Ajit Balakrishnan, rediff.com and riding waves of change

What does it take to pioneer a new industry from India? Particularly if the industry is just emerging globally, and the rules of the game and factors for success are not clear? In The Wave Rider, Ajit Balakrishnan, founder of Rediff.com provides a first-person account of such an experience.

Ajit Balakrishnan & Computers

Ajit’s introduction to computers was at IIM Calcutta when he was doing his MBA. But his involvement with the computer industry began in the early 1980s. Till I read this book, I didn’t realize that Ajit Balakrishnan was one of the co-founder of PSI Datasystems, one of the early computer pioneers in India. (By that time, Ajit had already been successful in co-founding Rediffusion with Arun Nanda, one of the first of a new generation of less constrained and more creative advertising companies. Rediffusion became famous at the national level for working with the Congress party on one of the first political advertising campaigns in India).

PSI was one of those brave companies back in the 1980s that dared to think it could make computer hardware for the Indian market in spite of the then extant import restrictions and crippling duties. A lack of venture funding made things worse. Not surprisingly, the company struggled, and the Indian promoters ultimately brought in Bull, a French company, as a joint venture partner. But even Bull’s participation couldn’t save PSI in those days of tight controls and a limited domestic market. (Other companies which tried to make hardware at that time including HCL and Wipro finally found their salvation in moving to the software business. Ajit relates how PSI-Bull had the opportunity to do that too, but PSI-Bull turned down the possibility of software development for GE in the early 1990s because Bull had no interest in being in software outsourcing!).

Trigger for Rediff.com

Ajit’s trigger to start what would ultimately become Rediff came from attending a management program at Harvard Business School, soon after the decline of the hardware venture. A case study discussion on CompuServe, one of the first companies to try and create virtual communities aroused Ajit’s interest. This interest got sharpened further in 1993 when, during a stint in the UK, he had the experience of visiting CompuServe chat rooms.

One important thing I realized from this book is that Ajit got a whole lot more first-hand international exposure than the average Indian. All credit to him that he used this to do something different. As I wrote in my earlier post on Steve Jobs, greater exposure to a broad variety of experiences and contexts is critical if we want Indians to be radical innovators!

The advent of the browser made the fledgling internet accessible to the individual user. In 1996, Ajit got a leased line from VSNL (I am quite surprised that he got it so easily, Ajit explains this away by saying that he was one of the only people seeking a leased line at that time!) and rediff.com was into business. By 1998, the company started providing “lightning fast email” when it realized that users were spending very little time at the rediff site itself. That was a very successful initiative, many people continue to have rediffmail.com IDs even today!

The Role of Global Capital

One point that comes through clearly from Ajit’s account is the role played by global capital and the flavor of the season in an enterprise accessing capital. As an early player in the Indian internet space, rediff.com was the focus of interest of investors in the heady days of the internet boom. Ajit recounts how investment bankers chased him to do an issue of American Depository Receipts to capitalize on this interest. Though Ajit was unsure about whether he needed the money, and even less sure about how he would service the capital once it was raised, he realized that bankers were likely to invest in some other company in case he demurred. By the time he decided to go ahead with this, the internet boom was beginning to stall, so there were anxious moments before the issue was successful. But the end result was that rediff.com was the first Indian internet company listed in the US and now had a war chest to work with. However this did not prevent the struggle of trying to meet investor expectations

Redif.com went public in 2000 and faced a baptism by fire when they had to face a class action lawsuit from disappointed investors as early as mid-2001. The financial damages were minimal as rediff had insurance against this eventuality, but this was the first time that Ajit had to face the litigious nature of American investors. (In recent years, companies as tony as Infosys have had to face up to the reality of American lawsuits. My fear is that as Indian companies become larger and more successful, much more of this will follow. But Indian companies are ill-prepared for such eventualities.)

Ajit’s close involvement with some of the new legal challenges posed by the internet persuaded him to get involved in the drafting of new cyberlaws. Interestingly , though, he seems to have some sympathy for the government’s position and is not a supporter of unfettered privacy on the net.

The Difficulty in Riding Waves

The difficulty in riding waves, the subject of this book is reflected in the experience of Rediff.com itself. Considering it has been around for such a long time, it still remains small, and is currently not profitable.  Why did this happen? (The book doesn’t cover this, the following comments are my own).

I can recall a time when I used to visit the rediff site to get consolidated Indian news. But that was before Google News India became available and provided an “easy to scan” page with all the top headlines. At one time, rediff.com was a major source of India news to the NRI community. But now several alternate channels including live television exist. At some point, Rediff bought India Abroad, a well-regarded Indian community newspaper in the US, but that doesn’t seem to be doing well amidst the steep decline in print in the US.

