Why are we so obsessed with volume/scale?

Anand Mahindra, vice Chairman, Mahindra & Mahindra Ltd. said in an interview, “…. The argument most people use against niche is scale.” Why are most people obsessed with scale? It follows that these people think that price is the only factor that matters and you can only bring down costs by increasing volume to achieve economies of scale. Everybody seems to working towards increasing scale. They seem to be saying that niche players cannot exist.

Practically, every industry is made up of participants with different strategies. In practically every industry, there are small niche players. As Porter suggests, one can follow a low cost or differentiation or a focus strategy and still survive and prosper. In the automobile industry, we have Rolls Royce which manufactures just 2000 cars a year while General Motors could be manufacturing 2000 cars a day (I am not sure about this number and I amusing it to make a point). There are boutique hotels and there are large chains of hotels. I just read that there are hotels for just gays. Now what kind of scale they can build? But I am sure they are profitable. You can buy a pan for Rs. 10 and chew it on the roadside while you could also buy a pan for Rs. 500 – Rs. 1000 and chew it in the airconditioned environment. I have a client who is in the headhunting business but is focussed on the pharmaceutical industry. Is he profitable? You bet. He even charges higher than the big headhunters who headhunt in practically every industry.

It is usually the obsession with scale that gets companies into trouble. In order to generate volume, they change their positioning or going on an acquisition spree. For example, after Tata Tea acquired Barista, the focus shifted on volumes and a change in positioning. Jet tried to increase its scale by buying Air Sahara. Not to be outdone, Vijay Mallaya bought Air Deccan. Vijay Mallaya was doing extremely well with Kingfisher. He had built a solid brand and a niche in the Indian market as an on-time airline with good service. What was the need to buy Air Deccan? He wants to build scale and become a global player. I thought the idea was to run a profitable and reputed business irrespective of scale or geographical coverage.

So forget about scale. Just keep taking the right decisions to develop your business at a steady pace.

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As mentioned earlier, interest of companies in building volumes quickly either to achieve economies of scale or to become number 1,2 or 3 in the served market brings in trouble at a later stage. For instance, it has now been reported by CRISIL that consumer bad loans of banks, NBFCs are increasing day by day primarily because of the aggressive startegies followed by them to lend more and more to high risk customers between 2003 and 2007. In fact, quite a few banks like ICICI are not giving consumer/retail loans anymore.

These financial institutions are going to suffer because of their misguided penchant with building volumes quickly. One, they have to desert a business segment and secondly they have to bear losses because of bad loans. Now if they would have followed prudent business practices while lending even at the cost of lesser growth rate, they would have been better off in the long run.

As I have said before, pushing growth beyond is counter productive. Achieving higher market share through risky strategies will not pay dividends in the long run.


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