Sunday, March 27, 2011

Metaphorical Management - Talent Works like River Flows

Stanford University Professors, Paul H. Thibodeau and Lera Boroditsky in their research paper, “Metaphors We Think With: The Role of Metaphor in Reasoning”, PLoS ONE, February 23, 2011 (courtesy, my erudite friend Narayanan Surendran) hypothesize that the way we talk about complex and abstract ideas is suffused with metaphor. In five experiments, they explore how these metaphors influence the way that we reason about complex issues and forage for further information about them. They find that even the subtlest instantiation of a metaphor (via a single word) can have a powerful influence over how people attempt to solve social problems and how they gather information to make “well-informed” decisions. Probably, this explains how powerful speakers with deep grasp of various domains are able to influence vast sections of population by metaphors and analogies drawn in a contextually relevant manner to current political, social and economic problems and their resolution.

The researchers see the influence of the metaphorical framing effect as being covert: people do not recognize metaphors as influential in their decisions; instead they point to more “substantive” (often numerical) information as the motivation for their problem-solving decision. Metaphors in language appear to instantiate frame-consistent knowledge structures and invite structurally consistent inferences. Far from being mere rhetorical flourishes, metaphors have profound influences on how we conceptualize and act with respect to important societal issues. They find that exposure to even a single metaphor can induce substantial differences in opinion about how to solve social problems. Knowingly or unknowingly, I believe, I have used metaphorical discourse in my recent blog post “Value Creation in Commodities: Water Lessons for Managers” (Strategy Musings, February , 2011). That said, the specific research by the Stanford Professors inspires me to explore and propose more metaphorical lessons from nature for management theory and practice.

The thesis for this blog post is that talent is for organizations what rivers are for life and human settlements. The evolution and behavior of talent in organizations mirrors how rivers originate and run their course. At least ten propositions on the course of rivers can be conceptualized to understand how talent influences, and gets influenced, by organizational forces. These interplays are as natural as manmade, as spontaneous as deliberate and as positive as negative. When we visualize through nature’s lens we would better appreciate the organizational dependency on, and vulnerability, to talent. Beneficial talent management can emerge from an understanding and application of the following ten principles, modeled after river characteristics, and also illustrated with practical organizational examples.

Rivers are water; talent is intellect

Like rivers are made up of water, talent is made up of intellect. Just as water is made up of two atoms of hydrogen and one atom of oxygen, intellect is made up of knowledge in two parts and attitudes in one part. Knowledge and attitude in talent are inseparable from each other like hydrogen and oxygen are in water. While assessing talent for induction into organizations, talent managers would need to look for the right flourish of intellect, fusing knowledge with attitude.

While many organizations are technically and commercially successful, leading organizations are often distinguished by talent profiles that reflect such fusion. The leader in each industry reflects talent that has that unique combination of knowledge and attitude; for example, the IITs in technical education, IIMs in management education, McKinsey in consulting, HUL in FMCG, ITC in conglomerate business, Tata Motors in automobiles, L&T in engineering, Infosys in IT and so on.

Purity at source; openness at graduation

Rivers are the purest at source; whether at the rain fed hillside catchment areas or pristine glaciers of snowy Himalayas. Talent, likewise, is purest at entry into an organization; intellectually alert, and anxious to deploy the knowledge in the organization. Like rivers, talent as it runs its course it gets vitiated by unpleasant organizational experiences even as it could be enhanced by the right on-the-job experiences and additional training inputs. Talent managers need to be focused on preserving the purity of talent and enhancing it over the long career spans of individuals.

Successful organizations have well-crafted mentorship programs that ensure that the worth and warmth with which a professional enters the organization are preserved and reinforced. A mentor is one who has high capabilities and long experience but more importantly a flair for developing people to their fullest potential. Mentors also like to mingle with youngsters and absorb new points of view. Mentors help fresh entrants navigate through complex organizational dynamics, retaining their intrinsic soft skills and acquiring necessary hard skills. Mentors should be identified not only for fresh entrants but also for experienced personnel who enter the organization.

Shapes as the container; moulds as the job

Water has no shape of its own; it assumes easily that of the container. Rivers likewise are shaped by their embankments. Talent fits the job it is supposed to fill. The structure of the job and its potentialities therefore determine to a large extent as to how talent gets positioned in the organization. Most times talented professionals fail to live up to their potential because of poor job design or misalignment between capabilities and job requirements. Accessing talent without a job that fits the talent is like trying to hold a river on a plain ground; it simply seeps itself to obscurity. Talent managers and organization designers need to work together to leverage professional capabilities through challenging jobs.

Clarity on job profile is an essential requirement for shaping talent. Job profiles must be designed with a macro perspective, providing a cascade of responsibilities and a canvas of stretch responsibilities, linking all jobs across the organization. Well-structured organizations have fundamentally well-structured induction and on-boarding programs that integrate the person, position and the organization under a canopy of vision, values and strategy of the corporation. Induction programs as well as re-contact programs are the opportunities to develop interrelationships between the old talent and new talent and shape the talent to the needs of the organization.

River follows gravity; talent defies gravity

Rivers, like civilization, have long history. As they get renewed seasonally with rains or glacier and snow melts, rivers run their pre-charted course. While a river moves from highs to lows, talent seeks to overcome lows to reach highs. Institutions and courses provide the motive power for talent. Talent that graduates out of reputed institutions or acquires top-notch experience has expectations commensurate with the background. It is important that career progression plans are designed to let highly capable talent move up the organizational hierarchy without needless obstacles.

Career progression is the toughest call of talent management. In a virtuous cycle, top-class talent, competitive corporate growth and rapid career progression reinforce each other. However, organizations in mature industries are faced with challenges in accessing and retaining talent that can drive growth while lack of growth per se in mature industries is further constrained by talent. Appeal to considerations other than compensation, like basic interest in an industry, helps in stability of talent. Talent level and industry setting have an equation that needs to be followed to achieve equitable career management.

Streams become rivers; people make organizations

Rivers often have their origins at multiple sources. Streams combine to become rivulets which, in turn, combine to become rivers. At a macro level, organizational talent is like a mighty river drawing into its mainstream multiple streams of talent. Diversity of talent that enters an organization needs to be encouraged to become an integrated organizational competence. Performing talent that enters the organization pure and raw can turn into high performing talent with the right inputs as well as challenges and opportunities.

A major challenge for human resources managers is to make employees across domains and organization feel like one family. Diversity should ideally also make for unity. The more diversified geographically and business-wise an organization is the greater is the challenge of making people feel together. Modern software and portal technologies as well as social networking tools provide platforms for even extremely large organizations generate employee engagement and create oneness. More than tools and technologies, however, a corporate brand reflecting what it stands for in terms of products, customers and values sustains togetherness, irrespective where the employee works in the globe.

