How Reliance Industries strategised its growth in the telecom sector

Disruption-the term and practice in vogue- in the business world is usually associated with startups. The ‘story’ goes as: Young and dynamic startup firms disaggregate the value chains of existing industries or firms, find a niche and build a robust business. (The problems usually associated with startups are that of scaling up). But contra the prevailing and conventional wisdom, established firms- especially conglomerates, can be disruptive too.

One example of a conglomerate disrupting an industry is Reliance that essentially totally disrupted India’s telecommunications industry leaving competitors scrambling.

Before dwelling on the nature and form of Reliance’s disruption of the telecommunications industry, it may be useful to recall some concepts and practices that pertain to conglomerates. Often times, these firms, in an attempt to expand took recourse to vertical integration (VI). This meant buying and owning both or either upstream and downstream activities of the industry. The well-known example of VI is that of oil firms. Many big ones like Exxon, Shell, bought and owned but the input, supply and refining side of the industry and the upstream one of retailing.

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These firms kept these aspects and functions in the house with the aim of efficiency, effectiveness, cost savings, and economies of scale.

While the rationale of VI sounds eminently sensible, but barring episodic attempts at this in the 1970s and 1960s, the overall success of conglomerates is debatable. Obiter dictum, it is held that conglomerates work well mostly in developed or emerging economy contexts.

Another strategy that firms usually of a larger size took recourse to was diversification. The rationale and the premise was growth and expansion. Diversification could be related or unrelated. With respect to the former, a given firm diversified into a related industry and in terms of the former, the diversification was totally unrelated. The doyens of business and industry held that related diversification offered a greater opportunity as opposed to unrelated diversification.

Against the generic backdrop of vertical integration, conglomerates, related and unrelated diversification, it is interesting to posit Reliance’s strategy of being all of the above and disrupting the Indian telecommunications industry. How did the firm do it?

It would appear that Reliance – being a family-controlled conglomerate- created an internal capital market, aggregated cash flows from its extant (sometimes unrelated businesses) and ploughed them into its telecommunications arm, Reliance Jio. Essentially, the firms cross-subsidised Reliance Jio from its various businesses. With such ‘deep pockets’, Reliance not merely took on extant competition in the telecommunications space but created what Chan Kim and Renee Mauborgne, in their book, ‘Blue Ocean Strategy’ call uncontested market space by making the competition irrelevant. While some competition in the Indian telco space exists like Airtel and some other minor players, but these firms are totally on the defensive and struggling to catch-up with Reliance Jio. In this sense, Reliance strategy does not entirely fit Chan Kim’s and Mauborgne’s premise but approximates it.

Reliance made both data services and calling extremely cheap forcing incumbents and competitors to catch up. The only option left for incumbents was to engage in a price war with Reliance Jio, but they could only do this at great cost to themselves. While Reliance could absorb initial losses with the aim of gaining and capturing market share from competitors, for the incumbents it could only mean bleeding extensively in the rules of the game set and created by Reliance. While at some point in time Reliance Jio will raise the Average Revenue per User (ARPU), but for now for its competitors, it was a blood bath as more likely than not competitors like Airtel match or craft a new strategy to overcome Reliance -which seems unlikely. Shorn of something drastic, Reliance Jio is likely to emerge as the leader in the telco space of India, if it already has not.

The key takeaway or even lesson of the disruption caused by Reliance strategy is that disruption can also be caused by established players – even conglomerates. And that it is not only the prerogative of startups. If, ultimately, the name of the game in a given industry, by a given firm, is to create value, the disruption could be a viable strategy for large firms and might be even more potent given that these firms, by virtue of deep pockets, can scale up faster and without hassles than startups. All this is not to discredit startups.

They remain important in their own right especially as drivers of innovation and path-breaking practices. It is only that disruption can be taken recourse to by conglomerates as well. Reliance Jio and its disruption of the telco space proves the point.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)