India’s Global Industries: Three Horizons of Growth

There has been a time when India was unlikely to be a global player in any industry or service. From the 1980s, thanks to software services and information technology, India came to be recognized as a global software powerhouse. Still, industry was seen as an unlikely arena for global play by India. The 1990s saw the first breakthrough with the pharmaceuticals sector, led first by bulk drugs and later by formulations, becoming the global generics powerhouse. Doubts remained, however, if India would ever be player in the broader industrial spectrum. The turn of the century, however, saw India become a major producer of components and finished products in a number of industries, including electronics and telecommunication products.

Quietly, India has been undertaking certain strides in multiple industrial horizons. But for that, several developments of Indian products being in global arena would not have been feasible. For example, Nokia has its Asha range of global mobile phones manufactured out of India. Toyota, the world leader in automobiles has recently announced that India would be a new hub for certain of its global component requirements. India has today launched its 100th space mission (the Polar Satellite Launch Vehicle, PSLV, C21), with satellites from the developed world to be put in orbits on a commercial basis. Tata Motors turned around Jaguar-Land Rover operations, and began making profits and adding jobs in the developed world. Impressive as these are, they are more a result of individual initiatives in private and public sectors. There is a need to identify a concerted strategy for globalization of the broader Indian industrial spectrum.

Public-private collaboration

Given that India is yet to attain global scales in research and development, manufacture or marketing, one of the fundamental planks of gaining better global competitiveness is through the pooling of public and private resources. This could be firm level and industry level collaboration or academic and research (largely public) collaboration with private and public sector firms, or even manufacture in private sector and marketplace in the public sector (and vice versa). The disallowance of private sector into defense production, for example, has been counterintuitive and counterproductive given the maturity the Indian automobile industry has achieved. Similarly, given the huge increase in the Indian civil aviation sector should Hindustan Aeronautics not have been tapped for manufacture of India’s own dream-liners?

Public-private collaboration could take a systems approach as well. In the airports arena, the Airports Authority of India as the airports builder and maintainer, Air India as the cargo handler and various airlines including Air India (all of them except Air India being private) could view their interdependencies and mutual services in terms of enhancing user experience rather than their own transactional requirements. Academic and industrial collaboration also takes on a similar hue. Certain private sector undertakings with overseas infrastructure can help manufacturing enterprises, of both the private and public sectors. Competition need not act against collaboration. Mahindra Group, which has its own automobile franchise, for example, is the second largest financier of India’s largest automobile manufacturer, Maruti Suzuki.

Higher objectives

Diffidence needs to be replaced by optimism. It was probably never envisaged that India, given its investment constraints and poor pay scales in public sector, could have its own space program that can one day turn commercial. The truth is that the impossible has been made possible with the successful launch of PSLV today. Eventually, India would have its own missions to the Moon and Mars. The need, therefore, is for the broader industry to have higher objectives of attaining global scale and competitiveness, dreaming to make the impossible possible. The higher objectives must go beyond choice of certain firms or sectors for export competitiveness or setting up of Special Economic Zones (SEZs) or Export Oriented Units (EoUs) for export production. The objectives must be to ensure sustainability of global scale R&D, manufacture and marketing, without undue reliance on fiscal incentives.

India needs global scale and local prosperity in order to achieve the objective of economic growth with social equity. For this to happen, India needs to set up new institutional structures, turning some of the concepts borrowed from the West upside down. For example, the Planning Commission must be broad-based to provide equal participation and impetus to both public and private sectors. The Competition Commission needs to be supplemented by Collaboration Commission. Special agencies such as National Manufacturing Mission must be reinforced by new entities such as Global Competitiveness Mission. Industry bodies must transform themselves from being mere lobbying houses or advisory bodies to global policy developers and global competitiveness monitors. The industry as a whole must be responsive to indicators of adverse movements in global competitiveness for India. Against the background of such a perspective of globally oriented institutional enablers, the right horizons of growth need to be chosen.

