IT leader Infosys has chosen high margins over fast growth, a strategy that has cost it both market capitalisation and market share. While many suggest that Infosys should reconsider its stand, academics and analysts seem to have a completely different opinion. Here is how they see the road ahead
Raveendra Chittoor
Assistant Professor of Strategy, Indian School of Business
Strategy is about creating a unique and sustainable competitive advantage and is always for the long term. A BMW will not suddenly get into production of low-quality cheap cars if its sales stutter for a few years. BMW’s strategy is to provide a unique value to its customers, albeit at premium prices. A Southwest Airlines or a Ryanair will not add a business class or start charging premium prices just because their margins shrink for a few years. Their unique advantage is low-cost leadership in the markets they operate in. Companies do come up with short-term plans to weather downturns, but never at the cost of undermining their long-term strategy.
From the beginning, Infosys positioned itself as a premium player compared to its peers in the Indian IT services industry. In line with this, it also enjoyed higher margins compared to its peers. In the last 10-year period, the net profit margins of Infosys have been around 25-30 per cent while Wipro’s net margins hovered around 20 per cent. Cognizant’s net profit margin have been around 15-17 per cent. Only the margins of TCS were in the twenties and are now nearly the same as that of Infosys.
Infosys always aimed to have superior revenue growth and margins relative to the industry. But this is a ‘desired outcome’, not strategy. To achieve this, Infosys needs to create a unique advantage through superior products and customer service, which will induce a willingness to pay a premium on the part of its customers. In the early nineties, Infosys clearly enjoyed this ‘premium’ perception — superior customer service, better suite of products, and demonstrated leadership in corporate governance and integrity. In the last few years, in my view, this superior quality is no longer obvious and perceptible, which is putting pressure on its premium pricing strategy.
What could be a way out? Moving up the value chain. Strategy is putting together an entire value chain of activities — selecting which products/services to offer, configuring operations, human resources, sales and marketing, customer service and so on — to offer a unique value to customers. However, today there is no big difference between the value chain of activities of Infosys and a lower-margin player like Cognizant. The global delivery model (GDM) is no longer unique to Infosys. Infosys aims to move up the value chain by combining GDM with consulting services. But it has not managed to put together the resources and capabilities.
In this, Infosys has a thing or two to learn from its counterparts in the manufacturing sector: leapfrogging through overseas acquisitions. There are many examples of companies — Tata Steel, Tata Motors, Hindalco — that have managed to accelerate their move up the value chain through overseas acquisitions. Infosys is probably the best equipped among the Indian IT services players to execute this strategy as it has the biggest war chest in terms of free cash. It has been on the lookout for a few years but has not acted. But if it delays any further, it runs the risk of ceding its premium position to one of its Indian peers. Tata Motors has been accused of overpaying when it acquired Jaguar Land Rover (JLR) and was punished by capital markets for it. Over time, with a large chunk of Tata Motors’ profits accruing from JLR, the same analysts are hailing it as a great move. More importantly, companies like TCS and Wipro are in as good a position as Infosys to make an aggressive overseas acquisition, move up the value chain and snatch the premium player position permanently from Infosys.
Downturns create tremendous pressure on companies to deviate from their strategy. Smart companies, however, do not succumb to this pressure. They actually leverage downturns as an opportunity to shake off any complacency, to cut out flab through value engineering and to embark on path breaking trajectories. Infosys needs to seize the moment.
Robert F Bruner
Eean, Darden School of Business, University of Virginia
My answer is “no, unless…” I am sceptical of those who call for a change in the firm’s premium pricing strategy for two reasons — strategic consistency and timing. Pricing decisions are part of a larger strategy about how a firm presents itself to the market. You must choose to set price in ways that are consistent with at least three other aspects of marketing strategy, such as the design of products or services (for instance, top-quality versus economy-class), the choice of channels through which they are offered (such as high-end boutiques versus discount shops), and how they are advertised or promoted (such as through a human sales force versus advertised over the internet).
Failure to achieve consistency among these parts can destabilise a firm’s business model and can threaten the very existence of the firm. Imagine a scenario where Infosys cuts prices while continuing to offer premium services.
Its profit margin falls stressing the organisation to make up the difference by signing up more customers at the lower price point. But these new customers may not appreciate the premium service and prove to be impatient “economy class” types who want bare-bones service and rock-bottom price. If the company adjusts as requested, the cycle repeats itself and a downward spiral accelerates.
The best advice to Infosys is to stay focused on what it does best, for that will provide a distinctive competitive advantage. I would resist calls for changing the pricing strategy for a second reason: a downturn is a terrible time to tinker with pricing. Once the price is lowered, it will be very difficult to restore it to former levels when a recovery comes. And from a managerial standpoint, it is very difficult to think rationally in a business contraction: alarms are going off all around you; pundits of all kinds are giving you unsolicited advice; there is great pressure to do something (anything!) fast. As they say, haste makes waste. It is very difficult to know, on the basis of a few quarters’ results, whether the downturn is “the new normal” or a rebound is about to occur. As Sir John Templeton, one of the most successful investors in history, said, “The four most dangerous words in business are ‘This time it’s different.’” In economic history, there has never been a downturn without a subsequent recovery.
But I also said “unless.” Disruptive new technologies, discoveries of new natural resources, major shifts in population, and wars have proved to be the tipping point in the forward course of industries and economies. Is now such a time? All of us outside of Infosys are in a poor position to know. My conversation with some senior business leaders around the world suggests that we may be in the early stage of a deflationary economic cycle, which would go hard on all firms. But given how much money the central banks of the world are pumping into the financial system, it seems just as likely that we will face a wave of global inflation.
If the answer is that Infosys faces the “new normal” and if it has absolutely no other alternatives, then the likely solution is to change the premium pricing strategy — very carefully and as consistently as possible with the other elements of the firm’s strategy.
But first my recommendation would be to innovate. Stay the quality leader and offer enhancements to products and services that create compelling new demand. While innovation is expensive, it can reinforce the firm’s competitive standing and continue to justify premium prices. Infosys enjoys one of the extraordinary market franchises of the world and should take extreme measures to sustain it.
Apart from “new normal” conditions, simply cutting prices is bad advice. It is the first impulse of lazy thought. It is always better to focus on value to the customer, first, rather than price. Hang in there, Infosys, and innovate.
