Author Archives: rahul

Our Agricultural crisis – A managers viewpoint

Our Agricultural crisis: A manager’s viewpoint

Much has been said about the crisis in agriculture. Newspaper and Digital columns have been written, TV anchors and their guests have screamed at each other, politicians have called each other anti farmer, experts (sic) have pontificated endlessly. However much has also been left unsaid. Today I want to bring in a managers viewpoint? Before we start, let me assure you those simplistic solutions like farm loan waivers and raising MSPs are NOT the solution.

So what is so unique about a manager’s viewpoint?

  1. A manager is guided by facts and data. In the words of one of my mentors. I trust my wife. For everything else show me data.
  2. A good manager is not driven by ideology, he is driven by a desire to solve problems
  3. Lastly, a manager, unlike politicians or bureaucrats, uses incentives and persuasion to solve problems, not rules and bans.

So let’s start with the key facts

Agriculture and allied services contribute about 14% to India’s GDP. In simplified terms, if all Indians together earn Rs 100, then all the farmers together earn Rs 14.

The problem is the number of people who have to share this Rs 14. The total number of people dependent on farming is about 60%. So again in simple terms, if India’s population is taken as 100, then 60 of them are dependent on agriculture and are sharing that 14% of Income.

Now our per capita income is Rs 1 lakh. So per capita income of farmers is 1/4th the national, i.e. Rs 25,000 per year. Not surprisingly most farmers also have other sources of income including small retail, construction wages etc. In fact, on an average farming accounts for 60% of farmer’s income.

So key takeaway. Too many people are sharing too little income.

Let’s as a manager, two possible approaches to a solution

  1. Increase the income from agriculture, i.e. grow the numerator.
  2. Decrease number of people dependent on agriculture, i.e. reduce the denominator

Increasing Agricultural Income

At its simplest, agricultural income equals Production Qty X Price. (less expenses)

I) Raising prices:

So the simplest way to increase agricultural income is to raise the price. Please note the clamor for a rise in MSP or minimum support price (Trust politicians to focus on the easy wrong answer for every problem). Unfortunately, raising MSP has many disadvantages

  • It raises the cost of food for Indian poor, i.e food inflation. And since the poor are in many cases daily wagers, it raises wages, including farm wages, creating an inflationary spiral.
  • MSPs only work if a government agency buys substantial quantities of agri produce. So, FCI buys wheat and rice and hence is able to implement an MSP. But for most other products there is no agency, which buys agri produce.
  • A simple demand and supply graph shows that to sustain higher MSP’s agencies like FCI have to buy larger quantities of food grains. And hence when MSP’s are set based on politics rather than economics,  we see overflowing godowns and wastage due to pests, spoilage etc.
  • Lastly, an MSP creates a false demand for products and hence distorts price signals. For example, say there is an oversupply of Rice. Market economics would see a drop in price, which would signal farmers to reduce supply in the next crop. But a high MSP would encourage more rice farming and hence create a greater oversupply next year.

Key takeaway: MSPs for all agri crops is not feasible. Nor can MSPs be raised independent of laws of supply and demand.

II) Increasing productivity:

Obviously increasing productivity is a win-win situation. A farmer can get more income without a rise in price, which will hurt the consumer. And clearly, there are many crops where Indian farms have lower per hectare yield compared to global standards.

The key problems here

  1. Fragmented landholdings: Like almost all productive operations, farming is also subject to economies of scale. Average landholding in India is far too low to generate economies of scale and sufficient income for farmers.
  2. Scientific Irrigation: The easiest way to generate more productivity is to convert single crop land into multi crop land. That requires a fundamental rethink of irrigation: from large multi purpose projects to small sustainable projects, from government operated to farmer operated and maintained through user fees, from flood irrigation to drip irrigation. We also need scientific crop selection suitable for the land. For example, the stupidity of growing sugar cane in water scarce Marathwada needs to stop.
  3. Risk of oversupply and falling prices: A higher productivity in many cases leads to a steep fall in prices. This happens because most agri products (esp perishable ones) tend to be price inelastic. Demand is fairly constant and hence a small change in supply can lead to drastic changes in price. Onions and Tomatoes are prime examples. There are only two broad ways to avoid such price fluctuation: One, is to address the perishable nature of such crops, so create cold storage facilities and connect to international markets using imports and exports to balance local supply fluctuations. The second is financial insurance against price fluctuations, which involves hedging against prices.
  4. GM Crops: While activists have demonized GM crops, let me assure you that scientific evidence on harmful effects of GM crops is Zilch, Zero. Americans and Canadians have been consuming GM food for ages and there has been no connection between GM food and health risks. Please note that the US is a lawsuit happy nation, If there was any evidence, there would have been million dollar lawsuits. In a nation where thousands of farmers commit suicide, preventing a technology that can greatly benefit farmer lives with a minuscule risk is a tragedy.

