The Indian Institute of Business Management & Studies
SUBJECT: Managerial Economics Marks:100
CASE – 1 Dabur India Limited: Growing Big and GlobalQuestions1.What is the objective of Dabur? Is it profit maximisation or growth maximisation?Discuss.Answer :
The objective is to “
significantly accelerate profitable growth by providing comfort toothers
”. It is growth maximization because for achieving this objective Dabur aims to:
Focus on growing core brands across categories, reaching out to new geographies, withinand outside India, and improve operational efficiencies by leveraging technology.
Be the preferred company to meet the health and personal grooming needs of targetconsumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.
Be a professionally managed employer of choice, attracting, developing and retaining qualitypersonnel.
Be responsible citizens with a commitment to environmental protection.
Provide superior returns, relative to our peer group, to our shareholders.
2.Do you think the growth of Dabur from a small pharmacy to a large multinationalcompany is an indicator of the advantages of joint stock company againstproprietorship form? Elaborate.Answer:
While opting company form of business, the entrepreneur should clearly gone throughthe distinction between company with partnership form of business. The next step arises aregard to why to go for company form of business. [ The following points depicts theadvantageous points of this form of business. Advantages of Joint Stock Company: (1) Hugeresources: A company can raise large amount of resources from the genera public by issuingshares. Since, there is no maximum limit of the number of shareholders ii case of publiccompany, fresh shares can be issued to meet the financial requirement. Capita can also beobtained by issuing debentures and accepting public deposits. (2) Limited liability: The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company. (3) Transferability of shares: The shares of the public company are transferablewithout any restriction. A shareholder can sell his shares at any time to anybody in the stockexchange Therefore, the conservative and cautious investors are also attracted to invest in theshares of public company. This brings liquidity to the investors. (4) Stability of existence: A joint
By now, the case study highlighting the contrasting fortunes of iconic film company Kodak and its arch rival Fujifilm has become a virtual business parable on what the unsparing speed of technological change can do to a company if it fails to adapt quickly enough. Kodak, one of Fortune's 'most admired' companies and a household name, simply wasn't nimble enough to adapt to the digital era and went bankrupt. Fuji, by contrast, threw down several bets on a variety of businesses, struck gold with its chemicals-to-cosmetics play, and thrived.
Indian IT -- comprising of Big 4 firms such as TCS, Infosys, Wipro, and Cognizant, and smaller ones such as HCL, TechM, Mindtree, and Mphasis -- now finds itself squarely in the middle of a similar tsunami. Almost overnight, its bread-and-butter businesses in infrastructure maintenance, application development, and software testing -- those that spawned a technology revolution in global delivery of software solutions leveraged by cheap, skilled Indian labour in the early 2000s -- is fast fading, upended by the world of digital, cloud, mobile, and artificial intelligence. Infrastructure is now taken care of by global giants such as Amazon, Google, and Microsoft, while marketing, sales, productivity, workflow, CRM, and analytics are mostly handled by a whole host of cloud vendors of varying sizes and expertise, from Salesforce to Workday.
The cloud, in particular, has transformed both the way corporates function today and consequently the business models of Indian IT firms. Gone are the high-end $200 million mega-SAP deals. What you're more likely to see is a profusion of smaller sub-$1 million cloud hosting deals causing carnage within the sales strategies of Indian firms. The opportunities in this space are huge. Last year, Gartner predicted that more than $1 trillion in IT spending will be directly or indirectly affected by the shift to cloud during the next five years.
However, data from UK-based research firm HfS shows that out of 121 cloud deals in 2016 that had a total contract value of over $8 billion, TCS was the only Indian company in the top five with 5 percent of the market.
"Problem is, just because deals got smaller doesn't mean they didn't get more complex," said Phil Fersht, CEO and chief analyst at HfS. "Cost of sales is harder. Winning deals is harder. You talk to people who work for these companies and they will tell you that it has never been as high pressure as it has today."
A changing paradigm
This kind of pressure has a lot to do with coming to terms with the basic economics of a cloud deal.
