Category Archives: Strategy and Marketing

What sense do we make of bad news?

It seems to be the season of bad news. Here, here, here, here and here with some honourable exceptions here and here, various sectors of industry led by the automobile sector seem to be facing slow or negative growth in the last financial year. What sense do we make of these disparate bits of data coming from different corners of the market?

Why are auto sales falling?

Before answering this question, it is important to understand that what we are witnessing is a broadbased fall in sales across the automobile industry, not just in one or two firms. This means that people have, in general, chosen not to buy new automobiles, which in turn means that they have chosen to retain their existing mode of transportation, which could be private or public transportation.

Second, a significant proportion of automobile purchases (2 and 4 wheelers) in India happens with a bank financing the purchase, usually paying a large chunk (70-80%) of the price. The buyer of the automobile pays for it on a 3-5 year EMI schedule. That people are not ready to borrow in order to finance automobile purchases indicates that either funding is not available as easily as before or has become too costly, or the borrowers perceive greater uncertainty regarding their future income and are therefore reluctant to take up the responsibility of paying for a new vehicle under a scheme of EMIs.

So, if automobile sales are indeed falling, it must be a combination of these factors
1. People choosing to retain existing modes of transportation
2. Funding not as easily available as before
3. People not ready to borrow now and pay EMI later due to fundamental uncertainty over their own income
that underlies the problem. But then that raises the further question of why such an outcome should occur, that too across the entire automobile industry after so many years of spectacular, non-stop growth? The answer lies not in an analysis of the automobile industry and its markets but in understanding the broader economic climate in which the auto industry currently operates.

The economic climate

Since 2007, the global economy and the Indian economy along with it have been muddling through what is today called The Great Recession and is being recognised as one of the longest periods of economic growth challenges since the Great Depression. On paper, the recession started in December of 2007 and while there are debates about the official end date, the problems that started in 2007 are far from over. Every now and then, a new crisis pops up and there is a mad scramble to contain it. It was Greece a few months ago and it is Cyprus now. Heaven knows what it will be in the near and distant future.

Like any depression, The Great Recession is just a period of correction that consists of identification of a cluster of entrepreneurial error. In simple terms, a large number of businesses suddenly and surprisingly find that they are and have been producing things that people do not need and are therefore staring at deep losses and capital erosion. As Austrian Business Cycle Theory explains, this cluster of errors is created during the preceding inflationary boom (in this case by the boom of 2001-2007) and is caused by a combination of misleading interest rate signals given to producers, credit injection into the production system and monetary inflation, causing intertemporal discoordination, i.e., a mismatch between consumers’ consumption decisions and producers’ corresponding production decisions.

That producers en masse suddenly find far fewer takers for their goods, as automobile manufacturers currently do, is a result of this intertemporal discoordination. When this happens, what a sensible producer should do is to understand the economic climate, try to develop a better forecast of what the future, medium and long-term, is likely to look like and adjust production decisions accordingly. This could mean, in some cases, producing less of the good. It could even mean completely ending certain lines of production, i.e., shutting down certain businesses.

Such decisions are usually accompanied by a lot of pain as many people are put out of employment and, in many cases, will need to reskill themselves to the requirements of the new production structure. This puts further strain on many already struggling businesses leading to more business failures and more people being out of unemployment. While this sounds painful, it is just the market’s way of clearing past production decisions that are not in line with consumer preferences.

This process goes on till the market clears out all such poor decisions and leaves the production system in sync with consumer preferences. Capital is taken out of the hands of those who made poor forecasts of the future into the hands of better forecasters, i.e., from failed entrepreneurs to successful entrepreneurs. This is the proper point of economic recovery. Further economic expansion would, under a free market, be triggered by fresh decisions to save and add to the capital available to be advanced for production for a more distant future.

An alternative, equally or more likely in today’s FRB system, is that the banking system interrupts the market’s cleaning up process and initiates a fresh round of interest rate depression through credit expansion and monetary inflation, thus flooding the market with cheap money and cheap loans. This time, however, one would also have to contend with the possibility that such measures are not guaranteed to work like they have in the past. Experiments in the Western world indicate that such attempts have not really led to an economic recovery this time round.

