Frugal Innovation in India

I had recently blogged about the innovative $35 computer introduced in India. Along the same lines comes news about inexpensive homes in India (http://www.livemint.com/2010/08/18213720/Jaithirth-Rao-launches-10-lak.html?atype=tp ). So why is this important?

India has been growing very rapidly – in the last quarter GDP grew at 8.8%. This growth has also spurred considerable domestic consumption - not least in the housing sector, where traditionally homes in cities such as Bangalore, have been out of the reach of many middle class citizens. Any initiative that helps address this lack of affordable housing will address a key social need as well as spur the local economy.

This initiative takes an innovation from a structural design company in Kansas City, USA and applies it to the housing sector in Bangalore, India (and other cities soon). The entrepreneurs in this case are successful corporate managers – Jaithirth (Jerry) Rao and PS Jayakumar were colleagues and senior managers of Citibank India, soon after liberalization. It is interesting that they have chosen to enter into a business that they have overseen lending to but not actively engaged in.

Perhaps what frugal innovation to succeed what is needed is a fresh perspective on old problems – similar to what the Indian engineers did with the $35 computer (and what the folks in Silicon Valley did not) and what IT folks did for emergency services in South India. This also raises an interesting question of whether disruptive innovation (frugal innovation is a dramatic illustration of disruptive innovation) is possible with managers who are already in the business. Does what the late CK Prahalad call ‘dominant logic’ block these game changing innovations?

The true test for the model shown by Jerry Rao and PS Jayakumar is going to be whether it is replicable in other cities in India that have even more tough housing markets like Mumbai and Delhi; while also reducing prices as they have promised. In the meantime other famous academics, such as Vijay Govindarajan at the Tuck School of Business at Dartmouth College, are tinkering with the idea of even more frugal housing – catering to the poorest in India, by suggesting a $300 home for the poor (http://blogs.hbr.org/govindarajan/2010/08/the-300-house-a-hands-on-lab-f.html )

The question as I suggested in my earlier blog then becomes – what does this mean for the already battered housing markets in more developed countries? How do they deal with the continuing flood of innovations that radically alter the cost structure of their industries?

Financial Reform: Welcome To The Dark Side

As I might have mentioned a time or two before, there are two fundamental ways to think about Strategic Management. The more common, because it makes us feel and look better, is that, unlike economics, we realize that in the real world there is no equilibrium solution, so we train managers to focus on innovating in the gathering, designing and using of corporate resources. In that way, they can gain a temporary competitive advantage that, we hope, allows them to continue innovating further temporary advantages. Everyone from the manager, to his employer, to society at large gains from efficient new ways to do exciting new things.

There is another way to think about strategy. It can also be seen as the dark side of economics. For example, where economics warns that cartels are bad for society at large, dark side strategy encourages industry to join with regulators to form cartels. If done properly, the cartel can last as long as the regulators last; and we have yet to witness a regulator dying a natural death (except for the Civil Aeronautics Administration, the exception that proves the rule).

With that context in place, let's think about the recent financial reform legislation. I borrow the following two paragraphs from Michael Hirsch at Newsweek:

[B]y midsummer of 2010 the Volcker rule that Obama finally backed was so full of exemptions—allowing banks to invest substantially in hedge and equity funds—that even Volcker expressed dismay. The fundamental structure of Wall Street had hardly changed. On the contrary, the new law effectively anointed the existing banking elite, possibly making them even more powerful. The major firms got to keep the biggest part of their derivatives business in interest-rate and foreign-exchange swaps. (JPMorgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley control more than 95 percent, or about $200 trillion worth, of that market.)

The same banks may end up controlling or at least dominating the clearinghouses they are being pressed to trade on as well. New capital charges, meanwhile, have created barriers to entry for new firms. This consolidation of the elites has in turn kept alive the “too big to fail” problem. “It makes it way tougher now to kiss somebody off when they get in trouble,” says the former Fed official. Eugene Ludwig, a former comptroller of the currency, believes the new law’s impact will be “profound” in changing the way banks do business. But he worries about a “skewing of the playing field” in favor of the big banks, putting community banks at a disadvantage.

