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ShareThe rapid rate at which western icons are biting the dust suggests that we need a new formula for corporate success. While conglomerates are going the way of T-Rex -- GE is the latest one to unravel -- it's not as if other ways of running companies are faring any better.
Every management guru claims he has found the ultimate formula for corporate longevity, but the "winners" they write about wither on the vine. From the path-breaking In Search of Excellence, to Built to Last, to the myriad books on individual corporate success stories (The Toyota Way), all have failed -- or are about to fail -- the ultimate test of profitable survival.
From this, one would conclude three things. One, all success is temporary. Two, luck plays a big role in success. Three, no approach or strategy works forever. Everything has to be re-evaluated constantly; new skills have to be learnt; old shibboleths abandoned.
The first proposition is obvious from the failure of the biggest banks and manufacturing companies (GM, Chrysler) in the current meltdown. Even Starbucks is tottering and Toyota is making losses.
Luck, too, is easily explainable. Microsoft became the world's largest software company because IBM foolishly handed it the rights to the PC operating system. Bill Gates merely used Microsoft's stranglehold on the desktop to perpetuate his profit mantra.
India's offshoring strategy was created because the US would not allow enough Indians to work onsite. Then Y2K came along and showcased Indian coding expertise to the world. Sure, you have to be smart to harness luck. Google leveraged its prowess in search technology to earn high revenues from online ad placements. But both Microsoft and Google are one-trick ponies.
If we accept the first two, the third proposition is a no-brainer. No strategy works forever. Companies that want to survive must change strategies when conditions change. This is where we come up against the first rule of failure: Success blinds you to changes in the environment.
A case is point is HDFC, a successful housing finance company with a declining future. HDFC's initial success was built in a competition-free field. Banks were unwilling to finance middle class housing. Today, that is no longer the case. Every bank is throwing money at home borrowers. Even in a recession, SBI is offering loans at 8% when HDFC is raising deposits at 9% or more. Lending to home buyers is a plain vanilla banking activity. It doesn't need an HDFC.
In short, HDFC is an accident of history. Today, it should be selling its assets to HDFC Bank and converting itself into a property services consultancy, earning fee-based income, including commissions from originating housing loans. Instead, the opposite is happening: HDFC Bank is earning fees and HDFC is funding the loans. Both parent and subsidiary are losing out!
The HDFC case illustrates why companies succeed and why they will ultimately flop. Its success came from its focus on a neglected customer segment: the home buyer. In the initial years, it had to vertically integrate a funding operation into its business model because no one was lending for housing. Today, when everybody is doing so, HDFC should be exiting this part of the business. If it did so, its margins would be better than HDFC Bank's. Now it is significantly lower.
A key contributor to failure is almost always a lack of focus. This happens when firms either integrate vertically (as HDFC did, and as Reliance is doing in the petroleum business), or horizontally (by expanding into unrelated areas).
Horizontal diversification is driven by greed and fear. Companies diversify away from the core because they see an opportunity elsewhere (greed) and/or fear that their existing business risks need to be balanced by holding a varied portfolio. ITC, which makes tonnes of money on cigarettes, tries hard to lose it in other businesses like FMCG; AB Nuvo, which is into everything from telecom to viscose staple fibre to fertiliser, is a shareholders' nightmare.
Perhaps the only sensible way to run a diversified portfolio is to break it up into bits, and float each one separately. This way each business will sink or swim on its own, and, for that reason, it will work hard to succeed. Cash can be rationally allocated to businesses that are succeeding and withdrawn from those that are not.
The future of the diversified corporation may thus be a simple holding company structure where every business is treated like a separate venture, and each has its own shareholder and customer focus. This way success and failure would be easier to identify. An added advantage: You can house incumbent businesses and incubate their future rivals, insuring yourself against disruptive ideas.
