Wednesday, December 29, 2010

India as a Superpower by 2020: Reformist Policies Hold the Key

In my last blog post of 2009, I wrote that India could become a global economic power by 2020 if certain welfare and development plans were to be adopted. These were: (i) a billion homes program, (ii) food security, (iii) universal education, (iv) healthcare for all, (v) multi-modal connectivity, (vi) energy assurance, (vii) global scale of operations, and (viii) innovation within a generic mindset. These are long term strategic journeys with tremendous funding and execution challenges, and it would be too ambitious to expect an immediate thrust.

Positives and concerns

That said, India in 2010 demonstrated some healthy progress and some worrisome constraints. From an overall economy point of view India not only emerged relatively unscathed from the global economic meltdown but also achieved a much stronger rebound in 2010. During the year, important actions have been taken to position education as a universal right and several reforms in the education sector are on the cards. The signing of the Nuclear Energy Bill has opened up new possibilities in the energy space. Indian companies have pursued the vision of global scale operations. Those Indian companies which made ambitious overseas acquisitions (eg., JLR by Tata Motors and Corus by Tata Steel) demonstrated the ability to successfully turnaround the acquisitions and integrate them. Indian firms continue to make overseas investments in the mining, oil and gas and telecommunication fields. Yet, against these few decisive moves, there has been relative inaction on other fronts.

Governments, central and state, are yet to embark upon a massive affordable funding program, which is essential for broader socio-economic vitality. Healthcare continues to be patchy and highly inadequate. Infrastructure continues to be the biggest bottleneck for economic development. While a few companies began turning out innovative indigenous products, India is far from being an electronics product innovator as Korea is or an electronic product manufacturing hub as China is. Agriculture continues to be ravaged by vicissitudes of nature. As an overall phenomenon, innovation is yet to make a mark in terms of competitive efficiency and product differentiation for India in the global markets, commensurate with India’s talent potential.

Potential clearly recognized

Despite the mixed record, India enjoys tremendous goodwill as the economic powerhouse of the future. Reputed journals such as Economist have forecast that India would be amongst the world’s 5 largest economies in the world by 2030. Experts also believe that the gap between China and India would substantially be bridged with greater foreign direct investment into India and more sustained economic growth. Evidently, with China having already built up its industrial and infrastructural strengths to nearly peak levels and India having substantial strides to take on this score, there is clearly a tremendous potential for India to up the ante of development.

While such perceptions of India’s growth are morale-boosting, India cannot be complacent given the fact that the constraints it faces are real and the resources it needs to marshal are enormous. To that, we need to add the fact that the two other BRIC countries, Brazil and Russia, have a new found appetite for rapid growth. India clearly needs to have a more pervasive yet more focused strategic economic plan to achieve the global powerhouse status.

While the eight points mentioned in my last year’s blog post, and recapped in the introduction to this post are valid, the developments of 2010 point to certain new opportunities that should be leveraged aggressively and chronic constraints that need to be eliminated resolutely. For the first time, India has the option and opportunity to leverage its unique democratic institutions and geo-political positioning to reinforce its economic and industrial strength. The future lies in reformist policies to be conceptualized and executed on a wide canvas.

Global collaboration

The first part of the reformist plan must be to leverage the interest and focus that various advanced economics have developed in India. The year 2010 saw the heads of almost all advanced nations, USA, Russia, UK, France, Japan included, visit India and explore a wide range of economic and business ties. This interest opens up several possibilities for widespread industrial and economic collaboration in nuclear power, thermal power, aerospace, defense, rail transportation, airports, and several other investment and technology intensive sectors. India should be keen to convert these proposals into active projects both in public sector and private sector domains. The Government should encourage public sector and private sector enterprises to diversify actively into these new areas, with the added promise of India providing low cost components in exchange for overseas technologies.

Coordinated policies

Much as private sector is destined to play a larger role in economic development, Governments have to exert themselves to draw up more cohesive reforms agenda with strong cross-sector linkages. Though there were no major reforms initiatives in 2008 or 2009, the Indian economy has grown significantly. The growth rates with a proper reforms agenda would be even more incredible. Policies balancing industrial needs and environmental compulsions simultaneously, rather then sequentially, are one important requirement, for example. Without such coordinated policy framework several mega projects that are planned, are failing to really take off.

Public oversight

On a related plane, stable and investor-friendly long term policies on Special Economic Zones which create employment are also required. Policies regulating private operations in an open, transparent and positive manner constitute another important need. India is perhaps not yet ready with the level of perfect market conditions that allow a totally free market economy to operate without a concern of wayward deployment of scarce resources. Even highly free market countries such as US are now veering round to the view that certain economic activities of strategic importance need larger governmental oversight. Banking, finance, healthcare, insurance, and education for example, need public policy oversight as much as private sector participation. Microfinance in India, as an illustration, has ushered in a silent revolution by financing USD 4 billion for empowering millions of indigent households. Yet, lack of regulatory oversight has led to multiple failings in this revolution, setting the clock back. Great private initiatives should not, therefore, be allowed to become exploitative for want of appropriate public oversight.

