Sunday, February 24, 2008

So which market will I focus on…

In my last avatar as a consultant, I have done typical market entry strategy studies for industries as varied as diamond jewellery, motor cycles, auto components and trucking. One question which you would invariably grapple with and try to answer was should I enter this product/service market, if so which geography/customer segment and in what order….

Assuming that the answer to the first question was a yes, the next was to answer the geography/segment and that used to be the toughest in my mind. Markets invariably tend to follow the pareto principle, where a few large clusters (either geographical or customers) will aggregate to most of the demand. So the normal response is to hit the largest market first. I used to look at this and wonder is it the right strategy, since in my mind it always used to be the most competitive also. So my question was, when you are entering a market where rapid growth can allow you a good toehold, should you get into a headon fight? The obvious answers entrepreneurs would throw at me was, dude we will get in, wean away some share from every player or from the weakest player and voila - I have got sales since a small share in a large market might still be in absolute numbers large. I had two problems with this

  • If you are so good and have a marketing team which can pull off this approach, why not go to the second rung markets and develop them and improve your hold? Why get into a competitive war, which invariably leads to pressure on margins – higher ad budgets, higher discounts…
  • Execution – its very easy to say I will gain market share, but rarely do we see huge swings in market shares, how viable is it to glean away marketshare from players in a stealth mode? If it is so easy, why the heck are you not exposed to it also?

I never could convince the managements that they need to look at the second set of cities/ markets ( Salem, Nagpur, vizag…) instead of heading into Mumbai, Delhi, Kolkata, Bangalore by default…Very rarely can you come up with strategies which can make use of longtail based strategies with a low cost delivery model, or a bottom of pyramid strategy which then makes it geography independent in a country like India since the proportion of urban and rural poor is a huge number.

Yes, I heard the same stories, small town customers shop from larger towns, disposable incomes are low, market size low, people are not aware, I am a luxury/ top rung product/brand blah blah blah…but I have come to believe it’s the failure of the operational machinery and the marketing machinery which might truly not know how to work with these markets.

The reason why I got thinking about this is also very interesting in my mind. Indian IT companies are going through a trying period – slow down in the largest market, currency appreciation, cost inflation, benign tax structure change etc. And I was looking at our arm chair business analysts writing about the shift towards Europe to create headroom. Interesting today most of the large IT companies have similar sales mix – 60% US, 25-30% Europe, 10-15% Japan/Rest of Asia /Australia. I said hey, I have seen this before, the pattern is the same, domestic/ export doesn’t matter managements finally always move to the largest market, will follow herd strategy and move in the same cycle, very few take the other path to grow.

So I ask myself for the IT companies– isn’t there a market in the gulf countries? Why isn’t anyone focusing on South America? What about the African countries? Why not Vietnam? I agree these markets will not be ready to accept the Indian tag, might be lower on realization, might be difficult terrain to operate due to language issues – but did large competitive organizations get built following a standard recipe?

Doing this needs a different enabler structure in the organization – a HR which can manage issues which will arise, an operations team which can manage widely different operating models, a front end which sells very differently, a strategy setup which can identify these opportunities and can build sustainable advantage around such ‘discovered markets’. Competing on price, incremental changes are far easier and failure on building the eco system forces to follow the set path.

Maybe, I should run this test and see if investors reward different behavior ? and what time the market takes to accept a company is different and the results are sustainable….

Saturday, February 16, 2008

My view on Indian Manuacturing and why you should invest there....

My basic degree is in commerce, professional training in Company law and my post graduation in management..... so its surprising I have spent so much time in manufacturing plants... I might have been a good engineer, I will never get to know, but I still love the look and feel of a manufacturing setup....

Most people who track the stock markets and keep track of that beast called the IIP will notice that the Decemeber number is lower, the last quarter has seen some slowing in the corporate earnings and I have started to hear how maybe the earnings growth will come down from the mighty numbers that drove the stock market frenzy to a large extent... But wait I have a theory about this....

A few quarters ago when the media and the so called protectors of "common man" were in a frenzy about inflation and the big daddies in the government were saying how some of this is supply led and how monetary measures would be ineffective, what they were saying was, we were heading up a capacity constraint in most of the agriculture related and manufacturing related sectors. So what was being done - the government/ RBI took measures to cool down the economy ( about which I have huge issues about how they went about it, but thats for a different post) , but what were industries upto during this phase? My guess (and here I am risking to make a statement without much analysis on data) is that corporates are building capacity. Manufacturing capacity is lumpy, takes time to come on tap and usually comes with a lag.... people who have analysed cyclical industries will see patterns of boom and bust driven by a cycle of - system inventory going down - capacity shortage - huge capacity addition - system inventory going up - price war - bam Bust ! - something similar is happening in India, capacity is coming up. But unlike the cyclicality, i think the Indian manufacturing industry will use this to improve their margins...How?

Most Indian manufacturing units are small compared to global standards, and although the best part of the last decade has been the improvement in efficiency , most of it I believe are work practice led efficiency gains, not technology led. So you had relatively small units with high shop floor efficiency driving profit improvement. Now the scale of operations for Indian units is changing, so people driven partly by tax breaks, are moving to places like Baddi, Rudrapur, Haridwar etc and setting up larger units and invariably with better technology. So the next wave of improvement is set to be driven by technology led efficiency ( and the assumption here is that the efficiency gains from work practice led improvement will not be lost ). Larger better technology led factories with scale economies slightly offset by additional logistics costs will keep the manufacturing margins high. So I would suggest look closely at those schedules in the Balance sheet and profit and loss, see Q-o-Q profitability improvement, remove seasonality and bet on Indian manufacturing for the next 3-5 years. ( Red Flag : Keep away from industries like Two wheelers, paper - where I think the segment might not be viable due to market dynamics for sometime). And you know what is the hidden zing you might get from all this - a one time bonanza since most Indian manufacturing is on the outskirts of cities (Peenya in Bangalore, Ambattur in chennai?, Mumbai) where land from the smaller factories will be freed up since manufacturing will become difficult to carry on since they will become closer and closer to prime residential areas.... so they will setup SPV/ spinoff companies, develop this real estate and push more of the production to the larger factories.

There is still one more wave after this where efficiency will come into play and that is the logistics improvement in factory gate - to intermediate distribution- to last mile distribution. Efficiency in terms of road infrastructure, de-bottlenecking out check posts ( remove the damn things you guys!!!!), warehousing, professional distributors etc. But these require fiscal measures and process improvement in this country..... and with what I think is the most inefficient goverment in the last decade at helm I dont see anything happening.

So bottomline - spend time on research, buy good Indian manufacturing companies and make some money.


There is an SEZ angle, outbound M&A angle and domestic market development angle to all this.... that might be part II to this post....