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The Herd Mentality

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The Herd Mentality

Following the leader in hordes is a natural business instinct. But how many can last the distance?

DINESH NARAYANAN

Some regular, peak-hour commuters in Mumbai's crowded local trains have a seat-grabbing strategy they call
‘back maro’ (go back). They board trains moving in the opposite direction so that they are assured of seats
when the trains turn around. But the number of such commuters has increased so much that many never manage to get
a seat. Stephen J. Dubner, co-author of Freakonomics, gives a similar example of his bus travel in New York and says
that people may not like being part of a herd, but psychologically they are somehow comforted by it. They succumb to
the “herd mentality” and unthinkingly tag along — because if everyone else is doing it, it must be the
thing to do.
This human psychology is as prominent among Mumbai and New York commuters as it is among businesses. The
phenomenon of hordes of people jumping on to the money-making opportunity in vogue is ages old. History of
businesses around the world is peppered with such rushes — from the 17th century Dutch tulip mania when
practically everyone in the Netherlands left their jobs to grow and trade tulips; the mid-19th century California gold rush,
when people from all over the world flocked to the state to prospect for gold; the dotcom boom at the turn of the
millennium; to the private equity and hedge fund craze of today.

But as businesses in the West have gained roots, such dashes have become infrequent there — especially since
1990 when management professors C.K. Prahalad and Gary Hamel introduced the theory of core competence (which
suggests that companies should not get into unrelated businesses) and investors increasingly began to push companies
to shed non-core businesses and stick to their core competence. For instance, a Wal-Mart or an Exxon-Mobil getting into
businesses other than its own is unheard of.
Herd On Every Street

However, in India, the herd syndrome has gone from strength to strength with entrepreneurs increasingly embracing
non-core businesses. There are some who wait for leaders to cut open a path so that their entry becomes easier and
less risky. Some join the herd because of peer pressure, and some because their other businesses throw up large
amounts of cash that need to be gainfully deployed. For example, Videocon group’s investment in Ravva oil field
throws up about Rs 600 crore cash every year.
In August, when the Telecom Regulatory Authority of India (Trai) recommended lifting of the cap on mobile service
providers in each circle, the department of telecommunications received as many as 190 applications from telecom
players as well as from companies in sectors as far removed from telecom as real estate (DLF, Parsvnath and Unitech)
and financial services (IndiaBulls). Videocon has applied for 22 licences. This is the third round of a major rush in the
segment. The last wave for the fourth telecom licence in each circle was in 2001 when six players applied for licences in
16 circles. “In any country when a new sector is opened, there will be herds like (they are) in telecom, retail and
aviation,” says Rajeev Chandrasekhar, founder of BPL Mobile, himself a part of the telecom herd of 1994-95.

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Organised retail is the current hot sector where a herd is forming. Several business groups, including Tatas, Reliance
and Birlas have committed huge capital towards their forays. Reliance is planning to spend about $5 billion (Rs 20,000
crore) by 2010 to build the business. The Aditya Birla and Future groups have planned billion-dollar investments each in
retail. According to Mumbai-based Enam Research, different players will spend about $22 billion (Rs 88,000 crore) to
create about 160 million-180 million sq. ft of retail space in the next three years.
Take the case of yet another emerging sector — aviation. G.R. Gopinath’s success with his pioneering
move to start a low-cost airline, Air Deccan, caused a revival of SpiceJet (formerly ModiLuft), the launch of GoAir from
Bombay Dyeing’s Wadias and IndiGo from a Delhi-based travel house. Delhi’s Mohan Meakins launched
Indus Air. Besides, UB Group’s Vijay Mallya launched Kingfisher Airlines and Madurai-based textile group
Paramount took off with an all-business class Paramount Airways. After Gopinath’s launch of Air Deccan in 2003,
low-cost airlines mushroomed across a span of two years (see ‘The Aviation Herd’ on page 32). There are
still around half a dozen waiting for a nod to their application to set up a new airline.
Gopinath says he never expected half a dozen airlines to be on his tail within months. “But then, you will always
have more followers than leaders,” he says. Gopinath is now working with Bangalore’s GMR group on
building low-cost terminals in small cities. When he started Air Deccan, he was looking at a new business model tailored
for an untapped Indian aviation market that resided predominantly in small towns and villages. “India, now, has
only one caste — the aspirational-consumer caste,” he says. “And people were consuming
everything but air tickets.”

