On the Competition Highway: The Perspectives of Two Bahns

Business highway is a theoretical concept of businesses traveling over time towards their destinations on certain pathways. While each company has its own goals, more often than not several companies, constituting an industry, tend to travel together along the same business highway. The reasons are simple: every company in an industry faces the same huge market that appears bountiful on the distant horizon and every company has only a defined set of prime movers to take them towards the destination. The nuances we speak of in terms of product positioning, market segmentation and so on are efforts to define motels and hotels on the highway to rest in the quest for market dominance. Those who take their rest as the endpoint in journey risk becoming marginal players in a subset of the large market.

When a company starts as a monopoly, the cruise seems to be smooth and unchallenged. Companies take their time to build up speed, and after certain periods of acceleration and deceleration, could stay on their chosen speed level.  In certain industrial situations of perfect duopoly, two players tend to travel together in a certain equilibrium without upsetting each other unduly. In most industrial situations, however, competition starts coming up. Dots in the rear view mirror become, new speeding competitive businesses zipping past the monopoly or the duopoly businesses. Academic gurus and practical leaders dedicate their lifetime understanding the dynamics of competition and developing constructs to stay ahead of competition. The fallacy in competitive strategy is that everyone has the same access to theories of competitive strategy and can operate in similar ways to meet their strategic objectives. Much like automobiles, businesses drive through rear view and front view.

Rear view

The essence of rear view in driving is to be watchful about vehicles overtaking us. The rear view strategy in business also works much the same way. As in safe driving, it requires the driver to focus largely on the way ahead while casting darting glances at the rear view mirrors. Each car has two rear view mirrors; the right one near the driver (in right hand drive vehicles) is the primary one to be watchful about overtaking vehicles (competitors, in a business context). The left side rear view mirror is helpful to be watchful of those who seek to overtake from the wrong lane and also help the driver assess how he is pulling ahead of competition as he overtakes. To make effective use of the rear view mirrors and not to be blind to relative speeds, it is important, without doubt, for the driver not to have glaucoma (and for businessmen not to have tunnel vision).

The highway cruise is a game of lead and lag. Over time, drivers in autobahns learn to maintain a distance in equilibrium or get used to an iterative lead and lag in disciplined lanes. They also confirm to lane discipline, by and large. While the destination remains the goal, the preoccupation of the driver’s mind is in preserving a competitive but collectively safe ecosystem. The leads and lags do help in arriving at the goals but miss the larger picture of if one is on the right lane. In business too, when one is preoccupied with competitive leads and lags, the businessmen tend to lose track of the broader picture. Much attention is paid on watching the rear view to take care of the zooming competition, and ensuring the lead. Business race is not one in which a few market share points matter (as seconds matter in a car race). What matters more is an unfettered view of the spaces ahead for businesses to continue racing ahead.  

  

Front view

It goes without saying that the front view is far more critical than rear view in driving. The purpose of front view is to seek a clear road, be mindful of signages, and avoid safety risks. In business too, front view ride is critical but cannot be curtailed like in road cruise. It is important to look far ahead and visualize the path. Verdant spaces to drive in are important. The trap, however, is that business managements very quickly convert the long term visions (strategies) into short run journeys (budgets), and become watchful drivers. Agility, if at all, is shown in overtaking the vehicle (business) in front rather than in considering a quantum jump to a distant destination. As with rear view, soon the drivers in front view too get into a comfortable equilibrium with the road ecosystem.

Many times, the best of views is disrupted by inclement environment; while the vehicle or business may have the best of navigation aids, prudence demands slowing down till the weather clears up. A road warrior understands the physical limitations of an inclement environment but a business warrior takes really a long time to feel the impact. All of these do not matter as much in a crowded bumper to bumper traffic condition or in a fragmented industry environment because speed is controlled by default. That said, it would be somewhat facile to assume that a leader who is well tuned to disciplined yet agile driving on the road would be equally so in a business highway. On the contrary, there are critical differences in how leaders conduct themselves in the two bahns of roads and businesses.

Two bahns

While both automobile travels and business travels are physical, the latter gives a vicarious feeling of virtual state. As a result, the business leaders who drive on the business highway tend to be far more freewheeling than the driver on autobahn. The results in an autobahn are instantaneous and physically experienced, whether positive or negative. In business bahn, however, the results take time to deliver and the careless driver is insulated from the likely impact. This fundamental difference makes well-groomed and disciplined leaders to be casual, careless and even undisciplined on a business bahn. Leaders who would be deeply aghast at liberties taken in physical driving would not only wink at liberties taken nonchalantly on business bahn but also be unmindful of the damage being inflicted on the business ecosystem. Leadership exhortations such as ‘making one’s own path’ can be easily twisted out of perspective to go berserk on business highway. Unfortunately, the impact of reckless driving on business highways gets known only after the drive is nearing to a serious crash.

A vehicle needs fuel to cruise on the autobahn. The faster you drive and the longer you drive the greater is the fuel consumption. The best bet lies in having a vehicle with a larger fuel tank and better fuel consumption; such an envelope only postpones the limitations but never eliminates them or avoids the need for refuelling. Like automobiles, businesses need the fuel of profits to run; so does everyone believe. In reality, businesses need cash to run. Profits are virtual fuel, an accounting fuel in a manner of speaking, that lets businesses keep on running despite losses (and even cash losses) through a variety of props of diverse financial instruments. It is important that businesses appreciate the importance of cash as the only fuel that can sustain deviant or careless drive on business highway. The processes of management have put in place a number of checks to ensure appropriate governance (much like speed governors, ABS and safety checks) but the way bankruptcies and stressed assets blow up in India and elsewhere indicate that the drives on business highways need a different perspective for future.

Autonomous driving

The automobile industry, nay the road transportation sector, is set to be transformed with the experimentation and eventual maturation of autonomous driving. An autonomous car (also driverless car, self-driving car or robotic car) is a vehicle that is capable of sensing its environment and navigating without human input.  Autonomous vehicles detect the surroundings through radar, lidar, GPS, odometry, computer vision and soon with artificial intelligence. They are equipped with advanced systems that interpret sensory information (including reading signages) and navigate the paths towards destinations, overcoming obstacles. What this implies is that man-machine interface through breaking systems, speed governors and safety devices is considered inferior to a completely machine controlled drive. Autonomous driving is both a tantalizing misnomer and a perfect descriptor, in parts. Conceptually, giving an automobile complete autonomy from the free thinking human being is considered to lead to better navigation, safety and efficiency for the vehicle and its passengers (besides accommodating one additional person in place of the driver)!

