Sunday, January 23, 2011

Five Great Indian Leaders: One Singular Leadership Ethic

In my long professional career of over thirty six years (from 1974 to date), I was fortunate to work with five great corporate leaders of India whose skills, attributes and personalities define sublime leadership in all its facets. A study of their leadership styles brings out that the Indian leadership model is clearly more of substance than of style. If India is now acknowledged to be in the vanguard of global industrialization, and if the world has stood up today to recognize that there exists a uniquely Indian way of management, such acknowledgement and recognition is in no small measure due to the leadership strengths that exist in India. The five leaders who are discussed in this blog post are archetypes of the vast community of the Indian leadership that is uniquely Indian, yet globally competitive.

The Indian leadership style is highly competency centric, relentlessly growth focused, steadfastly employee oriented, significantly export oriented, and uncompromisingly hard working. Indian leaders, whether they have their roots in enterprises belonging to the government owned public sector or family and people owned private sector, and whether they have entrepreneurial moorings or professional background reflect the above mentioned five leadership essentials. Each of these five facets, especially the facets of competencies and growth orientation have also variations that are contextual to the individual leadership backgrounds and the distinctive personalities. The clear common thread, however, is one of aggressive promise and authentic delivery, despite the challenges posed by a continuously dynamic macroeconomic and regulatory environment of a developing resource-scarce economy.

Given the high nationalistic orientation and professional pride that the Indian leaders possess, and the great opportunity for India to leapfrog into the innovation space while continuing to be the back office and workshop for the future, the Indian leadership passion never ebbs. The discussion of the five leadership examples brings out clearly that the Indian leadership model never takes it easy. As a matter of fact, each of the leaders discussed in this blog post even today actively contributes to the Indian leadership firmament, never resting on the laurels. It is fascinating to see how the Indian leadership recharges its batteries through work, and only more work, setting an inspirational model to the executives and managers across the organizations. In the earlier dogmatic socialistic era of the 1950s to 1980s as well as the recent pragmatic liberalization period of the 1990s and 2000s, the Indian leadership model has evolved in a consistently positive manner.

Though it is daunting to capture the multifarious leadership tenets of these five great leaders, and is even more difficult to describe adequately the several nuances of my association with them in a blog post I would, nevertheless, attempt in the chronological order of my getting in touch with them. The evocative titles that I have given to each of the models perhaps bring out just one facet each of the multiple leadership capabilities that the five great leaders possess.

Nationalistic rationalism

When the Government of India decided in the mid-1970s to bring into India a two-wheeler scooter for the common man in competition with the well-entrenched Vespa and Lambreatta models of dated designs, and that too through the transplantation of Innocenti production plant from Italy to India, it turned to Mr S Soundararajan (“SS”) who was heading the State owned Garden Reach Shipbuilders & Engineers Limited. SS, a protégé of the then Defense Minister VK Krishna Menon, a mercurial leader in his own right, had by then built a formidable reputation for turning around the shipbuilding firm which proved to be a waterloo for many a chief executive. SS, as the chairman & managing director of the new two-wheeler company, christened Scooters India Limited, brought a rare nationalism to the venture. His faith in Indian engineers was amazing; he refused to engage any Italian engineer in connection with the transplantation and indigenization efforts, and instead relied upon the Indian engineers to manage technology transfer, knowledge assimilation, plant commissioning and commercial launch. He had also a unique faith in the young graduate engineers of India, and extended bold invitations to them to set up a string of scooter retail centers and a clutch of component manufacturing ancillary units in India to support the new two-wheeler operations. At a time when import of components ruled roost in the Indian industrial scene and indigenization was considered a multi-year Himalayan task, SS motivated and managed the launch of the first product, the 150 cc Vijai scooter of the latest Innocenti vintage, in a completely indigenized state. While “India Can” is a fashionable axiom today it is to the credit of SS that he revolutionized Indian industrial thinking for true self-reliance decades ago. SS emerged in that context as an icon of nationalistic industrial pride in India.

The disaggregated components of SS’s leadership model make a fascinating account. A socialistic work ethic marked by equality combined with a capitalistic drive for efficiency characterized his unique leadership model. His egalitarian work ethic was characterized by a flat organization in Scooters India long before the concept became popular. He was completely socialistic, rubbing shoulders with the common citizens, whether on official or personal travel. It was all, however, not merely emotional or inspirational leadership with SS. A razor sharp intellect and an overwhelming passion for knowledge characterized his leadership model. Though a finance professional (SS was an Indian Audit and Accounts Service, IAAS, professional), he had an outstanding grasp of engineering matters, and personally solved many engineering and manufacturing problems. A photographic memory, an amazing sense of recall, strong analytical skills, a ruthless task focus, an unforgiving attitude towards slippages, a punishing approach towards slipshod work and a dare-devil approach to industrial risk-taking made SS a much respected as well as feared leader. He was a strategic visionary to the core too. Quite apart from the strategic marketing and vendor development approaches, his model of centralized production of aggregates and components of the scooter and decentralized assembly of the finished product in various States through independent licensee operations reflected his strategic thinking.

I was the Special Assistant to S Soundararajan between 1974 and 1976, following my stints in State Bank of India, and Tata Motors (then, Telco). My two years with him gave a lifetime of valuable experience to me, from shop floor studies to strategic licensee affairs; and from employee motivation to enterprise management. The principle of end-to-end thinking in the solution of operational and strategic problems, which became my forte in subsequent years, was inspired by his unique thinking approach. He challenged me to raise the bar of performance continuously, placed me resolutely in the zone of perfection, taught me the art of standing up to stalwarts, instilled in me the work ethic of selfless service and developed the rare attribute of thinking and acting strategically and tactically simultaneously. Whether regular shop floor production planning and inventory control or one-time savings in oil and energy consumption through optimized paint shop operations, SS provided the free play for demonstrating my engineering and analytical skills. That he saw a future leader in me as early as in the mid-1970s, despite my soft spoken and self effacing personality, is a great tribute to his ability to identify talent and challenge it to achieve greater heights. Clearly, S Soundararajan is an Indian leader par excellence who inspired others with unparalleled competency, irrepressible passion, and unquestionable ethics.

Focused specialization

When British Leyland plc decided in the late 1970s to steer the management and operations of its Indian subsidiary, Ashok Leyland Limited (established initially in 1948 as Ashok Motors to make Austin cars) into Indian hands, the parent corporation eventually focused on Mr RJ Shahaney, the then chairman & managing director, Jessop & Co a state-owned leading engineering firm for the onerous task. It was a decision well validated by the thrust of development and growth that RJS brought to the affairs of Ashok Leyland. RJ Shahaney, popularly called ”RJS” or “Ram Shahaney”, has been the long time chairman & managing director, and is currently the chairman emeritus of Ashok Leyland. He has also been chairman or director of many other Hinduja Group companies. RJS has been a strong believer in technological modernization and plant infrastructure development as the key drivers of corporate growth. Under his stewardship, AL grew manifold in scale and scope into a multi-site truck & bus behemoth in India, consistently optimizing fuel efficiency and load carrying capability of its products, and assimilating both Japanese and European concepts of manufacture. In fact, achievement of a singularity of purpose and delivery from a plurality of ownership, regulatory and environmental conditions characterizes RJS’s unique leadership strength. RJS was especially adept at deploying technology as a strategic driver of competitive advantage. He had an uncanny capability of harmonizing the best-in-class technologies of each aggregate of a commercial vehicle to develop a hybrid vehicle that was easily the best-in-class for India. A truck or bus engineered from a synthesized fusion of Japanese Hino diesel engine, German ZF synchromesh transmission, American Rockwell axles and British Leyland cabs is a tribute to his technological wizardry. Simultaneously, he also drove personally the concepts of indigenous vehicle design and manufacture to execution.

