Sectoral Developments in Indian Economy

National Research Seminar on

Sectoral  Developments  and their Impact on Indian Economy

UGC / K.P.B. Hinduja College of Commerce / Kirti M.Doongusree College of  Arts,Science and Commerce

Speech by R.Kannan

22^nd February 2014

I would like to thank the organisers for inviting me and   I have great pleasure in participating in the National Conference on Indian Economy , sharing some thoughts on the future options available for achieving a high economic growth going forward.

The topic taken for the two national conference is very appropriate at this moment and  I am happy to note that the deliberations in the last two days covered all the important sectors in the economy and the various issues relating to these important sectors and how they impact the growth rate of the Indian Economy.  I learnt that lot of new perspectives had emerged from the deliberations so far which will be useful for the  economic policy making in India.

The recent economic performance in India caused many concerns among various stake holders and the general sentiments toward new investments and growth moved towards a moderation.  After holding steady  for two years after the Economic crisis, the growth in the Economy had shown signs of tapering and reached  its decade low of 4.9% . Inflation in the recent past had shown a secular rising trend and recently started receding.  The lower economic growth in India was due to developments in the Global economy as well as issues relating to Regulation, Environment , increased competition  between political parties , increased social / Judicial activism and sensational reporting by media. In 2008, the potential for economic growth was at 10%. The conditions for higher economic growth were very favourable including  ; low interest rates, robust capital markets, good corporate performance,  consensus on national issues between political parties . Due to recent developments and the fast rise in inflation, the potential for economic growth is moderated to 8% now and there is a big gap between potential and the actual performance.

By taking a concerted actions in collaboration with various stake holder groups in the economy, it should be possible to achieve 8% growth within a year. The solutions for accelerating the economic growth are in place and what is required is cooperation of various stake holder groups in achieving this target. In India , even today many of the sectors are growing at more than 10% p.a. But before the economic slow down, many more sectors in the economy were growing at more than 10%. By adopting and implementing sector wise action plans the desired growth could be achieved.

Finance Sector. This is the sector which acts as a catalyst  to stimulate the economic growth since all the segments of the economy depend on external source of funding to pursue the growth objectives. Banking and Capital markets play a major role in the development of an economy. In India the value of Capital markets and bank credit are comparable but the number of IPO’s had seen a decline. Bank finance continues to play a major role. The issue of NCD’s by corporates is  likely to rise and private equity capital is available for investments in several sectors. The pension sector had been opened to new players and growth in this sector will generate long term funds which could be deployed in the infrastructure sectors

The issue of new licenses for banking will result in higher growth and penetration of banking . Adopting of new technologies including the mobile phone based technologies  will help in meeting the objectives of financial inclusion. Through these technologies , the availability of credit  could be increased in the rural areas.

The share of FII’s in total market capitalisation of the companies is at a high level.  The behaviour of FII investors , despite their investment is only through secondary markets, determine the stock market and index performance. As and when FII’s increase the investments, the boom in stock markets is witnessed and when there is a significant withdrawal, the markets take a beating. Considering the growth potential of India and the  future capital requirements in the economy ,  continued flow of funds through this route would enable corporates to meet a part of their requirement through this source ( through divestments and sale of shares through secondary market). Hence it is necessary to keep the sentiments of this investor class favourable and action plans could be drawn up to  sustain  the interest of this investor class through favourable conditions for investment.

FDI. After the Economic Crisis, only a few markets in the world continue to show a healthy growth. Despite India’s growth decelerating , the growth achieved this financial year was still one of the highest economic growth  in the world. There is an increased interest  from investors from all over the world to be associated with Indian market. Japanese companies are very bullish on India especially after the stellar performance by companies like Maruti, Honda.  Most of the companies from Japan had drawn up plans to increase their presence in India. The companies from US, Europe and Korea  have also shown keen interest to increase the investments in India. Last week, China expressed the desire to take a share of  30% in future infrastructure investments . The opening up of computer hardware industry for manufacturing including chip manufacturing augurs well for increasing the foreign investments in India. The creation of Industrial corridors will see more foreign collaborations in India and in future,  the FDI  inflows are likely to show a good rise from the present levels.

