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Monday, February 12, 2007

Innovate or die: What happens to firms that don't gear up

India is seeing a huge change in the pace of progress. With China's economy galloping along at such a fast pace, India has to do everything in its power to keep up and finally overtake the dragon. Professor of Marketing at Wharton School, Yoram Jerry Wind says that harnessing the power of the skilled human resources available in the country will help transform India.

Chairman of ICICI Bank, KV Kamath told CNBC-TV18, that the Indian corporate scenario is embracing radical transformation wholeheartedly, as they have no option. He elaborated, "Governments create space and the environment. It is for the masses including the corporates and the individuals to really fill this space and make the country what they want to. So I think this role has to be understood and I think this is where we have seen success in countries, where this model has been adopted. Coming to the industry - Indian industry came through structurally difficult times in the last 6-7 years and I guess that every one of the surviving industry members understood that those who embraced change, those who went beyond the one-way street would succeed and they changed."

"For example, 5-6 years back, every industrialist you met in India would say, 'The China factor is going to kill us.' If you ask the same industrialist today 'What about the Chinese factor?' Not a problem, we can compete. Where I find this new thought coming very clearly is the textile industry. Just two years ago, they were all saying - this industry is wiped out - and indeed due to structural changes, the industry was in deep trouble."

"Recently they are saying that we are a globally fit fighting machine and are able to compete. So clearly, the industry has been able to re-invent itself and understand that change is paramount and this change started from their shop floor. The shop floor has been cleaned, processes have been improved, quality has been improved, they have delivered themselves, they have cleaned up their financial structures and I am sure their organisational structures as well and their mental makeup also must have changed before they made these changes, so clearly change is a constant process."

Some Indian companies have changed mental models and because of that change are in a completely different league and in a completely different growth curve today. Kamath agrees, "If you look at the manufacturing industry, in the sense of the industry these companies always had the edge because they hit the floor running, as it were, a few years back and have kept the momentum. The real challenge has been the manufacturing sector and in the manufacturing sector I would pick the auto industry and the auto ancillary industry as the best examples of industries, which completely transformed themselves in the last few years."

"About three years back, if you talked to companies on what is your competitive disadvantage. They said about 30%-40%. These companies have overcome their disadvantages and today are overly acknowledged as people who can provide quality products at competitive prices."

From being a success in the domestic market to making it in the global space takes a different mindset. Wind explained with an analogy, "Well, a global company is a very heterogeneous place and the challenge for most of the companies historically, has been that they basically focus on 14% of the world whose GDP per capita is over $10,000 per year. They ignore the other 86% of the world - India, China and other parts of the world."

"The advantage that the Indian companies who are thinking global have, is a thought process of understanding that they are forced to innovate, to come up with better solutions for this 86% of the world. In the auto industry, Tata Motors came up with a car which is $2,000. There is no American company or Japanese company who can think what does it take to develop a $2,000 car. It is a dramatically different mindset. They are geared better than Toyota or any other American company or any other company to try and capture this 86% of the world because they have done it here and I think one must understand that going global, does not only mean selling success stories only to the US or to Europe. It means capturing and understanding the global market and outsourcing. So to be successfully global, you have to realize one, that you have to think outside the boundaries of your country and two, the solution is 'think global but get local' to understand the heterogeneity in each country."

Kamath gives an example of the banking sector in India. He said, "In India, the average deposit for a bank is about a $1,000. Other banks it could be from $200 - $500. In the West, it is ten times that number, $10,000 deposit on an average. So your topline is driven by, in my case a $1,000 deposit, in the West by a $10,000 deposit so it is a much heftier topline that you have in the West. Now lets take technology cost. In the West, let's say they are X. If the same X technology were to be opted for in India, in terms of convenience and ease of use, the model won't work because my topline is a fraction of what it is in the West. The expense is X and you are not going to make it work."

"How do you make it work? So you then innovate to find a solution that is appropriate to what you are doing here. If you have got it right, then it is a scalable model that you can take across the globe and build it into a winning solution. I am sure that the same is the case in every industry that we look at and I am sure that these sort of solutions will come from some of the developing countries not necessarily in India. You could see China doing this, South East Asia doing this and in the course of time other countries also coming up with such solutions."

Wind recounts an example from CK Prahalad's book, 'The Fortune at the Bottom of the Pyramid', in which he talks of artificial limbs. Wind elaborated, "In India there are over 5 million people who need artificial limbs. The cost of a artificial limb in the US is about $7,000-$8,000 and obviously people here cannot afford it. Further more, there is a much greater demand of functionality because here the people are walking or squatting all day and require much more functionality than in the US."

"Also you don't have that many orthopaedic surgeons and you don't have too many hospitals, so you needed to rethink the artificial limb. They did it with much greater functionality than in the US. It can be fitted by a semi-skilled professional not necessarily an orthopaedic surgeon and at a much shorter period of time and at less than $100. There is no way an American company that is used to the approach that led to the $8,000 artificial limb can compete in this market."

He added, "Now of course, the challenge is for the Indian company that is developing it. How do they capture other markets and I fully agree with the fact that what we need is that we cannot take a multinational approach for products that were successful in Europe, the US and Japan and just bring them to the rest of the world. That is the point clearly made in the book by Vijay Mahajan and Kamini Banga on the 86% solution, which primarily you have to think differently, think creatively. There are huge opportunities for India."

But the biggest challenge leaders face to any change is getting the foot soldiers in any organisation to accept it and implement it. Kamath elaborated, "The fundamental principle that we have found in our experience and it is universally true for any industry is to align your people and get your structure right. So, I articulate in the organization concept, that the organization structure cannot be cast in stone. It is like a living organism. It has to change shape and character as the organization changes shape and character. I find that if a company adopts this broad philosophy then it is easier to change. It is still not an answer to change, you still have to work hard. It is the biggest challenge a leader faces."

Written for www.moneycontrol.com

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