Undoubtedly, RJS ranks among the best in terms of leadership capabilities in the Indian industry. His crystal-clear thinking, laser-sharp focus, 360 vision, photographic memory, conceptual and analytical mastery and networking finesse are unmatched. He was extremely task focused and did not pardon delays and unjustifiable failures. Though he was an engineer by profession, his grasp of, and grip over business, financial and legal matters was exceptional. RJS was clearly a leaders’ leader. Several industry stalwarts worked under him at AL to enrich the management team at AL. RJS was also a champion of internal talent development. The clarity with which he identified R Seshasayee in the 1980s as the future leader of AL, enabled the space that could match Sesh’s extraordinary capabilities, and the steadfastness with which he supported Sesh as his successor were indeed remarkable.

RJS was a person not only of great professional eminence but also outstanding personal ethics. Despite the several environmental changes and market vicissitudes that AL faced from time to time, he held on to his professional beliefs and personal values and saw to it that no genuine platform or idea was ever mothballed. RJS’s passion for technology and scale is legendary. Technological modernization and infrastructure expansion at AL that were relentlessly pursued by him from the 1980s positioned AL as an undisputed leader in the Indian truck and bus industry. Long before the Japanese automobile industry took root in India, the innovative manner in which RJS led the absorption of the Japanese methodologies and techniques in AL’s engine assembly and manufacturing lines was exceptional. From multi-axle vehicles, tractor trailers and defense vehicles to Hino diesel engines, synchromesh gearboxes and ergonomic cabs, RJS was a pioneer of technological modernization at AL. After British Leyland sold its majority stake in Ashok Leyland to a joint venture of Hinduja Group and Iveco, RJS worked with the Hinduja family to drive the Group’s diversification moves, which he did as effortlessly as he steered the wheels of AL in the home turf of automobiles.

In my long professional career of over 36 years, my association with RJS has probably been the longest and the most profound. My first interaction with him was when I floated a note in 1982 on what I thought was an adventurous volume and geographic expansion that AL undertook in the 1980s under his stewardship. That was the time RJS was held in extreme awe by the AL organization that was conservatively molded by the previous Indo-British Management. It was a great tribute to his objectivity and equanimity that he not only took the critically evaluative tone of my note in his stride but also identified me to be his undeclared protégé and deputy in several of his strategic business initiatives and technological upgrades that he led at AL. My relationship with RJS was one of implicit mentor-mentee. He influenced talent development both by precept and practice and was a great role model. It was a pleasure and challenge to watch him dissect and analyze issues as well as numbers, and come up with brilliant solutions, whether in day to day internal corporate management or in external strategic negotiations. The support he gave for my Ph.D. program in industrial management at the Indian Institute of Technology Madras will always be cherished by me. Given the vast canvas of technological and business initiatives that RJS led at AL, it was a pleasure and privilege for me to be a part of all such developments with him.

World-class erudition

When Mr RJ Shahaney was like a huge banyan tree dominating the leadership landscape in Ashok Leyland, it was inconceivable that there would be an opportunity for another colossus to grow with the company to a leadership position. Mr R Seshasayee (“RS” or “Sesh” as popularly called) joined the company in the late 1970s as its internal audit manager from Hindustan Lever, almost at the same time as RJS joined the company as its first Indian managing director, and rose rapidly in the company to become the second Indian managing director in 1997. It required an extraordinary skill-set on the part of RS to grow under the never receding umbrella of RJS, with a vibrantly different personality and sparklingly differentiated skill-set. RS was the first consummate business leader from the conservative Southern India to make his mark felt as a pan-Indian leader. He conducted the affairs of India’s apex industrial association, Confederation of Indian Industry (CII) as effortlessly as he managed the affairs of the automobile giant. His unparalleled erudition that matches the best of Harvard, Wharton and Stanford as well as IIT and IIM alumni brings a rare universality and global sheen to his leadership stature. RS, despite his financial academic and professional background, instilled in himself a fine grasp of all things technical. His first internal audit study in AL which focused on engineering optimization and cost compression of carburizing in the huge heat treatment furnaces of AL was an incontrovertible proof of his engineering grasp, financial analysis and creative approach. There was no looking back for him thereafter. Interestingly, Sesh’s interests and passion extended beyond corporate matters. He is a connoisseur of arts and music, and a fine vocalist himself.

When RJS made way for RS as the managing director in AL it was a latent question in everyone’s mind as to how any other leadership model could be effective, let alone be different at AL. RS proved that a true leader is one who creates his own shoes rather than one who tries to fit into another leader’s shoes. Without in any manner diluting the technological ethos institutionalized by RJS, RS added newer technological nuances, redefined competitive economics of design and manufacture, and triggered the development of a global product range. An outstanding and passionate speaker, out-of-the-box and lateral thinker, incisive and intricate analyst and no less important an empathetic and enabling people’s leader, RS brought a global recognition to the Indian industry. He has been responsible, leading from the forefront, for building a youthful organization at AL, bringing in winds of change and unleashing energies of creativity. Yet, the organization needs more of his strategic services, as exemplified his being elevated as the executive vice chairman of the company, to lead the strategic drive as a top-ranking global automobile company, in line with the vision of the new chairman of Ashok Leyland, Mr Dheeraj Hinduja.

I did not have the formal opportunity to work directly with RS as part of his organization all through my two-decade career in AL, except for my last year but my association and rapport with RS were perhaps more intense and synergistic than what any of his direct reports would have had. Whenever he embarked on any major conceptual exercise or business initiative, he would invariably invite me to thought-partner him, and provide supplemental thoughts as well as counterpoints to his views. The several theme sessions we had as part of the corporate planning exercises were particularly exhilarating from an intellectual point of view. His openness to seek an alternative point of view prior to solidifying his approach has been a strong point of his participatory style of leadership. His ability to channel the finance function as a business enabler at one level and as a prudential gatekeeper at another level was instructive to me as I went through the integrated corporate planning exercises with him. RS was both an inspiration and challenge for me; inspiration because he demonstrated how communication is a key leadership skill and challenge because to be an effective corporate planner after him required the best of one’s strategic skills.

