The Herd Mentality

Businessworld The Herd Mentality CORPORATE 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. http://www.businessworld.in Powered by Joomla! Generated: 16 October, 2010, 15:12 Businessworld 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? http://www.businessworld.in Powered by Joomla! Generated: 16 October, 2010, 15:12 Businessworld 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.

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