July 5, 2002 | 1720 IST
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Money > Business Headlines > Special July 5, 2002 | 1720 IST |
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The Ambani magic that spawned a giantGita Piramal For almost two decades, Indian Petrochemicals Corporation Ltd dominated the Indian petrochemicals industry. Its three plants fed half the country's demand from the plastics and textile industries. The remaining 50 per cent was met through imports.
All this changed in the mid 1980s. The Indian petrochemicals industry continued to be supply driven but two factors reversed IPCL's fortunes. The first attack on the government-run monopoly's bottom line was a steady softening in the international prices of petrochemicals. The second was the commissioning of the Reliance Industries' cracker at Hazira. IPCL now had local competition. That it came from the private sector made competition all the more interesting. Reliance is undoubtedly one of India's most interesting companies and its founder, Dhirubhai Ambani, the stuff legends are made of. What is worth noting is that at the time Reliance's Hazira plant went on stream, internationally prices of its products had started falling, and locally it had to compete with IPCL's largely depreciated mother plant at Vadodara. Internally, the Hazira plant had overshot its budgeted cost more than twice over - partly because the Ambanis wanted a world-scale and world-class plant, a gold-plated Rolls Royce, as a business journalist once described it - and partly because of some unforeseen extras such as a jetty and pipelines which earlier the state government had promised to provide but for which eventually Reliance had to pay. Despite the rocky start, within five years, Reliance overtook IPCL as India's number one petrochemicals company. Today, it is snapping at the heels of Indian Oil Corporation. What did Reliance do right? Its many critics argue that Reliance's phenomenal success, particularly in the 1970s and 1980s, was substantially due to some government rules and regulations which seemed to have been designed by Reliance for Reliance. But there is an old adage that you can take a horse to the water, but you can't make him drink. Reliance wins in the market place every time because customers like to buy its ever-expanding range of products in ever-increasing volumes. In the textile business, for example, the company won the battle for markets primarily on the strength of a differentiation strategy. Reliance is India's single largest producer of textiles, but its Naroda complex started modestly in 1966 with just four imported knitting machines. At the time, its entire production was exported. In the early 1970s, the burgeoning demand for polyester fabrics in India caused Reliance to shift its attention to the domestic market. The Vimal brand quickly attained leadership status - customers liked the quality, the designs and the prices of its range of sarees, suitings, shirtings and dress materials. Unlike other textile mills, Reliance invested heavily in state-of-the-art technology. In 1975, a technical team from the World Bank inspected a number of Indian mills and its report concluded that only Reliance's mill 'could be described as excellent by developed country standards.' In 1977, a Japan Textile News reporter was sufficiently taken aback by the design studio facilities to report that 'such a scene is hardly seen even in the highly advanced textile producing countries like Japan.' If Reliance used the differentiation route to win the textile market, it won the battle for the petrochemicals market through an aggressive cost leadership strategy, based largely on scale and pre-emption. By continuously investing in capacity, often ahead of manifest demand, Reliance not only expanded its market share but also wrested all investment initiatives away from its competitors. The net result is that Reliance has come to command between 33 per cent and 80 per cent market share in India for all its key petrochemicals products. Coupled with an insistence on always procuring the latest technology, these large capacities and market shares have translated into unbeatable cost advantages that not only make Reliance the most profitable company in its industry during an upswing, but also the most robust in a downswing. Why was Reliance successful in developing and implementing its strategy? Many other companies, including the public sector giants, also tried to achieve low costs by putting up high-scale plants. Why did they not succeed like Reliance? Reliance's strategy worked because it was anchored in a set of outstanding competencies. Its project management skills are unsurpassed in India, and among the best anywhere in the world. It pioneered competencies in mobilizing large amounts of low-cost finance. It could manage the regulatory environment, partly through an extensive system for gathering and interpreting information - a key and often overlooked component. And it can move fast. These core competencies allow Reliance to set up world-scale plants at the lowest capital costs of any company in India. Clearly, Reliance's growth spiral is built on an iterative process. Its competencies in project management, the mobilisation of finance and the influencing of the regulatory environment, support its high-volume, low-cost strategy of putting up ever-larger plants. Each large-scale project, in turn, allows it to invest more in - and deepen - those competencies, thus preparing the company for even larger projects and bigger leaps. But this explanation, too, begs a question: what is the engine driving Reliance's evolution? Where does the energy come from? That question leads to the third stage of competition: the competition for dreams. This is where the power of corporate ambition and human will combine with a vision of future markets to create the exciting sense of purpose that energizes the whole strategic process. The spiralling dynamics of continuously engaging in bigger projects and using the experience from those projects to deepen its competencies have been powered in Reliance by Dhirubhai's dreams and, later, by the growing ambition of his two sons. The author is Managing Editor of The Smart Manager and author of Business Maharajas and Managing Radical Change. ALSO READ:
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In a supply-driven market, managers in its downtown Mumbai marketing office were constantly besieged by hundreds of small plastic processors hungry for raw materials for their factories. For years, IPCL was one of the most successful public sector companies in the country, turning in sturdy profits.