Passionate entrepreneurialism

Nations derive sustainable competitive advantage through the entrepreneurial passion of their professionals. Mr K Raghavendra Rao, founder-CEO, and currently the chairman & managing director of Orchid Chemicals & Pharmaceuticals Ltd (“Orchid”), epitomizes this essential entrepreneurial passion of India. K Raghavendra Rao (“KRR” or “Raghavendra” as is popularly called) set out to establish in 1992, almost simultaneous with India’s liberalization drive, Orchid as his entrepreneurial venture and grow it into a world-class, globally recognized integrated pharmaceutical enterprise. KRR, currently the chairman and managing director of Orchid, is unlike any other Indian entrepreneur. A true first generation entrepreneur hailing from a modest, conservative but disciplined middle class background he attained the stature of industrial leader by sharp intellect and sheer passion. Orchid represented a more challenging entrepreneurial journey than any other contemporary or prior era entrepreneurial venture. Unlike other ventures, Orchid did not have the benefits of inflection of technology, wave of outsourcing, size of domestic market, lack of entry barriers, and/or founder’s core technologies which drove the inception and growth of many an entrepreneurial enterprise in India or abroad. On the other hand, the Orchid model of excelling in the established and highly crowded Indian pharmaceutical space militated against the easy way. Though focusing on active pharmaceutical ingredients (APIs) and finished dosage forms (formulations) he built a business around indigenous process technology, global niche, scale and scope, and operational efficiency in the chosen product space. Starting with an initial focus on APIs for less regulated markets, KRR rapidly expanded the scale and scope of Orchid, progressively integrating into regulated generics markets and diversifying into innovative drug discovery. Building a US$ 3 million start-up into a US$ 500 million asset and 4000 strong employee enterprise, with a much envied status of becoming the 15th largest company in just 15 years from inception in an industry of several hundred Indian and MNC subsidiary companies, KRR demonstrated what Indian entrepreneurial gumption and passion could achieve.

KRR has many attributes that a great leader needs to have, from conceptual and analytical skills to strategic and operational capabilities and from a flair for communication and motivation to a penchant for control and coordination. More than anything else, however, his ability to connect with his stakeholders, from employees to investors, and from technology vendors to marketing partners in an endearing manner is remarkable. KRR passionately believed in establishing world-class facilities that generate employment and wealth for India. His commitment to environmental friendliness, as exemplified by his multi-million dollar investments to make Orchid facilities zero-discharge, place him in an entirely different class of altruistic entrepreneurs. In KRR, the oriental old world simplicity combines with contemporary new age dexterity to make him a charming, charismatic and dynamic leader, with a universal appeal. He is perhaps the most number-savvy leader in our midst, with a computer like numerical memorization and processing capability. And true to the already established thread of leadership in this blog post, despite being a finance and business management professional KRR has an amazing grasp over chemistry and pharmaceutics as well as engineering domains.

It was my privilege and pleasure to thought- and execution- partner KRR, whom I knew from my early Leyland days (from 1982 to be exact), on his entrepreneurial journey. After setting up pharmaceutical, steel, hotel and garment facilities and businesses in the rather industrially undeveloped areas of the Middle East, KRR set foot in India in April 1992 to set up his entrepreneurial venture with a modest seed capital of US$ 125,000. My leadership journey with KRR, built on the strong foundations of professional respect and personal rapport that we shared from the Leyland days, started first as an independent director from Orchid’s inception in 1992 to 1998 and later as its whole-time deputy managing director from 1998 to 2010. My association proves the point that a great leader has the uncanny ability to give the requisite space to peers and colleagues who can deliver value for his enterprise. He gave me the most challenging opportunity of conceptualizing and incubating all the diversification initiatives of Orchid from domestic formulations to global generics and from biotechnology to drug discovery. His unflinching faith in my strategic and negotiating capabilities helped me to structure several industry-leading strategic collaborations and alliances for Orchid. KRR’s ability to empower people to establish and grow initiatives, and provide value propositions for talented leaders eventually became Orchid’s core competence of attracting some of the best talent in the pharmaceutical industry to its fold. As part of this, KRR laid enormous faith in the competence of the Indian scientists, technologists and leaders to build a world-class infrastructure and global enterprise by themselves without any consultants. Such was the return commitment from his team that even in the most trying times of takeover threats, global economic meltdown and company-specific financial stringency, not a single senior team member left for greener pastures. My role, facilitated by KRR, in the strategic and structural transformation of Orchid remains undoubtedly the high point of my long career.

Technological virtuosity

Virtuosity, which reflects an almost inimitable and perfect skill that a true expert possesses, is not everyone’s forte. Virtuous masters are often seen more as domain specialists rather than business leaders. Mr RS Prasad, presently co-founder, and managing director of Suven Nishtaa Pharmaceuticals Private Limited is a virtuoso of pharmaceutical science and technology, turned into a passionate business leader. RS Prasad, popularly called “RSP”, is widely credited as the creator of some of the finest pharmaceutical research and manufacturing complexes in various corporations in India. He is also considered the pivotal force behind the generics successes of select Indian pharmaceutical firms, from the mid-1990s till date. An unmatched understanding of pharmaceutical science and technology coupled with a natural ability to develop new science and technology based on his own creative logic molded RSP into a unique techno-business leader. A fiery disposition towards exactitude and a friendly orientation to develop talent made RSP a rare genius who developed hundreds of pharmaceutical leaders in India, several of them now doing great stints in several overseas corporations. His talent development strategy is a simple three component strategy which is highly effective; he seeks accountability from his team members to deliver results, imparts deep knowledge, in terms of both know-how and know-why, and builds a community of professionals who share the vision of virtuosity. His vision is one of “doing right things and doing things rights” which alone, according to him, brings in sustainable results in the long term.

RSP proves a counter-theory that grassroots technical specialists can excel equally as high level strategic thinkers. He also establishes a framework that right-minded professionals would work, and choose to work again, with even the most exacting and often authoritarian taskmasters like him. The reason is that with RSP only objectivity and logic drive his fury. His team members appreciate that his passion to transfer knowledge to them, albeit through diligent working charters, ultimately empowers them. RSP characterizes a development model which abhors mediocrity at the peer and superior levels but accepts knowledge handicaps at lower levels with a view to make better professionals of his team members. Uncompromising integrity at both personal and professional levels, unflinching commitment to Indian science and technology, and unceasing quest for new knowledge and practice make RSP a true role model for the pharmaceutical industry. RSP, with his contributions to building of US FDA approved world-class pharmaceutical facilities, development of several products with Paragraph IV, first-to-file status for the US market, and shaping of a talent-driven quality oriented organization, is widely credited as the technological and scientific power behind the pioneering generics thrust of Dr Reddy’s Laboratories, which catapulted the company into the global league.

