Making the Public Sector Effective: V Krishnamurthy at the helm

The way some people tell history, India’s pre-liberalisation days were a wasted period. If only India had embraced capitalism and the private sector back in the 1950s or 1960s, India would have been like South Korea today – India and South Korea had roughly the same GDP per capita in the early 1960s, but today India’s GDP per capita is around $1,500 while that of South Korea is more than $23,000!

Different countries choose different models of growth. Productivity and wealth creation is the outcome of organization, and countries have made their own choices as to which organizations should champion growth. While South Korea chose what are now known as the chaebol, India chose the public sector. Critics of India’s poor economic growth till the 1980s tend to blame India’s policy-makers for this choice.

But was this ownership choice to blame? Is it possible that we could have done much better even with the public sector?

Could the Public Sector have done better?

Reading At the Helm (HarperCollins, 2014), the memoirs of V. Krishnamurthy, the answer would appear to be a fairly resounding yes. Krishnamurthy started his career as an employee of the state electricity board, moved on to the Planning Commission (yes, the same Planning Commission that is in limbo today!), and then worked with three government-owned companies. He built up the fortunes of Bharat Heavy Electricals Limited (BHEL), turned around the Steel Authority of India Limited (SAIL) and created Maruti from scratch. Apart from these, he worked with the government as Secretary, Ministry of Heavy Industry, in the late 1970s, and more recently as Chair of the National Manufacturing Competitiveness Council.

Those who are uncharitable to Krishnamurthy attribute his success to his proximity to the Nehru-Gandhi family. But what this book suggests that is that he had no inherent link to the family; rather, he came close to them thanks to his effective performance as a public sector manager.

When Indira Gandhi wanted to convert the pet automobile project of her son Sanjay into reality, she turned to a manager who could make it happen – Krishnamurthy. Again, when Rajiv Gandhi was strongly criticized for being anti-public sector, he chose Krishnamurthy to run SAIL to demonstrate his commitment to public enterprise. Clearly, there was something they saw in Krishnamurthy that persuaded them to repose their faith in him.

Understanding of Manufacturing Industry

As Krishnamurthy tells the story, it becomes apparent that he understood three basics of a manufacturing industry pretty early on – productivity, quality and customer focus. As the General Manager of BHEL’s Trichy factory, he ensured that the plant graduated to bigger and more sophisticated boilers in which BHEL would have an edge rather than small boilers where BHEL’s overheads were likely to make the company uncompetitive. He created a network of ancillary small units who could do the relatively lower added value work at much lower costs so that the BHEL system as a whole remained competitive. He reached out to BHEL’s customers – state electricity boards – at a time when, as a monopoly, BHEL had no need to do so.

Krishnamurthy invested in a quality department and brought in an experienced quality professional at BHEL almost two decades before the rest of Indian industry recognized its importance. There is clear evidence that his commitment to quality was enduring – some years ago when I interviewed CII’s quality czarina Sarita Nagpal, she explained to me how Krishnamurthy had led CII’s first quality initiative from the front and was responsible for persuading the industry body to take on the pursuit of quality as a national movement.

Managing People

One thing that resonated strongly with me was his emphasis on preserving human dignity. This memoir suggests an abiding faith in human potential. A common feature of Krishnamurthy’s management style across organizations was a strong investment in training and human development. But he seems to have been able to mix this positive orientation with a firmness to avoid compromise on core issues like productivity and discipline on the shopfloor.

I can’t help wondering whether Krishnamurthy’s success was also helped by the fact that he worked in simpler times. Early in the book, he describes a situation where a DMK-led union was making unreasonable demands, but he managed to convince DMK chief Karunanidhi that he was taking good care of the workers and that they should withdraw their demands. Somehow, I don’t see a contemporary politician giving in so easily, however justified the manager’s arguments!

National Manufacturing Competitiveness Council

Krishnamurthy spent a good part of his time with the UPA 1 and UPA 2 governments at the helm of the National Manufacturing Competitiveness Council (NMCC). While NMCC has produced some good reports, and piloted some useful schemes to enhance manufacturing competitiveness, its impact has been limited. Many of its recommendations were ignored or diluted because they contained anachronistic, protectionist measures.

One of the NMCC’s interest areas was innovation, and I tried to engage with them on this subject, but was not successful. After reading Krishnamurthy’s book, I now know one possible reason for this – he mentions how his efforts to get one of the IIMs to work collaboratively with him in one of his corporate assignments did not succeed because the faculty refused to work with each other. Clearly, this shaped a rather dim view of the IIMs in his mind.

