Think Beyond, Stay Ahead

"You need continuous introspection to improve"

Godrej Group chairman, Adi Godrej on how best management practices changed the group’s fortune

I joined the family business in 1963, when it was a reasonably well-entrenched entity with a turnover of Rs.10 crore, comprising two companies, Godrej & Boyce and Godrej Soaps. In those days Godrej & Boyce was profitable, while Godrej Soaps incurred losses. As I was the first business graduate (masters in management from MIT) to join the company, I introduced the disciplines of management across marketing, human resources and finance into the group philosophy quite early. Initially there were differences between me and my father on certain issues, but I won his trust as my initiatives demonstrated success — I turned around Godrej Soaps in the very first year, leveraging my management skills.

Today, the group has a turnover of Rs.18,000 crore, driven by organic and inorganic growth strategies. Pre-1991, the growth was largely organic, but the big push came post-1991 when we entered into joint ventures (JVs), pursued acquisitions and brought in modern business processes. In 1993, we entered into our maiden JV with Procter & Gamble (P&G) by transferring our soaps and distribution business into the JV. P&G was a great MNC and we learnt a lot in terms of business processes and marketing research. This added great value as our previous learnings came from insulated experiences. 

We faced some tough times, too. In 1997, P&G globally took a decision to focus on laundry, hair-care, paper products and pharma. Personal wash did not figure in that list, so we were on our own. As we looked at a long-term partnership with P&G in India, we merged our distribution to the JV. But post the split, some of our marketing team remained with P&G. Also, we had spent Rs.60 crore in 1994 on buying Transelektra, which owned the Goodnight brand. In 1996, we acquired two more brands Jet and Banish, and Transelektra’s turnover rose to Rs.200 crore. After the split, the burden of marketing another Rs.250 crore of sales from the consumer products division fell on Transelektra. Thus, a network fit to market Rs.60 crore of turnover was loaded in a short time with Rs.500 crore of turnover. I think that was my biggest error of judgement: I expected too much from the network and the distribution quality suffered. 

So, post the split, we had to recoup and rebuild a distribution network. We recruited about 250 new employees, adopted Total Quality Management and a continuous improvement attitude to create a partnership form of organisation rather than a paternalistic one. We also put into play all our learnings from P&G and created a productive organisation.

It was around this time, too, that we adopted the economic valued added (EVA) approach, a corporate performance measure that aligns employee incentives with shareholder interests. When management consulting firm Stern Stewart approached us with the concept, I was already familiar with it since I had attended conferences on the subject. It also helped that EVA had been successfully adopted globally by companies like Coca-Cola, AT&T and Siemens. Since the FMCG business along with other businesses such as investments and oleochemicals were all part of the same company, we realised that hiving off the consumer business as a separate entity would enhance shareholder value.

Importantly, EVA allows companies to calculate the amount of real wealth that an employee generates, and then links it with income incentives. The higher the EVA generated, the higher the income and, therefore, the greater is the likelihood of dividend payouts to shareholders. EVA also works well with employees as incentives are a far better tool than stock options, which are highly prone to market fluctuations. And there’s clear evidence that the EVA model has worked: Godrej Consumer and Godrej Industries, post the demerger in April 2001, have seen 10-year compound annual growth rates (CAGR) of 40% and 50%, respectively. 

Since then, there has been no looking back. Today, Godrej Consumer has emerged as the flagship of the group. More importantly, adapting the EVA model resulted in  consistent negative working capital, which fuelled our acquisition streak and generated more shareholder value. In 2005, we made our first overseas buyout by acquiring UK-based Keyline brands, and since then we have acquired 10 companies abroad. But the whole approach to buyouts is that we want to add value and don’t want mere appendages. Opportunities for growth and synergistic benefits would mainly be in the developing world. So, all our acquisitions after Keyline have been in Asia, Africa or South America.

We call our acquisition strategy 3x3: focus on developing markets of Asia, Africa and South America across three categories: hair colour, household insecticides and personal care. Growth aside, the idea of focusing on developing markets is that we can implement our business processes, leverage our product and technology. We have very good bottom-of-the pyramid know-how. For instance, in hair colour we have powder hair colours that cost 1/10th of what L’Oreal products cost and today, we export powder hair colour to over 50 countries in Africa, Asia and Latin America. 

