Tuesday, November 19, 2013

What will it take for Indian companies to embrace Radical Innovation?

In our innovation management class , we recently heard an interesting presentation from a high profile IT services company that runs a large number of innovation initiatives. One of the most ambitious of these hopes to build five new 50 million USD businesses, based on employee suggestions, as a part of the company’s quest to reach the magical 1B USD mark. But, though many ideas have been proposed, so far, the company has found only one idea which it is confident will meet the 50m target. Small ideas with incremental impact, however, continue to be generated, and put into practice across the company with good results.

Another very respected, fast-growing, IT services company has been very successful in getting employees to participate in its innovation programs. In FY 2012, 37% of this company’s employees submitted at least one idea; 14% of the ideas were implemented. This year, the impact of innovation is expected to cross a billion dollars. But most of this has come from “small ideas.” Breakthrough innovations have been largely elusive.
Of course, innovating in IT services where projects are tightly controlled and monitored by clients is not always easy. Innovation is possible only if the client is willing to try out new things. Nonetheless, it’s striking that both these companies which are otherwise rated very highly by clients and analysts have found it difficult to make big ticket or breakthrough innovations happen.   

A Challenge in Manufacturing Industries as well

We have seen a similar phenomenon in manufacturing industry. Shopfloor and process improvements under the rubric of kaizen, continuous improvement or total quality management (TQM) have made good progress in a wide variety of companies. As we mentioned in 8 Steps to Innovation, some members of the Indian National Suggestions Scheme Association (INSSAN) are comparable to the best in the world in terms of the number of suggestions generated per employee. But many of these companies have not been effective at high impact innovation.

Vinay Dabholkar and I frequently discuss this question: Why do companies in India struggle to be effective at big ticket / high impact innovation?

Why incremental innovation is relatively easy…

There are some obvious reasons why incremental innovation is relatively easy to adopt. Incremental ideas are usually easy to test. Decisions on acceptance and implementation are easy to decentralize because knowledge about the efficacy of the idea rests at lower levels in the organization. Incremental ideas usually don’t need large investments. Risk is low though rewards also vary from small to medium depending on the scope for implementation of the idea.

…..and more impactful innovation is hard

In contrast, high impact innovation requires large, relatively irreversible investments. While Indian companies have been good at bringing down the quantum of such investments through frugal approaches (see this interview with Pawan Goenka of Mahindra for some good examples), the fact is that investments can still be large in absolute terms. M&M spent Rs. 550 crores and 750 crores respectively on the development of the Scorpio and the XUV 500. The manufacturing investment needed to put such product innovations into production is even higher. Tata Motors’ Sanand plant with a capacity to produce 250,000 Nanos a year cost the company Rs. 2,000 crores while M&M spent Rs. 6,000 crores on its Chakan plant!

Is Creative confidence enough? How important is investment confidence?

In 8 Steps to Innovation, we argued that the advantage of innovation based on small ideas is that it builds creative confidence. But, for big ideas to succeed, creative confidence is not enough -  you also need investment confidence!

So far, wherever we have seen such investment confidence, it has been driven by conviction from the top. Ratan Tata put his personal prestige and authority behind the Nano because he believed such a car was needed, and that Tata Motors could produce it. Some of his confidence to make this investment must have come from the success of earlier products like the Indica (people laughed at the Indica as well, but Tata Motors made a success out of it). But, as I observed in one of my earlier posts, it is important that such a conviction does not mean ignoring or overlooking market needs.

Steve Jobs made such a mistake once with the Lisa, an over-engineered and overly expensive product that succeeded the Macintosh. But, he learnt well from that mistake, and was careful to keep things simple and easy-to-use after that.

How do we build Investment Confidence?

Top management confidence to back big ticket innovation projects is likely to be enhanced when they have a better feel for the market. It’s therefore very important for senior management to have first-hand exposure to the market, and to understand the likes and dislikes of important segments of customers. I get a sense that many Indian companies stay away from big ticket innovation because their top managements don’t have an intimate understanding of the market and hence lack conviction about what will work and what will not. (Remember that Steve Jobs and his team got over this problem by designing products for people like themselves!).

Second best is to have a trusted lieutenant who understands the market and technology well, and builds credibility over time. Even if Anand Mahindra doesn’t have first-hand knowledge of the Indian  automotive market, he knows he can depend on Pawan Goenka’s judgement and track record.

The R&D Challenge

Another reason for absence of support for big ticket innovation is top management’s lack of confidence in the R&D function. In many companies the R&D function just doesn’t enjoy credibility because, in the perception of the top management, it has failed to deliver what is required on time, and is not aligned with the marketplace.

Ask R&D, and you will hear a different story – inadequate resources, unreasonable expectations, and a preference for sourcing something proven from outside to doing things internally. Building internal R&D capabilities takes time and patience, and few companies have enjoyed sustained top management support in this regard. But there are exceptions like Tata Motors and Mahindra, and the results are there for all to see.
Few managers of R&D in India have a track record of developing successful products. So, bringing in an R&D head from outside who has experience of linking R&D to the market and a track record of delivery is one way of building the R&D function, particularly if the top management lacks R&D / deep domain expertise itself.

Risk Management

Better risk mitigation methods would help manage the risks of big ticket innovation better, and hence make taking big bets easier. Among these, I would underline techniques like the premortem, and early validation of any “leap of faith” assumptions inherent in the innovation (“doing the last experiment first”). Understanding of base rates (success rates of similar innovations in the past) helps avoid building unrealistic expectations.

When will Indian Companies embrace more radical innovation?

So far, few Indian companies have lost out because someone else disrupted their industry. This is partly because of the Industries in which they compete, and the fact that many of them have focused on India. But as the Indian market grows and becomes more attractive, and as more firms enter, they are more likely to be subject to such threats of disruption. As I noted in an earlier post, MNCs are increasingly looking for ways to make a big impact in the Indian market. As they do so, the risks of inaction will increase for Indian companies. Maybe it will take the risks of not innovating to be substantially higher for Indian companies to embrace more radical forms of innovation.

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