Saturday, April 28, 2012

Building High Tech Products from India: Tejas Networks & High Tech Manufacturing Policy

I first visited Tejas Networks about a decade ago. At that time, it was just two years old, had its first product in the market, and was boldly seeking a position for itself as a high technology product company out of India. Tejas was an early experiment in putting together a team to address a market opportunity – Sycamore Networks founder and prominent investor Desh Deshpande was the catalyst who brought together Sanjay Nayak and Arnab Roy from Synopsys, and optical networks whiz Kumar Sivarajan from the Indian Institute of Science to address optical networking equipment opportunities in the growing telecom space.

Tejas is well known for its integration of Ethernet transmission with optical networks. This technological innovation allowed Indian service providers to use their networks originally created for voice to easily add on data services thus benefiting millions of customers. Tejas has become well know for designing future proof transmission equipment that allows its customers to upgrade their networks at low cost. Design reuse, smooth and concurrent development of hardware and software, and quick build cycles are some of the distinctive competencies of Tejas Networks that allow it to provide such a benefit.

How has Tejas fared in the last decade? The good news is that its thirst for innovation and product development remains strong. Its products have won every significant innovation award in India (CSIR, Nasscom, etc.), are sold under the brand names of both Tejas and some of the most demanding global telecom OEMs, and have played an important role in the backbone of India’s telecom infrastructure. Tejas continues to be a technology-intensive company with a little over half of its 750 strong workforce in engineering and R&D functions. The company has raised five rounds of capital (about $75 million) from leading global investors. Tejas was nearly listed a few years ago but a change in market conditions postponed their IPO. As a private company, Tejas is not obliged to disclose its financial performance, but market estimates place the company at a size of about $150m (about Rs. 750 crores).

The obvious question that pops up: Isn’t that quite small for the leading equipment manufacturer in one of the world’s biggest and fastest growing telecom markets?

The Changing Structure of the Telecom Equipment Market

If Tejas has not grown as quickly as its founders might have liked or expected it to, market structure can’t be blamed. On the contrary, the market structure today favours the growth of companies like Tejas.

Till the 1990s, the telecom equipment market was dominated by large players with close links to the monopoly service providers in their respective markets. Alcatel in France, Siemens in Germany and AT&T (later Lucent) in the United States could make large and lumpy investments in developing new equipment because they were assured of a domestic market. It is estimated that each major player invested a billion dollars in developing digital switches in the 1980s.

However, this cosy arrangement broke down in the late 1990s for a number of reasons. In most countries, provision of telecom services was deregulated leading to the weakening of the dominant monopoly players and the entry of new service providers. Changing technologies (e.g. digital mobile, 2G and 3G networks, growing importance of data) led to the need for service providers to secure fresh licences and make large investments in networks and technologies. Service providers obtained licences at large costs and struggled to recover their investments. In this scenario, service providers sought to buy the best equipment at the lowest cost and were no longer willing to work exclusively with their national equipment manufacturers. The convergence of technologies and increasing dominance of software over hardware in telecom equipment and systems design led to new players entering the equipment market, the most prominent of these being Chinese players like Huwaei and ZTE. These players were willing to sell equipment at much lower margins than the existing giants, and thus prevented the majors from making the large margins they were used to.

The existing equipment manufacturers have struggled to cope with these fundamental structural changes in the industry. Witness the slide of Nortel into bankruptcy and the mergers (Alcatel-Lucent and Nokia-Siemens) that are symptomatic of the lack of competitiveness of these companies.

Life has been more difficult for these players because of another shift – the big markets for telecom products are today in the large “emerging” countries like China and India. Service providers in India took advantage of the ferment in the equipment industry to drive down prices to previously unimaginable levels.

So, it looks like Tejas was born at the right time, and in the right place, at least from a market point of view. Why hasn’t it become a larger company?

The Manufacturing Ecosystem in India

In From Jugaad to Systematic Innovation: The Challenge for India (FJ2SI), I argued that innovation is influenced by the quality and quantity of inputs available to the innovation process, the innovation capacity of firms, and the incentive for innovation. While at a broad level the incentive for innovation has improved in the last two decades, I pointed out that India firms are still handicapped by the absence of the right inputs and their failure to build innovation capacity.

