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Friday, January 14, 2005

The shattering of the value chain & making of millionares

This is going to be one of those economic analysis posts where my bored self will try to spew gyan about things I have no idea about. Ok , here goes nothing.

First read this & this. These articles/papers deal with the emerging business models in the strat consulting spaces. Interesting reading. I won't repeat what has been already written but ponder over a few unsaid points.
The article mentions "Knowledge building" as one part of the value chain that is increasingly going to be captured by firms based in India & other low cost destinations. Agreed. However,I have feeling that not everyone can set up such a firm. Going through the resumes of fouders of Evalueserve, Lex Orbis & others like them, it seems obvious that you need a lot of contacts to get the business off the ground. These contacts can't be gained by working in India. Therefore, most of the "Knowledge building" firms in India will most probably be set up by NRIs. Most of these NRIs are likely to have some strat consulting background. The US/European setups are most likely to be managed by thier ex-colleagues in their former workplaces/industries. If you go through the profiles of the current leadership of Inductis ( a high-end data analytics company) you will see that most(?all) of them have worked at the Mitchell Madison Group.

All this was about the supply side of the strat consulting. What about the demand side? There are lots of businesses in India growing at a CAGR of 70+% but no one knows about them. Sooner or later, they would need some sort of consulting experience to guide them through the especially murky world of globalization. Moreover, with shorter learning cycles nowadays & intense competition small Indian companies face a serious organizational learning handicap(which is a legacy of family owned structures) they need external help which is = a muti-billion $ business oppurtunity.
I wonder who will be clever(? astute? plain lucky?) enough to tap this & make a few millions. There are firms like Haldiram's , Foodworld, Murugappa group which are some of well known but still very small family business houses.

Let's try to put a number on this oppurtunity. India's GDP = 500 bn $ . Revenues of typical medium-scale businesses = 10 % of GDP. = 50 bn $. I took 10% because 20-25% mentioned in the articles are for countries without product reservations small & medium enterprises. (Anyways, that's a lot of money :-). If consulting is even 1% of the gross annual revenues then the total market size for consultancy = 1% of 50 bn $ = 500 mn $ = 2500 crores. The current market in contrast for all consultancy is 1000 cr & management consultancy is around 30% of that = 300 cr ( this is my guess).
Let's try to guess the timing of the oppurtunity now. Most of the medium scale businesses between 1960 & 1975 which was a period of extraordinary economic growth(don't have any data, so take this with a pinch of salt) & would have been started by an adult aged 30 years ( I am guessing again). Considering the mean of 1960 & 1975 =1967. The average patriarch would be aged 2005-1967 + 30= 68 yrs. The business patriarch would probably be thinking of handing over the business/already handed over the business to the next generation. Here lies the goldmine. It would have been very difficult to convince the average family patriarch(with socialist mindset & all) about the usefulness of hiring consultants to increase the competitiveness of their family businesses. But today's generation knows the premium of time & good,objective advice.
End game: The next 5 years would see the emergence of third tier consulting companies who would be the get-your-hands-types consultants maybe even taking a stake in the company running it during a difficult transition & streamlining it's procedures & helping it realize it's core competencies. This new industry structure is likely to very fragmented with most of the firms staffed with less than 50 consultants or less. Who will be these people? I hope I can catch the wave :-).
As always there are a lot of things I haven't covered, but what to do I have a day job as a mechanical engg student. More later(this is turning out to be a bad habit :-).


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