Friday, August 8, 2014

Lesson to learn from Vijay Mallya’s hubris-driven fall: don’t bet the farm

If there is anyone who demonstrates the true cost of business hubris, Vijay Mallya is Exhibit A.
Fisrt BiZ R Jagannathan  * Aug 2014
IF there is anyone who demonstrates the true cost of business hubris, Vijay Mallya is Exhibit A. He built a great airline, Kingfisher, on the basis of personal vanity, and continued vanity is now shrinking his business from empire to kingdom as Kingfisher’s Rs 7,000 crore dues force him to sell large parts of his better businesses bit by bit.
His creditors are chasing him. The taxman is chasing him. And his own former employees are In today’s newspapers (1 August), Mallya has negative mentions in at least three instances – all related to the original sin of bankrupting the now defunct Kingfisher Airlines. After a year-and-a-half of evading the summons issued by a special court on economic offences in Bangalore, he was forced to turn up yesterday (31 July) to seek bail. He got one. Mallya is accused of not remitting Rs 400 crore of tax deducted at source.
Photographers who came to record the event wereroughed up by unknown persons (though that may not be anything to do with him). And lenders are busy hawking his properties and assets, forcing him to sell larger chunks of his profitable liquor businesses. Flagship United Spirits has already gone to Diageo, control of beer company United Breweries has passed on to Heineken, and Mangalore Chemicals and Fertilizers is likely to be taken over by the Adventz Group though Mallya officially remains in saddle in all these companies.
According to this Business Standard report, Mallya, who has already ceded control of United Breweries to Heineken, may see his 32.86 percent holdings in the company fall further as lenders seek to sell another 3 percent of the shares pledged. Mallya has pledged nearly 26 percent of his holdings in UB, and even after a 3 percent sale, 23 percent of his holdings will remain in hock to the lenders.
The short point is this: in his blind pursuit of a “sexy” hubris-driven business like civil aviation, Vijay Mallya is now about to lose his crown jewels. His is a classic demonstration of management guru Jim Collins’ five-stage process of letting a business slip from success to failure. Only, in his case, Mallya has lost more than just one business. He is losing half his empire.
As I wrote earlier, in How the Mighty Fall, Collins, author of several best-selling books on corporate success and failure (Built to Last, Good to Great), gives five broad reasons why top-performing companies lose their way and collapse to either mediocrity or even bankruptcy.
Of the five reasons, the first two relate to the causes of failure (management hubris, leading to over-reach and expansion beyond the core) and the other three to how managements respond to crisis when things start going wrong (denial of risk, grasping at straws for salvation and capitulation to irrelevance).
In Mallya's case, he has not only managed to qualify on all five counts, but has added several bits of foolishness of his own. Jim Collins will have to add a few chapters when he learns about the Mallya mishaps.
Let's begin with Collins' five reasons.
Hubris: Mallya's Kingfisher foray had all the wrong reasons for entry and staying the course to disaster. He entered the business for the glamour it brought to his portfolio (which is why, in any Kingfisher flight, when Kingfisher was still flying, Mallya talked to you directly on the video), rather from any special understanding of competitive advantage. He wanted to be India's Richard Branson, forgetting the success is not easily copied.
In India, given high fuel prices and related costs, success in aviation depends on reducing costs all the time. In contrast, Mallya ratcheted up his costs wherever he could - from handing out earphones to all passengers to serving high-cost gourmet meals in business class.
When he bought Air Deccan, he failed to see that running a low-cost carrier is different from a full service airline. He made the mistake of calling it Kingfisher Red - another pointer to hubris ("my brandname") - and reduced his full-service brand to the level of a cut-price carrier despite much higher costs.
When Kingfisher was teetering on the brink and it seemed like he would have to sell the shares in his more profitable businesses, Mallya was still pretending the sale was a matter of choice. He told Business Standardtwo years ago: "I am a businessman and my businesses are for sale at the right price."
He said that in the context of his flagship United Spirits, not Kingfisher. In the case of Kingfisher, which has Rs 7,000 crore in accumulated debt and a further Rs 7,000 crore in losses, he missed the bus for getting the right price years ago.
Overreach: Mallya's prime folly, which again flowed from hubris, was overreach. The overreach happened at several levels.