Skill enhancement

The average age of India of the future will be less than 30 years. This means that educational and skill levels of the Indian population will have a great bearing on the competitiveness of the country. While engineering education is the lead component of India’s industrial growth with a vast network of colleges, thousands of seats are lying unfilled in engineering institutions. Perceptions of inadequate depth, patchy quality and low opportunity for certain educational streams are at the core of this paradox. This concern is accentuated by the fact that factories and infrastructure in India are at peril with the migration of engineering talent to softer areas such as IT, banking and consumer marketing. The position is no different in science and medicine. Despite the acute lack of medical care, the admissions to medical colleges are highly inadequate and regimented. Scientific institutions are unable to marshal resources to specialize in research driven scientific education. India’s educational sector is clearly in the need for a massive opening up with public and private funding.

Global scale funding

Juxtaposed against the massive growth needs, especially in long lead industrial and infrastructural projects, India perhaps is just not resourced adequately to fund the growth. The Indian banking sector is still introverted, for good and proven reasons. However, scales of operation are not commensurate with the global fund raising requirement for the envisaged infrastructural and industrial development. On one hand, infrastructure alone would call for an investment of $ 1200 trillion to get to global standards which the current banking sector is incapable of addressing. On the other hand, the Indian banking system seems to be more comfortable with, and geared towards, financing quick-payback industries, retail, white goods and other consumption sectors. A sea-change in the banking infrastructure would be called for which can only occur with dedicated policy support.

Equitable employment

Economic employment with a human face will be yet another facet requiring policy support. Indian homes are typically constructed by homeless, migrant workers representing a major social and economic paradox. Construction companies and the less literate labor force are continuously seeking cost and location arbitrage. Skill levels in construction and infrastructure development need to be upgraded to global standards which would require completely new vocational education policies for the underserved sectors such as construction, logistics and transportation. These sectors must be choices made by jobseekers out of dignity of labor and primacy of skill rather than resultants of lack of education forcing such low cost job seeking. At the same time, even in globally networked industries such as business process outsourcing, the Indian workforce is facing new challenges from relatively more stable and better educated call centre workforce of other Asian countries. With the Indian population itself touching 1.6 billion by 2020 with a mean age of 29 years, creation of a high level of skill base is essential to retain the competitive edge in both internally focused industries (such as infrastructure) and externally networked industries (such as outsourcing).

Reloading the governmental matrix

Indian governance is highly matrixed, with central and state governments and multiple political systems being in power. Focused identification and elimination of policy constraints is therefore essential for speedy progress. While everyone understands that major projects in highway development, urban decongestion, metro and intercity rail development, airport expansion and sanitation are called for neither inter-state or centre-state collaboration has been forthcoming in the requisite measure. This is often leading to long delays in conceptualizing and executing development projects. Standing committees on centre-state and state-state cooperation with the objective of clearing infrastructural projects on fast track could be one expedient way.

Software lead

India has the potential to surprise the world in a few aspects. Conduct of elections in this vast country with electronic voting machines is no mean task. An advanced country such as US has also been unable to accomplish such task. Soon the Unique Identification Number (UID) project will be another feather in the cap for Indian software sector. These skills can be leveraged to develop global businesses of digitizing governance in various countries of the world. Constantly discovering new processes of working with and around digital machines will be an opportunity for the Indian software and telecom sectors to leverage.

Thrust products

Countries have discovered that while broad based industrial development is vital for overall competitive efficiency, focus on a few selected industrial products often enhances the level of competitive efficiency and takes economic development to a newer level. India itself has discovered this fact with its focus on steel production, defense production and automobile manufacture in the last few decades. Dedicated efforts to develop new design and production hubs in nuclear energy equipment, solar energy panels, wind turbines, bullet trains, aircraft, space equipment, telecommunication equipment and electronics equipment, including mobile phones, tablets, note books and desk top computers could catapult India into global manufacturing league in a big way.

New product segments for the new era

A great trigger for India’s future development is the young age of the population, constantly increasing middle class and the consequent opportunity it affords for a whole new set of consumer items ranging from readymade and processed foods to personal products. Explosive growth may also be seen in future for equipment that automates household routines. The penetration of microwaves, multi-purpose cooking equipment, dish washers and washing machines could catapult, with these equipment becoming a standard feature of each dwelling unit in future. India could indeed see a revolution in the food processing and packaging industries as well as in the over-the-counter nutritional product and pharmaceutical industries. Indian firms need to pursue new business models that are not merely replicas of the past product lines but focus on newer product lines that would cater to the upcoming generation shift and income expansion.