Decreasing the workforce in farming

All the other options notwithstanding, this is an inevitable option. Farming is not viable at the levels of landholdings and the labor-intensive methods that we use. And this is not an opinion. There is not ONE country in the world, which has a high standard of living and a high percentage of people working in agriculture. Not ONE. All developed nations have between 5 to 15% of the population working in agriculture, and even those farmers are subsidized. The benefits of a transition to farm labor to Industry and urban work are clear and obvious.

  • Greater land holding size for remaining farmers and hence a greater income
  • Greater scope for mechanization, scientific farming, investments in technology and economies of scale
Country Per capita Income % age Population in Agriculture
USA $ 57,436 1.6%
France $ 38, 128 2.8%
South Korea $ 27,539 4.9%
New Zealand $ 39,427 6.5%

Before people accuse me of planning a large scale forced takeover of farmer land, let me assure you that I am talking of voluntary migration, as has happened in every developed nation in history . It must be noted that farmers across India would love to have the option of giving up farming and in many cases that is almost every farmer’s dream for their children.

What do we need to catalyze such a move?

  • Manufacturing: Manufacturing allows for the easiest transition from agriculture to jobs. Of course, despite Make in India program, progress has been slow. Reasons include global environment, ease of doing business, labor laws and infrastructural bottlenecks.
  • Allow those who want to exit farming an easy exit. Allow a simple land leasing model, which allows a farmer who gets a job to lease out his/her land to other farmers: a win-win option that supplements his income as well as makes his neighbor’s farming viable.
  • Remove restrictions on the sale of land and allow bank finance for purchase of agricultural land. This allows for farmers to scale up to a viable farm size while allowing a clean exit to farmers who want out. Today, you need to be certified by government as a farmer to buy farm land. Google search for Amitabh Bachan labelling himself as a farmer to buy land in UP.
  • Above all: education and skill development for next generation of rural youth to get employment rather than be forced into farming out of lack of choice.

In conclusion, we Indians have an oversupply of opinions and judgments and ideologies and a serious shortage of data and logical analysis. Certain mega trends are inevitable and cannot be fought. Second, it’s not for you and me to decide what is good for farmers. They will decide for themselves. We just need to see that they have decent alternatives to choose from.

A movement away from farming and into higher skilled jobs is one such inevitability. It would be accompanied by greater urbanization, which again is a good thing. Urbanization creates conditions for knowledge sharing, trade, and business, scale-based efficiencies in all areas. Rather than fight these trends we need to find a way to manage these transitions. For example, we cannot send back people migrating to cities, but we can definitely help provide a better quality of life for them.

Risk Aversion and human Behavior

Say you are looking for a job. What kind of income would you like? A steady paycheck of say Rs 25,000 or income fluctuating between 5000 to 45000 which is expected to average to 30,000. Most of us would like the steady paycheck. Which explains why insurance jobs with commission-based income are not attractive to most of us. However, most companies would like to incorporate a variable incentive as a part of the pay package as a completely fixed salary may breed complacency and does not reward the big achievers.

Let’s go back to the restaurant example. While a standalone restaurant may have fluctuating business, a chain of restaurants would have a far steadier stream of income. While the income stream of each individual restaurant in the chain is uncertain, the variations tend to balance out in a chain.

The same effect can be seen in many situations. Infosys or TCS has a large number of clients with no client contributing more than say 10% of the overall business. However a Satyam (now Mahindra Satyam) has an inherently riskier business model with a large portion of its business coming from a single client, in this case British Telecom.

The President and the Vice President of the United States never fly together on one plane. Thus, the likelihood of both planes crashing is obviously much lower. However, it is to be noted that the like hood of any one of the two planes crashing (and hence any one dying) is more than that of both traveling on the same plane.