However, in the case of manufacturing, particularly high tech manufacturing of sophisticated electronics and telecom equipment, there continue to be serious disincentives to innovation, particularly in comparison to players from China. Chinese companies are believed to enjoy both direct and indirect subsidies that allow them to be very aggressive on the pricing front (evidence: anti-dumping cases have been successfully fought in India against Chinese telecom equipment manufacturers). China is the world’s manufacturing hub for electronics with a complete ecosystem of component manufacturers and assemblers. India completely lacks this ecosystem, doesn’t have a semiconductor fab (in spite of central and state level policy statements), and has a taxation and duty structure that works against manufacturing (at the WTO, we signed up for a zero duty structure for IT and electronics imports under agreement ITA 1 years ahead of any obligation to do so).

Should we just give up on high tech manufacturing and focus on services where we clearly have a competitive advantage? Or, is there still an opportunity to re-build manufacturing? And, is there a need to do so?

Recent Government Policy Initiatives

After years of virtual abdication to “market forces”, policy makers in India have recently veered to the view that manufacturing is too important to the economy and for job creation to be ignored any longer. The Planning Commission and the Department of Industrial Policy and Promotion have been grappling with questions related to what the government should do, and what it should not do.

India is now developing a multi-pronged strategy to enhance the competiveness of high technology manufactured products. The first prong is the use of Preferential Market Access norms (a WTO-compliant policy initiative) to reserve 30% of government-purchased products for firms attaining a minimum specified level of value addition in India. This provision is not related to ownership but to value addition – any firm, irrespective of ownership, will be eligible to sell to the government under this reserved access as long as it meets the local value addition requirements. The second prong is the creation of a sectoral innovation fund for electronics and telecom within the overall Rs. 5,000 crore innovation fund proposed to be set up by the government of India. The third prong is to encourage the creation of one or more semiconductor fabs in India. And, the fourth prong is creation of an export promotion fund or agency that can support export sales through innovative funding mechanisms. In addition, new national infrastructure projects like the National Optical Fibre Network will help the growth of a domestic electronics industry.

Implications for Tejas & other Innovative Electronics/Telecom Companies

In FJ2SI, I made a case for stronger government policies to support domestic innovation. Innovation funding, government procurement support, and large national projects are some of the initiatives I underlined as important. Many of the current government proposals are consistent with these recommendations.

There are, however, two dangers. One is that the government dilutes the preferential market access criteria to the extent that they become meaningless. The other is that the Preferential Market access becomes a form of protectionism that enters through the backdoor. The new government proposals need a high level of sophisticated supervision if they are to achieve their desired results.

If properly implemented, the new proposals should be good for companies like Tejas. They will create a more supportive playing field for companies that do genuine value addition in India. Such value addition will not come from manufacturing alone. The real value addition will come from design and R&D. Companies like Tejas that combine superior engineering engineering capabilities with a sensitivity to the market should be able to drive such value addition. It is estimated that for every $500 iPAD that Apple sells, its value addition is of the order of $150. Though creating Apples from India may be far-fetched at this stage, Apple provides a good long-term aspiration that we can strive for. And more companies like Tejas will be needed if we are to move in that direction.

Friday, April 20, 2012

Naushad Forbes on Innovation

For Indian companies, design (rather than technology) may be a better source of differentiation and value addition, and provide a useful frame for exploratory efforts - this was the key theme of the presentation by Naushad Forbes, Chairman CII National Innovation Council & Director, Forbes Marshall Ltd. (FM) at the CII Innovation Forum at IIM Bangalore yesterday.

Naushad has been an important influence on my thinking on innovation. The book he wrote with David Weld – From Followers to Leaders (Routledge) – develops the idea of the importance of design in more detail.

Naushad covered a lot of useful but familiar ground in his talk. He started by identifying and dispelling several myths about innovation. The six myths he identified were:

  • Innovation = creativity, innovation = invention, innovation does not involve imitation;

  • Innovation has to involve high technology

  • Innovation required heroic inventors

  • Innovation means a radical leap forward

  • Innovation starts with research

  • Innovation has to be new to the world

Naushad observed that prior to 1991, innovation in India meant only indigenisation. But things have changed, particularly in the last decade, where the impressive growth of Indian companies has resulted in a major increase in self-confidence. This bodes well for Indian companies’ efforts to innovate more in the period of slower growth we find ourselves in today.