Products for the BOP population

That said, India will never be free from the challenges and requirements of finding economic, low-cost solutions for those living at the bottom of the pyramid. Professor C K Prahalad, in his landmark book on Fortune at the Bottom of the Pyramid (BOP) has described how healthcare products and services could be economically and successfully offered for India’s population. Indian companies need to develop a BOP line for each product segment, be it a household item, a personal product or a consumer good item, all the while emphasizing high utility and low cost. Hindustan Unilever’s and Tata’s low cost water purifiers, Pure It and Swatch, and GE India’s low cost ECG machine are indicative of the potential of this approach. Eventually, large companies may focus on designing and development as well as marketing of such low cost products enabling small and medium business enterprises to manufacture such products as part of an efficient value chain.

Growing capacity, compressing breakeven

From an economic analytics point of view, India’s emergence as a global power in 2020 would depend on a massive capacity expansion in all product and service lines, with highly granulated and suggested offerings to different customer groups. This needs to be accompanied by design, manufacturing and marketing paradigms that bring down the breakeven levels of operation. This would ensure that the economy as a whole remains viable and sustainable in lean times even as it maximizes its potential in good and booming times.

Goodbye 2010 and Welcome 2011!

Posted by Dr CB Rao on December 29, 2010

Sunday, December 26, 2010

Indian Microfinance Paradigm of the Future: Credit & Consumption or Investment & Employment?

As I set out to pen this post, I went through the available literature on the microfinance industry; global and Indian. The extent of scholarly articles and expert comments by economists, sociologists, activists and public on microfinance industry is truly amazing and humbling. Central banks of nations, Indian and international banks, rating agencies and the World Bank have been active participants and facilitators of the microfinance industry. India, especially the State of Andhra Pradesh, has been a silent leader in generation and distribution of microfinance. It is, therefore, sad that the Indian microfinance industry should have caused, either by inadvertent design or involuntary default, waves of suicides of indigent borrowers and thus is now itself suffering from the terrible backlash of such suicides.

Experts agree that microfinance has performed and would continue to perform a very useful purpose of reaching credit to the highly indigent and impoverished rural population. In India microfinance registered a meteoric increase from USD 250 milion in 2005 to USD 4 billion in 2010, serving millions of indigent households. Indian banks and financial institutions including subsidiaries of foreign banks have lent USD 3.3 billion to microfinance sector. Seeing the potential multiple other direct and mezzanine funding options became available to the Indian microfinance industry. Securitization of microfinance disbursements became another funding tool. Low delinquency of loans, managed by aggressive recovery methods, ensuring continued fund flow.

Clearly, the rapid and unregulated evolution of the industry led to multiple borrowings, usurious lending rates, and high-handed collection mechanisms to state a few. What ought to be a bank-aided socially purposive activity became a private equity driven business with profits and valuations as the goal. The Government of Andhra Pradesh promulgated an ordinance in October 2010 to regulate the industry while the Reserve Bank of India has constituted an expert committee to examine the industry in its entirety. International reviewers such as Financial Times, Forbes and Wall Street Journal while recognizing and condemning the follies and inadequacies of the microfinance sector have cautioned against mistaking the procedural weakness of the current microfinance industry as proof of the irrelevance of the industry.

Surely, the various efforts would lead to a more regulated microfinance industry that would stop the profitable piggybacking of the microfinance firms on not-for-profit Self Help Groups. The new policy would also hopefully establish a reasonable proportionality between the low-cost priority sector credit from scheduled banks that the microfinance industry is entitled to, and the interest rate that the industry would charge to its indigent and impoverished clientele. Probably, these measures will take some profit and valuation sheen off the microfinance industry but will be welcome for their positive impact of preventing a social disaster - of a new breed of urban bankers profiteering at the expense of the bottom of the rural pyramid.

Microfinance : a workaround road or a new credit highway?

The banks in India have an obligation to direct 40 percent of their credit to priority sector, which includes the indigent customers who constitute the customer base of the microfinance industry. Despite their efforts and establishment of several collateral institutions like cooperative banks, regional rural banks and specialist institutions such as NABARD by the central and state governments, the organized banking sector has trditionally failed to ensure a performing priority sector portfolio. The emergence of microfinance firms has enabled the banking system find an effective intermediary that fulfilled its purpose. The microfinance industry brought a rare on-ground control over micro-credit deployment and collection, and emerged as a preferred alternative to the ruthless moneylenders that held the impoverished people to ransom. Empowerment of women was a key plank of the microfinance movement bringing a higher level of acceptability to the sector.