Supported by KRR’s passion to get the best of technologists into Orchid, I was instrumental in inducting RSP into Orchid as the head of regulated generics business initially. As Orchid under KRR set out to grow into the complex business of setting up world-class aseptic formulations facilities for regulated markets, RSP emerged verily as the man of the moment. It was a pleasure to watch him conceptualize any objective in terms of a total resource plan, laying out sequential and parallel activity plans and schedules, integrating quality and regulatory compliance in each of the activities. We shared a belief that my business creativity and his technological virtuosity could create unbeatable value for the corporation. In my long conversations with RSP I could challenge him, and also get challenged, in the process expanding our horizons of knowledge. This process gave me a unique opportunity to understand his capabilities, conceptualize his leadership model and also make suggestions for his becoming an even more effective leader. Dogged as he was in his beliefs, committed as he was to his credos and immersed as he was in his pursuit of excellence people considered it a challenge to prompt him to look at a different point of view. On the other hand, it was to his credit that he accepted some of the most strident feedback from me or possibly anyone else, as long as it was logical. If a model of perfect planning and execution, marked by the highest standards of quality and self-reliance, ever needed to be defined, RSP exemplified it.

Indian leadership and global marksmanship

The account of the five leaders points out certain attributes that are common amongst the great leaders of India. Firstly, it is the competency basket that calibrates a leader’s stature in India. While a leader may or may not be accepted for his or her authority, the leader will certainly be respected for his or her intellect in India. The competencies that are reflected in India’s sterling leaders include not only higher order intellectual abilities such as the depth and breadth of knowledge, impeccable memory, and sharp thinking but also unique success factors such as visualization beyond the obvious, conceptualization of complex issues and incisive analysis of data and information. Secondly, certain unique factors emerge as defining aspects of the leadership personality, embellishing the commonly shared competency basket in a manner unique to each leader. These could be could be nationalistic fervor, networking finesse, collaborative mindset, export propensity, perfectionist quest, expansive erudition, influential communication, entrepreneurial spirit and technological excellence. Thirdly, all successful leaders are also inspiring role models who demonstrate their grasp over their related as well as unrelated domains and also impart knowledge to others by precept and practice. Fourthly, they are aggressive taskmasters who seek accountability and clarify responsibility, in the process punishing inefficiency and rewarding performance. Fifthly, all of them have an unflinching faith in the ability of Indian scientists, technologists and managers to deliver, and within that faith, a distinct reliance on the young and the intelligent to rise to overcome all challenges. Most importantly, great leaders also happen to be leaders’ leaders and/or people’s leaders who succeed in building great leadership teams and organizations that deliver sustainable performance.

To consider the flip side, if such sterling leadership attributes existed in the Indian industry from the 1970s and all through the decades of liberalization the question remains as to why such leadership could not make a more profound impact on the companies that it led, and on the broader industrial scenario. The answer to this lies in the fact that for most leaders their strengths act their weaknesses too. The delivery models of the five leaders offer interesting support to the intriguing but true theory of strengths sub-optimizing themselves as weaknesses. The five delivery models of the five leaders may be summarized as: “Intuit - Improvise - Indigenize” of SS, “Plan - Prioritize - Push” of RJS, “Organize - Orient - Optimize” of RS, “Dream - Diversify - Dominate” of KRR and “Resource - Recharge - Regulate” of RSP. In each case, an excess of a dominant streak of leadership served to erode the potential full impact of the respective leadership models. High dependence on intuitiveness, daring resort to improvisation and dogmatic commitment to indigenization resulted in several of the pioneering initiatives of SS going awry. RJS believed in meticulous and cautious planning, sticking to core product competencies and top-down push for enhanced delivery which sub-optimized his great potentialities. Despite well-intentioned efforts and notable successes in re-organizing and re-orienting the corporation around new themes (for example, cost savings and innovation), RS’s eventual propensity to satisfy conflicting interests possibly led to some level of compromise in execution. KRR dreamt like no other entrepreneur or professional CEO could, and expanded as well as diversified his canvas with great aplomb and panache but his overpowering desire to dominate led to overreaching on strategic and execution fronts. RSP clearly knew how to resource even the most complex project right, excelled in continuously recharging his team but probably could not generate self-sufficient leadership because of excessive regulation and minimal empowerment. These are, however, not insurmountable handicaps; little moderation or aggression on some of the components would unleash full potential of the leadership models.

As brought out by this blog post, India has had, and continues to have, deep leadership talent, of which the five leaders discussed herein are some of the finest examples. The Indian leaders, despite the handicaps of dated technology, scarcity of resources, paucity of trained manpower, and excesses of regulation, excelled in overcoming the challenges and bringing growth and competitiveness to the Indian industry. As India Inc braces itself for a new global competition it is easy to see how the leadership competencies and the leadership models defined by these five great Indian leaders would be very much contextual to India’s step function growth. The apparent plurality of these leadership models reflects, in fact, the singular and quintessential Indian leadership model of intellect-driven work ethic, which is smart and intense. These leaders point to the enormous leadership talent that resides in India. If the leaders such as these great personae are able to find common forums to work together, say as members of boards of directors, the powerful thrust for India’s competitiveness would be unimaginable. These five great leaders who represent diverse generations of leaders demonstrate that Indian leadership has continuously reinvented, reinforced as well as mellowed over time.

I sincerely hope and pray that all of the wisdom, foresight and passion of these great leaders, and several others of their illustrious ilk, will continue to be available to India Inc and its constituent professionals for years and decades to come.

Posted by Dr CB Rao on January 23, 2011.





Saturday, January 15, 2011

Black Boxes and White Spaces: Leveraging Creativity for Growth

Everyone agrees that employee creativity is essential for growth of corporations, or for that matter any organization be it in public sector or private sector. It is indeed a matter of significant research as to how start-ups are fired by creative energy while large corporations struggle to retain creative energy. Even highly creative firms such as Microsoft and Google which are founded solely on creativity are perhaps facing the burden of largeness affecting their basic DNA of creativity. It is not unusual, therefore for large organizations, for example Procter & Gamble and 3M, to devise ways and means to retain their creative energy despite the size. The models adopted by such firms are usually structure, process or initiative driven, and despite their relative success do not represent a universal model of organizational creativity.

Some of the approaches of creative firms focus on pursuit of open innovation (embracing ideas from outside the organization), percolation of strategic thinking down the organization (enabling strategy deployment at unit or department level) and relying on technology to drive innovation (letting products create markets). These approaches, however, occur in phases with creativity going through cyclical downturns, often influenced by strategic shifts and lapses. Nothing else, for example, explains how a leader in televisions in the 1980s like Sony (with its famous Trinitron picture tubes) should completely lose ground to Samsung and the likes which revolutionized the television industry in the 2000s with flat panel displays. Only those organizations which institutionalize creativity at employee level may hope to remain competitive at all times.

