'Entrepreneurs Should not Manage Business Hands-on'
Image: Amit Verma
Designation: Managing Director of Dalmia Cement (Bharat) Ltd. He first joined the company in 1997 at age 25, but left in two years and set up JobsAhead.com with Alok Mittal
What He Has Done: Transformed the 70-year-old family-managed business into a professional organisation where the role of the family is less hands-on and more about big-picture strategic planning
How that Has Paid Off In 2004, before the transformation began, the organisation’s topline stood at $100 million. It will be around $800-$850 million by the end of 2010
What He’s Doing Next Changing the gene pool of the organisation to cater to fast growth, training a staid old economy company to be more consumer-focussed, and instilling performance management measures and variable pay
I worked in Dalmia Cement (Bharat) Ltd. from 1997-99 and then I started JobsAhead.com. I sold it and came back in 2004. I could see things with fresh eyes. There were huge strengths in the company that weren’t being fully leveraged. One, we had always had superior profitability compared to the industry. Two, operating margins were consistently one of the highest in the industry.
Yet, over 10 years, we had lost ground. Competition had grown significantly even though all of them, except ACC, entered the business after we did. Competition was aggressive in timing their investments ahead of the market and they were willing to take bigger risks and were focussed on market share.
Our capital allocation process was structurally inefficient. Three family members were running the businesses — my father was running the cement business, my cousin was running the sugar business and my uncle was running the refractory business. The capital provider and capital receiver was the same.
I spotted a brownfield expansion opportunity at Dalmiapuram near Trichy. It was a low capital cost project since we already had the infrastructure in place. We had a 1.5 million tonne plant at that site. We wanted to expand this by 2.5 million tonnes. No one was investing in the business and we could buy machines cheap. I spoke to the family; the answers were, “We are not sure whether we should invest here, or in sugar or in refractories.” We had a very unclear sense of priorities.
Till now, we had looked at business year-on-year. We needed to look at a five-year plan and invest in whatever gave us the best returns. Each business could raise its own capital to support its business plan.We made a committee of senior executives and family members and each business presented its five-year plan. This opened our eyes — we were sitting on cash but we had no projects to deploy that cash. We didn’t have a growth pipeline of projects. We were just lucky that we had a brownfield project that we could immediately deploy that cash on. Otherwise it would take us three years to incubate a project.
That started the thought process — how we should look at business 5-10 years ahead. We had to redefine the role of the family — it had to be less operational and more strategic. Entrepreneurs don’t manage business hands-on. We were deep into problem-solving at the operating level. We were not spending time on business opportunities, M&A opportunities and lobbying for changes in regulation.
We had to redefine the role of the promoters. That’s still a journey. When the change comes to you, it becomes real and painful. It also means you have to reinvent yourself. I attended a course conducted by Prof. John Ward at IMD, Switzerland. I realised that the problems we were facing were all pervasive. Eighty to 90 percent of businesses in the world are family-run — it’s a model for entrepreneurship across the world. But how do we get the best out of it?
After that Prof. Ward conducted another course at ISB — our entire family including my wife and my cousin’s wife attended. It helped give everyone the same perspective. This taught us in every generational transition there are huge opportunities and huge risks. And the third generation is most susceptible to the risks: First generation creates, second generation preserves and the third destroys.