Manufacturing Renewal: A Personal Experience

Updated: Apr 27 2002, 05:30am hrs
To state the obvious, these are not good times to be in the manufacturing business in general and in capital goods in particular. It wasnt always this way. When I returned to India late in 1996 after many years with Cummins in the US. India appeared to be the promised land in those days with the real possibility of becoming a global manufacturing hub. Unfortunately, my return to India coincided with a sustained decline in the economy.

I suspect that many of you would have read a book called A Perfect Storm or seen the movie. In this book, a fishing boat gets caught in a storm. Had it been only one storm, the boat would have survived. But infact, she got trapped in an unusual convergence of 3 storms and consequently sank with all the crew. Something similar is happening to us. We are caught between four forces: One, Sustained weak economy and low demand. Second, Excess capacity and global competition. Third, unfavourable external environment- whether these be around labour laws, ability to shut sick units, lack of infrastructure, boiler inspectors demanding their cut and so on. Fourth, powerful legacies in our own businesses

I believe that most of us know how to cope and can cope with one or two of these factors. Squeezed into a box simultaneously on four sides is a very very difficult challenge. Worse yet, many of my fellow CEOs and many of the customers, suppliers and channel partners believe things will get better in the next 6-12 months. Unfortunately, they will not.

Last week, I was privy to some economic data generated by the Tatas which indicates no fundamental or significant revival in manufacturing demand for 5 years. India is becoming increasingly integrated with the world economy which means that competition will only increase. We are all seeing the frustratingly slow pace of regulatory reform in our country; there is little reason to believe this will accelerate in the near future. China is becoming the worlds factory and we will all encounter Chinese competition sooner or later. So the perfect storm conditions are likely to persist for at least a few years.

I hope I am wrong in the pessimistic prediction but our plans have to be built around this base case and not some rosy projections. Under such circumstances, the only prudent path is to focus on the things one can control and influence rather than all the things that are fundamentally beyond ones influence. And the things we as business leaders do control are our own actions and our own organisations response to such challenges. I would like to share our own response at Cummins to this situation.

Change management at Cummins
Many of you know us from our joint venture days when we were known as Kirloskar Cummins. Over the years, by the 1980s, KCL had built up a strong market position in a protected economy and enjoyed outstanding profitability. We had a very simple business model which we executed better than anyone else in our industry. We manufactured engines from 200-1000 HP and sold them to OEMs like BEML and L&T. Our service dealer network in turn, provided nationwide service and parts support for engines. However, by the mid-1990s, we became the victim of many of the same forces that are shaping all our industries.

The economic slowdown reduced the need for captive power and therefore for new gensets in our power range. Mining sector demand also collapsed. We began to see much more intense competition- from our erstwhile JV partners, from Caterpillar and new global players like Volvo. The cost of diesel increased to the point where diesel based captive generation has become uneconomical except for backup or standby power-significantly challenging our 400 crore genset business. This along with the improve- ment in quality of our engines has also significantly impacted our very profitable spare parts business. Our customers expectations rose faster than we could keep up.

In response to this, we crafted a very sensible strategy. The key elements of this were and are:

Export more engines, components to other parts of the world

Cut costs

Improve quality

Introduce new products

Improve customer service

In short, it looks like the sensible agenda for any company. And we did make significant progress in all these areas. For instance, our exports grew from 50 to 200 crores. We now export engines and components to customers and our sister plants in China and we are the sole source globally for 3 engine families. Significant cost savings were achieved. Many new engine models were introduced. Customers noticed the improvement in quality and service. However, these actions were inadequate. The problem was that the total market itself shrank on our range of 200-1000HP and our competitors didnt sit still either. They also improved so our relative competitive position didnt improve-it may have actually shrunk.

