Guest Post by Professor Sourav Mukherji: Inclusive Businesses can Solve Tough Social Problems

[Sourav Mukherji is my colleague in the Organizational Behaviour at IIM Bangalore. He has been taking a close look at Inclusive Businesses in the last few years.]

For the past four years, I have been researching the domain of inclusive business – businesses that address the needs of the poor in a financially sustainable manner. More than half a billion Indians are economically underprivileged having limited sources of livelihood. This results in their living in squalid conditions, with little or no access to healthcare, education, sources of energy, clean water or sanitation facilities, all of which contribute to a vicious cycle of poverty from which they are unable to extricate themselves. Acts of oppression, discrimination and exploitation make things worse.

Eradication of poverty was traditionally thought to be the responsibility of the government. Over a period of time, several not-for-profit organizations have complemented government’s efforts by delivering products and rendering services that cater to the needs of the poor. Such organizations often raise money from philanthropists and donor organizations to sustain their efforts. However, such efforts have not been enough – data from post liberalized India indicates that levels of inequality have gone up, rural indebtedness has increased and a lot more needs to be done if the fruits of India’s economic progress is to touch its billion plus population. Who will do this? The answer probably lies in looking at the world of business.

The Potential of Business to solve Tough Problems

Businesses have been able to solve some of the toughest problems facing mankind through various innovations and efficient deployment of resources. They are also able to attract good talent because of their ability to pay powerful financial incentives. This led economists and management thinkers like Muhammad Yunus and C K Prahlad to hypothesize that if one is able to deploy business principles of innovation, efficiency and financial incentivization (not philanthropy) to solve problems of the poor, we might be able to come up with solutions that are both sustainable and scalable. Indeed, work of several organizations worldwide and in India such as Selco, Narayana Hrudayalaya, Grameen Bank shows that it is possible to build inclusive businesses that can manage the duality of meeting the needs of the poor as well as being profitable themselves.

At the heart of such inclusive business models are one or several innovations that enable these businesses to overcome various tradeoffs that cause market failures as well as noble intentions of the innovators and entrepreneurs who want to maximize social returns rather than profitability.

The Case of RuralShores

One such innovative business model with potentially far reaching efforts is that of RuralShores – a business process outsourcing (BPO) organization setup in rural India. Founded by Mr. Murali Vullaganti, RuralShores has fundamentally changed the theory of business prevalent in the BPO industry by creating multiple small BPO centres all across rural India that provide high quality transaction processing and vernacular voice services to domestic clients. It employs village youth from neighborhood who have high school education and provide them intense training so that they become familiar with business rules of their clients and professional conduct that is expected from them. Apart from being innovative in providing such training, RuralShores had to ensure that it was not handicapped by poor infrastructure that is endemic in rural India. Therefore, it built redundancies in electricity supply and telecommunication links. All of RuralShores centres are certified in terms of security and it relentlessly focusses on cost control without making compromises on quality.

The result has been impressive. RuralShores is able to deliver quality of service that is equal to, if not better than its urban counterparts at a price that is 30% lower than the urban BPOs. Many of the large urban BPOs are now outsourcing some of their jobs to RuralShores simply because of the superiority of its model compared to theirs. And the social impact has been significant. One of India’s biggest structural problems is the fact that more than 60% of its population lives in villages, with less than 25% of livelihood opportunities being generated in villages. This causes large scale migration to cities or disguised unemployment in villages. The poor quality of lives that migrant employees lead and lack of livelihood opportunities act as dampener to the village youth in terms of being educated. This is especially true for girls for most of whom, migrating to cities in search of jobs after education is not an option.

By creating jobs in rural India, RuralShores is obviating the need for migration, creating livelihood opportunities for village women that in turn is resulting in giving economic independence, voice and empowerment to these women. Many of RuralShores women employees are now able to convince their parents that they should not be married off early, that they too can take care of their parents (and hence they are not paraya dhan) and thus acting as role models for the future generation.

RuralShores today employs about 1200 rural youth in its ten centres. There is no denying that it has several challenges in terms of sustainability and scalability. We need RuralShores to scale up ten times (they have ambition of setting up 500 centres) and several other organizations to create similar inclusive models if one is to solve the problem of rural poverty.

