Entrepreneurial Management vs Professional Management and Promoter Led Companies vs Professionally Led Companies
I worked for three decades in professionally run companies like Pond’s, Levers, Cadbury (which became Kraft and later on Mondalez), before I arrived at United Spirits Limited (USL) or Diageo.
Pond’s was a professionally managed company with a lot of entrepreneurial zeal. How else would you describe a company whose main business was talcum powder and cream, and was venturing into businesses related to leather, thermometer, mushroom and tennis racket?
In an age of core competence and strategic focus, it is remarkable what we did in Pond’s in terms of the businesses that we got into. Of course, there was a need for foreign exchange. We did many entrepreneurial things like hiring summer trainees and then making them permanent and paying the highest for on-campus recruits to get the best people. We were certainly ahead of our time.
Joining USL—the Spirited Leader
I took on the USL job with a lot of professional management experience. When I contemplated on this role, both the companies in the UB Group were formidable in the alcoholic beverages space. Dr Mallya, a second generation promoter had built on the legacy of his father, who was somewhat of an understated entrepreneur. We didn’t hear much about Vittal Mallya as we heard about Vijay Mallya. USL alone had become the largest spirits company in the world in terms of volume, almost equivalent to what Diageo sold in 180 countries. USL had nearly 50% share by volume in the Indian spirits market. United Breweries Limited with the Kingfisher brand had half the beer market in India. It was no mean achievement whatsoever.
For both these companies, the promoter was very much the brand ambassador. At that time, the alcobev industry had a questionable reputation. People had doubts about business practices and policies. With that kind of perception in my mind, I walked through the doors of USL on October 1, 2013.
Obsessed With ‘No.1’ and ‘Volume’
I saw a company with massive operational and execution capability—a company that was obsessed with volume and becoming number one in the world. It was a company with brands that we all have grown up on—McDowell’s No1, Royal Challenge whisky, Signature whisky, Bagpiper whisky and many more.
We stated in our vision that we should keep the best of the past and embrace the best of Diageo. We had to create an entity that had the best of both. The first journey that we embarked on was the journey of compliance.
It was a company that was street-smart. There were very few meetings. Most decisions were taken just by a phone call. Even major decisions were taken if one man wanted it, like the purchase of a cricket team, which is an enormous asset in a media dark market. I wonder what a multinational company would do if a similar proposal is put up to them?! As there was a quest for volumes, many brands were positioned at a lower price level. USL was formed by conducting huge M&As, like that of Shaw Wallace and integration of Herbertson and McDowells into one company. This created a complex monolith with more than 100 brands, often overlapping each other. There were 94 factories in India.
Traditional Specialities
USL had a lopsided overhead structure. Traditional promoters rarely ask people to go. Loyalty is everything and they have a paternalistic style of management. One promoter told me that they don’t want anyone’s curse or bad omen. They may sideline people but will not ask them to leave. I saw a few smart people and the rest were generally average. This was in sharp contrast to what I had seen for three decades in the companies that I worked for. I saw people who had spent their life in this sector, doing the same job for 20 years. Someone who joined as assistant manager became Vice President but he was doing the same job. Every year, he got an increment and his salary went up. Salaries were generally poor, much below industry benchmarks.
The alcohol industry was a bit like Hotel California—where ‘you could check in at anytime but you can never leave’. Despite all this, they were loyal to the promoter, a trait which can’t be seen easily in professional companies. When Dr Vijay Mallya was stepping down in 2016, half the company felt miserable. Their eyes were moist.
Where People, not Systems Mattered
The company had largely men, a sharp contrast to today’s mantra of diversity. The Management Committee of 20 people didn’t have a single woman. The company couldn’t attract people from outside the sector. And certainly, they couldn’t attract women to come and work in the alcohol sector. I also saw a huge lack of systems, controls and governance. There were very few processes in place, even for critical functions like planning, human resources and innovation. Things were people dependent rather than process or system dependent. People couldn’t be replaced as what they did was not chronicled anywhere.