Ultimately, the success of a brand does not depend on it being Indian or multinational. The key issue is good management versus poor management. When we used to sell the Camay brand (through JV with P&G), it became a Rs.100-crore brand. But post split, Camay was reduced to a Rs.5-crore brand. (Ultimately, P&G handed over the brand’s marketing and manufacturing rights to Nirma in India.) The other important driver behind acquisitions is that you cannot create brands overnight. For example, in the soaps business, Hindustan Unilever —with whom we have competed for decades — has a “new” brand, Dove, but its biggest brands continue to be Lifebuoy and Lux, which are 75-years old. Similarly, for Godrej Consumer Products, the key brands today are still Cinthol and Godrej No 1. 

While acquisitions have worked for us, the same can’t be said about some of our diversifications. We diversified into business process outsourcing, pest control services and also into medical diagnostics. But we exited these segments as we realised that opportunities that do not offer scale or cannot stand up to competition did not make business sense. More importantly, the realisation came that we were good in manufacturing and marketing, but services were not our cup of tea.

Similarly, we had a JV with Pillsbury, but we sold out because we felt the association was not helping the group leverage its brand potential and reach. However, in the case of our gourmet retail business, Nature’s Basket, the approach is different. The venture is not profitable because it is on an expansion spree and new stores take time to break even. But what underscores our confidence in the business model is that the older stores in the chain have started making profits. In other words, you know there is strong potential in the business and, hence, it makes sense to persist with it. 

Having said that, we do have businesses within the group that we would like to exit, although I won’t name them. The reason: if you are still in the business but make public your intention of exiting it, then the business will stop performing from the very next day.So, even if you are exiting a business don’t talk about it because divesting is a long-drawn process and you don’t want to jeopardise your chances of a successful exit.

Today, we have a strategy for the next 10 years called 10x10, under which our group will be 10 times what we are now, in the next decade. That means we have to grow at a CAGR of 26% every year, across businesses. In earlier days we did not have such objectives; now people pay more attention to formal strategic thinking. Hence, management processes are an important factor. Since the demerger of the FMCG business, the market cap of the company has grown exponentially. So, it’s a culmination of top-notch process and management ideas. 

Post liberalisation, we have adopted strong corporate governance and management practices as it was key to the group’s long-term growth and stability. We moved from a family-owned and managed organisation to being a family-owned and professionally run organisation. My brother, cousins and I jointly own the company. But we are not a family house driven by the need to accommodate the personal ambitions of each family member. It’s all about growth possibilities, the strategy, how much risk we want to take and how to mitigate those risks. 

Most of our companies are run by non-family professionals; we have been recruiting management trainees from the time the Indian Institutes of Management were set up in the country. I am a firm believer in management and professionalism; I also believe that a family member should join the business only if he or she is as qualified as the non-family professional in the company. 

Looking back, my biggest contribution in the initial days was to bring in new management principles, hitherto not followed by most Indian businesses. One must have a clear vision of the future and work to see how it can be achieved and how your people can contribute to achieve that vision. Take the case of ancient Greece: Socrates was Plato’s teacher and mentor. Plato was Aristotle’s and Aristotle was Alexander’s. That is a leadership chain that I have always admired. Leadership styles and dimensions must change with times. Till a few years ago, I didn’t really listen to what others had to say. Perhaps it was intellectual arrogance, but I am much less autocratic now. Now, I make an effort to listen carefully when a suggestion is made, or when someone is making a point. 

There is no perfect strategy to achieve growth; it has to be continuous improvement. You have to be dissatisfied with what you are doing, there has to be paranoia and you have to be introspective enough to continuously improve. We always look at business processes that deliver growth and progress, and benefit the reputation of the company. This is also one of the reasons why we have stayed off businesses like infrastructure, which are prone to government intervention.

Today, about 500 million Indians use one or the other of our company’s products each day, which speaks a lot about our brand spread and loyalty. Let me put it this way — of the Rs.16,000 crore market cap of Godrej Consumer, the book value (comprising tangibles) is around just Rs.3,000 crore, the rest is intangibles comprising brand goodwill, employees, intellectual property and the like. And good brands are not created by nature, they are created by productive people. If you cannot improve productivity, there is no reason for a business to exist. Where does economic growth come from? It comes from improvement in productivity and that creates wealth, which, in turn, creates employment; and then those very employees buy goods creating further growth. That’s what I call a win-win situation.