One of the challenges for corporates today is creating value out of operations and once having created the value , sustaining the created value going forward. There are many examples in the world where companies created value and not able to sustain it for a long time. The good examples are Sony, Nokia, RIM in the recent past and there are several examples and many companies which created value , not able to sustain the value for a long time. The following strategies need to be adopted to create and sustain value.
1.The value creation starts with a Competitive strategy. Every company has a strategy but the strategy adopted by a company should help in creating a competitive advantage over others. This should result in faster growth and higher profitability compared to the competition.
2. There are five strategies available to create a competitive advantage. A) Cost Leadership b) Differentiation 3) Focussed cost leadership 4) Focussed Differentiation and 5) Integrated Strategy ( cost leadership as well as differentiation). Depending on the technology and marketing capability ,cost structure and competition in the particular product segment, one of the above strategies and combination of them have to be chosen. The objective should be to minismise the impact of competition on growth and profitability.
3. Keeping the age of the product portfolio young. To ensure a sustained good performance , there is a need to introduce new products at regular intervals and keep the average age of the products very. Low. This does not assure sustenance in cases where there are technology break throughs . Hence, apart from age of portfolio , it is necessary to make sure that there is an adoption and absorption of emerging and new technologies. The focus for new products should be the segments where there is a good potential for growth, less competition and good profit potential.
3. Many companies develop good strategies but there is a poor implementation due to slow decision making, organisational inertia and poor discipline in implementation. Allowing so many exemptions from the planned strategy leads to slippages and not continuously monitoring the performance and taking course correction leads to poor results compared to the plan.
4.Good corporate governance. The starting point of value creation is good corporate governance. The books of accounts should be closed on time every month. The actual performance should be compared with the plan and reasons for variance in performance should be identified and without much delay the course correction should be put in place. There should be a fit administration which looks into the governance discipline and adoption of best practices in each functional area of operation. Many companies do not have well defined SBU’s ( Investment Centres ,Company within companies ) , Profit centres and Cost centres. This is the starting point for good corporate governance. There is a need to review whether the organisation is well structured and appropriate organization structure and robust systems and procedures are in place.
5. Good governance and good performance creates a good image in the minds of all stakeholders ( investors, bankers, customers , suppliers ). .The market gives a premium to the quality of governance and company starts commanding good multiples. It is true for even unlisted companies, wherein it would be possible to command good premium for the products and achieve above average profits..
6. In Capital intensive industries and where there is hyper competition , scope for collaborating with the competitors should be explored. This is a general practice in electronic hardware industry . telecom , auto and financial services. This provides a full flexibility to an organistion to adapt to variations in economic performance.
7. It is essential in general the companies should be able to maintain market leadership. But there are cases, where, even smaller companies command a high premium. Good example is HDFC’s market cap is higher than ICICI and SBI. The bank had given a sustained performance over the years, which helped to keep its P/E ratio at the highest levels, ever since the bank allowed FII’s to invest in the bank. So far, the bank was able to maintain its lead.
8. The companies / groups which have created a big value, generally grow at a CAGR of 25% . The stretch target of 25% CAGR is very stiff but it is better to keep this target and identify opportunities for faster growth. ( It has to be a combination of old product – old market , old product – new market , new product –new market , new product – old market , new technology – old market , new technology – new market ). Both organic and inorganic routes to be pursued.
9. Reputation. When one of the companies came for an IPO, the inherent value of the stock was even less than Rs.10 per share and no project was on. Since the group was known for creating value for shareholders, the investors were ready to pay Rs.500 per share for the stock. Cognizant technologies was able to win more projects and have become the number one software provider in US over taking TCS. This was mainly on account of Cognizant is seen as a US company and it is parent was Dun and Bradstreet corporation. Further the company adopts an integrated strategy which is helping it to over take others in Revenue growth and it reinvests any surplus amount which is more than 20% margin in the core business.
10. Constant Restructuring. At any point, only a few industries grow and some industries decline and some industries are at a maturity stage. The fortunes of industries change and the portfolio of a corporate should be well balanced to generate enough cash and sustain the growth levels. The strategy is not only about growth but also about keeping the portfolio healthy. The portfolio should be churned to ensure that the businesses generating negative cash flow and where scope for future revival is limited should be removed from the portfolio through divestment and sale. Many a times, the poor performance of corporates is due to keeping the businesses where there are continuous cash losses. There should be well defined criteria for entry in a business and criteria for exiting a business. GE is a role model for corporates in this respect and this is the secret of GE’s survival for more than hundred years.
11. Not Succumbing to herd mentality. The high growth businesses after the entry of few players start attracting many new investors. This results in overcapacity in the industry and the players who enter late find it difficult to adopt the cost leadership or differentiation strategy. In a few cases, new entrants come up with new business models and redefine the industry. If the industry is overcrowded and there are many players, then the best form of entry in the industry is through acquiring a company which is doing very well in the industry rather than starting a green field venture. In many industries, the feature of herd mentality leads to entry of many entrants and those who are not able to create competitive advantage report poor performance affecting the overall performance of an industry.
12 Constant interactions with the Investor community. This is the one way; the value created could be taken to higher levels. One of reasons for faster growth of Infosys compared to its peers few years back was due to early listing of the stock in a market where most of its customers were coming from . Whenever analysts brought out analysis on companies growing fast and reporting higher profits, Infosys was always coming on top of the table in USA. This has created awareness among the CXO’s in US who were the decision makers and investors in the stocks. Since the company was growing very fast and profits were growing faster, inventors felt the company was well managed. So when bids were opened for awarding assignments, even when Infosys quoted 10% higher price compared to competition, they were willing to pay the premium , despite the competitors were as good as Infosys. But Infosys lost this advantage , after listing of TCS and TCS moving away from the strategy of cost leadership to differentiation like Infosys. Cognziant also started growing fast which had reduced the attraction for this stock.
To create and sustain value, a corporate has to use the combination of above strategies to achieve a sustained competitive advantage.