Lessons from RuralShores

From the success that RuralShores has had so far, one can learn the following:

1.       For making an inclusive business sustainable and scalable, it must be run as true business. RuralShores is getting business and winning against its competitors because it is able to deliver good quality service at low prices, and not because it employs people from the economically challenged background

2.       Even while RuralShores has created this new livelihood opportunity for the village youth, it has tried its best to blend in with, rather than disrupt the socio-economic fabric of rural India. While urban BPOs are likely to insist interaction among its employees across gender, such interaction among unmarried men and women would be frowned upon in most Indian villages. Thus, it is not uncommon in RuralShores to see male and female employees sitting in separate clusters and interacting only within themselves. RuralShores often talks to village elders and parents of employees to gain their confidence in the kind of work that their sons and daughters would be involved with. It also ensures that all its women employees are back home before sunset

3.       The BPO market in India as well as across the world is intensely competitive. The rural BPO model does not have high entry barriers, especially for large incumbent urban BPOs. Thus, it is not inconceivable that once RuralShores established a viable business model operating from rural India, the incumbents could have setup centres on their own and driven RuralShores out of business. However, because RuralShores decided to offer complementary services and got into alliances with them, this seems unlikely to happen. This would overcome one of the scalability challenges of such innovative business models, which are often viable at low scale, but are driven out of market by powerful incumbents if they scale and start to act as a threat to the incumbents.

I am very hopeful that RuralShores will be able to achieve its target of scalability even while remaining ideologically committed to helping the economically underprivileged. It will thus inspire many more entrepreneurs and innovators to leverage the power of business to solve problems of poverty. 

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?

How can a CEO support innovation in the company?

What role does the CEO play in building a strong innovation capability? What CEO behaviours will support a systematic and structured innovation process rather than an ad hoc one or jugaad?

Lessons from Ratan Tata

Let’s start with an example. By the end of his tenure as Chairman of the Tata Group, Ratan Tata emerged as a strong supporter of innovation. What did he do well, and where could he perhaps have done differently, or better?

Mr. Tata worked hard at building creative confidence in the teams he worked with. Whether it was his support for the Indica in the late 1990s or his frequent weekend visits with the Nano team in Pune, he continuously demonstrated confidence in the ability of his young engineering teams to find creative solutions to the different problems encountered along the way. He did not lose faith after the rash of post-launch quality complaints that clouded the launch of the Indica, or the safety-related incidents and market setbacks after the launch of the Nano. Mr. Tata demonstrated consistent support for projects that the group had decided to back. (For more evidence of this, see the account of Tata’s development of the supercomputer in Harish Bhat’s TataLog).

Mr. Tata’s demonstrated interest in innovation, particularly the time he spent on the Nano, had an interesting ripple effect. Other Tata group companies figured that innovation was a good way to attract the attention of the Chairman, and started ambitious projects of their own.

Under Mr. Tata’s watch, the group also put in place some group-wide structures to support innovation. Prominent among these was the Tata Group Innovation Forum that assembled leading evangelists of innovation in the group under a common umbrella. This Forum helped promote collaboration between group companies, identify fresh methods for the management of innovation, and share best practices. The power of this collaborative approach was demonstrated best by the Tata Swach water filter that used the combined expertise of Tata Consultancy Services, Tata Chemicals and Titan.

The second important group-level initiative was Innovista, the group-level innovation contest. This created a new competitive forum for group companies from all over the world to showcase their innovative efforts, and be evaluated through a rigorous methodology. A distinctive feature of Innovista is the “Dare to Try” award given to teams that took on challenging innovation projects yet failed in spite of their best efforts.

On the flip side, Mr. Tata’s intense involvement in, and support for, the Nano may have prevented him and his team from taking some dispassionate decisions that could have made a big difference to the fortunes of the product. As I have written elsewhere, unlike in the case of the Ace (Tata Motors’ very successful sub-1 tonne commercial vehicle), available evidence suggests that the Nano development and launch process was divorced from the market. Instead, many key decisions involving critical specifications and performance of the vehicle were taken by Mr. Tata himself. Given that Mr. Tata (though a car enthusiast) was far removed from the target market of the Nano, this may have accentuated many of the problems the Nano has faced in the market.