CII is working on two initiatives to support industry in its innovation journey. The first is the development of the right metrics for innovation at the level of the firm as well as the country. Naushad pointed out that while the country’s R&D intensity has remained pretty much the same over the last two decades, there has been a major change in the innovation landscape and we need to find ways to measure this. At the level of the firm, the effort is to develop metrics that can be used both for self-assessment as well as indentifying the most innovative firms. The second initiative is mapping gaps in the innovation process with the objective of finding ways to plug these gaps.

Innovation at Forbes Marshall

But the most interesting part of Naushad’s talk related to the efforts of his company, FM, to enhance its innovation capabilities. FM’s innovation efforts centre around four initiatives: (1) add value through process innovation; (2) “get clever” and move from process improvements to the creation of proprietary products and technologies; (3) build R&D and design capabilities; and (4) create a culture of innovation. Naushad mentioned that it makes sense to start with less risky steps like documentation and codification (which, incidentally, are quite difficult to implement in the Indian context) before moving on to the development of new technologies and products.

In building a culture of innovation, FM has found that there are some necessary ingredients:

  • A shared drive to catch up and forge ahead across the company (needs to be built if it does not exist)

  • Getting the right incentives for innovation in place (citing Jim Adams, Naushad said the crux of the matter is “how do you treat failure vs how do you treat not trying” – in most large companies, employees face no penalty for not trying but run major risks to their careers if they fail).

  • Overcoming two important barriers: “Not Invented Here” and “Foreign is Better”

  • Setting the right business velocity – neither chalta hai, nor “quicky quicky”

  • Encouragement of experimentation and failure – this is hardly a trivial issue. Naushad gave an interesting example from FM where the top management at one time authorised 20 managers across the company to spend upto Rs. 10 lakhs each on experimentation with no questions asked about the results. What happened? One manager spent the whole amount, another manager half the amount, but all the other managers spent nothing. The lesson? You need to create “demand” for innovation as well.

  • Getting the right balance between exploiting old knowledge and exploring new knowledge.
Metrics for Innovation

In terms of metrics, Naushad mentioned that value-added per person and its growth over time was the most important metric used at FM. However, even this metric is best looked at in a relative sense – FM’s value added per employee has gone up 5 times in the last 13 years, but compared to its Joint Venture partners, it is still half as productive though the gap has come down from 6:1 to 2:1. Naushad cautioned against using a single metric for innovation and suggested a combination of value added per person, new product revenue as a percentage of sales, intellectual property, codification of knowledge and a measure of reaching innovation/NPD gates on time.

Naushad pointed out that old patents are a useful source of technical information. He reminded the audience that the purpose of the patent system is not only to reward inventors but share information and knowledge. Naushad cautioned against using intellectual property rights measures as the sole metric for innovation.

The talk ended with some interesting questions and observations. How important is passion for innovation? (yes, but then passion is required to do anything well); Can you start innovating late in life? (why not?); though exploration is important, exploitation and execution remains critical (Naushad’s pithy comment: “If you get weak at execution, you stop existing as a firm”); and the importance of throwing out challenges (almost always results in better innovation).

Wednesday, April 18, 2012

Large Company Innovation re-visited

A couple of articles I read recently put the spotlight on the challenges faced by large companies in maintaining their innovation trajectories.

When I studied management, and in the early years of my teaching career, Sony was always considered the epitome of a powerful innovator. The Walkman, the Betamax video format, the Handycam, and the Trinitron technology for colour television were some of the prominent innovations that characterized the company’s innovative genius. Over the last decade, Sony has lost its way, and I have often wondered why. This perceptive article from the New York Times suggests that many of Sony’s problems were internal to the organization. Somehow, this contradicts one’s picture of a Japanese company (consensus-driven, company more important than the individual, etc.), but is consistent with other accounts about Sony, starting with John Nathan’s Sony: A Private Life. Sony's travails point to the difficulties in sustaining a vibrant innovation culture in a large company.