Krishnamurthy and the development of R&D Capabilities

If I have one criticism of Krishnamurthy, it’s that he could have done more to build a strong R&D culture and capabilities in the organisations he led. While he advocated use of the latest technology right from his BHEL days (he played a key role in helping BHEL move away from dependence on out-dated Czech technology) and set up corporate R&D at BHEL, invariably critical technologies were sourced from elsewhere. Rarely does he seem to have focused on the in-house development of genuine and deep technological capabilities. Given his track record, stature and influence, it appears that he could have done more for the development of such technological capabilities in India in general, and in the public sector in particular. But then, given his contributions in other areas, perhaps it is churlish to ask for more!

Conclusion

Overall, I enjoyed reading this book for it gives a firsthand perspective of an important period in the development of India’s industrial capabilities. It shows that the public sector is capable of delivering results if it is allowed to function under capable and professional management. And, it gives insights into the leadership style and practices of arguably India’s most successful public sector manager.

[The views expressed here are the personal views of the author.]

Convergent Innovation: Can it solve complex development problems?

The main challenge of Indian agriculture is usually seen as productivity, and that too with a focus on the staple crops of wheat and rice. The government’s support system has also been focused on these crops – earlier through an effort to develop new varieties, and now through an elaborate system of procurement at minimum support prices.

Apart from ensuring the livelihood of our large agriculture-dependent rural population, the ostensible goal of this system is to ensure food security and prevent hunger and starvation. But, there is an increasing realization that mere carbohydrates are not enough, particularly since many of the human development or millennium development outcomes that we are seeking depend on good health and nutrition, and not just calorific intake.

This is critical because we desperately want to take advantage of the so-called demographic dividend, and therefore have a national focus on skill development – but, what if poor nutritional levels prevent our youngsters from developing their skills to their full potential?

From Food Security to Nutritional Security

The growing need for nutritional security (rather than food security) is prompting an increasing emphasis on the links between agriculture, food, nutrition, and health outcomes. India does grow crops that can provide proteins and thereby a more balanced diet, and the foods cooked from these are a part of the diet in many parts of our country. Prominent among these are pulses (different types of dals) and millets.

From a cultivational perspective, pulses have some advantages over the main cereal crops – they require much less water and can be grown in less hospitable conditions. However, the markets for pulses are quite volatile and often controlled by the trade, and the government has paid relatively less attention to supporting pulses production – as a result, pulses production has not grown to keep pace with demand, and India imports pulses to meet the gap. The very name used traditionally to describe pulses – “coarse grains” – itself signifies their inferior position! The demand-supply gap and the lack of transparency in the supply chain means that the price of pulses tends to be high and therefore outside the budget of many consumers.

This problem is further complicated by changing food habits. Faster-paced lifestyles and two income families leave less time for cooking. Youngsters prefer packaged snack foods. As a result, diversity in food intakes may be reducing rather than increasing as local foods that contain more nutrition go out of the diet.

Convergent Innovation

How do you make changes in such complex and inter-connected systems where there are multiple players with different motivations, policy trade-offs, and scientific and business challenges?

Fortunately, some people are not daunted by this challenge. I first met Professor Laurette Dube, Chair of the Centre for Convergence in Health and Economics (CCHE) at McGill University, about a year and a half ago. Laurette’s background as a nutritionist and specialist in consumer behavior make her an ideal person to look at these issues.

Laurette advocates a “Convergent Innovation” paradigm to solve such knotty problems.

Convergent innovation involves a multi-disciplinary, multi-stakeholder, co-evolutionary approach. A workshop that Laurette and her team organized on July 16 and 17 at Mumbai signifies how this works.

CCHE’s partners in this workshop were the Tata Cornell Initiative (a research program on enhancing nutritional levels in India, funded by Ratan Tata, and headed by Prabhu Pingali, formerly of the Gates Foundation); the International Food Policy Research Institute, and the CGIAR (the international network of agriculture research institutions – ICRISAT in Hyderabad is a part of this network). Speakers and participants included academics, bureaucrats involved in health and nutrition, journalists, bankers and corporate representatives (a wide spectrum including companies into food processing equipment, snack foods, green retail, and pulses procurement).

