How to keep your business afloat

New Delhi | Updated: Jul 26, 2016 9:56 PM

Understanding the dynamics of business environment and being able to bolster robustness can mean the difference between survival and extinction

The passing of India’s new Bankruptcy Law in May 2016 has creditors heaving a sigh of relief. ICRA estimates that at the end of December, non-performing assets at Indian banks have doubled over the last three years. There are currently over 60,000 cases pending resolution at the Debt Recovery Tribunals with only 10,000 cases cleared per year according to PRS research. The new law will give banks a means to recover their dues in a timely manner, avoiding long, drawn out legal battles by providing a single framework for debt-recovery within 180 days.

While it is indeed good news that there is a much swifter path to dealing with companies that have already made their way down the road to bankruptcy, the recent spate of bankruptcy announcements begs the question—what’s going on? Is this a global phenomenon, or one unique to the Indian markets? Is this a new phenomenon? Are bankruptcies the problem of fledgling startups or older incumbents? Are there specific sectors that are more vulnerable or is this more widespread?

Our research at the BCG Henderson Institute on corporate longevity and rejuvenation, using data from the US—across all industries-has increased significantly. Our analysis of entry, growth, and exit patterns for 35,000 publicly listed US companies since 1950 reveals a dramatic trend. Public companies are perishing sooner, with few surviving into their 50s and 60s. The five-year exit risk stands at 32% today—up from just 5% five decades ago. Equally troubling, increased mortality affects companies of all ages, in all industries. Size provides no refuge either: only 7% of companies that are market share leaders today are also profit leaders in their industries—down from 25% in the 1960s. It is likely that several of these trends will hold in India.

There are several forces converging to test businesses’ robustness including:

Greater diversity: Businesses face increasingly diverse environments with respect to predictability, malleability and harshness, and each environment requires a tailored approach to strategy and execution, as explained in our recent book, “Your Strategy Needs a Strategy”.

Increased interconnectedness: Businesses are more interconnected. Multinationals move goods, services, and capital around the world. Ecosystems are proliferating, with companies forging interdependencies across industry boundaries. More connections mean more vitality—but also a greater risk of shocks’ propagating throughout the system.

Accelerating change: Business conditions are shifting more rapidly, with companies moving through their life cycles far quicker than they did 30 years ago.

Corporate mortality is a sign of a healthy economy—one with greater competitiveness, interconnectedness and environmental change. That said, it is important for business leaders to understand how they can bolster their robustness in the face of such forces.  Through our research at the BCG Henderson Institute we recommend six tactics drawing on lessons from biology. These principles are proven to help both natural and managed ecosystems endure, so they can help businesses endure too.

First, maintain heterogeneity. Make your business sufficiently diverse in terms of people, ideas, and endeavors. Greater diversity helps you adapt to environmental change. To foster diversity, hire people with varied personality types, educational backgrounds, and working styles.

Second, employ a modular structure. Highly modular systems-those characterised by loosely connected components-impede the spread of shocks. That makes the overall system more robust. For example, Toyota just announced that it would create separate companies (Lexus, Toyota, etc.) instead of just handling the different brands as business units.

Third, preserve redundancy. Have different components of your business play overlapping roles. If one fails, another can fulfil the same function. For instance, cultivate partnerships with multiple suppliers for critical components of your most important products.

Fourth, expect surprise while minimising key sources of adverse risk. Consider how your business model could be superseded and what to do about it. Look especially for potential blindsiding by mavericks on your industry’s periphery. Ask yourself, “If the mavericks’ idea proved successful, how would that affect us?” Then replicate, acquire, improve or build defenses against the idea.

Fifth, employ adaptive learning. Empower frontline employees to consider challenges-and experiment with innovative solutions. Ensure that the best solutions get scaled, by diverting (if necessary) resources from less successful or older products and businesses.

Sixth, foster trust. Make sure you’re adding value to your business ecosystem even as you seek to maximize your profits. You’ll build trust between your firm and other stakeholders, which strengthens the ecosystem overall, further protecting it against shocks.

Rising mortality among businesses is an increasing threat, and will likely remain so for the foreseeable future. This is a sign of a healthy and growing economy and recognising this is a step in the right direction for India. But in the face of this threat, leaders need to consider not only how strong their game is, but how long it will last. Understanding the dynamics of business environment and being able to bolster robustness can mean the difference between survival and extinction.

(Arindam Bhattacharya is the director, BCG Henderson Institute and a senior partner and director, BCG  while Aparna Bijapurkar is a consultant, BCG Henderson Institute. Views are personal)

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