Rivers join oceans; talent becomes national wealth

Whatever be the origin or course, rivers ultimately merge into oceans either by themselves or by joining other larger rivers. It is often thought that the ultimate goal of professionals is to reach the apex positions of an organization. The competition for the apex positions and the churn at the top reflect the aspiration of the highly evolved talent to achieve self-actualization. In a macro view, all great talent becomes national wealth as it gets experienced and turns more capable as well as more mature. Organizations must have programs by which their best talent is represented through membership of industry and national forums to enrich a nation’s competencies.

India and the larger world have many examples of top-flight business leaders helping out nations and governments. Indian corporate veterans and leaders like V Krishnamurthy, N Vaghul, D Parekh, R Tata and R Seshasayee played major roles in government bodies and commissions. N Nilankani, the CEO of Infosys left corporate management and joined the central government as the head of UID project. Even the American government has co-opted several senior corporate leaders in various committees, Jeff Immelt being the most notable of such entrants into the national mainstream.

Rains replenish; training rejuvenates

Whether perennial or seasonal, rivers need incessant rains to be fulsome. Likewise, talent needs continuous on-the-job experiences and periodic educational inputs to stay continuously productive. Professionals placed in unchallenging jobs and are governed by introverted talent management tend to experience an intellectual decay of sorts. Such professionals and organizations may sustain stable mature corporations in an operations and maintenance mode but would be incapable of taking the organizations into more competitive and more exciting areas. By ensuring exposure to external academic and professional inputs, talent managers can ensure high levels of competence in their organizations.

Organizations which have become large today had significant training infrastructures even when they were small. In fact, their early emphasis on training set the tone for enhanced competencies and hence higher growth. Way back in the 1960s, Tata Motors (then, Telco) had one of the finest multi-location management training centre network. Most IT companies, Infosys being a leader, have their universities to train and retrain their employees. Organizations which cannot afford their in-house training infrastructure must develop relationships with leading academic and development institutions at least. Hindustan Aeronautics had such programs with the IITs in spite of having internal development capabilities for reasons of accessing specialized knowledge.

Society needs river reservoirs; organizations need talent pools

Conservation of rain through high rise dams is a gift of modern civil engineering that provided water insurance for a society stricken for water. As the world faces global warming with changes in climate, water would increasingly be in short supply. Future confrontations would be on water hegemony and not for political or economic dominance, some experts aver. The situation for talent is no different. Higher order global aspirations require higher order talent; especially the kind of talent that not only stays on with the company but also constantly reinvents itself. Talent managers need to structure plans that retain talent but also build it up into a reservoir that can lead futuristic growth.

If there is one redundancy that organizations must aim at it is talent. If there is one inventory that needs careful planning it is talent. Yet, many organizations run on shoestring budgets in talent pooling. Organization must precede both structure and strategy. Companies aspiring growth have benefitted from talent pools that were built up ahead of growth needs. HUL, Tata Steel, Tata Motors, Infosys, ITC, Reliance, M&M and scores of Indian blue chip companies are some companies which have built large talent benches to be proactive on growth.

Rivers are multi-purpose; talent is multi-faceted

Thanks to advances in civil and electrical engineering, rivers have become multi-purpose national assets, irrigating farmlands and generating hydro-power. Their vast reservoirs regenerate water table. Talent is multi-faceted. Many times the same problem is analyzed and addressed in different ways by different people. This is essentially because different faculties come into play when problems are approached with an open mind by different people. Organizations must emphasize a collaborative spirit by which diverse approaches are brought to bear on the problem. From a different perspective, each professional could have capabilities which are more diverse than those required by the job. Talent managers have to find ways to discover latent talent of professionals.

Discovering latent talent requires risk taking by companies. Frequent job rotation is seen as an answer. A precursor would be entrustment of special assignments to test the latent talent. The foundations of Ashok Leyland Finance in the 1980s were laid by the business plans laid out by me as an engineer. So was my advocacy of the IndusInd concept. Some organizational leaders have an uncanny knack to identify talent for purposes far beyond the obvious. This capability would be a core competence of the organizations. Many public sector and private sector undertakings have the practice of taking the young entrants as executive assistants to challenge and stretch their talent.

New water replaces the old; new talent reinforces the old

Flowing rivers are characterized by new water constantly replacing the old. The flow characteristics of a river determine the river’s standing in social acclaim. Good talent cannot stagnate in organizations. It must be the endeavor of talent managers to choose appropriate talent renewal cycles so that contemporary talent constantly reinforces the established talent. Existing talent must recognize the need for strengthening its capabilities by enlarging the talent pool. Talent managers need to promote a culture of openness in their organizations to welcome and integrate new talent.

Induction of new talent cannot be a sporadic affair. Companies which have annual graduate and post graduate selection programs institutionalize the process of new talent induction and progression. State Bank of India is a great example of building generations of professionals and leaders through annual probationary officer recruitment programs. Several other large private and public sector companies in India have maintained talent flow through annual inductions. Companies with such strong entry programs are also able to find internal talent more easily and assuredly for apex positions.

Talent ecosystem

Just as nature provides the ecosystem for rivers that are essential for life, organizations must provide an appropriate ecosystem for talent. Intellect that defines talent, like the water that provides the source for rivers, is universal. Successful organizations build talent proactively and gain competitive advantage. Talent properly managed helps organizations grow, but when improperly managed sub-optimizes potential. Metaphorically, talent like rivers can be harnessed for growth and competitiveness, if the ten principles of natural talent management are appreciated.

Posted by Dr CB Rao on March 27, 2011

Thursday, March 17, 2011

Coping with Crippling Calamities: Management to Mitigate Misery

The massive earthquake and ferocious tsunami that struck the Sendai and other northeastern regions of Japan on March 11, 2011 have once again demonstrated how fragile human life and property would be when faced with the fury of nature. Japan’s famed building designs that withstand earthquakes, the country’s perpetual preparedness for natural calamities and the society’s incomparable discipline and fortitude have served to buffer the fatalities and losses; but unfortunately only to an extent. The loss of thousands of lives and billions of dollars in this human tragedy would take years to cope with. The Japanese government and the society have risen to the challenges of rescue, relief and reconstruction while several other governments and nations are chipping in with their support in kind and services.

The severity and consequences of such natural calamities, which are indeed unpredictable, strongly suggest that proactive management to avoid and mitigate misery needs to be high on agenda of all leaders whether in government or enterprise. This may require caution and conservatism alongside aspiration and risk-taking as the mainstay of management of nations. This blog post presents some thoughts on this, with focus on Japan but with relevance to India in the context of a larger Indo-Japanese approach to reconstruction.