Rediff was one of the pioneers in the online marketplace space as well, though it appears that they have been overshadowed by the aggressive growth of specialized online retailers like flipkart.

Another Rediff.com business is a corporate email business that has large Indian corporations as customers. Though they have some big clients, I wonder about the future of this business when you have competition like google .

One business that looks exciting (and is growing fast too) is a local TV advertising business that allows local merchants to insert advertisements on a set of national channels in select cities.

On the whole, rediff seems to have caught the broad trends well, but not been as successful in consolidating and “winning” the trend.

But, I wouldn’t be too critical of Ajit and his team. At one time, Orkut was lauded as the pioneer of social media. But, just a few years later, Orkut was overtaken by Facebook. People have different explanations for why orkut failed – poor speed, badly designed UI, wrong technology choice, poor understanding of customers, engineering-driven, lack of fun, etc. Deciphering trends and what consumers will prefer is not always easy!

Tailpiece

Returning to the book, I only wish that Ajit had devoted a larger part to narrating his personal experiences. The few experiences he has related are quite insightful, and I would have loved to read more. 

Innovation for Emerging Markets: Insights from Renault’s Duster and Gillette’s Guard

In earlier posts and articles, I have written about the challenges faced by MNCs in innovating for emerging markets. This week, I focus on two recent success stories to see whether they offer new insights.

The two cases are Renault’s successful SUV, the Duster, and Gillette’s razor system, Guard. Duster has enabled Renault to find a sweet spot in the increasingly crowded Indian automotive market and achieve a significant volume of 60,000 to date. Guard has enabled Gillette to target the huge market of male shavers who use conventional double edge blades instead of more modern cartridge type shaving systems.

Immersion in Customers’ Lives: Key to Success

The first thing that strikes one on reading these two cases is how they depended on straightforward but in-depth consumer research. In both cases, teams from the companies immersed themselves in the lives of users to understand their needs.

In the case of the Duster, this revealed that customers were looking for a vehicle with the looks of an SUV, but a driving experience more akin to that of a car. This process also helped identify a vacant price band in which the product could be offered. Specific customer requirements like better rear air-conditioning and more comfortable rear seats also emerged from this exercise. [As an aside though, I should mention that most foreign car makers have known for several years that cars sold in India need to offer a much better rear seat experience than that offered in developed markets – so I am surprised that this was a big revelation.]

For the Guard, customer immersion alerted Gillette to the fact that many Indians shave without running water, and they also don’t shave every day, hence the blade system needs to be easy to clean, and also able to deal with longer and tougher hair.

Interestingly, neither of these products required Steve Jobs like skills of understanding needs that users had not expressed. Instead, all that was required was in-depth understanding of existing user needs. This only confirms what I have suspected for a long time – at the current stage of evolution of most Indian product markets, there are enough opportunities to be had simply by identifying user needs that have not been addressed by existing products and solutions. No sixth sense is required!

Clean sheet or De-featuring?

While the Duster was developed by starting with an existing Renault vehicle and adapting it to local needs, the Gillette Guard appears to have started with a clean sheet. Readers of my previous post might recall that I wondered when it would be appropriate to start with a clean sheet, and when to de-feature or modify an existing product. The Duster and the Guard offer a possible answer to this question: when you need to make a really revolutionary change in cost structure to address an almost unthinkable price point (as in the case of the Guard), clean sheet is the only way. The Guard razor retails for Rs. 19 and the cartridge for Rs. 7 – neither of these price points would have been even remotely reachable starting with a product like Gillette’s Fusion or Mach 3 razors.

The Guard is certainly the more enterprising product of the two. It has only a single blade (unlike Gillette’s array of high end multi-blade products). It uses drastically fewer components than a typical Gillette razor, uses much less material and has a very simple structure. All of these contribute to its low cost. Yet, all reports suggest that it gives a good, safe (cut-free) shave for customers shaving in conditions of poor light and no running water.