In the Innovator’s Dilemma, Clayton Christensen convincingly argued that large, established companies are unlikely to embrace disruptive innovations unless they set up organizational units separated from the main business organization. This article builds on the “skunkworks” idea, but I really wonder whether the skunkworks model is a sustainable way for companies to pursue disruptive innovation – at some point, companies have to try and induce more disruptive thinking into their “Standard Operating Procedures,” even if this sounds like a contradiction!

Saturday, April 14, 2012

Infosys: Innovation to Build Tomorrow's Enterprise

The annual financial results of Infosys Ltd. announced yesterday triggered a major slide on Indian stock exchanges as the company not only failed to meet the “guidance” numbers it had given out but also projected muted growth in the current financial year. Perhaps anticipating this, in recent weeks, analysts have been quite harsh on the company, with some arguing that it can no longer be considered the bellwether of the Indian IT industry.

But, my recent visit to Infosys Labs, the R&D centre of the company, suggests that it may be premature to knock Infosys off the pedestal it has occupied for several years. Infosys Labs is currently home to more than 600 experts across domains and a further expansion is on the anvil. As of March 31, 2011, Infosys had been granted 22 US patents, and had 357 patent applications pending in the US and India. Infosys spent 2.1% of its FY2011 revenue on R&D.

In the 1990s, Infosys identified the importance of quality, and was one of the first IT services companies to put in place a robust system to ensure high levels of quality in the delivery of its software services. The company also recognized that it needed to create an engine to hire, train and deploy engineers across disciplines to be able to scale-up its workforce. In 2000, the company realized that it needed to create a simple yet scalable Project Budgeting System to be able to manage the next phase of growth. These initiatives enabled the company to grow rapidly in the last decade without too many hiccups.

Could R&D, as reflected in the current project portfolio of Infosys Labs, be the vehicle to drive the next phase of growth of the company?

One thing you have to grant Infosys is that they have a clear philosophy and vision to drive their innovation initiatives. The company believes that there are seven themes around which it can contribute to “Building Tomorrow’s Enterprise.” These are: Digital consumers, Emerging economies, Sustainable tomorrow, Smarter organizations, New commerce, Pervasive computing and the Healthcare economy. Infosys believes that it can work with its clients to optimize (enhance efficiency), transform (grow existing businesses) and innovate (create new growth opportunities) their companies in line with this vision of Building Tomorrow’s Enterprise.

The company has specific targets for this R&D-driven growth. Infosys CEO Shibulal told reporters yesterday after announcing the company’s financial results that 6.2% of the company’s revenues last quarter came from products and platforms. The company’s target is to raise this to 33%.

During my visit to Infosys, I had the opportunity to see demos of some of the platforms that have already been launched. Some highlights:

  • The company’s WalletEdge platform was recently chosen by India’s leading mobile services company, Airtel, to power Airtel Money, India’s first mobile wallet service. This is expected to provide a big boost to mobile commerce in India, and also transform financial inclusion possibilities. In a recent blog post, Forrester’s Fred Giron believes that this deal points to the future of IT services in India, and the potential of IT service vendors to become “multistakeholder integration enablers.” (Visit for more details)

  • Another Indian mobile services company, Aircel, uses Flypp, the App management platform created by Infosys, for its popular “PocketApps” service. Use of Flypp provides easy access to the ecosystem of Independent Software Vendors (ISVs) developed by the company.

  • A Digital Marketing Platform developed by Infosys jointly with Fabric, a WPP company, allows large companies to manage their global online digital marketing efforts through an integrated cloud-based platform. The benefits for the client are a uniform brand positioning, lower costs, better consumer/channel insights and superior analytics. Last month, one of the world’s largest pharmaceutical companies, GSK, signed up to use this platform to optimize its digital engagement with consumers and healthcare professionals.

  • The Shopping Trip360 platform makes innovative use of sensor technologies to track shopper buying patterns and keep track of inventories. One of the largest retailers, Metro, uses this platform in its “Future Store Initiative.”

It’s really heartening to see these platforms providing Infosys an opportunity to work closely with Indian customers like Airtel and Aircel (in FY2011, almost 98% of the revenues of Infosys came from exports!).

Earlier, intellectual property provided the differentiator for services. Now, Infosys looks at services as a way to deliver the benefit of its intellectual property to clients!