Probably, the very availability of organized low-cost funds for the microfinance industry and the low bar of performance arising from a benchmark of traditional money lender system have led to the imperfections of the microfinance industry. Some economists characterize the microfinance system as an unfortunate work-around methodology for the failure of the mainstream financial institutions to reach credit to the poor while others predict a schumpeterian dead end for the microfinance industry. An eminent former governor of the Reserve Bank of India who is credited with saving the Indian financial system from the global liquidity meltdown felt that microfinance is a kind of sub-prime lending which is not sustainable in the long run. Others believe that despite the noble objectives, the microfinance industry performs no more than a sustenance role that is far from the transformational aspiration that the industry is charged with. The supporters of the microfinance industry, on the other hand, argue that the low cost structure of microfinance firms provides the much needed competitive advantage vis-à-vis the mainstream firms and the microfinance firms would eventually grow into financial behemoths in future.

Regardless of the arguments, it appears that the microfinance industry is in need of a significant paradigm shift in terms of three key fundamental approaches: (i) from lending to investment, (ii) from consumption to employment, and (iii) from competitive growth to collaborative development, if micro-financing has to be transformational. The industry needs to evaluate whether it is truly equipped to make micro entrepreneurs out of the millions of the poor, less literate people it serves or it would be better of generating more sustainable employment development by focusing on thousands of capable rural entrepreneurs. The governments have to also evaluate if the microfinance industry would serve its social purposes better by getting funded more by public equity funding than by private equity funding. In sum, there are more fundamental issues involved in the reincarnation and rejuvenation of the scalded microfinance industry than procedural regulations, essential though they are.

From lending to investment

The biggest point against the current microfinance model is that it is addressed at survival and consumption needs of the rural customers. Most microfinance customers are indigent individuals who lack ownership of any assets and are therefore incapable of generating additional income streams out of the loans taken. While the end-use details of loan amounts are presumably sought as per the loan clearance processes, clearly the processes are deficient as demonstrated by the multiple loans taken from multiple institutions by the individuals. It is important, therefore, to have a transformational view of the lending process by the microfinance institutions and the individual beneficiaries. The lending process needs to be viewed as an investment process aimed at asset ownership and supplementing asset management for, and by, individuals.

The next important point is whether microfinance institutions can see themselves as micro investors and not as micro lenders. As opposed to lending, the institutions should see themselves as investors in the notional equity of the individuals they lend to. This approach requires a shift from a quantitative view to a qualitative view of lending by the institutions. It also requires the microfinance institutions to view themselves as development institutions rather than lending institutions. If the institutions are benefitted by private or public equity it is incumbent, given the social objectives the sector has, to invest part of the proceeds as risk-bearing investment capital. This, ipso facto, would compel the institutions to be more alert and helpful towards the borrowers from a sustainability point of view.

A sore point against the current microfinance model is the rather uncapped and usurious rates of interest. The institutions need to compete with low cost bank finance providers rather than the high cost traditional moneylenders. In a regime where even high cost credit cards charge monthly flat interest rates of 2.5 to 3 percent it is inappropriate to have uncapped interest rates going up to as high as 5 percent flat, as allegedly charged by certain microfinance companies. Regular auditing of the books would help keep a semblance of control to this essential requirement. More fundamentally, however, the founders of microfinance institutions should stop viewing their operations from a traditional profit-oriented business angle and aggressive revenue/profit optics, and instead see themselves as instruments of social transformation.

From consumption to employment

Closely allied with the investment approach outlined above is the employment approach. The principal macroeconomic objective of microfinance must be to generate sustainable employment. This objective can be fulfilled by focusing on employment generation capability of the village as a whole rather than individuals per se. This requires a study of what the village economy currently has, what it is capable of generating and what it is capable of marketing. The study also requires an evaluation of the training and development needs of the individuals. In other words, there needs to be a strategic employment plan developed by the institution with respect to each village it desires to focus on.

Employment generation is dependent on the ability of people to be self-reliant eventually. Possibly, not all indigent individuals would be capable of being self-employed. It makes sense to create employability in a village as a whole rather than just provide loans to all individuals to be self-reliant. Microfinance would be more than fulfilling its promise if identifies entrepreneurially talented individuals in the village system to set up small and medium businesses that can provide larger scale employment. The focus of microfinance institutions in this approach would be more effective if it provides a learning and development school or enrollment in a vocational school as a means to improve the employability of individuals.

Fundamentally, micro-financing in a rural, or for that matter even in an urban, setting cannot be independent of the sociological trends in a village. Many village social and economic structures and systems are overwhelmed by decades and century old practices. It is important for the microfinance firms to understand the sociological setting of each village it focuses on so that plans of employment generation or produce marketing do not flounder on social barriers. Future organizational and talent structures of microfinance firms must encompass sociologist positions as important components, virtually on par with credit agents and collection agents.