But Questions Remain…

Margins & Profitability

Yet, the Guard raises several questions. Firstly, there is no way that a product like this would yield anywhere near the 35% EBIDTA margins that P&G (Gillette’s corporate parent) is used to from shaving products. This is corroborated by the financial performance of Gillette India over the last few years. By a quirk of fate, Gillette’s India operations are not yet fully integrated with that of P&G because Gillette in India is a publicly-listed company with an Indian partner (the Poddar group). Hence, we have access to the financials of Gillette India. These show that while their top line has been growing by about 15% every year, the bottom line has been declining in most of the past few years. Though this decline can’t be attributed to Guard alone, the fact remains that this is clearly a low margin product and it’s likely that its increasing volumes are adding to the top line but not helping the bottom line. While Gillette might nurture the dream of upgrading its Guard customers to higher margin shaving products, that’s unlikely to happen in any foreseeable future. (Instead some reports indicate growing interest in the Guard in developed markets!).

Imitation & Appropriation of Value

The second issue is “barriers to imitation,” and concerns related to appropriating value from a new product like the Guard. Historically, As a company. Gillette has depended on R&D to come up with improved shaving processes, and comprehensive intellectual property protection to ensure that the value of its proprietary technology is not appropriated by others. For the Sensor, Gillette built a wall of 22 patents; for the Mach 3 razor, a much bigger wall of 57 patents. But, it’s not clear to me how Gillette will prevent imitation of the Guard. A quick internet search does reveal some design patents covering the design of the Guard, but there doesn’t appear to be as impregnable a patent fortress as in the case of the Sensor or the Mach 3. Instead, Gillette seems to be relying on the superiority of its design, the choice of materials and the complexity of manufacturing as barriers to imitation.

Though the Duster has been successful in the market, its success has already been threatened by the launch by competitors of new products like the Ford Ecosport. Renault can take credit for identifying a market gap and addressing it, but the company seems to have no easy means of preventing others from coming up with competitive offerings to address the same market.

But the Biggest Threat maybe to Indian Companies…

The fact that MNCs are coming to grips with understanding Indian user needs and can then use their technological strengths to address these needs constitutes a significant threat to Indian companies. As MNCs get their emerging market innovation act together, Indian companies’ failure to embrace systematic methods of innovation is going to place them at a significant disadvantage.

Focus on Cost Innovation as it is Socially-embedded: Dr. V. Sumantran

An important highlight of the recent Nasscom Engineering Summit at Pune was a talk by Dr V Sumantran, head of the automotive business at the Hinduja group, and formerly head of the car business at Tata Motors. Dr Sumantran is an auto industry veteran with a long innings at GM in the US and Europe before he re-located to India about a decade ago.

The overall theme of the summit was how the Engineering Services industry in India needs to move from cost arbitrage (which has eroded substantially over time) to innovation. As the keynote speaker, Dr Sumantran did a masterly job of making the case for how India needs to innovate.

Dr Sumantran started by setting the context. He explained how India is slowly developing into a major auto hub. He gave one interesting statistic to underline this phenomenon – today Chennai produces more cars than Detroit! However, India’s labour cost advantages are eroding fast, and India does not rank high on manufacturing competitiveness surveys. There is therefore an urgent need to find sources of competitive advantage that transcend labour cost arbitrage.

Source of Competitiveness needs to be Socially Embedded

Dr Sumantran made a powerful case for the importance of our competitiveness being embedded in our social context. He explained how Japan’s embrace of a quality culture did not happen by chance but had a sociological and geographical basis. As a country with a limited land mass, Japan has an inherent focus on space efficiency. This gets translated into an emphasis on compactness (remember the Walkman came from Japan, as does the concept of a “sleeping hotel” – see the picture below). A Japanese automobile plant typically occupies one-third the space of an Indian automotive plant. Japanese practices came from the need to conserve space – e.g. Just-in-time is very useful when you have limited physical space to store inventory.  And, lean on space meant lean on working capital.

Translating this into the Indian context, Dr Sumantran argued that India is constrained by affordability. (Examples: Shared auto, shampoo sachet, etc.). Given this reality, he asked: “Can India make cost innovation a strategic platform?” There are a number of India-like markets across the world where this approach would yield dividends, and this could work in developed countries hit by recession as well. The world is changing and an interest in lower cost solutions is emerging even in the most unlikely places – e.g. the best selling motorcycle in the US is a Honda 250 cc bike, not the powerful gas guzzlers of the past. Even recreational bikes are getting focused on fuel efficiency!

But, Dr Sumantran was quick to emphasise that cost innovation is not jugaad or quick fix solutions. Rather it is based on good engineering with a cost-oriented mindset. He quoted Ingvar Kamprad, founder of Ikea: “The challenge is not in building a desk that costs a $1,000 but in designing  one that is functional and elegant for $50.”