Well for businesses too, all the wisdom from the stakeholders to advocate prudential norms and all the efforts from the regulators to put in place governance standards are akin to the meters and governors, with all their bells and whistles, embedded by the designers to enable smooth and safe functioning of an automobile in the hands of its driver. Just as these have been found wanting and autonomous driving is the new goal for safe autobahns it appears that businesses that are algorithmically driven and are autonomous from the inducements, aberrations and compulsions of human enterprise could be the new norm for safe driving on business bahns. Conceptually, a machine controlled business would appear to be completely antithetical to the idea of free enterprise but with the strides being made in artificial intelligence businesses may be run faster and safer as well as more profitably and more prudentially by machine controlled algorithms! The advantages could lie in terms of better regulated investments and expenditures with greater business assurance!!

Posted by Dr CB Rao on June 3, 2016

Pyramid of Technology and Competitive Strategies: Drivers of Industrial Growth

Technology is the primary driver of industrial development. Generally, technology is viewed in terms of two categories: innovative (or discovery) technologies and generic (or copycat technologies). It is commonly understood that innovative technologies open up new markets with first-to-market products and services, and generic technologies thereafter follow with same or similar products, expanding the markets further. The extent and pace of generic technologies depend on the protection of intellectual property rights (IPR), and the attendant monopoly rights that innovator firms enjoy. The sequence and balance between innovative and generic technologies is well established in certain industries such as pharmaceuticals and electronics while it is somewhat blurred in other industries such as automobiles and Fast Moving Consumer Goods (FMCG).

Technology is hard to develop innovatively for two intertwined reasons; innovation requires intellectual capital which, in turn, requires an ecosystem that nurtures innovation. Generally, innovation is considered technology, and investment intensive and only financially very well endowed firms are considered capable of performing in the innovation space. The real take on that is a bit ambivalent. Fundamental research, no doubt, requires sophisticated equipment and high calibre people, both of them costing a lot. On the other hand, some of the brightest technological innovations be it genomics, epigenetics, stem cells, artificial intelligence, drones and so on have been initiated on a small scale in start-up or academic research formats. The fact of the matter is that it is difficult to categorise technology in a binary format. This blog post proposes that technology is complex and needs to be appreciated from multiple angles.

Technology pyramid

Pyramid is a very graphic template to appreciate multi-layered activities or experiences. Regular pyramid has a square base and an apex point joined to the base by four equal triangles. Viewed from any angle of elevation, the pyramid would look like a triangle. There are three separators in this triangle from a technology point of view. At the very top lies the true innovator space. The middle space belongs to improver-followers. The bottom space belongs to followers. While there is no research body that points to clear statistics, the ratio of innovators to improvers to followers tends to be 1:3:6 in technology oriented industries, and 1:1:8 in commodity oriented industries. The higher the complexity of innovation of the top 10 percent, the greater will be the number of technology components. This provides an opportunity for improver-followers (30 percent) to improve upon the components, making the follower products similar but with some improvements. Most players (60 percent) find even partial improvements daunting, and are satisfied with being generic clones.

The relationship between technology and science has been age old. Science is the foundation of technology. While classification of technologies as above tends to be secular, depending on the edge of the base, there are four types of industries, driven by four different types of sciences. The first is driven by material sciences, the second by biological sciences, the third by mechanical sciences and the fourth by computer sciences. Depending on the base scientific driver, the proportions cited above vary. Semiconductors, medical equipment, wearables, white goods are some examples of predominantly materials sciences driven industries. Vaccines, ayurvedic products, pharmaceuticals, biologics and regenerative medicines are examples of biological sciences driven industries. Robotics, automobiles and machine tools are examples of industries driven by mechanical sciences. Artificial intelligence, IoT and Cloud are examples of computer sciences driven industries. In today’s world, though, there is significant cross-dependence and convergence. Wearables, for example, are driven by advances in computer sciences as well.

Strategy grid

Given that technology driven product strategy is the core of business strategy, the technology pyramid influences the business strategy of a firm, which has two principal components: investment direction and earnings potential. There are two fundamental dimensions of investment; one of technology (including both design and manufacture) and the other of marketing (including both selling and distribution). Innovators need to be extraordinarily high on design and manufacturing investments as well as marketing investments. Improvers need to be balanced in terms of technical and marketing investments. Followers need to be high on marketing investments but can afford to be low on design and manufacturing investments. Only those products which are on phase-out can afford to be low on investments on both technical and marketing dimensions.

There tends to be an earnings grid that corresponds to the investment grid and that has two dimensions: the revenue grid and the (gross) margin grid. Gross margin (or, simply margin) is defined by earnings before depreciation, interest and taxes. The innovator firms would be high on both revenue and margin dimensions. Improvers will be high on revenue grid and medium on margin grid. Followers would be low on both revenue and margin grids. Clearly, there are logically strong incentives to be innovators, followed by improvers and trailed by followers. The reality, however, is otherwise. Most firms tend to prefer an improver strategy or a follower strategy and only the strong hearted tend to pursue the innovator strategy. One financial reason is that the investment intensity adversely affects the net margin potential of a firm, because of depreciation and interest. As a result, even innovator firms tend to follow a strategy of mixed portfolio, with a fair proportion of improvers in their portfolio.

Competitive strategies

There are three competitive strategies of technology that firms can pursue based on the desired positioning in the technology pyramid. These are innovation leadership, improver differentiation and follower productivity. The classification has relevance in terms of organizational leadership characteristics as well.   

Innovation leadership

Innovation leaders are in the forefront of experimentation. Such firms tend to invest enormous resources, including time and effort, not only in their primary scientific drivers (say, materials or mechanicals) but also in exploration of how the other drivers can also be leveraged for greater innovation. Microsoft acquiring DNA sequence to store trillions of data bytes is an example. Another example is driverless cars, combining car and computer technologies.  Innovators are not disheartened by failures and would press on with resource allocations until breakthroughs are achieved. Innovation leaders are often driven by insightful and intuitive leaders who are visionary rather than data oriented analytical leaders.