While addressing the economic growth issues, the foreign exchange movements had become one of the main issues and the robust risk management had become very important.  The imported products had contributed to higher inflation levels due to exchange depreciation. In the recent past, many new initiatives were taken by government to control both fiscal and current account deficit and there is a relief in the short term. For the long term, solutions are available to ensure a good fiscal position for the country and by strengthening the financial position, it should be possible to keep the exchange rates at competitive levels . Since the oil imports are increasing , there is a need to keep the currency at the present levels.

The increased Inflation in India in the last few years was due to both demand and supply factors and the supply factors had a major influence on the way the inflation behaved. The latest reported level of inflation had shown a favourable trend and we have to ensure inflation remains within 5% levels going forward to keep the economy growing at 8% growth. The government has to continuously monitor the developments in the economy and develop appropriate responses from time to time to ensure the inflation remains at healthy levels.

    Agriculture sector in India continues to employ the maximum number of people in India today and year on year, the share of agriculture in our GDP is showing a declining trend. As per the predictions, in the next few years, agriculture will add the maximum number of employees among all the sectors in India, despite its Share in GDP will fall further , year on year basis.  The issues in agriculture include, the low productivity levels of crops compared to best in the world, the wastages at the farm / during transportation / storage , the reduced interest in Agriculture as a profession. Considering the recent developments, especially, the inflation fuelled by agri commodities at the retail level, this sector will become attractive and more corporate and individuals will look at this sector favourably to fulfil the growth ambitions. There is an immediate need to increase the crop productivity without losing much time . The reforms in distribution of agricultural commodities through amending the APMC act would help the farmers to obtain remunerative price for their produce and generate enough surplus to buy inputs at much higher prices ( without availing any subsidies )  and  invest in new technology to achieve the best productivity levels witnessed in other countries.

Services Sector. The loss of share of agriculture in GDP is taken by Services sector. Indian IT sector helped to create the India brand in the minds of investors from across the world and this sector continues to grow at a fast rate  , creating lot of employment opportunities. The prediction going forward for this sector is also very encouraging. This  sector’s contribution in GDP growth is very high , since value addition in this sector is one of the highest among all the sectors in the economy.  India has one of the  large education systems in the world producing large number of Engineers, Doctors and Graduates. Despite most of them are not job ready, the companies which recruit them give a good training. The government has drawn up a skill development plan with a target to train more than 500 mn by 2020 in various sectors / skills, where the demand supply gap is high and  likely to become higher. Government is taking steps to increase the enrolment ratio at higher education level and various action plans were in place to develop skilled personnel.

The future projections for media sector indicate that this sector would continue to grow at more than 10% and the technological developments in this sector will lead to many changes in the way we consume media offerings. The business models will undergo a major change. The health , tourism, aviation , banking and financial services will continue to grow at more than 10% going forward. The penetration of mobile communication in rural areas is going to change the customer preferences in rural areas and even in rural areas, the growth in services will be higher than the growth in other sectors. This sector will continue to support the higher economic growth going forward.

Manufacturing contribution to GDP is India is very low and the government has set a target to take this to 25% of GDP from the present level of 15%. This will happen through liberalisation of more sectors and entry of several MNC’s in India to set up their manufacturing operations. Achieving this target requires the basic condition of simplified procedures to do business and moving up the rank in ease of doing business.

To achieve higher economic growth, the continued investment in infrastructure is necessary.  Despite savings level is very high in India, not all savings is invested in financial assets . There is big demand supply gap in financing infrastructure and from the present resources available within India, it would not be possible to create an infrastructure which will support an economic growth of 8% p.a. There is a need to create new sources of funding and tap the foreign funds. Government has already created enabling conditions to attract funds and increased the limits of foreign investors to invest in various financial instruments. New instruments are being introduced to address this need. But in the last few years, the attractiveness of this sector reduced due to environmental concerns , profitability of projects and availability of funds. Apart from Traditional funding sources like multi lateral financial institutions and LOC, the scope for raising funds from Pension funds and  Sovereign Wealth funds is being explored. By increasing the investment in financial instruments from the domestic savings through innovative financial instruments, the required funds could be raised.

The present issues constraining our economic growth are short term. The solutions are available to achieve a higher growth. The starting point could be revival of mining in India through creating a mechanism to  sort out the issues which resulted in closing of many mines in India. Only through mining of Iron ore, Coal and other resources, the industrial growth could be revived. This has to be taken up on a priority basis and it is possible to bring solutions which is acceptable to all the stake holders.