Summary

What the auto industry is going through today could very well be one of the manifestations of the bursting of the bubble created from 2001 to 2007. If people are not buying as many cars as they are producing, it is probably because they do not wish to see producers produce as many cars as they are producing. It is possible that the market is crying for a correction and that producers need to cut-back production to the level customers are ready to support. This is clearly one of the possibilities for any producer. Alternately, producers could place their bets on the RBI, through the banking system, inflating a new bubble through a fresh round of credit expansion and monetary inflation. In this case, they need to hold their horses for the recovery to happen while being prepared to profit the most by being at the vanguard of the recovery.

Clearly, therefore, each entrepreneur will have to decide which scenario is likely to play out and what is the most appropriate course of action for him. It’s not easy, but no one ever said that operating a business in an environment of uncertainty created by endless meddling in the market would be easy. The times sure are challenging and let’s hope many entrepreneurs do make their way heroically through this economic fog to do what they do best – meet customer needs in the best possible way.

What we need to take home, and what this article seeks to emphasise, is the point that in many circumstances, having sound economic understanding can help us understand business situations far better than those economically uninformed or ill-informed can. We can also see that cutting through the fog and making sense of complex situations is made possible by a good grasp of sound economic principles. The situation created by falling sales of the automobile industry in India only highlights the point that learning sound economics is a critical prerequisite for any aspiring business manager seeking to create a career out of making effective business decisions in a complex economic environment.

When KFC goes veg, the market wins

We live in an age of metaphors. We use all kinds of violent terminology to denote the most peaceful of all human relationships – business. Terms like price-war, hostile takeover, predatory pricing, price gouging, etc., are common place. None of these terms has any place in discussions of business and the economy, but in the age of metaphors, anything goes.

In these times, here’s an example to demonstrate a simple point that economic theory makes – No business, however big, can defy consumer preferences for long if it wants to stay in business.

Having stayed in Ahmedabad for 3 years, I have been amazed by the preponderance of vegetarian restaurants there and by how rare are restaurants that serve non-vegetarian fare out there. That was when I understood that Gujaratis, be it Hindu or Jain, are predominantly vegetarian.

Take it from me – Gujaratis are NOT the symbol of asceticism. They love their food. They love their fun. They show their love for life on their shirt sleeves. They love eating out more than you can imagine (if you haven’t been to any part of Gujarat, you can’t know this really well). During my 3-year stay there, festival holidays were the worst days to go out to dine at a restaurant. The queue everywhere, especially at the good and sought after restaurants, would take 40-45 minutes to clear. And let’s not discuss Sundays.

With all this culture of eating out, Gujarat must be the dream of any restaurant chain, right? Wrong! Especially if your brand is Whatever Fried Chicken and your menu largely revolves around the different ways in which you could cook and serve the meat of that bird. For how many years can franchisees of the biggest international chain wait till the magic of the brand will cause the preferences of the Gujarati to change enough to draw them in droves to chomp on the chicken nuggets? The interest costs sure must have been piling up.

It comes as no surprise that KFC decided to go veg. Personally, I knew it was only a matter of time before it happened. As I understand economics and marketing, the way a business makes money is by offering goods and services that people value, i.e., express a preference for over the money they have in hand (or in fact the other goods they could buy with that money). Those that fail to do so will not get the business. There are only 2 ways to address this
1. Go out of business
2. Change your products to meet customer preferences

What has happened is to be celebrated, for the free market has won and once again demonstrated that no business entity, however large, can act against consumer preferences for long. It has demonstrated that no business entity is immune to the forces of supply and demand, and the law of scarcity.

The best part of this is that no one has lost. If KFC does perform well going forward, it would have won customers over. If customers do find KFC’s veg menu good, they would have won the challenge of communicating their preferences to the producers. Above all, it is a victory for the free-market (as I’ve already said) and, it goes without saying, for those (like me) who proclaim its virtues from the rooftops.

p.s: As a vegetarian, I am yet to step into an outlet of KFC till-date, not even for their low-price ice-creams.

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