Improver differentiation

Improver differentiation looks at multiple components of a successful innovator system to develop a new value proposition. Modular smartphone, for example LG G5 model, which enables modular enhancers like DSLR camera which can be attached for performance enhancement, reflects improver differentiation. Such firms tend to take off where others stop. Fitbit, launching a fitness watch, is an example. Despite the launch of Apple watch or Samsung Gear smart watch, Fitbit fitness band continued to be popular. However, the firm recognized that getting a watch bezel on to the band would be a key differentiator and portfolio enhancer. Improver differentiators are driven by leaders who are observant and thoughtful leaders who are creative rather than analytical leaders.  

   

Follower productivity

Followers need agility, accuracy and efficiency to play the generics game successfully. Wise followers keep their generic follower templates ready even as the innovator products are launched. They understand that the marketing universe is diverse, and the bottom of the economic pyramid so large, that there would always be scope for follower products. Generic pharmaceutical industry is a shining example of how follower productivity enables me-too followers transform the structure of an existing industry, and in the process virtually build a whole new industry segment successfully. Generic followers succeed based on the quality of management and rigour of operations. Leaders who lead follower productivity tend to be operational and efficiency experts.

Crystallisation versus Commoditization

Those who are familiar with solid-liquid physics and chemical engineering understand that crystallization is a complex process. There are many natural crystallization processes that are time scale dependent (examples, mineral crystals or snowflakes). Innovation, likewise, is time dependent; leaders committed to innovation need patience. Laboratory crystallization works on a number of parameters (concentration, temperature, polarity, ionic strength etc.,) to ensure required crystallization. Innovation similarly requires specialization, energy, passion and persistence. More importantly, just as crystal growth happens with the primary crystallization or the first nucleus formation (convergence) and then develops secondary crystallization, innovation also starts with one unique idea and then builds on to make a whole new innovative product eventually.  Examples are electric cars built around high performance electric batteries, smart phones around bright displays, driverless cars on sensors, and so on.

Technology, on the other hand, has a paradoxical aspect. Even highly sophisticated technologies, with high investment intensity, are subject to rapid commoditization so long as they are not protected by patent and monopoly rights. Commoditization stimulates proliferation of competing products. Commoditization occurs when a core or base product is recast into multiple end-user products as in the case of iron and steel. Commoditization is an inevitable outcome of outsourcing of design, development and manufacture. Outsourcing promotes diffused technological entrepreneurship. As more systems developers and component makers get their teeth into their own proprietary technologies, commoditization of technologies tends to occur. This phenomenon, widely commonplace in white goods industry, is now evident in electronics and other industries as well. Commoditization as a phenomenon supports a wide base for followers, and works to the advantage of consumers.

Posted by Dr CB Rao on May 03, 2015     

Patanjali Phenomenon in Indian FMCG: A Study in Industry Level Competitive Strategy

The rapid growth of Patanjali Ayurved Ltd (PAL), with its range of natural or ayurvedic products, has shaken up the Indian Fast Moving Consumer Goods (FMCG) industry by a silent storm. Established in 1996, and with humble origins as a small pharmacy in Haridwar in 1997, PAL has had a tepid growth until five years ago but has achieved exceptional growth over the last five years, quadrupling the revenue to Rs 2000 crore as a large developer, manufacturer and seller of ayurvedic or natural FMCG products. Now, the company has even more ambitious plans to double the turnover to Rs 5000 crore, and then to Rs 10000 crore over the immediate term. India has not been new to natural products; Himalaya has an eighty year legacy of ayurvedic drugs and nutraceuticals while several companies such as Zandu, Dabur, Emami, Vicco and Jyothi have developed remunerative natural product portfolios. Some of them have, in the past, shaken the MNCs operating in India with their potential; however, no company promises (or threatens!) to jolt the established MNC and Indian players as PAL does.

The case of PAL is an interesting study in competitive strategy. It has valuable lessons on overcoming entry barriers and scaling up. It helps one understand industry definition and industry segmentation from multiple angles. It also offers insights on generic competitive strategies that a firm could pursue, and how aspirant firms can establish their unique selling propositions (USPs). It also helps one appreciate the importance of value chain management in development of competitive strategy. It also rewrites some principles of organizational management. PAL’s success would offer valuable lessons for a breed of new native companies seeking to nibble away shares from established players, more so from the Indian subsidiaries of multi-national companies (MNCs). It also indicates the challenges it would face, and the strategies it could adopt, to keep on the growth path. Finally, it also makes a powerful case of management theory and practice needing to be unique to the Indian context.

Uniqueness

As students of competitive strategy are aware, a new entrant needs certain unique propositions to make an entry into the industry (beyond generic strategies). The fundamental uniqueness of PAL stems from the fact that it has been set up a highly popular Yoga guru, Baba Ramdev, who struck a chord with vast sections of Indian population as a highly committed Yoga practitioner cum teacher. The Yoga guru setting up a natural Ayurvedic products company has significant conceptual synergy and emotional appeal. This is quite akin to a reputed doctor setting up a hospital, and thus bringing in an additional level of confidence to patients, doctors and investors. That the establishment and growth of PAL has coincided with a world-wide revival of interest in Yoga and natural products as a natural alternative to western practices is probably more than a coincidence. The market for natural wellness products is not small by any standard; it is estimated to be USD 107 billion by 2017. Given that India, and other Asian countries have an unorganized natural supplements practice, setting up a dedicated venture by a committed Yoga practitioner is certainly a coup of sorts.

There are other unique points as well. The second uniqueness lies in the aggressive promotion of the natural Ayurvedic concept in two different formats. Unlike Himalaya and Dabur who sought to market their products as therapeutic medicines, PAL positioned its products as wellness products capable of enhancing strength and immunity. It has also sought to aggressively promote the wellness characteristics, rather than be cautious and circumspect about it.  The third uniqueness lies in the claims of backward integration. PAL claims to be the only company that produces its own rare herbal plants; it has extended the concept to claim its “herbo-minerals” as unique ingredients. As a delayed response to PAL’s integration proposition Dabur began to say that it has its own “nursery” for rare plants (whatever it means). The fourth unique proposition has been, of course, what sells in India – more affordable price.  Virtually every Patanjali product is priced lower, typically 20 to 50 percent cheaper than a comparable competitor product. This compares with HUL Ayush products that are sold 2 to 2.t times higher! 