That is how an insurance company operates. Will I die tomorrow or over the next week or next month. I don’t know and neither does my insurance company. However they are still willing to insure me because they can estimate quite accurately how many 36-year-old Healthy Indian Males will die over the next year.

Lets take a simple example to see how that works. Lets say the insurance company XYZ Life insures 1,00,000 young healthy Males for a 1 L policy. Through a complicated formula they calculate that 0.5% or 500 people will die over the next year. So they total payout is Rs 500L. That amount plus a premium is charged equally as insurance premium. Say the operating expenses and desired profit for XYZ life is 100 L, then the premium for each individual is 600L/1L or Rs 600. Note the Probability based expected value is Rs 500 and the Rs 100 extra that you pay is to mitigate the risk.

Insurance companies are not the only examples of risk transfer.

Say that you are a book retailer. A publisher offers you books at a 20% commission. If you sell a book worth Rs 100, you make Rs 20. However any books that you are unable to sell will not be taken back. Now the risk of variable sale is yours. How much would you order? If you over estimate you run the risk of excess inventory i.e. a loss of Rs 100. If you underestimate, you run the risk of lost sales i.e. a loss of Rs 20 on every lost sale.

Given that most people are risk averse what would you expect to see? Most retailers would under order. My Author friends also complain that Publishers often under publish, but that is another story.

As a publisher, what would you do if retailers routinely under order. One option is take on the risk your self. You give the retailers an option of returning unsold books, perhaps reducing the commission to say 15%.

Now the retailers have no fear of underestimation. On the other hand, they may develop a tendency to over estimate, as they have no problem returning the books.

Similarly, a retailer who offers consumers a easy refund if they bring back the product will find sales increasing (as customers have lower risk) but runs the risk of having a high number of refund cases.

In all these cases, it is imperative to find a balance. How much of the risk different players in the distribution channel assume varies from industry to industry and depends of the objectives and relative bargaining power of the players.

Let us go back a few days to the beginning of the world cup. Now say the Mumbai Cricket Association is trying to decide on ticket prices for the world cup final. Now if India makes it to the final, they can sell the tickets at a premium and still expect to sell out all tickets. However, if they wait too late and India exits the cup, then the tickets would have to be sold cheap or may remain unsold. Please note that in the end ticket prices had reached a lakh plus per ticket.

Now MCA has to determine when to start the ticket sale (during league stage, after QF, after SF).

Or they could offer a ‘50% money back’ in case India does not reach the final. Thus they could still sell tickets early and also earn more in case India does reach the final.

Rahul Reddy

Director

Vanguard Business School

(In the concluding part of this article we will look at Moral Hazard and Adverse selection about how high bonuses at Investment Banks may have been responsible for the great financial meltdown of 2008)

 

 

Understanding Uncertainty & Risk

Are you a risk taker? Or a risk avoider? Do you like to bet all you have (All in as they say in poker) for a big payoff, or do you like to play safe and actively seek to avoid risk? Most of us lie somewhere in the beginning.

If risk is only about avoiding uncertainty, then it is no brainer of a choice. There is a lot of risk and nothing to gain in walking blindfolded across NH5. However in most cases risk is tied to return and when we reduce risk we also reduce return. How do we make such choices? Lets play a simple game.

We spin a coin. If it is heads we win Rs 100 If it is tails we win nothing. Simple math tells us that the expected value is Rs 50. Call this game 1

In Game 2, you win Rs 50 if it is Heads, and Rs 30 if it is Tails. The expected value is Rs 40, which is less than game 1.

But if given a choice, which game would you like to play? Game 1 has a higher expected value. However Game 2 is more attractive to the risk averse.

If you think you would choose Game 1, (after all it is a small sum) what if I add a few zeroes to the figures? Now take a look at the Table below

Option A (prob & Payoff) Exp Value Option B (prob & Payoff) Exp Value
20% of 400 80% of 300 320 20% of 700 80% of 100 220
40% of 400 60% of 300 340 40% of 700 60% of 100 340
50% of 400 50% of 300 350 50% of 700 50% of 100 400
60% of 400 40% of 300 360 60% of 700 40% of 100 460
80% of 400 20% of 300 380 80% of 700 20% of 100 580
100% of 400 0% of 300 400 100% of 700 0% of 100 700

It is obvious that in the first row, you are better off with Option A. As you go down the table, Option B starts looking better and better. In the last row, clearly option B is Rs 700 straight into your pocket. However the key is where do you make the switch from Option A to Option B.