Nevertheless, reaching the 33% target set by Mr. Shibulal will be a challenge. The sales and marketing team of Infosys will have to rise to the challenge of selling a more productized offering. The platforms will have to be continuously upgraded and enhanced even if immediate revenues are not forthcoming. And the domain and software research folks will have to provide genuine differentiators if Infosys is to compete with the likes of IBM.

But what I found during the half day I spent at Infosys Labs is that there is a quiet confidence that these challenges can be addressed. R&D at Infosys has moved, over the last decade, from being a demonstrator of technological capabilities to a potential source of competitive advantage. Let’s hope that this potential is realized.

Thursday, April 12, 2012

3 Useful Insights on the Innovation Challenge

Three recent pieces in the media identify some of the challenges we face in moving from jugaad to systematic innovation.

In an interview to the Economic Times, M&M chief Anand Mahindra talks about the challenges in building a world class R&D facility, and points out that the success of M&M's new R&D centre in Chennai will be core to M&M's dream of becoming a global leader in the automotive industry. I really liked his observation that the days of Jugaad are over, and we now need to build genuine technology capabilities. Thanks, Mr. Mahindra.

Sunil Khilnani, the brilliant author of The Idea of India wonders aloud whether we should be focusing on building great universities rather than a whole lot of mediocre ones. His argument is that the world's leading universities have been the most enduring engines of innovation over the last few hundred years. My own take is that its no longer a matter of "or" but one of "and" - we need to build great universities, and do a lot of other things too.... and at a pace much greater than we have seen in recent years.

Soumyanetra Munshi, a young and bright colleague of our's at IIM Bangalore, draws attention to the importance of society recognising its researchers and creative people. In a critical review of Manu Joseph's Serious Men, she argues for greater societal support for scientists involved in basic research.

Three thought-provoking articles to chew on!!

Sunday, April 8, 2012

Making Public Innovation Work: The Pune Power Model

Any kind of innovation is challenging for it involves questioning the status quo. But innovation in the public sphere is particularly difficult because it involves acceptance by diverse stakeholders who often have conflicting interests. I am currently studying one such innovation that helps us understand what makes public innovation work.

In the early years of the new millennium, citizens of the growing industrial and commercial city of Pune often faced power cuts and “load-shedding” as the state-run electricity utility struggled to meet the increasing demand. Government projections suggested that this situation would continue for several years to come due to the time involved in setting up new power plants and the shortage of resources to do so.

Rather than take this situation for granted, a group of concerned people from the business sector met under the umbrella of the Confederation of Indian Industry and the leadership of Pradeep Bhargava to brainstorm to find solutions to tackle this problem.

They soon realized that the large companies resident in the city – Tata Motors, Bajaj Auto, Bharat Forge, Thermax, and Praj Industries to name just a few – each had huge back-up diesel generation sets that were often idle since the power supplied from the grid was cheaper, even after they paid a commitment charge to the utility for ensuring continuous power supply.

Could this back-up resource be used to meet the shortfall of power faced by the city? A quick back-of-the-envelope calculation revealed that the city’s shortfall and the captive generating capacity of the largest companies matched each other. Feeding this power into the grid was complex technically as well as from a regulatory perspective. Instead, the group realized, why not get the companies to use their diesel gensets for their own consumption during peak periods, thus freeing up grid power for use by the citizens and other businesses of the city?

Using their own gensets involved higher costs for the companies, so a mechanism had to be found to compensate the companies. And this compensation would obviously have to come from the other consumers of the city who would benefit from a continuous power or “Zero Load Shedding” (ZLS) regime.

The ZLS model became a reality in mid-2006 after:

  • The local utility under the Maharashtra State Electricity Distribution Company Limited (MSEDCL) confirmed the technical feasibility of this arrangement and put in place a system to measure the daily generation of power by the companies using their own gensets.

  • The Maharashtra Electricity Regulatory Commission (MERC) held a series of hearings where citizen groups, political parties, NGOs and other stakeholders could discuss and clarify how this scheme would work.

  • Citizens consuming less than 300 units of electricity per month were exempted from any additional charge due to this arrangement. But consumers using more than 300 units per month would have to pay 42 paise extra per unit as a reliability charge that would be used to compensate the companies for the additional power costs incurred by them as well as the maintenance costs of their gensets (however, no capital or financing costs would be reimbursed to the companies).