Horizons of growth

Growth happens in horizons. The three horizons usually are the current growth makers, emerging growth drivers and future growth triggers. It is tempting to characterize the several industries in the three horizons and seek to maximize global competitiveness individually. For example, one of the more export-intensive sectors like pharmaceuticals could be placed in the current global horizon, a scale-friendly automobile industry in the emerging global horizon and a technology-intensive space industry in the future global horizon. Such an approach could have its merits and even support better globalization for the chosen industries. The disadvantage or limitation is that such classification is based on current factors of performance rather than on intrinsic enablers for the complete spectrum as a whole.

An alternate, and more systemic, approach would be to view the three horizons in terms of core competencies required. The first horizon could be one of cost-competitiveness, the second could be one of development-competitiveness and the third one could be one of innovation-competitiveness. Classifying in the three horizons enables global forays based on competencies that India possesses or can develop in a phased manner. That India could be cost-competitive in a number of industries is given; equally it is clear that India could undertake incremental developments as a matter of routine. What is not probably clear is how soon and how effectively India can transit to a paradigm of innovation; that obviously needs special focus and effort.

All industries, all horizons

The elegance of the cost-development-innovation horizon construct is that it enables a play for all the industries simultaneously in all the three horizons. For example, within the automobile industry sub-compacts, compacts and sedans may be placed in the cost horizon; luxury vehicles, sports utility vehicles, multi utility vehicles and crossovers in the development horizon; and hybrid and electric vehicles in the innovation horizon. This construct helps the automobile industry seek and achieve globalization without any lapse of time and also with utmost effectiveness. Similar examples would abound in terms of various industries. In the computer industry, desktops and laptops as well as tablets would figure in the cost horizon, supercomputers in the development horizon and the artificial intelligent computers and robots in the innovation horizon.

When the detailed paradigms of research, development, manufacture and marketing are drawn up for each industry across the three horizons, it would be evident how, rather than sector-specific tactical plans, horizon-specific strategies would be relevant and helpful for the industry as a whole for global competitive advantage. This construct has lessons for firm level strategy as well. Firms should not view globalization as a single product or convenience led effort. Rather, it should be seen as an overall competency reinforcing effort across the total product range. Although as of now clear examples do not exist of Indian firms having demonstrated the multi-horizon success organically, both Tata Motors and Mahindra & Mahindra effectively demonstrate how they could achieve multi-product, multi-horizon competencies through a fusion of organic and inorganic initiatives.

Horizons of competence

The three horizons of global competitiveness of cost, development and innovation correspond to three core competencies which successful global firms must possess. These correspondingly are operational excellence, development creativity and absolute innovation. Regardless of product differentiation, cost leadership is a good position to be in for all Indian global firms. This would be reinforced when product development capability enables the firm to also develop differentiated products. An Indian crossover vehicle is thus a first for an Indian car maker. Complete multi-horizon capability occurs when the firm makes innovation its passion and develops breakthrough products. Most Indian firms are yet to focus on the third horizon but the sunrise technologies such as nanotechnology and alternate energy provide potential for research institutions and industries to make common cause; this requires scientific and technological leadership as well as cutting edge laboratory infrastructure.

Indian experience suggests that induction of experienced professionals skilled in each of the horizons, whether from Indian industry or overseas helps the firms master the three horizons appropriately. In terms of operational excellence we have multiple examples of leadership from efficient Indian companies such as Reliance Industries. Development excellence in Tata Motors and Mahindra & Mahindra was catalyzed by Dr V Sumatran and Pawan Goenka respectively. Even in the mysterious and challenging domain of drug discovery, some Indian firms have relied on proven scientific leaders and state-of-the-art laboratories to achieve considerable traction. This is indicative of the fact that the base talent for all the three horizons is appropriately and abundantly available in India and catalytic leadership, and modern infrastructure, with the three horizon approach enunciated herein, is all that is required for India, Inc to deliver on the promise of globalization.

