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"The companies which model themselves on mechanical systems where future is an

extension of the past are doomed to fail."




No rooin for
on-performing assets
(NPA) have been in
the headlines for quite
sometime now; they
have assumed epidemic
proportions and threaten
to derail the banking
system. A recently released survey report by
Ernst & Young, Unmaskin9 India's NPA issues - can
the bankin9 sector overcome this phase? highlights the
present market scenario. As much as 72% of the
respondents (a majority of whom were bankers)
said the crisis will worsen, 64% said there were
lapses in the initial borrower due diligence (presanction), and 4 3% blamed change in political/
regulatory environment leading to business loss.
According to the report, the overall level of
stressed loans- or the sum of gross NPAs and
gross restructured assets- rose to over 11 %
in March 2015, from 9 . 2% in March 2013 .
Similarly, gross NPAs rose to 4.6% from 3.4%
in the same period.
At 39 listed banks, gross NPAs rose by
27.69% to ~3.21 trillion on 30 June 2015
from~ 2.51 trillion a year earlier. Although
diversion and misuse of funds are still a major

reasons for this, it wiil not be discussed here

as it falls in the category of fraud and requires
forensic accounting discussion. We will limit
the discussion to discovering hitherto unknown
causes wherein projects have been derailed due
to high debt component of the project costs.
In most of the cases, the promoters have cited
adverse economic conditions for the projects
going bad. But, we think otherwise.
We have studied this phenomenon through
case studies in The VUCA Company. We believe
one of the main reasons behind the rising NPAs
is the financing of high-leverage projects that
have a high debt: equity ratio. In an environment
where the future is uncertain, and so is cash
flow, the funds for servicing debts can diminish
or vanish suddenly, creating NPAs. Professor
Ram Charan has rightly said, "cash is king;
cash is blood supply" in times of business
uncertainty. 1
The question arises as to why these promoters
who were highly competent, v;r:ith a good track
record of running profitable companies such
as Shree Renuka Sugars, Kingfisher Airlines,
and many infrastructure companies undertook
projects with such high leverage in an uncertain

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business environment. The answer may be sought

in behavioural sciences and should be a lesson
to all those who might be thinking of taking the
same route to grow and diversify.

Stop blaming the business environment

After the unshackling of the economy in
the 1990s, there was much euphoria about
the capabilities of a new generation of
entrepreneurs. The initial success
egged them take more risk to
Properties are the most
grow faster. Let us take the case
of Hotel Leela Venture. Its debt
valuable assets of a hotel
equity ratio has been steadily
chain and when you
rising from 3.9 in March 2011
start selling prime hotel
to a staggering 17. 78 in March
property, it is time to
2014. The sudden deterioration
is, no doubt, due to the loss
seriously take stock and
valuation of equity, but still
learn lessons.
the ratio is much higher than a
prudent 2: 1.
Leela's financial woes started with the
construction of Leela Palace in New Delhi. Then
late Captain C P Krishnan Nair, chairman of
The Leela Palaces, Hotels and Resorts, said cost
was no consideration when building the hotel.
He added karma will help them break even. 2 The
per unit cost is estimated to be Z 6 crore (with
land cost) or Z 3.5 crore (without land). This
is way above the average per unit cost range of
Z 7 5 lakh to Z 1 . 8 crore for a five-star deluxe
property, according to the Federation of Hotel
and Restaurant Association of India (FHRAI) . 3
It means cost of construction was 100% higher
than the most luxurious cost estimate in India.
To recover this cost, in 2011, when the hotel
opened, the lowest room rent was Z 2 5, 000
per night, which was progressively reduced
and is Z 14000 today, a drop of 40%. 4 The
hotel also witnessed low room occupancy, as
a report by Cushman & Wakefield estimated
occupancy in the five star category hotels of
top six cities of India in the first half of 2012 at
58 per cent. 5

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When cost of construction is 100% higher,

room rate 40% lower, and occupancy is less
than 60%, cash flow goes for a toss. Now this
restricted cash flow has adverse consequencesfrom servicing loans to funding future projects,
which further restricts access to additional loans
and private equity. A vicious spiral \vith everincreasing velocity. "The economics of building
properties is the key to profitability,'; says Timmy_
Khanduri of PricewaterHouseCoopers. "This is
applicable to any hotel group. If you can't justify
the spend on a room with the charge you are
going to fix for that, that is a recipe for disaster". 6
This has resulted in the company trying to
sell its Chennai and Goa properties to repay
over Z 5,033.81 crore in loans as on March 31,
2015 . On September 20, 2015, the company
announced the sale of its Goa property for Z 725
crore. It had already sold its luxury hotel, Leela
Kovalam, in Kerala for Z 500 crore and its IT
Park building in Chennai for Z 170. 17 crore. It
is also looking for strategic investors to buy a
24% stake in the company. At one time, it was
considering selling the Delhi property too but
valuations were very low. Properties are the most
valuable assets of a hotel chain and when you
start selling prime hotel property, it is time to
seriously take stock and learn lessons.
It is fruitless to blame all problems on external
business environments. One also has to seek
causes elsewhere such as untested assumptions or
fixed mindsets, among others, which contribute
to the company's downfall. We strongly believe
that it is the result of a dysfunctional and
corrosive behaviour pattern which sets in people
who have led successful ventures in the past.
We are now operating in a world characterised
by volatility, uncertainty, complexity, and
ambiguity. All businesses are affected by this
phenomenon irrespective of whether it is
a political, economical, natural, or social
environment. The assumptions and mindsets
which lead to poor decision-making stems from
our poor understanding of complex, uncertain,



