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Business News/ News / India/  Five memos about change from the CEO war room

Five memos about change from the CEO war room

India’s top business leaders are facing multiple challenges in a dynamic environment. Here is the big-picture view from the corner office

CEOs recognize that this crisis has exacted organizational costs. Almost half of the companies have undertaken pay cuts, and nearly 30% have laid-off or furloughed employees.Premium
CEOs recognize that this crisis has exacted organizational costs. Almost half of the companies have undertaken pay cuts, and nearly 30% have laid-off or furloughed employees.

NEW DELHI : The Mint-Bain India CEO Survey has captured the hopes and fears of India’s top managers. CEOs have freely answered questions on a range of topics, from global and local risks; impact of covid-19 on the Indian economy; and their immediate priorities for the next 12 months. There are five big themes that have emerged from the survey.

There’s long-term gain

Covid-19 has hit a decelerating economy hard. India’s gross domestic product (GDP) for April-June 2020 contracted by almost a quarter, while GDP for the full year could shrink by almost 10%. About 80% of CEOs have experienced a negative impact of the crisis till date, and nearly 60% expect top-line growth for FY21 to be lower than FY20.

Despite widespread near-term gloom, there is divided opinion on the impact of covid-19 on India’s economy over the next 5-7 years. A quarter of the CEOs say that the crisis will continue to blaze a value-destroying trail, but almost half believe that it will be value-accretive.

The latter group of CEOs expect companies and key stakeholders in the economy to recognize this unique opportunity and make audacious moves to benefit from the inevitable changes in the world economic structure.

If history serves as a guide, this expectation may not be misguided. A global analysis of company performance during and after the 2008 financial crisis reveals that companies that get the recovery right during the crisis go on to create sustained value (see chart). These winners experienced 14% year-on-year EBIT (earnings before interest and taxes) growth over 10 years versus stagnant EBIT for those who failed to handle the crisis well. Indeed, companies usually make more dramatic gains and losses during downturns than in stable times.

Graphic: Mint
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Graphic: Mint

The “winners" during a crisis get a few things right. They protect and even reinvent the core of their business by tapping into evolving consumer preferences with agility. They trim fat and add muscle. Along with diligent liquidity and balance sheet management, they pursue a proactive M&A pipeline.

If corporates in India are able to seize this moment, the covid-19 experience could indeed turn out to be a long-term gain for them and the economy.

Reset in a disruptive world

The impact of covid-19 is not limited to P&Ls and balance sheets—many sectors are likely to witness a shift in the way they are structured. Nearly 85% of CEOs expect a transformational or significant change in industry structure, especially in terms of disruptive innovation, new business models and changes in consumer habits.

While expectations of change are quite consistent across sectors, they are more pronounced for sectors like healthcare, financial services and real estate. Apart from changes in industry structure, this is also a time of uncertainty and risk: CEOs are most worried about the government’s limited fiscal and monetary space, and reduced consumer purchasing power.

Coupled with the financial impact, these disruptions and risks are reflected in CEO priorities for the next 12 months. Recovery of existing business is understandably a top priority for CEOs; and transformative cost reduction and digital transformation complete the top three priority list.

This differs somewhat by sector: real estate CEOs identify growth capital and liquidity management as far more important, while consumer products CEOs gravitate towards pursuing or scaling up new businesses.

Cost has emerged as a top CEO priority. Indeed, nearly 65% of CEOs who see covid-19 as value-accretive, have transformative cost reduction as a top three priority, versus 30% of the remaining CEOs. CEOs have managed costs in this crisis through pay cuts, furloughs, and reduced discretionary spends, but such stop-gap measures will not build adequate resilience. CEOs will have to effect a strategic and radical zero-based approach to costs to emerge stronger from covid-19.

Given the expectations of significant changes in industry structure, CEOs have identified new business models, consumer experiences and resource productivity as main elements of their digital transformation agenda. Many companies have been on a stop-start digital journey; the imperative now is to accelerate progress and make a few big bets.

Vocal for local

While the Indian manufacturing sector has shown remarkable resilience, a majority of corporates have faced massive supply-chain disruptions—on inbound and outbound logistics, and market access. Unforeseen and inconsistent lockdowns and restrictions at local levels are a key concern that CEOs are struggling to work around.

