Among the many tourist attractions of Mumbai are homes of famous people. The Ambanis used to live in Sea Wind building at Cuffe Parade till Mukesh Ambani built the 27-floor Antilia on Altamont Road. Kumar Mangalam Birla’s bungalow is very close to Mukesh’s Antilia. So is the Jindal Mansion of the Jindal family.
Lata Mangeshkar’s flat in Prabhu Kunj building is not too far off. Recent news reports suggest that industrialist Gautam Singhania is building a 40- storeyed building, JK House ,on Warden Road, which again is in the vicinity of Ambani’s Antilia.
For those who are historically inclined, there is Jinnah House (originally referred to as South Court), the erstwhile residence of Muhammad Ali Jinnah, which is very close to the residence of the Chief Minister of Maharashtra.
The other famous residences in the city are Amitabh Bachchan’s Jalsa and Pratiksha, Shahrukh Khan’s Mannat, the late Rajesh Khanna’s Aashirwad and Salman Khan’s one-bedroom-hall-kitchen flat in Galaxy Apartments.
Before you start wondering why I am giving you all these titbits that you may already be aware of, let me tell you, dear reader, that I have always wondered where Ratan Tata lives.
Where is his Anitilia and his Jalsa? Is it as posh as the other residences I have mentioned above? And given the fact that Tata is an architect by qualification, did he design it himself?
The point is that unlike a lot of other industrialists, Tata is very low key. You won’t find him hosting a Page 3 party or even attending one for that matter. His reclusiveness is famous. No wonder The Economist magazine, in a January 2007 profile of him, called him the “shy” architect.
But, as it turns out, he has designed only two houses till date. As the Guardian newspaper wrote in a 2008 profile of his “He only designed two houses: his mother’s and his own beach-house off the Arabian sea.” (You can read the complete profile here)
Ratan Tata took over as Chairman of Tata Sons in 1991, just as the Indian economy was opening up. “His uncle (JRD Tata), who had run Tata for more than 50 years, had started Tata Airlines (which became Air India)…He was a good-looking philanthropist with a French wife and held the first pilot’s licence to be issued in India.His shy and unglamorous nephew, in contrast, trained as an architect at Cornell University, slipped quietly into the family firm and was not marked out for the succession even when his uncle was due to bow out,” wrote The Economist in the 2007 profile. (You can read the complete profile here)
Ratan Tata took over as Chairman of the group from the great Jehangir Ratanji Dadabhoy Tata, or JRD Tata, of Jeh as he was known to friends. JRD had been Chairman of the group for more than 50 years starting in 1938. He took over the reins after the untimely death of Sir Nowroji Saklatvala.
JRD Tata’s father RD Tata was the first cousin of Jamsetji Tata, the founder of the Tata group, and had been a partner in the original Tata & Sons. As Morgen Witzel writes in Tata —The Evolution of a Corporate Brand: “He (RD Tata) had been a partner in the original Tata & Sons, but then moved to Paris, where he set up in business on his own account…He married a Frenchwoman (Suzanne Briere), and JRD their eldest son was born in 1904…He grew up and was educated in France; years later, some Indians remarked that he still spoke with a French accent.”
JRD was surprised at being appointed Chairman of Tata Sons and, as Witzel points out, he “once described the decision of the directors to appoint him as chairman as a ‘moment of mental aberration’”. But the group did rather well under him despite the setbacks it received in the way of its companies being nationalised by the government now and then. In 1939, the group had 14 companies with total sales of Rs 280 crore. By the time JRD retired and Ratan took over, the group had more than 50 companies with sales of around Rs 15,000crore.
JRD was a visionary and a lot of labour reforms that Indian corporates had to carry out over the years where envisaged by him and first implemented within the Tata group. “Tisco (Tata Iron & Steel Co, now Tata Steel) was…probably the first company in India to have a dedicated human resources department, a practice followed by other Tata companies,” writes Witzel.