CHALLENGE OF LEADERSHIP

Confront reality
Reinvent the business instead of attempting incremental change
Change mindsets; start with your own
Focus on people, organisation and capabilities, especially front-end capabilities

Thats when I realised that incremental measures are not going to solve our problems. I decided that if we wanted to create wealth for our shareholders, we were going to have to reinvent ourselves and develop a fundamentally new business model. This is what we started to do two years ago. The big breakthrough happened by talking to customers. We realised a couple of things. We are in the wrong business. We are in the engine business. Our customers are in various end-use businesses- hospitality, tea, textiles, paper, construction etc. None of them is interested in engines. They are interested in power. We needed to redefine ourselves as being in the power business.

Second, the market had shrunk only as we measured it. In fact there had been plenty of growth at the low end of the market and at the high end, and in terms of selling add-ons, accessories and consumables to our customers. We had walked away from the market.

In response to this, we redefined what business we are in. Were in the business of providing reliable power to end users in our power generation, industrial and commercial vehicle businesses. As a result, we decided to involve our selves more with end users in the selling and service processes- something we had left for 40 years to OEMs and dealers.

We launched several new ventures to help us move in this direction. Cummins Power Solutions which puts up captive power projects for customers like L&T John Deere. We entered the small genset market and now offer a range of products down to 15 KW. We increased our high end up to 2500HP and modified our engines to run on a variety of lower cost fuels such as LDO, SKO and gas. We focused on capturing a greater share of our customers spending by going after services, and consumables including lubricants. Our big strength is our installed base of nearly 100, 000 pieces of equipment. If we could capture even a small additional share of wallet, it could mean a large amount of money.

Two years after we embarked on our new strategy, I would say quite honestly that we are still struggling but we are far better off than if we had stayed with our old strategy. The incremental sales from or new businesses is nearly Rs 300 crores. This has helped us more than offset the decline in our traditional business. We have been able to preserve our overall profitability. But it is well short of our target of Rs 1000 crores and the Board and I and the investment community are not satisfied. As I have reflected on this situation, it is pretty clear what the problem is. It is simply one of execution. We have improved quality but not fundamentally changed the way we build our product. We cut expenses but have not changed the cost structure of the company. And we are making very slow progress implementing our new strategy. This gets me to the heart of my message . Where I see most of us really struggling is execution. We do not lack ideas or strategies. Indeed our organisations are suffering from too many ideas. Where we fall completely flat, is in implementation. I serve on a number of Boards and advise a number of companies. What is remarkable to me is how similar our companies are across industries; we are far more similar than different. So why cant we execute better The main reasons I believe are two: Mindset and lack of capabilities.

Execution is key
I would like to focus on the mindset problem because I believe it is the more fundamental. The biggest reason for our competitiveness problem today is not a weak economy. It is not the government. It is our own leadership mindsets that is the the single biggest problem. The problem is that we for the most part lack a passionate commitment to excellence. As a result, what we find in many if not most organisations, is what I call the seven deadly sins. These are: * Complacence and paralysis * Chalta hai attitude * Disdain for customers * Pervasive Lack of integrity across the company. * Feudalism * NATO * Lack of consequences. Too many people yet too few people with passion and ability. Id like to talk about each of these.

The first deadly sin is that we dont confront reality. As a result we are complacent or paralysed. We dont see how things are not going to better, that no one will help us that we have to help ourselves. We keep hoping for the economy to improve, we keep hoping that silly or unhelpful policies will be changed. Yes, we have to work on these but we must first and foremost embrace change within our organisations. The second problem is that we aim far too low. Most of our companies have depressingly low standards for everything: for quality, for customer satisfaction, for financial performance, for growth. We are quick to accept mediocrity. This is the proverbial chalta hai or its good enough attitude. Good enough is the enemy of great. We as leaders must aspire to greatness-greatness not for ourselves but for the companies we lead. In the manufacturing business, I see a lot of companies who are our suppliers and customers. I see depressingly few companies that are genuinely committed to this. Naturally, if this is the leadership attitude, we cannot expect anything more from our companies. If we look instead at the companies that are steadily gaining ground-whether it is Hero Honda, Reliance, Sundaram Fasteners or HLL, we find a very different mindset at work. One that is single-mindedly focused on achieving excellence and scale by world standards despite the odds. This passionate commitment to excellence, the essential difference.