Sales and Finance were the only powerful functions—Sales to become the Number 1 company and Finance to control the money. All other functions were relatively toothless. There wasn’t even a qualified lawyer for a company of this scale heavily dependent on the regulatory environment. The culture was hierarchical. There were classical symbols of seniority. Even elevators were reserved for senior people. There was reserved parking and huge panelled cabins for a few senior people who worked in UB Towers in Bengaluru. Except the promoter, no one else had real power. Everyone looked up to the promoter as the benefactor. They almost revered the ground that he walked on. He was a man with a larger-than-life image. He had great vision and ambition. He was a remarkable person. He had great risk taking ability, high intellect and huge charisma. He led the big thinking; everyone else obeyed and executed. Diageo wanted to buy this company because of its formidable position in one of the most exciting markets in the world. If it were not for the collapse of Kingfisher Airlines, this transaction may never have materialized. After wooing Vijay Mallya for over a decade, Diageo bought the company on July 4, 2013. I was brought in a few months later.
The Changes Post-Diageo
What happened after Diageo took over? Everything that a professional multinational company would do happened. We stated in our vision that we should keep the best of the past and embrace the best of Diageo. We had to create an entity that had the best of both. The first journey that we embarked on was the journey of compliance. It was very hard. Employees got frightened when they saw people being asked to go. The organisation suddenly became risk averse. They passed everything to their superiors for approval.
Out of the 150 brands in the company, we chose 15. As all multinational do, we decided to focus on brands. We renovated those brands and made them more contemporary and relevant to the younger generation. We upgraded their offers and imagery, so we could charge the rightful price and we didn’t have to discount the brands.
From Volume to Value…
We set up an innovation process and an innovation team. We transformed sales from volume to value. We changed the mindset of the sales force from push to pull. We halved the number of factories to 47. We halved the number of white collar people in the company. We created a muscle for cost savings and elimination of waste as part of productivity. We changed the way business is done in the industry. My proudest legacy is that I established that business can be done the right way in the alcohol industry and that one can be an ethical marketer of alcohol. We changed the way we engaged with the government. We put in place systems, processes and governance. The board was completely revamped.
We integrated the cricket team and its brand assets much better, with the mother brand of Royal Challenge whisky. I must admit that we are unable to deliver the performance of all the other 7 teams of IPL which are promoter owned! We transformed the culture to be more open, more inclusive and non-hierarchical. We acquired the ability to attract people from the broader FMCG space. We stepped up the quality of talent, especially by hiring women. We made a big difference in diversity and inclusion in the company. Finally, we enhanced profitability and showed how share could be won strategically rather than through discounting and M&A alone.
Losing the Spirit of Entrepreneurship
But we have lost something along the way—the true spirit of being entrepreneurial and pioneering that Dr Mallya had built in that company. Decision-making became seriously slow. There is now a lot of analysis and sometimes paralysis. We have lots of meetings and a lot of bureaucracy, due to process intensity. All these crept in while we tried to transform the company.
We struggled to reward the entrepreneur and the risk-taker in our business. We were stuck with KPIs and performance reviews. It’s often about tackling people who are non-performing rather than recognising those who do well. This was a challenge in all the companies that I worked previously—particularly, Unilever and Cadbury. We used the Covid crisis to address some of these issues.
Covid and the Forced Changes
In the last six months, we suddenly became focussed. We started taking much quicker decisions. We introduced flexi working. Engagement levels despite being on virtual mode have never been higher. There has been some improvement but still I don’t think we have an entrepreneurial and a risk taking culture in the company. That’s the USL story.
Jet, Set and Go
I want to touch upon a few more examples from other companies. Jet Airways was brilliant and made so many Indians proud. It was the promoter who built and created the airline with obsessive focus on delighting the customer. At one time, he brought in a great CEO from an FMCG company. Within months, he got frustrated because he spent months sitting outside bank managers’ rooms to battle fund-related issues. Every morning, he got a slip from the promoter about what he wanted the CEO to do for the day. The CEO said that what the promoter needed was a Secretary and not a CEO. So, he left. The promoter, however, missed an opportunity of leveraging the best of both.
