Thursday, August 14, 2003

A Winning Strategy for Post-Reform India


The truth is that a decade after the reforms most Indian companies are floundering. With a couple of dozen exceptions the vast majority has failed to become truly competitive. Our companies have still not acquired the confidence or the skills to succeed in the global economy. Most continue with a “factory mindset” when the industrial age is disappearing. Most sell cheap, shoddy products.

It has become increasingly clear that a definite divide has emerged in Indian business. And it is not the divide between the so-called “new” and “old” economy companies. It is between those companies who have a clear strategy and are quietly building competitiveness and those that are not.

The best Indian companies have been re-inventing themselves, building on their strengths, investing in talent and technology, and approaching the type of competitiveness achieved more broadly by Korea and Taiwan. Reliance and Hindalco are two outstanding examples. Those who think that Indian brands are disappearing should note that Titan watches are stronger after the entry of Timex. Maruti may have lost market share, but it is putting up a good fight and becoming innovative. BPL, Videocon and Onida are holding their own in colour TVs, despite the entry of global players. Bajaj may be struggling, but this has more to do with a shift in the market than competition. Even Thums Up is well and alive within the coke stable. Taj and Oberoi continue to expand their world-class hotel chains.

There are only three ways that a company can create sustainable competitive advantage. It can compete on the basis of superior costs or superior products or superior service. There is no fourth way. I find that most Indian companies are still following the cost/price strategy. This is a vulnerable approach—for example, when the neighbouring country devalues, your cost advantage disappears overnight, as we learned painfully during the East Asian crisis.

Indian companies have many failings—they are short term; they try to do too many things and lack focus; they do not invest enough in improving their employees or their products; they have been unable to separate the business’ and the family’s interests—but, I think, their biggest failing is that they are following the wrong strategy.

It is unrealistic to expect Indian companies to become technology leaders. This is not because Indian scientists are not capable, but because Indian companies will take time to mobilise the power of science and create a technology driven culture. The companies of Korea and Taiwan still do not have a technology edge. Eventually, some will become innovation-driven, but it will take us 10-15 years to get there after sustained investments in R&D.

The right strategy for Indian companies is the third--to differentiate themselves by offering unparalleled service. This is a far cheaper strategy than to invest in R&D or in cutting prices. In the competitive global market, the quality and price of most products have narrowed to the point where it is only service that distinguishes companies. A survey in the U.S. found that 68 per cent of customers are lost not because of quality or price but because of service. Service builds on the proven capability of Indian traders in the competitive bazaar economy.

Anyone who has shopped in a sari store or eaten in an Udipi restaurant knows the Indian traders' ability to deliver superior service. The employee in a typical sari store opens a hundred saris within five minutes in an attempt to sell a single one. Similarly, the waiter in a typical restaurant or dhaba delivers the customer's thali in two minutes. Among larger companies, HDFC and Sundaram Finance are good examples of superior service. Everyone recalls the positive experience of dealing with HDFC for a housing loan. The legendary loyalty of truck customers to Sundaram Finance is based on excellent service.

Commitment to a service strategy means that you hire new employees on the basis of their attitude and train them on skills. Most companies do the opposite. No matter which of the three strategies you adopt, however, you have to deliver a threshold level of quality, price, and service in order to exist. But in order to gain advantage over others, you must choose one and stay with it.

A strategy based on superior service can be especially powerful where the value added is high. Superior service delivered by highly trained “knowledge” workers—scientists, engineers, market researchers, salesmen—provides a powerful insulation against competition. Not only can knowledge workers harness the power of information technology, they can also be trained to benchmark their deliverables against competition and against customers’ needs.
Creating competitive advantage takes years of painstaking effort and few Indian companies have had the patience or the inclination to do so. It requires the ability of the top management to penetrate into the messy details of the business, without losing sight of the big picture. Most Indian businesses have found themselves hopelessly unequal to this task. Until 1991, they could blame the Socialist Raj. Now, a decade after the reforms, they have no one but themselves to blame.

1 comment:

Health Blog said...

There is no fourth way. I find that most Indian companies are still following the cost/price strategy.