Posted by Dr CB Rao on September 9, 2012

Corporate Centurions: Lessons for Longevity

On June 15, 2011, IBM one of the most respected names in industrial history joined the ranks of US public corporations which crossed 100 years of existence. The list of nearly 500 corporate centurions that was published in USA Today (http://i.usatoday.net/money/_pdfs/11-0615-centurions.pdf) demonstrates that it is feasible for corporations to live not only long but also successful. The list comprises corporations which are top ranked in terms of market capitalization and brand equity. Examples (to quote a few selectively, not necessarily representatively) are: Exxon, GE, Chevron, IBM, Berkshire, P&G, J&J, JP Morgan Chase, Pfizer, Coca Cola, Wells Fargo, Citigroup, Bank of America, Merck, Pepsico, Abbott, Goldman Sachs, United Parcel, 3M, American Express, Ford Motor, CVS Caremark, US Bancorp, Union Pacific, BMS, DuPont, MetLife, Eli Lilly, Dow, Colgate-Palmolive, Walgreen, Emerson Electric, Deere, Target, Corning, Praxair, Prudential, Lockheed, General Dynamics, Kimberly-Clark, McKesson, Kellogg, Becton Dickinson, Chubb, Paccar, Alcoa, Heinz, Sprint, Xerox, McGraw-Hill, Hershey, Macy’s, Moody’s, Tiffany, Harley & Davidson, CB Richard Sears, J C Penny, Perrigo, TRW, McCormick, Whirlpool, Navistar, Timken, WABCO, Lazard, Goodyear, Babcock & Wilcox, Westinghouse, John Wiley, NCR, Packaging Corporation, Dana, Unisys, New York Times, Universal, Eastman Kodak and Exide.

The list of corporate centurions clearly establishes that corporate longevity has no relation to the nature of the industry. The list of corporate centurions includes firms in all types of industries such as oil, automobile, engineering, banking, financial services, computers, consumer goods, power equipment, distribution, telecommunications, tires, automobile components, transportation, reprography, newspapers, beverages, movie studios and so on. The list includes companies which have started in basic engineering such as Bobcock (boilers) or dominated modern engineering such as Lockheed (aircraft engines). The list includes highly specialized, mono-industry companies such as Ford or highly diversified, multi-industry companies such as GE. The range of companies includes companies which have more or less retained the original ownership and those which have seen complete changeover into public or third party hands. It also emerges that while inflection of new technologies provides  opportunities for new firms to break into big league (for example, Microsoft and Google) even companies in basic industries can protect and grow their turf. Whichever way the universe of corporate centurions is sliced, it would appear that certain characteristics of corporate and leadership vision, strategy and execution rather than any industry characteristics or ownership biases have influenced corporate longevity.   

Other examples

Japan is an example of country with several contrasting facets. Several mega corporations have reached or are reaching the centurion status on the planks of technology and globalization. Yet, there are reportedly thousands of companies which are over 100 years old which employ fewer than 300 people. This adds another dimension indicating that corporate sustainability could be a function of niche, however small it is. In fact, in the tradition bound Asian countries it would not be uncommon for tradition to play a large part in corporate longevity. By staying small, not going public, not pursuing big cities or big markets, nurturing community relations and keeping know-how within the family small companies have managed to sustain themselves over decades. It is, however, creditable that many Indian corporations have ventured big despite lack of national independence until 1947 and have become worthy corporate centurions. Some companies belonging to Tata and Birla groups and other corporations such as ITC have demonstrated that corporate longevity could occur despite alien occupation. Many of the companies have been in basic industries such as steel and engineering or even in threatened industries such as cigarettes and tobacco. There is now a whole new generation of post-independence companies in India which are bound to become worthy corporate centurions.

