Solution A

R K Saraf
Chairman & Managing Director, Zenith Computers

Irrespective of the nature of business, there are three areas which demand the personal attention of an entrepreneur in ensuring not just growth, but sheer survival of a firm. First, you must listen to your customer. If CEO Raj Bahadur Singh had spent a few weeks every year visiting the end-users of Bharat Synthetics' products and talking to them, he would have understood how their priorities and preferences were changing. No doubt Bharat Synthetics built up a loyal customer-base. It did so when there was little competition. But it let the initiative slip out of its hands. The assumption that customer loyalty lasts forever was its major undoing. Second, you must manage your costs regularly. When a competitor lowers the price because of scale, technology, or cost advantages, the move should not catch you by surprise. You should always be a step ahead. And that is possible only if you regularly monitor all cost drivers. Third, you need to track the way the industry is moving--locally and globally. This must be done even in a sheltered business environment. Shifts take place in all industries. They do not take place in a vacuum. A change in one industry affects another. The impact on one's own business could be subtle or sudden. Bharat Synthetics should have seen the winds of change and responded accordingly.

It is, therefore, hardly surprising that Bharat Synthetics has limited options today. It is noteworthy that the company has been operating at full capacity and selling everything it is producing, even if at a discount. Evidently, there is demand. But there is one fundamental question that Singh will have to address: how does the cost of the Bill of Materials (BOM)--the aggregate of direct material costs and direct expenses--at Bharat Synthetics compare with the selling price of its competitors? That is the litmus test against which he will have to weigh all his options. The exercise will have to be done separately for each product, and with both local and global competitors. If his BOM cost is lower than the competitors' selling price, Bharat Synthetics has some respite in the short run. If it is the same as, or higher than, its competitors' price, Singh should quickly cut his losses by selling off the affected businesses. For instance, if the variable cost of Polyester Filament Yarn (PFY) at Bharat Synthetics is higher than the selling price of a local producer like Vimoline Industries, Bharat Synthetics is in serious trouble. It should then purge PFY from its product portfolio.

If there are signs of reprieve, Bharat Synthetics could look at some options: selling off all unproductive assets, seeking a moratorium on interest payments for a few years, or even hiving off one of the business units into a joint venture with a technical partner who can bring in equity. In fact, it would be a good idea to import some of the finished products from the primary sources and increase trading income. For example, not all of the PFY imported from, say, Korea, is made in Korea. It would be sourced from elsewhere, say, Japan. Bharat Synthetics could access the primary source, import the goods, and sell them at a margin. That would improve its cash-flow.

Solution B

Ranjan Dasgupta
Crompton Greaves

I would not suggest the sale of business--either in part or whole--as an option. However formidable the crisis at Bharat Synthetics, and however tempting the possibility, Singh should not think of exit. The company's predicament is not unique. Post-liberalisation, most businesses in India have been forced to redefine a number of their time-tested beliefs. For instance, loyalty on the part of customers, employees, and investors cannot be taken for granted. The expectation levels of the stakeholders are rising. Companies that recognise these changes, and re-orient themselves accordingly, will survive. Others will just fade away. Bharat Synthetics is grappling simultaneously with several problems that are threatening its survival. But at the core of it all is the problem of mindset--an inability to recognise change and adapt to it. And therein lies the solution. It is in this context that Singh should not think of leaving, but initiate a turnaround strategy. And the first step in this direction will be to secure the support of the creditors. He should appoint a new CEO, chalk out a turnaround strategy with a time-frame of three years, and seek a moratorium on interest payments for that period.

This revival plan should focus on the following five approaches:

People drive any organisational transformation. Singh should identify the company's star performers and put together a cross-functional core team--headed by the new CEO--which will steer the change process. The team will, in turn, identify pockets of excellence at Bharat Synthetics, however small, and nurture them. The objective is to generate ideas for improvement from within. It is amazing how people rise to the occasion when they are recognised.

The quality of interaction with customers should be improved as well. Bharat Synthetics should set up dedicated customer teams, each focusing on either a big customer or a group of small customers. The objective is to ascertain the various factors that help create customer satisfaction. Obviously, price alone cannot be the driving force behind customer satisfaction. The teams should then identify what intangibles Bharat Synthetics can offer its customers--after-sales service, customised manufacture, or on-time delivery--to win them back into its fold.