I have also seen promoter-driven companies becoming too professional and losing their creative spark and risk-taking ability. While the founder stays, the founder’s mentality is lost in the company. They become victims of the investors and stock price.
I have found them doing with ease an M&A for 500 crores, leveraging their balance sheet, rather than building something from scratch, investing 50 crores a year for 10 years, which will impact their P&L.
I have also seen a promoter in a media company who was very clear why he was bringing in a professional. He kept high-risk and judgmental decisions like which movie to produce or invest in, to himself. But he handed over processes, controls and systems to the professional manager that he hired. This promoter was self-aware enough and had the ability to let go of what he felt that he was not good at. So it’s not about one or the other. For companies to sustain over a longer period of time, you need a combination of both. The art is in getting the balance right and in making both flourish in one company. This is easier said than done.
I have had 35 years of professional management experience during which I had the opportunity to interact with several entrepreneurs in India and abroad.
Successful entrepreneurs are very, very special people and are a tiny percentage of the population. They are the driving force of the national economy and society. They bring in a unique mindset, exploring the unexplored, taking on all the associated risks with them and chalking their own path towards success. They are in control of their destiny. They are very energetic, creative, passionate, committed, resilient and persistent. As the enterprise evolves, successful entrepreneurs build the four pillars that will sustain their organization, viz., values, culture, integrity and ethics.
When the enterprise becomes big, it becomes a social institution owned by several stake holders including clients, customers, employees, regulators, government, banks, auditors and the society in general. During this phase, successful entrepreneurs proactively induct professional managers into the company. They accept and imbibe the creation of systems, processes, metrics, measurement, controls, evaluation, human resource development and several other governance practices.
Roles, orientation and focus of professional managers and entrepreneurs are not mutually exclusive. Professional managers too need to embrace innovation to build an innovative, economic organization for long-term success; and entrepreneurs need to focus on sustainability, efficiency and nurturing talent.
I have seen entrepreneurs completely handing over their organization to professionals. This is rare, though. In such cases, if professionals had worked with entrepreneurs for a reasonable length of time, both would have a shared vision, an aligned purpose for the company and broadly agree on the medium- and long-term strategies. The manager must have a set of people to drive innovation in the organization. It is equally important for the entrepreneur to periodically check and monitor the results of the organization and not interfere with day-to-day management. The entrepreneur must be available for wise counsel.
Key Learnings from Real-Life Experiences in India and Abroad
I was part of a financial services company. This business is highly regulated. It involves processing and transacting trillions of rupees of value. It must have a high degree of consistency and accuracy as well. This business also involves a huge responsibility of compliance and risk management. When the capital market was experiencing a heady growth not so long ago, this company was having a 50% year-on-year organic growth with the existing set of clients. On top of it, the company had an opportunity for inorganic growth in the form of acquiring many clients who had legacy business in the same industry and who were willing to adopt this company as a service provider, all within one financial year. This was an extremely daunting task but thanks to the entrepreneurial leadership and the prevalent culture, the company took on the challenge and within a matter of three years the business metrics grew by 12 times.
Entrepreneurs bring in a strong family culture to the organization transcending normal employee response. In capital markets, new offers of securities to the public will result in impact load to normal business. During such times of peak offering of bunched up public offers, the company had a work load necessitating nearly 60% additional human resources at short notice for a few weeks. These public offers need to be managed within regulatory timelines while maintaining a high degree of financial accuracy. Thanks to the entrepreneurial culture, the company was able to manage them by working with a large number of temporary employees and vendors 24/7. People came together and achieved the task to the satisfaction of the clients and regulators.
Entrepreneurial culture on occasion stretches resources to think out-of-the-box and deliver extraordinary results. This company had highly documented processes and controls. These were needed in order to achieve consistent outcomes.
