Destabilisation that came with the entrepreneurial freedom


In this article, post liberalization we are examining the sea change that has taken place in the business environment of India in the right perspective. The new environment favored the display of entrepreneurial talent in ample measures. One gets the impression that in the deregulated environment, Indian industry and businesses would be having a comfortable and great time. The entrepreneurial freedom did help entrepreneurs enter industries of their choice but for some of the existing players, the new freedom implied destabilization. Their markets, market shares and profits came under severe pressure. We are giving below how some of the well known companies fared in the new environment.

Milk food Ltd: After almost two decades of strong position in the dairy industry in Northern India, Milk Food Ltd, found itself in dire trouble, following the de-licensing of the industry. With the removal of the licensing barrier, many new firms entered the industry in quick succession. Milk food Ltd suddenly found itself pitched against a plethora of new competitors. In fact, the very same people who were supplying milk to the company earlier now became its competitors. Any one could become a milk food producer with the de-licensing of the industry. Many existing milk suppliers felt that it was in their interest to become producers instead of remaining suppliers. Milk food Ltd, not only found itself surrounded by new competition, but also had to struggle to obtain its daily supplies of raw material-milk-as its erstwhile suppliers had now become producers. A shift had taken place in the demand-supply position of the raw material. There was now a scarcity of the raw material, resulting in a sharp spurt in its prices. Milk food could not face the destabilization. Consequently, Milk food Ltd sold its brand to some other company.

Passenger car industry: De-licensing of the industry resulted in a difficult situation for existing players like Hindustan Motors (HM) and Premier Auto Limited (PAL) and even Maruti. This is another telling illustration of the destabilization on account of de-licensing is provided by the passenger car industry. A host of new players like Telco, Daewoo, Hyundai, Ford and Honda entered the industry; HM and PAL had to chalk out survival strategies which included new foreign collaborations, fresh investment and expansions. Even Maruti, which had a unique position in the industry, had to make a lot of readjustment.

Cocoon of Protection Disappears for Existing Players

In short, while the entrepreneurial freedom helped the new entrants, it threw the existing players out of the cocoon of protection. For them, it meant that unlike in the past, profits could no longer be secured by procuring a license and setting up an industrial unit; it had to be earned by playing the market game in full measure. Under the licensing system, firms, that entered an industry through a license, enjoyed captive markets and assured profits. The licensing barrier served as a cocoon of protection. Under the new dispensation, as the licensing barriers were lifted, new players could enter any given industry and seek a piece of the cake. It meant that existing players had to compete for their share.

Existing Notions on Economic Size are shaken:

Notions associated with scale economies/minimum economic size (MES) also started changing as a result of deregulation and entrepreneurial freedom.

Earlier, licensing policy determined economic size:

In the past, the government’s licensing policy determined the economic size for industry. Enterprises had to be content with smaller capacities, as licenses were just not available for larger capacities. Operating on a smaller scale was a compulsion enjoined by the regulated economy. MRTP provisions too inhibited setting up of bigger capacity. In short, the notion on what constituted MES was a by-product of then prevailing restrictions on industrial activity.

The family-oriented business system too contributed to lowering of MES

In addition to the restrictions emanating from the regulated economy, the nature of ownership of firms in India also came in the way of achieving economies of scale. The private corporate sector in the country was largely family managed. Families generally tend to diversify excessively. This is so because the family is interested in hedging its bets by being present in several industries. For example, Godrej makes soaps, refrigerators, almirahs, locks, mosquito mats, and office furniture and so on. When a firm is present in so many businesses, naturally, it reduces the scale in each of them.

Now, ‘going big’ became the order of the day

With the opening up of the economy, the ideas on economic size underwent a drastic change. Economic size now meant international size and ‘going big’ became the order of the day. Even companies, which were already big in the relative sense in a given product, started re-defining their ideas of minimum economic size. Most companies now felt that if they were to compete with the MNCs and larger Indian companies, they had to consolidate and become big. Many of them preferred to get bigger in their business quickly through mergers and acquisitions. Reliance Industries Ltd.,(RIL) is one such company which has taken a lead in backward integration, expansion, mergers, acquisitions and so on and believed in world class capacities. RIL has even set up a huge refinery at Jamnagar for various petroleum products and are even exporting petroleum products which could not be imagined in the past. Many other companies followed them in their respective product groups. This has not only increased the GDP, exports from India but a capacity and ability to reach international quality standards.

Soaps and detergents:
Hindusthan Lever Ltd., (HLL) goes bigger
HLL’s takeover of Tomco and its subsequent merger with HLL is a particularly apt example. HLL was already enjoying the largest capacity in soaps and detergents in India. But, even HLL had to enlarge its idea of desirable size. Its global rival, P&G, was entering the Indian market in a big way. HLL found it necessary to become still bigger and went in for the acquisition of Tomco. Interestingly, Tomco was the second largest players in the industry at that time. Overnight, HLL increased its already high capacity of over 2 lakh tonnes of soaps and detergents per annum to nearly 3 lakh tonnes by the acquisition of Tomco’s capacity of about 80,000 tonnes.

In fact, the rush for corporate mergers and takeovers explained the need and desire for scale up gradation. And, with the notion of economic size undergoing such change, existing players who were unable to enhance their size in tune with the new trends naturally experienced a handicap. This has resulted in some of the firms closing down by hiving business to larger companies and some merged together to grow bigger. The process continues even today encompassing international firms also.