That said, for the few scores of companies that have been so longstanding and successful globally, there have been thousands of companies which have either collapsed beyond revival or seen a complete transformation in their business moorings. As the IBM centenary essay observed, within the US, of the top 25 industrial corporations in 1900, only two remained on that list at the start of the 1960s. And of the top 25 companies on the Fortune 500 in 1961, only six remain there today. Some of the leaders of those companies that vanished were plain unlucky while others made choices that turned out to be poor. But the demise of most came about because they were unable simultaneously to manage their business of the day and to build their business of tomorrow. In fact, it appears that most companies find it easy to establish and grow themselves in the initial years rather easily but find growth beyond the mid-teens challenging and daunting. Part of the reason is that there is no repository of techniques or cookbook approach to corporate sustainability and longevity. As with a human being who can live for 100 years based on healthy lifestyle practices which are behavior driven, corporations also find that leadership and managerial behavior that focuses in healthy corporate lifestyle leads to corporate longevity. More importantly, the body of knowledge that enables corporate longevity emerges from an alert observation of external competitor behavior and a wise interpretation of organic developmental experience. Fortunately, however, the several names listed in the earlier discussion typify corporate and leadership behaviors that foster customer centricity, adaptability, innovation, people orientation and globalization as critical drivers of corporate longevity.  

Customer centricity

Customer centricity is at the core of corporate longevity. Customers come in multiple forms and hues. From an individual consumer utilizing a product or service to a firm requiring equipment and to a society needing an institutional service the spectrum of customers is indeed vast. Customer centricity means not only making the current customer happy with outstanding quality and service of existing products but also creating new customer loyalties by offering products and services not perceived openly by the customers. To be able to fulfill the first objective, companies must realize that customers have choices; even in industries which are subject to current monopolies, customers would eventually have choices. Continuous improvement in products and services is therefore mandated independent of monopoly position. To be able to fulfill the second objective, companies must focus on how consumer needs can be fulfilled through new products and services or how a completely new need can be structured through breakthrough products or services. For example, for a doctor diagnosis of the internal condition of the patient’s body remains the fundamental purpose. As a company specializing in medical diagnostics progresses from X Ray machines to CAT Scan to PET Scan to MRI Scan equipment, each with superior imaging capability the primary need is better fulfilled, and the company remains for the long term. If the medical devices company considers that an even more fundamental purpose of the doctor is disease prevention, the company may deploy entirely different modes of technology, be it genetics or molecular biology, to develop gene types that are prone to develop specific diseases or biomarkers that predict specific diseases and even develop preventive vaccines. The potential for customer centricity is infinite, and is limited only be corporate creativity.

Adaptability

Thomas J Watson Jr, the second chief executive of IBM said, “I believe that if an organization

is to meet the challenges of a changing world, it must be prepared to change everything

about itself, except its beliefs.”  The history of IBM demonstrates the adaptability of the corporation to change despite the apparent success that its pioneering status brought to the corporation. For example, IBM invented the desktop personal computer and dominated the industry. Yet, it took a bold decision to exit the personal computing business years ago losing billions of dollars of revenue to refocus more vigorously on mainframe computers and other new technologies and services. The core commitment to enhancing the thinking and execution capability through computing power, however, remained.  Pepsico has demonstrated its adaptability by recognizing early on the need for health foods and integrated new non-beverage businesses in its fold. The core commitment to meeting the day to day living needs remained unchanged, if at all only expanded to cover also drinking water and breakfast cereals.  ITC in India recognized the futility of fighting India’s national concerns of the 1960s and 1970s in terms of national importance and redefined its business. As a result, ITC not only expanded its fast moving consumer goods business to cover new business segments such as branded packaged foods, personal care products, education & stationery products, lifestyle retailing, safety matches, and incense sticks, but also entered new industry segments such as hotels, paperboards, paper and packaging, agribusiness and information technology. A core commitment to become more positively connected with society, and reduce negative connotations of cigarette business underlined many of such strategies. Adaptability requires the leadership to be emotionally disconnected with their strategic successes when the time to move to a new future beckons. Adaptability also requires the institutional development of a corporation so that corporation can outlive its founders and successive CEOs. IBM says it has been able to outlive its great founders and CEOs because the founders created a culture that enabled IBM grow on certain differentiating characteristics that made IBM, IBM. 