JRD was also a great believer in letting his managers do what they wanted to do. This was one of the reasons why the Tata group reached the size that it did under JRD. “Russi Mody…was exceptional in the way he steered Tata Steel through difficult times; Darbari Seth built Tata Chemicals and Tata Tea from scratch; Ajit Kerkar was instrumental in turning a one-hotel company into a 1,000-room hospitality giant. And, of course, there was the indomitable Nani Palkhivala, who served on the board of many Tata group companies,” an Outlook Business story on the Tata group points out. (You can read the complete story here)
But what this freedom did was that it made the entire group very unwieldy. “JRD had a clean, uncomplicated portfolio of businesses when he took over in 1938. There was textiles, the group’s first business, steel, power, cement, insurance, and, of course, JRD’s first love—aviation… In 1991, the Tata business structure was quite complicated. Till then, the group was not run as one business group.
Each company was led in the direction that each of the mercurial chairmen chose. JRD allowed them to give full vent to their managerial entrepreneurialism. The result was a maze of businesses. Three companies were making cement and at least five were in the pharmaceutical business in some form or the other,” points out Outlook Business. Other than making the group unwieldy different managers ran different companies within the group as their own personal fiefdoms.
What also did not help was the fact that JRD did not bother much about ownership. As Witzel points out, “By the 1980s Tata Sons held a smaller share of steel-maker Tisco than did their rivals the Birlas. Tata Sons’ share of…truck maker Tata Engineering & Locomotive Co (Telco, now Tata Motors) had declined to 3 percent, and its share of Indian Hotels, the parent company for many of the Taj Hotels, was now just 12 percent…The family’s own stake in Tata Sons had shrunk to just 1.5 percent,while construction magnate Pallonji Mistry owned 17.5 percent… ‘There was a question,’ says Ratan Tata, ‘as to whether we had the right to claim to manage these companies. In fact we didn’t have the legal right or even the moral right, to manage them.’”
What also did not help was the fact that JRD had left the appointment of Ratan as Chairman till very late in the day. Speculation had been rife on who would succeed JRD since the mid-1980s, when JRD had crossed the age of 80. JRD it is said to have made up his mind to pass on the baton either to Russi Mody or Nani Palkhivala.
Palkivala’s political views worked against him. And Russi Mody did not do his chances much good by criticising the performance of other senior leaders within the group. So it was left to JRD to pass on the baton to another Tata.
Ratan Tata was born to Naval and Soonoo Commisariat in 1937. Ratan’s father Naval Tata was the adopted son of Lady Navajbai, who was the wife of Sir Ratan Tata, one of the sons of the group founder Jamsetji Tata. Sir Ratan Tata died of a heart attack at the age of 47 in 1918. He and Lady Navajbai did not have any children. Neither did his elder brother Sir Dorabji Tata.
So it was decided that Lady Navajbai would adopt Naval, who was an orphan and the son of Sir Ratan’s favourite cousin.
As business historian Gita Piramal told the Guardian newspaper a few years back: “The Tatas are a reconstructed family who adopt and cobble together people to make a family. That way they do promote talent rather than blood relations.”
Ratan Tata completed his graduation in architecture from Cornell University in the United States in 1962. It is said that he had a job offer from IBM but he came back to India and was put to work at Tisco, what was then the biggest group company.
His first independent assignment was in 1971 as the director of National Radio and Electronics (Nelco) which was in dire straits. As soon as Tata had managed to turn the company around, Indira Gandhi declared emergency and Nelco was in dire straits again.
Tata was then asked to turn around Empress Mill, which was one of the three businesses started by the group founder Jamsetji Tata (the other two being the Taj Mahal hotel and Tata Steel)). Tata managed to turn around the sick mill but was refused an investment of Rs 50 lakh that was needed. Soon the mill workers’ strike led by Datta Samant hit Bombay (now Mumbai), and the mill had to be shut down in 1986.
In 1981, Ratan Tata was appointed as the Chairman of Tata Industries. “Ratan helped draw up a group strategic plan in 1983. Among other things, it emphasised venturing into hi-tech businesses; focusing on select markets and products; judicious mergers and acquisitions; and leveraging group synergies.
Accordingly, Ratan promoted seven hi-tech businesses under Tata Industries in the eighties: Tata Telecom, Tata Finance, Tata Keltron, Hitech Drilling Services, Tata Honeywell, Tata Elxsi and Plantek,” points out another Outlook Business story on the Tatas. (You can read the complete story here).