Government procedures. Over the years, the procedures have become cumbersome, resulting in a huge delay in approval of projects. The creation of CCI at Centre and project monitoring group has helped to address the needs of projects having investments of above Rs.1000 cr. Similar system is being introduced in states to fast track projects. There is an immediate need to simplify the approval procedures and time bound targets for various procedures to be declared by government and they have to stick to this schedule for all the projects.

Capital  is one of the major inputs to doing business  and since the main source of funding in India today is bank funding, there is a need to reduce the interest rates.  This will help all segments including government, corporates and individuals and increase the purchasing power.

Land. After the recent high economic growth , the land has become scarce in both urban and rural areas. The cost has become prohibitive. There is a need to evolve policies, procedures by which land is made available for businesses at affordable rates.

Increased co-operation between all the stake holders. This is the need of the hour today. Part of the poor performance was due to increased activism by all the stake holders without realising the impact it has on the Economic Growth, Inflation, Interest rates and Unemployment. All the stake holders need to work towards the common target of 8% Economic growth.

Finally, it is very important for every sector to contribute to the economic growth of the nation. Despite , the potential for growth is different for different sectors, in India , there is still a huge gap between the potential and actual growth. Many more sectors in India can grow at more than 10% in the years to come. To achieve the desired growth, sector wise , policies and systems are to be introduced and implemented very effectively by the government and support of all the stake holders is necessary. Let us all strive towards achieving this growth potential through our initiatives and actions.

Thank you.

Business Excellence and Strategy

Speech delivered by R.Kannan

30^th January 2014 at National Stock Exchange

On the Business Excellence – Annual Day

I am very pleased to be here today and would like to thank you for inviting me to be part of this  Business Excellence day and annual celebrations.

We are living in a VUCA world, where things are vague, uncertain, Complex and Ambiguous and the challenge for organistions today is to bring predictability to the performance from operations. This has become a major concern for Governments and corporates after the  2008 financial and economic crisis. Every thing  done well within a company is not a clear recipe for success since the developments in the environment have a major impact on performance of companies. Developments in the environment including the hyper competition,  challenge the proven business models and companies have to be agile and nimble to address the emerging challenges with fast response.   The businesses which were very attractive five years back had become unattractive today. The viability of many of the business models is being tested in this uncertain world and new models of doing business are emerging and in a continuous, evolution mode. To address these challenges , it is necessary to build a business excellence frame work spanning the entire organsiation.

The organisations which emerge as leaders in their field have Visionary leadership,Customer focus, robust strategy, appropriate organisation structure, scientific allocation of financial resources, sound HR policies,excellent business systems and good corporate governance practices. The combination of above factors will go a long way in creating and preserving the competitiveness of organisations.

Jack Welch Says . “A strategy is something like, an innovative new product; globalization, taking your products around the world; be the low-cost producer. A strategy is something you can touch; you can motivate people with; be number one and number two in every business. You can energize people around the message.” GE is a great organisation which introduced the latest management principles on Strategy and competitiveness and these models are being adopted by corporates and management consultants in strategy formulation across the world. GE as a company went through many business cycles and witnessed many economic crises during its existence of more than hundred years and it  continues to perform very well even today. The company is a good example for large corporates to adopt the best practices in strategy formulation and implementation.

Strategy development will be at two levels, one at the corporate level and other at the business level. In a corporate level, the decisions regarding What business to enter, what business to grow, what business to maintain and what business to divest are taken.

In Business level Strategy, it is the strategy to be adopted within a business and Strategy is all about positioning an enterprise in the minds of the target customers. The battle of companies and the leadership happens in the minds of the customers. Companies can adopt Strategies like Cost leadership, Differentiation or combination of both to achieve a competitive position in an industry. The strategy adopted by NSE is integrated and combination strategy. In any industry , there will be companies adopting one of the above strategies and the companies creating competitiveness do different things from others or adopt different methods to do the same thing. The best strategy which provides the long term competitiveness of an enterprise is the one, which is able to offer quality products and services at affordable and reasonable costs. The companies adopting these strategies emerge as market leaders and achieve margins which are much higher than the rivals, which is evident from the experience in many industries.

Earlier companies adopted one of the above strategies, competing in a few product market segments. The emerging trend is that  companies are trying to compete in all price points and cater to different customer segments . Starting point of successful strategy is right positioning of the product which will attract the targeted customers.