The “Pune Power Model” as it came to be known worked in this form till mid 2008 when, thanks to a further growth in demand, the corporate diesel genset capacity was no longer adequate to meet the power demand-supply gap in the city. Subsequently, with the support of the MERC, other variants of the Pune Power Model involving external purchase of power were put into place to ensure continuance of ZLS in Pune.

I recently interviewed several key stakeholders who were involved in the early stages of the introduction of the Pune Power Model. Some key points that emerged from these interviews:

  • When the idea was first proposed, many of them were skeptical that it could be put into practice. A “veto” from any powerful stakeholder could jeopardize the whole model.

  • Social groups and NGOs were particularly suspicious of a proposal of this nature coming from industry!

  • Exempting consumers who used less than 300 units per month from the reliability charge helped overcome the opposition of political and social groups. But, this same segment of consumers may have been the biggest beneficiaries of this model because the rich can often make arrangements of their own to overcome public infrastructure deficiencies.

  • The willingness of the MERC to consider this proposal as well as the public hearing process of the MERC provided a platform for the open and transparent consideration of such an innovation.

  • Once it understood the potential of the Model, the media played a useful supporting role in spreading information and ensuring the transparency of the process.

  • Pradeep Bhargava and the leadership team in CII Pune persevered for months as they tackled the concerns of different stakeholders, worked out the nitty-gritty’s, and made the Pune Power Model a working reality. Their efforts remind me of a quote attributed to the social anthropologist Margaret Mead: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.”

The Pune Power Model is a good example of what Michael Porter and Mark Kramer call “creating shared value” (HBR, January-February 2011) – policies that enhance the competitiveness of companies while at the same time advancing the social conditions of the communities in which they operate. At a small cost, Pune’s largest companies improved the quality of life of the people of the city, enhanced mutual trust, and paved the way for more enduring ways of ensuring continuous power supply to the city.

Sunday, April 1, 2012

Innovation at TCS

I recently had the opportunity to visit the Bangalore Innovation Lab of TCS, India’s largest IT services company. R&D efforts in information technology in the Tata Group go back more than 30 years to the Tata Research, Design, and Development Centre (TRDDC) which was set up at Pune in 1981. Today, TRDDC is one of 19 innovation labs that constitute the corporate R&D effort of TCS.

TCS sees R&D playing three important roles:
  • Supporting the competitiveness of existing businesses
  • Providing platforms for non-linear growth
  • Developing new technologies to address new business opportunities

Here are some of the important achievements of TCS R&D in recent years that caught my eye:
  • mKrishi is a versatile technology platform that allows a farmer to get customized advice on fertilisers, pesticides, markets and prices on his low-end mobile handset. In its most sophisticated form, it can transmit information about in situ soil conditions using sensors or transmit pictures of crops using the inbuilt camera on the handset. mKrishi can be used in a multitude of local languages. It has won several awards from the Wall Street Journal, Nasscom, and other prestigious organizations.
  • Tools developed in-house have helped enhance the functionality and effectiveness of the BaNCS financial services software product, one of the principal pillars of TCS’s non-linear growth strategy. Domain groups use their expertise to expand the range of BaNCS offerings to new areas like algorithmic trading and multi-level derivative clearing solutions.
  • iON, a cloud-based platform developed within TCS, allows the company to provide an integrated ERP-like IT solution for small and medium businesses. This is another prong of TCS’s non-linear growth strategy. 
Some important figures about R&D at TCS from the 2010-11 annual report:
  • Total expenditure on R&D at TCS was Rs. 98.61 crores in FY 2011, constituting 0.33% of sales.
  • Upto March 2011, TCS had filed 448 patent applications across jurisdictions and 68 had been granted.

But what impressed me the most about the R&D/innovation activity at TCS is the organizational innovations that have helped drive innovation partnerships. In today’s era of “open innovation,” companies need diverse organizational arrangements to support myriad partnerships. The Co Innovation Network Model (COIN) of TCS provides platforms for TCS to collaborate with academic institutions, start-ups, customers, vendors and venture capital firms in different ways and with different IP sharing arrangements.