A summary of the talk delivered by Prof Jagdish Sheth under the Leaders Speak series held on 15 October 2007 at Chennai

I went to the states in 1961 and became a professor in two years without finishing my doctorate. John Howard was my mentor and I went to Columbia University with him, I came back to India for the first time in 1968 to teach at IIM Calcutta. Today I find that for an Indian to do well you don’t have to go abroad, now we can do well in India.

I am a refugee from Burma. I would be happy to be back in Kutch, Gujarat. I come from a Gujarati family where education is not important but business ownership is more important. The best entrepreneurs are all college dropouts. They are driven by what they want to do and not by education. Exceptions are of course technology people. It was Chennai which realised my potential out. As I was a good student, I was allowed to study. I wanted to be a CA. I loved accounting. Gujaratis working for someone is considered dumb and working for no money is more so. They sent me to America. If you take a grain of wheat and make it in to a loaf of bread, the value add is about 4 to 5 times. If you take a rough diamond and polish it, value added is 15 to 20 times. If you take a human being and polish him with education, nurturing, either as employee or as a child, the value add is infinite. That is the power of India. We have a talent which now is becoming globally recognized.

Self destructive habits. This came from most insightful question I have been asked by CEOs of many companies. And experts like Dr C K Prahlad became advisors to companies. The question he asked was why companies fail. I thought companies were immortal, humans are mortal.

How many of you remember Metal Box, one of the best companies in Calcutta. ITC is only survivor from those days. So why would companies fail? It is universal, doest matter whether in India, or Japan, Complacency. Bad habit; you acquire. Complacency comes out clearly as one of the seven bad habits. They don’t have the vision. But key point is, they are unable or unwilling to change with times. Inability I can understand, but unwillingness is more surprising.

There is the story of most successful entrepreneur who created a multi billion dollar business, only company to compete against IBM called Digital Corporation. Brilliant scientist from MIT, and he simply refused to listen to his own people. All the outside consultants, his own board members, said PC will take over the function of mini and main frame computers. And he simply said impossible. Said PC is a toy. What does that tell me? Often we create basic belief systems at our educational level. We are brain washed by our professors who say this is the right theory. He could never imagine that a PC could do a job of a main frame or mini computer. Infact, he goes the other direction deliberately by investing billion dollars in trying to create a super computer and collapses completely. He is still alive and kicking. I watched the trend about this company. There was Dr Wang, he is hardcore American Brahmin, intellectuals, they are unwilling to change.

My second story begins with IBM. I had interviewed John Ackers for a telephone company as the CEO of customer company on how to motivate people. We were in his office. The Camera was on. When we finished interview, he says do you know when I close that door, I am so irritated that I pace around my desk as a caged animal as I am not able to make any difference in my own company. Often CEOs despite their own powers do not have leadership to transform their own company. The bureaucracy took over. Finally board woke up, got in an outsider, Luge Hushner, brilliant CEO and transformed IBM within 44 months. Internal succession planning began to haunt them. This is often very true by Indian setting, especially family businesses. Something that jolts the group. In the group there is crisis management like the Thapar group. Now there is a young person called Gautam Thapar who has totally transformed the company. Have you seen the value creation he has done both on BILT and Crompton Greaves?

Same thing with Kumaramangalam. He brings in a professional to support him and transforms the company. He has diversified into newer businesses. In the stock market, it is not Wipro, TCS that is moving the market. It went up because mundane industries like steel are announcing their performance. India will get globalised much faster than imagined, not thro export oriented economy. But by major acquisitions of foreign large corporations. Hindalco buys largest company in America, you hear Corus steel, Mittal. Consolidating worldwide position will be considered. World will wakeup and say wow, I never thought an Indian company can own a European company. Governments of those countries will allow an Indian corporation to buy them. So rupee has to rise. I have been forecasting rise of rupee for sometime. There is no change back again the other way. Rupee will get hardened as a currency. You have to go through gradual process of reforming the currency.

Most insightful question, why good companies fail. Lessons of management and leadership that we learnt today don’t seem to work for these big companies. The 1970, fortune 500 list had already vanished by 1983. Now it is less than one half of the fortune 500 list in 1970, as newer companies have become a part of fortune 500. Nobody thought of Walmart, Google, Microsoft. Average corporate life expectancy in Japan and Europe is now down to 12.5. US is about the same. For example, with the EU that took place, one market regulation changed from 45 years of life expectancy of a German company, it is now down to 18 years and this data is slightly older. British have the most dramatic one. Life expectancy is down to 4.5 years. This year more than 50 percent of large British companies are all owned by non-British. They believe that foreigners will revitalize those companies. They see more asset value in those companies than the original owners.

Most of this arises because, on the way to success, I have taken the analog of the human body. In other words, we become more successful and affluent we acquire bad habits. Just like what we know what we should be doing, like diet, exercise, we are not doing it is obvious. Once we get in trouble we change,. For example, early warning signs are there, but I don’t do exercise or change so I get mild heart attack. Within one week, all bad habits are gone and good habits come in. Have you seen these guys start walking. They eat bread with no butter. So it is possible to change. Humans are the most versatile resource that can be molded which is interesting, that is the main message. Therefore the role of the CEO of a company or his leadership is like a doctor. Like a doctor, first principle of Bhagvad Gita and other religions, detached commitment - don’t get emotionally attached to the business. Doctors don’t get attached to the patients. So they are much more objective.

