Dhirubhai Ambani

 

&

 

Reliance

 

 

 

 

 

 

 

 

 

- A Leadership Project done by Parashmoni Chandra

Table of Contents

 

Part 1

 

Introduction

 

Childhood

 

Trader to Tycoon (early business)

 

Post Independence Business Scenario and Difficulties

 

Difficult Licensing Regime

 

Raising Capital

 

Competing with established Players

 

The Reliance Spread

 

Some Major Plants

 

 

 

Part 2

 

Leadership Analysis

 

Designing Organizations

 

Conclusion

Part 1

 

Introduction

 

Whatever progress humanity has made has been due to the effort of leaders whose visionary efforts and innovations have changed the way people live and see the world. There have been leaders in all fields such as Napoleon, Leonardo da Vinci, Einstein to name but a few. Similarly, we observe that leaders are behind the growth of successful organizations. In ancient times Alexander built an army that nearly conquered the whole world and in modern times Bill Gates has built a software company that has nearly conquered the whole world with its software products. What seem to shape organizations are the leadership qualities of the leaders concerned.

 

As a student of organizations the whole challenge is to assess a leader’s leadership qualities to understand what impact he has had on his organization. In Pravir Malik’s class (Course: Flowering of Organization) we have done this in six ways, namely, Signature, Play of Signature, Fractal Thought, Mastery, Openness to Intuition, and World Impact. I will explain these terms in the section entitled ‘Leadership Analysis’.

 

In the First Part I have explored Dhirubhai Ambani’s life and work to give a broad idea about the leader. In building Reliance he faced three major hurdles. First, there was a difficult licensing regime to negotiate with to start new business ventures. Next, he had to compete with established players who had monopolized the markets and lastly, he had to raise capital in innovative ways to avoid taking loans from banks which taxed high interest rates in his days. In the Second Part I use the material I have covered in the First Part to analyze the leadership qualities of this leader.  Finally, I build an organization centered on my leader’s leadership qualities.   

 

Childhood

 

Dhirajlal Hirachand Ambani was born on December 28th, 1932, in the remote village of Chorward in the Saurashtra region of Gujarat. His father was a lowly paid school teacher in Chorwad. He remembers of his childhood, ‘I, as a school kid was a member of the Civil Guard, something like today’s NCC. We had to salute our officers who went round in jeeps. So I thought . . . one day I will also ride in a jeep and somebody else will salute me.’[1]

 

Ambition shone in the eyes of Ambani right from his childhood. In 1949, at the age of 17, along with his brother Ramniklak Ambani, he set out for Aden in the Middle East, for better business opportunities. He worked in a Shell pump where he filled gas for a measly salary of three hundred Rupees. But quickly, he made an impression amongst his colleagues for being courageous and clever. Dhirubhai wouldn’t let any lucrative opportunities slip by. A story that may be apocryphal runs as follows. During the 1950s the Yemeni administration discovered that the main unit of its currency, the Rial, was disappearing from the market. The administration traced the shortage to Aden, a port in Yemen and found to its surprise that a young Indian in his twenties had placed an unlimited buy order for Rials which are solid silver coins. What this young man did was to simply buy Rials, melt them into silver ingots and sell them to bullion dealers in London. This was a profitable venture as the silver in the Rial was valued higher by bullion dealers in London. The name of the young man? Dhirubhai Ambani.[2]

 

Trader to Tycoon (early business)

 

In 1958 Dhirubhai returned to Mumbai a determined young man and started trading in spices such as ginger and turmeric. A firm, Reliance Commercial Cooperation, was simultaneously floated with a capital of fifteen thousand Rupees. He also moved with his family to a one-room flat in Bhuleshwar Chawl in Mumbai.[3]

 

In 1959, Dhirubhai switched his trading business from spices to yarn in an office barely having table space in the Masjid Bunder area of Mumbai. The staff consisted to a total of two members, out of which one was Dhirubhai himself. Dhirubhai was a man who learnt far more than others just by plying his trade. There are many examples. He was able to recognize the quality and weight of yarn just by the sound of its twang when he held it to his ear. He also had a knack for recognizing the best technology in whatever sectors he chose to invest in. And later, though he didn’t consider himself to be a politician he could supposedly make or break governments across the country. There are also stories of ruthlessness, when it came to bending the rules for beating his rivals.

 

As he started out his business in yarn he had certain innate qualities that helped him to expand his business into the large empire it became. He had an acute mind, a sense of the others around him, a degree of cunning, an element of ruthlessness and loads of practical sense.[4] Dhirubhai earned handsomely in the yarn business but needless to say he wasn’t satisfied with remaining an ordinary trader. So he purchased a big chunk of barren land at a far away place in Naroda near Ahmedabad. He was ridiculed for buying this barren piece of land and made fun of. But Dhirubhai proved that he had great vision and foresight. He constructed a mill there to become a mill owner. In time he expanded that same textile unit into India’s most modern textile mill. This was a period when the Indian government faced a massive foreign exchange crisis and this provided Ambani’s company an opportunity to export in a big way as the government offered incentives to encourage export, in return of the foreign exchange that it badly needed.