From competitive growth to collaborative development

Microfinance, with all the socio-economic ramifications, is not the appropriate sector for competitive growth of firms. Yet, it seems to be the malady afflicting the industry with examples set by phenomenal profitability and profitability of certain firms. As the industry comes into public scrutiny it would be impossible, besides being inappropriate, to continue the model of competitive growth. In particular, microfinance firms must be open to the criticism that they have unduly benefitted from the prior work done by Self Help Groups (SHGs). One expert commentator has gone to the extent of stating that while the SHGs prepared the meals with great dedication and effort the microfinance firms simply came on to the scene, and enjoyed the meals. The fundamental requirement, going forward, for microfinance firms must be collaborate with not-for-profit and other SHGs.

Secondly, microfinance cannot be independent of socio-political implications. The backlash in Andhra Pradesh is clearly indicative of this. Microfinance firms must deal with this requirement in an open manner rather than through behind the scene arrangements. A model of inclusive development by co-opting political representatives on strategic boards for villages or constituencies could be one solution. Equally, it would be important to integrate the government machinery dedicated to rural development in their extended organizational structures. These requirements, in turn, call for broad-basing their organizational structures and boards by including ex-bureaucrats and social activists in them.

Thirdly, microfinance firms need to collaborate with other firms in their corporate social responsibility activities. In fact, microfinance firms could be the major instruments for carrying out or supplementing corporate social responsibility activities. The collaborative links would be financial, and beyond. For example, collaboration with ITC which has done significant rural development through its path-breaking e-choupal initiative could bring in significant synergies. Such collaborations would help bring technology to the door step of borrowers and make them better equipped to handle the technological requirements of employability. Collaborations with consumer firms which are dedicated to develop low cost products and services for the rural population would also be in order.

Fourthly, education should be the sheet anchor of microfinance movement. Considering that the industry is neither organized nor equipped to handle education as its offering or a core purpose, collaboration with corporate firms engaged in educational initiatives would be in order. Virtually every firm today is committed to supporting education. While some companies have established foundations for the purpose some companies have taken up “Teach India” initiatives involving voluntary participation by socially responsive professionals. As clientele of microfinance institutions become more educated it would trigger a virtuous cycle of microfinance with the ability to cover an ever enlarging canvas of the indigent society.

A positive future beckons

As this blog post demonstrates, notwithstanding the setbacks and controversies, microfinance has an important role in ushering a more inclusive growth of the Indian society with a focus on the bottom of the pyramid. Microfinance in India has a socio-economic role that other sectors of the economy would find difficult to match. This would require the microfinance industry as a whole to be more regulated and structured while redefining itself on the dimensions of investment, employment and collaboration outlined herein. It is incumbent upon the government agencies, political institutions, banks and financial institutions and corporate firms to understand the importance of microfinance and back the sector with appropriate and apolitical policy support. Organizationally, microfinance firms would need to bring on board economists, sociologists and public servants to provide the required socio-economic thrust to this important economic sector.

Posted by Dr CB Rao on December 26, 2010

Thursday, December 23, 2010

Super Fast Moving Consumer Goods Industry: The Cradle of New Management

Established management thought and practice owe much to two major industries: the automobile industry and the fast moving consumer industry. These two industries, more than any other industry, demonstrated how firms could achieve stability and efficiency in design, manufacturing and marketing of products. Management principle rooted in these two industrial sectors epitomized effective ways of conducting businesses. In today’s knowledge economy driven by new modes of technological convergence, a new industrial sector of Super Fast Moving Consumer Goods is fast taking shape rewriting principles of management.

Automobile and FMCG industries

Automobile industry was the cradle of management ever since the design, manufacturing and marketing of automobiles became the leading component of the industrial revolution. The automobile industry contributed several path breaking concepts in functional management and geographic management, with a special focus on operations management, supply chain management and technology management. Specific national and company systems such as 5 S, Toyota Production System and Just-in-Time System became industry standards and management role models globally. The automobile industry was also the leader in globally networked design and manufacture, heralding in the 1970s an era of globalization. In the 1990s, the automobile industry took new strides in integrating electronics and digital technologies.

The automobile industry was, and continues to be, driven by technology to achieve better fuel economy, safety and user satisfaction for the singular, unchanged objective of road transportation. That said, automobile technology has been characterized by incremental improvements, and yearly model changes. The industry became a prototype of a standardized template of management that withstood vicissitudes of time as well as cyclicality of demand, often linked to economic factors. In one sense, the automobile industry by the 2000s could contribute all that it could to the development of management theory and practice. The author’s pioneering work in the application of Porter’s theory of Competitive Strategy to the Indian automobile industry characterized the last of breakthroughs in management theory and practice in the automobile industry.