    

Generic home strategy

Micheal Porter proposed cost leadership, differentiation and niche as the three principal generic competitive strategies. PAL strategy involves all the three strategies. With practically no advertisement and promotion expenses, compared to competitors, and also with lower organization and retail costs, PAL has inbuilt cost leadership in its supply chain. The differentiation strategy is built through the authentic Ayurvedic link through the founder Baba Ramdev. While HUL tied up with Arya Vaidya Sala for its Ayush products, it has not been promoted as a strong proposition nor has it been reflected in product claims. The niche strategy of PAL relates to the focus on health conscious middle class customers across mini-metros and major towns. PAL has found its niche in the spiritual and yogic wellbeing that Baba Ramdev brings and the natural, Ayurvedic wellness facet that the products provide.

At the same time, PAL has chosen a strategy that seeks to rebel against Porter’s discipline on business definition. Rather than define its business around only Ayurvedic wellness and personal care products, the company has decided to branch off into groceries such as atta , home care products such as detergent powders and washing bars, and breakfast products such as cereals and noodles. The emphasis seems to be on the good old marketing approach of brand extensions utilizing the umbrella brand goodwill of Patanjali. Rather than generic product or business strategies, PAL is focussed on developing its own ‘generic home strategy’, seeking to convert its consumer homes into Patanjali homes! While in one perspective such a broad strategy would help in scaling up rapidly and also achieve the goal of giving tough competition to MNCs on their home turf, the strategy has its challenges.

Enablers to sustainable scale-up

What Patanjali has achieved so far is indeed remarkable. The ambitious goals are even more formidable. Continued success would depend on three key enablers: quality, distribution and digitization.

Quality

While a great entry and growth profile has been achieved by PAL, the ambitious scale-up would require demonstrated quality platform. Customers would be greatly reassured if the company sets up top class analytical laboratories, and takes assiduous care in establishing the product specifications including shelf life, labelling and advertisement claims. Given the multiplicity of testing laboratories in India due to central and State level FDA regulations, each product development and product release must conform to the best of laboratory practice and manufacturing practice. Quality Assurance and Quality Control as well as Regulatory Affairs and Compliance must be established as visible departments.

Distribution

PAL has chosen to sell its products through franchisee model of Patanjali stores and direct online marketing. It has more recently tied up with Future retail group for national marketing. Successful retailing depends on efficient national supply chain and distribution systems. It would appear that this is the greatest strength the established MNCs have. PAL must have a distribution system that could reach every store throughout India directly as the MNC products reach. Whether this would be through strategic alliances with logistics providers or this would be through its own distribution company is a matter of deliberate choice for PAL. The success of Internet online delivery giants is directly linked to their distribution efficiency. Serving India’s 1.3 billion population would require even more extraordinary distribution reach.  

Digitization

The success of Patanjali organization is attributed to a very hardworking managing director and a two member board (besides Baba Ramdev’s organizational messaging). Scaling up to Rs 10000 crore with a portfolio of 800 SKUs would require an organizational depth not envisaged so far by the company. There could be newer avenues open to PAL to develop a hybrid swadeshi organization structure. Digitization would be a very important organizational tool to ensure repetitive purchases and brand extensions. The current online store needs a major transformation linked to an enterprise resource planning system. PAL should have a digitization strategy and infrastructure at the earliest.

Mindfulness

Yoga is all about mindfulness and decluttering. The current business model of PAL is, however, cluttered with every product that may be conceived of for home consumption. One would feel that demonstrating superiority over MNCs, rather than serving customers where really required, is becoming the motto for PAL. Wisdom could lie in focusing on fewer product categories that are directly linked to the principles of Ayurveda and natural organic nature and play in such domains really well. If PAL is able to back its foray into other products based on organic principles they could emerge as a second choice. The cost leadership that currently exists would, doubtless, be eroded as the organization expands and overheads build up. Whether speed of growth should be the primary driver is a matter for deliberation for PAL management.   

While most analysts feel that the success of Patanjali Ayurved is due to Baba Ramdev and his dedicated followers, the truth is also that Indian customers are eager to use natural products without harmful chemicals and utilizing the science of Ayurveda. The company now needs to demonstrate the scientific aspects even more vigorously if it aims for an unassailable lead. Modern technology as well as structured management processes would help Patanjali fulfil its mission. It would be a great contribution to society if the company carries out clinical studies to study and establish the correlation between the various Ayurvedic ingredients and development of immunity and wellness in the users. If Patanjali Ayurved has benefitted from the use of Ayurveda as its signature claim it should be gracious and progressive to use its prosperity to further develop and demonstrate Ayurveda as a pristine science, and as India’s gift to humanity.

Posted by Dr CB Rao on May 03, 2016   

Do Rules Help Innovators? A Practical Paradox for the Digital Age

In the domains of strategy and innovation, the book titled “Ten Rules for Strategic Innovators” authored by Vijay Govindarajan and Chris Trimble, Professors at the Tuck School of Business, (Harvard Business School Press, 2005) provided an interesting thesis, ten years ago. The book was inspired by the authors’ belief (shared still by the author of this blog post) that innovation is at the core of economic vitality as it drives growth, creates jobs, builds wealth, provides purpose to employees and revitalizes organizations. The authors, in their work, held that innovation would enable companies to simultaneously enhance society and increase profits in two ways of improving productivity and commercializing new products and services. According to the authors, knowledge of the genetic code served as knowledge of the fundamental rules that guide human behaviour. Genetic code is, as then and to date, researched to cure illnesses more effectively, seek immunity from disease proactively and hopefully resist or reverse the ageing process itself. Ten years after the postulate in the book, human genetic understanding continues to hold promise with sporadic discoveries on the above lines.

Vijay and Chris proposed strategic innovation as the organizational code for exploring a set of experimental strategies that could help corporations reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The authors held that strategic innovation differed from continuous process improvement, process revolutions and product or service innovations in that, unlike others, strategic innovation would involve unproven business models. Strategic innovation would be successful with or without the three other types of innovation, they held. They also cautioned that strategic innovation offered major challenges to entrepreneurs and professional CEOs, in terms of one-time career challenges in starting and growing a new company as part of, or distinct from, the core established company. The authors proposed ten rules for success of strategic innovation, therefore. Ten years after the postulates in the book, a wave of start-ups with disruptive business models and technologies validate the need for strategic innovation but also challenge us with a leadership paradigm that goes beyond any classic rules of innovation.