But outside Tata Industries, the blueprint did not achieve any success with various CEOs and managing directors continuing to run their individual fiefdoms. Given this, Ratan Tata’s career within the Tata Group hadn’t been great shakes and his appointment as Chairman was as big a surprise for others as it was for himself. This is something that Ratan Tata admitted to in an interview later. He had believed that Palkhivala and Mody were the main players in the race.
So it remains a mystery as to why Ratan Tata was appointed as the Chairman of Tata Sons by JRD. One version is pointed out by Tata group historian RM Lala in an interview to Outlook Business.
“RM Lala recalls speaking with JRD some 10 days after the announcement and asking whether Ratan had been chosen because of his integrity. ‘Oh no, I wouldn’t say that; that would mean the others did not have integrity,’ JRD replied. ‘I chose him because of his memory. Ratan will be more like me.’” Was this JRD’s way of saying that Ratan Tata was chosen because he was a Tata at the end of the day? He probably felt that only someone with the Tata name could hold a group built by various satraps independently together. But we will never know for sure.
The first few years of Ratan’s tenure as the Chairperson were spent fighting the leaders within the Tata group and the fiefdoms they had built. And the fight with Russi Mody got very ugly with JRD having to fire Mody in 1993.
Ratan Tata, on that occasion, had said that Tisco would not be affected by Mody’s exit. To this Mody had replied “Ratan is quite right. No one is indispensable. My disappearance from Jamshedpur may not be felt, but the arrival of Ratan Tata and (JJ) Irani will certainly make a difference. It’s all like a circus — the serious acts of entertainment are always shown first. Then come the clowns and the animal trainers. That may well be the case with Tisco.” (quoted in Russi Mody: The Man Who Also Made Steel, written by Partha Mukherjee and Jyoti Sabharwal).
That was uncharitable, but Mody was quite off the mark on this.
Ill-health forced Nani Palkhivala to leave (he was later affected by Alzheimer’s disease). Other biggies like Darbari Seth and Ajit Kerkar were forced out by implementing a long dormant retirement rule. It is the same retirement rule that Tata has now implemented for himself and appointed Cyrus Mistry in his place.
The other thing that Ratan Tata did was increase the holdings of Tata Sons in all group firms to 26 percent, the level which allows a shareholder to block resolutions at the board level. As Ratan Tata told Witzel in Tata – The Evolution of a Corporate Brand: “Then we set ourselves the task of seeing how we could put ourselves together as a more meaningful and recognisable group of companies with more central control.”
The money required for increasing stakes in various group companies came from Tata Consultancy Services (TCS) which had become the largest software company in Asia and was generating a phenomenal amount of cash for Tata Sons. TCS was a success story that had come out of JRD’s philosophy of allowing his managers to do their own thing. And since the company was unlisted back then, Tata Sons owned it fully.
The other thing that Ratan Tata did was to make the Tata brand more visible and uniform. “One of the first steps in the establishment of the Tata corporate brand was the harmonisation of the brand mark as it was used. As Ratan Tata says, ‘You could fill a wall with the different symbols used by the companies’. These were now swept away and a uniform style was introduced,” writes Witzel.
Also company names like Tisco and Telco were changed to Tata Steel and Tata Motors to make the Tata connection more explicit. Strong brand names like the Taj Mahal hotel were not changed. The group companies were also made to sign the Tata code of conduct. This also meant paying Tata Sons a subscription fees of 0.25 percent of their annual sales, if the companies used the Tata brand name directly.
The other big decision of Ratan Tata was to get Tata firms to go global. When Ratan Tata took over only around 5 percent of the group’s revenues used to come from overseas operations. Now the number is at 58 percent.
A 2007 story by Business Week magazine best describes Tata’s international forays. “Since 2003, Tata has bought the truck unit of South Korea’s Daewoo Motors, a stake in one of Indonesia’s biggest coal mines, and steel mills in Singapore, Thailand, and Vietnam. It has taken over a slew of tony hotels, including New York’s Pierre, the Ritz-Carlton in Boston, and San Francisco’s Camden Place. The 2004 purchase of Tyco International’s undersea telecom cables for $130 million, a price that in hindsight looks like a steal, turned Tata into the world’s biggest carrier of international phone calls. With its $91 million buyout of British engineering firm Incat International, Tata Technologies now is a major supplier of outsourced industrial design for American auto and aerospace companies, with 3,300 engineers in India, the US, and Europe.