Third is lack of empathy if not total disdain for our customers. Nine times out of ten, I find that our customers dont walk away from us. It is we who walk away from our customers. We walk away by exploiting them, by mistreating them or ignoring them. We got away with these behaviours for 50 years; the same behaviours today are life threatening.

Our biggest opportunity for growth is to hold on to the good customers we have and increase our share of their business. We all know the theory, we talk a good story but we do not practice it consistently. At Cummins, we have walked away from over 400 suppliers and many of our channel partners in just the last year. In most cases, those who lost our business lost it because of their poor attitude and their indifference to us. I observed that when we lost our customers business as well, it was seldom because of price. It was because we took them for granted.

Lack of integrity is the fourth deadly sin in many of our organisations. We are all embedded in one of the most corrupt societies in the world. It is hard to prevent this corruption from seeping into our organisations unless we make extraordinarily determined efforts. The problem with corruption of course is that it compromises the organisations interests in favour of an individuals. It is pretty hard to drive quality improvement, or cost reduction or improvement in service standards if there are strong personal financial interests that stand in the way. Also, allowing such corruption completely undermines our credibility as CEOs. We lose legitimacy and moral authority to govern. So stamping out fraud and corruption must be THE highest priority within our companies. I know from deeply personal experience just how hard it is to weed out this cancer once it has set in and I also know it is possible once one is willing to pay the price. I will add that lack of integrity doesnt just mean fraud. Integrity fundamentally means doing what I say I will do and not doing what I say I will not do. I see an awful lot of saying one thing and doing another in our companies. We tolerate that for various reasons. This compromise of integrity dooms excellence.

Feudalism, is our fifth deadly sin. What is feudalism The best description of this I found was in an article on arab society last week by an Arab scholar. He says a typical Arab village is a set of tents or small homes separated from each other by some distance. Each person distrusts his neighbour and is fearful of his neighbour. All the villagers are even more distrustful and fearful of outsiders and this is a unifying influence. The toughest most ruthless person in the village rises to power in a Darwinian struggle. Once he is in power, he and his family rule with absolute authority and help themselves to the spoils. People understand and accept this as the way life is. What matters most is utter personal loyalty to the Chief. Within this loyalty, one can lie, steal cheat, kill within bounds. In return the Chief confers a measure of protection. While this is clearly a somewhat extreme portrayal, I was struck by just how feudal many of our companies really are. What matters most is the politics of getting along with the Boss. Everything else is second. Jack Welch described this well when he described GE as he took over-400, 000 people with their face to the boss and their rear end to the customer. Is it possible to drive improvement in this intensely politicised environment

The Sixth Deadly sin is NATO. I was taught this by Mr Yamaguchi, my guru of TPM. NATO means, NO Action Talk Only. When he came to TataCummins 3 years ago, he spent a day with us and accused me and my leadership team of this. He was right. We spend far too much time in meetings, talking and debating issues and too little time either in our shopfloor or our customers shopfloors implementing improvements. This is one of the most significant differences that I find that separates excellence from mediocrity. The seventh and final deadly sin is lack of consequence management. Which is a fancy way of saying no carrots and no sticks. We fail to differentiate adequately between contributors and non contributors, between people with ability and those without, between suppliers and channel partners who perform versus those who do not, between passionate employees who approach the challenge as though it were a mission versus those who treat its as a 9-5 job to which they are entitled. The result is predictable. Oceans of mediocrity. Too many people. Not enough with passion or ability who can make a difference. So these seven deadly sins that I call our Mindset problem is what we have to combat if we are really serious about creating competitive organisations. The challenge is that most of us have inherited powerful legacies that have been built up over decades. The new mindset requires that we confront and challenge these. It is not easy to walk away from half your suppliers, a third of your dealers and a fourth of your employees who have been part of the enterprise for 40 years. It is not easy to change out the whole leadership team of the company. It is not easy to close factories or outsource 70 per cent of what you make. It is not easy to change the fundamental social fabric of the company. Yet this is some of what we have had to do at Cummins in the last year and this is what we have all got to do if we are genuinely committed to excellence. In the process we confront and challenge powerful vested interests and therefore there are serious risks and a lot of pain. We have to be prepared to suffer that pain and suffer the personal consequences of this if we are really committed to creating excellent and competitive institutions. Very very few leaders are and who can blame them for the price can be high.