The ten rules

Vijay and Chris considered the case of innovation being driven by a new company (NewCo) set up by a big parent company and argued that the middle phase that would exist between ideation and execution required the typical NewCo to forget or unlearn some past practices, borrow the good practices and learn new relevant processes.  The organizational DNA comprising staff, structure, systems and culture was proposed as the compelling inner logic. All the rules, the authors stated, reflect learnings from various case studies of strategically innovative (but also challenged) companies that form the core chapters of the book. They proposed that understanding the relative roles of creativity (typically required at the beginning) and execution (typically required at the end), and the need for identifying the process of strategic innovation through the middle of converting ideas into actions.  The base assumption of parent-child relationship in fostering innovation limits the canvas of strategic innovation, however.

The authors, in their last chapter, distilled and emphasized ten rules (that are summarized herein), rule 1 and rule 10 being general rules. These rules are prescriptive as well as cautionary.  Rule 1 states that in all great innovation stories, the great idea is only Chapter 1. Rule 2 is that sources of organizational memory are powerful. Rule 3 is that large, established companies can beat start-ups if they can succeed in leveraging their enormous assets and capabilities. Rule 4 states that strategic experiments face critical unknowns. Rule 5 is that the NewCo organization must be built from scratch. Rule 6 is that managing tensions is job one for senior management. Rule 7 states that NewCo needs its own planning process. Rule 8 cautions that interest, influence, internal competition, and politics disrupt learning. Rule 9 suggests to hold NewCo accountable for learning and not results. Rule 10 is that companies can build a capacity for breakthrough growth through strategic innovation.

Ten years later…

As observed in the beginning, the book by Vijay and Chris was published in 2005. Today, in 2015, we witness a completely new dimension of innovation. Facebook founded in 2004, Twitter founded in 2006, WhatsApp founded in 2007 and Uber founded in 2009 as well as iPhone launched in 2007, which together represent a completely new dimension of start-up innovation bring into question some of the rules detailed in the book. Ten years later, there is now a clear recognition that strategic innovation, deploying disruptive technologies and disruptive processes, has already rewritten the rules of innovation. These start-ups which grew in less than a decade into mega phenomena (including the earlier ones such as Google and Amazon) came into being with no parentage or legacy and no prior brands or resources to leverage. They had nothing to forget and nothing to borrow from any established entity and everything to learn and everything to execute from their own inspiration. And, some of them have been dazzling successes.

Recognizing what a fresh mind and innovative thought can achieve, the start-up ecosystem has been attracting some of the largest investments ever. The start-up wave has clearly been raising in India, long seen as a country of professional preferences for the tried and tested as well as safe and secure options. While there are certain bubbled up expectations, there is no doubt that not only individual firms but also whole segments of industries (be it the Internet or Biologics) are being built on, and around, start-ups. The sentiment even among the large corporations seems to be to neither compete nor mimic start-up characteristics in their established ecosystems but instead let start-ups come up their own way and acquire them at an opportune time. We have two challenges now, relative to the base case with which Vijay and Chris started a decade ago. The first is that start-up firms need rules that help them make them successful. Secondly, both the large and start-up firms need helpful rules of engagement in the event of acquisition or merger.

The new ten rules

Ten years later, the rules of strategic innovation, according to the author of this blog post, need to be completely different. These are as follows:

Rule 1: Innovation does not necessarily come from new discovery; it would emerge from digital development of physical and biological processes. From email which digitized physical mail to Uber which digitized taxi hiring, digital face of innovation is evident. 

Rule 2: One has to only look around, but extremely perceptively, for the multiple opportunities that exist for strategic innovation. Every physical or biological activity will one day or the other ‘virtually’ mapped to a digital activity. Keeping a health track of biological parameters is just the beginning.

Rule 3: The route to innovation in the digital age is not necessarily perfection; once the core clicks, the rest easily falls into place. Twitter moving from mere text tweets to hashtags and vine is an example.

Rule 4: In the new age, collateral earning capability of a strategically innovative platform is as important as the fulfillment of core business need. Each product or service tends to be a purveyor of social networking. On-line newspapers are an example.

Rule 5: Strategic innovation may have several chapters but passion is the binding thread of all the chapters; from idea to delivery, through several chapters of execution. When passion starts ebbing, practicality, including sell-off, begins as can be seen from the increasing trend of early sell-out of start-up stakes.

Rule 6: Strategic innovation may be aided by establishment of R&D Centres and creation of Innovation Offices but it is nurtured only with an organization-wide culture of innovation. The inner DNA of an innovative organization condones failure as much as it seeks success.

Rule 7: Unlike established organizations where management’s primary responsibility is to resolve intra-organizational tensions, the primary responsibility of managements of experimentally innovative businesses is to resolve the tensions between themselves and their investors. The issues faced by certain start-ups are reflective of this.

Rule 8: Frontend digital innovation can come about only when there is someone to back it up with innovation in both back-office and shop floor. Without huge fulfillment centres and competitive products, for example, it is impossible to snap billions of deals!

Rule 9: Innovative organizations must be established and run almost as academic laboratories where the talent has no obsession other than bringing the products and services through successful pilots, betas and eventual commercialization.

Rule 10: Whether it is portfolio investors or established companies, the firms betting on strategic innovation should aim at more than one initiative of strategic innovation, for in respect of some, others could be ahead of them, and in respect of others, their own initiatives could be ahead of time. 

 

The rules reflect the reality that while digital is the new dimension of strategic innovation, digital alone cannot provide the complete solution. Classic corporate stuff, from physical brick and mortar to human aspirations and ambitions would be an integral part of strategically innovative firms.

Innovate to live or morph?