The crowning deal to date has been Tata Steel’s $13 billion takeover in April of Dutch-British steel giant Corus Group, a target that would have been unthinkable just a few years ago. In one swoop, the move greatly expands Tata Steel’s range of finished products, secures access to automakers across the US and Europe, and boosts its capacity fivefold, with mills added in Pennsylvania and Ohio.” (You can read the complete story here).
If all that wasn’t enough in 2008 Tata Motors also bought iconic British car brands the Jaguar and the Land Rover.
This strategy of Tata has come in for some criticism given that a lot of companies were bought during 2003-2008 when prices were at their peak. While this is correct with the benefit of hindsight, it also needs to be pointed out that it is easier to carry out big deals in a bull market when people are willing to sell and finance is easier to raise.
On the home front the group has entered newer business like Tata Sky (direct-to-home television) and Ginger Hotels (budget hotels). But Ratan Tata’s big dream has been the Tata Nano, an affordable car for the average Indian. He had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai.
The car has run into a spate of controversies. The Tatas had to pull out of West Bengal where the Nano was originally supposed to be made after political trouble erupted there. They have since moved manufacturing to Gujarat. Other than that, the quality of the initial batch has been criticised with some cars catching fire. But more than anything the car which was supposed to cause traffic jams all across India isn’t really selling too well. Nevertheless it is too early to write off the Nano. (You can read the complete story here). Ratan Tata, for one, believes there is life to the Nano and he could be right.
Ratan Tata’s stint at the Tata group is now coming to an end. He is set to retire in December when he turns 75. As he attends his last annual general meeting of Tata Global Beverages today (31 August 2012 in Kolkata), he can look bank in wonder at what he has created over the 20-and-odd-years he has captained the group. The total revenues of the Tata Group in 2010-2011 were around $83 billion,many more times what it was when Ratan Tata took over the group way back in 1991.
Tata has remained a bachelor all his life though, in an interview to CNN in April 2011, he admitted that he came close to marrying four times. “When you asked whether I’d ever been in love, I came seriously close to getting married four times and each time it got close to there and I guess I backed off in fear of one reason or another,” he said.
The most serious affair was when Tata was in the United States. “Well, you know one was probably the most serious was when I was working in the US and the only reason we didn’t get married was that I came back to India and she was to follow me… and that was the year of the, if you like, the Sino-Indian conflict and in true American fashion this conflict in the Himalayas, in the snowy, uninhabited part of the Himalayas, was seen in the United States as a major war between India and China and so, she didn’t come and finally got married in the US thereafter,” he had told CNN.
Tata, like his uncle JRD, is an avid pilot and is known to fly the Falcon 2000 business jet on his own within India. In the Aero India 2007 air show Tata co-piloted the fighter jets Lockheed F-16 and Boeing F-18.
He has a younger brother Jimmy about whom not much is known. He also has one step brother Noel (who heads the retail business of the Tata group) and three step sisters, one of whom is married to the next Tata Sons Chairman Cyrus Mistry.
Mistry also happens to be the son of Shapoorji Pallonji Mistry, the largest individual shareholder of Tata Sons. Given this, chances are that Ratan Tata may be the last Tata at the helm of the Tata group.
However, as Gita Piramal noted earlier, one needn’t be born a Tata to be its head. Tata is about a state of mind, not just being born in India’s most respect business family.
(Vivek Kaul is a writer and can be reached at [email protected])
(The article originally appeared on www.firstpost.com on August 31,2012. http://www.firstpost.com/business/ta-ta-how-ratan-rebuilt-the-house-that-jrd-left-him-437593.html)
A little over three years after it was first introduced Tata Nano is being widely touted as a flop. The car which was supposed to cause traffic jams all over India is not selling as much as it was expected to.
Between January and July this year 55,398 units of the car have been sold. This is 13.3% more than the number of units that were sold during the same period last year. So even though the numbers are looking better this year they are nowhere near the installed capacity that the Nano plant in Sanand in Gujarat has, as an earlier piece pointed out. (You can read the complete piece here).