Strategic management has two phases. The first phase in which the formulation of strategy takes place ; the Vision, Mission and Objectives and overall direction are decided. In the implementation phase, allocation of resources, adapting the organisation structure  / systems and procedures in line with the change in strategy , performance monitoring and implementing course correction are adopted. The methods like Balanced score card are being utilised by many organisations today in the strategy formulation and strategy implementation stage. The same process is being adopted to evaluate the performance of employees at all levels to decide the  incentives, bonuses and promotions.

For effective strategy implementation, adoption of business excellence model goes a long way in achieving the intended goals of an organisation. Business excellence is one of the main pillars of good strategy implementation. The difference between organisations which succeed and fail is mainly determined by how well the formulated strategy has been executed and seamless execution depends on the excellent practices adopted across the enterprise in organisations.

Perfection is what every visionary leader wants to achieve. According to Aristotle, “Perfection is not attainable, but if we chase perfection we can catch excellence.
Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.”

The companies use business excellence framework to attain and maintain competitiveness. Business excellence process by itself is not  strategy but a process by which effective strategy implementation takes place. The framework covers the entire organisation .

Unlike in Strategy formulation wherein only a few in the organisation are involved, the strategy implementation involves every one in the organisation. In this respect, the business excellence framework has to be a company wide exercise and covering all the employees. Each employee has a role to play in bringing out the best in the organisation. It is a combined effort.

It had been empirically proven that the organisations which adopt business excellence frame work report much better performance than those who do not adopt this frame work. According to a Mckinsey study, internal processes in an organisation leads to variation in performance to the extent of 50% compared to the peers.

One tool that can help organizations strengthen their management systems and processes holistically, is the internationally-benchmarked Business Excellence framework. It provides standards for managing people, innovation and service, which are key enablers of business excellence.

 The BE framework helps organisations to assess their performance, identify gaps, and take action for improvement. It encourages a systems-based approach to management, with the adoption of a robust measurement system, to assess and monitor performance. Measurement allows organisations to compare and benchmark their performance against the best-in-class in their industry.

Employees play a key role in an organisation’s journey towards higher productivity and business excellence. The business excellence journey of every company is anchored by its employees. It is, therefore, important to align employees’ aspirations and efforts with the organisation’s goals.

Your branding of this effort, ACE ( Attitude, Customer and Excellence  is very apt.) The business excellence initiative should start with a positive and favourable attitude from every employee. An effective implementation of identified strategies depends on the favourable attitude from all the employees. Every employee in the organisation has to understand the Vision , Mission and overall objectives of an organisation and align his /her personal objectives with the organisational objectives. Their activities should be channelised towards excellence in whatever they do. The attitude towards company’s vision,mission, objectives, colleagues and customers should be in alignment with the overall organisational efforts in achieving the overall objectives of an organisation.

Customers decide the future of an organisation . It is essential that companies understand the customer expectations well and develop products and services which meet their needs. Today customer awareness is very high and customers expect a fair deal from the companies and they support companies which are very fair to the customers delivering the expected value for the price paid.

In my career I had an opportunity to work in companies where new business excellence initiatives were undertaken. Especially after the  liberalisation the competition in industries increased and the need for developing formal strategic plans and excellent business processes became very important , to sustain the competitiveness.

1. Our Group is a family managed Enterprise. The group gives full independence to the Executives who are in charge of different businesses and the involvement in the group is more in Strategy formulation level and the budget finalisation is done at board level. Once the budget is decided and allocation of resources is decided,  there is a complete independence to the CEOs on operational matters and  the CEO’s have the freedom of choice to change their tactics according to the emerging market dynamics. There is an effective  performance measurement and management system which is in operation which contributes a lot to the value addition to the overall performance of companies. The best practices adopted by a company within the group is being shared with other companies and group companies encouraged to adopt the best practices in all their operations. Balanced score card frame work has been used for Strategy formulation, implementation and performance appraisal. Business excellence frame work had been introduced in a few companies in the group and it is being introduced in phases across the group companies.
2. ICICI bank redefined the paradigm of banking in India.The banking business in India  today is totally different from the way banking was done 20 years ago in India. Under the Visionary leadership of Shri.K.V.Kamath, intensive automation of processes and reduction of manual intervention in operations enabled the bank to scale up the growth very fast. Several new initiatives were taken under Operational Excellence Initiative and Sig Sigma initiative, which helped the bank to acquire customers faster than others and enabled cross selling of products. The importance of  fee income had become equally important as that of core income and existing branch and IT infrastructure was effectively used to sell more products and services to the existing and new customers. The diversification into new geographies helped the bank to gain leadership in remittances business and cross border mergers and acquisitions. The creation of trading platform under ICICI securities helped the company to gain the leadership in the retail stock trading business. All this was possible through involvement of all employees and eliciting the best ideas from employees. There was a   reward system for the innovative ideas given by the employees. It was enabled by establishment of an Intranet which helped in knowledge sharing, training and transfer of best practices .

