Growth and profit. These two words dominate a CEO's life. More often than not the CEO achieves one at the cost of the other. Many believe that growth and profit belong to mutually exclusive clubs. Today, the need to achieve a strategic balance between pure revenue growth and pure profitability improvement (so as to ensure maximum value creation) has moved to the top of the CEO's agenda. This has also raised questions on how soft organisational parameters can be used as key tools to propel the value creating potential of companies. (See Why Growth Is Critical To A Company). At A.T. Kearney we have been studying issues relating to growth and profitability for over 10 years. The firm has tracked over 10,000 leading global companies consistently during this period. Today, the firm is an acknowledged leader in the area of value-building growth.

Recognising the increasing importance of strategic balance among Indian CEO's, we decided to bring the A.T. Kearney study on value-building growth to India. This study, conducted in collaboration with Business Today, was focused on identifying India's 'Best Managed Company' and analysing the successful growth patterns of such companies. We wanted to address questions such as: How have these companies developed and exploited growth opportunities while ensuring the right balance between profit and growth as strategic co-objectives? What do these companies do differently? How do they manage their growth cycle over time? How do softer internal organisational parameters affect their value creating potential?

Our analysis used the proprietary A.T. Kearney Value-building Growth Matrix as a key criterion to identify value-building companies. This tool was also used to assess a company's strategic direction and the suitability of its current position for maximising future value creating potential. This quantitative evaluation criterion was then combined with qualitative parameters (See How We Identified India's Best Managed Company on page 60) to arrive at some answers.

THE FUNDAMENTALS
of India's Best Managed Companies

A.T. Kearney's international studies highlight the fact that companies with strong financials need not necessarily be 'Best Managed'. Conversely, companies strong on soft organisational parameters but without high growth financial metrics also do not qualify for being 'Best Managed'. In the first instance, the company will find it difficult to sustain strong financial performance that will enable it to move to the next level of scale and growth. In the other, the company will not be rewarded by the market and will find it difficult to sustain operations. We defined 'Best Managed' companies as those that excel in the following parameters: Strategy, financial performance, leadership and management philosophy, systems and processes, hr effectiveness, organisational structure, corporate governance, and corporate social responsibility. The 16 companies that made the grade in our analysis are (in alphabetical order) Asian Paints, Britannia, Cadbury, Dr. Reddy's, Gujarat Ambuja Cements, HDFC Bank, Hindalco, HPCL, ICICI Bank, Infosys, Moser Baer, Reliance, Satyam, Sun Pharma, TVS Motors, and Wipro. The Indian corporate environment reveals five fundamentals of 'Best Managed' companies (See Fundamental of India's Best Managed Companies)-each contributing to the value-creating potential of the company and making it worth emulating.

FUNDAMENTAL 1:
Value-building is possible in any industry, in any region and at any phase of a business cycle.

The first fundamental of value-building growth is its universality. Value growers represent approximately 20 per cent of companies analysed across the Asia Pacific region, Europe and North America. In India, the corresponding figure is 24 per cent. Across all regions, value-growing companies achieved average annual revenue growth of 19 per cent and average annual growth in shareholder value of 22 per cent over a 10-year period. As compared to this, Indian value growers achieved an average annual revenue growth of 28 per cent and average annual growth in shareholder value of 27 per cent for 1996-2002.

By definition, companies in any given industry will run the gamut from value growers to under-performers, but the combination of industries in India reveals certain clusters (See India Inc's Growth Portfolio: 1996-2002). For instance, the study confirmed our hypothesis that Indian pharmaceutical (Dr Reddy's, Sun Pharma and Cipla) and high-tech (Infosys and Satyam) companies would be dominant as value growers. These companies have continued to post double-digit revenue growth, although they are still young enough to be run by their founders. It is interesting to note that in the pharmaceutical sector, the Indian companies, by focusing on expansion, acquisitions, and research are creating greater value than MNCs.

The fast moving consumer goods sector sees an overlap between value growers and profit seekers with companies like HLL, Cadbury and Britannia clearly being value growers while Nestle and ITC are on the cusp of the profit seekers quadrant. Many MNCs mirror their international strategy and keep their sights on year-end results. Meanwhile, there are some MNCs like Cadbury that have matured into an 'Indian' company-they are seeing and expected to continue seeing value-building growth.