Principles of Cost Innovation

Dr Sumantran went on to describe the core principles of cost innovation:

Cost innovation needs discipline and following rules. It is usually not achieved by adding complexity. He described how a Swedish engineer at SAAB came up with a simple and elegant solution to the problem of neck injuries caused by car impact from the back.

Cost innovation needs courage to move away from established solutions. Dr Sumantran gave the example of Cessna Citation Mustang which at $2.5m is one-third the price of the private jets sold earlier. The Mustang was a clean sheet design involving new concepts like a glass cockpit.

Cost innovation is aided by minimalism. European car makers like Opel, Audi and Volkswagen have all recently unveiled urban commuter cars with very different concepts that promise to change the auto industry in fundamental ways. Even F1 car designers like Gordon Murray have taken on the challenge of designing low-cost cars – Murray echoes Kamprad in saying that he finds this even more challenging than shaving off 100 gms in weight from a Formula 1 racing car. (Murray has designed a new carbon fibre based Europe city car, the T.25, that has received rave reviews).

Dr Sumantran emphasized that cost gets defined by the requirements, and hence it is important to define (and re-define) requirements carefully. He gave the example of the Indian low-cost CRDI systems that are specified quite differently from their more expensive European counterparts.

Another important principle of cost innovation is intelligent re-use. He gave the example of the Boeing 737 Max, a competitive product from the Boeing stable, that is desendant from the very successful Boeing 737-200. Since the production of the B737 Max does not involve major new tooling and fixtures, costs remain under control. The Logan, Renault’s most profitable car today, was designed out of “throwaway bits” from different Renault models. The first model of the Honda City launched in Asian markets was a derivative of an earlier Honda Civic.

In summary, Dr Sumantran mentioned that new rules, new thinking, re-use, minimizing complexity, challenging goals, downsizing and setting the right requirements are the key principles of cost innovation that India needs to practise in order to achieve cost innovation. He concluded by quoting Kettering, the legendary leader of General Motors’ R&D and engineering: “Engineering is a combination of brains and materials. The more the brains, the less the materials.”

Questions / Implications

Dr Sumantran’s talk had one core message – innovation in India has to be focused on affordability but needs to be driven by good engineering. But the question that kept buzzing in my mind after hearing him was: We may have the affordability mindset, but do we have the engineering competence required to make cost innovation work? Affordability may be socially embedded, but is high quality engineering?

All indications are in the negative. For the last two decades, engineering education in India has been driven by quantity and not quality. Engineering education served as the feeder to a fast growing software industry that hired people for their ability to write computer programs, and not their ability to practice engineering.

As a veteran engineering educator, Professor K Chandrasekaran recently wrote to me, “As a teacher of mechanical engineering, especially engineering design, for over 4 decades, I am appalled at the way the most important component of engineering education, viz., students' projects ( a curricular requirement), has not been capitalized on. With no serious attention to this, we are not only denying India of creative designers, but also generating millions of engineering graduates without fundamental design knowledge and problem solving ability.” This doesn’t bode well for building innovation skills based on engineering competence.

Dr Sumantran’s talk raised another question in my mind: When should one do clean sheet design, and when should one re-use? He gave examples of successes from both approaches, but it isn’t clear to me how one predicts which one will work in what context. In the automotive industry itself, we have contrasting experiences: Ford’s first product introduction in India, the Ford Escort, failed; but Ashok Leyland’s Dost which uses ideas from older Nissan trucks seems to be doing okay. Maybe one simple principle is to avoid re-use in external appearance as far as possible, but to enhance re-use in whatever is not visible to the customer as long as it does not impact performance in an adverse manner.

Guest Post: Chirantan Chatterjee on "Where will the next big idea come from?"

[Professor Chirantan Chatterjee (IIT Roorkee/IIMC/CMU) is our colleague in the Strategy area at IIM Bangalore and focuses his research on the Economics of Innovation.]

I recently finished an executive class teaching principles of valuation and corporate entrepreneurship to employees from a large multinational company. Participants in the class had aspirations to go entrepreneurial with their business ideas and it was curious to gauge their reactions in the presence of the sponsor of the program, their employer. These are the quips I over-heard in coffee and lunch time conversations.

‘The government is wasting money on entrepreneurship competitions around the country’.

‘Has there been any metric designed to measure their performance’?

‘The focus should be on breeding Corporate Intrapreneurs’.

‘This is where the resources and most hungry souls with ideas are’.

Where will India’s Next Big Idea come from?