Planning with pessimism

Ironically, most human civilizations and settlements had grown in regions prone to natural calamities, be they seismic zones, volcanoes, islands, sea shores, river banks, freezing terrains, desert tracks or mountain ranges. Some civilizations and settlements even got wiped out in natural adversities in the past, and some were rebuilt at huge cost. Similarly, several industrial units, whether chemical and fertilizer plants or thermal and nuclear complexes, are set up near oceans. As the recent earthquake and tsunami that struck Japan and their adverse impact on the Fukushima nuclear power complex as an aftermath demonstrated, civilization can be endangered by natural disasters even in this era of technology. Planning for protection of civilizations has to be undertaken in a scenario of pessimism, rather than in a scenario of complacence. Pessimistic planning is an essential insurance for human safety.

In today’s world, leaders are expected to be optimistic rather than pessimistic. Realistic leaders, let alone cautious leaders, seem to have little place in the contemporary annals of competitive governance and business. The adage of planning for the best and preparing for the worst is only partially followed now, with the second half of the exhortation completely ignored. Calamities such as these are a grim reminder that preparing for dangers, imminent or distant, is what wise governments and societies should aim at. Similarly, industrial managements need to ensure eternal vigilance in respect of all their units which are located near fault lines and ocean waves irrespective of the past and present tranquility. Any expenditure on preemptive vigilance which probably would cost a few millions of dollars annually would be worth the billions of dollars that would be lost in one go when calamity strikes the unplanned and unwary.

Fallible infallibility

Advanced nations such as Japan, Germany, United States and Korea, to name a few, have a culture of systemic placation of technology. Japan, in particular, has not only a flair for high technology but also an uncanny ability to obtain outstanding results even from dated technologies by appropriate upgrades, retrofits and management. However, as the Fukushima nuclear threat shows there are limits to stretch technology while assuring the needed safety. It also raises a question if the systemic approach considered infallible in a national culture context would indeed be so in respect of individual systems, particularly when old generations of technology are deployed. Even Germany has reportedly seven aged nuclear reactors which the government has shut down in the wake of the Japanese calamity. It would appear that planning for failures as well as enhancements must be a routine part of periodic technology and safety audits that all installations and systems must undergo.

One way of systemizing this could be to classify technologies in terms of key technology drivers or generations. The telecommunications field has done a good job categorizing transmission technologies from 1G to 4G, with clear distinctions in performance indicators. However, clarity in terms of relative safety or the desirability of newer generation taking over completely are not very evident in discourses; nor is there clarity in terms of definition of different generations of cellular phones and their relative radiation safety. There appear to be at least ten types of nuclear power reactors, in terms of technology, but the relative safety is not well debated. In fact, papers by the World Nuclear Association discuss safety more in terms of aging and terrorism rather than earthquakes and tsunamis. Clearly, there is a need to define and deploy technology in terms of both performance and safety, with systemic robustness that ensures performance stability and safety.

Seismic tsunami engineering

Traditionally civil engineering focused on normal construction of buildings and infrastructure with studies of earthquake-proof engineering remaining a specialty. The only country where civil and architectural engineering as well as the building codes specify earthquake resistant engineering is Japan. The benefits of such approach are evident in the way the buildings could withstand the high magnitude earthquakes and the unending series of post-quake tremors. A review of engineering curriculum (at least in India) suggests that engineering for high stress and vulnerability prevention is not a mainstream topic. It is important to revisit civil engineering and architectural curriculum to incorporate engineering for earthquakes and tsunamis as a mainstream subject at the graduate level itself. Subjects of structural dynamics should incorporate special design simulation to take care of multiple seismic zones.

Going by the experiences of 2004 and 2011, new disciplines of seismic tsunami engineering would also need to be evolved to cater to constructions within say 100 to 200 kilo meters of all coastlines. The forces that are unleashed in earthquakes, tsunamis and the seismic tsunami combination are different. Structural designs of buildings may need to be reinforced by potential embankments to cater to multiple forces. To start with, such courses may be developed in institutions which have specializations in multiple engineering disciplines including civil engineering, architecture, ocean engineering, nuclear engineering, thermo and hydro power engineering and materials engineering to ensure appropriate hybridization of the new construction and materials engineering domains.

Nuclear Security

Seismic tsunami brought into force the risks of nuclear power complexes. By their very nature, nuclear plants require enormous amounts of fresh water and/or sea water which make their location on the sea coasts rather inescapable, adding to the risk profile. Despite the robust construction mechanisms and rapid shutdown mechanisms that exist it appears that the nuclear complexes are vulnerable to earthquakes and tsunamis. This is more so in respect of plants of older designs, whose lives are extended from time to time, albeit with appropriate reviews. The use of nuclear energy would only increase in future. The number of countries producing nuclear energy is likely to move up from the current count of 30 to 50 in the years to come. The number of nuclear reactors would more than double from the current 443 to 955. India and China which have only around 2 percent of energy coming from nuclear power are likely to lead this nuclear power wave and need to be especially cognizant of the risks.

There is a need for national government and national atomic agencies to undertake immediate and comprehensive review of all the safety aspects of nuclear reactors, current and planned. The review should cover the technology deployed, radioactive materials used and generated, shutdown mechanisms, emergency power mechanisms, cooing water systems, location hazards (seismic and tsunami) proximity of civilian population, rigor of repairs, maintenance, vulnerability to water shortages and heat waves (in land-locked location), emergency response and rescue systems, radiation monitoring system, radiation treatment system and so on. As almost all nations have nuclear safety boards or atomic energy commissions with overarching powers, consistent and diligent use of their powers to audit technologies and management of nuclear power plants on an ongoing basis should be mandatory.

Safety Stock

Over the years, supply chain management has come a long way from the classic economic order quantity (EOQ) paradigm which stipulated a batch ordering and stocking system which balanced demand generation and product consumption with lead time to replenish and safety stock. Lean concepts, that originated in Japan and embraced with enthusiasm by the West all but eliminated the concept of safety stock with just-in-time ordering and replenishment concepts. Time and again, natural disasters, even on a much smaller scale such as routine floods and droughts, have brought out the benefits of safety stock to meet the emergency needs. Today, the starkly empty shelves in the retail and wholesale chains of Japan illustrate the vulnerability of the population in crises to profit-driven squeezing of supply chains. While the supply chains could be ramped up in time, the damage done due to the lack of essential goods in the critical days following the crisis can never be made up.