Innovation 

Commoditization is every firm’s or industry’s closing call for profitability, establishing the inevitability of competition and supremacy of markets. From steel to smart phones, commoditization has become an inescapable trend. Commoditization does not spare even high technology companies; in fact, the higher the technological sophistication the greater is the risk for commoditization. Companies have only one weapon in their armory to fight commoditization – innovation. Innovation is not an issue of a new product or service, or even of a new technology. Innovation is a broader concept of a company moving into the future based on a whole combination of new needs, new products and new services in a holistic sense. Innovation is not a short term fix for a company’s growth needs. Rather it needs to be a corporate culture that consistently invests in science and technology and finds new ways of deploying them for identifying and fulfilling customer needs. R&D expenditure is an enabler of a company’s innovation effort while the patent estate is a marker of the company’s innovation output. Neither is, however, adequate as an end unless genuine value is built for consumers. Innovation is rarely organic. Multi-functional collaboration, open source networking and multi-industry integration help build greater value. Robotic surgery is a great example of previously incompatible domains of engineering and medicine merging with each other; for example, the application, by three IBM engineers in 1981, of the newly invented excimer laser to remove specific human tissue without harming the surrounding area and do so on an extremely minute scale—a process that became the foundation for LASIK and PRK surgery. The painless procedure, which changes the shape of the cornea, has improved the vision and quality of life for millions of people around the world. The ultimate innovations are perhaps yet to come in, whatever be the industry sector one considers. Society’s needs and expectations are continually increasing. Today’s super computers are expected to compete with the sharpest of human minds. Infrastructure is expected to be built completely earthquake and tsunami proof. Industry is expected to be completely environment friendly. Innovation will increasingly be the true hallmark of leadership vision, strategy and execution, going forward.

People orientation

All through the centuries of industrialization, people have been at the core of competitive business development. A great company will be fortunate to have not only talented employees but also understanding investors, supportive bankers, collaborative vendors and suppliers, loyal customers, and appreciative regulators. People, in many ways, constitute the core of a company’s business. A company’s people orientation would need to extend far beyond how it cares for its employees; it would need to be displayed in its dealings with all of its stakeholders, and the broader society. Honesty, trust and transparency of behavior and communication help build people relationships. Companies at times tend to view relations and results as two poles of management. In matter of fact, however, there can be no results without relationships. Even competing companies achieve successful outcomes in contentious negotiations through the rapport that principal negotiators develop based on fair principles of negotiation. The need for co-employees of a company to achieve results through relational skills than transactional efforts cannot be overemphasized. The convergence of relations and results would happen when a company’s culture aligns thoughts, talks and actions of all across the organization transparently, and integrates company’s values and employees’ beliefs based on a shared agenda. IBM’s organizational talent processes from the very early years emphasized customer relationships, and organized development of people to stay focused on customer service. Emphasis on relationships does not mean lack of confrontation or differences when circumstances compel. An ability to advocate change and gain acceptance is a significant facet of the success of corporate centurions.