That experience got me thinking on where will India’s next big idea come from. Will it come from its entrepreneurs or its intrapreneurs? But before we get there, let’s take a quick detour on corporate intrapreneurship (or one can also term entrepreneurship, for convenience let’s condense it as CI/E) as it has evolved over the last 4 decades. The essential model for this phenomenon can be captured as shown in this figure:

This framework comes from a 2009 book by Kellogg School academics Robert Wolcott and Michael Lippitz titled ‘Grow from Within: Mastering Corporate Entrepreneurship and Innovation’. The authors point out that firms decide on ideas generated by employees, and take stock of the amount of ‘Resource Authority’ to be allocated (from ad-hoc to dedicated) and also on the quantum of ‘Organizational Ownership’ to be assigned (from diffused to focused ownership). They further argue that the models of CI/E could either be that of The Opportunist, The Enabler, The Producer or The Advocate. The authors point out thereafter how Zimmer is an example of The Opportunist model, Google’s Product Council is an example of The Enabler model, Du Pont’s Market-Driven Initiative is a case of The Advocate Approach while Cargill’s Emerging Business Accelerator is an example of The Producer approach.

The intriguing point to note was, when goaded, my class, a pool of technology professionals from India’s software industry, slowly started thinking about what might be the relevant models in the organizations that they have worked for in the past. Thus, students conjectured on bucketing how an Infosys, Wipro, Cognizant, TCS, Reliance Group or even an I2 Technologies could come under these four buckets. For the more discerning reader, I will leave it as an exercise to mull more on how these models could be retrofitted into your experience of corporate intrapreneurship at your respective organization.

The Challenges of Corporate Entrepreneurship

But moving on, the bigger question lies somewhere else. Basically, is corporate entrepreneurship easy? Not really. Ideas and ideators come with their own discoveries, and information asymmetries about its value, could result in the firm-level sponsor disagreeing about the potential for the idea with the intrapreneurs, the inevitable consequence of which could be spin-off formation. CMU professor Steven Klepper who recently passed away, documented in a series of work ranging across various sectors how disagreements are a key source of spin-off formation, and how spin-off formation could explain the growth of technology clusters like the Silicon Valley. 

Thus sustaining CI/E is not an easy task, since it always keeps open the possibility of new firm formation. After all reduction in transaction and coordination costs are a key explanation indeed for why firms exist, as Nobel Laureate economist Ronald Coase argued in his seminal work on the ‘The Nature of the Firm’.

What should the Government do?

But is it a more difficult a task than sustaining external entrepreneurship? What could governments do to create a market for ‘corporate intrapreneurs’ for example in lieu of ‘external entrepreneurs’? Especially in resource constrained settings like that in India, where a rupee spent here might mean a rupee lost from being spent somewhere else? This is largely an open question worth pondering about with careful measurement providing better evidence. Outcomes from such an exercise could actually be used to get a hang of this question, especially by tracking performance of a rupee spent on external entrepreneurship and equivalently on corporate intrapreneurship, controlling for all else that could confound causal understanding of the question at hand. Perhaps this is something worthy of a doctoral dissertation work in managerial economics and decision sciences. Irrespective, the need to evaluate this is now more than ever before, especially in a world under recessionary pressure contemplating ways to jumpstart its flagging economies, especially the emerging ones.  

Talking about external entrepreneurship, over the last decade in India, across engineering and management colleges of the country, including in the IIMs and the IITs as much in other institutions, entrepreneurship has been experimented with as the latest fashionable professional choice. Spurred on by sponsorship from key governmental institutions like the Department of Science of Technology, ‘Entrepreneurship Competitions/Contests’ are now dime a dozen and one wonders how much these have enhanced the welfare of society with all the money being spent. Are there metrics to measure the performance of these entrepreneurship competitions? How many of the oceans of ideas prospected have really taken off in the last decade? How many have generated useful employment? Have some of these ideas really disrupted competitive dynamics of certain markets, bringing down prices of products and/or offered better choices to consumers? Like many other issues right now in the country, the answers to these questions remain unknown.

But with the National Association of Software & Services Companies along with Confederation of Indian Industries betting on the 10000 Start-Ups Program one hopes this will promote more useful resource and thought-leadership allocation on this issue. Perhaps one can also conjecture that the raison d'être of the 10000 Start-Ups Program is in itself the fact that corporate India (domestic or multinationals) are not doing enough to spur the creative juices of its employees. Till then, one can only be optimistic.

As my spirited students in the class debated, the answer to the starting question of this article might not be an either/or issue, potentially the panacea lies in stimulating both, entrepreneurs and intrapreneurs.

And maybe there in will lie the source of India’s next big ideas?