First movers aren’t necessarily the most successful. Those who learn from the mistakes of the first movers can
capitalise on their ideas more effectively. For instance, PhotoJagat began as an online photo printing website in 2004
(See ‘The Online Herd’, on page 31). It was soon followed by Picsquare, MeraSnap, PhotoMasti, iTasveer
and SnapGalaxy. iTasveer leads the pack now because it introduced an innovation — a Flash-based tool called
Doodlepad, which gives the user the ability to add captions, text, borders and colours to their photos. These remixed
photos can then be used to create customised T-shirts, mugs and greeting cards. It also made a smart move of tying up
with Microsoft to become the only Indian vendor for ordering photo prints directly from the technology giant’s Vista
operating system.
Among other areas, in media, 2006 saw more than 50 news and entertainment channels launched, while 60 more are
waiting for licences. More could follow as some large groups such as Mukesh Ambani’s Reliance Industries are
still examining the business model. The rush for FM radio stations has now led to about 267 licences, while another 800
could be issued over the next one year. In automobiles, as soon as Ratan Tata announced his plans of making a Rs 1-
lakh car, even international car makers such as Renault, Honda and Toyota cottoned on to the idea. Even two-wheeler
makers such as Bajaj Auto and the Hero Group are working on their own prototypes of the small car. Special economic
zones have attracted 550 applications, only 386 of which have been approved. Today, multiplexes, wind farms, BPOs
and Web 2.0 have also witnessed a significant herd mentality.

‘There Could Be An Element Of Ego At Play’

Herd mentality in business is perhaps a natural extension of human behaviour. BW spoke to Madhukar Shukla,
professor of organisational behaviour and strategic management at XLRI, Jamshedpur, and author of Competing
Through Knowledge, Building a Learning Organisation, to understand the behaviour of herds. Excerpts.
Why do businesses display a herd mentality?

A lot of opportunities spring up when a new sector is opened. Many try to exploit this. Since the sector is new, there
are no benchmarks. Capability issues arise only later.
Do they have clear strategies for new opportunities?
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They would have, but they would not be tested. They rely on previous experience, what they already know from other
sectors and other countries. But that may not work for a new segment and local markets.
What are the risks they face?

When huge markets such as India open up, the picture is always incomplete. The retail sector, for example. More
than 95 per cent of the sector is unorganised. The organised players think that even if they capture 5-10 per cent of the
unorganised market, it would be great business. But there are too many unknowns. The strategy that worked in other
developed markets may not apply in India.
Some businessmen don’t quit even though they do badly...

Sometimes, they stick on the hope that the sector would mature sooner or later. There could be an element of ego at
play sometimes that clouds decision making.

Me-Too Mania

As expected, most of these companies are fixated on the pot of gold at the end of the rainbow, but many do not know
how to get there. The short-term strategies that commuters deploy don’t work with businesses that have to be
built to last. Often, herding gets companies into trouble. Some are able to extricate themselves, others fall by the wayside.
In fact, quite a few companies acting in a herd have neither a clear strategy nor the deep pockets to sustain the
business. For instance, MDLR Airlines and Indus Air, which began operations earlier this year, are already grounded.
They were unable to sustain operations as non-scheduled operators. In the previous rush in the mid-1990s, companies
such as ModiLuft, East West Airlines and NEPC Airline had to shut operations in the face of intense competition and a
financial crunch, whereas Damania Airways was bought over by NEPC.
The Aditya Birla Group (with AT&T) and the Tata Group, for instance, got into telecom at the first opportunity but
struggled for nearly a decade as they could not match the growth of competitors Bharti Airtel and Hutch-Essar (now
Vodafone Essar) who expanded through acquisitions and growth. Finally, they tried to gain scale by merging their
telecom businesses into one entity Idea Cellular (formerly Birla AT&T Tata). But talks to merge with BPL Mobile failed
and Idea Cellular’s size was still not large enough to take on the might of market leader Bharti. So, Tatas began
their own nationwide telecom business using CDMA technology under Tata Teleservices and their marriage with Birlas
ended in an acrimonious split early this year with a sellout to the Birla group.