Probability dictates that Option B is better from row 3 onwards. However the worst-case scenario in Option A is better, you are assured of a min amount of Rs 350. In Option B, you have a chance that you will end up with only Rs 100. What would you choose? Most of us are risk averse and would choose option A.

On the other hand, the best-case scenario in option A is a mere 400 compared to Rs 700 in option B. A risk taker would probably take option B, even in row 2 and maybe row 1 also. So do you focus on the best case or the worst case?

Nothing wrong, of course in being risk averse. We need to understand our comfort level with risk and make economic choices accordingly. The more risk averse we are the more we are willing to give up to reduce variations in outcome.

The level of risk that one is willing to assume is also dependent on the environment. However, in some situations, people are risk averse to the point of being irrational.

For example, in an experiment, participants were asked how much they were willing to pay for a lottery ticket which has two prizes – a 50% chance of winning $50 and a 50% chance of winning $100. Obviously, it was expected that people would pay between $50 and $100 (the expected value being $ 75). Stunningly the average bid was $16 with a median of $5.

Crazy, as the minimum you would win was $50. However what we understand from this and similar experiments are that people simply dislike uncertainty.

Say, you are running a restaurant, which can seat 200 people during lunch hour. The average customers that you get are also 200, which is perfect. Or is it? One must also consider variance. Suppose you get as few as 100 customers a day and as many as 300 a day. When you get 100 you lose revenue as most of the costs like rent, salaries etc are the same. When you get 300 customers, you have to turn away 100, which is lost revenue and also creates ill will among customers.

Different businesses have different capacities (and strategies) for absorbing risk. However most of us would prefer steady predictable revenue like a salary. That is why most of us are willing to forgo a higher average – a higher expected value – in exchange for a steadier payout

We understand the desire of students (and parents) to get a secure government job even if it doesn’t pay as much as a private sector alternative. It is difficult for us to even imagine the number of people who sit for an SBI PO or Clerical exam, way more than the number of people who sit for the CAT or even the IIT JEE.

What are the ways of reducing this uncertainty?

  • Avoid risk altogether (eg: Stick to Bank FD’s & Govt Securities)
  • Reduce risk by pooling the risk (spreading the risk)
  • Reduce risk by increasing our knowledge about the situation
  • Transfer the risk to someone else (Insurance)

Avoiding risk altogether is a bad idea, as it leads to significant loss of opportunity. By staying off the roads for life you bring the risk of dying in an accident down to zero but clearly by paying a huge cost.

Rahul Reddy

Director Vanguard Bschool

www.vanguardbschool.com

Redesigning the MBA Curriculum: The Vanguard Experience

Before we get into a discussion on what should or should not form a part of the MBA curriculum, we should first understand what an MBA is?

MBA is meant to teach the principles and practices of management

The principles are such that they can be applied to all industries with required customization based on practical knowledge. If you look at the IIMs or any top International BSchool, they never offer narrow sectoral programs – like Healthcare management, Oil and Natural gas management etc. If you teach basic management well enough, then the students would be able to apply them in all business sectors.

Two, an MBA should teach the practice of management or how these principles are applied in various industries.  This can be done using real examples in class, case studies, live projects, Industry seminars etc.

Keeping all these mind, I would like to explain how we at Vanguard came up a curriculum design for the PGPM + MBA program. The essential curriculum consists of three distinct areas

Management concepts

Here we have done a wide-ranging consultation with Academic experts and corporate managers with the idea of understanding what concepts are critical and what is not. We are asking two simple questions? What are the concepts required by frontline managers in the first five years of their career? What are the concepts required to understand key industry sectors where students are likely to be placed?

For example, we have reduced the focus on cost accounting and added Financial Markets as a first year compulsory course

Practical exposure

For every class care has to be taken to relate the topics taught to actual business practices. One way is through industry lectures. However, we do not plan to call very senior leaders who will give motivational talks, but young managers who are applying the same business concepts on a daily basis. So a class on pricing strategies may be followed by a product or brand manager explain how he or she takes pricing decisions

At the same time faculty will take the lead in procuring live projects for student groups. They will also actively monitor the project so that quality work is done.