The major financial firms have had to accept new regulation, but that regulation doesn't seem to change what the largest firms can or can't do. More to the point, the new legislation makes it unlikely that a new financial giant can arise, while the government is probably still tacitly on the hook if any of the existing giants look like collapsing. Now, this might be the best political deal that could be struck ("too big to fail" is a legitimate policy problem, not simply a gift to politically connected bankers), but it looks a lot like strategy from the dark side.

Yes, you, too, can be an inventory manager.

The NYT reported recently that Nordstrom has opened up their in-store inventory system to customers. (See: http://www.nytimes.com/2010/08/24/business/24shop.html?scp=2&sq=nordstrom&st=cse). An online customer can order an item they like from any store or from Nordstrom's warehouse system, providing them the access that many stores don't even provide their own workers. In-store customers can have this done by a salesperson.

Nordstrom is famous for taking risks, most notably in the form of their rule book that says that there are no rules. One suspects that they are out in front of a trend in this case, though, and won't be the only firm to offer such a service. (While shopping at another department store recently, in fact, I had a clerk checking for an item I wanted in the store's inventory system. He found one in a nearby store, but when he called there to double-check, no one answered the phone! There's always a right way and a wrong way to do something.)

This is an extension of the idea of co-production of services, wherein customers become temporary employees (unpaid, of course) of the firm in order to enact the service they want. Other examples would include getting your own soft drink in a fast food restaurant, or pumping your own gas (which New Jersey stubbornly refuses to allow.) Here, Nordstrom has made customers a part of their logistics operation, letting online shoppers check and move inventory. Doing so, the article states, has helped to increase Nordstrom's inventory turnover ratio significantly.

In most cases, this is a win-win: customers will generally be happy to help Nordstrom manage their inventory if it results in getting that Hermes tie with just the right shade of green. It will be interesting to see how they manage this, given their reputation for highly personalized service, because that's the only potential downside: the loss of some interaction. A Nordstrom customer that shops by computer is getting the same level of personalized service that they get when they shop online using searchbots.

This is the challenge, then, for using technology and for increasing the level of customer co-production: keeping that personal touch intact. Shopping is still a social experience. In fact, if the customer begins to help to manage the product delivery, perhaps the sales personnel will have more time and inclination to be social.

The Liability Of Foreignness

The liability of foreignness is the social costs imposed upon firms doing business abroad. It depends upon the identity of the host country, the home country and the host country's stereotype of the home country.

The America's Cup, the Winged Keel, and Innovation

Yesterday I had the opportunity to go through the Museum of Yachting in Newport, Rhode Island. In addition to being a very pleasant space on a beautiful spot overlooking the harbor, it has a series of exhibits that would be of interest to anyone even slightly interested in boats. The one that I found the most enjoyable was an exhibit on the history of the America's Cup, which was held in Newport for most of the 20th century.

What is interesting to me about the America's Cup is the paradigmatic shift that occurred beginning with the 'winged keel' of the 1983 race. In 1983, of course, the Australian yachting syndicate won the Cup, prying it from the hands of the NYYC for the first time in decades. Dennis Conner, the losing skipper, was saved from becoming the Bill Buckner of yachting by the Australian team's triple-secret winged keel, which they kept hidden until after the race.

The winged keel is an interesting bit of technology, and, of course, it was quickly imitated by other teams. This is to be expected - innovations are often promptly copied. What makes the America's Cup history a little more interesting is that shortly after the introduction of the winged keel, other, more substantive changes took place. Most notable of these was the introduction of catamarans to the competition - a huge paradigm shift. Catamarans are crazy, and crazy fast. I remember being in a boating store as a kid and seeing one for the first time. They're a completely different sailing experience - you hang out over the water in a harness, they flip over at the drop of a hat, and they are an absolute blast.

In the parlance of the Americas Cup, these are "multihull" boats. The question is, without the winged keel, would the racing world have gone "multihull"? Perhaps, but probably not so quickly. Small innovations can wake up other innovators, and they can create an environment where change is no longer so scary. It took some plucky Aussies to shake up the venerable yachting world, but once they did, the gangway was cleared and sailing innovators were off to the races.