The worst thing you can do in a company is to put balanced scorecard as a technique. That will not diagnose the real problem. It will tell you if what you are measuring is ok. Indian doctors are trained to first look at you and say if everything is right. Older traditions, ayurvedic guys are master at this game. They will then talk to you; they have the time to talk to you. it more clinical approach to leadership than makeshift approach to leadership. Boards of company and compensation committee in America, manipulate the numbers to make sure that they get the salary bonus and stock options. What does this mean in leadership? I found this guy who asked me the question, observed him and found that a typical CEO in America is driven by a chauffer, is insulated from the environment. Goes through elevator or lift, goes to his room and is in ivory tower. Everything comes to his office is pre authorized by his directive force and they only allow him to see things they have predetermined. He is in a farce of reality. So we have mandated now that CEOs have to take time out in the field and touch five stake holders that determine the future of the company, customers, employees, suppliers. Community in which you are putting your resources, people in charge of community are you pleasing them or not. And investors.

Here are seven bad habits –
We are suffering from arrogance. With success Indian corporation, Indian entrepreneurs and students are the worst and are getting more arrogant. Especially at the top schools, they think they are demi Gods. It is self-destructive. Never works if you are arrogant.

Denial of new reality is another one. Three kinds Disruptive technology – like PC, or cell phone. They believe that only way you can house intelligence is in the central office. They deliberately keep it there , distributed the intelligence. That’s what happened in cell phone. As powerful as microprocessor mode, shifting power of PC , from PC to mobile phones. Telephone guys used to laugh at them. Technology shifted to edge of network. Core competency goes. Same thing analog to digital – radical change. There are hardcore engineers who believe that analog is a superior technology. Then, HP comes in with digital instrument to measure, Japanese follow up, then the company goes bankrupt.

Compentency dependence. Compentency may become your change. Infact, more competency specialist you are, less you are able to do anything. Competitive myopia. Customers don’t care whether you are in rail road, bus, customer just wants transportation. Rail roads don’t know how to run buses. I have seen companies getting destroyed in the US due to diversification. CBS, a TV company, says we are in the tent and recreation bus. They go and buy out coffee centre, resorts, publishing company and collapse financially. It was followed by NBC, ABC, they collapsed. United Airlines they actually diversified, bought hotels they collapsed. License raj is gone, the right strategy would be to diversify into as many businesses as possible, as under license raj you have the political favor in your favor. After you get the political signals right, grab the opportunity, and as you have capital, you can go from steel to a tea to a cellular company. But in a deregulated economy, there is no way you can fight competition. So you begin to reduce the number of businesses. Aditya Birla reduced to 6 businesses, GE has reduced from 100s to 12 business groups. That’s the competitive myopia. We really must not become myopic about who is our competitor. Beginning is like a marathon running. Everyone is running. In marathon you need stamina, and it comes from complex carbohydrates or pasta. Pasta in a start up business is money. Couple of them in front and on the side is the only competitors. IBM focuses on Accenture.

Any company that has a dominant market share, above 50 percent, always have inherent cross subsidization. They cross subsidize some customers, some products. Ernst & Young, on the CPA side. There have 4000 clients worldwide. 20 percent of your customers in this case have 80 percent of your revenue. Cost of serving those customers, comes down gradually. In this case, they were profitable in less than 400 accounts. Work in progress, inventory, sale of asset etc. here you had to do CA by account and not by products. They sell this technique called ABC. I said you guys are not using on yourself. If you did that, you find less than 400 clients are profitable. Today if you are small to medium sized, publicly listed company they don’t want to do work for you. For them today largest account is Coca Cola. It is cross subsidization that makes the difference. And always in cross subsidization, the little guy is the loser. You may be the lowest cost producers, but who cares as the concentration of profits is in a handful of accounts. Major Civil aviation Industry has left 5 percent market share to a new entrant like Air Deccan here. What is your cost strategy? How do you capture share, Price. You drop price, almost unthinkable, Ryanair just announced that they would cross Atlantic from Europe to America for 20 pounds. They say they have captive passengers for 6 to 7 hours. It sounds like a shopping mall. Do you get charged to be there. Shopping malls recover their cost through the margins built into the merchandising. IA and JA are losing share. They are big boys. They have 60 percent. What would they do? They drop their price. If they drop their price they will lose more money. It is no win situation., worst thing they can do.You have to do reversal. Raise the prices and selectively reduce price for those customers or routes where you have competition.

Turf wars. Every successful company has enormous turf wars because I find that companies actually are designed by the same market. It is a 50 storey building. 50th storey is a common lobby. You have towers, tower A is engineering, B is manufacturing or operations, C is sales and marketing, D is customer support. There are other towers like product management. You have IT , finance, HR. They all hang around outside the lobby. There are smoke free rooms. The boss at the top of the function says, if you communicate without my awareness I will kill you! There are couple of months in a year you can get on the lift to get the approval. Those are budgeting months. They are all fighting for hare for capex power, operating expenses. They put up a task force. You put an engineering guy, along with manufacturing, sales, customer support. It is easier to get German and French together, but hard to get an engineer and a sales guy together. Rather than cooperate, they fight among themselves. This is the disfunctionality of task force and that’s the turf war. And in India the turf wars are not CEOs and professional bureaucrats but the family. Sons and son-in laws disputes, so there is a break up. TVS and Bajaj, Birlas have gone through all these. They basically divide themselves. It works. Take Reliance Ambani brothers, by separating they did better.

Role of leadership is like a medical doctor. Watch for the non-traditional. Just like in the body something is happening that we don’t know, and suddenly we find that we have BP, cholesterol or arthritis, it could happen either aging, or physically picking up bad habit, and your job as a CEO or as a leader is to break that habit. Focus on that one as if it is the most critical thing you would do. Do not delegate that responsibility. Problem with transformation is that if you make it more like crisis management, no one joins you. In adversity situation, how can you make it energizing. Role of leadership is active intervention all the time.