Essential skills and Attitude

Many a time when we spoken to Corporate Managers and HR professionals, the chief concern regarding fresh MBA’s has been lack of essential skills and poor attitude. Essential skills are skills, which are cross-functional and applicable in all industries. These skills include understanding technology as well as communication and team skills. The importance given to this area can be seen from the fact there are 6 courses in the first year alone which focus on essential skills and personality development. These courses are a part of the curriculum and will be graded, unlike some Bschools where these are taught as special classes where both teacher and student interest is low.

Evaluation

One of the chief problems with University education in India has been the evaluation system. The system of annual or semester exams loads all the pressure at the end and is primarily based on memorization of course.

Any good MBA program should have a continuous evaluation system which also measures the work done by students in terms of case studies, projects etc. While the actual evaluation system is dependent on Subject/Course, at Vanguard, the evaluation system would be

Quizzes

Assignments

Projects

Mid Term and End Term exams

The Mid and End Term exams would never exceed a maximum of 50% of the available marks for a course.

Use of Technology

Technology is an important component of management in a corporate. At Vanguard we will use technology to enable better quality education and at same time make students comfortable with the use of technology.

All students will have Wi-Fi enabled notebooks. The BSchool has a leased line connection which will ensure high quality uninterrupted Broadband Internet for all students. All students will log onto an online Learning Management System where they can access Class schedules, Case studies, Assignments, Presentations etc. At the same time all assignments have to be submitted online or by email. This will also ensure that experts from may evaluate student assignments across the country and the world.

Also many additional features like blogs, chat etc will be enabled through the LMS. Podcasts from top Bschools worldwide as well as Webinars from Industry experts would also be done through the LMS

Rahul Reddy

Director – Vanguard Business School

www.vanguardbschool.com

Understanding the Customer’s mind – Part 2

Human Mind’s are insecure

Who was it that said  ‘Man is Rational animal’? It is at best an extremely incomplete description. Humans are emotional beings. They are also largely insecure and risk averse.

One of the problems of Market Research is that the stated reasons of customers for purchasing a product are very different from the actual reasons. In some cases, the customer knows the real reason for purchasing a product by gives a different answer. And sometimes the customer doesn’t know precisely why she purchased a particular product.

One thing that I have noticed is that stated reasons are more rational or logical and the real reasons are more emotional. After all, we all like to show that we are smart and rational individuals – even when we are not.

Q: Sir, Why did you choose bike X?

A: The Torque to weight ratio is just perfect. It has a 5 speed integrated transmission and a y fork suspension.

Real Reason: The blue bike looks sexy and might attract the girls.

Lets look at some of the reasons why people buy products

Because other’s buy it

People copy what they see. Once a new product has certain number of customers (called early adopters), it achieves critical mass and gains momentum as more and more customers buy the product. In other words it becomes fashionable.

That’s how the iPod became a cult hit. After the early adopters picked up the product and wore them around (note the distinctive white earphones – no accident that) other began to clamor for IPods.

Buying a well-known popular brand reduces the perceived risk of the customer. The risk that it might not work, or that he might have wasted money or the risk that he might be considered stupid by people around him (social risk)

Lessons for Marketing Managers

Use testimonials of people who have successfully used the product. Testimonials can be from celebrities or from ordinary people. Celebrity testimonials are watched by more people but may be less believable than ordinary people.

Create the Bandwagon effect. If your product is no 1 or is the fastest growing in its category say it. It will help convince the risk averse.

Human Minds are resistant to change

Kellogg’s is the world leader in breakfast cereals, cornflakes etc. They launched its products in India in September 1994 about the time I passed out of Engineering. The product positioning was the same ‘Healthy breakfast’. For Indians of course breakfast means either Parathas or Loch or Dosa depending on which part of the country you are from.

Today 17 years later, a vast majority of Indians still eat Maratha, Dosa etc. The total breakfast cereal market in India is only 400 Crores. And Kellogg’s has approximately 50% market share i.e. about 200 Crore. Clearly it shows that the vast majority of 100 Crore Indians have not changed their breakfast habits. And the biggest success stories have been Chocos and Frosties – products aimed at children who are more willing to try new things – especially if it comes out of boxes with cartoons on them.

Why is so difficult to change minds?

Human minds are based on belief systems. Ideally such belief systems are based on information and when new information is received, the beliefs should change. But this rarely happens. Information that doesn’t suit your beliefs is either ignored (you do not notice it) or rejected.

A BJP supporter will notice and accept news that is pro BJP while ignoring or explaining away any news that is anti BJP.