3. Thai Airways in Bangkok ,benchmarked its performance , systems and processes with the Airlines like Qantas, Singapore Airlines and Cathay pacific and fine tuned the strategies to become  more competitive. It has started hedging its fuel requirements and monitoring the performance of each flight operation. This helped the company to prune some routes, increase flights to routes where there was more traffic and optimise the use of fuel. This has improved the overall performance of the company.

NSE is a world class organisation led by a Visionary and committed leadership. The Forbes had acknowledged this fact and the leader of your organisation has been ranked among the top 15 leaders in the world and among the top three leaders in India.  NSE had set the global bench marks and redefined the way the securities trading was happening in this country with high transparency, good governance, robust processes and high quality standards. It ranks among the top three in volume in all its activities in the world and continues to improve its performance and if the pace of the Indian Economic growth continues, NSE will become the leader in all its activities in the Global arena.  Despite achieving an invincible leadership in the near term and far ahead of the competitors in all the performance parameters, the business excellence process has been identified as a key enabler for sustaining the competitiveness of the enterprise in the long run. This is the articulation of desired outcomes by your leadership  and the focus was not just on immediate opportunities and challenges, but also on building capabilities for the future.     

Business Excellence is a Journey and am sure every one of you is working towards the excellence in your organisation.

I would like to congratulate this year’s award winners and all those who are here on the Excellence journey. You serve as an inspiration for all other colleagues to continue the journey of  business excellence. I wish you all the best and  
 and have an wonderful evening.

Thank you.

Healthcare in India

Healthcare  in India   Healthcare sector in India is one of the most competitive ones in the world and Quality medicines and quality health care services in India are available at very affordable price in the world. The sector is growing at more than 10% per annum in the last few years and the growth is likely to be at 15% p.a in the years to come. The size of the industry is likely to reach $ 160 bn by 2017.   The planning commission has allocated $ 55bn to this sector in the 12th five year plan. This is a three fold increase from the allocation made in the 11th Five year plan. The 12th Plan focus is to provide Universal Healthcare, improve the Health infrastructure , promote R&D and develop Patient friendly  regulations.   The growth of this sector provides opportunities in many areas including, Hospitals, Pharmaceutical development, Diagnostics, Hospital Supplies, Medical Insurance,etc.   The contribution of each segment to this sector is as follows : Hospitals 71%, Pharmaceuticals 13%, Medical equipments and supplies 9%.   The contribution of private sector in this industry was 66% in 2005 and it is expected to increase to 81% by 2015. Since there are financial constraints in the public sector, Private sector was playing a major role in creating new capacity and the share of private sector will increase year on year in the coming years.   Due to change in life styles , the number of in patients getting treated for life style diseases is showing a rising trend and the share of these patients in admissions had already reached 50% and it is likely to rise further.   The size of the Hospital services was estimated at $ 54 bn in 2012 and the projections show that it is likely to double in four years . The growth of Hosptial services segment is likely to be around 20% p.a. going forward.   The factors driving higher growth in this sector include , increasing purchasing power , increased interest of private sector to start hospitals, Changing age profile, increasing penetration of Medical insurance and increasing awareness of health and health related issues among the consumers.   The demand for quality treatment is increasing in Tier – II and Tier – III cities and hospitals with good quality high tech equipments are being created to meet the demand in Tier II and Tier III cities. To encourage the private sector participation, the government has given a tax concession of five years for new hospitals.   The high quality service is also being extended through Telemedicine to rural areas and this business has already gained a critical mass with the size of $ 7.5 bn and this will grow at a rate of more than  20% p.a in the years to come.   The low cost advantage in Medicines and Medical treatment is a big advantage for India and the country is able to attract patients from across the world for various treatments. The increasing medical costs in developed countries offers lot of opportunities for Indian healthcare industry and like in IT, wherein India became the back office for the world, in Healthcare, India can become low cost provider of medical services for the world. The developed countries should look at India as a good destination for treatment and should help develop world class healthcare services to reduce the cost of their medicare.