Ratan Tata has announced that Tata Sons – the preeminent family conglomerate (global sales of over $70 billion and 357,000 employees) that touches every Indian with products ranging from soap to hotels to cell phones – is looking for a new head when he steps down at the end of this year (http://in.reuters.com/article/idINIndia-50627620100804 ).

In most countries this would not be big news – but in India where family controlled businesses never let “outsiders” i.e. people from outside the family run “their” business – this is huge. The Tatas have always had a history of being pioneers in bringing change to the Indian business milieu. The appointment of a panel to consider suitable replacements for Mr. Tata is in itself a huge innovation, since they are going about their assignment of finding a replacement in a fairly transparent manner. The panel has indicated that they are looking not just beyond the family but that they are looking at individuals from beyond India.

As India rapidly integrates itself into the world economy this decision has ramifications for the country as well as other firms from emerging markets. The lesson that the Tatas seem to be putting out is that if you are going to compete in a global marketplace then your managers need to be equally competitive and simply hoping that family members will be able to take on the mantle of leadership is simply not going to hold.

It is going to be interesting to see how managers of family run businesses from other emerging markets, especially China, are going to react to this news. Leadership in a Chinese setting may be problematic since the state is a big player in the running of businesses even in the private sector; and this may be okay while the macro sentiment is great, however there could be concerns as China faces a more hostile business environment.

If Only They Had A Union

$35 PC from India

A couple of weeks ago the Indian government showcased the debut of a new $35 dollar computer (http://www.pcworld.com/businesscenter/article/201769/indias_35_pc_is_the_future_of_computing.html?tk=hp_pop ). This computer seems like it does most of the functions expected of a PC such as web browsing, word processing, and video-conferencing. The target price for this product is $10 once mass production starts. One can thus forgive PC World magazine when it calls this new product “the future of computing”.

This ‘frugal innovation’ is in line with what Indian organizations have been doing for a while now. The drastic drop in pricing is not simply due to locational advantages but is driven by a fundamental change in the way products are designed and delivered (this PC can use solar power too). At the 2008 Strategic Management Society special conference held in Hyderabad, India, the late Professor CK Prahalad talked about the costs associated with EMRI, which handles emergency calls (such as those made to 911 in the United States) in the state of Andhra Pradesh at a cost which is about 2% of the costs associated with similar services in the US, at comparable quality levels.

There is an increased awareness in India that marginal reductions in product cost are not going to help Indians continue to grow GDP at the 8-9% that they have recently gotten accustomed to. While product ideas typically continue to be generated by firms outside of India, there is urgency in reverse engineering these products and making them available at a fraction of the original cost – but doing so by going beyond the original product’s promise. This appeals to the concept of ‘jukaad’ that most Indians innately understand. Jukaad represents concepts partially captured by words such as ‘somehow’; ‘make-do’; ‘can-do’. What it means is that “okay given that I know what I want – I need to make it happen, no matter what the obstacles are”. This entrepreneurial yet frugal mindset has been a hallmark of key business people from India.

What has changed in recent times is the collaborative nature of the public / private entities; along with policy changes necessary to make it happen. India has had the advantage of superb engineering colleges such as the famed Indian Institutes of Technology (IIT); their graduates populate many of the firms of the west. What is happening now is the IITs are now encouraged to collaborate with private entities to develop products that will be sold not just in India but beyond. It is important to note that this product was launched by the government of India and not by an individual firm. The government of India (HRD ministry and Department of Science & Technology) is starting to take a more active role in innovation, which resembles what MITI did in Japan, in its focus on garnering requisite resources for innovation rather than focus on allocating resources for production.

So what does this mean for India and perhaps the world? Kapil Sibal, the Indian HRD minister who launched this product has suggested that the goal is for the “the solutions for tomorrow” to emerge from India," (http://www.bbc.co.uk/news/world-south-asia-10740817 ). The median age in India is a little over 25 years and about a third of the population is below the age of 15 (https://www.cia.gov/library/publications/the-world-factbook/geos/in.html ). Handing this group of young people a tool that can unleash creativity can only be good for world welfare – which may not be the same as the short term welfare of firms competing in the same product spaces. The option of not taking this building crescendo of frugal innovation (from India and other countries) seriously is one that managers everywhere take at their own (and their shareholders) peril.