In parallel, however, a new industry was developing globally and contributing to new managerial paradigms. Organized retail, combined with what are euphemistically called Fast Moving Consumer Goods (FMCG), set the stage for new paradigms for global supply chain management, cost and profit management, production outsourcing, market segmentation and shaping consumer behavior. If the automobile industry shaped its management paradigms out of research laboratories and manufacturing complexes, the FMCG industry shaped its management paradigms out of turning around product manufacture and consumption at a rapid pace. The fact that the FMCG goods represent daily necessities lent a new dimension to management of cost economics and consumer perceptions. Technology was less relevant compared to management of hundreds, if not thousands of, store keeping units (SKUs), related distribution logistics and advertising to perk up demand. As with the automobile industry, the FMCG industry came to be typecast in terms of management ethos of outsourcing economics and perception management, with freshness management becoming the key driver of managerial success.

Super FMCG

The late 2000s, however, saw the emergence of a totally new breed of consumer products which are driven by rapid strides in technology on one hand, and challenges of global supply chain management on the other. These consumer products, such as cellular phones, portable audio and video devices, gaming devices and other consumer electronic products combine leading edge design and manufacturing technologies with rapid-fire management of supply chain. These products, which may be called Super FMCG products, have clearly raised the bar on technology and management. To illustrate, unlike an automobile or a tooth paste, a cellular phone is designed and launched with the objective of making itself obsolete in 3 to 6 months of launch. Unlike an automobile which is segmented on clearly defined user needs (be it carrying capacity, fuel economy, or driving sophistication) or an FMCG item which is segmented on vaguely defined user perceptions (be it savings, esteem or functionality), the Super FMCG creates new markets based on new technologies at an amazing speed. Super FMCG is as tangible as an automobile is in technology and as intangible as an FMCG product is in freshness.

The SFCG product typically has multiple technological dimensions, which is best illustrated by the example of a cellular phone. A cellular phone can typically be based on one of the three operating systems (Symbion, Android or Windows, each of which is updated at least twice a year), RAMs and processor speeds (from 128 MB and 1 GHz to successive higher levels), internal and external memory (up to 64 GB), input technology (hard Querty, touch Querty, handwriting recognition, regular cell input), imaging technology (from 1.3 to 12 MP cameras, with or without flash, and with or without video conferencing and camcorder capabilities), communication technologies (2G, 3G or 4G), panel technologies (LCD, Super LCD, retina display, AMLOED or Super AMLOED), screen size (from 2 to 5 inches), documentation technologies (office document editing), application technologies and a plethora of other options (like radio, music player, organizer and so on). Every manufacturer tends to have scores of models of combing these variations, with challenges of forced technological obsolescence almost every three months.

It is easy to realize therefore that SFCG products pose managerial challenges like no other product. The basic principles of management such as economies of scale and scope, product life cycle, learning curve, globalization, cross-industry integration are challenged by the technological factors that drive innovation in SFMCG. As SFMCG firms break new ground in managing the aforesaid complexities they not only stay ahead of the efficiency curve in their own industries but also offer new managerial insights for the other less complex industries just as the Japanese automobile industry revolutionized the management thought and practice for the industry as a whole.

SFMCG management

There are a few special features of SFMCG management (called from now on, SFMCGM for simplicity) that are clearly contrarian to the established management thought. Fundamentally, SFMCGM continuously accelerates innovation in multiple yet inter-linked facets as a combined trigger for market expansion. Secondly, SFMCGM embraces technological discontinuities to create new markets, accepting product obsolescence as a welcome need. Thirdly, it relies on unconventional marketing to maximize sales and achieve quickest possible paybacks. Fourthly, it relies on globally networked design, manufacturing and supply chain processes with a high mix of outsourcing to optimize investments and push down breakeven points. Fifthly, it creates a sustainable brand loyalty based on customized functionalities and harmonized user experiences. These features can be set out as five essential principles of SFMCG Management.

Principle of seamless innovation

Innovation is not new to industrial development. Where SFMCGM differs from the past experience as well as from other contemporary sectors is the continuous and comprehensive nature of innovation, often backed by creation of intellectual property by SFMCGM firms. As a result, multiple product generations are under parallel processing in an SFMCG firm. SFMCG firms have an ability to innovate on multiple platforms, oftentimes combining multiple products under a single umbrella design platform. This is driven by a clear conceptual clarity on how successive generations of products will be conceptualized within the firm and delivered for the marketplace. SFMCG firms typically do not see innovation in the typical risk-reward lens. On the other hand, they utilize innovation as a survival tool. They believe that if they do not innovate, some other firms would, to the detriment of the incumbents.