CI in Action

The wide variety of ideas that emerged indicates both the potential and the challenges of the convergent innovation approach. While the Government of Maharashtra believes that teaching women the importance of a balanced diet and providing them lessons on how to cook nutritive food in a short time is important, a corporate representative suggested focusing on wherever large numbers of meals are cooked such as in the mid-day meal schemes or the rapidly expanding food services sector.

One corporate representative spoke about the challenges involved in designing new food processing machines for inputs that are not well characterized and studied (including millets) and customers with very strained budgets. Another corporate representative spoke about the difficulties in designing new nutritious packaged food products that simultaneously meet the requirements of the right price point (typically Rs. 2 or Rs. 5), brand image, taste, fun and excitement. He recommended building a dashboard incorporating these dimensions to evaluate product options – his examples showed that, as of today, few millets-based products would be able to pass the dashboard test!

Iron Chusti

Pepsico’s experience with Iron Chusti brings out the challenges inherent in launching such products. It was developed as a food product specially targeted at anemic girls in a part of Andhra Pradesh. According to the company, a single pack of the ragi and soya-based Iron Chusti meets 25% of the daily iron requirements and upto 50% of the requirements of vitamin B1, B12 and folate for adolescent girls. However at a Rs. 5 price point, the product weighs only 10g, and even though this meets the nutrient needs described above, the consumer considers the product inadequate (at that price) in terms of grammage (weight). Further, there are no standards for ragi and ragi-based foods, and few suppliers of ragi of consistent quality.

Different Worldviews

The tensions that can arise when people approach problems from different worldviews were quite evident in the workshop itself. While some people appreciated the market-driven perspective of the corporate participants, others from the government and academia argued for increased communication so that people consume healthy foods for the right reasons (nutrition, avoiding anemia, etc.) and not for what they saw as extraneous reasons such as fun or brand image. Some among the latter cautioned against playing into the hands of commercial interests!

But there is hope for a middle path, as many participants appreciated the success of India’s milk revolution and more recent efforts to increase egg consumption by the National Egg Coordination Committee (NECC), and advocated drawing lessons from these experiences. Neither the milk movement nor the NECC have been shy of using marketing methods – Amul is today one of India’s largest brands! There’s no escaping the observation that one of the participants made: “It may be hard to get improved seeds into a remote village, but packaged potato chips are everywhere.”

Conclusion

The good news is that everyone recognizes the problem – India may have demonstrated impressive economic growth numbers in the last two decades, but human development on the parameters that matter has not kept pace. Better nutrition, particularly for girls, is now on the agenda of governments, civil society and even large multinational corporations. But, can they all work together for better outcomes? Convergent innovation could hold the key, and let’s hope these current efforts regarding pulses bear fruit.

Lenovo, Foxconn & the Indian Pharma Industry face Innovation Challenges

Who is a Frugal Innovator?

The term innovation is really getting trivialized, and unfortunately even by people who should know better!

A recent article on Lenovo in The Economist caught my eye because of its subtitle: “The rise of the frugal innovator.” The Economist is a serious, and sometimes even scholarly magazine, and I have often found it has useful insights, so I read the article with a high level of anticipation.

But this article is perplexing. Because there is little in the article to point to Lenovo being any kind of innovator, let alone a frugal innovator. First of all, the company makes $1 Billion on sales of almost $38 Billion, demonstrating very low margins. Yes, it makes profits from a business which lost lots of money for IBM, but does that make it an innovator? The article points to Lenovo’s recent acquisition of IBM’s low-end server business and its acquisition of Motorola Mobility from Google as attempts to shore up its competitive position, but acquisition per se can’t be equated with innovation.  The article concludes by appreciating Lenovo’s ability to “turn firms around deftly, execute strategies economically and overcome obstacles nimbly” and clarifies that Lenovo is no design-driven innovator a la Apple – but this still begs the point – what is the innovation Lenovo has done? This badly needs further investigation!

Foxconn and the Elusive Quest for Value Capture

Patenting behavior is a useful indicator of invention trends, even if it does not reflect innovation itself. In recent years, China has seen a sharp increase in patenting (see graphic below from a Chinese website). According to another recent article in The Economist, China’s patent office is now the busiest in the world. But Chinese firms are also filing patents outside China at a fast pace.

