Inefficiencies in fragmented markets.

English: Sitabuldi main road as seen from the ...

English: Sitabuldi main road as seen from the flyover. 🙂 (Photo credit: Wikipedia)

I have noticed a few peculiar things about the commercial environment in India. No doubt it is extremely competitive and highly volatile but there is something that I don’t seem to understand.

I am sure you must have seen several places in India where a million people sell just one type of good. What do you think is common between them? Yes of course, the damn goods. And guess what, all those goods are most likely coming from a single place where a thousand people actually manufacture those goods in a very similar fashion using the same technology which is indeed coming from about a hundred people making that same machinery in an exactly similar way. Now the funny part here is that this practice has been going on since several decades now and in most of the cases there has been no up-gradation whatsoever.

Now before coming to the consequences, let me highlight the reasons so as to why there is so much of a herd like behavior that’s going on since decades in our country.  Firstly, there is a sort of hesitation on capital expansion with small-SME’s around India. Most of them are majorly content with the kind of produce they are getting and so are others. This has created stagnancy in the capital goods market. There is no incentive to make better machines; there is no incentive to learn. Secondly, crowding in a single place has cut margins extensively due to fierce price wars and heavy competition. This leaves no scope for any expenditure on research and development. Hence survival is usually their biggest challenge. Thirdly, that one technology is in use so extensively that new ones who are entering the market are reluctant to try any thing different due to suspicion and fear of lack of support in future in cases of breakdown. Ultimately, they end with exactly the same copy of what others have, another brick in the wall.

The consequences of the above activity are quite massive. The major one and what makes the title of this blog is inefficiency. I was being guided through a few industries near Nagpur and it was crazy how all the industries I visited were having the same deficiency. Now when I try to imagine the effect, it gets ugly. This is just one deficiency that I noticed but there may be so many others replicated in every fragmented group of industries in India. This would effectively translate into billions of rupees being spent over something that can be gotten rid of so easily. It’s like doing all my calculations on paper just because I don’t know what a calculator is!

While I have been talking about technology all throughout, inefficiencies can actually be in various other areas too. This may be in stock management, finance, marketing, supply chain management, et cetera. Although, I believe that we are standing at a juncture where there is an inevitable change that is due. As the world is molding into a global economy, there is robust exchange of knowledge around the world. People are learning from each other, learning the world’s best practices.

Hence, the future is going to be about highly efficient market. If you are not efficient, you cannot survive. This efficiency is possible when there are high economies of scale. And this is possible when businesses do their activities on a very large scale. This will eventually lead to a vertical disintegration and a horizontal integration.

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