Cost reduction should be the new motto of the company. Cost-plus pricing is always a perfect platform for padding costs. The underlying assumption is that the more costs you incur, the more profits you make. As the company is locked into this vicious line of thinking, it becomes progressively insensitive to costs. The results could be disastrous in the long run. This is the mindset that Bharat Synthetics will have to change.

The focus should be as much on the top-line as on the bottomline. When you do an ABC analysis of inventory, for instance, it is the C category items that are deprived of management attention. That should change---and fast. Turning the spotlight on smaller items not only eliminates hidden wastes but sends out powerful messages about the management's commitment to change.

Singh should also identify the sustainable advantages of Bharat Synthetics. Call it competencies, if you may. Frankly, in my view, there is a great deal of uncertainty about what qualifies as a core competence. It is hard to come up with a precise definition. The idea is to strengthen the value chain activities in which the company is better than its competitors--and create differentiation. But the competitors can always catch up.

Once the above changes are in place, Singh's next priority should be to implement Bharat Synthetics' backward integration plan, which has been put on hold for lack of working capital. It is noteworthy that Bharat Synthetics is, essentially, in the business of intermediates. Price realisation is, generally, low in such a business because the value of the company's product, as perceived by the end user, may be negligible in the latter's own value chain, forcing Bharat Synthetics to sell its output at the lowest-acceptable price. The best way to strengthen one's bargaining position--and cut the cost of operations--is to opt for integration.

Solution C

G Balakrishnan
Corporate Advisor, GSL (India)

It is important for Singh to recognise that the letter from the consortium, even if somewhat harsh in tone, isn't a vote of no confidence in him. Bharat Synthetics is at a crucial stage, and there is need for a clear demarcation of managerial responsibilities from those pertaining to strategy. The latter requires risk-taking abilities associated with expansion, diversification, and turnaround, which only an entrepreneur can exhibit. The logic in asking the CEO to shed his executive powers is to help him chalk out a dynamic strategy without getting bogged down with the routine tasks. And Singh has steered the company successfully for more than three decades--a clear evidence of his intrinsic business acumen which no lender can overlook. In the absence of entrepreneurial focus and dynamism, Bharat Synthetics will turn into a non-performing asset which no banker would like to be saddled with.

There are several characteristics peculiar to the Indian synthetics industry. It is a closed industry; it rarely recruits professional managers from outside. There are considerable income disparities: compensation packages of managers are quite large while workers' salaries are, comparatively, small. Most companies are personality-driven, and there is misplaced emphasis on the part of the promoters on employee loyalty. There is also a great deal of bonding in the entire value chain, beginning from raw material suppliers to stockists, dealers, and end-users--a product of decades of association. Management decisions are, often, governed by personal, rather than professional, considerations. Technology is uniform, and does not provide any cutting edge. There is no scope for branding or product differentiation. Not even for core competence, which is an exclusive attribute that competitors cannot duplicate. In fact, the only attribute which comes close to being a core competence is the scale of operations. But nothing prevents a competitor from catching up by mobilising adequate resources. So, the concept of core competence does not have much relevance in Bharat Synthetics' case.

Singh's predicament will have to be viewed accordingly. There is, however, one silver lining: man-made fibres are cost-effective substitutes for cotton. Therefore, with the exception of nylon tyre cord--which is threatened by substitutes--all the other products have an assured demand since they fulfil a crucial human need. Bharat Synthetics needs to worry about working capital in the short run, and capacity expansion in the long run. The former will have to be firmly dealt with by improving cash-flows through some of the measures that Singh has already set in motion. The latter requires two steps. First, Bharat Synthetics should galvanise his people by employing competent human resources managers. Not an easy task. For, it is difficult to change attitudes hardened over the years. But a beginning must be made. Second, the company should secure the support of the financial institutions to reschedule its loans. Singh could also go in for an equity issue of about Rs 100 crore in the near future. If accurate demand forecasts are made, and Bharat Synthetics' intrinsic growth potential highlighted, there is no reason why the rights issue cannot succeed even in a depressed market. Genuine investors would, definitely, be interested in a stock which has long-term growth prospects. It is, therefore, not difficult for the company to turn around provided it is willing to implement a sound revival plan. There is definitely hope for Bharat Synthetics.

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