Logically, leadership of strategic innovation requires a talent landscape that covers more than conversion of innovative ideas to commercial fruition; it requires leadership that not only dwells deeper into the core of product or service innovation but also connects the dots of innovation across the business value chain. It is a high intensity leadership that finds not only inspired internal owners in the organization but also like-minded external sponsors amongst investors, vendors, buyers, bankers, regulators and so on. The greater the intensity of competition in the innovation space, the greater would be the need for a leadership bench that is actually deeper and broader than that exists solely in either the classic, established and brick and mortar businesses or the neo, emerging and digitally driven businesses.

It was noted in the beginning of the blog post that Vijay and Chris wrote their book in 2005 hoping to institutionalize a rule set of strategic innovation that helps firms reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The reality, just ten years later, is that highly innovative companies are a complex set of universe; some have such compelling power of universal innovation that they have become the new mega corporations with new rules of perpetuity while several others are not necessarily looking for life beyond the next decade, let alone beyond the average human life span. It is, however, becoming increasingly clear that established firms as well as the new mega corporations need smaller but sparkling innovative firms and entities in increasing measure to stay relevant in the digital age.

Given the amazing pace of innovation and the frenetic entrepreneurial zeal, it is not surprising that the book by Vijay and Chris finds itself overwhelmed in just a decade of its writing. It is certainly clear that any book on strategic innovation would need to be rewritten every two years!

Posted by Dr CB Rao on October 24, 2015 

A New Theory of Competitive Economic Forces: Supplementing Porter’s Aging Theory of Competitive Strategy

There is no doubt that Michael Porter’s Theory of Competitive Strategy (1980) is a landmark thesis in the domain of strategy, expressing the relationships between the firm and the environment as well as between the firms in an industry in a unique manner. Professor Porter identified five forces of competition, namely the threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers and intensity of industry rivalry. Porter’s Five Forces theory draws largely on the structure-conduct-performance theories of industrial economics. Porter held that the five competitive forces vary based on the nature of the industry, the state of the industry and the state of the firm. He advocated that firms could deploy three generic strategies, namely cost leadership, differentiation and niche, for them to derive sustainable competitive advantage over the competitor firms.

Michael Porter also held that definition of the industry in which a firm operates in, and the levels of entry and mobility barriers within and across the defined industries, also influence the competitive strategy of a firm. Strategies of integration and diversification within an industry are proposed to influence, and be influenced by, the five forces. In a manner of saying, Porter’s theory of competitive strategy represents a domain that is at the intersection of industrial structure and business performance. Pathbreaking though Porter’s theory has been, there are certain critical shortcomings, especially with reference to contemporary industrial development. The first shortcoming is in viewing buyers, suppliers and competitors as distinct unrelated entities. The second is in the proposition that the higher the entry barrier the higher is the value or profit potential. The third is that industry or environmental volatility is low and predictable enabling firms plan their competitive strategies based on structural designs. More importantly, it is not calibrated to address the contemporary economic realities.

New realities

The new realities are that buyers, suppliers and competitors have multiple overlaps. Firms in the same industry competing at the product level tend to compete at component or materials level. While they may look for sourcing advantages or cost savings, brand premiums or sales discounts and design dependencies or independencies, they also tend to be aligned to maximize overall throughput individually and collectively. The smart device industry is an example with multiple layers of collaboration at component level amidst competition at product level.  Secondly, entry barriers need not necessarily represent value building opportunity. Steel industry may have the highest investment intensity and hence the highest entry barriers but typically offers meagre returns relative to low investment industries such as FMCG. The third is that industry structures are becoming increasingly impacted by economic trends, even as economic trends are getting increasingly governed by commodity and liquidity cycles as well as cross-border investments and exchange rate regimes are becoming increasingly volatile, impacting stability of strategies.  

The new realities could also combine two or more competitive forces into one and accentuate their combined impact. For example, new firms could enter the industry with substitute products or services (not just imitator products) thus increasing the competitive intensity more than proportionately. Buyers may start dumping their products in the exchange or used product schemes thus making firms more of substitutional sellers rather than incremental sellers. The intensity of industry rivalry could be more due to exit barriers (absence of bankruptcy provisions) rather than due to low entry barriers. Commodity and other economic cycles may mean that strategies such as cost leadership at design or manufacturing level may be differently impacted from time to time. An automotive design strategy developed at great cost for maximal fuel economy may become less powerful in a protracted phase of extremely cheap oil prices.

Macro versus micro

For Porter, industry-specific and firm mediated micro-environment provided for sharper articulation of corporate and business strategies, compared to woolly SWOT analyses that were in fashion in the 1960’s and 1970’s.  The issue, therefore, is whether industry level micro-environment as proposed by Porter in the 1980s or economy level macro-environment as is now emerging in the 2010s is more appropriate for formulating competitive strategy. The way the global economy is anticipative of US Fed rate hike or the entire Indian industry is exultant about RBI rate cut does indicate that macroeconomic factors do have an increasingly overarching influence these days. Similarly, the way the slowdown in China causes global demand tremors and stock market blues or how a taxation issue can fray or calm the nerves of portfolio investors in India are also proofs of global economic and industrial interconnectivity.

Industries and firms are impacted not merely by firm and industry specific competitive forces but also national and international economic forces. IPOs as well as follow-on offerings and stake sales by Public Sector Undertakings (PSUs) in India, for example, are affected by dips in Indian stock market sentiments which are, in turn, caused by dips in global stock markets.  Economic liberalization may have freed industrial development from public policy (notwithstanding residual macro regulations) but industrial development is impacted more than ever by national and international economic factors. There is probably no way to decouple Indian economy and industry from such vagaries but at least there must be a model that focuses the attention of firms and industries on such competitive economic forces. This blog post proposes a theory of five competitive economic forces as an adjunct to Porter’s theory of competitive strategy. 

Five Economic forces

Five economic forces impact industrial structure and performance. The first is the threat of inflation. The second is the risk of global capital flows. The third is the bargaining power of national technologies. The fourth is the bargaining power of national markets. The fifth is the intensity of national rivalry. Each of these has an impact on industry level competitive strategy. They also dictate a preferred drift in the generic competitive strategies. Competitive threat of inflation, for example, impacts the bargaining power of suppliers as well as that of buyers. It also supports cost leadership as a preferred generic competitive strategy. The competitive force of global flows influences market capitalization levels on bourses, and brings in or drives out more risk capital for expansion and diversification. Unlimited capital flows take the focus away from efficiency and promote differentiation and niche as generic competitive strategies.