Entrepreneurial culture on occasion stretches resources to think out-of-the-box and deliver extraordinary results. This company had highly documented processes and controls. These were needed in order to achieve consistent outcomes. The culture enabled the employees to empower themselves in adverse conditions. During the 2015 Chennai floods, it had around 200 employees who were housed near the company and they worked 24/7. These people had to reinvent the business processes to ensure business continuity and completion of essential operations. They managed it amazingly well. It has been documented as a successful case study by SAGE Business cases.
I have also come across the creativity and entrepreneurial zeal of Italian garment manufacturers who specialize in selling high fashion winter garments. They source cut pieces and residual leather at cheap rates and come up with nicely designed leather vests for men and women!
In the late Eighties, I was part of a professional management team in the business of cultivating button mushrooms and processing for US markets. It was a very capital intensive business. The professional managers over time turned into entrepreneurs. The professional management team developed an entrepreneurial approach of growing mushrooms in the cool climes of the Nilgiris without using power. Today, mushroom cultivation is done in a not-so-capital or energy intensive manner. To summarize, skills and talents of both entrepreneurs and professional managers are relevant to varying degrees depending on the lifecycle of the business. It will be prudent for an organization to adopt a judicious mix of both—professional and entrepreneurial styles of management.
I worked for two entrepreneurial and two professionally driven companies. After that, for over 25 years, I’ve been working with owner-driven companies as a consultant. Let’s look at the lifecycle of a company.
Most entrepreneurs start their companies in a small way. Even HP was started in a garage with a capital of 500 USD. Michael Gerber, an expert in small business coaching and strategies, says that in every business organisation, there are three types of people:
1) Entrepreneur 2) Manager 3) Technician. The technician knows his job and he does the job. Ex: a chemist or an accountant. Managers coordinate the work of several technicians. The entrepreneur sets the goal.
If the professional management team looks at an opportunity and tries to implement a new opportunity without its own personal financial risk, then it is called intrapreneurship. 3M is a well-known example for this. They encourage employees to spend 20% of their time in creating new products.
Work on the Business
In the initial stages of the company, the entrepreneur doubles up as a manager and perhaps as a technician too. Michael Gerber says, “Don’t work in the business; work on the business.” As the organisation progresses, there is need for systems and processes and it is better to hire professional managers to set up the company and its systems.
Entrepreneurs are passionate about their goals and they expect the same mindset from everyone, which is a tall order. Organisations are built with ordinary people who deliver extraordinary results. Professional managers are adept at handling ordinary people.
Many entrepreneurs tend to bootstrap; they have a frugal attitude to business and are not ready to hire the high-salaried. Such entrepreneurs need to undergo a mindset change. Entrepreneurs are interested in the topline. They want market dominance. When entrepreneurs completely leave the company to professional hands and if the business they run loses relevance (e.g.: Kodak), a dose of entrepreneurship is needed for the business to survive.
If the professional management team looks at an opportunity and tries to implement a new opportunity without its own personal financial risk, then it is called intrapreneurship. 3M is a well-known example for this. They encourage employees to spend 20% of their time in creating new products.
Very few companies are completely professionally managed in the world like L&T or the branches of Unilever, where the original promoter is no longer visible. But there are many cases where the entrepreneur hires a professional team and closely monitors the company performance. Ex: Asian Paints, Pidilite and Dr Reddy’s Laboratories. Here, even the transition from one CEO to another happens smoothly and often goes unnoticed.
To sum up:
• Entrepreneurs need to bring in professional managers who will deliver results.
• Entrepreneurs come up with many new ideas. The CEO has the responsibility to moderate those ideas and pursue those which are beneficial to the company.
• Entrepreneurs must be ready to attract talent from professionally run organisations by paying the right salary.
• The CEOs joining owner-driven companies must be ready to create an organisation and build systems and processes.
• The CEOs must be transparent with the owners and brief them periodically.
• The CEO must be a buffer between the owner and his team. The owner may, at times, be whimsical and the CEO must support his team in critical moments.
• In the course of time, CEOs must become intrapreneurs.
• The professional manager must multiply the vision of the entrepreneur.