My takeaways from Mr. Tata’s tenure are that the Chairman / CEO can play an important role in building and sustaining creative confidence. A continuing and demonstrated interest in innovation can act as a spur to innovation. Setting up relevant structures that support innovation is another critical role.

But the Chairman/CEO should not get so closely involved in specific innovation projects that he begins to second-guess the market. Instead, he should support the use of appropriate processes and approaches that prevent the company from making costly mistakes. To build a process-oriented approach to innovation, TVS Motor CEO Venu Srinivasan reportedly refuses to take a decision on any innovation project unless it is backed up by the data and analysis required by the company’s innovation process.

Other Roles of the CEO

In 8 Steps to Innovation, we identified some specific roles that CEOs can play in making innovation a more systematic and structured activity.

Laying the Foundation

The CEO can play an important role in identifying the company’s innovation priorities at a given point in time, and ensuring that the company’s resources are directed towards addressing those priorities. When Jeff Immelt became CEO of GE a dozen years ago, he realized that his company had been very successful under his predecessor Jack Welch in squeezing out waste and inefficiency from the company under programmes like Six Sigma. Instead, Immelt identified his priority as re-igniting GE’s DNA as an innovative company. He therefore challenged his business heads to identify imagination breakthroughs – big ticket $1B+ ideas that could provide new revenue streams for the company.

When HCL Technologies CEO Vineet Nayar took charge of the company, he found that HCL’s image in the marketplace did not match what he believed was the quality and scope of work being done inside the company. He therefore challenged HCL’s employees to find new ways of communicating the value being created in HCL to analysts and other stakeholders in the investment community.

Understanding the Market

As managers go up the hierarchy, their day-to-day activities tend to get far removed from the marketplace. Yet, they have to take big ticket investment decisions on new innovations. It’s therefore essential that they find distinct and concrete ways of keeping in touch with the market. The UK retailer Tesco advocates the CEO (and other CXOs) spending at least a few days each year in a customer-facing role.

Professor Huggy Rao of Stanford recommends each CXO having at his fingertips the top three delighters and top three disgusters of every important customer segment in the company. This again helps them take the right decisions when it comes to innovation projects and programmes.

Create time, space and infrastructure for innovation

Employees need time and space to come up with new ideas as well as to translate them into prototypes and demos. The CEO needs to therefore make sure that this time and space is provided. The right place to start this is with his direct reports.

A related requirement is the infrastructure and training for innovation- infrastructure includes equipment for experimentation/ prototyping. The CEO also needs to ensure that there is support for learning and development initiatives that can spur and support innovation. One company where we have seen sustained support for innovation-related training is Titan Industries. When I coordinated a management development programme on innovation for Titan’s managers two years ago, not only did Titan CEO Bhaskar Bhat attend many of the sessions, he attended the reviews of all the innovation projects and also hosted a dinner for the participants.

Make sure that honest failures are not penalized

Experimentation is an integral part of innovation, and many experiments simply won’t work. In fact, if all the innovations in your company work as planned, your innovations are far too conservative. But, why would anyone work on these really challenging and risky innovations if they will be penalized for failure? One of the key innovation-related tasks of the CEO is therefore to see that “honest” failure is not penalized. We saw how the Tata group under the chairmanship of Ratan Tata introduced the “Dare to Try” award. In other companies ranging from 3M to GE to IBM, legends about innovators whose projects failed but were appreciated by the CEO give a clear message that it’s safe to fail in pursuit of a good cause. 

How to be a successful innovator within a company

We wrote 8 Steps toInnovation to help organizations build a capability for systematic innovation. But, how do our insights from the 8 Steps framework translate into action points for the individual who has the desire to be an innovator? [Here, my focus is on the innovator who is working in a company or other organization.]