The energy industry in India is a stark example of simple growth as most companies are state-run and with highly regulated operations. This is born of a legacy where their commercial focus was limited. The returns that the government assured to them was enough to continue running the companies and increase the top-line. With deregulation kicking in, a few of the better managed companies will be propelled strongly into the value growers quadrant due to the vast profit potential and asset base they have created.

The financial services industry is a simple grower. Private banks like HDFC Bank and ICICI Bank, with increasing focus on retail, have shown signs of exploiting the vast profit potential that the Indian market offers and have been rewarded as value growers. With many public banks also joining the retail bandwagon, we might soon see many of them, led by SBI, move from simple to value growers.

The under-performers quadrant is home base for many companies operating in the automotive, discrete manufacturing and process industries. These companies did not necessarily fail to generate any revenue growth or shareholder value, but consistently lagged their peers in both areas and failed to 'break out'. Companies in smokestack industries often cite factors like poor infrastructure and the Chinese threat as reason for their performance. Still, our findings show that value-building growth is accessible and applicable to any company in any industry. Every industry has a significant range of performance that allows value growers to emerge- even in mature industries such as manufacturing (Moser Baer), process (Reliance) and automotive (Hero Honda Motors).

The flip-side is also true. Contrary to the headlines generated by Infosys and other it pioneers, our research shows that entry into a 'hot' sector such as it services, e-commerce, bio-technology and now, BPO, does not bestow on a company a license to print money-either by issuing shares or by someday turning a profit. Virtually all sectors also have room to host under-performers (See Revenue Growth Rates For Industries: CAGR 1996-02). This finding underscores one of our main motives for reporting our results: Value-building growth is no accident. It is a conscious, constant process, focused on execution.

'Best Managed' value growers ride out economic downturns and the effects of other external influences and do not claim to be immune to such developments. Instead, their balanced and conscious control over the process of value-building growth inoculates them, allowing quicker and more confident and decisive response rates to the effects of external developments.

FUNDAMENTAL 2:
Growth is spiral-shaped, not linear.

In the previous fundamental, we were essentially looking at snapshots of value growers. However, within this set of value growers, tracing the company's movement within the portfolio over a period of several years is of great interest, as it clearly highlights the better-managed companies. The question that comes to mind is: Do these companies remain in the value-growing quadrant year after year? And if they do not stay in the same quadrant, where do they go?

In viewing growth performance over time, it is apparent that most companies migrate between the different quadrants. One of the most intriguing findings of our international study is that not one company among the 1,100 value grower companies actually sustained value-building growth continuously for 10 years. The Indian study highlights that only six companies, Reliance, HDFC Bank, ICICI Bank, Infosys, Hero Honda Motors and Cipla, have managed to sustain value-building growth for the six-year period. Evidently, it is difficult for a company to continually outperform its peers, and even the best companies fall back at some point. Sometimes, this is done intentionally so as to consolidate and enable better growth and profitability in the future.

A detailed analysis of growth and share-price performance over time revealed that growth is anything but linear-it evolves in a spiral. 'Best Managed' companies are those that are able to manage the growth cycle and do not let the business or market environment manage it-in consolidation periods, these companies 'step back' and view the downtime as an opportunity to redefine their strategies and invest in the internal organisation in preparation for the next wave of growth (See Growth And 'Step Back' Movement Of Value Growers: 1996-02).

Where do these companies go in periods of consolidation? Over 75 per cent become simple growers and nearly 35 per cent, profit seekers. This is greater than 100 per cent because a company could be moving through more than one quadrant over the six-year period. The usual decision for profit seekers is to shut down the growth engine and opt for a profit-oriented focus that involves heavy cost-cutting to meet earnings targets.

In sharp contrast, 'Best Managed' companies never slow down their growth engine, even if it means sacrificing the bottom-line for a certain period of time. These companies make intentional investments either on acquisitions or people or systems. They recognise that sinking into profit-seeker territory can make the eventual return both slower and more difficult. "The biggest mistake we ever made was to voluntarily slow down our growth process," one respondent to our study said. Few companies exemplify this growth philosophy better than TVS Motors and Reliance. During the downturn, TVS Motors made extensive investments in its distribution network, internal quality systems, manufacturing units and R&D facilities. This enabled it to ride out the period of separation from its JV partner. Similarly, Reliance has continued to make investments in existing as well as new businesses.

