Risk Management in the Public Sector - Emerging strategies in India

What would be the competitive environment in the decade of 2010s?


In a rapidly growing market, well managed companies grow, some faster and some slower. However during the last 3-4 years, the pace of growth by certain Indian companies has been nothing short of dramatic. A few have had this growth on the back of global acquisitions as is the case of Tata Steel’s acquisition of Corus and now are in the Top 10 list of global steel companies. Most however grew through Greenfield expansion and taking its accompanying high level of risks. However whatever may be the mode of growth, this period seems to favour proactive companies with a larger than average risk appetite. Also as they progress ahead with their bold objectives and initiatives, their growth is also impacting the leadership status within their industry. There has been a reshuffle at the top in certain industries, which over the coming years is expected to be seen across various industries. The second observation regarding the shuffle at the top is that the displaced companies may end up coming down more than a few notches. For e.g. MTNL was till sometime back a monopoly in telecom. Its 2009-10 turnover of Rs 5,000 cr is small when compared to Rs 40,000 cr of Airtel. So is the case with Goodyear whose turnover has been static over the last few years at Rs 1,000 cr. and is small vis-à-vis Rs 5,000 cr of Apollo Tyres. This in spite of Goodyear having been an industry leader in India for half a century, has global level relationships with auto majors who themselves are doing extremely well in India. It is quite evident that the business environment of this decade will judge harshly. The slow growing companies would carry the risk of being marginalised and an inconsequential competitor. Hence in the coming years pace of growth will matter.

The next question that moots an answer on the business environment of the next decade is on the expected level of competition? Competition formally entered the Indian markets post 1991, and now after two decades it is entering a maturity phase wherein industries are exhibiting the classic three layer segments, viz. leaders, the middle segment & the marginal players. What does this mean? That marginal players would fade away fairly quickly, while the middle segment must have either a differentiation strategy (offering products with different features than competitors) or a focus strategy (concentrating on a particular group of customers, geographic markets, etc.) to exist. The Indian market will continue to remain price sensitive, leaders would continue using cost leadership strategies, viz. forward, horizontal, backward integration strategies to gain cost leadership benefits. The CPSEs are well versed with these strategies. But this is not going to be enough. Cost leadership which is a generic strategy would now need to be pursued in conjunction with differentiation. Large number of cost elements affecting the relative attractiveness of generic strategies would need to be zeroed down to and a differentiation strategy crafted into the generic one. Aspects to be studied could include economies or diseconomies of scale achieved, learning the experience of curve affects, impact of the percentage of capacity utilisation achieved, dynamics in linkages in the supply chain, etc. Also addressing the risks of pursuing cost leadership whereby competitors may imitate the strategy, thus driving overall price points down or that buyer interests may swing to differentiating feature other than price.

Another aspect that may need to be mastered are the three grand strategies which are the classic moves that companies use in a competitive environment, viz. Expansion, Stability & Divestment strategies

The above would be the standard strategic management approach followed in an environment maturing to competition and market forces. However the situation here is far more dynamic. The African market still has to have depth and the Chinese market has domestic companies who are global cost leaders. With Indian economy growing at one of the fastest rates on a year-on-year basis, global players want to be here and have demonstrated their willingness to compete fiercely for market share. So in this fiercely competitive environment what are the main challenges & opportunities for CPSEs and what should the responses be? Fierce competition is the big threat but along with it goes the opportunity in the form of business cooperation. Already the Public Private Partnership (PPP) as a way of business collaboration is showing very good progress. This is taking many different shapes. For e.g. PSUs are in JV mode setting up ash based & slag based cement plants with Private Sector to unlock value from what has so far been treated as waste. CPSEs could quickly start looking at cooperative network of business as the Kieretsus model e.g. the cooperation between say BHEL & SAIL where BHEL sells turbines using steel made from SAIL. The Kieretsus model could be extended to partner with private sector players, cooperation between similar business enterprises as Tata Motors is doing by selling FIAT cars through its dealer distribution network.etc.

If a Strength, Weakness, Opportunities, Threat (SWOT) analysis is done for the Public Sector then two observations come out clearly. A sizable number of CPSEs are leaders in their industry. Also Government policies are moving towards giving them more autonomy and through selective divestment mainstreaming CPSEs by increasing public participation. Although there still exists multiple oversight boards along with duplicity of accountability & reporting, however the Government policy is moving in the right direction for unshackling CPSEs for competition.

What are the strategies that the CPSEs should adopt?

