This
article reviews a recent book written book by Jim Collins, namely, “How The
Mighty Fall And Why Some Companies Never Give In.” The review is with reference
to the possibility of Great Indian Companies falling like the way the mighty
American companies have bitten the dust.
What are the chances of great Indian companies
failing in their efforts to scale up or sustain their past record? Are there
any chinks in their armour?
Jim Collins, the author of a seminal book Good to Great on 11 American companies,
has come out with a new book: “How the Mighty Fall and Why Some Companies Never
Give In.” In his well-researched book, he answers some questions on why great
companies fail, can anyone detect early signs of weakness or can they reverse
the course. The new book, of course, is written in the context of American
companies.
He argues that there are five stages of decline
for great companies:
o
Hubris born of success
o
Undisciplined pursuit of more
o
Denial of risk and peril
o
Grasping for salvation
o
Capitulation to irrelevance or death
After going through the book, I was just
wondering whether great Indian companies, like, Infosys, Reliance Industries,
SBI, ITC or Bharti Airtel for that matter, have got any cracks in their big
reputation or business processes/models.
No one can deny the fact that many Indian
companies have acquitted themselves well to the changed economic environment in
India
Let me recount a few such instances:
Larse
& Toubro: The company, in March 2008, reported a possible loss of Rs 200
crore due to commodity hedging by one of its foreign subsidiary (LTIFZE). It was obvious that this was due to pure
‘speculation’ by the managers in their foreign exchange operations. Many a
time, hedging is a euphemism for speculation. It was no wonder that a great
stock like L & T had fallen by 14 per cent on the day the news was posted
by the company on stock exchanges.
By the way, I’m not aware of any measures taken
by the company to avoid such mistakes in future. A cursory glance at their
Annual Report 2007-08 did not reveal any info about what kind of new risk
management framework was set up by the company with a view to avoiding the kind
of commodity hedging losses the company suffered in December 2007 through its
foreign subsidiaries; except making some routine and general statements. Surely,
the measures were revealed to institutional investors. The circumstances or
‘Black Swan’ events (huge volatility in commodity prices, etc) under which the
company made these losses was understandable.
However, the company could have been more transparent about its
operations and risk management policies.
Again some eight months back, the company as
part of its treasury operations bought equity shares of erstwhile Satyam
Computers with an intention to make a quick buck. When the latter’s share price
tanked after the massive Satyam fraud, L & T again bought more of the same
shares justifying its gamble as a ‘strategic’ decision – whatever they mean by
that. One could argue that now the price of Mahindra Satyam has gone up to
three-digit figures, L & T’s decision is visionary. But the post-facto rise
in stock price of Satyam Computers does not validate the bad decision made by
greedy and speculative financial managers of L & T.
It’s not my intention to discount the great
business model pursued avidly by Larsen & Toubro. My point is investors,
especially big institutions, need to constantly question the management about
their Risk Management policies.
ITC: The company has been
burning cash, for a few years, in its non-cigarette FMCG business. However,
it’s yet to reap any benefits from this segment. The company pleases the
investors by saying: “It’s brand building.” A few months back, its chairman, in
a leading business channel, boasts that their brands will serve the investors
“for two hundred, three hundred years.”
Investors need to be wary of such absolute statements by top people. Its paper
division is capital-intensive, hotels division is not doing any great things
(of course, due to the harsh business environment) and most of its profits are
from its cigarette division – its cash cow. As a conglomerate, the company has
been using its cash flows from cigarette division to build other businesses and
diversify out of cigarettes. There’s nothing wrong with that. All good or great
companies do that. But, investors would like to know the payoff periods from
its other loss-making or pedestrian profit-making divisions. It’s good to know
that its agri-commodities business is doing well now.
Bharti
Airtel:
The company wants to acquire MTN of South Africa in a complex process. May be, Peter
Lynch would dub such diversification as ‘diworseification.’
It’s significant that the stock price of Bharti Airtel is not going anywhere
for a long time. Companies, usually, are not good at utilizing their cash
surpluses in a proper way. The company will be better off if it concentrates
more on customer service, which is quite ordinary. Their emotional visual and
print ads appeal to lot of potential customers. However, the experience of
existing customers is less appealing. Is there any connection between the
quality of the company’s customer service and the falling ARPUs?
Statistics reveal that more than seventy-five percent
of all acquisitions/mergers end up badly the world over. One such great failure
was merger of Time Warner and AOL in 2001, which was dubbed as one of the
biggest mergers in those days. Only time will tell whether the merger of MTN
and Bharti Airtel will be beneficial to all the stakeholders.
I’m giving only a few examples. Many readers
will be aware of several such companies going for reckless speculation or other
practices inimical to the interests of the stakeholders. We have seen how the
mighty Hindustan Unilever has fallen from its pedestal with smaller and nimbler
companies nibbling away its market share continuously in the past decade.
However, HUL is trying to make a good comeback and I feel it’s a company to
watch in the next two to three years.
How the
fallen giant Xerox has risen from its ashes and the mighty Fannie Mae has
fallen from its grace:
As Jim Collins pointed out in its new book,
fallen companies have got the capability of rising from their ashes like a
phoenix. The author cited the examples of turnaround stories of Xerox, IBM and
HP in his book.
He has beautifully described how a great company
like Fannie Mae (the company had shown extraordinary performance between 1969
and 1999) has fallen from its grace extremely badly. But for the US
Ø Perhaps, Fannie Mae got
hammered down by an industry catastrophe
Ø Fannie Mae had acquired
a reputation for arrogance by the early 2000s enabled by its past success
Ø The company was blinded
by its pursuit of growth, without bothering about its increased risk profile
Ø Fannie Mae got embroiled
in wrong accounting practices
Ø It had developed a
missionary righteousness thinking it had got a special role in advancing the
American Dream of home ownership (what a joke!)
Ø It problems were
compounded by political pressures to help more low-income families become
homeowners #
# It’s very reassuring
to know that Indian politicians are not the only ones who play to the gallery!
More politicians are doing the same thing means that these politicians are
‘right’ in following populist policies while ignoring the fiscal pressures!
Wow!
“Bad decisions made with good intentions are
still bad decisions.”
- Jim Collins
|
Well-founded Hope: I would close my
thoughts with another captivating example quoted by the author in the book. His
succinct description of how the fallen Xerox Corporation has bounced back under
the leadership of Anne Mulcahy and made a profit of USD 1 billion by 2006 is as
follows:
ü Anne Mulcahy, the CEO,
didn’t take a weekend off for two years
ü She shut down a number
of businesses
ü She cut company’s cost
structure worth USD 2.5 billion
ü She turned down advice
from outsiders to cut R&D to save the company; and actually increased the
R&D expenditure as a percentage of sales
It’s no wonder that she was selected as chief
executive of the year 2008 by a magazine. May be, readers can update me on
whether the company continues to do well even now.
The contents of Jim Collins’ new book, “How the
Mighty Fall and Why Some Companies Never Give In,” are fascinating stuff. I
think Indian companies can learn some good lessons from the experience of
American companies – both that have fallen and risen. But history suggests that
we don’t learn from history!
I reckon financial professionals in India Bombay
I wonder whether there are any such books on
Indian companies.
Happy reading and investing,
Rama Krishna Vadlamudi
MUMBAI
Disclaimer: The author is an investment analyst, equity
investor and freelance writer. The author has a vested interest in the Indian
stock markets. This write-up is for information purposes only and should not be
taken as investment advice. He blogs at:
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