Creativity is the ability of an individual to visualize imaginatively, think innovatively, and act effectively to achieve an end-result with value-adding differentiation. Creativity also signifies an ability to overcome known and unknown challenges with the least possible expenditure of additional resources. Creativity is significantly different from pursuit of excellence. When limits to excellence begin to operate, only creativity and innovation can take companies to different trajectories. In a competitive and uncertain world, companies which are creative would most certainly have advantage over companies which are not. Nevertheless, creativity figures low in corporate agenda as a work or organizational ethic that needs to be institutionalized. For most organizations, only the visible working of an employee mind to follow the prescribed practices is relevant and the employee brain is akin to a black box (“one can never fathom what happens inside a human brain, nor is it necessary”)! For most organizations, their environmental view rarely strays beyond an explored business canvas into unexplored white spaces (“one has to have deep pockets to lose money on white spaces”)! By failing to dip into the thought processes that go through the black boxes, companies miss on the opportunities of white space growth that lies ahead of them.

Creativity-conformity conundrum

Organizations are often faced with a creativity-conformity conundrum which needs to be optimally resolved to ensure both differentiation and focus simultaneously. Organizations are nothing but aggregations of heterogeneous people who are brought together to achieve a common purpose, complying with certain organizational ethos and norms. Implicit in this is the need for organizations to be homogeneous in the way they think, talk and act. Conformity to the organizational processes and systems as well as corporate goals and strategies is essential for organizations to achieve oneness despite individual plurality. On the other hand, creativity is a trait that requires freedom of thinking and action. Creativity is enabled in organizations when individuals are enabled freedom of thought, communication and execution. Creativity requires reinforcement through acceptance and execution of ideas, which in turn calls for expenditure of resources. In one sense, conformity enables organizational focus with frugality while creativity sparks corporate differentiation at the risk of profligacy.

Competitive dynamics are often difficult to navigate. They mandate focus and specialization, and also demand differentiation and diversification simultaneously. While large firms and conglomerates are probably better placed to cater to the apparently conflicting needs, small and medium firms find the demands of competitive dynamics extremely complex to resolve. This is where creativity as a corporate strategy and as an organizational ethic comes in handy. Contrary to popular perception, creativity does not ipso facto lead to profligacy. Some creative ideas may require resources to implement, some may lead to multiple foci but some may neither need additional resources nor create additional streams of work. Creativity could often find a better way to accomplish the set strategies, more productively and more effectively, and could many times lead to breakthrough strategies, to catapult companies into new trajectories. It is, therefore, important that organizations understand the conformity-creativity conundrum more perceptively and create an optimal balance, and synergy, between the two essential sources of competitive advantage.

In organizations, conformity needs systemic strength to be effective while creativity needs cultural enablement to flourish. Conformity supports better execution, which requires clearly defined projects, programs, systems and processes. In the absence of these systemic enablers, conformity becomes individualized to boss-subordinate relationships, often leading to multiple and often conflicting approaches across the organization. Creativity supports better planning, which requires ideation to develop alternatives and evaluate vision, strategy and performance vis-à-vis aspirations from time to time. In the absence of these strategic enablers, pursuit of creativity becomes a purposeless diffusion of organizational effort. Prudent and dynamic organizations resolve this conundrum by establishing core foundations of business discipline while cantilevering the core to enhance business efficiency and achieve business diversity. To be able to do that, however, organizations need to disparage their mindsets of the perception that creativity is all about strategy, and hence is the responsibility of the corporate elite, and is not a competence and motivator of the organizational mass whose main responsibility is to execute.

Manifestations of creativity

Creativity is not all about corporate vision or strategy. Creativity, on the other hand, is the core of on-ground continuous improvements as well as the launch pad of breakthrough developments. Creativity improves existing products as much as it creates new ones. Creativity creates new manufacturing processes as much as it enhances the capability of existing processes. Creativity enables market segmentation as much as it creates new user needs. Creativity extends to every function of an organization may never be limited to innovation in research. Creativity results in product superiority as much as it leads to cost competitiveness. Creativity seeds and grows new businesses as much as it protects and extends existing businesses. Creativity makes industries more resilient and self-reliant even as it connects and even amalgamates multiple industries into one. Creativity happens at the leadership level as much as at the front-line worker level. Creativity is pervasive and universal in its concept, execution and ownership.

In everyday’s life we encounter occurrences which demonstrate how creativity achieves all of the above. There was not so long ago a time when USB data cable and charger were distinct in a cellular phone. Today, simple standardization with USB at one end and micro-USB at the other end merged both the accessories into a single cable, reflecting how simple creativity could lead to cost savings through continuous improvement. On the other hand, when a slide-in, slide-out tablet computer is configured to morph into a net book computer, enabling dual use as a tablet and net book based on needs, it represents a complex improvement, capable of creating new market segment. However, if a palm held computer which reads electrical signals of the brain and conducts day to day affairs is developed it would represent a breakthrough innovation that redefines life and creates new markets. Successful and creative transplantation of technologies from one industry to another would result in product innovations that could be game changers. If the roof and side panels of cars are fitted with solar panels a new hybrid car revolution could take place, for example.

Vintage machine tools could achieve enhanced performance with superior jigs and fixtures as well as stronger tools and dies. Sequential machine tools could be amalgamated into machining centers and reconfigured into flexible manufacturing systems with creativity. When conventional metal cutting is replaced by laser cutting or when surgeon’s scalpel is replaced by laser beam, it is creativity of transplantation. Yet, successful transplantation is not a result of any one singular technology. Biological-engineering interfaces on one hand, and hardware-software integrations on the other reflect the need to have multiple functions and domains to collaborate to make creative improvements and breakthroughs feasible. The few examples given here give an impression that creativity and complexity go hand in hand. Harnessing of fundamental research and use of several technologies, some of them unrelated, indicates that creativity requires higher order abilities. On the other hand, creativity is multi-layered, the first layer of which is simple and spontaneous ideation.

Ideation, the engine of creativity

Creativity at the core is just ideation. From Newton to Archimedes, simple observations resulted in groundbreaking laws while from Bell to Edison fulfillment of day to day needs resulted in breakthrough products. In the bygone era of limited education and constrained industrialization, it was left to the passion and brilliance of individual scientists to be creative. In today’s context of broad-based education and unfettered industrialization, creativity could be everyone’s cup of tea. More particularly, if simple ideation is seen to be the engine of complex creativity, there is no reason why every employee in an organization, or for that every individual in the society, cannot participate in a revolution of ideation. Japanese companies have long realized this vital trend and made Kaizen or continuous improvement, through creative grassroots ideas, the fountainhead of performance enhancement. The same has been the case with the Japanese concept of quality circles. There is no need for any other proof that ideation is in everyone’s territory.

Ideation to work in organizations needs two triggers: challenge and motivation. Employees need to be challenged to find improvements to every day issues. The challenge is that no human endeavor, even with the best of technology, is perfect; there would always be room for improvement. Even as new products are conceived leading to improved need fulfillment, the quest for perfection only increases. Designers, manufacturers and marketers need to be constantly challenged to update their own creations. It is established that a product in today’s environment undergoes at least two upgrades every year and potentially evolves through at least ten generations before it is completely overshadowed by a new breakthrough product. Innovative firms have laboratories that seek ideation from every source, sales and service reports, competitor products, vendor experiences, shop floor feedback and employee opinions, and convert the prioritized ideas into product actions. Too few companies realize the power of having all employees thinking about process improvement all the time. At Toyota, each year, each employee generates on average at least ten ideas, aggregating in the process to several thousands, and even a million, of improvement ideas each year. Each of these ideas enhances efficiency and saves money. Over 99% of the ideas are reportedly implemented.

