The Hindu Business Line : The entropy of markets

Entropy is like a gravitational force. It pulls `things' down from a higher level to a lower level. And, natural entropy drives markets downwards in quality and special energy is needed by marketers to fight it.

INDIA IS A CONSUMPTION MARKET, not an export-oriented market. That is why private consumption expenditure as a percentage of GDP ranks with the US and the UK in the 65-70 per cent range, as compared to Brazil (55 per cent) and China (40 per cent). This makes India an especially attractive market for marketers.

Excerpted from the inaugural address by R. Gopalakrishnan, Executive Director, Tata Sons Ltd, at the recent Advertising Future Shock Convention organised by the Advertising Club Madras.

Marketing and business people have always been fascinated by the changing nature of the world around them and of the specific markets they serve. There are players who keep this fascination alive: forecasters, analysers, integrators and experimenters. My focus is on the development of markets and about the `special energy' required to overcome the forces of entropy affecting markets. I have three parts: first, what is market entropy? Second, what are the forces against the entropy of global markets? Third, what are the paradoxical forces driving Indian markets?

What is market entropy?

The word is derived from laws of thermodynamics. One law states that energy will naturally flow from a state of greater organisation to a state of lower organisation, from a state of higher differentiation to a state of lower differentiation. This is the law of nature, and to achieve the opposite requires `special energy'. Through this concept, a student of physics will explain why heat transfers from a hot electric iron to a cooler garment. A hydrologist will use the concept to explain how water flows from a high level to a lower level. To reverse these natural processes requires `special energy' like cooling the electric iron to a temperature below that of the garment or pumping the water uphill.

The concept is visible in common phenomena as well. Your newly-organised cupboard or bookshelf gets disorganised naturally until you expend special energy to organise it again. The same thing happens to markets.

The auto industry had hundreds of manufacturers in the early 1900s. Henry Ford had a unique advantage in 1907 when he launched the Model T and reached a peak market share by 1927. During this time, the auto industry got consolidated into fewer players. However, the Model-T offering got undifferentiated by other players. The special energy required to restore differentiation is called `new brand introduction' or `brand re-launch' by marketers.

In short, entropy is like a gravitational force. It pulls `things' down from a higher level to a lower level.

Someone creates a great new market; the forces of entropy start to drag it down into a commoditised category. The market degrades unless there is the special energy from new entrants or new offerings. So we must remember — natural entropy drives markets downwards in quality and special energy is needed to fight this entropy. And that is what good marketing is all about.

Successful marketers have to observe and understand the forces that influence their markets. As has been said about life itself, if you cannot read the signals and enjoy the journey, you cannot reach your destination.

The forces against entropy

Looking far back over centuries, it would appear that there was hardly any progress in the well being of man till three hundred years ago. And then, terrific things started to happen.

From the time of Jesus Christ till Aurangzeb, a period of 1,700 years, the world population increased at a very slow rate from 230 to 900 million. In the 300 years since Aurangzeb, the world population has increased seven-fold, from 900 to 6,500 million!

So also with per capita income expressed in 1990 dollars; from Jesus to Aurangzeb, it inched up from $90 to $140, but since then, it has increased explosively to the current level of $6,500.

Until the time of Aurangzeb, everywhere in the world, most people worked on the farm. Land productivity did not vary hugely from one place to another.

Therefore, population was a pretty good surrogate for output and wealth. For centuries, China and India accounted for three fourths of the world's population as well as wealth. This is what brought travellers and conquerors to these nations in the early centuries.

The invention of the printing press in 1440 by Johannes Gutenberg made religious literature available widely. As a result, in country after country, people realised that the clergy did not have a direct connection with the gods. People began to think for themselves about what is wrong or right. Navigational advances shrunk the world. People could travel freely across lands, they could trade and exchange ideas. This was early globalisation.

Five waves dramatically intercepted the natural entropy of markets.

In the 1830-1850 period came the steam age with locomotives and railways.

Second in the period 1870-1890, came light and heat with the electricity age.

Third, in the 1920-1940 period came mass mobility with the automobile age.

In the 1940-1960 period, came the twin pleasures of entertainment and spending power with the electronics and credit card revolutions.

Last, in the 1980-2000 period came the information age.

These well-known facts are mentioned only to underscore how dramatic the changes were. During a short period of just 300 years, the `prosperity market' was completely restructured. Whereas China and India accounted for three fourths of world income until Aurangzeb, by 1950 these two countries accounted for under 10 per cent. As late as 1830, Asia, Africa and Latin America contributed 61 per cent of world manufacturing output. By the end of the First World War, these accounted for 8 per cent. These were truly dramatic changes in market share.

Paradoxical forces

We are passing through very unusual times because too many unusual things are happening concurrently. They are contrarian and paradoxical, but they are there for sure. The sum total is that after centuries of impoverishment and losing share in the world prosperity market, India is returning to the centre stage (as is China).

Let us begin with agriculture and food. These are not quite where we would like them to be. We have recognised the need to improve in this regard for long.