Rather than relentlessly pursue lean supply chain concepts, it probably would be wise to emphasize the need to ensure safety stock of all goods vital for human life in emergencies such as food items, pharmaceuticals, medical devices, clothing, personal items, automobiles, generators, rescue equipment, oil and gas and such other items. Countries such as India which have public distribution systems should have prescribed norms for emergency stores. Private sector corporations dealing in the above items must be willing to relook at the concepts of treating safety stock as a wasteful concept, and instead view safety stock as a potential means to smoothen out volatility in the best of the times and as an essential need to mitigate misery in the worst of times. Supply chain planning can in fact be more optimal with safety stock planning.

Rescue forces

Natural disasters point out the need for a group of trained experts and personnel who can carry out rescue operations in times of crises with surety, speed and empathy. Traditionally, governments have relied on the armed forces to carry out such tasks. While armed forces bring to the action scene unique capabilities of operating in all-terrain conditions and are backed by the infrastructure of air, land and sea forces, many times natural disasters bring out challenges of understanding local conditions and engaging with local provincial governments and their agencies. This task can be undertaken effectively if each province has self-help forces which are specially trained in understanding and coping with natural disasters.

The mandate for rescue forces could be to actively collaborate with provincial governments in all medium / high risk zones and undertake personal risk-mitigation audits as well as conduct safety audits. Rescue forces of each nation should link up with the forces of other nations not only to reach out in events of national emergencies like the one currently faced in Japan but also to learn from various events of this nature to strengthen the infrastructure against national disasters and reinforce the capabilities of the SHDs to respond better. Nations should earmark separate budgets for development and maintenance of rescue forces and provide them with high technology communication equipment and protective gear that can help them operate in all kinds of environmental challenges and disasters.

Market financing

It is distressing that when natural disasters strike investors in stocks and commodities speculate based on perceived impact on their investments. Rather than support market stability, investors of countries affected tend to dump stocks in panic reaction while investors in other countries tend to speculate favorably or unfavorably based on perceived impact, positive or negative. For example, post the seismic tsunami, Tokyo Stock Exchange lost thirteen percent, or USD 278 billion, in a matter of few days on perceptions of damage to the economy while a few other stock exchanges including the Indian ones gained on perceptions of softer oil prices and enhanced export opportunities with Japan. While the capitalistic market behavior and perfect market economics cannot be controlled there is no reason why the investors who are prepared to lose or invest in billions in such speculative trade transactions in the wake of crises should not be made to contribute to mitigations of misery on ground.

One way would be to impose a securities transaction tax of 0.1 percent on all transactions that take place on the bourses on a perpetual basis, and an additional special securities transaction of 0.1 percent on all transactions that take place on the bourses for a period of 3 months after any such disaster or calamity. The proceeds of such transaction tax should be credited to specially established infrastructure fund which will help in the rescue, relief and rebuilding efforts. As the investments out of this fund will be for rebuilding of infrastructure and economy, the taxes will eventually be growth triggering. The investors should not grudge such taxation economically, and should in any case be welcoming it from a humanitarian point of view.

Incredible society

Whatever be the technological, economical and infrastructural measures to combat natural disasters, it is the attitude and fortitude of the society that would be the determinant of how well a nation can cope with such disasters. Japan stands out as a role model in this aspect. It is amazing how the entire nation has calmly and methodically responded to the disaster and the emergency pressures. Attention has been on a unified national response than on individual groups indulging in critiques of the rights and wrongs. Even in the face of shortages people have been disciplined and patient. From the very composed manner in which the citizens have responded to the very courteous manner in which the rescuers and rescued have interacted one can see the society’s strong roots of self-support and mutual empathy. Despite the successive governments of Japan being in the dock for infighting and poor performance, the Japanese society’s basic strengths have endured to govern itself in an outstanding manner in the face of calamity. Japan has proved itself to be an incredible society that can meet even the most challenging disasters as effectively as is humanly possible.

Aspiring nations such as India must take Japan as a role model and attempt to build incredible societies that have both wits and guts to progress on one hand and responsibility and resilience to overcome setbacks on the other. Contrary to popular perceptions, the young in Japan are neither apathetic nor lacking in engagement. The disasters in Japan have tended to bring in a surge of volunteerism from the young. The aged are not giving up either. Apart from maintaining a healthy lifestyle that is enabling a graceful aging of the population, more of the aged themselves are working longer much beyond the traditional retirement age. The greatest cause for optimism for any nation should lie in the reservoir of social capital that generates productive wealth and growth in good times and in difficult times, as is the case with Japan. These social values would need to be inculcated from the childhood. India has a rich legacy of great religious and social values which admirably support such initiatives. These teachings which are lost in the speed and materialism of the modern living need to be restored as guiding social principles.

Seismic security for Japan, with India

The measures of reconstruction which Japan would surely undertake with perfection would restore the ravaged economy of the northeastern Japan, and of the nation in the overall. The costs of reconstruction could be as high as USD 200 billion. Investments and reconstruction do not by themselves mitigate any of the risks associated with Japan sitting on a seismic zone, perpetually prone to earthquakes and tsunamis as well as volcano eruptions. Japan needs a more permanent solution, and the history of Japan’s globalization could offer one. In its first wave of globalization covering the 1970s and 1980s, Japan became a major exporting country, exporting products made in Japan. In the second wave of globalization covering the 1990s and 2000s, Japan globalized its production substantially, with several thousands of overseas ventures contributing to over 50 percent of Japan’s gross output. Time is now compelling for Japan to look at a third wave of globalization whereby Japan would create several Little Japans in seismically and economically stable countries which have large surplus land mass, and are also hungry for growth. India comes up as an excellent choice in that respect.

India and Japan have signed a free trade agreement (FTA) in February 2011 providing enhanced trade and investment access. Rather than be concerned that the current crisis would delay the fruits of the FTA, India should propose to Japan a path-breaking strategy by which Japan could move at least 50 percent of production of all of its agricultural and industrial needs to India. To provide needed infrastructure and incentives, India should offer land banks to establish Special Japan Agricultural, Industrial, Residential and Economic Zones so that the Japanese could transfer or establish additional facilities in the manner they desire. Creation of Little Japans with interconnectivity amongst themselves in India with appropriate rail and road network, and connectivity with key industrial centers of Japan by sea and air would help catalyze such investments. Apart from reducing seismic risk to Japan, this strategy would provide a government supported low cost, high quality supply base for Japan, and access to technology and market for India.

From seismic and tsunami insecurity to regional and global security

Japan is a great nation which has the best of technological competencies, people skills and societal values. It has endured its geographical disadvantages and nature’s adversities by steeling itself as an infrastructural and social marvel. As the last Friday’s seismic tsunami has shown the nature has its gentleness and a fury of its own. Recognizing this, Japan, and other nations positioned in medium/high risk zones must readdress their national management approaches. The thoughts in this blog post, written with a heavy heart in the background of the grievous loss to life and property suffered by Japan, hopefully point a way forward for national and global security.