Globalization

Globalization is an essential requirement of leadership and longevity. There appear to be five distinct phases of globalization over the last century. The case study of India is an interesting one. Globalization of the early decades has been the first phase which focused on entering new markets, especially less developed countries like India, often with limited investments and with somewhat dated, early generation technologies to benefit from local demand. The second phase involved a counter-trend of moving away from such less developed markets as governments became socialistic and began nationalizing foreign enterprises in sectors such as oil, moving out foreign companies from certain disparate sectors such as computers and beverages and limiting growth in certain sectors such as FMCG and pharmaceuticals. The third phase involved post-liberalization reentry on a large scale based on major investments and relatively new generation technologies. Market making emerged as a new objective of the third phase of globalization. The fourth phase has seen a completely different paradigm of foreign enterprises seeking emerging markets that were previously less developed markets, in search of factor advantages as well as cost and time arbitrage. Probably, the fifth phase of globalization is now set to commence as emerging markets come on their own and become hubs of innovation in their own right but also suffer from the impact of inflation and relative cost equalization. The statement on globalization by IBM in its centenary essay assumes significance in the emerging context: “We have learned that national origin is less important than the indigenous value you create everywhere you choose to do business. Certainly this starts by creating jobs, making local investments, paying taxes and bringing products and services to new buyers. But it goes beyond that. Our history teaches us the difference between entering a market and making a market. The latter requires working with leaders in business, government, academia and community organizations to help advance their national agenda and address their societal needs. It requires building real skills in the local workforce and enabling new capabilities among its citizenry - being a force for modernization and progress. All of this means we must think differently about long-term commitment and investment. And, as the world becomes flatter, it also means that we have to be particularly thoughtful and progressive in helping every part of the world adjust to and participate in global integration”.    

Corporate longevity

Corporations exist to serve customers and shareholders in one sense, and to take care of employees in another sense; however, in a holistic sense they exist to grow as responsible members of society, helping the society become better in the process. As manmade instruments of progress, corporations have the ability to last perpetually. Yet, it is a matter of concern that many corporations struggle to grow confidently beyond their mid-teens. As the 100 year history of IBM shows a corporation can overcome seismic shifts in technology and environment to remain in leadership position by a corporate behavior that emphasizes customers, adaptation, innovation, people and globalization. It also requires corporations to stay focused on the long term despite the pressures and compulsions of the short term. The lessons are particularly relevant for an India Inc that is set to play a larger global role.

Posted by Dr CB Rao on July 17, 2011     

From Start-up to Maturity: Indian Entrepreneurial Challenge

Indian psyche is unique in that it follows an icon as much as it chooses independence. Indian corporate saga is an equally unique amalgam of followership and independence. The growth of Indian enterprise is founded on an entrepreneurial rush into an activity that is opened up. The evolution of industrial structure in India is based on a continuous expansion in the number of firms in the fray rather than a structural consolidation at any point of time. The Indian corporate sector therefore faces a challenge as firms struggle to transform themselves from start-up stage to maturity state, some passing successfully through a growth phase, and some failing to. The challenge if left unaddressed could affect entrepreneurial development, and eventually the competitiveness of the Indian corporate sector.

The Indian industrial evolution

The Indian industrial start-up model, as elsewhere, was fuelled by entrepreneurial energy. Even when India was under foreign occupation, in the 1800s and the early 1900s, Indian industrial start-ups were established by the Tatas and Birlas, with their enterprises becoming large industrial groups over the years. Post-independence, successive government policies enabled and encouraged establishment of scores of cottage and small scale enterprises in India. Some of these served larger firms as suppliers and vendors of materials and components while several other start-ups sought a direct go-to-market strategy, with varying degrees of success.

An introverted India, even post-independence in 1947, rarely encouraged free entry and exit, expansion of scale and induction of technology in its industrial and economic policies. As a result, companies stagnated and became less competitive, relative to global trends. At the same time, licensing regulations inhibited global corporations from entering into or expanding in India. On a helpful side, process patent policies (as in some other countries) ensured freedom for domestic companies to reverse-engineer global products for Indian markets. The Indian automobile and pharmaceutical industries became, for example, the epitome of low-scale, domestic-oriented direct to market fragmented industrial structures of the 1960s and 1970s.

There emerged a new Indian entrepreneurial wave from the 1970s (Ambani founded Reliance, for example). Technology induction and assimilation blazed new paths from the 1980s (Indo-Japanese automobile collaborations such as Maruti-Suzuki). Entrepreneurs and corporations were rid of controls, and certain industries started becoming global leaders in certain sectors from the 1990s (TCS and Infosys, in Information Technology). Increasing confidence in Indian competencies and policies from the 2000s and post-patent harmonization assurances led to great global interest in India with a better awareness of the competitiveness of Indian enterprise. Simultaneously, Indian industrial groups and larger Indian companies became globally aggressive, entering overseas markets (directly and through partnerships), acquiring overseas units and marquee brands.