So to change a customer’s behavior you need to change her attitude and to change her attitude you need to change the beliefs on which such attitudes are best. And you expect to change that with a 30 second TV Ad. All the best.

When Parents can’t change their kid’s minds, nor can wives change their husbands, Marketing has no realistic chance.

Well that’s all for today. We will come back next time with a classic slogan by Famous Author Jack Trout ‘Differentiate or Die’. And How the marketing graveyards are full of me too imitations.

Till then ciao and please come back with comments and feedback. You may also place requests about what you want us to write about.

Strategy and Marketing: Understanding the Customer’s Mind – Part 1

In my last post we discussed the basics of Strategy and why it is critical for organizations to get it right.

I had also mentioned that for a Marketer it is a game of perceptions – Customer perceptions. It is critical enough for me to repeat ‘Perception is the Reality’ So a good marketing professional has to understand how human mind’s work.

Human Minds are very selective

All of us today overloaded with information. Newspapers and assorted printed matter, TV, Internet, etc flood us daily with news, articles, advertisements etc that our mind has developed a very effective screening mechanism.

The mind focuses the senses (Eyes, ears etc) on information that it deems to be of interest to you. So if an information message is no relevance to you, it might not even be heard. You watched the India-SA cricket game last Saturday. So how many advertisements do you recall?

Lesson: Seen any newspaper ad for CAT coaching by T.I.M.E. or any other centre for that matter? The Headline is always CAT or MBA. So if you are thinking of an MBA or considering giving CAT, you would read the rest of the Ad. So if you have a headache you would notice the ad for aspirin that you would have ignored have you are healthy.

The Same rule applies for TV Ad’s too. If the first few seconds draw interest, the ad gets watched else – ZAP goes the remote.

The mind also allocates its limited memory space to various issues. We rarely remember more than 3-6 brands of any product category. Quick name all the brands of Television that you know. At the end of the article I will give you the list of brands that are active in the Indian market.

So you see how difficult your job as a Marketer is. You would need to do

  • Present your message as important news relevant to the customer
  • Compare and contrast your brand to existing well known brands
  • Use celebrities to draw attention and then give the message

Human Minds hate confusion

Well most human minds. You will always find one odd guy or girl who enjoys quantum mechanics and string theory but most if us seek simplicity.

Information overload tends to overwhelm us and tends to delay decision-making. What we call ‘Paralysis by Analysis’. Amitabh of course put its more elegantly ‘Itna mat soch, Jab soch gehree hoti hain to failse kamzor ho jate hain’

Think about it. HR executive’s want 1 page CV’s. CEO’s would like executive summaries. We all need information but we would like it to be simplified for us.

Lesson: Keep it Simple Stupid (KISS). Make your products easier to use, easier to understand. People want a product that they can switch it on and relax.

Want examples: Graphical User Interface or Windows made the PC usable by everyone. Imagine how many PC’s would be sold if people had to use say Unix (great Language by the way). Plug and Play devices have revolutionized the peripheral business. How many people are comfortable with installing drivers etc for peripherals like Printers, etc.

The More trap: Today Marketers are falling into the ‘More’ Trap. Adding features after features to products and then wondering why they failed. As experts in their own fields they are able to understand the features and expect that the customers would understand and want it. But the average customer is not an expert in that field. She doesn’t want to spend hours working out how to install and use the product. She has got office, Husband, Children, Shopping and various things to think of.

That shall be enough for today. The idea of course is to keep it short sweet and simple. Will be back with Part 2 where we will look at Human insecurity and Rational/Emotional decision-making and the folly of changing attitudes.

Yes, the Television Brands

Sony, Samsung, LG, Panasonic, Sharp, Hitachi, Hair, ONIDA, Videocon, Philips,  etc etc

How many did you get?

Strategy and Marketing: Some Concepts

Strategy and Marketing

As one of my favorite professors used to say, ‘the number of people who do not understand the meaning of Strategy is exactly equal to the number of people who routinely talk about strategy

So what then is strategy?

Strategy is the essence of a product or a brand or even an organization. It is the answer to the question “Who are you?”. However, it is not what you think about your brand or your company. It is what the customers think that matters.

For example, Indigo Airlines stands for on-time performance. However, they did not just stop at advertising it. They trained all their employees to focus on getting there on time. From getting passengers through security check to getting airplanes cleaned up before the next flight, the focus was clear and understood (and accepted) by all employees. And now, customers are beginning to agree. Indigo has grown to become 3rd largest airline in India. Will it grow further? Mark my words, it will.