Posted by Dr CB Rao on March 18, 2011

Sunday, March 13, 2011

India Inc’s Globalization Challenge: Need for Cross-cultural Expertise

India Inc is at the cusp of an unprecedented globalization wave, which is an opportunity as well as a challenge. The key opportunity is that India is poised to be a 5 trillion economy by 2020, and become the third largest economy by 2030. As part of this economic transformation, India would be a manufacturing powerhouse as much as an information technology leader. India would see increased foreign direct investment in services, manufacturing and infrastructure as well as low-cost product development. Globalization for India Inc would take two forms: Indian companies would make more international buys to access technologies, resources and markets (outbound globalization) while being open to getting partially acquired to support expansion and diversification, or simply to unlock value for newer forays (inbound globalization). Globalization is an irreversible multilateral phenomenon with solid hypotheses.

Hypotheses of globalization

Overseas companies view India as an investment destination for several valid reasons. India offers a huge market for new products and services more particularly as social economics and demographics change in favor of a larger middle class and younger population. The already established perspective, of course, is of India being the world’s back-office, covering both information technology (IT) and IT enabled services (ITES) and business process outsourcing (BPO). From a manufacturing perspective, India offers a low cost manufacturing footprint, not merely of labor cost but also of materials and components. Not many, however, still appreciate that there is also a uniquely Indian way of conceptualizing and executing projects with lower investment costs and faster time to market. In terms of global supply chain management, the advantages are of low cost sourcing and supplier development for global optimization. The new opportunity is one of product development comprising design services as well as development of low cost products for global needs. Added to this, availability of high caliber firms with established competencies in the above areas and open for capital participation by overseas enterprises is a distinct advantage. Clearly, India offers a holistic opportunity for multinational corporations seeking further globalization.

Similarly, Indian companies have valid motivations for overseas forays. Overseas countries offer ready markets for India’s low cost, high quality goods, with appropriate value propositions for both developed and developing countries. Essentially, overseas markets offer scale and scope for India Inc. within the established IT base, Indian companies can diversify into less developed regions on one hand and expand into IT product development and knowledge outsourcing. From a manufacturing perspective, India Inc can look to selective overseas manufacturing presence to turn around acquired assets with Indian materials and component support, and also establish lower cost projects, the India Way. An optimized global footprint that brings manufacturing and markets closer could result. From a supply chain perspective, India could benefit from an ability to absorb the sophisticated supply chain technologies and systems of the developed world, and to offer products at multiple value points. In terms of product development, an entry into sunrise sectors and access to development areas which require global scale would be feasible.

Talent as an enabler, and a barrier

Globalization is dependent on talent. Indian companies seeking inward or inbound globalization (into India by overseas companies) need to realize that entry into India in future would not merely be for a market or cost opportunity but more for the India Way of conceptualizing and executing projects and operations. Plentiful availability of talent in India is given, but talent which is fully immersed in the Indian way and, worse still, talent that is able to articulate the Indian way is in short supply. Talent meeting such criteria is not cheap, thus reducing cost arbitrage. Also, such talent tends to be migratory impacting sustainable globalization. Indian companies seeking outward or outbound globalization (into overseas countries by Indian companies) need to realize that globalization is more than valuations, collaborations and contracts. The availability of technological and managerial bandwidth in Indian companies is essential for the companies to realize the envisaged objectives. Given the relatively nascent stage of outbound globalization, availability of true global talent is indeed an issue for Indian companies.

As discussed in the earlier two way hypotheses, globalization has an economic logic. Successful globalization, therefore, requires talent that can enable desired objectives in business, marketing, manufacturing, supply chain, product development and financing. Capability to achieve required synergies and competitiveness through fusion of Indian and global resources is necessary. Indian executives must hone their skills in due diligence studies, business negotiations, valuation studies, and transaction consummation. Ability to conceptualize globalization plans as well as plan and execute collaborations, alliances and joint ventures would be essential. These skills are particularly tested in mergers and acquisitions where post-transaction transition and integration requires special skills of handling people. Management of multiple cultures becomes as important a facet of talent as the technical and commercial competency profile that enables the realization of economic rationale.

Culture and complexity

Culture is multi-factorial and defies easy definition. Cultural diversity occurs across all nations and within nations too. Similarly, different entities have different cultures, and it is not unusual to have subunits of an entity sporting different cultural traits. Culture defines the personality of an organization as much as it defines the personality of an individual. Understanding the diverse cultural patterns and the cross-cultural interplays is crucial to successful globalization. This is easier said than done as culture gets partitioned in many ways: local culture versus overseas culture, western culture versus eastern culture, developed market culture versus emerging market culture, professional culture versus family culture and established corporate culture versus start-up entrepreneurial culture. Many times, culture camouflages or gets mixed up with managerial styles and systems. Addressing cultural issues without the accompanying organizational noise is a challenge.

Management of culture needs relational skills, on top of an understanding of cultural determinants. It often is impossible and also irrelevant to aim for cultural homogeneity. The key requirement is to identify the cultural parameters that reflect strongly a local nativity and accommodate or work on them. For example, in a culture which respects authority and hierarchy it would be inappropriate to attempt a flat organization structure or introduce multiple decision makers. The aim of global organization development should be to address the key cultural influencers of organizational effectiveness. The complexity of cross-cultural interactions emerges from the fact that thousands of individual to individual interactions that happen real time on a continuous basis between two interactive organizations aggregate to a dynamic cultural mosaic. It would indeed be difficult to regiment cultural behavior but it would be helpful to develop models of cross-cultural behavior that operate when executives of different cultures interact. As India Inc globalizes, it would need to be aware of the need to be sensitize its executives to cultural diversity that could confront them. Interactions between the executives of the East and the West could be a model of study.

East meets the West?

There are at least seven dimensions on which models of managerial behavior can be developed, with a cultural overlay. These are: communication style, working style, accountability, risk-taking, performance review, professional relationships and lifestyle. If one were to compare a typical US manager with a typical Indian manager on these dimensions the differences would be palpable. A US manager tends to be analytical and quantitative as well as direct and open in communication, emphasizing early communication of successes as well as failures. An Indian executive, in contrast tends to be experiential and emotional as well as indirect and deferential in his communication, with an inclination to report only end-stage results. The US working style tends to be process and metric-driven, with an elaborate stage gated decision making. The Indian working style tends to be end-goal driven, rather than sequential intermediate stage driven, with back-of-the-envelope quick decision making. In the US, job boundaries, and hence accountabilities are well understood while in India overlapping job responsibilities often result in a failure to pin accountabilities. In the US risk is taken in a measured manner based on risk authorization while India is open to take risks, without deep analysis, in pursuance of growth. Performance reviews in US are clinical and non-emotional while performance reviews in India tend to be as much relationship based as performance oriented. In addition, seniority carries weight in India. In US, professional work and personal life tend to be completely distinct while in India work is allowed to intrude into personal and family life. The US lifestyle emphasizes independence and nuclear families while the Indian lifestyle emphasizes dependence and joint families.