At times, companies can fall victim to one wrong move. In the telecom rush of 1999, Koshika Telecom of the Delhi-
based Group Usha, which had already dabbled in sectors such as hospitality and steel, took a suicidal decision to pay a
lumpsum Rs 450 crore to buy licences for four northern states while most other telecom players opted for revenue
sharing. Koshika collapsed due to the cash crunch soon after. Many others, who could have suffered like Koshika,
escaped because companies such as Analjit Singh’s Max Telecom and C. Sivasankaran’s Sterling Cellular
had the good sense to sell out to bigger, better players.
Ahead Of The Pack

Once a company is part of a herd, or is faced with a herd, whether it stands out or not depends on the tactical moves it
makes (see ‘Bharti’s Tactical Moves’ on page 34). For players such as Videocon Industries’
V.N. Dhoot, who pretty much exemplifies India’s consumer electronics business, such moves are about staying
ahead of the pack. In 1986, Dhoot was just a fresh engineer. His father ran a profitable sugar mill and wanted him to join
the family business. But the young graduate wanted to start an electronics company. Dhoot’s father tried to
scuttle a Rs 4-crore loan that he sought from the local SBI branch. But the manager had more faith in him than his father.
Venugopal set up his electronics firm, and the rest, as they say, is a minor business lore. “I knew when I was in
college that today’s profit-making businesses may not be tomorrow’s profit-making ones,” says
Dhoot.
His success does not lie as much in identifying an opportunity as it is in designing pre-emptive strategies. When he
entered the business, there were other TV makers such as Keltron, Uptron and Weston. But Dhoot was among the first
to integrate backwards. “I knew that the government will allow imports some day,” he says. “That is
why I decided to make semiconductors and picture tubes instead of assembling TVs.” When the electronics
appliances market exploded with the entry of LG, Samsung and Sony, Dhoot was ready with his factories to supply to the
assemblers. The Videocon brand today has a relatively small share of the TV market, but is one of the largest picture
tube makers in the world.

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“If you want certainty and clarity, wait for others to take a position and see how they do,” says Richard
Rumelt, professor of strategy at UCLA’s Anderson School of Management. “Then you will know what
works.’’ That is what happened in the Indian aviation market.
Air Deccan’s Gopinath shook up the industry by pioneering the low-cost-fare model in India. Soon, others such
as SpiceJet, IndiGo, Air Sahara and GoAir positioned themselves in the same marketplace. It wasn’t long before
profits nose-dived rapidly. Air Sahara sold out to Jet Airways and SpiceJet, and IndiGo and GoAir have leased out
aircraft to other airlines and slashed the routes they fly.
There was, however, one man who waited and watched the herd from outside as Air Deccan took on Jet Airways, Air
Sahara and state-owned Indian Airlines. Vijay Mallya, a relative latecomer to the aviation party, positioned Kingfisher as
a classy, full-service airline with tickets priced somewhere between the low-cost, no-frills operators’ fares and
those of established carriers such as Jet Airways and Indian Airlines. Mallya was convinced that it was ridiculous to run a
high-cost business on wafer-thin margins.
Kingfisher itself is not profitable yet, but it is focusing on building a business for the long haul. Its long-term vision
helped it become a market leader in the aviation sector, when it bought Air Deccan in May. The acquisition has taken its
market share from 11 to 28 per cent, nearly as much as Jet Airways’, which had a 14-year headstart in the
industry. Kingfisher has grown from a fleet of four Airbus A320 aircraft at the start to 34 planes today. Meanwhile,
SpiceJet’s market share is stuck at 8 per cent, IndiGo’s at 6 per cent and GoAir’s at 4 per cent,
almost stagnant for more than a year.

Bharti’s Tactical Moves

When mobile telephony was opened to the private sector more than a decade ago, 32 companies put in their bids.
Their lineage was from the who’s who of Indian industry, including the Tatas, Reliance, Modis, Hindujas, Dalmias,
Escorts, Essar, SPIC, Videocon, Usha and the Bhilwara groups. They had the financial and management bandwidth to
make it big in the industry. But 12 years since, a nondescript company of that era, Bharti Cellular (now Bharti Airtel),
stands out as a clear market leader with some bold and strategic moves. It has 46.8 million subscribers as against the
second largest player Reliance Communication’s 34.48 million.
But in 1999-2000, Bharti’s Sunil Mittal was struggling to pull out of the herd. By end-2000, Bharti had 18 per
cent of the market with 560,000 of the 3.1 million mobile subscribers in India. BPL was still ahead with 606,000
subscribers in four circles. The next biggest players were around a quarter their size. Tatas had 90,000 subscribers
nationally and the Birlas 178,000.
That’s when Mittal struck with the most significant telecom acquisitions of that period. First, he bought a
controlling stake in JT Mobiles (end-1999), the service provider in Andhra Pradesh and Karnataka, for Rs 600 crore.
Soon after, he picked up Skycell Communications, which controlled Chennai, for Rs 100 crore and the Modi-controlled
SpiceCell in Kolkata.