India is emerging as a preferred location for carrying out R&D activities and the cost of doing R&D and drug development in India is much lower than the cost in developed countries. India has lot of advantages in R&D and this trend is being witnessed in creation of R&D centres in other industries also. MNCs around the world are setting up R&D centres in India, since India has the advantage of large number of trainable candidates coming from Higher education institutions.   To meet the emerging requirements, there will be a need to increase the capacity of seats in Medical colleges and to train large number of supporting staff. The efforts are on to promote the skill development in the country catering to the needs of this sector. Due to high demand supply gap, there are good opportunities in creation of educational institutions meeting the requirements of the emerging need in this sector. As per the estimates, additional 2 mn beds and 1.6 mn doctors are required to realise the growth potential in this sector. The estimated investments required are about $ 90 bn to achieve these targets.

The government has drawn up a plan to promote India as a global healthcare hub. To meet the global requirements, the entrepreneurs and government have to collaborate with the leading healthcare institutions and the Accrediting agencies in the world which will help to promote the India brand and India’s advantages. The cost of surgeries in India in many procedures are one tenth of cost in developed countries. By improving the quality of hospitals and services, India should be able to attract more patients from abroad.Medical Tourism Several key trends are giving impetus to the growth of India’s healthcare sector. Of these, medical city is relatively a new concept that offers immense growth opportunities, in addition to the medical tourism. India is also regarded as the most competitive destination with advantages of lower cost and sophisticated treatments. Due to such promising factors, the medical tourism has great potential in the country. The industry in India is pegged at US$ 1 billion per annum, growing at around 18 per cent and is expected to touch US$ 2 billion by 2015. India has witnessed an influx of patients from Africa, CIS countries, Gulf and SAARC nations, Pakistan, Bangladesh and Myanmar, who mainly come for organ transplant, orthopedic, cardiac and oncology problems. Apollo Hospitals has six tele-medicine (through video-conferencing system) centres in the East and North East India. Plans are afoot to add another 24 over the next couple of years. Government Initiatives The Government of India has decided to increase health expenditure to 2.5 per cent of gross domestic product (GDP) by the end of the Twelfth Five Year Plan (2012-17). Dr Manmohan Singh, the Prime Minister of India, also emphasised the need for increased outlay to health sector during the Twelfth Five Year Plan. Moreover, 100 per cent FDI is permitted for health and medical services under the automatic route. In a recent initiative, 348 essential medicines will now come under price control in India. These currently contribute Rs 13,033 crore (US$ 2.05 billion) to the total annual sales of Rs 72,762 crore (US$ 11.46 billion), according to market research firm IMS Health’s analysis. Some highlights of the Union Budget 2013-14 presented by Mr P Chidambaram, Minister of Finance, Government of India, for the healthcare are as follows: Health for all remains one of the priority sectors for the Government The Ministry of Health & Family Welfare has been allocated Rs 37,330 crore (US$ 5.87 billion). Of this, the new National Health Mission that combines the rural mission and the proposed urban mission will get Rs 21,239 crore (US$ 3.35 billion), an increase of 24.3 per cent over the Revised Estimates (RE) Rs 4,727 crore (US$ 744.41 million) for medical education, training and research In addition, contributions made to schemes of Central and State Governments similar to Central Government Health Scheme, eligible for section 80D of the Income Tax Act. Road Ahead The country's healthcare system is developing rapidly and it continues to expand its coverage, services and spending in both the public as well as private sectors. This is creating a large market for hospital information systems and other healthcare-related IT solutions. The favourable demographic virtues offer an attractive market for healthcare providers and investors in India. An increase in foreign investment inflows and private equity (PE) deals in the industry’s various segments have also been noted, in addition to the increased focus received from the Government. Exchange Rate: INR 1 = US$ 0.01574 as on September 12, 2013 References: Department of Industrial Policy and Promotion (DIPP), Union Budget 2012-13, RNCOS Reports, Media Reports, Press Information Bureau (PIB)

 

Healthcare is attracting lot of interest from PE players and out of total deals , more than 60% of investments by PE’s was in the healthcare sector. The sector is one of the attractive sectors for investment  in India today and increasing penetration of quality health services in India will go a long way in meeting the needs of the Indian population.

Value Creation - Strategies

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.