The Indian start-up model

From a protected, regulated domestic regime, the industrial paradigm in India evolved into a liberalized, competitive globalized regime in the 2000s. The models that helped Indian start-ups to enter and stay fixed in scale and scope are becoming less tenable. The Indian start-ups are today verily at cross roads, with choices between smug stagnation and tough transformation. Yet, the continued proliferation of owner-managed companies and small scale enterprises with dated technologies indicates that a new start-up model is yet to emerge.

The Indian start-up model is highly domestic market oriented and self-reliance inspired. While start-up firms would not be averse to being suppliers to larger firms, especially in sectors such as engineering and automobile, the overwhelming preference seems to be on direct go-to-market strategies. This enables firms have a quick market-oriented entry in any industrial segment but also limits the ability of entrepreneurs to create stable, growth or niche models that could be more vibrant technologically and commercially in the long term.

The missing dimensions in the Indian start-up scenario relate to inadequate access to technology, insufficient financial resources and overwhelming reluctance to consolidate. The first two factors dictate the pace with which a start-up in India is able to navigate to, and through, the growth phase while the last factor dictates the ability of a start-up firm to stay on course in the growth phase or navigate the maturity phase. Typically, a start-up in India would have the capability to move from a USD 1 million to USD 100 million annual sales but lack the capability to move beyond without dedicated efforts to manage the three dimensions of technology, finance and ownership.

An examination of the Western and Japanese models of start-up could provide guidance for new development models relevant for Indian start-ups.

The Western and Japanese start-up models

The Western and Japanese start-up models are typically based on pioneering pieces of technology or market creation. While it may be tempting to relate this to the fact that all modern technologies emanated in the West (largely USA or Europe) or in Japan it is the start-up intent that made the difference. Entrepreneurs with truly ground-breaking products in the West or in Japan or Korea went on to make their start-ups into mega global enterprises. However, there are certain typical nuances of technology-led start-up development that are different.

Not all techno-entrepreneurs in the West were or are keen to build their start-up enterprises into mega enterprises. Entrepreneurs in the West see creation of commercial value (for themselves) more important than either reaching the market or expanding the scale of the enterprise. Entrepreneurs see technology as a concept to be commercially proved at their hands rather than converted into commercial saleable products in their hands. Entrepreneurs benefit from an equity environment that provides multiple-series funding. Finally, entrepreneurs are willing to monetize their technologies and firms to generate surpluses for new endeavors. Ownership and management are treated as very important in the start-up phase but are considered expendable for leading into the growth and maturity phases.

The techno-entrepreneurs in Japan are different. They tend to innovate for larger industrial firms or trading groups and in the process help create multi-level business arrangements. The start-ups set up by the techno-entrepreneurs typically grow with the larger firms and groups, and become global enterprises in their own right. The entrepreneurs are typically attached to their technologies and family presence but are also able to evolve to the higher levels due to the synergistic relationships. Typically, the larger firms in Japan respect the origins and independence of the smaller suppliers and desist from the Western temptation of acquiring promising technologies and firms. Instead, the accent is on letting the smaller start-ups grow into mature, innovative enterprises.

A hybrid model for Indian start-ups

Given the constraints the Indian start-ups face in accessing technology, finance and markets, and the attachment of the entrepreneurs to continued ownership of the firms they founded, a hybrid model is relevant for Indian start-ups. Assuming that a base level of promoter and external funding is arranged, typically, start-ups fall into one of the three categories: those that make better use of available technology, those that make their operations more competitive and those that access certain market segments more creatively. Needless to say, firms which achieve a virtuous combination of technological innovation, operational efficiency and market penetration would be in a position to drive into a growth phase on their own. The hybrid model would be relevant to start-ups having competencies in one of the three dimensions.