By end-2002, Bharti had 2.77 million subscribers across 15 of the 23 circles. That gave it a 26.31 per cent share of
the market. BPL had just 1.08 million subscribers in four circles. The divide was just beginning. The headstart that Bharti
had helped it maintain the lead despite the entry of state-owned Bharat
Sanchar Nigam (BSNL). Today, Bharti Airtel (23.76 per cent of 196 million mobile users) is way ahead of Reliance
(17.59 per cent), Vodafone Essar (17.40 per cent) and BSNL (15.15 per cent). The combined market share of Tata
Teleservices, IDEA Cellular and Spice (Modi) is just 20.35 per cent. And Rajeev Chandrasekhar sold out of BPL.

Followers Are Winners Too

Madhukar Shukla, who teaches organisational psychology at XLRI, Jamshedpur, points to Reliance’s came-
late-done-well telecom foray as a useful example of thinking differently (see interview on page 31). Reliance came into
the market with a different technology as well as a radical marketing strategy. It offered a low-cost proposition to traders
and small businessmen who make a large number of calls every day. In sum, the company delighted customers with low
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tariff and made its money in volumes.


Innovation need not only be in products. It can even be a unique marketing strategy. In 1983, Chennai-based
CavinKare revolutionised the shampoo market by introducing its Chik brand in small sachets. The new packaging idea
ambushed entrenched giants such as Hindustan Lever and Procter & Gamble in rural markets where people could not
afford large cans of shampoo. CavinKare envisioned and executed a unique strategy to break loose from the herd and
emerge as one of the fastest moving FMCG companies.
Standing out from the crowd is as much about understanding the customer better than others. Kishore Biyani’s
Big Bazaar is different from the usual mega retail stores found in other parts of the world because he tapped a peculiar
customer behaviour. While hypermarkets elsewhere focus on ease of movement of shoppers through long, wide aisles,
Biyani’s store designs are rather chaotic. “It is deliberate,’’ says Damodar Mall, who heads
the innovation and incubation division at Future group. Product sections in Big Bazaar are laid out in a shape that
resembles the letter ‘C’. “A customer standing in the personal care section, for example, will feel
she is standing in a personal care shop,” says Mall, pointing to the hemmed-in feel of kirana shops that Indian
customers are familiar with. From the first retail store in Gariahat in Kolkata 10 years ago, almost to the month, the group
has grown to now manage 5 million sq. ft across 450 stores in 40 cities. “We have twice the number of customers
per square foot than any other retailer,” says Mall.

Away From The Core

The early years of the new millennium have proved to be a golden period for Indian entrepreneurs. Every industry
sector has flourished as risk-savvy entrepreneurs started ventures betting on a booming economy and a modern India.
Consulting firm BCG’s Arun Maira says it is human nature to follow the herd under these circumstances.
“There is nothing wrong in it. As in life, I am not actually in competition with others. I want to be part of the crowd,
yet stand out.”
What it also means is that in doing so, domestic entrepreneurs will continue to defy Prahalad and Hamel’s theory
of core competence for a long, long time. And herding as a phenomenon may be here to stay as long as new
opportunities keep popping up. Companies after companies have proved that they can not only grab new opportunities
but also succeed with them. Take the case of tobacco giant ITC’s diversification into agriculture, retail and hotels.
Its non-cigarette revenues today account for 36 per cent of total revenues. Similarly, oil and petrochemicals major
Reliance Industries’ foray into telecom in 2003 and its rise to among the top three players in telecom proved that
entrepreneurs can continue to defy core competence for as long as the industry continues to provide greenfield
opportunities.
“An opportunity may be good enough for many players,” says Sanjeev Krishan, an executive director at
PricewaterhouseCoopers in Mumbai. “It has to do with business sense.’’
As the past millennium drew to a close, India shed its socialist cloak and embraced capitalism. In the short period of
freedom that businesses have enjoyed, domestic entrepreneurs have hunted in packs. But such entrepreneurial zeal has
also caused casualties such as S.K. Modi of ModiLuft and the Khemkas of NEPC who briefly excelled in their herds but
faded into oblivion. Those joining the herds now may well pick their lessons from some of these misadventures.
With inputs from Baiju Kalesh

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