Nations play a major role in licensing technologies, and generate major bargaining power over these. This is countered in part by the bargaining power of national markets. This interplay is evident usually in military technologies (eg., Rafale aircraft deal between France and India) but has extended to high end civilian technologies too (eg., China’s high speed rail technology for US to connect Los Angeles and Los Vegas). The latter at industry level was evident when major technology firms of US vied each with each other during Prime Minister Narendra Modi’s visit to US West Coast to invest and supply technologies for Indian markets. When nations compete to participate in emerging markets, rivalry is heightened, but to the benefit of the local industry. Governments can leverage such rivalry for national benefit. India, for example, can benefit from generating international interest and rivalry for building bullet train infrastructure or new capital cities. A firm, before applying Porter’s Five Forces Theory, must, therefore, apply the Five Economic Forces Theory to establish the correct perspectives for firm level competitive strategic analysis.   

Model within model

This blog post has proposed, probably for the first time in the history of strategic management, a theory of competitive economic forces as an overarching umbrella under which Porter’s theory of competitive strategy needs to be recalibrated. The big difference between the national economic forces and the industrial competitive forces is that the former are more volatile and unpredictable, and are additionally susceptible to public policy and governmental actions. While industrial competitive forces are more predictable they are swayed by how the economic policy framework changes. Some research is clearly needed to understand if and how the economic forces model can be linked to the industrial forces model. One way could be to choose a time horizon that starts with a major economic inflexion point and model the industrial forces until the expected next inflection point, and develop a calibrated industry and firm level model for the target timeframe. The author suggests that academia and practitioners of management, as well as economists and strategists must collaborate to assess the relevance and coupling of both these models; the new economic and the established industrial!   

For India, at this point a combination of competitive economic forces sets up the five force economic model, the forces being decelerating inflation (as is presently evident), declining portfolio investments (due to the much anticipated Fed rate hike), dependence foreign technologies (for next generation infrastructure), consumerisation of markets (with increased purchasing power) and increasing national rivalry to enter or expand in India (virtually every developed country desiring to have a share of India). Such an analytical framework sets the tone for recalibrating the basic Porter model. In the ultimate analysis, the issue is not one of choosing between a micro or macro model. Macro model is the missing piece in current strategy framework and must be provided for, as suggested herein. In addition, Porter’s micro model continues to be relevant but with two caveats. Firstly, industrial play is not only about forces of completion; it should be equally about forces of collaboration. Secondly, the five forces, and the entities causing them, are not independent of each other but could have overlaps, and be accentuated or attenuated based on overlaps.

Posted by Dr CB Rao on October 3, 2015

Innovator Competitive Strategies: The APPEXP Framework for Competitive Advantage

Michael Porter postulated, in 1980, three generic competitive strategies that are appropriate for most industries and their several phases of evolution. These are cost leadership, differentiation and niche (or focus). These are both intuitively and practically elegant. Any firm that has cost leadership can ensure price competitiveness or earnings superiority, or a combination thereof with certain inter se trade-offs. A firm that follows differentiation can achieve a superior market and price position based on a set of differentiated features. A firm that follows a niche strategy seeks to adopt narrow product-market strategies that are unique to the firm. Some firms are successful in adopting a mix of the three strategies to eventually emerge as industry leaders. The three generic competitive strategies are yet to be dwarfed by any other superior set although over thirty five years have elapsed from the time the framework was first postulated by Porter.

A question may arise if the three generic strategies are relevant for companies engaged totally in innovative products or services. By innovative products or services we may mean products or services that fulfil a new use (or application) and/or fulfil an existing use (or application) in a novel manner. From Sony Walkman to Apple iPad and from diagnostic imaging to new molecular entities, innovator companies fulfil the above two criteria through their products and/or services. That said, firms that deliver an existing product or service through an innovative way of delivery may not be considered innovator firms; for example, firms engaged in transportation of a product utilizing trucks tracked by RFID devices may not qualify as innovator firms although they have struck upon a somewhat inventive component in their service value chain. Regardless of innovation levels, innovator firms also require the three fundamental generic competitive strategies.

Basic purpose

Many times innovation gives a strong entry into, and a significant time-reprieve in, the marketplace, and even provide a monopoly, but only so long as a strong follower product or service does not get introduced. The three generic competitive strategies help the firms develop brand equity at product or service level and secure staying power at firm level. Without cost leadership, innovators could get priced out when new competitors enter the market with lower cost of products. Even if such competition takes time, cost leadership builds a reservoir of accumulated profits to invest aggressively in new product innovation. With differentiation on certain specific attributes, innovators are able to build brand equity which provides a strong defence against market erosion. The association of Toyota with quality or Mercedes Benz with safety, for example, is reflective of how brand equity accumulates over time.  

 

Niche or focus strategy is particularly relevant for small firms. This strategy is well deployed by small firms in drug discovery area (focusing on just one target or at most on one therapeutic area) and in component area (focusing on just one component or at most on one system). Clearly, individually or together the generic competitive strategies are a vital adjunct to innovator firms even though innovation provides them with the first mover and monopoly advantages. That said, innovator firms would do well to have certain strategies that are unique to innovator firms, and which could work in a synergistic manner with the three generic competitive strategies. This blog post proposes three innovator competitive strategies that would be foundation strategies on which generic competitive strategies can be superimposed or worked as adjuncts. Prior to that we may review why R&D itself is not being seen as the sole innovator strategy.

Revisiting R&D

Clearly, Research & Development (R&D) is recognized universally as the foundation for new product development. A clear R&D roadmap and a robust R&D budget have always been seen as the drivers of innovation in a firm. It is, in fact, expected that the level of R&D budget both in absolute numbers and as percentage of sales determines the difference between an innovation-led industry segment and a generic industry segment. In each category as well, the R&D focus determines the relative inter-firm scaling in innovation. There are firms that still stand by R&D as the engine of organic growth while increasing number of firms are opportunistic about inorganically acquired R&D. It may, therefore, be questioned as to why anything other than R&D leadership is required as an innovator competitive strategy.