"Earlier, the HR implementation on a Oracle or a SAP deal would be 18 months. Now it's nine," said Rajesh Ranjan, a partner at research firm The Everest Group.
"This means that the implementation fee has also come down by 50 percent. Moreover, ongoing support and maintenance are also slashed by as much as a third in this model," added Ranjan.
These new-era numbers have had a major impact on Indian firms. Once used to basking in gaudy revenue growth rates in excess of 20 percent just two short years ago, Indian IT firms are now posting a paltry 5 percent thanks to a 3 percent revenue growth rate decline each year in their traditional business, which still makes up at least 75 percent of their revenues.
Only half of the remaining 25 percent dubbed 'digital' is money made from cloud implementation. Compare this to Accenture, which is predicted to outstrip its Indian peers in revenue growth at 6.85 percent in 2018, versus 5 to 6 percent for the Indian cohort, despite being twice as large -- it currently gets up to 50 percent of its business from digital.
"I think the Indian entrepreneur is pretty good at working a demand curve," said HfS's Fersht. "They will milk something as long as they can until it loses money. They won't change the model until they really have to."
In the short-run, sticking with the old model may seem to be not such a bad idea. Today, that old model is still oozing easy money although the gusher of yesteryear is now slowing down to a trickle. By deploying robotic process automation (RPA), Indian IT firms are beginning to let machines take over structured tasks and support their vastly reduced 5 percent revenue growth rates with the same kind of profit margins they once enjoyed. The fallout -- a 28 percent culling of the existing workforce by 2021, according to HfS's estimates -- is something that they won't have to agonise about beyond managing a public relations fallout.
For existing IT employees, however, it could be nothing short of the apocalypse. This new world is not about learning new programming languages or platforms like in the past. It is about intensive research skills that can cater to big data, AI, and machine learning, and much of this cohort is badly out of its depth in these areas.
"I tend to believe that 60 to 65 percent of them are just not trainable," said Capgemini's India head Srinivas Kandula at an industry summit earlier this year, pointing out that most of whom he was talking about were senior level employees to boot. A recent report by consulting outfit McKinsey & Co adds to this dire scenario by predicting that approximately half of Indian IT's 3.9 million workforce will be irrelevant over the next three to four years.
Already, signs of this are rife across Indian tech hubs today as mid-to-senior level managers are showing up at work to discover not only do they no longer have a job, but that their prospects in what they believed to be vibrant industry that would employ them throughout their life are suddenly very bleak to non-existent.
As far as their employers are concerned, avoiding planning for a much-needed pivot could be a grievous mistake for Indian IT firms. Yes, there will always be a need for a systems integrator. Corporate transformation projects seldom allow for a greenfield cloud proposition and instead require more of a melding between cloud-based and legacy services. Still, if these IT firms were to take a peek at the rapidly shifting landscape surrounding them, they'd be alarmed by what they see. The elephant in the room, Amazon's AWS, is redefining what a company can do in the public cloud by offering services across IaaS, PaaS, and SaaS. This shark can eat anyone's lunch on a given day.
There are so many other speciality outfits available for between $250 million to $1 billion, from a Workday, to a Zoho, to a Marketo, that are soaking up much of the globe's money that should be coming to Indian IT firms. Why would you, as a corporate client, want an originally-architected cloud solution from an IT services firm in India when you can get the same firm to stitch together some of the world's best tried and tested solutions in the cloud across functionalities for a fraction of the price?
Instead, the real opportunity could be sitting right there under their noses.
"The BPO skill set can be a great one," observed Ray Wang, founder of research and consulting firm Constellation Research. "Today when you go to a hotel, who handles your internet connection? It's some company in Romania or potentially India. It's a massive IoT outsourcing operation, managing the cooling and elevators and electrical sensing for companies, and eventually for smart cities -- that's a gigantic market to be created."
"But IT companies are afraid to make bold moves and shareholders are afraid to make bold moves."