On the other hand, what does Air India stand for? The employees have no clue. The customers have a lot to say, though most of it can’t be printed here. Unfair comparison? Ok. What does Kingfisher stand for? Unclear. Is it about a luxurious experience? About high quality service? If so, why the hell did you buy Air Deccan, which is clearly, a low cost no frills airlines? Shri Mallya would want to customers to think best service when they think of Kingfisher and low cost when they think of Kingfisher Red. Mostly, we think of beer when we hear the name Kingfisher. So no wonder Kingfisher Airlines is making huge losses.

Customer Perception is the reality

As a brand or an organization, you are what your customer’s perceive you to be. So Hero Honda is perceived stands for reliable fuel-efficient bikes. It doesn’t matter whether some bike from another company actually gives a little better mileage. Customer minds are made up and while they can be changed, it is an extremely difficult and time taking process. In the minds of the customer (the marketing battlefield) Hero Honda is fuel efficiency.

Yamaha tried for years to take over that position to no avail. In fact, the net effect was that Yamaha actually lost out on sales. Recently, Yamaha has got back to its original strategy – Style and performance – with bikes like R15 and FZ. So I would predict that Yamaha is back on track.

Similarly, Hero Honda tried to take over the style and performance position with Karizma. Now Karizma is a great bike (have driven it myself) and, with its 225 cc engine, was superior to the Bajaj Pulsar (till the Pulsar 220 launch). However it was the Pulsar that outsold the Karizma every year. Why? Because the Karizma doesn’t fit with people’s perceptions about hero Honda.

Can we think of other such examples? Maruti Suzuki, India’s largest seller of cars by far. So what do people think of Maruti. Dependable, good mileage, easy to maintain, good service network (remember the ad about finding a Maruti service station in Ladakh?). But Maruti doesn’t stand for Hi performance or Luxury. So premium cars from Maruti like Baleno, Grand Vitara etc etc have always failed. Now they have launched a 16 lakh + car called the Kizashi. Now ,will it work? My bet is absolutely not.

Of Complexity and Confusion

The customer’s mind is overloaded with information. He is thinking about many things, about work, about his boss, why Dhoni doesn’t play Ashwin, etc, etc. When it comes to choosing a product he is again faced with a choice from a large number of products, all making claims of superiority.

How do you choose a TV from among 15 brands, each with at least 8 models? How do you expect the customer to understand the difference between Dynamic and Static Contrast ratio, about in plane switching, etc, etc.

The key is in simplicity. Organizations should aim to simplify the choice that consumers make.

One of the mistakes that companies make is to play on features. The customer does not wish to understand the technology behind your product. She would like to know what this does for her.

The Internet is full of jokes on Microsoft Windows. It’s prone to crashing, has lots of bugs, and is vulnerable to virus attacks. Linux is far more robust; Apple Mac OS packs a far greater punch. Where Windows really scores is ease of use. People can learn to operate it almost immediately.

Man is an emotional animal

Much has been said and written about the nature of Man as rational. However, rational decisions require a heavy investment of time and mental effort on the behalf of the customers. That might well be the case when an Large Corporation is buying a 2 $Million piece of machinery.

However, ordinary people like you and me have neither the ability nor the patience to go into such great depths. We cannot learn digital imaging technology before buying a camera, nor understand mobile telephony before buying a handset. Tell how many of us understand EDGE, HDSPA etc etc.

It makes sense for any product to attempt to connect emotionally to your customers while keeping it simple and focus on customer benefits and ease of use.

Do you think Apple IPod was the best music player or that it has the most features? Hardly, experts have always recommended players like Creative Zen, etc. What apple did was to create a stylish cool device that has an excellent user interface.

I see something similar happening in the Iphone and Ipad wars. Motorola and HTC and others have focused on features and specifications on their Android phones, while Iphone users really want to be cool. Ditto for Ipad. There is a lesson here. Gadgets are made by techies and bought and used by ordinary people. I don’t really care for the tech specs. My Iphone is great fun to use and pretty cool to carry around. Go Apple.

Enough for today. Will be back with more common sense Strategy and Marketing concepts. Would appreciate comments and queries.

Rahul Reddy

Director Vanguard Business School