Numbers of reasons are being pointed out for the Nano flop show. Let me discuss a few here. In the book The Little Black Book of Innovation Scott D Anthony, who is an innovation consultant, points out a conversation he had with a colleague in late 2009. ““Here’s a provocative perspective,” my colleague said in late 2009… “I think the Tata Nano is going to be a disappointment.”… So why was my colleague being so skeptical? “Look at it from a customer’s perspective,” he said. These people could already afford to pay twenty-five-hundred dollars (or around Rs 1 lakh as the Nano was expected to be priced initially) for a perfectly good used car. Instead they consciously chose the scooter.”
Ratan Tata had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai. But despite the safety hazards people still preferred a two wheeler to a Nano. “Why would consumers choose a scooter? It wasn’t that these people didn’t care about their family. Rather, they didn’t have the space to park a car, or they found scooters that fit into tiny gaps on India’ chaotic streets a much more convenient form of transformation,” writes Anthony.
Another major reason being pointed out for Nano’s failure is it’s positioning. As Rahul Shankar points out in a blog post titled “Why did the Tata Nano fail as a disruptive innovation?” “The Nano was essentially branded as the world’s cheapest car…The truth is that no one wants to own a car that is thought off as cheap. Very few people treat a car as just a machine that takes them from point A to point B. This is basically what the Nano has been reduced to. People want to brag about how awesome their car is and how it kicks their neighbor/friends car’s butt….The advertisements that I have seen for the Nano have unfortunately come off as bland and catering again to the theme of affordability.” (You can read the complete post here)
These are valid points that have been raised. Even Ratan Tata has admitted to mistakes having been made. “We never really got our act together…I don’t think we were adequately ready with an advertising campaign, a dealer network,” Tata remarked earlier this year.
But these reasons notwithstanding, it’s too early to write off the Nano. Nano is what innovation experts call a disruptive innovation. This term was coined by Harvard Business School professor Clayton Christensen. “A disruptive innovation is an innovation that transforms an existing market or creates a new one by introducing simplicity, convenience, accessibility and affordability,” is how Christensen defined disruptive innovation when I had interviewed him a few years back for the Daily News and Analysis (DNA).
An important thing with disruptive innovations is that they tend to work out over a period of time. As Christensen said “It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
A great example is the Apple personal computer which took around a decade to establish itself. As Christensen put it “A great example is the Apple personal computer. The incumbent companies of the time were those like Digital Equipment Corporation (DEC) that made minicomputers, which were big machines that sold for lots of money and could handle very complex tasks. When the personal computer burst on the scene, it sold for significantly less money than the minicomputer did…the PC wasn’t as good as the minicomputer for the market as it existed at that time. Apple made a wise decision and first sold the personal computer as a toy for children. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Given this any disruption does not come as an immediate shift. “Disruption rarely arrives as an abrupt shift in reality,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class —How Disruptive Innovation Will Change the Way the World Learns.
This is something that Nirmalya Kumar, a professor at the London Business School (LBS) agrees with. “What I know about is radical versus incremental innovation. The more radical the innovation is the longer the time customers take to adopt it. People think of Nesspresso as being as a great radical innovation, but what they don’t know is that for 20 years it did not sell a whole lot and then the sales went up in a spike,” Nirmalya Kumar had told me in an interview I did for the Economic Times. Nespresso is a cappuccino maker sold by Nestle.
Amazon, which started off as a bookseller is another great example of a disruptive innovation which took time to get settled in. Another great example from the field of cinema is the movie Sholay. The film was massacred by critics when it released on August 15,1975. As Anupama Chopra writes in Sholay: The Making of a Classic “Taking off on the title of the film, K.L.Almadi writing in the India Today called it a ‘dead ember’… Filmfare’s Bikram Singh wrote: ‘The major trouble with the film is the unsuccessful transplantation it attempts – grafting a western on the Indian milieu.”
The Indian audience had never seen anything like this before. And it thus took time to sink in. The film went onto become the biggest box office hit of all time.