As a result of the two polarities of cultural behavior, initial interactions could be challenging for a globalizing India Inc. It takes time to build robust platforms and styles of shared communication. Both sides find the opposing methods of delivery management culturally different. The head oriented approach and the heart oriented approach are seen to be mutually exclusive. An Indian manager could see a US manager as being too process driven and micro-managing too much. On the other hand, a US manager could see an Indian manager to be too fatalistic, often hoping to overcome delays through good crisis management. Despite great strides in professionalization and management education, Indian corporations are driven by emotional themes while the US corporations are driven by economic realities. It is easy to appreciate that unless respective managers are culturally sensitive, both inbound globalization and outbound globalization could lead to cultural logjams for India Inc. Successful corporations tend to address this by separating cultural issues from systemic issues, prioritizing each stream and developing a hybrid model of professional and cultural synergy with open and transparent discussion. While the above East-West cultural model may be typical, It would be facile to assume that cultural divides occur only between the East and the West. The Corporate East itself is quite plural culturally.

A divergent East

Japan, Korea, China and India are the four major countries which have strong and emerging industrial and business relationships. India Inc has the task of deepening and broadening relationships with the three Eastern countries as it seeks to globalize. When analyzed on the seven dimensions of cultural model as above, the four countries display significant diversity. In terms of communication style, for example, Japanese managers are extremely polite and often inscrutable while Koreans are pointed and direct. Chinese communication tends to be complex while Indian communication is highly spontaneous. In terms of working style, Japan tends to be highly systematic and consensual while Korea tends to be competitively opportunistic. China focuses on sustainable mass delivery while India tends to be hungry for growth. All countries except Japan emphasize speed in decision making while Korea and China back it up with speed in execution too. In terms of accountability, seniors assume accountability in Japan while in Korea the middle level leader gets to be empowered and accountable. Accountability in China is hierarchy-bound while in India accountability is often difficult to quantify due to diffused job definitions as well as an accepted practice of moving up accountability by juniors. Japanese managers evaluate risk carefully through geo-political and socio-economic lenses while Koreans are open to experiment with promising external markets in pursuit of growth. Chinese managers are willing to pioneer first entry into even difficult markets while Indian managers prefer to be fast followers.

In terms of performance review, Japanese emphasize collective performance while Koreans gravitate towards individualism. China believes in performance as a mandated mass commitment while India lets relationships overarch performance. In terms of working relationships the ethos in all the four Eastern countries emphasize long and extended working hours, with India not even following the mandated vacation cycle as Japan, Korea or China follow. In terms of life style, Japan respects seniors, independent of either nuclear or joint family system while Korea is relatively more westernized. Chinese executives tend to be migratory while Indians tend to root for nativity. Had India Inc addressed its globalization in cross-cultural context, India would have garnered a much greater share of Japanese investments and would have forged greater collaborative industrial relationships between themselves. With Korea aggressively optimistic on India greater cross-cultural collaboration could have placed Indo-Korean globalization on a more equitable partnership mode. The emerging lesson is one of India Inc needing to follow multiple cross-cultural approaches for a more comprehensive globalization, both within its historical cultural constituency of the East and the historical business constituency of the West.

Global strategy under a cultural umbrella

Established wisdom is that strategy determines the structure. In a globalizing economy, both strategy and structure are influenced by culture. There is a need for India Inc to understand local cultures and work in alignment, and through, local cultures to achieve strategic objectives. Tata Motors did culturally appropriate moves prior to and post acquisition of Daewoo Commercial Vehicle in Korea and Jaguar- Land Rover assets from Ford, and reaped successes. Not only that, it appointed an experienced automotive expatriate leader for its global business to reflect the international culture. M&M appears to follow an Indian talent driven approach in its management of Korean SsangYong Motor. In mergers and acquisitions particularly, there is a need to understand how local culture responds to challenges of consolidation and opportunities of growth. Employees of developing economies like India despite plentiful job opportunities appear to be concerned with stagnation and job losses upon acquisitions of Indian entities while employees of developed countries appear to be taking the challenge and opportunity of getting acquired without much churn. In any case, it would be incorrect to treat cross-cultural management as a solely human resources functional issue. While HR leadership could drive the change or acceptance management all the initiatives should be owned and managed by operations and business leaders. Cultural sensitization must be set in the context of day to day job experiences for effectiveness.

Strategy and structure would be impacted by several cultural variations that could occur during the implementation of globalization initiatives. Some of these variances relate to leadership and talent surpluses or shortages as well as misalignments. These arise mostly due to non-involvement of human resources function in due diligence studies, pre-acquisition and in integration exercises, post-acquisition. In some cases, urgent considerations of business continuity force skews in or place restraints on green field or brown field organization development. From a strategy and structure point of view, therefore, several questions need to be addressed a priori to make head quarters and regions work in a seamless fashion. Adoption of the right organization structure - product, geographic, SBU, matrix - could be one option to guide global governance and managerial processes in a manner appropriate to both business and cultural contexts. Globalization succeeds when the processes of managing the relationships and communications between head quarters and subsidiaries as well as between subsidiaries are well defined. Organizational structures, cultural factors and communication channels, therefore, constitute a triad for successful globalization.

One global firm, several local entities

Globally successful organizations operate as one firm, despite being several entities. They sport a common set of vision and values while providing for locally customized strategies and structures. Cross-functional and cross-border mobility enables unity in diversity. In India, despite the heterogeneity of States, cultures and languages, Indian Administrative Service and Indian Railway Service each emerged as one singular service. In international scene, McKinsey, the leading management consulting firm is a perfect example of the One Firm concept, with shared vision and values, common high standards in talent, respect for uniquely local cultures, pursuit of economic logic, knowledge sharing with client firewalls, and so on. Virtually all large multinational corporations seek to institutionalize the One Firm concept in a number of ways. Several global companies make knowledge sharing and best practice integration across global locations as a means for the one firm experience. Automotive, engineering and electronics companies have taken strides in knowledge sharing portals as a tool of successful globalization.

