"Why me? I have done everything right, haven't I? A 35-year-old business can only get better at what it is doing. And while my competitors have been busy diversifying into unrelated areas, I have consciously stuck to my knitting: synthetic yarn. And that was the management gurus' prescription for success. But my rivals are prospering--and I am sinking. Core competence, competitive advantage: they seem to be so convincing. But they have yielded nothing." Those were the unpleasant thoughts plaguing Raj Bahadur Singh, the 55-year- old CEO of the Rs 353-crore Bharat Synthetics, even as he was reading a letter from his creditors, holding him responsible for the mess that Bharat Synthetics had got into. As his childhood friend, and management consultant, Abhinav Paul, explained to Singh, Bharat Synthetics was stuck in the past. For a business that was becoming global, scale was critical; so was vertical scope. And Bharat Synthetics had neither. Crompton Greaves' Ranjan Dasgupta, Zenith Computers' Raj K. Saraf, and GSL's G. Balakrishnan probe Bharat Synthetics's problems, and offer Singh a way out. A BT Case Study.

Raj Bahadur Singh, the 55-year-old CEO of the Rs 353-crore Bharat Synthetics, was taken aback at the tone of the letter he had just received from his creditors. Expressing concern at the lack of seriousness in initiating a turnaround strategy, and the inordinate delays in the repayment of loans, it said that Singh should now make way for a new CEO. "In the considered view of the consortium of lenders," it said, "only a professional manager can steer Bharat Synthetics towards growth." The news was worrisome. Clearly, the letter was a vote of no confidence in Singh's ability to lead a 35-year-old company in a highly-competitive marketplace.

"Damn liberalisation!" swore Singh. "Why did it have to rock my cosy world?" The economy had opened up all right, but, to his dismay, it had left Bharat Synthetics in limbo. Or had it? "Perhaps I did not read the signals right," he said to himself. After all, economic liberalisation had also created a world of opportunities that many entrepreneurs had grabbed quickly. He wondered if he had done anything wrong by refraining from diversification. Recalling the time, only four years ago, when Bharat Synthetics was perceived as a good investment opportunity, Singh was troubled at the way the tide had changed.

Later, at a luncheon meeting with Abhinav Paul, 54, executive director of the management consultancy firm, Quotient, Singh ruminated. "It does not make any sense," he told Paul, who was a childhood friend. "I have been practising for years all that management consultants have been preaching. Core competence. No unrelated diversification. I was doing well without these fancy buzzwords. I have stuck to man-made fibres throughout my career. Why, then, am I in this mess? And look at my competitors. They did everything that went against present business wisdom. They diversified into unrelated areas--one of them even set up a cement plant--without giving a damn about core competence. Another ventured into financial services and hoteliering. Still, they seem to prosper."

"Interesting," said Paul. "You know, although we have never discussed business, I have been tracking Bharat Synthetics' progress. Its predicament is typical of what has been happening to many commodity businesses since the economy opened up. Costs, you must understand, are driven by two factors: economies of scale and technology. Bharat Synthetics' products are out-priced and no longer competitive. I am aware that after record profits of Rs 34 crore in 1994-95, Bharat Synthetics today has accumulated losses of Rs 27 crore, and is unable to service its total debt of Rs 60 crore. You have a big crisis on hand. But we could find a way out of the mess. Why did you think of man-made fibres in the first place? Did you have any expertise?"

"We took the plunge into rayon filament yarn simply because we had a licence to make the product," said Singh. "In those days, if you remember, the choice of business was determined by official approvals--not market needs. You needed a licence to be competitive. Of course, being a cellulose derivative, rayon was a perfect substitute for cotton. So, its manufacture made good business sense. It was also a sellers' market. We could sell everything we produced. So, we set up a plant in 1963 at Surat, to make rayon yarn. Profits posed no problem, since pricing was done on a cost-plus basis.

"I was also keen on improving the quality of our products. So, in 1966, we collaborated with a Japanese company. We also began trading in finer deniers of rayon filament yarn, which are used in the manufacture of chiffon and georgette. A decade later, we commissioned a nylon filament yarn plant in collaboration with an Italian company. Simultaneously, we went into the manufacture of polyester filament yarn (PFY). And, in 1984, we started making nylon cord--which is consumed by the tyre industry--in collaboration with a Japanese firm. Today, we have four product categories: rayon yarn, which has a capacity of 4,500 tonnes per annum (tpa); nylon yarn (2,500 tpa); nylon cord (4,000 tpa); and PFY (15,000 tpa). And we have been operating at full capacity for years."

"Frankly, those capacities look minuscule," said Paul, "in relation to global scales of 100,000-plus tpa. And India is gradually becoming a global market. In fact, your are incurring losses despite optimum capacity utilisation. This is a clear indication of poor economies of scale. Was there any synergy among the four products?" "No," replied Singh. "It was