To begin with, leaders will need to reset the most fundamental assumptions they hold about the future. Any strategy a company makes will be based on its assumptions about the macro environment, the growth outlook, their industry’s boundaries and the nature of their competitive threats. Given the huge changes seen in recent years, many of these assumptions are now redundant.
Secondly, India Inc. will need to build a very different type of organization to take on the challenges and seize the opportunities in today’s world. This process should begin with transitioning away from the traditional hierarchical approach common in Indian organizations, towards more fluid structures that encourage collaboration and faster adaptation. Leaders should also place a high priority on engaging and empowering the new cohort of millennials that is transforming the Indian workplace.
The third point is the requirement to get agile. Agility allows companies to better sense new threats and opportunities, interpret them correctly and act promptly. To become agile, organizations can deploy contingent thinking. This approach moves away from trying to predict the future and instead examines different scenarios and how they might impact the business. As a result, the organization is better prepared for every eventuality. In addition, organizations must reject the tendency to inertia and adopt a bias for action in both offensive and defensive moves.
Finally, companies need to digitalize their business. To do this, they need to focus on three areas. First, adopt the principle of start small, fail fast, to rapidly test digital initiatives and identify those to which they should commit further resources. Second, businesses must review existing data assets across the organization and see how they can be leveraged to deliver a strategic advantage.
Last, CEOs will need to spot the digital talent inside and outside their organizations that will be essential to implementing digital initiatives, and then bring these digital champions into the heart of their strategic conversations.
Kanvic is a leading strategy consulting firm in India with a global perspective and reach. Kanvic works with CEOs and board-level executives to address the business challenges of 21st century India.