First, he failed to understand the difference between running a business with 25-35 percent margins (booze) and one with 1-2 percent margins, or even losses for long periods of time (aviation). He failed to see his managerial limitations in this new business where he didn't have a clue on how to run it.
As we noted before, in the US, the last 30 years have seen nothing less than 50 airline bankruptcies. In India, we have seen at least 10 failures since aviation was opened up to the private sector in the 1990s. But Mallya did not seem to have noticed any of this. He assumed that since he was so successful in liquor, the airline business should be a breeze.
Trying to run an airline like the liquor business was his first mistake. It was also a case of unrelated diversification.
The second overreach related to his expansion with the acquisition of Air Deccan. Despite the odds, the fact is Mallya did create the best airline brand in Kingfisher. Business passengers were shifting from Air India and Jet in droves to Kingfisher, thanks to Mallya's no-expenses-spared approach to Kingfisher First Class. But when he suddenly decided that he wanted size and scale, he bought Air Deccan at a huge premium. Worse, he named it Kingfisher, too. Do you call both the premium and discount ends of the businesses the same way? It’s like calling the Toyota Corolla as Lexus Classic.
Mallya can be excused for running a lavish Kingfisher, but trying to run a cut-rate carrier like Kingfisher was folly dipped in red ink from day one.
This double overreach-from profitable liquor to an unprofitable airline and even further into a discounting airline-set the stage up beautifully for Mallya's ultimate failure.
Denial of risk: It is one thing to blunder into an unprofitable business, quite another to bet the farm on it. But this is precisely what Mallya had done. He staked almost his entire liquor business to save a sinking airline.
In business you can succeed by doing one of two things: avoid putting all your eggs in one basket (and so spread the risk), or you can put all in one basket (that is, focus on one business and stick to your core competence) and watch the basket like a hawk.
Mallya did neither. He put all his eggs on one flight to disaster - including his shareholdings and personal assets - and failed to focus on what makes an airline succeed.
Today, if Mallya has had to sell his crown jewels to Diageo and Heineken, it is because he was driven by vanity to deny he had blundered with Kingfisher. He thus pledged too much of his liquor business and his personal assets to keep Kingfisher afloat. He threw away his good business to rescue the bad. Now even Kingfisher beer under United Breweries belongs substantially to Heineken.
Did Mallya not understand, at least as late as 2010-11, when everyone knew how the aviation business was going downhill?
Did he not understand the risks involved? Like a gambler who thinks the next throw of the dice will get him his jackpot, Mallya bet the farm after his Titanic had already hit an iceberg.
Grasping for Salvation: Nothing exemplifies a bankrupt rescue effort more than Vijay Mallya's constant refrain – made almost till the middle of last year – that he was talking to investors on Kingfisher. He kept claiming help was round the corner even when banks had moved in on his properties and aircraft lessors had been willing to pay Mallya's dues to the Airports Authority of India (AAI) just to repossess their aircraft.
When aircraft lessors pay somebody to repossess what is theirs, it was essentially a telling indictment of what they thought Mallya's chances of a rescue were.
Clearly, Mallya was, till very late, living in "cloud cuckoo land" - to use HDFC Bank CEO Aditya Puri's colourful phrase, used in another context.
Capitulation to irrelevance: Vijay Mallya’s Kingfisher clearly did not have a snowball’s chance of being viable three years ago. He should have stopped pledging his shares two years before that in order to salvage the rest of his empire from going out of his control. He should have plotted an exit strategy in 2010, if not earlier. But he failed to see the writing on the wall, and all his claims – that a white knight would rescue him when foreign direct investment (FDI) was opened up – turned out to be so much hogwash.
When FDI was opened up, it was the most viable of businesses that would get investment. Kingfisher was a stretcher case, and it had the lowest chance of finding a white knight. If fuel costs fell, they would fall for everybody, and the resultant fare war would have damaged Mallya more than his rivals. Two years after Kingfisher went under, the fare wars continue. Mallya would not have succeeded in any event. His only option was to sell. He failed to do that, thanks largely to his unwillingness to admit that he goofed up big time.
So far, Vijay Mallya has gone by the textbook - Jim Collins' textbook - to show he can fail successfully.

No comments:

Post a Comment