 

Ambani took advantage by exporting to Russia, Poland, Zambia, and Uganda. Dhirubhai’s first recognition came amongst the people when a team from the World Bank visited many textile mills of the country and declared the Reliance textile mills to be excellent even by developed country standards.[5]

 

So this is how Ambani started his business and grew rapidly. Before I move onto this almost mind blowing growth into different industry sectors it is important at this point to understand the post-independence business scenario of the country. What were the problems he faced from other companies? What restrictions he faced from the government, India being more of a socialist than a capitalist country then? What was the psychology of the people then? Let’s see these problems and what strategy Dhirubhai used to overcome these difficulties.

 

Post-Independence Business Scenario

 

After the independence in 50s, 60s and 70s, there were a few big business houses such as Tata, Birla and Mafatlal. These few large companies, probably encouraged by the existing socialistic regime of the time, had grown tremendously and had monopolized the industrial markets of India. They also had substantial influence over the banking industry, primarily because existing banks had in many cases been nationalized, often even from them.  Because of their size and wealth they had superior organizational features and diversified structures. For example Tata was manufacturing products as diverse as steel, lorries, buses and salt. They virtually dominated all manufacturing fields. And importantly, because of their influence they and other business houses of similar stature were either encouraged to or able to maneuver the regulatory system, especially the licensing system, in their favour.

 

They had good track records and were financially strong and therefore attracted credible foreign partners. They accessed information from within the secretive portals of the state. By these means they expanded and made huge profits. As India was a protected economy they didn’t face competition from outside and made large profits in spite of the often poor technologies and functions they used. Competition from within would mean cutting profit margins to be competitive, therefore they could resort to restrictive tactics. The licensing system in theory was meant to curb monopoly, and prevent excessive regional concentration but it failed to realize these very goals.

 

So if Ambani had to grow it would have to be in spheres outside the operation of traditionally monopolized markets of the large and wealthy companies. Dhirubhai chose the synthetic fiber trade. He bought the synthetic fibers and distributed them to the vast number of composite mills and burgeoning powerlooms producers. As there was high protection in that market he was able to get adequate profit margins to accumulate a decent amount of cash. This surplus helped him to become a mill owner from being an ordinary trader. This progress seemed to many, to be a natural transition. But there were difficult prerequisites that had to be met before the transition was made.

 

  • First, Dhirubhai had to break through the tight licensing regime that was in place.

 

  • Second, he needed the necessary credit to be able raise capital for expansion through new investments.

 

  • And third, he needed to survive the competition in the markets of the already established players who had deep pockets to draw from. Further, if Reliance was to grow and become the empire it is today he had to replicate his strategy without being marooned by wrong decisions and damaging investments.

 

Breaking Through the Licensing Regime

 

What Dhirubhai did was to keep costs at the minimum. He invested in large plants so that the high levels of production would keep the costs at a minimum. While he did this, his circumstances helped him too. The licensing regime was losing credibility because it was disrespecting the very objectives it was created to fulfill. It did not encourage new players and therefore could not curb monopoly. It was in this scenario that Dhirubhai used one of his exceptional talents. He had a rare ability to get those people who controlled the external environment in his favor. He had a clear aim and it was as if he moved the bureaucratic and political classes like puppets to achieve it. He knew which strings to pull to get his job done. This ability to manipulate powerful people in his favor not only got him many benefits but also earned him a certain degree of notoriety.[6] But why did Dhirubhai manipulate people in his favor? It was because he came across vexatious government policies that threatened to mar his business goals. So he simply redefined the boundaries of business by including government relationship as a part and parcel of his business paradigm and strategy.[7] He justifies, ‘the most important external environment is the government of India. All we have to is to break the shackles that chain the energies of our people, and India’s economy will record a quantum leap and move into a new, higher orbit of growth, competitiveness and productivity.’[8]  Let us see the consequence of this redefined business boundary.

 

Dhirubhai became important to every prime minister since Indira Gandhi. During Indira Gandhi’s ‘second reign’ he was able to make giant leaps in vertical integration by setting up the famous Patalganga Mega plant by beating high profile license seekers such as the Tatas, Birlas, Garwals and Mafatlals. How did he achieve this? Dhirubhai hosted a grand and lavish party at the hotel Ashok to celebrate Indira Gandhi’s 1980 election victory. And of course it is not under record how much he contributed to her election campaign. He was able to boost growth by this savvy ‘environment management’. But this invited more and more opposition. Dhirubhai met these challenges with deft punches of a shrude boxer. During Rajiv Gandhi’s reign, the then finance minister V.P. Singh attempted to stall the Reliance gadi (train) by imposing restrictions on the imports of their chief raw material. V.P. Singh also encouraged Nusli Wadia of Bombay Dyeing to launch a media campaign against Ambani. Dhirubhai joined the battle in late 1986 after his first cerebral attack. He used old friend Amitabh Bachchan (legendary Indian film star) to renew ties with Rajiv and pulled the strings from under V.P. Singh’s nose. The finance minister was Rajiv Gandhi’s buddy but soon turned into a suspect and then a sworn enemy. But V.P. Singh became prime minister in 1989 and turned the heat again on Reliance. This time Ambani’s deft hand was in evidence within a year when the BJP, V.P. Singh’s allies, turned hostile and withdrew support and his government fell.[9] So Dhirubhai was able to get the regulatory regime in his favour but there was another thing he needed to do to grow his business.

