Margin(al) Utility

I was reading this blog post by Scott Galloway and was literally blown away by the simplicity of the argument. It also got me thinking, why is this not clear to most of the businesses? Margins are your bread and butter. You can buy market dominance and growth keeping your margins low, or you can, as the post suggests, have high margins and consequently low scalability and growth. India with its focus on the services sector tried to move to the high margin quadrant and we are now realising that the growth has considerably slowed down in that. IT bellwethers have seen continuous margin erosion and low scalability into the product business.  

Indian businesses have been in a unique position all this while. While in the pre-liberalisation era, you had no/low competition or cartelisation. Business houses flourished. After 1991, with the increased competition, things looked a bit different initially. Obsolete and uncompetitive business houses vanished. You don’t hear much of the Mafatlals, the Khataus and so on. MNCs brought with them both great processes and great technology.

Recently, I believe the Indian businesses are going back the same path. Policies are being changed at the behest of Indian business houses, ex post facto. A business house can’t compete with the deep pockets of a MNC, Hey Presto, the minister declares that they will look into the deep discounting model of the MNC. That’s crony capitalism, if you ask me. Our businesses and our consumers are smart enough to understand what’s good for them. Let them compete fairly and let the consumers reap the benefit out of it.

Not that all businesses are like this. There are certain companies which realised that there are certain sectors with huge margins for the early incumbent and they did that. Let me share an example. Toiletries in the 5-star hotels in India were imported at one point of time. While this meant precious foreign exchange leaving India’s shores, it also meant that a company can take advantage of the non-existent competition in this field. Enter Kimirica Hunter International. This company is now the largest supplier to almost all 5-star hotel chains in India and has started exporting them too. You can read more about them here. They are currently in the high margin, high growth quadrant.

The low margin high growth quadrant in India is big enough and our consumption figures, even if slowing currently, are going to grow in the next couple of years. We would have a pie that’s increasing in size and smart players would find ways to increase their share without crying mommy to the government. The only sector I am a little worried about is telecom. With ARPUs falling for almost all remaining players (4 now out of 16 in 2012-13) and consumer addition figures reaching a plateau, the sector would find it difficult to return back to its heydays of yore, unless the GoI decides to change the spectrum sales policy for 5G. I am keeping my fingers crossed.

To sum it up, a business with its eyes firmly on the margin metric will be the survivor in the long run. If you focus much on growth, make sure you are able to keep the wheels turning ala AWS for Amazon.

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