After 2008, the world economy has largely entered uncharted territory. Businesses are grappling with multiple uncertainties. What kind of leadership do we need in such a scenario? Some answers emerged during a conversation with Ram Charan, a world-renowned business adviser, author and speaker. He has spent the past 35 years working with many top companies, CEOs and boards. The companies include GE, Bank of America, DuPont, Novartis, 3M, Verizon, Aditya Birla Group, Tata Group, GMR, Max Group and Grupo RBS. Since 1998, he has authored many books that have sold more than 2 million copies in over 12 languages. His latest book Boards That Lead: When to take Charge, When to Partner and When to Stay Out of the Way (Harvard Business Publishing) has just been released. In this interview with Forbes India, he talks about leadership in uncertain times.
Q. What are the biggest challenges that businesses are facing today?
There are a number of unstoppable forces that are changing the global economy. At the same time, we have an increasing level of uncertainty. Those leaders and business persons who can gear up to the uncertainty will progress. And those who don’t will find it very difficult.
Q. What are the unstoppable forces?
There are two major unstoppable forces. (There are many other forces, but I would like to put forth two that business leaders need to be cognisant of.) One is the instability of the global financial system. It is uncoordinated and uncontrolled, with so many moving parts that we do not have total transparency of information to dismantle it. At the same time, the central banks and regulators are not fully equipped to prevent this. Hence, you are going to have fluctuations of currency flows. Countries that do not have foreign exchange reserves will need to have certain kinds of controls on the inflow and outflow of money.
Q. Which is the other force?
The other one is digitisation. It is the sensors, the web revolution, the internet, the mobility. A combination of all this is going to cause an impact on just about every industry. So leaders have to see how they adapt to it, take advantage of it, and make their organisation more flexible and agile.
Q. How would you define uncertainty for a business because, in a sense, all business is uncertain. You don’t know when a new competitor will emerge. You may get taken over, policy and regulatory changes may happen. Is there a new kind of uncertainty lurking beyond the normal business ones?
There are two kinds of uncertainty. One is the normal day-to-day one. Like today, the demand for something that a company makes may be 100 tonnes; tomorrow it might be 105 tonnes and the day after, 95 tonnes. For these uncertainties, we now have mathematical models.
Then there is the other kind of uncertainty that can change the whole structure of the industry or [that] of demand. And that is the kind of thing you can see in the personal computer industry, which is now declining in size, and things like tablets are coming up. For these situations, leaders need to look for early warning signals. They [signals] are there and they [leaders] need to face up to the reality.
Q. In the immediate aftermath of the Lehman crisis, you wrote a book called Leadership in the Era of Economic Uncertainty. What are the key things that a CEO needs to do when he sees so much uncertainty around?
They need to ensure that they do not put high debt on the balance sheet. In India, the cost of debt is very high. This has a deep impact on the company. And then you manage your businesses for cash, not for accounting earnings. Cash is king. Cash is the blood supply.
Q. Can you expand on that?
When you look at Amazon in the United States, its whole management is cash per share. It doesn’t go for accounting methods. So companies and their leaders need to ask a few basic questions: Where is the cash being generated? Where can you have some uncertainty? What would you do in that uncertainty?
Q. What about companies which already have high debt? How can they tackle the situation?
Companies need to figure out their good assets; if the debt is high and they cannot repay it or pay the interest on it, they have to decide on how to go about restructuring it. They will have to figure out which assets they may have to sell, or get into a joint venture with a partner to get cash and, thereby, get the company on an even keel.
Q. You talk about how CEOs should practise management intensity in periods of uncertainty. Can you explain that?
Management in the era of uncertainty needs to first focus and assess what is happening at the customer level: Where is the information that customer behaviour is changing? Are consumers under pressure? The management must have a first-hand feel from the bottom to the top.
Q. It must drill down to the customer to get a feel of what is happening out there?
Check out our Festive offers upto Rs.1000/- off website prices on subscriptions + Gift card worth Rs 500/- from Eatbetterco.com. Click here to know more.
(This story appears in the 24 January, 2014 issue of Forbes India. To visit our Archives, click here.)
With regards to India - where inflation (influenced by external forces) and a sluggish economy are taking a heavy toll, it pays well to be cash rich. It is only in such times as these; you realize that the only way to increase your asset base is by letting your cash negotiate a good deal for you. In bad times, cash is the only thing that earns you respect.
on Jan 21, 2014