For this to happen, Wang believes that Indian firms have to grab opportunities as they come and build their own IP in new areas.
"Are they going to be slaves to the cloud computing providers or are they able to build out their AppDev practices in order to counter the cloud onslaught and deliver something that customers are willing to pay for?" asked Wang.
After all, the essence of cloud computing means that integration will eventually play less and less of a pivotal role in the future, with more control accruing to the vendor.
Buying Yourself Out Of Trouble
One way to instantly establish great abilities in new areas is to emulate Accenture's spectacular track record in acquisitions. The firm has dished out more than $900 million in each of the past two years for a dizzying number of companies, 15 of which were made in the last year and provided 2 percentage points of fuel out of its 6 percent growth, according to analysts. It plans on another $1.8 billion shopping spree this upcoming year -- more than the $1.66 billion that TCS, Wipro, and Infosys have together spent in the past three years. No wonder Accenture is predicted to post 6.8 percent growth in August 2018 while outstripping its smaller Indian rivals. Of course, analysts are concerned that the firm may not be able to properly digest and integrate this plethora of sub-200 employee acquisitions, but for now the news is more good than bad.
This is one way that Indian IT can save itself -- by buying into new markets that come with new-era customers who are growing rapidly and therefore have the money to spend. Yes, Wipro did fork out $1.14 billion for five firms over the past 36 months, but has shelled out only $8.7 million on one company in the past eight months. Infosys hasn't made a purchase in 20 months and TCS hasn't done anything at all in recent memory. This is despite sitting on $5 billion cash hoards each before being pressured to issue stock buybacks recently.
So where does that leave Indian IT?
"I really do believe that the top 20 providers will become 10 or less in the next 18 months," said HfS's Fersht. "There are simply too many suppliers chasing too few deals. You will see the emergence of different players with new names and brands. Most of the leaders are going to be involved in consolidation."
"Winners will be those who do it quickly, smartly, efficiently, and ruthlessly, and stay very focused on the execution as well as the bottom line," he added.
Experts like Fersht also predict the rapid emergence of new power players in the cloud arena who are smaller and more focused on one process or delivery with a revenue base of $20 million to $30 million but growing rapidly. Some of these range from OneSource Virtual, which provides outsourcing services that plug into your Workday application, to CRM expert Zoho, to those in the investment banking and insurance spaces. Many of these could very well be the acquisition targets that Indian IT desperately needs.
So are there any positives for Indian IT amidst this tale of woe?
"I don't think the pace of change is quite as fast as everyone is saying," said Fersht. "A lot of it is driven by social media, panic, and clients who are a lot more aware these days about what is going on." Also, there are a lot more approachable clients out there than before.
"SaaS is creating an opportunity for the acquisition of new clients of all sizes. It is casting the net wide," said Everest's Ranjan.
The flipside of this is that in this new era of democratization at the work space, people at all levels within the company are often making decisions to purchase and deploy cloud and digital applications as they see fit. This can cause havoc with an IT services sales model that has been, until now, used to working in silos and landing business accounts via the apex of the hierarchical pyramid.
Another problem is that Indian IT doesn't know how to speak the language of consulting, an arm that is rapidly becoming the engine house of IT services practices and responsible for landing transformational projects.
Consulting arms at the top global IT companies are growing at 30 to 40 percent rates and bringing in a third of overall revenue, which is why they are the linchpins of new business. If you look at the top consulting companies in the world, from the Bains to the McKinseys, they are flooded with Indian engineer MBAs -- just the kind the Indian IT firms now desperately need. Yet, Indian IT is woefully short of these products and may find breeding them from the ground up an impossible task.
Quite simply, services firms have been used to speaking the language of products and features. They've become used to being given a problem to solve. That no longer works.
These days, business heads want to be approached with an array of out-of-the-box approaches that detail how cloud can help boost sales, establish dynamic pricing, target customers more effectively while reaching new ones, and streamline processes -- a kind of proactiveness that is simply not yet deeply ingrained in the DNA of Indian services firms.