What these examples tell us is that it is too early to write off the Nano, despite the fact that the initial planks on which it was sold are largely not true anymore. “A cheap car that’s not really cheap. A safe car whose safety has been questioned. A poor people’s car that poor people aren’t buying. That sounds like a failure, certainly. But really it’s not. It’s par for the course for almost every breakthrough innovation,” writes Matthew J. Eyring the president of Innosight, a strategy innovation consulting and investment firm, on the HBR blog network. (you can read the complete piece here). “In fact, I can think of only one example of a CEO who pre-announced an innovation that was going to change the world and actually delivered it. That’s Steve Jobs of course,” he adds.
Critics point out that a lot of assumptions that Nano’s initial strategy was built on are not turning out to be true. The two wheeler riders aren’t upgrading to the Nano as they were. It’s no longer as cheap as it was initially promised to be. And people are buying it more of as a second car rather than their main mode of transport. But this is again in line with the way breakthrough or disruptive innovations operate.
As Eyring puts it “There’s nothing unusual about a company having to adjust the price, the production process, the marketing, or even the market of a breakthrough offering. The Nano’s price changes, the new maintenance contract Tata is rolling out to assure buyers of quality, the test drives it’s introducing, the new smaller showrooms, and the new commercials — all widely discussed in the press — should not really be news.”
All these things are also happening with the Nano because Tata Motors went in for a full fledged launch of the car rather than a small one. As Nirmalya Kumar put it “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch. With radical innovation you need to keep tinkering and figuring out what is it exactly that the customer wants. This is because with radical innovation pre market testing is not really relevant because the consumers are not good at telling you whether they will buy a radical new product because they have no conceptualisation.”
This is something that Godrej & Boyce did with the ChotuKool refrigeratior. “Long before most people had heard of the low-power fridge ChotuKool, Godrej & Boyce spent quite some time investigating people’s refrigeration needs, designing and redesigning the product, and redoing its distribution strategy, carefully, slowly, and quietly,” writes Eyring.
It would have helped if Tata Motors had followed a similar strategy with Nano. As Eyring points out “It might not have been easy, but had Tata piloted the Nano quietly, on a small scale, perhaps through a limited production run in a small city like Durgapur in West Bengal or Ranchi in Jharkand, its engineering, pricing, financing, and marketing might have been adjusted far from the limelight to suit the needs of an optimal target customer… the Nano might have made its debut to the wider world with less hype and greater effect. It might not have been a 1 lakh car or even an alternative to motorscooters. But when it first appeared in the mainstream, it would have been right product for the right price in the right market.”
So now the Nano has entered the tinkering phase. And as this goes along Tata Motors will figure out what works and what does not. And this may be totally different from the assumptions the company started out with.
What still doesn’t change is its low price, despite the fact that it never sold for Rs 1 lakh as it was initially expected to. As Nirmalya Kumar put it “That’s the real startling novelty of the product because there is no car available anywhere in the world for $5000.”
The article originally appeared on www.firstpost.com on August 24,2012. http://www.firstpost.com/business/why-you-shouldnt-write-off-the-tata-nano-just-yet-429044.html
(Vivek Kaul is a writer and can be reached at [email protected])
A few years back I had booked a ticket on an early morning Kingfisher flight from Mumbai to Ranchi, or so I had thought. I came to realize I was on Kingfisher Red and not the full service Kingfisher only once I was inside the aircraft.
Sometime later I came to realize that several people I knew had had a similar experience. They had booked flights thinking they were on the Kingfisher full service, only to realize later that they were on Kingfisher Red.
The airline clarified that it was not their mistake but the mistake of the websites that did not make a distinction between Kingfisher Red and Kingfisher First.
But the question that cropped up in my mind was that why would Kingfisher, a premium-upmarket brand, want to dilute its positioning by associating itself with Kingfisher Red, which was essentially a low-cost airline.
Vijay Mallya, started Kingfisher Airlines in 2005. A few years later he tried to get into the low cost airline business, which was the flavour of the season back then, by taking over Deccan Aviation which ran Air Deccan, a low cost airline. He rebranded it as Kingfisher Red. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer.
To explain this a little differently, let us take the example of Hindustan Unilever Ltd (HUL). It sells the Lifebuoy which is targeted at the lower end of the market and goes with the line tandurusti ki raksha karta hai Lifebuoy. The company also sells Lux which is targeted at the upper end of the market and comes with the tagline filmi sitaron ka saundarya sabun.