Ideation is sustained and reinforced by the motivational culture of a company. Contrary to perceptions, financial incentives are not the sole instruments of motivation; in fact, in many cases they could fail to motivate too. The reason is that ideation is a spontaneous response to an individual’s yearning for self-actualization. The greatest satisfaction an employee or a team derives from ideation is to see the ideas blossom into physical improvements. When I visited the Toyota plant in Nagoya, Japan, I found the factory operations to be an object lesson in continuous ideation. The coordination of the arrival and assembly of the 30,000 parts of an automobile, the minute-by-minute completion of assembly balanced to Takt Time, the visual signals that are everywhere, the error-proofing of manufacture and component and sub-assembly movement in a quietly efficient Toyota factory all take some time to sink in. The nuances of the Toyota Production System are so subtle and effective that only an underlying credo of spontaneous and continuous ideation can support such a hugely successful innovative machine. The large sign that is in both Japanese and English, announcing “Good Thinking, Good Products” in a Toyota plant brings out the motivational impact. Toyota values the creative energy of its employees by tying up the duties of supervision and management to the generation of improvement ideas by the workers. When one looks at Toyota’s record of financial performance over the last several decades, and the evidence of employees’ creative ideas to power this performance, there is clearly a lesson here for all businesses and all organizations.

Arithmetical potential of ideation

For committed and talented employees, work just grows on them, day over day. For those who spend a lifetime on job, ideas constantly flow through the mind rather subconsciously. Yet, managers and leaders fail to harness the potential due to three commonly held fallacies. Firstly, it is rarely understood that creative ideas come up spontaneously to only the uninhibited employees. Creative expression needs to be facilitated in those eco-systems that place a premium on conformity and compliance; and unfortunately organization design and practice, by and large, tend to be conformist. Organizations thus rarely recognize the enormous creative potential that lies within them. Secondly, it is commonly believed that creative ideation requires structured and systematic studies. Many managers and leaders who are steeped in scientific management cannot believe in the concept that ideas that are borne out of intuition, experience or even hypotheses can also be tenable and viable. Thirdly, those control the intellectual reigns in organizations believe that effective ideation can only be done only by personnel appropriately qualified and experienced, such as corporate planners, industrial engineers or operational and business leaders, and so on. If only the latent churn of ideas all across the organizational pyramid could be harnessed the power of mass ideation in organizations would be enormous.

Assuming a typical employee joins a firm at the age of 25 years and retires at the age of 60, working 250 days a year, 8 hours each day, he or she would have lived through 4,200,000 minutes of breathing and living through his or her firm. Given that a creative idea just needs a spontaneous spark, the typical employee would have millions of opportunities for ideation. Just a few of the opportunities could become tools of excellence or triggers of game-change. If only the organizational culture facilitates and encourages employees to be creative and expressive, and the organizational eco-system captures and distills such creative ideas, creative ideation would receive a significant institutionalization. In idea-centric organizations such idea generation and capture occurs from the very first contact between the employee and the company. When I joined Telco (now Tata Motors) 34 years ago as a Systems Analyst, almost the first question I faced in my induction program was whether I had any suggestions for the company! Senior leaders in Tata Motors consistently emphasized the power of ideas, motivating greenhorns as well as established managers to contribute with ideas. It is not surprising that the DNA of Tata Motors became one of sustained leadership in development and manufacture of automobiles.

Typically, there exist four phases in the life of an employee which give rise to different capabilities and opportunities for creativity. The first phase is the entry phase into the first job which provides the first opportunity to view the operations of the firm with a totally uncluttered perspective. To the extent that the employee is well equipped with academic tools he or she has the opportunity to enhance problem solving capabilities of the organization. Clearly, it is the organization that has to take the lead to harness the untested power of a new employee with an open, hear-him-out approach. The second is the development and growth phase of the employee, say the first ten years of his or her career, wherein the employee understands the depth of the job, appreciates the nuances and makes the work better. At the same time, this phase could be the most challenging, for the employees and their bosses, in terms of achieving the right conformity-creativity balance. The third phase could be the most opportunity filled phase of an employee, with he, or she, moving from an operating role to a managerial responsibility. It provides the twin opportunity of shaping strategy development as a manager heading a domain and mentoring his or her operating executive team members to tap their creativity. The fourth phase, say the last ten years of one’s career, would be the game changing phase where one, by virtue of being a cross-functional or business leader, would be vitally interested in unleashing and harnessing the power of organization-wide creative energy. Leaders of organizations could be the greatest advocates and beneficiaries of organizational creativity.

Black boxes and white spaces

Entity leaders need to appreciate that continuous and sustainable profitable growth is the essential facet of economic and social life. The judicious manner in which a business leader manages the forces of competition and sources of competitiveness determines the growth trajectory of the corporation. The business leaders have a unique responsibility in conceptualizing an integrated three-horizon platform of growth. The first horizon aims at excellence in the current business, the second horizon leverages the current business to exploit adjacent businesses, and the third horizon leads the corporation into uncharted but value-building futuristic areas of growth. Employee creativity plays a notable role in each of the horizons, from continuous improvement in horizon 1 to step-function creativity in horizon 2 to breakthrough creativity in horizon 3. To harness the employee creativity in this manner the leaders should understand and respect the employee black box as a treasure-trove of ideas, and seek out and also pursue the environmental white space as a landscape of growth.

Dr VS Ramachandran, an eminent neuroscientist in the University of California, San Diego, in his path-breaking book,” The Tell-Tale Brain” proposes strikingly that the human brain, with its 100 billion nerve cells and pathways, is capable of making more connections than there are particles in the universe. The human brain is capable of being much more than a set of compartments for specific functions or even a complex set of electro-mechanical neuron network firing away based on internal and external stimuli. Cognitive neuroscience enables us understand how a human brain could feel and appreciate its own deep consciousness. This sunrise science is an essential tool for employees and leaders of an organization to understand the power of the human brain which is otherwise sought to be severely limited by the way our organizations are designed for rigidity (often creating hard silos), the manner in which organizational processes are operated for conformity (which is often dictatorial), and the strategy by which development paths are rendered bumpy (laced as they are with ego-status polemical speed-breakers). The new science is anchored on the premise that each and every human brain that works in the organization is capable of visualizing unimaginably latent growth vistas, mastering immensely complex skills, and performing seemingly impossible feats of development. Organizations whose employees and leaders appreciate the human brain as a dynamic force of creativity and not as an obscure black box of conformity would stand to gain immensely.

