• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Parmit Chadha

A simple what-if analysis can go a long way in understanding the risks of entering a market.

THE lemming is a cute little rodent which has gone down into natural history as being incredibly stupid and throwing itself in a seemingly mass suicide rush off a cliff. Yet, contrary to popular belief, lemming deaths are not deliberate suicide attempts, but accidents resulting from the lemmings' venturing into unfamiliar territories, being crowded and pushed over dangerous ledges.

In my last column, I talked about the lemming factor in Indian business, and showed how the first signs of success in an industry leads to a flood of new entrants, all hoping to make their fortunes. The result is a market flooded with me-toos, and ending up with massive discounts, freebies and excess capacity. Very much like the hapless rodent, this is an outcome of ill-considered ventures into unfamiliar territories.

But there appears to be a paradox here. Generally, the rush is triggered by an industry chamber report on the potential of a new sector (could be processed foods, call centres or IT-enabled services). Surely, these reports are based on in-depth analysis. Or what about sectors such as shampoo and household insecticides, where high market growth rates enticed a host of new entrants? The market growth was a fact - it was not unreasonable to assume that this could be a major revenue earner. Then why do projections go so badly wrong?

Mostly, it's because the analysis did not go deep enough. Sure, the CEO said, `show me the numbers'. But what were the numbers he asked to see? Equally important, what were the assumptions behind the numbers, and how valid were they and how reliable were they?

And what were the assumptions behind these - how valid were they?

Let's begin with the revenue and profit numbers. These are the first ones the CEO asks for, and on the face of it, appear the most researched. But dig deeper, and the picture is different. One common culprit is the per capita consumption number. It starts by making an artificial boundary - in the case of branded atta for instance, one tends to ignore all the local packaged brands. Next, it divides this artificially small number by India's teeming millions, ignoring the one-third of the population that barely gets enough food to eat. This figure, miniscule by now, is compared with a country varying from the US to New Zealand, depending on what suits the case. Finally, the differential is multiplied with India's population (again ignoring the poverty levels) to deliver a huge demand potential.

Like this, there are plenty of hidden assumptions that can trip you up. In the case of packaged atta, as per a report on the market in 1997, this was supposed to be a Rs 15,000 crore market by 2005. This led to companies such as HLL, ITC, Marico and Conagra entering into the packaged atta segment in the late '90s. Currently, all the major brands put together are about Rs 500 crore. A research failure? Or a failure to understand the report? Why assume that packaged atta means only national brands? The report assumed a certain pattern of social and economic change. What if this pattern did not happen (as in fact, it didn't)? In foods, almost an entire generation can go by before food habits are changed - a fact noted rather belatedly by Kellogg and Pillsbury.

A simple what-if analysis can go a long way in understanding the risks of entering a market. Instead, marketers tend to take a single number (like the Rs 15,000 crore figure) as gospel. No wonder, then, that any deviation throws their strategy out of gear.

Then, there are the numbers that no one asks for.

The first is the cost of entering the business. And no, I'm not talking about how much you need to advertise, but about whether you need to change the way you do your business model, and if so, how much that will cost. Take the case of atta once again - the new entrants started off assuming it could be run like their other FMCG businesses. They bought raw material from the market, processed it in third party units, packaged it, and advertised it. Today, they are being forced to look at integrating backwards into contract farming. There's a major cost to this, financial as well as organisational. How many would have entered into atta if they had factored in the necessity of contract farming?

The point is that managers looking to enter to new businesses for growth need to ask themselves why they're doing so. Does it really make sense given their skill sets, or whether they are chasing a grandiose Rs 1,000 crore turnover (or equivalent) mirage?

The second piece of data no one asks for is how many competitors are likely to enter. Also, how about the existing competition from the regional players? This is usually not seen as being serious competition for the new national level players. Or, ignoring generic competition. All too often, strategic planning stops at broad projections of overall market sizes, macro level growth rates and the like. All this is good, indeed essential, but what about the competition? Just because packaged atta did not have a national player in '98 did not mean there was no competition. As HLL, Pillsbury et al found to their cost, the regional and even city level competitors were very strong brands.

Further, as pointed out last time, no sector can possibly grow fast enough for any reasonable length of time to sustain the number of companies that tend to jump into it in India. The markets and industries are impacted at least as much by competitive activity as by broad demographic trends. The biggest mistake a manager can make, going into a new business, is to assume that competition will be restricted to the top few players, and to ignore the possibility of dozens of new entrants. A Rs 200 crore market may double in three years, but if past experience is any guide, the number of competitors will triple or quadruple. In fact, given the attention that high growth industries generate nowadays, it would be a miracle if any red blooded manager managed to resist the siren call of limitless growth in BPO, or retailing or garments or IT-enabled services, or ... you name it.

Yes, the numbers are critical, but even more important are the soft issues - the qualitative factors and assumptions behind the numbers. What are the key drivers of the demand estimate - and what happens if they don't deliver?

And all the qualitative stuff that needs to be examined - what are the basic assumptions that will result in the demand estimate - and what if these drivers of demand don't come through? Do not underestimate the lemming factor in Indian business. But, at least, by asking a few simple questions, you can ensure that you don't get nudged over the cliff.

The author is a Chennai-based marketing consultant. Karate-gy is a proprietary term for strategic exercises conducted by Paradigm Management Knowhow. Feedback can be e-mailed to bleditor@thehindu.co.in.)

Article E-Mail :: Comment :: Syndication

Stories in this Section
Protein punch

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line