Kautilya: Know What Not To Be

India Today
October 5, 1998

KAUTILYA
Know What Not To Be

Global excellence depends on understanding core incompetence

Jairam Ramesh

Eight years ago, an India-born management professor created a stir in the pages of the venerable Harvard Business Review (HBR), the world's pre-eminent management journal. C.K. Prahalad along with his colleague Gary Hamel put forward the theory of core competence. This article has become the 15th most influential in the past 75 years of the Review. Prahalad wrote that the world's most successful companies are highly focused, have developed expertise in one or two inter-related technologies or lines of businesses and do not hanker after diversification. Prahalad went on to become a global guru. Faced with a whole new world after the 1991 reforms and seeking global pastures, some Indian CEOs quickly became proteges of Prahalad.

But now the core competence theory has come under attack from two young Indian dons at the Harvard Business School, Krishna Palepu and Tarun Khanna. Drawing on a variety of cases in India, South Korea and Japan, Palepu and Khanna warn in a recent issue of the HBR that in emerging markets and developing economies focused strategies do not make sense. They present evidence that diversification can be financially profitable, add value and help beat competition.

The timing of the Palepu-Khanna article could not have been worse. Hugely diversified conglomerates like Samsung and Daewoo are widely believed to have caused the financial mess in South Korea. Japan's Mitsubishi has long held a fascination for Indian corporate houses but what is not realised is that Mitsubishi reflects the peculiar political and social economy of Japan. Further, the examples of diversified and effective conglomerates in India given by Palepu and Khanna -- the Tata and RPG groups -- are themselves fighting for survival and are being forced to effect a fundamental mindset change.

The Indian companies on the global threshold -- Reliance, Bajaj Auto, Hero, Ranbaxy, Sundaram Fasteners, Infosys, Arvind Mills, Dabur, to name a few -- have all stuck to their knitting. But a number of Indian businessmen have never hidden their disdain for Prahalad. One Indian CEO who is in consumer electronics, white goods, oil and power once told Kautilya that his core competence is to start new businesses. Another top CEO who is in steel, power, telecom, shipping and mining told Kautilya his core competence is the ability to raise money for mega-projects.

Believing technology and management expertise could be acquired at the drop of a hat, Indian companies went on a dizzy, wholly unfocused diversification binge in the early '90s. This is at the root of our current industrial malaise.

True, it takes a while to develop a core or a set of core competencies. So what do Indian entrepreneurs do in the interim? Kautilya recommends a strategy drawn from ancient Indian thought. Our seers, when asked what truth was, replied neti, neti, neti -- not this, not this, not this. By this process of trial and error, the seeker of salvation was supposed to find the Ultimate. The ability to define core incompetence -- what not to do -- is perhaps more fundamental than the ability to delineate core competence. But for this to materialise in real life, policy has to be right.

First, exits have to be timely. They should be a purely bilateral issue between the management and labour. This is no prescription for a blind "hire and fire" approach. But haphazard exits are not protecting the interests of labour and are fuelling social tensions. The lack of a flexible, growth-oriented exit policy is only benefiting owners who find it profitable when their companies become BIFR cases. Hence we have sick companies but no sick industrialists. The Urban Land Ceiling Act is preventing generation of resources which can take care of labour affected by restructuring.

Second, mergers and buy-outs must be freely allowed, subject only to the discipline of the transparent takeover code that is in place. Contrary to fears, such a code has not led to a flood of hostile takeovers. Even so, there is pressure from Indian industry to dilute its provisions.

With buyback of shares on the cards, such a dilution would be totally uncalled for. And in takeover cases, the regulator, namely SEBI, must not take sides, a simple maxim it has forgotten in the Sri Vishnu Cements case.

Third, the way the Government and courts in the US have gone after giants like AT&T, IBM and Microsoft is a reminder that a market economy is based on laws which ensure that competition is both free and fair. India needs professional regulatory agencies that will enforce clear pro-competition rules and deter monopolistic, restrictive and unfair business practices.

Fourth, the floating stock in Indian companies is low. Even in Reliance, the most widely traded scrip, it is no more than 25 per cent. One of the reasons why the floating stock is low is because public financial institutions like IDBI and UTI continue to hold substantial chunks of equity in private companies. A three-year programme of divesting these holdings will not only subject the companies to greater market discipline but also perk up the capital market.

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

Issue Contents | Write to us | Subscriptions | Syndication