The answer lies in the fact that over a period of time, R&D has also become a “mechanical” or routine function rather than the kind of dynamic innovation hotbed that the domain is expected to be. It is seen as a product renewal domain rather than product redefinition domain. From time to time, product re-definitions do occur but the overall theme of R&D in a great majority of companies is to find a new product for the same application or to make the existing product better. In a recent McKinsey Quarterly (April 2015), it was postulated that innovation is indeed difficult for established companies and suggested eight essentials for innovation: Aspire, Choose, Discover, Evolve, Accelerate, Scale, Extend, and Mobilize. The first four attributes are considered to be strategic and creative elements and the balance four organizational and delivery components of an innovation operating system of a firm. The author of this blogpost feels that these eight essentials are enablers or practices but not innovator competitive strategies like the Porter’s generic competitive strategies.

Three strategies

As with the generic competitive strategies, the innovator strategies must prescribe end-goals which are not project-specific, project-dependent and also are not firm-specific or firm-dependent; rather the goals should be somewhat universal strategies of innovation that provide a sustainable competitive position for an innovator firm. These are Application Leadership, Experience Leadership and Application-Experience Hybrid. These are discussed below.

Application leadership

Every product is designed to meet an application. Password, for example, is a product to ensure security for the user of either a computer or a safe. Depending on the product, passwords have been taking more user-friendly but more secure forms. Patterns and colours have been the first step. Fingerprint scanner has been the next step. Iris scanner and face reader are the more recent ones. These developments are done more easily on a smartphone because the smartphone has a processor as well as a camera. If, for example, the same functionalities (of processor, camera and communicator) are brought to the password mechanism of a safe, an entirely new safety system of not only multiple password possibilities but also recording all those who attempt to open the safe and communicating the photo identity of those who break the safe would be possible. It would be a game changer, at least for the domestic or office safe industry.

Application leadership requires a disruptive approach (in a positive sense of making things better, of course) to how user functions or product functions are to be performed. These usually require aspirations that are far beyond the obvious (like a flying city car, for example). Such ideas require breakthrough or disruptive technologies. In the example of flying car aspiration, this requires a breakthrough combination of automotive and aeronautic as well as electronic and communication  technologies like mini-rocket engine for vertical thrust, mini-jet engine for flying and an on-board computer which controls these two engines alongside the traditional gasoline or diesel engine and the navigation systems thereof. Reverting to the home or office safe example, similar disruptive engineering is required. Firms committed to application leadership would be having many laboratories dedicated to discovering and developing fundamentally new technologies, and fundamentally new ways of integrating them.

Experience Leadership

In contrast to application leadership which reengineers the usage-product mix completely, experience leadership focuses more on a product meeting higher levels of sensory satisfaction. The touch keyboard is an example of transitioning from mechanical to electro-mechanical and electronic, resistive and capacitive. Capacitive touchscreens have brought in a new level of touch-feel to screens in smartphones and tablets. The next experience change would be when 3D touchscreen keyboards are commercialized. The virtually silent automotive engine, the passenger seats that reconfigure optimally to a driver body profile, voice communicators (such as Siri of iPhone or Cortana of Windows phone), the visual graphics of a high technology movie are all examples of experience leadership. The movie blockbusters, in fact, are an excellent example of experience leadership, bringing superlative experiences onto conventional tales.

Experience leadership requires a combination of product and process approaches to take user experiences to a different level. Often, novel material and precision manufacturing technologies have to be used together to conceptualize and provide an elevated level of user experience. Certain firms (like Apple) focus on experience leadership to achieve market dominance (for example, iPad was not the first tablet to be made but became the leader with the experience leadership approach of Apple). Experience leadership typically focuses on the worst case situation or the most demanding situation and develops the products to meet such extreme needs. Low floor buses which are designed to let even the old and disabled commuters enter the buses most comfortably is an example of design perfection for the most delicate need. At the other extreme, a rugged all-terrain sports utility vehicle caters to the most punishing terrains while insulating the passengers from excessive trauma.

Application-experience hybrid

The application-experience hybrid innovation is a niche model relevant for situations where markets are segmented or resources are varied. It could vary from a resource optimized situation to a resource rich situation. Unlike the earlier two models, a resource optimized application-experience model would not be securing reputation dominance but could enable higher market coverage, albeit with lower margins. Cadbury’s chocolate range to meet diverse needs is an attempt to develop a hybrid of different applications and different experience levels. To be really effective, however, there must be distinctive and differentiated technologies to calibrate the application and experience dimensions. Full-line firms are usually better positioned to achieve this hybrid while niche firms would need to choose their competencies carefully.

One of the most interesting examples of application-experience hybrid can be found in the watch industry where the technologies of dial and movement and the design elements of form factors and display factors enable a grid of application-experience hybrids. It is interesting, for example, how Citizen focuses on ‘wear and forget’ super-light perpetual movement watches while any typical Swiss watch focuses on bold designs that need as well as seek attention. The success of Apple watch, in this context, would depend on bringing to the user a high level of novelty in both application (communication and healthcare) and experience (real-time and selective), packaged in high standards to which the watches are typically made. The hybrid model requires a much greater perfecting and fusion of new technologies than the application leadership or experience leadership would individually suggest.

Innovation mind-set  

Innovator competitive strategies require a leadership mind-set, both at firm level and functional level, to understand and implement innovation enablers. The organizational DNA must encourage aspirations to make transformational changes in product-market configurations, expressing of the aspirations through multiple ideas, analysis, evaluation and prioritisation of ideas, and development of implementation plans. It must also have the resource framework to work on such action plans over long periods of time, retaining the ability to be nimble and flexible in the face of changes in technology and markets. Innovation requires creativity and steadfastness but openness for review and integration of new pathways. 

Innovator competitive strategies require collaboration between agencies. Low floor buses would be useless if civic authorities do not construct bus shelters and pathways that are friendly to the differently abled. Luxurious aircraft would provide little overall convenience in airports that do not have aerobridges and have chaotic inter-aircraft transfer paths. The best of ultra-high definition televisions would not provide the viewing pleasure without commensurate transmission services. Oftentimes, the dilemma would be who should be the driver of innovation – the product manufacturer or the service provider? While there is no clear cut answer, as long as leaders in vantage positions think and act by and for innovation, eventually, the total consumer value chain would benefit. Innovation works best in an innovation-driving organizational operating system nurtured by an innovation-inspired leadership mind-set.  

Posted by Dr CB Rao on May 2, 2015