The bar to achieve profitable growth is continuing to rise. It is passé today to seek excellence in the current business or attempt to gain business in contiguous spaces. Limits to efficiency in ongoing businesses are adversely set by the way day to day management is run in a complicated manner. At the same time, the entrepreneurial instincts which are the very vitals of industrialization are ebbed out by theories of strategic synergy and core competencies. Yet, whoever objectively surveys the deep history as well as the contemporary progress of industrialization understands that white space growth is the one that has the maximum potential of game changing growth. Very often, even large organizations with tremendous resources become wary of investing for white space growth, abjectly failing to do what a lone entrepreneur or a wise technocrat sets out to do in spite of resource crunch. Organizations should develop a healthy respect for the human brains in the organization (which are all waiting to express without their own conscious knowledge), and supplement it with a yearning for white spaces in the environment (which are all awaiting to be seeded with businesses that were never-before thought of). The way to action the new neuroscience of organizational behavior and the new paradigm of dynamic corporate strategy is to continuously drill for creative fuel in the organizational landscape and use the creative energy to build a pipeline of ideas that would drive growth. Just as humans, organizations must aim at, and experience, self-awareness to reach the full creative potential.

Posted by Dr CB Rao on January 15, 2011

Sunday, January 2, 2011

Urban India 2020: Models for Growth

With a land area of 3.2874 million square kilometers and a population of 1.2 billion, India has 2.4 percent of world land area but supports 18 percent of world population. By 2020, India is estimated to have a population of 1.33 billion, with an astonishing demographic dividend; average age of an Indian would just be 29, compared to 37 in China and 48 for Japan. With economy poised to grow at 9 percent per annum, gainful employment of the huge workforce is both the challenge and the opportunity for India. Seventy percent of the Indian population lives in India’s 638,000 villages while 30 percent of the population lives in 5100 urban habitats. With economic growth, urbanization is projected to expand further, requiring to support 40 percent of the population by 2020. Most industrial and economic investments would be made in and around the urban habitats as part of the unabated economic growth.

Urban challenge

If the central and state governments do not address the issue of strategic urban planning, the opportunity of economic growth could turn into a serious nightmare. Indian cities and towns are already bursting at the seams. The pressure on civic facilities has grown enormously within each city and town, with the governments and companies preferring to focus themselves on city centers and extensions which have established social infrastructure. This coupled with continuous migration of people from rural and semi-urban habitats to such established cities has enhanced the pressures on the limited road space and other social infrastructure beyond bearable levels. As each suburb becomes a beehive of industrial activity, cross-movement of people and materials tends to create unceasing traffic logjams. An Indian worker today spends additionally anywhere between 25 and 50 percent of his work time moving between home and office, adding yet another reason for low productivity and skewed work-life balance.

In the past license raj of the 1950s to 1980s, the governments directed industrial activity away from cities. Virtual barren lands were converted into thriving industrial townships, creating new cities. While a modern Indian who is used to seeing swanky factories coming up in city suburbs may baulk at the trend of the yesteryears there is no doubt that industrial dispersal brought economic benefits and de-pressured the urban systems. This phenomenon is by no means Indian-dogmatic or government-centric; India has its own Jamshedpur and Jamnagar in the private sector while Hyundai and Toyota helped build cities in Korea and Japan respectively around their sprawling industrial complexes. The Indian model was however weak in that the principal sponsors (public or private companies) could only do some part of social construction; their principal purpose had to remain that of building, equipping and operating factories. The industrial dispersal trend lost the steam with economic liberalization in the 1990s and beyond as the governments began to woo private and foreign investors with industrial estates developed nearer the cities. This has, in turn, created more tier 2 cities while converting cities into metros. However, this level of urbanization has resulted in severe stress on the dilapidated urban systems.

Urban decongestion and expansion of cities on one hand and creation of new satellite towns on the other have been the two principal strategies adopted by different state governments in India. Some governments followed a radical policy of broadening city roads of their metros by demolishing houses and shops on either side (with compensation to the owners) and also setting up new suburban hubs. Some metros focused on creation of new suburban hubs and office complexes. A few others followed a city extension strategy in three directions, with either IT or industry being the primer for such extension programs. Satellite cities were enabled as alternative locations but they themselves became as pressured as the primary cities. Various connectivity models were also followed; a bus-train system in one case and metro rail in a couple of other cases. Cities known for their natural beauty and salubrious weather became victims of aggressive development of offices and businesses in all directions. Even cities which saw flight of capital have seen businesses streaming back to operate in green as well as reclaimed land belts.

Whatever be the strategies adopted by various governments, Indian cities are continuing to grow faster than can be handled. Space has been, and would be the greatest limitation for economic growth, as Indian urban planning continues to develop in the legacy spatial planning model. It is not that every city has to be planned only like an American city with clearly demarcated areas, highways, flyovers and green spaces. Japan has a number of cities that support a smooth life in cramped spaces. This is achieved with a combination of social discipline (pedestrian walking plus non-use of automobiles) and a huge system of metro rail (underground, on-ground and elevated) systems. The task for India is in terms of infrastructural planning as well as attitudinal shaping to enable the society achieve substantially more with the needed incremental investments.

Determining factors

The choice for India as it plans the new age urbanization could be an amalgam of the American model as well as the Japanese model adapted to Indian user model. As India keeps its tryst with the destiny of becoming a superpower, the following factors would characterize the evolution. Firstly, there would be a burgeoning of factories, offices and businesses across the country, several of them in and around the 5000 plus urban habitats. Secondly, growth will be focused (i) in and around cities with redevelopment of legacy land and buildings and (ii) on adjacent and near to national highways. Thirdly, consumption centers (shopping malls and movie multiplexes), development centers (schools, colleges and universities), and living centers (houses and hospitals) would be as important as business or factory districts. Fourthly, connectivity (rail, road and air) would determine the productivity of operations and the quality of work-life balance. Fifthly, the opportunistic pace of new business development could be far higher than the planned pace of urbanization, unless new development perspectives are co-created by various stakeholders.

The combination of factors as above could be a heady cocktail for urban vertigo, driving the society from aspiration to exasperation unless strategic plans are developed covering each of the above five factors through centralized and coordinated planning. While avoiding a throw-back to the old licensing regime of directed industrial or enterprise location, the governments should come up with clear demarcation of land for different uses as stipulated above. This task of spatial guidance is a specialized function which needs to be undertaken through analytics by a standing institute rather than by government departments. At the same time companies proposing mega projects must examine how they could facilitate orderly planning of social infrastructure by discussing with the central planning institute, local civic authorities, and private real estate developers their requirements of civic infrastructure. Conceptually, every industrial planning initiative must have an accompanying social planning initiative, each of which must be formalized as specific projects in the hands of experts.

Conceptually, the urban development models would differ based on the key trigger for the urban expansion. The following two models are suggested.

Socio-industrial model

The classic model in India which gave birth to industrial cities such as Bhilai, Bokaro, and Rourkela (all based on government owned steel plants) as well as Jamshedpur and Jamnagar (based on private sector steel, vehicle and petrochemical plants) was based on industries acting as engines of development. Despite generation of huge wealth these cities have failed to reach the status of even tier 2 cities in social attractiveness index. The same may be said of the several suburban industrial hubs that came up, or are coming up, near established top cities in various states. Despite major industrial investments, some new industrial cities have not measured up to the desired levels of sustained factor inflows. At the same time, even though each State has at least ten to twenty urban habitats which could have supported a larger industrial growth given their factor endowments such towns remained tier 2 habitats.. Clearly, the trigger for synergistic socio-industrial growth is hard to identify.