At the same time, it is important to note that 'Best Managed' companies optimise growth rates rather than maximise them. These companies avoid the dangerous yet alluring trap of 'more the better', and instead maintain a sustainable speed and time for their growth to effectively ride the spiral. They understand that every company has an optimal unique growth rate for long-term value creation and they continuously assess the growth rate by looking for symptoms of sub-optimal growth. Once the optimal growth rate for an individual enterprise is determined, it is not carved in stone- these companies understand that the rate may even increase if they improve their ability to manage resources, build and develop competencies, and achieve organisational excellence.

FUNDAMENTAL 3:
Best Managed companies use innovation, geographic expansion and risk taking to fuel value-building growth.

'Best Managed' companies are those that maintain (or return to) a position of value-building growth by emphasising innovation, geographic expansion and risk-taking. They push the envelope in all these areas and constantly redefine their markets and reinvent themselves-either through internal growth or acquisitions-and they outperform their peers on all parameters.

A closer look at how these companies prosper shows that they take a 'core' approach. They 'stick to their knitting', avoid wide-scale unrelated diversification, and generate a bulk of their revenues and profits by building on core business or core competencies. This does not mean that these companies are single-product or niche players. In fact, it is just the opposite. They typically tend to build ranges of products and services that rely on breakthrough innovations and incremental improvements. They use innovation to develop and adapt their offerings to the requirements of the market and ensure maximum customer satisfaction.

This is best displayed by companies like Cadbury, Britannia and Asian Paints. Cadbury has developed new products for the Indian market and has even taken it to international markets, a first for all Cadbury operations. Britannia has put in place a concept called 'Opportunity Manager' that allows any employee to come up with an idea that once approved enables her to build a team and take it through to completion with complete support from the top management. Asian Paints was the first to introduce innovative customer-facing initiatives such as ColourWorld, Home Solutions and Helpline.

A typical exemplification of value growers is the spend that best managed companies make on R&D- these companies do not cut back on this type of expenditure in tough times. They move forward, keenly aware that product improvements are essential to securing future sales growth. Dr. Reddy's is a good example of such a company that has regularly increased its spend on R&D and is aiming to invest 8 per cent of sales annually on this to achieve its long term vision of becoming a 'discovery-led global pharma company'.

'Best Managed' companies use geographic expansion as a key growth multiplier. Companies, specifically in the pharmaceutical and it industries, have aggressively used geographic diversification as a key growth mechanism. Infosys, Wipro and Dr. Reddy's are aggressively focused on this and have clear visions to become leading global players in their respective fields. Asian Paints is a true Indian MNC; it has operations in over 22 countries. The company has used a mix of acquisitions and organic growth to achieve this state. Even companies focused on the domestic market, especially in FMCG and financial services are intent on increasing their reach and penetration.

These 'Best Managed' companies are less inclined to "grow with the market". They consciously define, redefine and extend markets in which others merely participate. They set trends instead of following them; break boundaries instead of respecting them.

Given the need to innovate, spend on R&D and expand geographically, what really matters at the end is 'execution'. Although acquisitions can boost the revenue base quickly, it takes significant management effort and appropriate post-merger integration to sustain results. Thus, regardless of the mix between internal and acquisitive growth, what really matters is execution and this is where 'Best Managed' companies excel.

Reliance is a leader in the successful execution of strategies and projects across its areas of business. It has outperformed national and international companies in the execution of capital projects. It has effectively developed this competence over the years and used it to execute state-of-the-art, global-scale projects at low cost and on time. It has used the best available technology and people together with detailed planning to achieve this status. At another level, Reliance has been able to execute its strategy of being an end-to-end player in the energy sector with great success. The long-term vision of convergence between energy and communication- consolidation of all consumer-facing activities-still needs to face the test of time and if Reliance is able to successfully execute this, it will cement its position in the national as well as international markets.

FUNDAMENTAL 4:
Best Managed companies use clearly laid out systems and processes in areas of strategic review, operations and people management to sustain superior performance and growth.

As the CEO of a respondent company in the international study said, "We know that the bigger and better we get, the higher the hurdles become. Therefore, it is incumbent upon us to challenge and continuously improve the way we run our business." We have seen that 'sustained' value creation and growth requires strong and robust systems and processes across the different business areas and support functions. Indian 'Best Managed' companies realise this.

In India, we find that many companies reach a certain level of growth and scale by continuing with a few formalised systems and processes-execution and implementation tends to be more by experience than by established systems. These companies face great hurdles in moving to a next level of growth.