As India Inc with its limited technical and managerial bandwidth, and the largely domestic market orientation seeks to globalize at a more aggressive pace, it needs to evolve its own paradigm of One Firm. The first need is to build a talent pool for globalization. The new breed of Indian managers bestowed with high quality engineering and management education in reputed institutes such as the Indian Institutes of Technology (IITs) and the Indian Institutes of Management (IIMs), yet integrating the uniquely Indian emotional ethos, reflect a unique combination of head, heart and gut management, so essential to meet the multiple needs of diverse countries and cultures. To enhance the talent pool, India Inc must depute its managers of the previous generations to long refresher courses by such institutes to realign their skills to the new globalization needs. Strategies of globalization must be based on validated hypotheses of inbound and outbound globalization with appropriate structures and processes that deliver efficiency and effectiveness across the global network. Case studies of successful globalization by the Indian conglomerate groups such as the Tatas and Birlas offer several insights for India Inc as a whole. It is perhaps time for the leading industry associations such as the CII, FICCI and Assocham as well as the IIMs to diffuse the knowhow of globalization amongst their constituent firms.

Posted by Dr CB Rao on March 13, 2011

Sunday, March 6, 2011

Value Creation in Commodities: 'Water Lessons' for Managers

After air, water ranks as the most important element in human life. Water constitutes seventy to eighty percent of the human body. Unlike air which is a perpetual integral part of the environment, water which is fit for industrial and human use, is provided by the nature seasonally. When the human population was thin and industrialization was low centuries ago, such water was plentiful and unpolluted. Even today, despite the humongous growth in population and increase in pollution water is a more natural commodity than say, oil or metals; and is one of the most liberally wasted natural resources, either by failure to capture rain water seasonally or to control day to day consumption. Historically, it has been the responsibility of the governments all over the world not only to store the water but also treat it and supply it to the society. A striking feature of modern living has been the emergence of packaged drinking water as a product offered by private enterprise. This blog post, however, is not about water per se but about how the management of a commodity like water as a premium, differentiated product offers valuable lessons for managers who succumb to the commoditization of even high technology products.

Curious economics

The price of a good branded packaged drinking water in India is Rs 15 to Rs 20 per liter pack. The price of good branded packaged dairy milk is Rs 20 per liter pack. The similarity in pricing levels of packaged water and packaged milk, despite the complexities and costs involved in the latter is amazing. Water is freely available with minimal costs of collecting and extracting while raw milk has a significant cost of availability per se. The value chain involved in delivering the packaged milk product to the consumer on a 24X7 basis is extremely complex, comprising rearing of milk-yielding animal stock, collecting milk, processing, pasteurizing and packaging milk, and distributing the packaged milk in cold chain conditions. The picture becomes even more curious when the family consumption patterns of purified water and pasteurized milk are factored in. An Indian middle income household typically consumes 750 ml of milk per day per person in various forms, ranging from plain milk to milk converted into yogurt. The household also consumes 2 liters of packaged drinking water per day per person. Assuming a six member family, the household is willing to spend twice as much on water as on milk (Rs 180 per day on water versus Rs 90 per day on milk).

As one moves up on the richness scale, the consumer would be seen to be willing to as much as three to four times on an imported packaged water brand in a restaurant or hotel, providing an even more curious twist to the socio-economic puzzle. One cannot explain away the enigmatic dimension either on purity assurance or once-in-a-way indulgence of the rich. A life saving Dextrose infusion solution is priced probably at half of the price of the imported water brand. A life saving pharmaceutical product which is produced with the consumption of millions of liters of treated water, and recycling and treatment of millions of liters of effluent water is priced on par with packaged water, weight by weight. The issue perhaps is not in the quixotic behavioral patterns of the consumers. The issue relates more to the ability of managers to appreciate the compulsions of commoditization and the enablers of value creation in a more pragmatic manner. It is the managerial capability that creates value in an essential commodity like drinking water and depletes the value in a relatively optional nutritional product like milk or in a critical life saving or lifestyle product. Without making value judgments on the business behaviors and the social perversities involved in these curious scenarios, the intention in the discussion that follows is to understand the lessons that water as a packaged product teaches to managers in the competitive dynamics of commoditization.

Understanding commoditization

Commoditization is a function of demand-supply balance. An ordinary fossil fuel like coal would cease to be a commodity feedstock if coal-fired thermal power plants are required in greater measure or if the availability of coal mines becomes dramatically impaired. Gold and platinum see escalating value due to scarcity of mines and mining on one hand, and economic hedging coupled with social passion for jewelry on the other. The rare earths such as promethium and terbium are rare not because of lack of availability in earth’s crust but because of the complexity of their extraction and separation as well as radioactive impact of the effluents. China’s move to curb the export of rare earths is triggered not only by the desire to conserve the elements and avoid pollution but also by the desire to move up the value chain of producing value added products from the rare earths. Pricing of a product inversely correlates with commoditization; the greater the commoditization the lower the price. On the other hand, impact of technology has random behavior.

Steel is a perfect example of economy linked supply factors overriding the technological challenge and investment intensity of steel production. Poor growth in infrastructure lowers the demand for steel, creates oversupply of the product and makes steel a commodity. As basic steel making technology is mastered by a greater number of producers steel became a commodity product. Technology has a random impact in addressing the challenge. For example, steel could be a commodity but automotive steel is not. At a gross level, technological improvements in input material quality control, conversion efficiencies and energy consumption can reduce the cost of steel production and either protect the margins or spur the demand. On the other hand, forward integration into value added products such as automotive steel, on the basis of technology, could make steel producers create niche positioning. As industrial managers face the grim prospect of commoditization of even high technology, high investment products by their own actions, they need to appreciate how a naturally occurring commodity product like water could offer lessons in de-commoditization.

Function-value matrix

Every product offers functionality and value as its two fundamental dimensions. Water offers functionality as the essential nutrient and osmotic agent. Water provides a balance in the body – homeostasis. It provides an absorption of the water-soluble substances, transportation of the nutritive elements to the target cells and the excretion of waste products of the metabolisms of the body. Water is taken so much for granted that its elevated role in ensuring homeostasis is never understood in detail. On functionality and value, the packaged water has traditionally been split in terms of purity and branding, with a perceived correlation between brand popularity and water purity. Industrial managers, however, have succeeded in vesting water, which has been a co-element of life from the inception of life, with several additional dimensions of functionality and value. The fundamental functionality is in terms of a matrix of portability and storability; ensuring the availability of the product from the smallest bottle size of 200 ml to the largest size of 2 liters for individual use and the smallest can size of 5 liters to 50 liters for use directly as storage carriers or in tandem with water dispensers. The distribution logistics have been so perfected that the user has now a total assurance that he can access a packaged water bottle wherever and whenever he needs it. By making the packaged water available ubiquitously, the producers and distributors have liberated the user from the need to carry water around, and created value around supply assurance.