If Business Cooperation is the strategic intent to competition, then the CPSEs need to bring strengths to the relationship of a quality whereby it is seen as the strong partner. Looking at the 5 factors of production viz. land, labour, capital, entrepreneurship & knowledge, the CPSE has the ability to turn each one of 8them as a competitive strength and should frame strategies to do so. Some thoughts in this direction are as under

1. Land: Land acquisition is the biggest bottleneck being faced by new entrants and is a show stopper in mineral based industries. There have been many cases in the recent past where projects have been delayed or shelved in these industries as the companies including new entrants MNCs have not been able to acquire the requisite land. On the other hand many of the CPSEs hold sizable land banks and this could be one of the set of valuable resources they can put on the table while entering into JVs with such new entrants especially those who have innovative/critical technologies. For e.g. POSCO has been trying to set up a Steel Plant since long and has been relatively unsuccessful in land acquisition. As per recent press reports BHEL was reportedly in talks with SAIL & Vizag Steel to tie up for making high grade steel while POSCO may join the proposed JV as a technology partner. More of such cases would happen in this decade. Hence CPSEs would need to look at its land base as a critical resource. In their portfolio there could be some land which is under dispute, encroached upon or has been offered by the concerned authorities for a project but not acted upon. Such cases should be looked into and suitable action taken to make available clear title and unencumbered access. Also it may help at times for CPSEs to exchange land and related resources and as such an exchange mechanism could be created to facilitate this.

2. Labour: With the current rate of growth in GDP it is now well established that the coming years would see a sizable skill deficit whether in the form of availability of professionals or skilled tradesmen. The Government is also trying to address this problem as part of the five year plan agenda. In recent times we have seen a very sharp rise in demand and salaries of civil engineers, metallurgists, doctors, fitters, mechanics, nurses, etc. as and when activities in that particular sector are increased rapidly. One of the common pools where the Private Sector taps into is employees/ex-employees of Public Sector. Some CPSEs on the other hand are in the downsizing mode and also at times pay very large compensations under the voluntary retirements schemes. The Public Sector through a network may want to formulate strategies to deploy these resources. At times the same people perform exceptionally well in a different environment. In the past staff has been seconded /sent on deputation to overseas locations by CPSEs. There is also an opportunity for providing skilling &training facilities for the industry at large. Industry specific courses can be looked into. NTPC has a Power Management Institute at Noida, where it offers various training programs mainly to cater to the Power sector. Participants are from all over including the Private Sector. Hence a new look towards the HR at CPSEs is in order. In some organisations which have a well-established & structured activity, HR can over time become a profit centre.

3. Capital: With India’s capital & asset market expected to offer consistently better returns during this decade, Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII) into India are reaching record levels every year, and this trend is expected to continue. Interestingly availability of capital to Indian companies is not expected to be a bottleneck in this decade but what could be a problem may be an over supply in the form of excessive capital flows thereby strengthening the Indian rupee or making Indian exports expensive . To get the full benefits in terms of lower cost of capital the shares need to be listed across global stock exchanges. CPSEs owing to their size are ideal candidates for such listings. Hence they should have such a strategy to aim at lower cost of capital.

4. Entrepreneurship: Indian Entrepreneurs & Global mangers of Indian origin are at the forefront of creating/managing global businesses. Many are keen to associate with the Government to help find solutions. A recent example is of Nandan Nilkeni at the UID program. As a strategy it would be useful to invite such Entrepreneurs on the Board of CPSEs

5. Knowledge: PSUs are operating in the Indian market for decades and have a good knowledge of customers, suppliers, distribution networks. Also in the area of Corporate Social Responsibility &Corporate Governance they have in-depth knowledge and experience. They have a structured way to imbibe ethical behaviour and model code of conduct. CPSEs do not have a trust deficit in areas where they operate as they have demonstrated time and again their ability to balance the various interests of the different stakeholders. Hence it can be said that they are practitioners of the Indian style of Corporate Governance and hence should make model strategies which then become synonymous with the India Brand on Corporate Governance.

In summary:

1. The pace of growth matters. Growth levels has been different for different companies which is having a significant impact on the companies and their stakeholders

2. This decade will see fierce competition in the Indian market, with products and services being flooded from all types of players

3. Public Sector the globe over, is not particularly known for their proficiency in handling severe competition and hence should look at opportunities for business cooperation through PPP and JVs.

4. For this they would need to have a competitive advantage in one of the factors of production which they would bring to the collaboration

5. An in-depth study of the factors of production, viz. land, labour, capital, entrepreneurship, knowledge should be done to see where a competitive advantage can be drawn upon and strategies formulated to develop these strengths.