SFMCG firms oftentimes adopt a scaled approach in the functionality of individual components to develop several permutations and combinations of end-products. In this endeavor, SFMCG firms generate enormous flexibility for components to work in a range of performance parameters. To revert to the basic example of cellular phone, it would be possible to fit a low-end or a high-end chip in a common configuration. One cannot, however, imagine a light axle to be fitted on a large truck. In other words, SFMCG firms design internal components in a manner that they can function independent of external form factors. From a lowest common multiple (LCM) basic approach to a highest common multiple (HCM) premium approach, SFMCG firms revel in innovating to varied functionalities and user experiences, thus providing another facet of seamless innovation.

Innovation in SFMCG firms typically tries to expand market base through user experience. By making product usage multi-functional yet highly intuitive SFMCG innovation brings knowledge to the consumer. SFMCG products, in one sense, are highly educative products which stimulate intellectual curiosity in the users and expands market base. The success of telecommunication and gaming products in relatively less literate or less affluent sections of emerging markets is attributable to innovative simplicity. This simplicity automatically provides the leverage to raise the bar for high end products. A product such as Kinect which provides for the simplest of movements thus leading to as universal appeal as possible also retains a sophisticated gaming capability to cater to the well-initiated. SFMCG firms thus typically break the ceiling as well as crash the floor to create a seamless expanse of user base.

Principle of disruptive technologies

Unlike traditional industries such as the automobile industry or watch industry which were unwilling to proactively embrace substitute or even complementary technologies until it became inevitable SFMCG firms tend to readily integrate disruptive technologies to create new products and achieve product obsolescence. Apple proactively leveraged touch screen technology to virtually reinvent cellular phone. Samsung stole a march over Sony by pioneering a new generation of televisions based on flat panels. Nintendo pioneered Wii by integrating motion recognition technology in its gaming devices. Amazon simplified digital technology to enable avid readers access books any time, any where. Google saw cloud as a new way of disrupting the established model of physical infrastructure based computing. And the examples would only abound in future.

From incremental innovation in products and processes to disruptive leapfrogging in technological development, SFMCG firms could use either or both the approaches. An SFCG firm which bases itself on the foundation of disruptive technology and seeks incremental innovation is, however, likely to be more successful than firms which are based on a foundation of continuous innovation with only an occasional disruptive development. The benefit (sales turnover) to cost (R&D expenditure) ratio of product development at Apple is several times over that of Samsung or Sony Ericsson, for example. A continuously innovative Samsung, however, fared far better than other giants less inclined towards seamless innovation. Clearly firms are advantageously placed when they pursue original as well as incremental innovation.

To be successful in disruptive technological model firms must be prepared to take bets on such sunrise technologies with “perfection at first attempt” objective. Firms which dabble in disruptive technologies without aiming for maturity are likely to fail rather than succeed. The first generation of tablet computers introduced in 2000 failed because of the imperfect nature of hand-writing recognition technology. Disruptive technologies need to carefully cultivated and imbibed based on observation of technological maturity of internal as well as external technology sources. Many times, an industry as a whole needs to bet on disruptive technologies to be pioneering. For the automobiles global positioning systems (GPS) was one such disruptive technology of the recent past while automated (driverless) driving could be a disruptive technology of the future.

Principle of unconventional marketing

Firms in several industries rely on keeping their products under wraps until they are in a position to launch their products. Automobile industry is a classic example with several other FMCG and white goods firms following a similar philosophy of secrecy until product launch followed, or at best closely preceded, by open advertisement. Possibly, this reflects a philosophy of avoiding signals to competition. On the other hand, SMFCG firms follow an entirely different and largely unconventional marketing model. SFMCG firms follow a model based on three approaches of (i) expectation marketing, (ii) technology marketing, and (iii) saturation marketing, which together present a wholly new and challenging marketing model.

SFMCG firms typically indicate the profiles of their futuristic products almost at the same time as that of new product launches. Consumer expectations are built up as the products go through their development phases, are offered in their beta versions and are finally showcased in industry conferences and exhibitions. In a sense, expectation marketing of SFMCG firms is akin to the marketing of a celluloid movie, expectations on which are built up right from the launch date of the movie through several phases of casting, information release on shoots, music launch and finally screening of trailers. SFMCG firms believe that current products will continue to be purchased because of compulsive needs even as expectations of future products will lead to future compulsive buying. Experience indicates that expectation marketing helps SFMCG firms retain and broaden their customer base.

Technology marketing is unique to SFMCG firms. While other industries such as white goods industries also seek to market products based on their novel technological platforms (for example, filtration efficiency or cooling efficacy by air conditioners), SFMCG firms take technological marketing to an entirely new level. Additionally, the technological impact of each component of the SFMCG product is felt more tangibly than in the case of a white goods product which makes technological marketing a veritable tool. The flip side to technological marketing is the need for the design to live up to the value propositions. Whether it is signal response or screen clarity technology has to speak with performance. The positive side to technological marketing is the build-up of virtuous opinion base on technological performance.

