Learn lessons from past recessions, says Mrityunjay Athreya
December, 26th 2008
The current global economic downturn takes me down memory lane. The first recession that I experienced and observed personally was in 1966-67.Since then I have been several.While there was been much pain in the various recession,they have also also helped to refine the Indian managerial competencies to the point where it can go for aggressive growth, and a global footprint.
The recession of 1959 : There was a recession even before 1966, in which I was not an actor, but a student. In the second Five Year Plan, India went through a foreign exchange crisis. Growth targets had to be lowered, partly because of our import substitution model. We failed to participate in the global trade boom of 1946-1972 , when trade grew at 16%. One macro lesson has been that an export-promotion model is better for a Least Developed Country, especially in the early stages of development. It encourages labour-intensive industries, creates jobs, purchasing power, and hence demand. As scale builds up, we could have gone into intermediate and core sector industries, in a more cost-effective manner. The Indian economy was even more of a gamble in the 60s than it is now. In my civil service examination, one of the questions was to comment on a report of a foreign expert team, funded by the Ford Foundation, forecasting severe famines in India, due to high population growth and low agricultural growth. I wrote, disagreeing with the report, asserting my faith in the learning of all segments of the economy , and affirming that the 1943 British-Bengal famine will be the last one in Indian history. Agriculture has been another of Indias success stories, though much more can be done.
The recession of 1966 : After finishing my bachelors degree in Mathematical Statistics in Loyola College, Chennai, I went to Kolkata to study Cost Accountancy and gain work experience. I landed a job in GKW (Guest Keen Williams), then one of the top British MNCs. There, I learnt much of budgeting; costing, investment and this stood me in good stead, at Stanford, 1964-65 , and then Harvard Business School, 1965-67 . When I returned to Kolkata to join the IIM faculty, GKW, like the rest of Indian industry, was reeling under the first major Indian recession. Railways and defence were major customers and the monsoon failures of 1966 and 1967 had reduced their budget allocations. As GKW and other companies coped with that recession, there were two major lessons. First, the need to go beyond cost control to cost reduction . Cost control is the control of actual costs, by comparing them with pre-set standard costs; identifying variances; analysing the reasons; and taking necessary actions to bring the actuals back in line with the standards. But, in a recession, meeting the standards is not enough. One has to beat the standards by significant amounts. This required the application of many management techniques, such as work study; industrial engineering and value engineering. We had set up institutions like the AIMA, NPC, ICWAI and ICAI, in 1959 and their offerings began to be appreciated in this recession. One lesson is to look for concepts, techniques, tools; grab them and use them, ahead of the curve, before the competition. Today, Indian corporates are more aware of the need for organisational learning and knowledge management.
The recession of 1973 : This was triggered by the oil crisis. India was still a substantially closed economy and so was less affected by the global recession, under which the US, Europe and Japan were reeling. But we could not escape the costs of high dependence on imported crude oil. Organisations like EIL and NPC offered energy audits their recommendations promised a short payback period of 12 to 18 months. Still, there was a large gap between awareness and action. The major lesson here is that managements do not optimise their performance but push for incremental results. Greater domestic competition tends to reduce some of the gap between optimising and satisfying behaviours. At least a few players, in each industry will push harder. Global competition will help even more. The heretical questioning of the Licence-Permit raj, and the need for a different paradigm intensified and some loosening up began in the 1977. The long term fiscal policy of more stable tax rates came in 1985 and the concepts of minimum economic size, and bigger capacity licences and IT Parks followed.
The recession of 1981 : This led more Indian companies to take interest in Japanese management techniques like Kaizen, Kanban, Just in Time (JIT). The Hero Group and Maruti, which had Japanese collaborations, were already benefiting from these. My colleagues at IIM-C had done a study of how the Hero plant in Ludhiana was practising JIT, with cycle rickshaws delivering components. With most companies there was some initial resistance. Various difficulties and constraints were raised and some of them were indeed valid. For example, when I talked of JIT, some executives would cite infrastructure and transport bottlenecks. My suggestion to them was to begin with Nearer-In-Time , and work their way closer to JIT. Some would raise vendor weaknesses . A lesson is that vendor development and incentivisation is a part of the mother companys responsibility.
The recession of 1996 : The RBI over-reached itself in controlling inflation, touching 2%, though 4% was a more sustainable rate for a high growth economy. The monetary contraction and public borrowing crowded out the private sector and there was even nonsensical talk that we should accept the service sector as Indias strength, and leave manufacturing to China. The answer lay in corporate restructuring. Since 1992, I had been advocating a three part model of corporate restructuring portfolio, financial and organisational.
Indian companies were over-diversified , since they had to grab any license they could get. They had to retain core businesses and divest others, to release cash. Companies were over-geared and had to reduce debt. They were also overmanned , because of a cost-plus pricing regime. Under competition , the paradigm has shifted to price-minus costing. I helped many of my clients, as the recovery began, with statements of Mission, Vision, Values and Strategic Plans. We have now had a long period of high growth and some moderation and consolidation is no harm. Industry will emerge stronger.