The second reason we struggle to execute is the lack of capabilities. In a protected economy with licensed capacity and rationing, the defining capability is what my friend Venu Srinivasan euphemistically calls environment management. It means cultivating good relationships with those who can constrain your growth if not your existence.

In an open economy, in a free market, the defining capabilities for success are very different and much more varied. One needs capabilities in five key areas- in marketing and sales, in customer support, in product development, in manufacturing and supply chain management and in human resources and OD. These capabilities are the result of skilled committed people and good processes. Most of us are novices at building capabilities. We exhort our people to do better get frustrated with our functional leaders for not delivering or improving performance. I know that I am very guilty of this. But the reality is that a lot of our people are doing the best job they know. They do not know better and they do not know how and having grown up in sheltered environments, one cannot really blame them. Changing our people, recruiting seasoned talent from the outside is terrific but the amount of seasoned and outstanding talent is limited. So the tough reality is that we have to grow our own talent and develop our own people. This is hard and painstaking work but I have found little alternative. So developing our people and their capabilities in these five critical areas is one of the most vital agendas for senior management.

Lessons learnt
Let me turn around now and apply these lessons to us. What in retrospect would I do differently I give ourselves high marks for confronting reality and recognising the need for change. I give ourselves high marks for developing an effective strategy. The most important thing would be to change the sequence of events. I focused on strategy first. In hindsight, I would focus on people and organisation first. I would focus on people and organisation second and I would focus on people and organisation third. We ought to have focused on getting the right leadership in place a lot sooner. We ought to have dealt with our productivity , mindset and capability problems a lot earlier. We should have got the wrong people off the bus and the right ones on it in the very first year. This would have given us the platform or foundation for our strategy. We would have been a lot further ahead with a lot less stress. This has been our biggest lesson.

Next, we should have focused much more attention on our front end or customer facing organisation a lot sooner. Having grown up in a closed economy, like many if not most Indian companies, we struggle with basic skills in marketing, selling and customer service. Marketing basics like segmentation, branding and communication are significant challenges. We still wait for customers to come to us rather than go pound on their doors. Our service engineers often lack customer handling skills and are not consistent enough. Our channel partners, OEMS and dealers, also struggle greatly with the same issues and we are limited by their attitudes and abilities.

So the entire front-end requires a comprehensive overhaul and we are in the throes of this. Our front end performance, our customer acquisition and retention ability is the single biggest determinant of our future. Ironically and paradoxically, for a manufacturing and engineering company like us, it is not cost reduction and quality improvement that is likely to decide our fate, but marketing, sales and service.

Globalisation is a lot like Formula 1 racing. To win you need a Ferrari and a Michael Schumacher behind the wheel. We are unlikely to win with Ram Lal driving our trusty Ambassador. The answer is not to rush out and buy a Ferrari. Changing the driver is far more fundamental. Michael Schumacher can do better in an Ambassador than Ram Lal in a Ferrari. These are my personal beliefs based on the last six years of turbulent change at Cummins. I have realised that the journey to competitiveness ALWAYS begins by looking hard into a mirror.

(Ravi Venkatesan is chairman, Cummins India. This is a speech that Mr Venkatesan gave at a recent CII Seminar on Manufacturing in Mumbai)