Of course, the positioning of Lifebuoy and Lux is totally different. And HUL tries to make this very very clear in the minds of the consumer. First of all, both the products have different names. Second the pricing is very different. And third, the advertisements of both the products emphasize on the “different” positioning over and over again.
Now Mallya running a low cost airline under the premium brand name of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium.
And it’s not just about the brand name and the positioning in the mind of the consumer. The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a low cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake.
So in the end this did not work and Mallya decided to close down Kingfisher Red. He explained it by saying that “We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers.”
Kingfisher might have just survived if it had not made the mistake of buying Kingfisher Red. World-over several airlines have tried running a full-service and a low cost airline at the same time and made a mess of it. A company cannot run a low cost airline and a full service career at the same time. The basic philosophy required in running these two kind of careers is completely different from one another.
But the bigger question is what was Vijay Mallya trying to do by running a liquor business, a real estate business and an airline at the same time? This was other than spending substantial time on his expensive hobbies of trying to run a cricket and an FI team, and cheaper ones like commenting regularly on Twitter.
There isn’t really any link among the businesses Mallya runs. Some people have tried to explain that the airline was just surrogate advertising for the beer of the same name. But then there are cheaper ways of advertising than running an airline and losing thousands of crores doing it.
Businesses over the years have become more complicated. And just because a company has been good at one particular business doesn’t mean it will be good at another totally unrelated business.
Mallya is not the only one realizing this basic fact. The period between 2002 and 2008 was an era of easy money. Businesses could borrow money very easily to expand as well as get into new business. And this is what finally got businessmen like Mallya into trouble.
The British economist John Kay calls this the new Peter’s Principle. The original Peter’s Principle essentially states that every person rises to his or her level of incompetence in a hierarchy. Simply put, as a person keeps getting promoted he is bound to appointed to a job, he is not good at. The same is the case with companies which keep buying and diversifying into different businesses, until they land up in a business they don’t really understand. And that drives them down.
Mallya was a victim of the new Peter’s Principle, his non related diversification into the airline business cost him dearly. The lack of focus has hurt Mallya’s core alcohol business as well and United Spirits is no longer India’s most profitable alcohol company. That tag now belongs to the Indian division of the French giant Pernod Ricard.
An era of easy money got Indian entrepreneurs including Mallya to get into all kinds of things which they did not understand and had no clue about. Kishore Biyani brought the retail revolution to India, having been inspired by Sam Walton who started Wal-Mart. His retail businesses were doing decently well till he decided to get into a wide variety of businesses from launching an insurance company to even selling mobile phone connections. When times were good he accumulated a lot of debt in trying to grow fast. Now he is in trouble in trying to service the debt and rumors are flying thick and fast that he is planning to sell Big Bazaar, his equivalent of Wal-Mart. This after he sold controlling stake in the cloths retailer, Pantaloons.
Let’s take the case of DLF, the biggest real estate company in the country. It tried getting into the insurance and mutual fund business. It had to sell its stake in the mutual fund business and if news reports are to be believed it is trying to lower its stake in the insurance venture. It also tried unsuccessfully to get into the luxury hotel business and failed. Hotel Leela tried to get into the up-market apartments space and failed.
Reliance Energy (the erstwhile BSES) was turned into Reliance Infra and now is into all kinds of things. It is building one section of the Mumbai Metro, the completion of which keeps getting postponed. It is also supposed to build the remaining portion of the sealink in Mumbai.
The days when businesses like Tata and Birla used to do everything under the sun are long over. In fact, those were the days of license quota raj with very little competition. Hence companies could get into a new space as long as they got a license for it.
An interesting example is that of the Ambassador. The car had the same engine as of the original Morris Oxford which was made in 1944. The same engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. And when it comes to airlines its time Mallya read what Warren Buffett told his shareholders a few years back.
“Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt.”
The bigger sucker saved Buffett. But Mallya may not have any such luck
(The article originally appeared on www.firstpost.com on July 5,2012. http://www.firstpost.com/business/how-the-new-peter-principle-caused-kingfishers-downfall-368549.html)
(Vivek Kaul is a writer and can be reached at [email protected])