 

Raising Capital for Expansion

 

He needed capital - that is crores of Rupees to construct new plants and factories. As I have mentioned already, the Tatas and Birlas raised cash by taking loans from banks they had tremendous influence over. But this method was inefficient because the banks can only loan money the people save in them. So the companies indirectly paid double interest to pay back the loans. It was the people’s money that was indirectly got through the bank anyway. What if this middle player could be eliminated and cash be directly raised from the people? Dhirubhai first executed this idea and became known as the father of India’s equity culture. He revolutionized India’s capital markets and thereby ended the dominance of bank financing in big businesses. He was the first to appreciate the potential of the equity market. He conceived that India’s millions of small savers could finance his ambitions.[10] In 1977 Reliance Industries Limited went public and this was definitely a turning point in the company’s history. It was one of the largest public offering of the times. Dhirubhai wooed the masses by promising that he would create a khazana, that is, a treasure, for all his shareholders. The result was that he mobilized 58000 investors most of whom were from the middle class. Many of these investors were investing for the first time in spite of warnings given out to them by merchant bankers that they should keep off the issue. [11]

 

Reliance offered shares for Rs10 each. But there was so much expectation from Reliance and Ambani that the shares opened at the price of Rs 23, more than double the price. This reflects the premium that Reliance was in a position to command. To fuel his breakneck growth and expansion into various industry sectors Dhirubhai offered many public issues successfully.[12] Today Reliance has approximately 3.5 million shareholders making Reliance the largest private company in India. The annual shareholders’ meeting had to be held in football fields to accommodate the growing middle class. But Dhirubhai Ambani’s persuasive powers were not limited to India alone. He was one of the first to enter the American and the English share markets and has made much name for himself there too. He has demonstrated that he is world-class businessman. Unlike other companies, Reliance paid high dividends and bonuses to their shareholders, which made Ambani a hero to them. The early shareholders from that era have enjoyed an incredible compounded interest rate 43%.[13]

 

He says, ‘Logon kalyan, unko khush rakho (welfare of the people, keep them happy.)[14] “Does money making excite you?” No, but I have to make money for my shareholders. What excites me is achievement, doing something difficult.’[15]

 

Sound Manufacturing Strategy to Stay Ahead

 

What was Dhirubhai’s strategy in the manufacturing field? And what did he do with all the money he had managed to raise form the people?

 

His competitors had uneconomic plants with very small production capacity. To beat them, he built plants of massive capacities. This was risky. But Ambani set up world-class facilities and acquired the best practical technology to achieve his goals. He collaborated with Du Pont and Shell to make a number of world-class plants to compete successfully internationally. One of the strategies he implemented was vertical integration. He acquired ownership of his supply chain, to reduce supplier power and thus reduced input costs. So from a yarn trader he became a textile manufacturer. He then progressed to manufacturing petrochemical and progressed further to constructing plants that had the capacity for fractional distillation. And then he took the final step by investing in oil exploration and extraction to complete a full integration of his supply chain.[16]

 

The Reliance Spread (as of March 2002)[17]

 

Reliance Industries Limited (RIL) is today India’s largest private company in terms of sales {Rs 65,000 crore), assets (Rs 60,000 crore) and profits (Rs 4,600) crore}, becoming the first Indian private company in the Global Fortune 500 list.

 

No adjectives are needed to describe Reliance, as it exists today. The figures are jaw dropping.

 

RIL has a net worth of Rs 5.5 billion which is almost 3% of India’s gross domestic produce. The empire has a workforce close to 1 lakh people. Reliance has an extensive marketing network consisting of more than 500 distributors, 2,500 showrooms, and 34,000 retail outlets and these figures are increasing.

 

A DECADE OF BLAZING GROWTH (in crores)

1990-91           2001-02

Total Revenues                         2,112               65,000

Net Profit                                 130                  4,604

Cash Profit                               305                  7,224

Total Assets                             2,778               60,768

Market Capital                         1,881               45,845

 

Petrochemicals

Reliance is a world major in polyester fiber and polyester filament yarn. It is the countries largest polymers producer with a market share of 52 per cent.

 

Oil and Gas

Joint ventures produce crude oil and natural gas in Panna, Mukta and Tapti fields. Awarded exploration blocks. Bidding for more.

 

Reliance Petroleum

RPL is the world’s largest grassroots refinery with a capacity of 27 million tonnes at Jamnagar in