Having said that, there are 'Best Managed' companies like Infosys, ICICI Bank and Reliance that have strong established processes and systems across areas of strategy, business operations and people management. Companies like HDFC Bank, Wipro and Cadbury's make extensive use of technology to streamline processes and ensure high employee and customer satisfaction. 'Best Managed' companies are increasingly focusing on effective capture of knowledge and intellectual capital resident within themselves.

Infosys has clearly recognised the importance of having robust review processes that allow it to capture information from all interested parties and make strategic and operational decisions accordingly. Another 'Best Managed' company that has not only established a strong strategic review process but also put in place systems to ensure execution is ICICI Bank-each strategy is broken into initiatives and given to teams for execution, with a committee established for regular review.

So, we see that best-managed companies make use of systems and processes to automate and streamline routine and work-flows and to increase the internal efficiency with regard to people and knowledge management. The best strategy is wasted in the face of poor implementation and 'Best Managed' companies recognise the requirement of extremely robust review processes. The Indian corporate world is still developing the processes it uses. Going forward, we expect stronger investments of money and, more importantly, top management time in getting the internal organisation in shape so as to compete in the global environment.

FUNDAMENTAL 5:
Best Managed companies have a strong leadership team to help broad-base strategic thinking and 'fire their growth engine on all cylinders'.

One of the myths of corporate leadership is that 'the leader' is the be all and end all in the road to making a company globally competitive. While 'Best Managed' companies have one or two people who act as visionaries, these individuals are ably supported by a very strong top leadership team. Previously, a group of people was required to primarily be the 'doers' in a company. Today, with companies growing in scale and spread, this group has become a part of the top leadership involved in strategy formulation and implementation. A leader can only take a company so far. The Indian corporate world has traditionally been one of individual brilliance. Today, companies are investing more in people and seeking to create strong leadership teams. 'Best Managed' companies like ICICI Bank, Reliance and Wipro have had great success in establishing a strong team of leaders.

Reliance is a classic example of the transformation of what essentially used to be a one-man company. Apart from the two Ambani brothers, this company has a close-knit group of very senior people strategising and working on all operations. Another popular myth concerns shareholding and family-owned businesses. Our study clearly shows that being a family-owned business does not prevent a company from being best managed. There are many examples-Reliance, TVS Motors, Wipro, Asian Paints and Sun Pharmaceuticals.

This myth is actually linked to the current trend towards 'professional management'. Professional management refers to the top leadership of the company comprising of people ably trained, educated and with experience in the required field. Nowhere does it state that a capable family member cannot and should not occupy positions of leadership within the company. In 'Best Managed' companies like Dr. Reddy's, Reliance and Asian Paints, a qualified second-generation has come in and provided the company with renewed energy to continue on its value growth path.

KEY AREAS FOR IMPROVEMENT for India inc.

The study highlighted two areas where corporate India appears to be weak, governance and social responsibility. While both have started getting management attention, substantial initiatives are required to not just meet the requirements but also consciously exceed tough global standards. Transparency and corporate governance not only help attract quality global investors but also build credibility with customers.

Best managed companies like Infosys, Dr. Reddy's and Hindalco, have made extra efforts in the area of corporate governance. Infosys complies with the corporate governance guidelines of six countries.

Similarly, corporate social responsibility is also an area to which the average corporate has not given adequate attention till recently. Despite increasing regulations, the need for being environment friendly is still in its nascent stages.

OVERRIDING LEARNING:
Conscious steps are taken by companies striving to be amongst the Best Managed companies-these can be learned and applied.

Every one of the 16 best managed companies in our study holds its position because it has moved consciously and with great deliberation. Each has necessarily striven to formulate, reformulate and achieve its vision and improve the internal organisation. The companies have focussed on what are often considered secondary issues-culture, processes, structure, training and development, employee skills and motivation. 'Best Managed' companies believe they control their own destiny and shy away from blaming external factors. They are focused on achieving certain goals; learn, adapt and apply best practices (See Diagnosing From The Strategic Gap And Learning From The Best); and take conscious steps to ensure execution of the vision and strategies. This is one of the key messages for CEOs intent on improving the overall functioning of their organisation.

Devinder Chawla is Vice President, Anshuman Maheshwary is Senior Business Analyst and Satyajit Lahiri is Marketing Manager, A.T. Kearney.