Our obsession – building scale

Businesses all over the world are obsessed with achieving market leadership, building scale to achieve economies of scale and last but not the least, consistently clocking high growth rate. However, the obsession of businesses with the above objectives invariably lands them in trouble. Why? Primarily because they have not only misunderstood the concepts behind these objectives but have also misunderstood how these objectives should be achieved. As such, I feel that there is a strong need to clarify what our obsessions mean so that we can avoid the pitfalls and run our businesses successfully. Today, I will discuss our obsession with building scale.

It seems that most people are obsessed with scale? It seems that these people think that price is the only factor that matters and that you can only bring down costs by increasing volume, that is, take advantage of the economies of scale. Everybody seems to working towards increasing scale. I find this very illogical for a variety of reasons:

What about niche players?

People who believe in the above theory seem to be saying that niche players cannot exist. But we all know that there are profitable niche players in practically every industry. 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 manufacturers just 2000 cars a year while General Motors could be probably manufacturing more than 2000 cars a day (I am not sure about this number but I am using it to make a point). There are boutique hotels and there are large hotel chains. I read somewhere that there are now hotels for just gays. Now what kind of scale can they 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 an air-conditioned environment. I have a client who is in the headhunting business but is focused on the pharmaceutical industry. Is he profitable? You bet. He even charges higher than the big headhunters who head hunt in practically every industry.

What is the optimum level of scale?

It seems that nobody seems to know if there is an optimum level of scale. Are the people who are obsessed with building scale suggesting that building scale should be the primary objective of all companies, big and small? Subhiksha Retail, a start-up, wanted to scale up fast and so did Tata Steel by acquiring Corus. So where does the quest for scale end?
What about the disadvantages of scale?

We all know that scale also brings in certain disadvantages with it, such as bureaucracy, delayed decision making and inability to respond quickly to the changes in the marketplace. It would seem that part of the advantage of achieving low cost through scale could get offset because of these disadvantages.

Building scale at what cost?

It is usually the obsession with scale that gets companies into trouble. In order to generate higher volumes, they take unwise decisions. Some even change their established positioning while others go on an expensive acquisition spree. For example, after Tata Tea acquired Barista Coffee, the focus shifted to volumes. They changed their positioning to achieve volumes. Jet Airlines tried to increase its scale by buying Air Sahara. Not to be outdone, Vijay Mallya bought Air Deccan. I thought Vijay Mallya 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 excellent service. We all know the trouble he landed himself into with the acquisition of Air Deccan. From “King of Goodtimes,” he became “King of Badtimes.” Now where was the need to buy Air Deccan? He just wanted to build scale fast and become a global player. I thought the idea was to run a profitable and reputed business irrespective of scale or geographical coverage. As of now (February 2010), most of the small low cost airlines like SpiceJet are making money and even expanding their fleet while Kingfisher is losing money as well as hiring consultants to restructure its organization.
Now we have Airtel which is obsessed with growth and expansion. It is desperate to enter the South African market through expensive acquisition. Where is the need for Airtel to grow through expensive acquisitions? It is already participating in one of the largest and fastest growing telecom market. I think it has now become an ego issue with Sunil Mittal. He wants to build a Indian multinational company and be hailed as a great deal maker. You would be amazed at the kind of money that is being spent on manpower, investment bankers, lawyers and travel expenses to fulfill this dream of Sunil Mittal. I think the shareholders should seriously question this obsession of Airtel’s management.

Building scale and trying to achieve economies of scale is a natural consequence of the growth of a business based on sustainable and prudent business strategies. The problem arises when we intervene with strategies to expedite and force growth at an unnatural pace.

So I suggest that we stop worrying about building scale and just keep taking the right decisions to develop our business at a steady pace. Building scale will become automatic.

Avinash Narula

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