Arvind Singhal: Disruptive environment

MARKETMIND

In 1997, a very interesting term named "disruptive technology" was coined by a leading Harvard Business School professor.

In his book titled The Innovator's Dilemma (and a sequel titled The Innovator's Solution), he postulated that from time to time, some new technological or strategic innovations occur in the market place (related to products or services) that have a fundamental impact on existing businesses in those sectors, and if these existing businesses do not respond or adapt fast enough, they run the risk of becoming history.

Some relatively recent examples include the impending demise of chemical photo-films and photo development equipment/businesses on account of digital photography, the rewriting of music industry marketing paradigms on account of file sharing and downloading through the internet, e-commerce's impact on traditional travel agencies, etc.

As the learned professor correctly identified, most of the time such technologies are actually not disruptive for the consumer""in fact, in most cases, they provide a better solution.

However, the impact on consumer behaviour could be a slow process, and hence usually the incumbent players tend to ignore the phenomenon""many times till a point when it may be too late.

Using this analogy, I would like to postulate that in emerging markets and rapidly changing economies like India, there could be "disruptions" in the business environment itself, which could create unprecedented new opportunities for those who can either cause the disruption or adapt to the disruption quicker than the existing businesses.

In my view, there are several enabling conditions that are favouring these disruptions.

Some of the oft-mentioned ones include major changes in the demographic profile of the Indian consumer; rapid changes in the income, attitude, and lifestyle aspirations of the Indian consumer; the accelerating integration of India with the rest of the world in terms of trade as well as information/technology flow; and the breakdown of conventional barriers to entry such as legislation/licences, capital, and technology.

The generic impact of some of these enabling conditions is manifest in several ways. These include the reduction of product lifecycles since consumers are looking for changes all the time, and get bored or tired of existing products quicker than what used to happen in the past.

A recent report from Deutsche Bank on the prospects for the recovery of investment made on the development cost of Indica and Scorpio automobiles is one example.

Mobile telephone as a category could be another example with the relatively recently launched Motorola Razr ceding its "hot" position literally in just a few months from its worldwide launch.

Rewriting price-performance rules is another impact area, such as that illustrated by Reliance Infocomm in its extraordinarily aggressive entry in the crowded telecom market.

Changes in buying patterns are a likely impact area, which is amply illustrated by the advent of easy consumer credit /financing leading to millions of young consumers re-orienting spending priorities across various categories of spending, favouring more spending on buying durables, automobiles, homes, and other assets and thereby spending more carefully (read: looking at lower-priced options) on usual FMCG and clothing products.

In this background, I am sometimes confounded by the reports routinely being dished out by various investment analysts and the stock market behaviour pertaining to businesses in some of the consumer goods sectors.

In these goods""fast-moving as well as durable""there are several "market disruptions" on the (3-5 year) horizon.

Some of these include the impact on local manufacturers/local brands as India further lowers import barriers and signs more FTAs; the likely increase in the interest of manufacturers and marketers from all parts of the world including China in the growing Indian market leading to more options for the Indian consumers and more competitive activity on the ground; the imminent acceleration of growth of large format/value retailing in India""both from Indian as well as international players""that will not only challenge the small retailers but also some of the existing relatively large ones.

The entry of more international brands""across a wide range of products including fashion, accessories, home textiles, footwear, etc.""shall have the potential of not only challenging the existing leaders but, in many cases, totally disrupting their current positioning and thereby creating a disconnect with their existing customers.

And yet, very surprisingly to me, the stock market is lapping up scrips of some of the most vulnerable consumer product businesses at price-earnings levels that (incredulously for me) actually assume exceptional growth and increasing operating margins in the coming years rather than factor in increasing potential for disruption in their entire business model itself as newer innovations (at least for India) start making their presence in India.

In my own view, Indian consumers' needs and desires are already running ahead of the increase in their incomes, and it would not be long before even the so-called affluent customers start seeking new options that can deliver more value (higher quality, better shopping/buying experience, and lower prices).

Not many of the current market leaders in India can deliver this""with or without hurting their margins. I believe the most vulnerable players, in the next 3-5 years, are most of the current FMCG, branded clothing, and modern retailing business.

In these next few years, India will see the entry of many new competitors""indigenous and international""who will change most of the current paradigms of doing consumer (and other) products businesses.

True to the observation of the Harvard professor, the current leaders in India are generally dismissive of these threats. The Indian business media has already crowned many of them, and stock market pundits have created amazing paper wealth for most of them.

Their hubris, therefore, is understandable. As for me? I look forward to 2010 with keen anticipation!