Concurrent with near static agriculture in recent years, a percentage of household expenditure on food is declining. The ratio has come down from 60 per cent in 1950 to 35 per cent now. Since Brazil is at 15 per cent and the US at 8 per cent, the direction in which India is headed is clear. Furthermore, the rate of decline is accelerating. During 1950-1990, the average rate of decline was a quarter of a per cent every year. Since 1991, the rate of decline is one whole per cent point each year. At this rate, our food to household expenditure will reach the US level in about 30 years! That is quite dramatic.

Our savings rate is quite high despite being a poor country. Currently it is 30 per cent, lower than China (40 per cent), but much higher than the US and Brazil (18-20 per cent). So the country is able to fund development expenditure from domestic savings to quite a remarkable degree.

India is a consumption market, not an export-oriented market. That is why our private consumption expenditure as a percentage of GDP ranks with the US and UK in the 65-70 per cent range, as compared to Brazil (55 per cent) and China (40 per cent). This makes India an especially attractive market for marketers.

Arguably, India is the only country in the world where the number of retail outlets per million of population is increasing. Everywhere else, there is a huge concentration of trade. When I began my career, it was thought that there two million consumer outlets for widely distributed goods like soaps and cigarettes to service half-a-billion population. Today, it is estimated that there are three times as many outlets to support twice the number of people. Yet modern trade is also growing. So we have the paradox that unorganised trade and organised trade are both booming!

Urbanisation is accelerating change all over, quietly and surely. In 1800, only 3 per cent of the world population was urban. One century later, it was 14 per cent. Another century later, today, the world is approaching 50 per cent, which urban experts believe to be the tipping point for accelerated development. In the early phase, urbanisation in India meant migration to the city from the village.

Now it means transforming villages to cities. Urbanisation in India is 30 per cent, but Tamil Nadu is crossing 50 per cent with Maharashtra and Gujarat following closely. And for those who travel in Tamil Nadu, it is evident that the State is on a trajectory of its own, distinct from any other state in the country.

The Indian consumer

A widespread anxiety was that the Indian consumer would prefer anything foreign and that local brands could not fight foreign brands. This has turned out to be a misplaced view. In detergents, Nirma and Ghadi provide impressive competition to Surf. In colas, Thums Up retains a strong market position in spite of Coca-Cola and Pepsi. In automobiles, Mahindra and Tata have both built excellent positions against Suzuki and Toyota.

There are broader sociological paradoxes that are bewildering. These influence how we view the world.

Most nations have followed a certain pattern during their economic development. Land and agriculture were reformed first; then came light manufacturing industries like sewing and cobbling; third they built their infrastructure; fourth they built heavy industries like mining and metals; and last came services. We have built up services to the point that the world thinks we might well have a billion people in software! We are debating about infrastructure now and have not even started the debate about land and agricultural reform.

Most countries seem to have followed a sequence in their political development. People first experienced capitalism because of the industrial revolution; this allowed wealth rather than class to be the determinant of social status. Then they experienced constitutional liberalism i.e. speedy legal dispute resolution and protection of property. Full franchise democracy was experienced last: until the First World War, women could not vote in the UK , neither could blacks vote in the US. In India, people experienced full franchise democracy right from 1947. Capitalism was suppressed till the 1990s. It is arguable whether we have a responsive legal system even now! The sequence of experiences is completely different.

Of the billion people, English (or Indlish) is spoken by no more than 50 million. Yet English speakers and the English media have a disproportionately huge share of opinion-making in this country as compared to the vernacular media. While the circulation of several language newspapers is larger than English, the advertising tariffs for the English papers outstrip the language papers by several multiples. Many in the `officer class' in India (managers, administrators, professionals) read and think more comfortably in English than their mother tongue. Their exposure to Western ideas, for example in management, is quite broad through such reading. Yet, they have to act in the Indian social milieu. That is why we Indians think analytically, articulate beautifully and act clumsily!

Arguably, we are perceived as a `generally happy' country, at least happier than wealthier nations. Nowadays, `happiness studies' engage the attention of economists - The Economist opened this year with a cover story on this subject. The belief is that up to a per capita income of $20,000, happiness increases with income. If this is true, then we have a long and happy journey ahead of us as a nation. When people feel better than before, which is the characteristic of a people on the ascendant curve of happiness, they sense hope.

I hope that this experiential journey into the evolution and current state of markets has been interesting, perhaps even instructive. I have no hesitation in stating that India is unique, it is a truly differentiated offering. And entropy will undifferentiate it progressively. In the meanwhile, successful marketers will have to invest in understanding the paradoxes and crafting appropriately unique strategies. This can avert the setting-up of American style hamburger restaurants and cornflakes factories!

India was always global. India was open to the teachings of St Thomas in Kerala, the travels of Fa Hien and Huen Tsang, as well as the positive aspects of the British Raj. Indians went to Bali, Malaysia, East Africa for trade and jobs and their influence is visible to this day. Even after independence, Indian leadership perhaps wanted India to be `global', but the path they chose for that destination was mistaken. We now seem to have the right path.