On the purity front, producers perfected the purification processes to achieve continuously higher levels of purity and taste. Fundamentally, by adopting multiple sources for water extraction from public treated water to mountain springs, manufacturers tried to assure lower impurities from source. Typical multi-step purification process includes reverse osmosis, ozonation and carbon filtration at the minimum. Each of these steps, even individually, and collectively is designed to remove manufactured molecules such as chemicals and pharmaceuticals, as well as naturally occurring substances such as impurities and heavy metals. By keeping the Total Dissolved Solids (TDS) below the levels mandated by the FDA, manufacturers create new standards. TDS is the sum of all solids dissolved in water measured in parts per million (ppm). Examples of substances that can account for TDS include carbonates, bicarbonates, chlorides, sulfates, phosphates, nitrates, calcium, magnesium, sodium, potassium, iron, manganese, and a few others. Value creation often entails investments in product development, manufacture and distribution to breach higher technological barriers, and higher marketing expenditures to convey the superior function-value matrix to the consumer in terms of brand explanation. The question that arises is whether commoditization has any scope for innovation.

Innovation for de-commoditization

It is often assumed that commoditization is only a one way street, and except for demand-supply factors there is no way to de-commoditize a product, particularly once a commoditized product has been stretched to the limits as is the case with current branded packaged drinking water products. Not really, as innovation has no limits and could turn even commoditized products into differentiated products. For example, the current filtration processes remove all the TDS while a new technology that could retain essential minerals such as calcium and potassium could provide a value edge. At a higher level, purified water with added nutrients and taste agents could provide additional value. Given the extensive use of plastic in packaging water, innovations in the use of plastic which is absolutely non-reactive and non-carcinogenic over an extended shelf life could provide added value assurance. Quality control and quality assurance on plastic bottles assumes greater importance given the higher dependence on recycling. Similarly, in distribution additional protection that assures dust-proof protection and dust-free delivery would provide additional delivery assurance.

Innovation in commoditized products could take the shape of positive environmental balance as well. It is counter-intuitive that a water packaging corporation could generate more water table than the water table it depletes. This would, however, be possible on an overall global scale by resorting to rain water harvesting, creating rain water reservoirs around manufacturing complexes and providing community watershed schemes. At a different level, by conducting research on the role of hydration therapy for persons of different clinical conditions such firms could help establish better linkages between water and life. Comparative studies between different sources of water in terms of impurities and TDS and related manufacturing efficiencies could help achieve better manufacturing economics. Developing linkages between water quality and other beverages could help beverage manufacturers achieve better taste and consistency parameters. Given the propensity in emerging economies to counterfeit, reuse-proof, theft-proof and tamper-proof plastic containers could constitute an agenda for packaging innovation. In sum, if a simple natural product like water could lend itself to enormous value differentiation and de-commoditization other more complex products could provide a significant potential for value creation.

'Water lessons' for managers

Water provides several business and technical lessons for managers. Ten of these are summarized as follows. Firstly, it demonstrates how product management could alter the lifestyle choices, leading at times to skewed deployment of resources and returns. Managers must therefore understand their own ability to influence consumption patterns and utilize the power in a socially responsible manner. Secondly, product strategies need to simplify life in terms of portability, mobility and universality. Managers must try to optimize a total eco-system around core and related products rather than focus only on optimization of their core product alone. Thirdly, governmental and regulatory standards are guidelines and offer opportunity for firms to differentiate themselves beyond. Managers must accordingly focus on futuristic bar-setting and technological efficiencies to be ahead of the curve. Fourthly, all products, whether of human consumption or non-consumptive usage, have an impact on health. Managers must endeavor to correlate product performance and health impact. Fifthly, corporate social responsibility requires that what is taken from the environment must be more than made up. Managers are, therefore, responsible to develop and implement environmentally regenerative strategies.

At a product level, managers must have faith in the technical characteristics of the products they develop and manufacture. If water can have marketable properties, a chemical product or an automobile product would have several properties based on which they can be differentiated. Managers who fail to study and grasp the technical attributes of their products, and who attempt to market them solely on price considerations are value destroyers for their corporations. On the other hand, managers who undertake techno-economic marketing of their products create not only outstanding value for their products but also lasting value for their companies. Secondly, the quality of raw materials and intermediates influences to a great extent the product quality and manufacturing efficiencies. Managers must therefore focus on incoming quality as much as on in-process and outgoing quality. Thirdly, manufacturing is a key differentiator in terms of attainable conversion efficiency and deliverable quality standards. Managers who develop manufacturing systems that achieve tighter manufacturing tolerances, lower number of operations, and lesser effluents with greater recycling contribute to operational sustainability. Fourthly, quality needs to be perceived transparently at the time of purchase and in regular usage. Managers who ensure integrity in product delivery and usage with good packaging, transportation, distribution, delivery and after-sales service practices contribute to overall conservation of resources. Fifthly, and most importantly, irrespective of whether the product is commoditized or prone to commoditization, innovation can slow down or reverse commoditization. Managers need to support innovation across the value chain as much as they seek cost economics.

Multi-point value chain

There are fundamental differences between companies which choose to be completely commoditized, to have a mix of commoditization and innovation and opt to be completely innovative. The first group operates in a negative spiral of managing on costs, and having no wherewithal to reinvest. The first group brings down not only itself but all of its suppliers and vendors. The group believes it is operating in low risk-low return class, but actually runs the highest risk of industrial sunset, as customers who constantly evolve would see declining value or relevance for such products. Typically, such companies convert their industries into sunset industries. The second group operates at multiple value points ranging from pure commodity, low value, low cost and mass products to pure innovation, high value, high cost and niche products. The second group consistently innovates products, and moves them down the value chain as markets evolve. A sub-set of the second group has the capability to introduce products simultaneously at various value points. The second group has the utmost capability to achieve long term sustainability. The third group of totally innovative companies operates at the highest levels of risk and reward but is the essential trigger for evolving new sunrise industries. The third group has the ability to create markets, and even industries, around its innovations.

Water is a product that cannot be differentiated visually or in use. Yet, as this post has brought out differentiation could be done creatively even for an apparently commonplace product. Clearly, various other products which have so many technical complexities and nuances offer manifold opportunities for differentiation. Managers, irrespective of the industries they operate in, must use their intellect and perseverance to innovate against commoditization. Long term sustainability stems from innovation rather than commoditization. Water, as an industrial product or as lifestyle packaged product, has several instructive lessons for managers in building value for products and corporations.

Posted by Dr CB Rao on February 6, 2011.