and chaotic business ecology. The companies
which model themselves on mechanical systems,
where future is an extension of the past, are
doomed to fail. The mechanistic model is deeply
embedded in traditional business practices
because it has produced so many successes. It is
rooted in the success of the Industrial Age and
heavily influenced by Frederick Taylor's scientific
management to move the modern world out
of a feudal agrarian state into the prosperity
of industrial age. In 1958, S&P 500 index
companies survived on an average of 61 years.
By 1980, this figure had dropped to 25 years
and by 2011 to only 18 years. Companies fell
off the index as they declined in market value,
were acquired by others, or were threatened by
bankruptcy. As management guru Gary Hamel
says, "The seeds of failure are usually sown at the
heights of greatness".
Eight months prior to the filing
It is when the company
of bankruptcy, General Motors's
is at the height of
then chairman, Rick Wagoner,
success, it should
boasted that his company was
'ready to lead for 100 years
question its assumptions
to come' - a comment that
and practices.
only could have been made by
someone who was either naively
optimistic or hopelessly delusional. Though GM
has been getting better for a long time, yet it
has been 40 years since it was the best. 7 GM
committed suicide in degrees. Success robs us
of our learning capabilities and it is when the

company is at the height of success, it should

question its assumptions and practices. Kodak,
25 years ago, had 90% of market share in the
US and 60% gross margin. Today, it is bankrupt.
Failure is a slow process even in a fast-changing
environment. This transformation can only come
when we possess a learning mindset .

Qualities tied to failure

Success comes at a cost and stops the day we end
questioning assumptions, become complacent,
and start believing in our invulnerability.
Tim Irwin in his book Derailed.8, has listed
the highs and lows of six CEOs, there are four
qualities which are tied to failure:
Authenticity: There should be alignment
between a person's inner and outer self. An
alignment between what you say and what you do
regarding beliefs, values, and behaviour. Creating
real value-enduring, meaningful, authentic
value- is not about theatre.
Self-management: Through insight, sensitivity,
impulse control, optimism, and persistence.
Humility: Channelling one's ambition into
excellence in performance rather than selfpromotion. One journalist reported Carly
Fiorina, ousted CEO of HP, used the word 'I' 29
times in a 30-minute talk. She took over most of
the decision-making roles, rendering the position
of COO superfluous. No doubt, she was fired
unceremoniously at Chicago airport.
Courage: Choosing to do the right thing under
difficult circumstances.
The absence of any of these characteristics can
lead to failure and the chances of success increase
as the number of these characteristics increase in
an individual.
In our book, we showcased 12 companies
which failed after opening of the Indian economy
in the 90s, many of them due to high debt
expansion, acquisitions etc., and studied the
impact of these four characteristics on these
companies. The conclusion was that though
the people were smart they suffered from


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To people with fixed

mindsets, failure is a
setback, showing that
they are not smart
or talented.


Suhayl Abidi is
a practitioner in
learning and
management and
co-author of The
VUCA Company.

jettisoning of top personnel in quick succession

shows that his talent pipeline was inadequate. He
was given several warnings not only by his close
associates but also experts in external agencies
such as DGCA.
Alfred Binet, inventor of the IQ test, said, "It is
not always the people who start out the smartest
who end up the smartest."These are people
whom Carol Dweck in her book Mindset termed
as those with fixed mindsets 9 , also sometimes
called the 'CEO disease' suffered by a majority of
CEOs in our case studies, as against those with
learning mindsets.

behavioural black holes, which

led to severe setbacks. Some like
Vijay Mallya suffered from the
abs.e nce of all the four qualities.
In spite of receiving several
warnings from his generals,
Napoleon, took his successful
warfare strategy to the Russian
campaign. When the Russians refused to take a
stand and fight, he should have made a strategic
retreat or be satisfied with a part of the Russian
territory which he had captured before winter
set in. However, he slowly lost sight of the four
characteristics of failure due to his spectacular 32
victories out of the 35 battles prior to Russian
campaign. He ended up losing his entire army
in Russia which started his eventual downfall
culminating in his final defeat at Waterloo and
ignominious death as a prisoner.
Like Napoleon, Dr Mallya extended his debt
led acquisition model which was very successful
in liquor business, to acquire unrelated businesses
such as airline, Formula One racing team, and
IPL cricket club-all in quick succession and
running all ventures as the CEO. At one time,
he had ordered over 100 aeroplanes including
five dreamliners for Kingfisher Airlines. His

Is your mindset flexible?