Surprisingly, Foxconn – the contract manufacturer for several consumer electronic s products including Apple’s iPhone – is one of China’s largest patent filers outside that country.  The fact that Foxconn’s margin on every iPhone that it manufactures for Apple is less than $15 while Apple earns $368 out of that same $560 iPhone must have spurred Foxconn to seek additional value capture. But, the move from manufacturer to inventor is not an easy one, so I look forward to seeing how Foxconn deals with this challenge. I haven’t seen the list of Foxconn’s patents, and it’s possible that many of them are more focused on manufacturing processes than product or technology ideas, but since there is often little incentive to patent processes that are embedded inside a plant, there may be something cooking at Foxconn!

Indian Pharma Industry under Siege

I am not a great believer in conspiracy theories but I am increasingly sensitive to the fact that people and enterprises can find common cause and act together when their commercial interests are hurt. The global pharmaceutical industry may have done a great job in the last hundred years in discovering or inventing new therapies, but it got its fair share of returns as well as it has usually been one of the most profitable industries across the industrial spectrum. The industry used patent provisions very cleverly to ensure that these returns were maintained. It managed to convince policy-makers in the US that high patent walls were required to protect the significant investments it has to make in R&D to the extent that some drugs got protection much beyond the period originally mandated. But, there’s a lot of controversy about how much of the huge cost of each new drug is actually driven by R&D and how much by marketing and promotion.

The HIV AIDS Controversy

The drug industry’s determination to protect its profits at all costs comes through very clearly in the fascinating docu-drama, Fire in the Blood. This film chronicles the saga of how even after a cure was found for HIV-AIDS, the drug companies stubbornly defended their monopoly over this therapy even though thousands of people were dying of AIDS in Africa. It took resolute voluntary action by high profile AIDS sufferers in Africa, intervention of global figures like Bill Clinton, a courageous move by George Bush and the resourcefulness of our own Yusuf Hamied and Cipla for this to be diluted at least to the extent of allowing a low cost AIDS cocktail to be sold in Africa.

The inventor drug companies have tried to hit back at the growing clout of imitators and generic companies in myriad ways. Some of them have entered the generic business themselves. Rather than allow generic companies to enjoy some of the benefits of US laws to promote generic drugs (such as the famous “Para 4” exclusivity granted to the first inventor of an equivalent generic drug), other inventor companies have taken to licensing their molecules to selected players as the patent expiry date approaches.

Aim to Discredit Generic Pharma?

More recently, there has been a concerted campaign to discredit generic players. One strand of this is raising doubts about the efficacy of generic drugs (there have been articles appearing on this theme at regular intervals in the New York Times, for example). A second and related strand is the recent move by the US FDA to scrutinize applications from generic producers much more closely than before. The Commissioner of the US FDA even visited India to underline the importance of this campaign. The third is the move to withdraw licenses already granted to Indian players by identifying shortcomings in their quality or safety processes.

Now, I am not for a moment condoning shoddy practices, and I have written elsewhere about my disappointment at leading companies like Ranbaxy getting caught out for their poor quality processes. Those who are living in glass houses should not throw stones, and it’s very short-sighted of some Indian pharma companies to take on the might of the global inventor companies without keeping their own house in order. But can it be a coincidence that we are seeing so many attacks on the Indian pharma industry at the same time?

My suspicions in this direction are heightened by the declaration some months ago by the Global Intellectual Property Center of the US Chamber of Commerce that India has the worst patent regime in the world. Now, the Indian patent system has well-known shortcomings that I have written about elsewhere, but it does function in many cases. The game is given away when you read the report of this US body – all the complaints are about patent laws, court judgements and regulatory decisions in the pharma industry, almost as though no other industry exists!

Conclusion

Companies from emerging markets whether in consumer electronics, high tech manufacturing or pharmaceuticals have their challenge cut out for them in finding the right innovation strategy to compete with global giants!

[The views expressed here are the personal views of the author.]

Disruptive Innovation Revisited

Disruption and disruptive innovation have been in the spotlight of late. The guru of disruptive innovation, Clayton Christensen, and his famous theory were put under the scanner in a highly critical if somewhat flippant recent piece by Jill Lepore in the New Yorker. Just a few weeks earlier, the New York Times carried a provocative article titled “Business School, Disrupted,” that examined the potential of MOOCs to change management education and chronicled the troubled efforts of arguably the world’s strongest business school brand, Harvard Business School, to embrace MOOCs.

Is the problem with disruptive innovation or innovation itself?