Most companies are re-evaluating their supply chains for the longer term, and a majority of them intend to significantly increase the volume and value of local sourcing as well as re-examine greater vertical integration. Almost a third of the companies are planning for greater buffer capacities and an expanded vendor base.

This could act as a major stimulus to the “Make in India" programme. If considered in tandem with government measures to focus on domestic manufacturers in areas like defence, we could potentially create a strong base of ancillary component manufacturers that are quality- and cost-competitive. This will also support the emergence of more specialized clusters similar to auto components and engineering products.

The big opportunity is to make Indian manufacturing truly global, and benefit from the China+1 strategy that most large global corporations are beginning to seriously examine. India has always had the engineering talent; however, scale and cost have been issues, both of which can now be addressed. Of course, significant reforms around logistics, training, labour and ease of doing business will be required, but the dividends will be significant over the medium term.

Infrastructure-led recovery

The relief measures announced by the central government over the last few months have focused on segments that required it most, and ensured that the most marginalized individuals received cash transfers and other forms of material support. Almost half the CEOs feel that, going forward, a one-time/permanent goods and services tax (GST) reduction or income tax waiver will be truly impactful to boost economic recovery.

But as we navigate through this period, India Inc believes that the most impactful measure for sustained recovery is a dramatic increase in capital spending on economic infrastructure. This is especially relevant as most CEOs reckon that their own capital investment cycles will only start to revive by mid-late FY22.

The infrastructure sector with an economic multiplier of two is the single-largest employment generator after agriculture and the money spent goes back rapidly into further virtuous spending cycles. Investment in the sector also provides momentum to sectors like steel, cement, capital goods and building products. The recent announcement to accelerate the Infrastructure Project Pipeline is very encouraging; however, translating this to rapid awards on-ground will be a critical step.

Sector-level reform around areas of claims management, contract standardization, one-time fiscal adjustment windows for ailing companies, establishment of a nodal infrastructure ministry and creating a new construction and infrastructure legislation will help build a generation of Indian companies that can compete on the world stage. This will also re-energize private capital participation and drive growth through public private partnerships at a time when the government has limited fiscal capacity.

The new office

Never before have leadership teams and employees been as challenged as the past six months. And the message from CEOs is unanimous. They are proud of the resilience, agility and collaboration displayed by their teams. CEOs say that work from home (WFH) is not only viable but often more effective. It comes as no surprise that over 70% of them have voted for increased use of flexible working models as a top-three priority.

However, the extent of impact of such flexible models is still uncertain, as only one in three CEOs expect more than 25% of the workforce to continue working from home. It is to be seen whether WFH models are limited to office roles or they are extended to field and factory roles.

CEOs recognize that this crisis has exacted organizational costs. Almost half of the companies have undertaken pay cuts, and nearly 30% have laid-off or furloughed employees. That’s not the entire story though. CEOs who cut through organization layers and empowered the frontline benefited from both innovative solutions and speed.

Thus, the social contract with employees needs to be recast. Nearly 50% of CEOs have put employee engagement, increased automation and faster decision-making as organizational priorities for the next year.

We believe that it is time to take a fundamentally new approach to organization models. One, preserve the best of the lockdown—the software of culture, decision roles, and ways of working which overcame the hurdles of structural hardware. Then, clearly distinguish between the delivery and development agendas, teams and operating models—manage the former with established playbooks and enable experimentation on the latter.

Finally, take an axe to ossified layers of middle management that over-manage existing business and redirect them to business-building. And, rewrite the social contract with employees to ensure informal touchpoints in a virtual world, celebrate heroes, establish ‘zorms’ (norms on Zoom) and cultivate a growth mindset. The office, as we know it, is ripe for change. Not just in a hybrid real-virtual sense, but also what employees do and how they interact.

Gopal Sarma, Joydeep Bhattacharya and Abhishek Tiwari are Senior Partner, Partner, and Associate Partner respectively with Bain & Co India

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Published: 13 Sep 2020, 10:35 PM IST
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