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Those with fixed mindsets live in a world with

fixed traits and success is all about proving
they are smart or talented, and validating their
existence. In the other- the world of changing
qualities- it is about stretching yourself to learn
something new and develop yourself. To people
with fixed mindsets, failure is a setback, showing
that they are not smart or talented. In other
words, failure is about not growing, or reaching
for the things you value, or fulfilling your
potential. When people focus on improvement
rather than on whether they are smart, they learn
a lot more. Scientists are learning that people
have more capacity for life-long learning and
brain development than they ever thought.
Neuroscience research suggests that an
assumption that what worked in the past would
also work in the future, can become a major
obstacle to high performance. As Steven Snyder
explains in Leadership and the Art ef Struggle, the
real secret of success resides in people's mindset.
He shows how a 'fixed' mindset that ascribes
success to innate qualities is less resilient and
adaptable than a 'growth' mindset that connects
achievement to continuous learning and
persistence. 10
We should keep in mind that our brain is not
our friend. Thanks to behavioural scientists like
Cordelia Fine, we are learning some unflattering



Dr Manoj Joshi
is Professor
of Strategy,
and Innovation at
Amity Business
School, Lucknow,
and co-author
of The VUCA

things about our brain. In her book A Mind ef Its

Own 11 , she asserts that our brain manipulates,
distorts, and censors evidence to fashion a more
palatable version of reality for itself. It is prone
to wild irrationalities, stubbornly close-minded,
it finds evidence for its pre-established beliefs
where none exists, and blinds itself to counterevidence with the help of strategically selective
powers of reason and memory. Blinkered by
self-love, it indulges in ego-inflating vanities and
self-serving fictions. It short, it deludes you and
success feeds this delusional behaviour.
When human beings were learning to live
and walk on two feet, he had few tools or
weapons to hunt, he had only his courage . The
brain boosted his ego to gather courage to
hunt. This behaviour is implanted in our brain
even though our days of hunter-gatherer are
long gone. Our brain highlights our smallest
successes and finds justification for our biggest
mistakes . It is stubborn and deceitful. However,
with conscious determination, we are capable of
seeing the world more accurately. Although we
can never entirely cast off the brain's distortions
and deceptions, we do have some m eans for '
mitigating their effects.
Coming back to Leela Venture, hunger for
growth should have been tempered with desire
for maintaining a positive cash flow. The high
cost of construction of Delhi Leela Palace
turned out to be unproductive way of draining
cash flow. It was the result of a lack of selfdiscipline and control of impulsive behaviour,
not lack of competency or experience in
managing luxury hotels. If Leela's leaders
had paused to reflect on the four qualities
mentioned above, they would have realised the
folly of building a Taj Mahal and instead would
have built a hotel where the cost could be
recovered with competitive pricing and would
not be drowning in the financial mess they
are in, now. Leela Venture now plans to sign
contracts with hotel owners to operate their
properties under the Leela brand, under the so-

called management contracts. At this juncture,

this is the right course of action to take, as such
expansion does not add to debt.
Unshakable assumptions and beliefs are a
result of a successful past. Some psychologists
call it crystallised intelligence. Intelligence
was once thought of as a single concept until
psychologist Raymond Cattell introduced the
notions of fluid and crystallised
his research. 12 The two types of intelligences
are governed by separate entities within the
brain and serve different functions. Crystallised
intelligence is defined as the ability to use
learned knowledge, skills, and experience.
As against the fluid intelligence which is the
ability to solve new problems, use logic in new
situations, and identify patterns, something
which young people excel at as they do not have
much experience and most situations are novel.
As people grow older, they acquire more of
crystallised intelligence and start losing fluid
intelligence. Successful people are more prone
to untested assumptions and fixed mindsets as
they start b elieving that they have somehow
discovered the formula for success. They
continue to carry out strategies and practices
which brought them success in the past. They
do not pause to test these assumptions and
create new knowledge-a fatal error in the
VUCA world.
1. Cash is King. Cash is Blood Supply: Ram Charan, Forbes, 15
January 2014
2. India's Most Expensive Hotels, Wall Street Journal, 22 April
3. Rs 1600cr hotel to open in city, Times of India, 15 Sep 2010
4. accessed on 16 Sep 2015
5. After economic slowdown, Delhi hotels hit hard as room
occupancy drops by up to 15 per cent, India Today, 10
March 2013
6. Why Captain Nair, chief of Leela Hotels, is so confident about
his future, Economic Times,20 May 2012
7. Hamel,Gary:Why companies fail? Wall Street Journal,8 June
8. Irwin.Tim: Derailed, Thomas Nelson,2009
9. Dweck, Carol: Mindset,
1O.Snyder,Steve: Leadership and the Art of Struggle, BarrettKoehler Publishers, 2012
11.Fine,Cordelia: A Mind Of Its Own, Icon Books, 2005
12.The Difference Between Fluid Intelligence and Crystallized


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