Though Lepore’s article is ostensibly targeted at disruptive innovation, her grouse seems to be with innovation itself. She chronicles how “progress” used to be the ideal, till the notion of “progress” got discredited because of the many negatives that came along with it (atom bombs, for instance). Today, innovation has become the holy grail even though innovation can result in several unanticipated negative consequences.

As someone who has beaten the innovation drum for close to 2 decades now, I have to admit that some of this criticism is justified. The word innovation is used quite indiscriminately these days because it’s the “in thing.” I remember grimacing when I once read a report on the Indian BPO industry that gushingly identified picking up and dropping employees at home as the most important innovation of the industry! But, many people are sensitized to this debate – whenever I try to define innovation in my class these days, we end up having a lively discussion about the difference between improvement and innovation. I must admit that in keeping with the times, and reflecting the importance of small changes in most business contexts, my own definition of innovation has become much broader over time (see below)!

Innovation can be criticized on several counts including a propensity to create needs that are not fundamental, being wasteful of resources, and, at times, acting as a smokescreen for other less desirable activities. The best example of this last one is the success of the pharmaceutical industry in justifying high prices for drugs in the name of innovation, when some studies have shown that what really pushes up the price of drugs is the marketing activities undertaken by these companies (that these marketing practices are often far from kosher is another dimension of this story!).

Lepore’s criticism

But Lepore’s main target is disruptive innovation. Much of her criticism is targeted at the process of Christensen’s theory-building. She cites examples from Christensen’s own work to try to establish that disruptive innovation is not based on strong empirical evidence. She faults it for not being predictive, pointing out that Clayton Christensen predicted that the iPhone would not be successful! She accuses Christensen of picking and choosing data to suit his theory, and suggests that the cases he cites don’t  take alternative explanations into account.

Some of this criticism may be unjustified. As far as I can make out, there is no “theory” of disruptive innovation. It’s an interesting concept, particularly when it is contrasted with “sustaining” innovation (for a review of disruptive innovation, see my earlier post. Incidentally, this is the post on my blog that has the highest number of hits!). Christensen advanced the concept of disruptive innovation as an explanation for why several successful companies failed.

In fact, disruptive innovation can be subject to legitimate criticism, but not along the lines of many of Lepore’s arguments. Christensen sees disruptive innovation as a new way of doing things that is often inferior to the existing way, but one which advances rapidly thereafter, so much so that it can overtake the sustaining innovation trajectory at some point. One of the difficulties I have always found is identifying which (potentially) disruptive innovation will actually succeed and which will fizzle out.

Which disruption will succeed?

MOOCs is a good example. Plain vanilla online learning has been around for some time, and the demise of education as we know it has been predicted for the last 15 years. But, the first phase of online learning proved to be a complement to conventional education rather than a substitute. It’s only in the last few years that the improvement in streaming technologies and the huge increase in the availability of low-cost internet bandwidth have resulted in the take-off of MOOCs. Interestingly, MOOCs are still dependent on the teacher, only you now see her in video streamed from the MOOCs site.

However, even today, the jury is out as to whether MOOCs will replace classroom education. MOOCs seem to work well for self-motivated adult learners but there are many aspects of education that can’t be achieved through MOOCs such as socialization, working in groups, and values.

Lepore is critical of the way people tend to see disruption lurking everywhere. But, there are two reasons why disruption has become a part of our everyday lexicon. The first is that the internet has been a trigger for disruption in different industries and product categories. Particularly where the product itself is digitisable (books, movies, photos, music, etc.), the internet has clearly acted as a force for disruption. The second is related to cost and reach. The focus on reaching out to price-sensitive “unserved” or “under-served” markets (the so-called “bottom of the pyramid”) has led to people trying to discover ways of delivering products and services shorn of frills, and at the lowest cost possible. This has inevitably led to attempts to “disrupt” markets in the way that Christensen suggests. But, though this sounds easy, it’s not so in practice as several efforts have shown (see, for example, my earlier post on chotukool).

Tailpiece: What can we learn from this episode?

There may be a lesson for would-be management gurus from the Christensen experience. He has become an easy target because he appears to be a “one-trick pony,” known for disruptive innovation and nothing else. Contrast this with Michael Porter (5-forces framework, generic competitive strategies, competitive advantage of nations, clusters, CSR and shared value) and CK Prahalad (strategic intent, core competence, bottom of the pyramid) and you realize the difference. Both Prahalad and Porter moved on to other ideas, and such portfolio diversification made their reputations less vulnerable to sniper fire!

[All views expressed here are the personal views of the author.]