The third component of SFMCG marketing is based on saturation marketing. The SFMCG marketing model does not follow the conventional product life cycle marketing model which prescribes almost equal phases of introduction, growth, plateau and decline. On the other hand, SFMCG marketing considers an urgent and rapid growth phase, immediately upon launch with little concern for plateau or decline phases both of which are treated as bonuses, if at all. This helps SFMCG firms recover their investments with saturation sales before the new expected products reduce the impact. This model requires SFMCG firms to adopt an aggressive multi-chain and multi-store format with maximal exploitation of all trade channels, including online options. Online marketing including access to critical review portals helps in saturation marketing in a big way.

Principle of integrated outsourcing

SFMCG firms share with their FMCG counterparts a reliance on global networking and outsourcing to enhance their manufacturing efficiencies and achieve cost and price competitiveness. The role played by several mainline vendors (such as Acer) in multi-brand computer development or more recently by HTC in supporting many leading mobile phone products and the pivotal role of global workshops like Foxcon to deliver millions of products are reflective of the approach to optimize global manufacturing for maximal supply efficiency.

SFMCG firms, however, differ from FMCG firms in that they consider manufacturing advantage as a source of firm-level competitive advantage which must be preserved internally. This is reflected in the efforts by end product makers to internalize some of the advantage by establishing manufacturing bases in countries providing such efficiencies. The bases established in China by global electronics firms and in India by global auto makers are clear examples. They have helped such global firms to align demand and supply points for least cost factor supply and product distribution solutions. They have, more importantly, enabled global firms overcome the vicissitudes of exchange rate variations and other macroeconomic factors.

SFMCG firms, however, are more unique in their internalization of key technologies (as is practiced by established firms) which is in contrast to the philosophies of FMCG firms which could totally outsource both design and manufacture. The efforts made by SLR camera makers to develop in-house their image processing engines, the note book computer makers to develop o develop solid state devices, the cellular phone makers to develop capacitative or super bright screen technologies are indicative of the need for SFMCG firms to retain core competencies within their in-house industrial systems.

Principle of sustainable loyalty

SFMCG firms need a constant and ever increasing customer base to give effect to, and derive benefit, from the SFMCG business model discussed above. Brand switching as a concept accepted in other industrial sectors acts to the detriment of SFMCG firms. The principles of loyalty in SFMCG sector are more challenging than in other sectors where a generic strategy such as cost position (eg.,Wal-Mart for budget products) or product differentiation (eg., Mercedes for esteem and quality) build long lasting brand loyalty. The user of SFMCG products evaluates at least three facets before developing loyalty. Typically, SFMCG firms build lifelong loyalty around one or more of the following factors: technology markers, usage versatility and esteem value.

A user of automobile is less likely to be impressed with the use of fuel injection system than with the fuel economy or acceleration that it provides. On the other hand, the user of an SFMCG product would tend to be fascinated by specific technology markers such as the operating system, screen technology or application repository. Technology has thus a standalone appeal for users which provides a feel of customized preference. The power of choice that is embedded in a typical SFMCG product is an extremely important lever to play for the SFMCG firms.

Unlike several other products which are mono-functional delivering one usage functionality (a detergent just cleans, an automobile just drives and a microwave oven just cooks, for example), SFMCG products tend to be convergence products delivering multiple functionality, and at least multiple options within a single functionality. As a result, the versatility of functions provides the second most important lever to build loyalty with SFMCG products.

SFMCG products, however, share with other products the lever of esteem as a driver of customer loyalty. A premium automobile user would any day love to drive a car with Mercedes Tristar, BMW logo or Toyota brand. An electronics equipment user would always consider a Sony or a Bose to represent higher senses of listening pleasure. In a similar manner, SFMCG firms have the ability to convert their products into products of esteem. When technology of design, manufacture and usage provides a unique experience and feel, SFMCG products tend to assume a cult phenomenon. Apple has emerged as the most skilful in leveraging esteem as a driver of sustainable customer loyalty.

Others: Quo vadis?

The above discussion has led to an interesting profile of what defines an SFMCG product and the five essential principles that shape the evolution and sustainability of an SFMCG product. Yet, it would be facile to assume that the other sectors and products would, for ever, be molded in conventional laws of development, manufacture and marketing. The rate of technological change would in the coming years be even more intense and comprehensive. The new laws of SFMCG would need to be studied and adapted by all firms which believe in product reinvention and competitive rejuvenation as strategies to dominate future industrial evolution.

Posted by Dr CB Rao on December 24, 2010