Be curious

All of us are creative. But it’s not creativity but curiosity that is the trigger for innovation. A few days ago, some students from NIT Surathkal came to meet me. They are keen to get involved in innovation and entrepreneurship, but they don’t know where to start. I suggested that they look around for problems to solve. India has no shortage of problems that could provide the starting point for creative problem solving.

How do you find these problems? Whether you are working in an organization, or are a student, immerse yourself in the life of people, that’s the best way to find these problems. Pain, wave (current trends), and waste (wherever resources are not being put to good use) are good sources of problems that you can include in your challenge book.

A strong desire to do things “better” – faster, at a lower cost or with better features or performance - helps drive the curiosity for innovation.

   

One successful innovator whose co-creation we use every day is Art Fry (picture below). He is well known for the Post-it note – see how his curiosity led him to a very successful innovation.

Learn and practice techniques to “release” your creativity

While all of us have some innate creativity, we may express it in different ways – some of us in the kitchen, some of us through music, others on the sports field. How do we direct our creativity to problem solving in the business context?

Fortunately for us, there are a number of methods and techniques that can help us release our creativity. These include TRIZ, design thinking, Six Thinking Hats, and brainstorming. The internet has plenty of resources covering these techniques, and there are many organizations offering courses as well. But, remember that all these are aids to innovation, and need to be applied and practiced in the context of the problem you have chosen.

Focus your creativity on “relevant” problems

For innovators within organizations, I hope you don’t mind a piece of advice: it’s usually much more helpful (and less stressful!) to focus your problem solving skills on problems that are relevant to your organization.

During my visits to companies, I often hear complaints from employees such as: “I came up with an app to help farmers get market prices easily on their mobile phone, but no one is interested in what I have created.” But is this a surprise if the person complaining works for a company in the automotive industry?

All companies work within some scope of business that they have chosen. They target their (limited) resources to succeed within this domain. They are unlikely to support ideas that fall far outside this scope. The best way to avoid frustration is to work on ideas within the scope of the company or in nearby adjacencies. Otherwise, you will have a really tough (if not impossible) time convincing someone within the company to support your ideas. As you might have read, even companies like Google (which was famous for allowing employees to work on projects of their own choice for 20% of their time) have in recent months narrowed the scope of their attention to some well-defined domains and projects.

Participation in organizational innovation initiatives/contests can be a good way of ensuring that you are working on problems that are relevant to the company (provided, of course, that your company has given some careful though to the themes of the contest!).

Continuously experiment, try to validate your ideas at low cost

While most of us love brainstorming and coming up with new ideas, ideation is only one part of the innovation process. Ideas gain value when they can be demonstrated to work. Many ideas may in fact fail, and may need to be refined and improved upon before they solve a particular problem. So, a critical skill for innovators is the ability to design simple experiments that can help them see whether their ideas work. The ability to persevere with an idea is the hallmark of a successful innovator. Remember Edison’s comment about innovation being 1% inspiration and 99% perspiration!

Be open to ideas from others, build on your own

It is rare that a single idea solves a complex problem. Ideas become stronger when they are mixed, matched and refined by other ideas. Being open to other people’s ideas helps your own become stronger and better. Of course, while doing this, it’s only fair to acknowledge the contributions of others.

Very few ideas are fundamentally new. Often borrowing ideas from other fields and adapting them is a powerful way of solving problems. Remember that the design of complex financial products became much easier because people from Physics and Maths brought their skills and ideas to the financial services industry.

Make your idea sticky

I often find innovators in organizations frustrated by what they see as a lack of interest in their ideas. While one way to overcome this challenge is to work on organizationally-relevant problems, that’s usually not enough.

Many successful organizational innovators get traction because they manage to find a champion, a senior organizational member who acts as their ambassador and promotes their idea. To get such support, it’s essential to make your ideas sticky – you need to build a good story around your idea and find ways to creatively communicate it to others. The slide below gives some of the ways in which you can make your idea sticky.

Communicating your ideas well benefits from practice. So, as in the case of enhancing your creativity, work on this skill.

Contemporary management emphasizes the importance of networking. Try to build a strong network with others in the organization. Once you have built credibility and trust with influential members of the organization, it will be easier for you to get acceptance of your ideas.