An analysis of the industrial cities which rank high on industrial concentration but low on social acceptance and the civilian cities that continue to remain as the hot contenders for industrial growth despite stressed out urban infrastructure indicates that unless social, educational and quality of life infrastructure develops on par with industrialization, the overall urban development will remain skewed. A socio-industrial model by which governments pursue simultaneously development of all the four infrastructural bases would, on the other hand, have multiple benefits. Establishment of urban development boards with public-private partnership, co-opting of qualified investors in real estate and education in talks with industrial developers, grant of major social infrastructure projects simultaneously with sanction of major industrial projects would go a long way in rolling out a sustainable socio-industrial model.

The socio-industrial model by definition would need to focus on creating mini socio-industrial cities, perched between already developed hubs. Several corridors can be conceptualized in this manner, each extending to a length of 100 to 150 kilometers or so, and connecting about 200 to 250 non-city, larger urban habitats. By avoiding arable land belts as well as bio-diversity land belts, and creating special economic zones in dry and non-arable land belts, a golden mean of complementing agriculture with industrialization can be achieved. The socio-industrial model would require a large measure of inter-district and inter-state and political consensus to succeed. If enabled, the socio-industrial model could be a great optimizer for the federal economy on one hand a robust bridge between rural and urban habitats on the other.

Connectivity-productivity model

Experience in India and elsewhere suggests that connectivity is an essential element of industrial productivity. The Indian rail and road systems are saturated. The railway system has remained virtually static for decades while the national highway and golden quadrilateral road systems merely catch up with the current congestion. If the Indian railways create a new 10,000 kilometer cross-country rail network, connecting hitherto unconnected tier 2 and tier 3 cities there would be all-round triggers for industrial dispersal. This when integrated with dedicated freight corridors and bullet trains would usher in a sea change as to how industries and societies feel connected with each other. The connectivity model would be a great new way of stand-alone employment besides channeling industrial investment into the interiors to spur further employment.

Experience in China suggests that rural people migrating to urban factories provides distinct initial cost advantage which, however, ebbs over time. Proactive movement of factories into hinterland on the other hand could help sustain more durable crucibles of productivity. In India, certain industries such as food processing, personal product which utilize factor resources and also finds contiguous markets could benefit from such reverse migration of factories to people, as opposed to traditional migration of people to factories. This approach along with the connectivity approach could diversify the geographic base of industries substantially.

An essential facet of the connectivity-productivity model is mutual leveraging of industrial and infrastructural options. As a principle, every city or urban habitat having at least a select number of industrial parks and/or special economic zones (SEZs) in contiguous space must have a top class domestic airport and the ones with a large number of such industrial campuses should have an international airport even. From a reverse logic, cities and towns with airports and ports must be targeted to develop industrial clusters. For example, Krishnapatnam which would have a major sea port and a mega power plant operational soon must be developed to have more industrial parks, and an airport too. The essence of connectivity-productivity model is building of new spokes of development around upcoming infrastructural and connectivity projects.

The challenge in the connectivity-productivity model is one of developing the social infrastructure such as residences, schools, colleges, hospitals, entertainment complexes and so on. By preferential allocation of land for pioneering industrial and infrastructural developers, incentives can probably built into the development system. The already established capabilities in the more competed socio-industrial system can be leveraged for the benefit of the less endowed but less competed connectivity-productivity system. There can, however, be no understating of the requirement to enhance skill levels in this model. Companies and agencies would need to deploy special efforts for this purpose, both through in-house and collaborative efforts. If companies already established in the socio-industrial system move into the connectivity-productivity system, methods of training by deputation from one system to the other can be beneficial.

Role models and thought leaders

It is gratifying that India has many public sector and private sector role models that excelled in creating these systems in their own way. The top 21 public sector undertakings belonging to the Maharatna and Navaratna categories and the several top private sector conglomerates as well as some individual mega companies have excelled in creating assets, skills and wealth in barren tracts inIndia. Even as these and other groups venture into other countries to secure factor and cost advantages, focus must also be on the potential that still remains to be exploited within India itself to achieve more intense and more diversified social and industrial transformation.

The Government of India, especially the Planning Commission, can play a very important role in systematizing and accelerating urban development, comprising both renewal and expansion components. The Commission may, however, need to tweak the planning processes a bit. Firstly, given the interplay of industry, society and infrastructure the planning horizon would need to be extended to ten years, from the current five years. Secondly, the current emphasis on sector-wise and ministry-wise plans will need to be supplemented by strategic spatial planning. Thirdly, an institute of analytics to develop urban spatial planning models and their components needs to be established under central aegis. Fourthly, the Commission would need to establish supportive state planning processes as well as apolitical engagement processes amongst all stakeholders. Finally, central and state governments would need to engage bilaterally and multilaterally to optimize land use across the country for social and industrial benefit.

The private sector and public sector corporations have no less a role to play. Industry organizations such as CII, FICCI and ASSOCHAM as well as public sector bodies such as SCOPE would need to establish public-private boards which can develop perspectives of social industrialization. The industry bodies are well positioned to undertake or commission studies which develop socio-economic logic for various urban development options, drawing upon international comparisons where appropriate. These bodies can be the vital link between the entity plans, and public perspectives for understanding the industry’s passion for profitable growth, the government’s mandate for economic welfare and the society’s yearning for integrated development.

Posted by Dr CB Rao on January 2, 2011

Wednesday, December 29, 2010

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

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

Positives and concerns

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

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

Potential clearly recognized

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

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

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

Global collaboration

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

Coordinated policies

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

Public oversight

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

Skill enhancement

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

Global scale funding

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

Equitable employment

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

Reloading the governmental matrix

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

Software lead

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

Thrust products

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

New product segments for the new era

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

Products for the BOP population

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

Growing capacity, compressing breakeven

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

Goodbye 2010 and Welcome 2011!

Posted by Dr CB Rao on December 29, 2010

Sunday, December 26, 2010

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

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

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

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

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

Microfinance : a workaround road or a new credit highway?

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

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

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

From lending to investment

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

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

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

From consumption to employment

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

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

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

From competitive growth to collaborative development

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

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

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

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

A positive future beckons

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

Posted by Dr CB Rao on December 26, 2010

Thursday, December 23, 2010

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

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

Automobile and FMCG industries

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

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

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

Super FMCG

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

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

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

SFMCG management

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

Principle of seamless innovation

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

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

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

Principle of disruptive technologies

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

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

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

Principle of unconventional marketing

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

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

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

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

Principle of integrated outsourcing

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

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

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

Principle of sustainable loyalty

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

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

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

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

Others: Quo vadis?

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

Posted by Dr CB Rao on December 24, 2010