Big firms and the problem of intra-India variation of the locale
Business Standard, 30 May 2022
Many firms have prospered through establishing standardised process manuals, backed by IT systems, and obtaining scale by rolling these out all across India. Even more ambitious are firms like Uber who have built a single product and rolled it out all across the world. But in numerous industries, the design of products and processes needs to respond to the locale. And in India, the locale is highly heterogeneous. The first flush of excitement in India was that of building large firms that operate all across the country with one single suite of products and processes. The second wave lies in more complex organisations which vary their behaviour across the country.
The emergence of homogenised behaviour in firms
In the old days, the front line staff of a firm was empowered, and negotiated details of products and processes on a per-transaction basis. This was messy! Decision making was idiosyncratic and the front line staff had agendas of their own. But in return, the working of the firm was more flexible.
In the 1990s, the first complex nationwide corporations emerged, backed by IT systems. For the first time, products and processes were standardised all across the country. Every detail about the behaviour of the firm was coded into software, and front-line staff had no flexibility to change things. Process standardisation made scaling possible: Indian firms were able to rapidly put up thousands of offices with millions of transactions.
The people who built these systems, for the first time in India's history, are justly proud of what they did. And in some domains, such scaling is indeed the right way to think. Looking beyond India, products like Google mail are remarkable situations where one single product is built which works all over the world.
The heterogeneity within India
India is highly heterogeneous. We tend to think of states or languages as defining homogeneous regions. But even within one state (Kerala) with one single language (Malayalam) there is important variation between North Kerala vs Central Kerala vs South Kerala.
CMIE has constructed a classification of India into 102 `homogeneous regions', which are about 7 districts or 15 million people each, which is useful in thinking about intra-India diversity. Using this classification, we get some measures of the extent of heteogeneity:
- In terms of household income, the median income in the best places (e.g. Bombay, Delhi or Chandigarh) is 4.3 times bigger than the median income in the worst places (e.g. Jaunpur, Sultanpur, Faizabad, Ambedkar Nagar in UP).
- Consider the fraction of females that own a mobile phone. The best places (e.g. Bombay, Chandigarh, Goa) have a rate that is 17.8 times higher than the worst places (e.g. Jhansi, Lalitpur, Hamirpur, Mahoba, Jalaun in UP).
Geographical variation and firm design
For many products and processes, a single offering all across India or all across the world does not work well. Variation by location should change our views on the optimal design of the firm. As an example, many food companies hold a brand name constant, but use focus groups in each geographical region to discover a recipe that is optimised for the local palate. As a consequence, the precise taste of (say) a packet of noodles or a candy bar varies depending on where it is purchased. The French are different from the Germans and a sophisticated corporation will not behave in the same way in the two countries.
When a firm picks one product or one process that is supposed to serve the entire country, this will work well for some households only. Ideally, that single design will be done well, so that it is a "modal" design which reaches the largest possible number of people. But it will be just a part of the overall population for reasons of class and geographical heterogeneity. In the first flush of big companies scaling up all across India in this fashion, a two-tier market has emerged, where local firms do unique things that reflect the locale (while having inferior economies of scale), and global/national firms that are tone deaf on the locale get to economies of scale.
We can, then, envision three classes of markets. In some things, localism wins, there will just be local players within each homogeneous region. In some things, a simple global/national product wins, there will just be global / national players everywhere.
And then, there is the middle zone. Is household lending in South Kerala much like household lending in Jhansi, Lalitpur, Hamirpur, Mahoba, Jalaun in UP? Are the tastes and price points for food products in these two homogeneous regions the same? Can global/national companies achieve greater success by varying their offerings across the country?
As in many other respects, there is an analogy between India and the European Union; each is vast and diverse. In the middle zone, the task of firms in India is to choose the appropriate level of sub-national homogeneity. This answer will vary depending on the industry. Some firms may choose to cut India into 10 geographies; some firms may choose to go all the way down to the 102 `homogeneous regions'. The management systems within the firms need to create substantial flexibility for each geographically defined team to grow their business by modifying products and processes.
This will require management complexity. It is easier to mass produce a single soap that is pushed all across the country with a single jingle. It is harder for a firm to have 10 or 100 decision making units which make a diverse array of tactical and strategic decisions. This process is helped by advances in software, where there can be a single national/global level enterprise IT system, with numerous parameters of variation which are placed in the hands of local managers.
Every firm in India today sees a map of profit per population, or of market share, which varies a lot across the country. The firms that learn how to take decentralisation seriously, that are animated by a federal character, will achieve greater uniformity in this map of the outcomes.
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