Firms which are technologically innovative need to aim at achieving the earliest proof of concept, following which they should be prepared to license or sell the technology to larger firms which can take the product to the market. This phenomenon is widely prevalent in the West, especially in technology and biopharmaceutical fields, and needs to be adapted to the Indian situation. Firms which have pieces of market would do well by either taking in products from other start-ups or providing market access to larger firms. Firms which are operationally efficient must focus on gaining market access in partnership with larger firms having Indian and global market presence. This could enable a longer independent functioning to such firms, enabling growth journey on their own.

The hybrid model for Indian start-ups thus envisages growth through inorganic relationships across fragments of value chain rather than through organic end-to-end value chain. Many Indian start-ups in India have evolved into mid-sized firms through such relationships. Still some decisions have to be customized: for example, the scale and scope of such relationships, whether such relationships would need to be limited period relationships or permanent relationships, and whether the end game is surplus generation through value monetization and exit as per the Western model or lifetime domain commitment.

Founder-Manager transformational issues

Part of the evolutionary response would emerge from how the founders of the Indian start-ups manage the entry, growth and maturity phases of an enterprise. Entrepreneurial firms tend to be typically founder managed. Investors gain confidence with the founder being in total control of the enterprise while the employees get inspired by the leadership of their founder. As enterprises move into growth phases, investors need to let go of their control on the founders, and the founders need to let go of the control on their enterprises. As an enterprise becomes larger it needs to organize itself into organizational and business units that can be driven by independent managers to generate greater value.

While no professional manager can bring the passion and feel of a founder-leader to an enterprise, start-ups need to find ways and means of institutionalizing the entrepreneurial passion and feel through diversified professionalization. Indian start-ups which moved into the big league have done so not only on the basis of technology-efficiency-market grid but also due to organizational development. Serial entrepreneurship could well help Indian entrepreneurs to continue to feel their passion with newer enterprises while helping their earlier enterprises move on their own steam.

The suggested organizational model is based on the unique Indian psyche that complies as much as it commands; that follows as much as it leads; and that is as much professional as it is entrepreneurial. Compensating any limitations it has, the Indian employee base is driven by a deep sense of loyalty and frugality that can be leveraged by placing capable people in commanding positions. The success of large Indian private and public sector corporations is related to the diversified ownership model that is extended to individual organizational units of an enterprise.

Science and finance for start-up transformation

Start-ups need access to science and technology. Indian entrepreneurs are adept at adapting technology, enhancing efficiency and perching their firms on market niches. They are, however, diffident in taking science and technology from Indian research laboratories. For example, there are over 40 specialized laboratories under the umbrella of the Council for Scientific and Industrial Research (CSIR) as one of the largest publicly funded research network in the world. In addition, institutes of higher learning such as Indian Institutes of Technology and Indian Institute of Science have cutting edge researchers. These competencies can be leveraged to establish new drivers of growth through win-win commercial arrangements. Indian start-ups can place a just small proportion of the risk on using and developing indigenous science and technology to secure cost-effective business development. There is a great potential for Indian science and technology that is waiting to be captured.

Western and Japanese angel investors and private equity funds can achieve substantial returns by considering multi-phase investments in Indian start-ups that could transform themselves into future growth engines by utilizing India specific science and technology. There is tremendous potential that is untapped in social and industrial infrastructure, as well as rural and urban development. A comparative inventory of small enterprises in US, Europe and Japan with those existing in India will indicate the enormous possibilities.

Central and State Governments in India have traditionally supported start-ups by policy measures. Newer and more creative measures are required. Encouragement of single person companies, creation of financial exchanges exclusively for start-ups, channeling of a certain proportion of CSIR research effort for small enterprises, creation of start-up finance divisions in all banks and financial institutions, exemption of small enterprise promotion and management from complex legal hurdles and encouragement of mentoring of start-ups by working executives, all of these supported by governmental policies, could add up to a great entrepreneurial start-up movement in India.

Posted by Dr CB Rao on May 9, 2010